2016 ANNUAL AND SUSTAINABILITY REPORT

Transcription

1 2016 ANNUAL AND SUSTAINABILITY REPORT

2 LKAB IN BRIEF EUROPE LKAB is the EU s largest iron ore producer and mines around 78 percent of all iron ore within the EU. 84% of LKAB s revenue comes from pellet sales. 100% 2 EST LKAB is one of Sweden s oldest industrial companies and has customer relationships dating back more than a century. LKAB is the world s second-largest supplier of iron ore pellets. SEK 16.3 BILLION Net sales ,224 LKAB is wholly owned by the Swedish state. Average number of employees. LKAB s mines and processing plants are located in the Swedish orefields in Kiruna, Malmberget and Svappavaara. Our upgraded iron ore products are transported along the Malmbanan and Ofotbanen ore railways to the ports of Narvik and Luleå for shipment to customers around the world. Narvik Svappavaara Kiruna Malmberget ARCTIC CIRCLE Malmbanan ore railway Luleå Cover: The Leveäniemi open-pit mine in Svappavaara. Large trucks with a total weight of 400 tonnes haul ore from the bottom of the mine to the crusher bin, a difference in elevation of 120 metres.

3 CONTENTS 2016 The year in brief 2 3 President s report 4 6 MARKET TRENDS AND DEVELOPMENT 8 OBJECTIVES AND STRATEGY 12 Objectives for sustainable development Commercial and sustainability strategy How we create value PRODUCTS AND MARKETS 18 Iron ore products Special products 21 OPERATIONS AND IMPACT 22 Exploration Mining Processing Transport Suppliers Employees Social responsibility Environmental responsibility RISKS AND RISK MANAGEMENT GOVERNANCE AND CONTROL 55 Corporate Governance Report Board of Directors Group management 66 Auditor s statement on the Corporate Governance Report 67 Auditor s limited assurance report on the Sustainability Report 68 Materiality analysis 69 GRI Index Group overview FINANCIAL RESULTS 75 Financial statements Notes Affirmation by the Board 118 Auditor s report Mineral reserves and mineral resources Ten year overview 126 APPENDICES 127 Terms and definitions 127 Annual General Meeting and financial information 128 Addresses lkab.com GRI appendix lkab.com Increased demand for better grades of iron ore for more competitive steel processes. Market trends and development, page 8 LKAB aims to be one of the most innovative, resourceefficient and responsible mining companies in the world. Objectives and strategy, page 12 Highly upgraded iron ore products for the steel industry are supplemented with other industrial minerals and technology developed within the company. Products and markets, page 18 Focus on continual improvement and improved efficiency throughout the value chain. Operations and impact, page 22 ABOUT LKAB S ANNUAL AND SUSTAINABILITY REPORT 2016 The Board of Directors and the President hereby submit the Annual and Sustainability Report for Luossavaara-Kiirunavaara AB (publ), corporate identity number LKAB is a limited liability company that is wholly owned by the Swedish state. The Annual Report is integrated meaning that our sustainability work, which forms an integral part of LKAB s operations, is reported together with the administration report and financial statements that make up the statutory part of the Annual Report. In accordance with the state s ownership policy and guidelines for state-owned companies, LKAB s Sustainability Report has been prepared as per the Global Reporting Initiative (GRI) guidelines. The administration report comprises pages 2 3, 20 21, 38 40, 44 47, and of the Annual Report, while pages contain the financial statements and associated notes. The auditor s report on the Annual Report can be found on pages Sustainability information covered by the auditor s limited assurance report is identified by the page references in the GRI Index on pages 70 71, and the auditor s report is on page 68. On pages LKAB presents a Corporate Governance Report in accordance with the state s ownership policy. In accordance with Chapter 6 Section 8 of the Swedish Annual Accounts Act, the report is a separate document to the statutory Annual Report. The auditor s statement on LKAB s Corporate Governance Report can be found on page 67. The Annual Report and the GRI appendix for 2016 are available on the website lkab.com as of 31 March 2017, with a translation into English available subsequently. A printed copy of the report can also be requested by ing info@lkab.com LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CONTENTS 1

4 THE YEAR IN BRIEF PROFIT/LOSS FOR THE YEAR During the year increased delivery volumes, improved prices and the effects of the cost-cutting programme made a positive contribution to the improved result. Cost efficiency measures cut costs by around MSEK 700. However, impairment of property, plant and equipment and increased provisions for urban transformation had a negative impact on operating profit of MSEK 1,192 and MSEK 2,106, respectively. In addition, the result was also brought down by hedging transacted at the lower price levels that prevailed during the fourth quarter of 2015 and the first quarter of 2016, which meant that LKAB was not able to take full advantage of the price increase in Underlying operating profit increased to MSEK 1,621 (1,548). NET SALES AND OPERATING PROFIT/LOSS MSEK MSEK 16,343 Net sales MSEK 1,621 Underlying operating profit MSEK -1,677 Operating loss Net sales 2016 Net sales Operating profit/loss EVENTS DURING THE YEAR Q1 Q3 The spot price of iron ore is listed at USD 39.25/tonne in January, close to the lowest price level since spot market trading of the commodity began in Agreement on outsourcing of tugboat operations in Narvik brings major savings while also improving safety and readiness. Presentation of new compensation principles for property owners, residents and businesses affected by the mining. Uncertainty concerning the financing of the new section of road E10 in Kiruna risks delaying the necessary detailed plans for continued mining. In November, however, an agreement is reached on financing. 300,000 tonnes of new pellet product for the European market is produced in Malmberget. Tests are conducted in LKAB s experimental blast furnace in October. Following extensive renovation, the mine hoist wrecked in the Kiruna mine in 2015 is taken back into operation in July Q2 LKAB, SSAB and Vattenfall present a joint project for carbon dioxide-free steelmaking using hydrogen as reducing agent. Negotiations with the Municipality of Gällivare on levels of compensation move slowly on. The agreement in October allows continued mining in Malmberget. At the end of April the first delivery of 40,000 tonnes of pellets is made from the new ore Quay 7 in Narvik. Q4 In its 2017 ranking Sveriges Karriärföretag names LKAB as one of Sweden s best places to work for the fifth consecutive year. The structural review and staffing reductions announced by LKAB have been able to be achieved without layoffs in the Parent Company. Iron ore deliveries increase by 11.5 percent in total over the year, compared with This is LKAB s best delivery result since the 1970s. LKAB announces that the open-pit mine in Mertainen will not be taken into operation as planned, due to the prevailing market situation. 2 THE YEAR IN BRIEF LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

5 PRODUCED DELIVERED SALES BY PRODUCT AREA 26.9Mt 27.0Mt Iron ore products produced by LKAB in 2016, compared with 24.5 million tonnes in Iron ore products delivered by LKAB in 2016, compared with 24.2 million tonnes in % DELIVERIES 84% The highest volume of iron ore pellets, as a share of total deliveries, that LKAB has delivered. PERCENTAGE OF SALES (MSEK) % Blast furnace pellets DR pellets Fines...8 Special products...2 KEY RATIOS From and including the fourth quarter 2016, the business is being managed and followed up according to a new Group structure in which the operations are split into the Northern Division, the Southern Division and the Special Products Division. Figures for full-year 2016 and 2015 have been restated according to the new structure. PRODUCTION OF IRON ORE PRODUCTS, Mt Northern Division Southern Division Total Of which pellets Of which fines DELIVERIES OF IRON ORE PRODUCTS, Mt Northern Division Southern Division Total Of which pellets Of which fines PRODUCTION AND PRODUCTIVITY Production Production 2016 Productivity, tonnes/average number of employees Mt/year Tonnes/average number of employees FINANCIAL OVERVIEW, GROUP Net sales, MSEK 16,343 16,200 Underlying operating profit 3, MSEK 1,621 1,548 Operating profit/loss, MSEK -1,677-7,156 Operating margin, % neg neg Loss for the year ,686 Operating cash flow, MSEK -2,762-2,370 Return on equity, % neg neg Net debt/equity ratio, % Capital expenditure on property, plant and equipment, MSEK 3,341 6,354 Provisions for urban transformation at end of reporting period, MSEK 13,062 12,234 FINANCIAL OVERVIEW, DIVISIONS NORTHERN DIVISION2 SOUTHERN DIVISION2 SPECIAL PRODUCTS DIVISION Net sales, MSEK 10,376 8,606 7,162 5,998 1,598 1,619 Underlying operating profit 3, MSEK 2,891 1,002 1, n/a n/a Operating profit/loss, MSEK 1,164-3, , SUSTAINABILITY OVERVIEW Average number of employees 4,224 4,463 Of whom women, % Of whom female managers, % Accidents with absence per million hours worked (accident rate) From and including the fourth quarter 2016 the business is being managed and followed up according to a new Group structure in which the operations are split into a Northern Division, Southern Division and Special Products Division. Figures for full-year 2016 and 2015 have been restated according to the new divisions. Production volumes as per financial reporting. 2 The Group s earnings, the composition of the Group and the breakdown of earnings between operating segments are shown in Note 3 on page Underlying operating profit is reported in Note 43 on page 117. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 THE YEAR IN BRIEF 3

6 We ve increased the focus on our core business. 4 PRESIDENT S REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

7 IMPORTANT STEPS IN IMPROVING LKAB S COMPETITIVENESS AND LONG-TERM PROFITABILITY During the year LKAB streamlined its operations, introduced a new organization and formulated new Group goals. These measures contributed to increased volumes and a record level of pellet production, but profits were brought down by non-recurring items and disadvantageous price hedging. President Jan Moström comments on the past year. How would you sum up 2016? Our goal is sustainable, profitable and cost-effective growth. Through joint efforts, during the year we brought down our costs and increased volumes. We have also taken major steps to create a more flexible and effective organization that is better able to fend off fluctuations in the market. At the same time, the market developed better than expected during the year. Various challenges remain in order for us to strengthen our competitiveness, but overall we have moved a good way in the right direction. What has been done to make LKAB more competitive? We ve increased the focus on our core business and on operational matters. In January 2016 we introduced a new Group structure with three operating divisions the Northern Division, the Southern Division and the Special Products Division. This means that the producing divisions have clearer responsibility and a clearer mandate, from management level right out to individual employees. We want those who are closest to the operations to be able to make decisions themselves and take responsibility for how the operations are run. By delegating operational responsibility we are putting a focus on continual improvement and cost efficiency. In order to be more flexible we have also changed our investment strategy. In future, our investments will track the general economy more closely so that we invest during good times and have the capacity to slow things down and safeguard our cash flow and earnings when there is a downturn. In the past two years we have also implemented two cost efficiency programmes, which together will have reduced our cost base by MSEK 1,600 by the end of the first quarter We have done this with the greatest possible consideration for our employees. Through an active Employer Policy, we have succeeded in streamlining the operations as planned with very few layoffs. The programmes were necessary in order to rapidly improve our competitiveness and profitability. I do not see this as part of our continued path going forward, however. From now on, we will instead develop our capacity to work on continuous improvement and ensure that we are better able to respond to the economic fluctuations that are an unavoidable part of our industry. What results has the work achieved this year? We have taken many steps in the right direction. Thanks to stable production with few stoppages we increased volumes by 7 percent during the year, and our clear focus on highly upgraded products meant that we set a new record for pellet production. At the same time we have succeeded in lowering our costs. Despite these improvements, LKAB is reporting a loss in Profits were mainly brought down by non-recurring items in the form of impairment losses for the Mertainen open-pit mine and increased costs for urban transformation. Underlying operating profit increased to MSEK 1,621 (1,548). However, hedging transacted at the lower price levels that prevailed during the fourth quarter of 2015 and the first quarter of 2016 meant that LKAB was not able to take full advantage of the price increase during the year. Hedging was carried out in order to alleviate the effects of price and exchange rate changes in the market. In this case it had a negative impact on profits. In February 2017 a revised finance policy was adopted, which makes changes as regards hedging activities. The main thrust of the revised policy means that LKAB will not normally hedge price risk in the Group s forecast iron ore sales. LKAB has been applying this updated finance policy with effect from the first quarter of Can you describe LKAB s strategy and what you have worked on during the year? LKAB aims to be one of the most sustainable mining companies in the world. To maintain that position we need to have highly productive mining operations, highly upgraded products and climate- and energy-efficient processes. Highly productive mining operations are dependent on access to mineral reserves and mineral resources, and good knowledge of these. We have therefore focused our exploration work on existing open-pit and underground mines, so that we can improve the basis for production planning. This is an important step in producing long-term plans for the operations life-of-mine plans in order to have greater freedom to implement our operational strategy and reduce risk. During the year we also developed and began implementing a new strategy with three focus areas operational excellence, growth, and employeeship and leadership. This is all about streamlining and optimizing our processes, being at the forefront of technological and product development, and delegating responsibility and authority in the organization more clearly. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRESIDENT S REPORT 5

8 How do you view LKAB s competitiveness today? LKAB has a strong niche position as a leading supplier of highly upgraded iron ore products. We have close relationships with our customers and during the year we deepened our cooperation with our customers further. Today we have development projects with all our customers. Demand is good and we are still in a situation where our customers are calling for larger volumes than contracted. In other words, we are in a strong position. However, there are two powerful parameters in competitiveness: costs and volume. A high proportion of LKAB s costs are fixed so the volumes have a huge effect on the unit cost. Our focus is therefore on developing production and productivity. In 2016 we laid the foundations for a stronger and more sustainable LKAB. What kind of growth plans do you have? Growth in the coming years will come primarily from optimizing existing production units through increased production and efficiency. We will expand mainly in our existing underground mines. We are still in a situation where our customers are demanding more than we can produce, so we will increase our production with a focus on profitable products. In the current market situation this means that we will continue to focus on maximizing pellet production where we have a price premium. At the same time, it means that we will not be taking the open-pit mine in Mertainen into operation until market conditions allow profitable production. You reviewed LKAB s objectives during the year why? As part of the work on strategy during the year we shifted our positions up somewhat. Among other things, we have set more stringent objectives for the work environment and for equality. On the environmental side, we have linked the objectives more closely with production. Previously we had environmental objectives in absolute figures, whereas we are now introducing objectives per tonne produced. That is more in line with our aim of increasing production in a sustainable way. Sustainability is clearly integrated into LKAB s strategy. What do you see as the key events during the year in terms of environmental and social sustainability? Right from our beginnings over 125 years ago, LKAB s existence has depended on our ability to add value for, and grow together with, our operating locations. It is vital that we take responsibility for our impact and that we have a close dialogue with the community around us. In the area of the environment, we need to reduce our energy consumption and our climate impact in the form of emissions to air and discharges to water. The new objectives are related to our production and to the challenges we face as regards permit issues and increased requirements from the world around us. Within social sustainability, LKAB has a clear ambition to set an example internationally. Ethics, equality, diversity and the work environment are key issues. This is reflected in our Code of Conduct, as well as in the demands we make of our suppliers. Among other things, during the year we conducted audits on a number of suppliers in which together we identified areas that can be developed. We also adopted a policy on human rights and started working on charting such things as the impact of urban transformation and our exploration activities on human rights. Despite progress in a number of sustainability areas, unfortunately, I have to state that this year accidents resulting in absence total 6.9 per million hours worked. In other words, the same level as in 2015 and thus above our target of no more than 3.5. Every accident is a failure and the safety culture is a priority area in our work on a shared management philosophy that will be adopted in Among other things, this will involve all operations implementing targeted action plans. What are the greatest challenges for LKAB? Our operations are highly dependent on two factors the community s acceptance of mining operations and the authorities permits for these. My feeling is that people trust us and accept us, that we have a social licence to operate. However, the permit processes are complex and slow-moving. That affects our opportunities to maintain and expand production at rate we would like to. In Kiruna and Malmberget, continued production is dependent on large parts of the communities being moved as the mining expands. Around 10,000 people and businesses located in the area will be affected when around 700,000 square metres of residential and other properties are demolished and replaced with new buildings elsewhere. In 2016 new compensation principles were decided on for the urban transformation and with these as a basis, the process of signing agreements with the nearly 10,000 land and property owners affected is now in progress. Where public infrastructure is affected, the challenges are all the greater. Our hope is, however, that together with the municipalities we can plan and implement urban transformation in both Kiruna and Malmberget in a way that combines LKAB s social and environmental responsibilities with reasonable costs and a fixed timetable. We have a strong common interest in securing LKAB s future in the Swedish orefields. What is the outlook for 2017 how do you see things developing? I am cautiously optimistic. Compared with the market situation at the start of the year, the global iron ore price has developed well and we expect prices to be at a stable level in The focus on maximizing pellet production remains and demand for LKAB s pellets, which provides a premium over the spot price, is strong. During the year we incurred various major costs and implemented a number of changes that improved our operational capacity. The measures taken, including impairment losses and provisions, combined with the volume increases should contribute to provides developing positively in Thus in 2016 we laid the foundations for a stronger and more sustainable LKAB. I would like to take this opportunity to thank all our employees, each and every one of whom contributed to this. I am convinced that leadership and employeeship are the foundation of strong companies. It is now a matter of continuing along this path together, to achieve cost-effective growth that is sustainable in the long term. That is how we will add value for customers, communities, employees and our owner. Luleå, March 2017 Jan Moström, President and CEO 6 PRESIDENT S REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

9 GROUP STRUCTURE WITH THREE DIVISIONS As of January 2016, LKAB s operations have been decentralized into three divisions plus groupwide functions. The group-wide units run important development areas. The new structure means a greater focus on production and gives a clearer mandate and responsibility to the organization NORTHERN DIVISION Comprises production of crude ore and processing in Kiruna, including the world s largest underground iron ore mine as well as three pelletizing plants. SOUTHERN DIVISION Comprises production of crude ore and processing in Malmberget and Svappavaara, including an underground mine and two pelletizing plants in Malmberget as well as open-pit mines and a pelletizing plant in Svappavaara. SPECIAL PRODUCTS DIVISION Alongside its iron ore business, LKAB is active in the industrial minerals market and sells drilling technology that it has developed to the mining and construction industries. The new structure means a greater focus on production and gives a clearer mandate and responsibility to the organization. GROUP-WIDE FUNCTIONS Within the LKAB Group a number of group-wide functions are responsible for the provision of such things as rail transport, rock and engineering services and explosives, as well as properties, insurance and the electricity network. Some of these are run as wholly owned subsidiaries which mainly supply products and services within the Group. To support the divisions, there are also group functions for Finance, HR and Sustainability, Operational Support and Business Development, and for Sales and Logistics. There are also group-wide units for Urban Transformation and for Communications and Community Contacts. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GROUP STRUCTURE 7

10 MARKET TRENDS AND DEVELOPMENT LKAB is well positioned as a sustainable supplier of high-grade iron ore products. LKAB s loading port in Narvik. 8 MARKET TRENDS AND DEVELOPMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

11 FIVE EXTERNAL TRENDS DEMAND FOR BETTER GRADES OF IRON ORE FOCUS ON COST REDUCTION CONTINUED SHORTAGE OF PELLETS ON THE WORLD MARKET LARGE PRICE VARIATIONS BUT STABLE PELLET PREMIUMS INCREASED SUSTAINABILITY REQUIREMENTS ACROSS THE VALUE CHAIN MARKET TRENDS AND DEVELOPMENT The iron ore market is driven by demand for steel, which in turn is linked to developments and growth in the global economy. The deceleration of China s growth has created excess capacity and overproduction of steel in China, resulting in a continued high level of steel exports. China s steel exports remained high, but decreased somewhat compared with the previous year from 112 million tonnes to 109 million tonnes. Thanks to a strong end to the year, total global steel production increased by 0.8 percent in 2016 compared with Protectionism in the US and Europe, combined with speculation in China and higher raw materials prices, contributed to relatively high global market prices for steel although the global growth in demand remains weak. In Europe the market situation of continued excess capacity and reduced steel production is signalling continued consolidation among steel producers. Brexit effects are also creating uncertainty surrounding the STEEL CONSUMPTION IN CHINA AND THE WORLD China Rest of world Source: World Steel Association Mt longer-term development of the steel market. Despite this, both demand and prices for steel increased in the final quarter of 2016 and development of the market in Europe as a whole is expected to remain relatively positive and stable. In the Middle East and North Africa (MENA) the development of the steel industry is difficult to assess. Steel imports from China and the CIS, political unrest, volatile oil prices and a shortage of DR pellets are factors contributing to the unsettled situation. Despite this, domestic steel production increased in Although steel prices strengthened towards the end of the year, the unrest in MENA is expected to continue in STEEL PRODUCTION AROUND THE WORLD Source: World Steel Association Mt LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MARKET TRENDS AND DEVELOPMENT 9

12 EXTERNAL TRENDS AFFECTING 1 2 DEMAND FOR BETTER GRADES OF IRON ORE FOCUS ON COST REDUCTION The prevailing market situation means that steelmakers are continuing to focus on costs and productivity. Upgrading inputs to a higher grade of iron ore is one way of achieving more efficient and competitive processes. China s iron ore imports therefore increased by just over seven percent in 2016, while at the same time the country s own low-value and cost-intensive mining production is gradually being phased out. The focus on productivity in the steel industry is also reflected in spot prices for iron ore fines, where the price difference between high-grade products and standard products increased during the year. LKAB s response: LKAB has a stated strategy to be a leading niche supplier of highgrade iron ore products. The global market trend among steel producers to demand higher grades of input materials for more efficient, more environmentally friendly and competitive processes is entirely in line with LKAB s product range of pellets and high-grade fines. The price drops of recent years, down to the price level effective at the beginning of 2016, brought the strong expansion of the iron ore market to a halt. All mining companies are trying to adapt to the prevailing market situation and are focusing on reducing their costs per tonne produced. Among other things, this means a more restrictive approach to new projects, mothballing low-grade cost-intensive deposits and increasing production, automation and cost-consciousness in existing operational mines. LKAB s response: LKAB s relative position on the cost curve is close to the average cost for pellet producers globally. To be competitive regardless of the market situation, LKAB must continue to lower its cost level through cost control and through volume and production increases. Improved productivity is to be achieved through increased availability and access to raw materials in the mines, optimization of production control and working methods, and through technological developments. IRON ORE SUPPLY AND DEMAND Supply Demand Source: Wood Mackenzie CASH COST PELLETS Source: CRU Cost Model Q Mt USD/tonne LKAB Mt Average production cost for global pellet producers Global pellet production 10 MARKET TRENDS AND DEVELOPMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

13 OUR MARKET CONTINUED SHORTAGE OF PELLETS ON THE WORLD MARKET The world s second-largest pellet producer for the seaborne market, Samarco, was forced to close down its production following a tragic dam accident at the end of This meant a production shortfall of nearly 30 million tonnes in the seaborne pellet market a loss which other pellet producers have not succeeded in compensating for. In addition, the supply of pellets from certain of LKAB s competitors has been limited. LKAB s response: Demand for blast furnace pellets and DR pellets, in particular, is very good in LKAB s primary markets, Europe and MENA. LKAB intends to meet this demand and aims to increase the 2015 production level by five percent per year up until LKAB is currently the world s second-largest pellet producer in the seaborne market and pellets account for around 85 percent of sales. LARGE PRICE VARIATIONS BUT STABLE PELLET PREMIUMS While the price of iron ore fines was pressed in 2014 and 2015, the pellet premiums quoted on the market remained at a stable level. The shortage of pellets combined with increased demand for high-grade iron ore products as an input material for steelmaking even helped bring about a somewhat upward price trend for pellet premiums in Europe and MENA in In China, demand for pellets increased because of a decrease in domestic fines production. The pellet premium on the Chinese market has therefore also been strengthened. LKAB s response: The steel industry is demanding and places a premium on high, consistent quality, which favours LKAB and is in line with the company s stated pellet strategy. Most of LKAB s deliveries to the steel industry consist of iron ore pellets with an iron content in excess of 66 percent. INCREASED SUSTAINABILITY REQUIREMENTS ACROSS THE VALUE CHAIN In autumn 2016 the US president and China s general secretary agreed to adopt the UN s 17 sustainable development goals. Among other things, these involve efforts to substantially reduce the countries carbon dioxide emissions. Global political decisions to deal with the climate crisis are having an increasing effect and impact across the value chain among all the world s companies. The iron ore and steel industry is also a strong driving force as regards meeting goals for increased prosperity and social development, among other things. LKAB s response: LKAB is one of the world s technologically leading producers of pellets that contribute to more efficient steel processes with less climate impact. LKAB has also taken the initiative for leading research into new reduction processes with reduced or no carbon dioxide emissions. In partnership with steelmaker SSAB and energy group Vattenfall, a new project was initiated during the year. MARKET TRENDS AND DEVELOPMENT GLOBAL PELLET PRODUCTION Global total Of which seaborne market Source: Wood Mackenzie Mt TREND IN IRON ORE PRICE AND PELLET PREMIUM Source: PLATTS USD/tonne TOP 5 PELLET PRODUCERS FOR THE SEABORNE MARKET Source: Wood Mackenzie NO. COMPANY EXPORTS, Mt 1 Vale 33 2 LKAB 17 3 Ferrexpo 11 4 IOC Cliffs 7 Spot Price Fines Premium Blast Furnace Pellets Premium DR Pellets LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MARKET TRENDS AND DEVELOPMENT 11

14 OBJECTIVES FOR SUSTAINABLE DEVELOPMENT LKAB s overall objective is cost-effective expansion and growth with long-term profitability from a perspective of economic, social and environmental sustainability. LKAB aims to create prosperity by being one of the most innovative, resource-efficient and responsible mining companies in the world. TARGET AREA ECONOMIC SUSTAINABILITY LKAB needs to be financially strong in order to be an innovative and responsible company that contributes to prosperity. OBJECTIVES AND RESULTS 1 Objective Objective Return on equity of at least 12 percent over a business cycle neg neg >12% Net debt/equity ratio 0 20 percent 20.7% 4.1% 0 20% Ordinary dividend of percent of profit for the year % SOCIAL SUSTAINABILITY LKAB shall be a secure and attractive workplace and exert a positive influence on our business partners and our immediate environment. Objective 2016 Base year 2015 Objective for 2021 Reduce accidents resulting in absence to a rate of 3.5 per million hours worked by Women to make up at least 25 percent of employees by 2021 Women to make up at least 25 percent of management by 2021 Compliance with LKAB s Code of Conduct and well-functioning dialogue with stakeholders According to plan for % 20.0 % >25 % 19.5% 17.7% >25% n/a According to plan ENVIRONMENTAL SUSTAINABILITY LKAB aims to be one of the most resource-efficient and environmentally efficient mining companies in the world. Objective Reduce carbon emissions by at least 12 percent per tonne of finished product by 2021 compared with 2015 and at the same time reduce emissions of nitrogen to air (NOx) Reduce energy intensity (kwh per tonne of finished product) by at least 17 percent by 2021 compared with Base year 2015 Objective for kg/tonne 27.2 kg/tonne <23.9 kg/tonne 158 kwh/ tonne -6% 165 g/tonne n/a 166 kwh/ tonne <138 kwh/ tonne Reduce discharges of nitrogen to water by at least 20 percent per tonne of finished product by 2021 compared with g/tonne 21.0 g/tonne 16.8 g/tonne Reduce emissions of particulates to air from scrubbing equipment by at least 40 percent by 2021 compared with 2015, calculated as an average for all equipment 821 tonnes 21 2 mg/m 3 ntg 532 tonnes 17 mg/m 3 ntg 319 tonnes 10 mg/m 3 ntg 1 During the year LKAB drew up a strategy for In conjunction with this, the company adopted new sustainability objectives. Previous sustainability objectives and their achievement are reported in LKAB s Annual Report for One measurement point for particulates in Kiruna is reported separately see table of emissions from product manufacturing on page OBJECTIVES AND STRATEGY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

15 BUSINESS CONCEPT To manufacture and deliver upgraded iron ore products and services for ironmaking that create added value for customers on the world market from our base in the Swedish orefields. Other closely-related products and services that are based on LKAB s know-how and that support our main business activities may be included in operations. VISION To be perceived by customers as the supplier that provides the best added value, thus becoming the market leader in our chosen market segments. OBJECTIVES AND STRATEGY COMMENTS ECONOMIC SUSTAINABILITY In 2016 LKAB s profitability, debt and ability to pay a dividend were negatively affected by impairment losses for Mertainen and provisions for urban transformation. SOCIAL SUSTAINABILITY The accident rate remains at the same level as in The most common causes of accidents are slipping and tripping. A stronger safety culture is part of the strategy for operational excellence. The percentage of women and of female managers increased over the year. In addition, the Code of Conduct was updated and translated into six different languages. Read more about how LKAB works on its objective relating to the Code of Conduct and stakeholders on page 45. LKAB s objective is to create prosperity by being one of the most innovative, resource-efficient and responsible mining companies in the world. ENVIRONMENTAL SUSTAINABILITY LKAB continually investigates measures to reduce energy intensity and the levels of carbon dioxide, particulates and nitrogen released into the air from our processes. Improvements have been made to the maintenance of particulate separators, since problems with a few separators had a substantial effect on particulate results. Actions to improve measurement and reduce the quantity of nitrogen discharged to water are being charted. See pages for more information on measures in the area of energy and the environment. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OBJECTIVES AND STRATEGY 13

16 STRATEGIC FRAMEWORK LKAB s main strategic focus is on creating mining operations that are sustainable in the long term through operational excellence and growth. Our four focus areas for sustainability are central to this work. STRATEGIC PRIORITIES Highly productive mining operations Highly upgraded iron ore products Energy- and climateefficient processes COMMERCIAL AND SUSTAINABILITY STRATEGY OPERATIONAL EXCELLENCE GROWTH FOCUS AREAS FOR SUSTAINABILITY Resource-efficient production Attractive LKAB Responsible operations Attractive communities LEADERSHIP AND EMPLOYEESHIP Ivar Van der Stijl. THE VALUES THAT GUIDE US COMMITTED INNOVATIVE RESPONSIBLE Our customers results are the focus of everything we do. We emphasize creative thinking to drive improvements forward. We think long-term, are respectful and put safety first. 14 OBJECTIVES AND STRATEGY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

17 Our employees active participation in continuous improvement work is the key to success. OBJECTIVES AND STRATEGY LKAB s Jan-Ivan Johansson and Peder Nensén point the way forward for LKAB. LKAB S ROADMAP In the forthcoming years competitiveness is to be enhanced by exploiting existing production capacity and investments made, combined with identifying and acting on our growth opportunities. OPERATIONAL EXCELLENCE LKAB will increase productivity and continue to reduce costs through more efficient processes. This is largely about leadership and employeeship in order to secure continuous improvement in our daily work at all levels. In addition, we are focusing on more efficient plant and machinery utilization as well as efficient and sustainable purchasing. By being more resource-efficient we cut not just our costs, but also our impact on the environment. GROWTH Our strategy for growth primarily involves expanding existing production units with new main haulage levels in existing underground mines. We will optimize investments made, while at the same time evaluating and developing new technology that can increase our productivity further. Focused exploration based on existing underground mines will also add mineral resources and mineral reserves 1. FOCUS AREAS FOR SUSTAINABILITY Since 2012 LKAB has been working in four focus areas for sustainability: Resourceefficient production, Attractive LKAB, Responsible operations and Attractive communities. Resource-efficient production means making efforts to reduce our energy consumption, minimize emissions and contribute to increased resource-efficiency in our customers processes. LKAB will offer safe workplaces and attractive career paths and, through our focus area of Attractive LKAB, we are also working to increase diversity and equality. Conducting Responsible operations means that we take responsibility for minimizing the negative impact of our operations on the environment. It is vital that our operating locations are Attractive communities in order that we are able to recruit and be an attractive employer. LKAB will make a positive contribution to the development of our operating locations, in close partnership with residents, authorities and other enterprises. LEADERSHIP AND EMPLOYEESHIP Alongside expertise and technical development, our strategy is based on how we lead and the responsibility that we as employees take. With committed, innovative and responsible employees we ensure that production is competitive and installed capacity is utilized, thereby securing a basis for future structural investments. Our employees active participation in our improvement work is the key to success for LKAB and our customers. 1 A detailed calculation and list of LKAB s mineral resources and mineral reserves can be found on pages LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OBJECTIVES AND STRATEGY 15

18 HOW WE CREATE VALUE LKAB s mission is to exploit our iron ore resources in a responsible way and to secure lasting competitiveness and long-term value creation. Sustainability work is therefore central to our business strategy. RESERVES AND RESOURCES CORE BUSINESS Iron ore of the highest quality Our employees expertise in minerals and mining EXPLORATION Responsible exploration and expansion of existing mines Core values that promote diversity and a safety culture Modern, automated facilities that meet strict environmental requirements MINING Safe, high-tech mining Investments made to increase capacity Research and development in close cooperation, both in-house and with our customers Responsible relationships with suppliers Efficient logistics and good transport capacity Trusted by local residents and the world around us PROCESSING Innovative and resource-efficient production of upgraded iron ore products TRANSPORT Regular transport and loading of large volumes CREATED AND DISTRIBUTED ECONOMIC VALUE 2016 A profitable LKAB creates economic value both within and outside of the company. The company creates jobs for employees, contractors and suppliers. The dividend to the owner, the Swedish state, and taxes are significant. Investments in areas such as research and development and infrastructure are other effects of our economic value creation. MSEK 0 Dividend to owner MSEK 117 Taxes paid by the Group MSEK 3,340 Employee benefits MSEK 4,213 Reinvested in the business MSEK 8,763 Supplier payments MSEK1,035 Expenditure on urban transformation 16 OBJECTIVES AND STRATEGY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

19 CREATING VALUE FOR CUSTOMERS FOR OUR OWNER FOR EMPLOYEES FOR THE OPERATING LOCATIONS FOR SOCIETY IN GENERAL LKAB strives to improve sustainability and value creation across the value chain, and to do so together with our stakeholders. LKAB will contribute to customers having efficient, sustainable processes. What is good for our customers business also generates a return for our owner. As a significant employer, LKAB offers its employees attractive career paths and a safe work environment. By creating jobs and through our product offering we also want to be a positive force in society and in the locations where we operate. OUR STAKEHOLDERS AND THEIR EXPECTATIONS OF US Our ability to work for mining operations that are sustainable in the long term and to contribute to sustainable development requires the confidence of our stakeholders. Suppliers Authorities and legislators CUSTOMERS EMPLOYEES LKAB enjoys an active and ongoing dialogue with many different stakeholders in order to encourage the kind of cooperation required to pursue sustainable mining operations. Our business requires a long-term approach and collaboration on numerous different levels and we place considerable emphasis on being responsive and transparent. Read more about our dialogue with stakeholders in LKAB s GRI appendix. MATERIAL ISSUES LKAB SOCIETY OWNER LKAB has identified a number of material issues that guide us as we prioritize and report on our sustainability work. The starting point for this was to define the areas where LKAB has the greatest impact and where our stakeholders feel we should focus our resources. Read more on page 69 or in our GRI appendix. Environmental benefits of the product Resource-efficient use of raw materials Urban transformation Responsible purchasing Interests of Sami villages Human rights Occupational health and safety Biodiversity Environmental emissions Land impact Hospitality industry Interests of Sami villages OBJECTIVES AND STRATEGY MSEK 17,468 Created and distributed value for the year TOTAL LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OBJECTIVES AND STRATEGY 17

20 PRODUCTS AND MARKETS LKAB s core business is to mine and process iron ore for customers within the steel industry. The Group s business also encompasses special products, which include industrial minerals, and sales of technology that we have developed. The new shiploader at ore Quay 7 in Narvik has increased LKAB s loading capacity by 50 percent. 18 PRODUCTS AND MARKETS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

21 IRON ORE PRODUCTS LKAB s customers are mainly found among the world s top steel producers. Our iron ore products are meant to help give steelmill customers stable processes and increased productivity that improve competitiveness and profitability. Magnetite ore from the Swedish orefields not only has a very high iron content, but also gives off energy when processed into pellets. A high degree of processing and pellet quality also reduce energy consumption and carbon dioxide emissions in the customers reduction processes. Through a combination of experience, cutting-edge technology and cooperation with customers, LKAB has positioned itself as one of the world s quality-leading suppliers of iron ore pellets. We thereby contribute to a more efficient, and thus a more economical and environmentally friendly, production chain from mine to crude steel. That is at the core of our customer promise, Performance in Ironmaking. The ore trains have 68 ore cars with payload of 100 tonnes each. Each train carries 6,800 tonnes of iron ore products and is 750 metres long. PRODUCTS AND MARKETS PRODUCTS 78% within the EU LKAB accounts for almost 78 percent of the EU s iron ore production and our customers are some of the most prominent steel producers in the world. Blast furnace pellets Direct reduction (DR) pellets Fines The majority of LKAB s deliveries to the steel industry consist of iron ore pellets with an iron content of 66 percent. Well-balanced, proven additives in pellet production increase productivity, reduce energy requirements, result in less wear and tear and reduce the amount of slag in steelmaking. Blast furnace pellets Blast furnace pellets make up LKAB s largest product group. They provide great customer value in steelmill blast furnaces, where they are reduced to crude iron. The optimized addition of various minerals such as olivine improves the high-temperature properties of these input materials. Direct reduction (DR) pellets DR pellets are reduced with natural gas to direct reduced iron (DRI), which is used to make steel in an electric arc furnace. This method is today common in countries with access to natural gas, for example, in the Middle East and the US. Fines Fines is finely crushed iron ore that is agglomerated to form large pieces (sintered) before being used to produce iron in a blast furnace. LKAB produces high-grade fines in Malmberget known as MAF. Reduced CO2 emissions CO2 emissions from mine to steel per tonne of hot rolled coil are reduced by 15 percent with LKAB s pellets compared with sintered hematite fines. 1 84% pellets Iron ore pellets account for 84 percent of LKAB s delivery volumes. 1 Benchmarking of carbon dioxide emissions from iron ore pelletizing. The report refers to contract research commissioned by LKAB. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRODUCTS AND MARKETS 19

22 IRON ORE MARKET AND MARKET DEVELOPMENT SALES OF IRON ORE PRODUCTS FOR STEEL PRODUCTION SALES BY REGION Percentage of sales (MSEK) % % Europe...73 MENA...25 China...1 USA...1 SALES BY PRODUCT AREA Percentage of sales (MSEK) % % Blast furnace pellets...63 DR pellets...26 Fines...11 In an overall perspective, LKAB is a niche supplier in the global iron ore market. We are, however, the world s second-largest supplier in the seaborne import market for pellets. The import markets for iron ore consist mainly of Asia, Europe and the Middle East & North Africa (MENA). Other markets are very small or essentially have their own domestic production. Demand from growth markets with major construction and infrastructure projects tends to be for more basic grades of steel in large volumes, while mature markets tend to demand niche steel products of higher quality. Europe is our biggest market LKAB s main market is Europe, where we have built up good relationships over more than 125 years. Focusing on efficiency and consolidation, the main demand is for iron ore products that allow European steelmakers to produce as much or more steel from fewer production units. This means that LKAB s pellets are much sought-after for customers production. Our geographical proximity to the European customers also gives us a freight advantage over our competitors. The European steel market is stable with slightly positive development. Despite rising steel prices, there is oversupply and excess capacity in the steel market. Steel production in Europe is decreasing at a faster rate than in the rest of the world, primarily in southern Europe and the UK. The situation is creating some uncertainty concerning the development of European steel companies, with signals of further consolidation. LKAB s pellets are in demand in MENA In the Middle East and North Africa (MENA), access to a good supply of natural gas and a lack of high-quality scrap means that steelmaking with direct reduced iron (known as DRI) is the most common method of production. To produce DRI, high quality and a high iron content are required in the crushed ore that is input. Shipping neutrality and strong demand for LKAB s DR pellets for direct reduction are what make MENA our second-largest market. Steel production in MENA decreased substantially during the year. This was mainly due to low oil prices, steel imports from China, a shortage of DR pellets and political unrest in the region. While steel prices in other parts of the world were stable and even rising, steel prices in MENA fell and the trend remains negative. However, the shortage of DR pellets in the seaborne global market means that demand for DR pellets in MENA remains high. RESEARCH AND DEVELOPMENT Hot rolled coil (HRC). Research and development costs for the full year amounted to MSEK 245 (365), corresponding to about 1.3 (2.2) percent of Group costs (excluding impairment losses). The focus of operations was on safe, predictable mining conditions, product and process development, and on exploration underground and in existing open-pit mines. Read more in the section Operations and impact on pages 26, 27, 30, 33, 34 and 35. Dewatering of Svappavaara ore. 20 PRODUCTS AND MARKETS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

23 SPECIAL PRODUCTS As a complement to our core business, LKAB also processes and sells selected minerals as well as iron ore for industrial applications other than steelmaking, and supplies technology developed by LKAB for the mining and construction industries. A new application for magnetite. SPECIAL Caption PRODUCTS DIVISION The subsidiaries LKAB Minerals and LKAB Wassara form the Special Products Division. INDUSTRIAL MINERALS LKAB Minerals is a global supplier of industrial minerals. Magnetite, mica and huntite are LKAB Minerals core products, where the company s own resources and product expertise allow it to provide customers with greater added value. Magnetite is used for water purification, noise and vibration damping and as aggregate in high-density concrete, among other things. Huntite is used, for example, as a halogenfree, fire retardant additive in plastics and cables. Mica has a wide range of applications, including as reinforcement and heat protection in plastics and to provide decorative elements in ceramic materials. Mineral sands are used for production of welding rods and welding wire. Refractory minerals are used to produce refractory bricks and casting sand. DRILLING TECHNOLOGY LKAB Wassara develops and sells advanced drilling technology systems all over the world, mainly to the mining and construction industries. The patented water-powered drilling technology was developed by LKAB to improve efficiency in its own underground mining. Market development Reduced demand for drilling technology from iron ore producers is affecting the company s sales, but this is being compensated by sales to companies that mine Market development In 2016 LKAB Minerals focused on investments, development and sales in two specific business areas: Magnetite and Polymers & Coatings. The company has a stated aim to grow within the industrial use of magnetite outside of steelmaking. Global oversupply of iron ore affected prices and margins, while at the same time low oil and gas prices stopped or deferred many investments within the offshore sector. Nonetheless, magnetite for use in high-density concrete in several pipeline projects was sold. The construction industry has also recovered somewhat, although growth is weak. Increased sales to projects in which magnetite ore has new applications, for example, within tunnelling and offshore wind farms, is providing LKAB Minerals with opportunities to broaden its business and increase its profitability. other minerals. At the same time, sales to the construction and civil engineering industries increased strongly. LKAB Wassara s drilling technology is increasingly attracting attention outside the mining industry and is in demand for many large urban infrastructure projects, particularly in Europe and Scandinavia, but also in North America. Since the company s external sales are mainly project-driven rather than being driven by the business cycle, the trend is stable and remains positive. LKAB Minerals mines and sells minerals and also processes and sells iron ore for applications outside the steel industry. The business has sales offices and production units in Europe, the US and Asia. LKAB Wassara develops and manufactures water-powered precision drilling systems for mining, construction and exploration drilling as well as dam building and geothermal energy. Customers are located throughout the world. SALES OF SPECIAL PRODUCTS SALES BY REGION Percentage of sales (MSEK) % % Europe...58 Asia...31 USA...11 SALES BY PRODUCT AREA Percentage of sales (MSEK) % % Magnetite...33 Mineral sands...27 Refractory material & foundry.19 Polymers & coatings...16 Drilling technology... 5 PRODUCTS AND MARKETS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PRODUCTS AND MARKETS 21

24 OPERATIONS AND IMPACT EXPLORATION see page 24 MINING see page 26 PROCESSING see page 30 TRANSPORT see page 34 DEVELOPMENT SUSTAINABILITY ACROSS THE VALUE CHAIN During the year LKAB focused efforts on efficiency improvements within our opera tions. Aiming for continuous improvement, we are creating a stronger LKAB in which we utilize all the capacity we have in mines, processing plants and logistics. At the same time, we continue to invest in the common future of the company and its stakeholders by taking responsibility for the impact of the operations across the value chain. We are working to minimize the impact on the surrounding environment and to increase resource efficiency at all stages. LKAB wants to be an international model for the mining industry in terms of ethics, the work environment, equality and diversity. To secure mining operations that are sustainable in the long term, we are keen that our operating locations continue to be attractive communities for people to live in. Throughout the value chain we have a customer/supplier relationship. This means that we are dependent on each other if we are to achieve responsible, effective and trouble-free production. SUPPLIERS see page 36 EMPLOYEES see page 38 SOCIAL RESPONSIBILITY see page 42 ENVIRONMENTAL RESPONSIBILITY see page OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

25 By identifying and acting on risks and opportunities and taking responsibility for our impact throughout the value chain we are strengthening LKAB s long-term competitiveness. OPERATIONS AND IMPACT The ore trains are made up of 68 cars and have a payload capacity of 6,800 tonnes per train. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 OPERATIONS AND IMPACT 23

26 EXPLORATION EXPLORATION CHALLENGES Ensuring long-term access to iron ore is a precondition for continued mining, improved productivity and increased production volumes. The main focus is on carrying out exploration adjoining existing underground mines and open-pit mines. Cooperation and dialogue with the communities around us and with stakeholders affected by the mining operations is vital for continued mining as more and more land is taken into use. LKAB maintains continual dialogue with neighbours, authorities, the hospitality industry and the Sami villages dialogue that is based on consideration, cooperation and a willingness to compromise. The mineral reserve is the most important resource of any mining company. The mineral reserve s size and quality are critical to product quality, production volumes and costs. Successful exploration therefore plays a crucial role in LKAB s long-term mining operations, value creation and competitiveness. A detailed calculation and list of our mineral resources and mineral reserves can be found on page 123. Exploration drilling in the Printzsköld orebody in Malmberget s underground mine at a depth of 1,250 metres. MAJOR EXPLORATION PROJECTS IN 2016 The main focus has been on exploration adjoining existing underground mines. In Leveäniemi and Gruvberget production geology and new block models have been produced for mine planning. In Ylipääsnjaska initial investigative drilling has taken place, with documentation and analysis of a potential ore deposit. Ylipääsnjaska: Drilling programme stage 1 complete. Block-modelled and interpreted Per Geijer: Evaluation of drilling programme, block-modelled and interpreted Leveäniemi: Production geology and new block model Gruvberget: Production geology and new block model Mertainen: New block model and block modelling Kaptensmalmen: Interpreted and block-modelled Mineral reserves and mineral resources are the basis of a mining company s operations. 24 EXPLORATION LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

27 PACE OF EXPLORATION IN MALMBERGET INCREASES Core samples for archiving from the Printzsköld orebody in the underground mine in Malmberget. 50,000 85,000 Exploration drilling underground in Malmberget increased from approximately 50,000 drilled metres per year to around 85,000 drilled metres in The primary focus has been on improving the basis of production planning and securing knowledge of ore resources in existing underground mines after COOPERATION IS THE WAY FORWARD Reindeer herding is central to Sami culture and an important industry in the region. The mining industry and its expansion affects reindeer herding and LKAB strives to maintain a good dialogue with the Sami villages affected by the operations. In 2016 LKAB negotiated a cooperation agreement with a Sami village in Gällivare. Similar agreements had already been negotiated with two Sami villages in Kiruna. The third agreement means that LKAB has cooperation agreements with all the Sami villages that have reindeer grazing lands neighbouring LKAB s mining operations. This approach, which focuses on dialogue, provides better prospects of reaching agreement and finding functioning solutions for issues where the parties have conflicting interests. The agreements establish a framework for the forums and working methods that are needed for sharing information, decision-making and ongoing consultation. Where applicable, they are based on the principle expressed in international law governing the rights of indigenous peoples known as FPIC (Free Prior and Informed Consent). OPERATIONS AND IMPACT New exploration organization The focus is shifting from new iron ore projects above ground to exploration in existing underground mines. As a result of an organizational change, responsibility for operations geology in operational open-pit mines is being transferred to the production divisions. At the same time, the exploration organization is taking over responsibility for all underground exploration, with the task of calculating and compiling the mineral reserves and mineral resources in the underground mines. The documentation from the exploration is an important piece of the puzzle in the work on producing long-term plans for the operation of the mines known as life-of-mine plans. Josefine Johansson, Jan-Anders Perdahl and Anton Lidström carry out exploration underground in Malmberget. INTERACTIVE TRAINING FOR DRILLING TECHNICIANS LKAB has produced interactive training for our exploration drilling technicians focusing on environmental responsibility and the management of sensitive natural environments. The training aims to ensure minimal or no impact by man or equipment when LKAB carries out test drilling in sensitive natural environments. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 EXPLORATION 25

28 MINING MINING CHALLENGES Safe and predictable mining conditions are essential for efficient mining at a fast rate. The challenge for LKAB is managing the mine-induced seismicity that affects both access and safety underground, and also managing its environmental and social impact above ground. Resource-efficient production is a challenge that requires more efficient utilization of plant and machinery as well as the development of new technology and new ways of working. Work on employeeship and leadership based on our values forms a basis for improvements in development work. LKAB s primary task is to mine and exploit northern Sweden s iron-rich ore in order to create maximum value for the company and our stakeholders. We do this by means of safe, resource-efficient production with a focus on improved productivity, delivery assurance and quality. It is crucial for the mining operations and our long-term value creation that we secure access to land, and thereby to iron ore resources for our processing chain. Production drilling using coiled tubing is an example of one of LKAB s development projects for more efficient underground mining. Securing access to land for continued iron ore mining is a major challenge for LKAB. Among other things, the effects of the mining operations on the communities in Kiruna and Malmberget mean that these communities need to be gradually moved. It is crucial that detailed plans and permits are put in place in time; otherwise, mining operations could be jeopardized. 1,365 m MINE PRODUCTION 1,250 m LKAB mines ore in Kiruna and Malmberget at a depth of more than a kilometre. CRUDE ORE MILLION TONNES PRODUCTION BY OPERATING LOCATION Kiruna Malmberget Svappavaara MINING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

29 OUR MINES LKAB mines iron ore in three operating locations. In Kiruna and Malmberget mining takes place underground at a depth of more than 1,000 metres. In Svappavaara the ore is mined in open-pit mines. Mining ore underground is a logistical challenge that requires efficient, large-scale mining methods with a high level of automation. Kiruna The orebody in Kiruna is an inclined slab of magnetite that is around 80 metres wide, four kilometres long and extends at least two kilometres underground. The current main haulage level is at a depth of 1,365 metres. Malmberget In Malmberget the underground mine consists of around 20 dispersed orebodies, of which around 10 are currently mined. In the eastern field only magnetite is mined, while in the western field a small proportion of hematite is also mined. The current main haulage level is at a depth of 1,250 metres. Svappavaara Iron ore is currently mined in the Gruv berget and Leväniemi open-pit mines. Increased production in LKAB s processing chain requires access to iron ore as a raw material. Svappavaara s open-pit mines give LKAB a flexible additional source of material to supplement the ore from the underground mines. Large-scale sub-level caving for competitiveness OPERATIONS AND IMPACT Most of LKAB s iron ore is mined in Kiruna and Malmberget. Underground mining is more cost-intensive, so to be able to compete with the world s open-pit mines LKAB has developed highly automated, safe and efficient production methods and processes below ground. The method that LKAB uses for underground mining is known as sub-level caving. After production drilling and blasting the ore is allowed to fall down into underlying production tunnels, known as drifts, for loading and onward haulage to ground level by rail and ore hoists. The construction of drifts through the orebody represents a major cost in sub-level caving. Increasing the vertical and horizontal distance between the drifts means significantly more ore can be mined. Crucial for profitability Using blasting and drilling techniques that it has developed itself, LKAB has been able to increase the height of the part of the orebody taken out from each drift from around 15 metres to 28 metres. This means that today each blasting provides around 10,000 tones of crude ore, compared with 1,200 tonnes in the 1980s. Efficient, large-scale sub-level caving is the sole reason why LKAB has been able to remain competitive in its underground mining operations. LKAB is constantly refining and developing accessibility and techniques for underground mining. This includes factors such as increased safety, improved communications, increased automation and new and refined technology. The next-generation production drilling system from LKAB Wassara will be capable of optimizing the caving flow and reducing the level of waste rock mixed in with the ore. Since every extra percentage unit of ore in each caving represents millions of kronor, this is highly significant for LKAB s profitability. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINING 27

30 NEW DRILLING TECHNOLOGY IMPROVES THE EFFICIENCY OF UNDERGROUND MINING Mining ore at great depths is a logistical challenge that makes the mining process more expensive and more difficult. The introduction of LKAB Wassara s waterpowered hammer drill in the 1990s made it possible to precision-drill fan-cuts to a length of 55 metres rather than the previous 28 metres. Now comes the next technological leap, which provides controlled and seamless drilling in which the drill bit is affixed to a length of flexible coiled tubing that is wound up on a drum, known as coiled tubing drilling. The advantages are that the drilling can be controlled according to the appearance of the orebody. Contaminants mixed in such as waste rock can be reduced and the caving flow can be optimized, with more even fragmentation as a result. The technology is being tested in Malmberget for validation during the latter half of The aim is for coiled tubing drilling to be introduced in production by SEISMICITY AFFECTS MINING OPERATIONS The mining of iron ore in LKAB s underground mines causes stress within the rock that can cause quakes, known as seismicity. The seismic effect of the underground mines in Malmberget on the nearby communities increased in 2016, which negatively affected the rate of mining. To maintain the supply of crushed ore to the processing plants, production plans had to be revised and mining brought forward in other areas. Trials are in progress in both Kiruna and Malmberget to attempt to reduce these stresses by pumping water into the drilled hole at high pressure in order to create cracks in the rock mass, known as hydraulic fracturing. LKAB s head of mining technology, Lars Malmgren, with the developers of the new measuring system Jesper Martinsson, a researcher in mathematical statistics, and Ville Törnman, a researcher in technical physics. INNOVATION PAVES THE WAY FOR A UNIQUE SEISMIC MEASURING SYSTEM Access to high-quality measurement data from seismic events caused by mine production is crucial for safe and predictable mining conditions underground. At present the measured values from about 400 geophones in Kiruna and Malmberget are interpreted manually by a contractor. As well as giving rise to large assessment variations, the manual process is very expensive and the analysis is delayed by around 40 minutes or even by hours during peak workloads. Automated realtime analysis Rapid and precise results for locating and assessing the magnitude of seismic events are crucial for time-critical safety decisions, but also for long-term analyses of the link between seismicity and production. Since 2009, therefore, LKAB has been carrying out research to find its own unique system for automated realtime analysis. An interdisciplinary approach, in which conventional models and principles are replaced by problem-solving via a mixture of physics and statistics, has proved successful. The automated system is five times more accurate and analysis is 40 times faster. Improved quality of information During 2016 the system for automatic data analysis was evaluated in the Malmberget mine in parallel with the existing measuring system, with the results being presented directly in the existing analysis tool. The trials indicate results almost in real time, as well as substantial improvements in information quality and location reliability. The self-calibrating system is extremely cost efficient compared with the current manual analysis methods, and opens the way for national and international research collaboration via an open research platform. 28 MINING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

31 URBAN TRANSFORMATION 700,000 square metres of residential and other properties are to be phased out 10,000 people are affected by urban transformation ACCESS TO LAND CRUCIAL TO LKAB For mining to continue, LKAB must take more land into use. The location of the orebodies and mining of ore at greater depths means that central parts of Kiruna and Malmberget need to be successively moved. The aim of urban transformation is to guarantee continued mining of iron ore, while at the same time LKAB has a great responsibility to compensate for the impact of the mines and to be involved in creating vibrant, attractive communities. Planning and implementing urban transformation in a way that allows LKAB to meet its social and environmental responsibilities at a reasonable cost and with a fixed schedule is a challenge. Schedules are produced in cooperation with the municipalities, and it is the municipalities task to establish area plans and detailed plans showing how the new communities are to be developed. LKAB has taken on a more operational and driving role in the urban transformation in order to have greater control over both scheduling and costs. Among other things, LKAB acts as a purchaser of new properties together with other large commercial construction companies. AT THE RIGHT TIME, AT THE RIGHT PRICE AND WITH MUTUAL UNDERSTANDING The mine and the community live side by side and are dependent on each other. LKAB s growth and success are good for its operating locations, and vice versa. It is therefore important that urban transformation takes place in cooperation and agreement with our stakeholders. In addition to LKAB and the municipalities, urban transformation involves a number of authorities such as the County Administrative Board, the Swedish Transport Administration, the National Board of Housing, Building and Planning and the Swedish National Heritage Board, as well as many private interests and companies. LKAB has taken on huge responsibility in terms of compensating for the impact of the mines and developing attractive communities. It is just as important that permit processes and planning take place on time and at the right cost for LKAB. This is vital in order for mining operations to be profitable in the long term and for the company s ability to shoulder an extensive social responsibility in its operating locations. Impact on mine planning In 2016 two important negotiations had a substantial impact on LKAB s long-term mine planning. Discussions with the Swedish Transport Administration and the Municipality of Kiruna on levels of compensation for the new section of road E10 past the town threatened to jeopardize continued mining in Kiruna. The slow pace of negotiations between LKAB and the Municipality of Gällivare on compensation for western Malmberget and delays in amendments to detailed plans also reduced the possibilities for the mining of various orebodies in Malmberget. In October 2016 an agreement was concluded between the Municipality of Gällivare and LKAB on compensation levels for western Malmberget, and in November the Swedish Transport Administration reached agreement with LKAB on compensation for the new section of road E10 past Kiruna. Read more about our social responsibility on pages OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINING 29

32 PROCESSING PROCESSING CHALLENGES Product development for growth takes place in close cooperation with customers in order to improve the efficiency of the products during steelmaking. Challenges include producing products using ore from different mines in order to create flexibility in the crushed ore supply, and continuous quality improvements such as the stability of the pellets during transport. LKAB is a quality-leading producer of highly upgraded iron ore products. Consistently high pellet quality helps give our steelmill customers stable processes and increased productivity for improved competitiveness and profitability. LKAB s aim is to deliver maximum customer benefit and the best added value on the market, from product performance to delivery and service. We call this Performance in Ironmaking our customer promise. Product and process development are part of core research at LKAB. Improved productivity is a challenge that calls for more efficient utilization of plant and machinery through streamlining and better process stability. Work on employeeship and leadership taking our values as a starting point provides a basis for improvements in this development work. Sustainable mine and steel production s an important global challenge. Here, LKAB s knowledge makes it a prominent player, as evidenced by its participation in HYBRIT, a Swedish project for hydrogen-based CO 2 - free ironmaking. 1.7 GJ less energy per tonne of steel with LKAB s pellets compared with hematite fines 1 PROCESSING PLANT PRODUCTION 15% lower emissions of CO2 per tonne of steel with LKAB s pellets compared with hematite fines 1 1 Benchmarking of carbon dioxide emissions from iron ore pelletizing. The report refers to contract research commissioned by LKAB. UPGRADED PRODUCTS MILLION TONNES PRODUCTION BY OPERATING LOCATION Kiruna Malmberget Svappavaara PROCESSING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

33 LKAB S PROCESSING OPERATIONS LKAB's production structure reflects a high degree of processing and flexibility. Being able to direct the flows of crushed ore between the different production locations allows maximum utilization of existing plant capacity. SORTING CRUSHING SCREENING MAGNETIC SEPARATION CONCENTRATING PELLETIZING COMMINUTION MAGNETIC SEPARATION FILTERING BALLING SINTERING Binder DRYING AND PREHEATING 1300 C Sorting LKAB currently has two sorting plants in operation: one in Kiruna and one in Malmberget. Sorting is a dry process in which the ore is crushed and screened in order to magnetically separate types of rock that are not iron ore. The iron content in the crushed ore is increased from approximately 45 percent to around 62 percent. Concentrating To further purify the ore after sorting, the crushed ore is ground finer still in a concentrating process. Kiruna has three concentrating plants, while Svappavaara and Malmberget have one each. In the concentrating plants the crushed ore goes through several stages of grinding and magnetic separation using water in order to release and remove impurities before the concentrated product (slurry) goes on to the processing plants to be made into pellets. The iron content has then increased from around 62 percent to around 68 percent. In Malmberget, in addition to slurry for the pelletizing plant, the first stage of the concentrating process also produces a fine iron ore sand with a high iron content, known as fines. Pelletizing LKAB currently has six pelletizing plants in operation: three in Kiruna, two in Malmberget and one in Svappavaara. Malmberget och Svappavaara produce blast furnace pellets. Kiruna produces both blast furnace pellets and pellets for direct reduction. The total capacity of the plants is around 28 million tonnes of pellets per year. In the pelletizing plant the slurry is filtered and a binder (bentonite) is added before the iron ore concentrate is rolled into 10-millimetre pellet balls. The pellets are dried, preheated, sintered, and then cooled down before being transported to a storage silo for onward transport by rail to the ports of Narvik and Luleå. OPERATIONS AND IMPACT EVALUATION OF NEW PELLET PRODUCT IN MALMBERGET To meet demand from steelmakers and increase production flexibility, LKAB s department for process and product development has come up with a new blast furnace pellet for production in Malmberget. Previously, the Southern Division only produced olivine pellets specially developed for SSAB. The new pellet product offers greater flexibility as an input material when mixed with sinter and is therefore better adapted to the blast furnace processes of many of our customers in Europe. In October positive full-scale trials were carried out in LKAB s experimental blast furnace in Luleå. The highest priority is to ensure rock stability and accessibility in the underground mines. In the processing plants the focus is on process stability and availability. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PROCESSING 31

34 ENHANCING DAM SAFETY In 2016 two measures were implemented to improve dam safety. In Kiruna a dam raising measure begun in 2015 was completed, involving the construction of a new spillway with an erosion-protected channel and the removal of the previous risk structure. The instruments for control of dam stability on the section concerned have also been reinforced. In Malmberget increased checks on dam stability were implemented and an extra supporting bank was constructed along part of the tailings pond in conjunction with dam raising. Two new positions have been appointed in 2017 as part of reinforcing the organization in respect of dam safety. Read more about dam safety under risks and risk management on page 52. NO CARBON DIOXIDE EMISSIONS FROM ENERGY USE By buying Guarantees of Origin for renewable electricity, in 2016 LKAB brought carbon dioxide emissions from electricity use by the mining and processing operations right down to zero. The decision to buy in Guarantees of Origin, which are issued by the Swedish Energy Agency, is part of LKAB s objective to reduce carbon dioxide emissions by 12 percent by 2021 using 2015 as the base year. Read more under Environmental impact and resource consumption on page 48. SWEDISH INDUSTRY TAKES THE INITIATIVE FOR CARBON DIOXIDE-FREE STEELMAKING Together with SSAB, Vattenfall and the Swedish Energy Agency, LKAB has initiated a project of which the aim is develop sustainable technology for carbon dioxide-free iron and steel production. With a budget of MSEK 13.4, the project will chart the conditions required for using hydrogen in the reduction process instead of coal and coke. Should the technology become a reality on an industrial scale, it could make Sweden the first in the world to have carbon dioxide-free steel production. At present the direct reduction method is used to reduce (remove the oxygen content) in iron ore pellets using natural gas to produce what is known as sponge iron or Direct Reduced Iron (DRI). However, natural gas is a fossil reduction agent that gives off carbon dioxide into the atmosphere. If hydrogen were used instead, the residual product of the reduction process would be regular water. Carbon footprint of LKAB s pellet production verified In 2016 LKAB carried out a thorough charting and certification of the CO2 emissions generated by pellet production from mine to port. The calculation includes not just emissions in the processing plants but also the impact from all operations, including mine production and rock reinforcement, subcontractors and all types of travel and transport. The certification was carried out by SP Technical Research Institute of Sweden and LKAB is now the first pellet producer in the world to produce certified figures for the carbon footprint of its pellet production. The emissions vary between 32 and 57 kg CO2 per tonne of pellets, depending on the product. Requires access to fossil-free energy The challenge lies in the fact that producing hydrogen is a highly energy-intensive process. Crucial to the project s success is therefore a large supply of pure, fossil-free energy such as hydroelectric power, solar power or wind power. The conditions must also be put in place for storage of hydrogen in sufficient quantities to ensure uninterrupted operating conditions. Replacing large parts of the existing infrastructure in steelmaking will also be very expensive. Good forward planning is therefore important, so that the switch is made when earlier investments have reached end-of-life. One of the upsides, however, is that the residual product of hydrogen production is pure oxygen. The oxygen can then be used in combination with other biofuels to eliminate fossil fuel entirely from LKAB s pellet production. Reduced climate impact from mine to crude steel That LKAB can now produce verified data for carbon emissions is both something demanded by customers and something that forms part of LKAB s own objective to reduce its climate impact. Earlier LKAB also presented the results of a report by industrial research institute Swerea MEFOS, which confirm that LKAB s magnetite pellets emit less carbon dioxide and use less energy in the blast furnace process. The research report shows that blast furnace energy consumption is reduced by a total of 1.7 GJ per tonne of hot-rolled coil (HRC) when using magnetite pellets as input material compared with using sintered hematite fines. Emissions of carbon dioxide are also reduced by 15 percent (around 320 kg) per tonne of HRC compared with sintered fines. 32 PROCESSING LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

35 LEVEÄNIEMI PROVIDES A FLEXIBLE SUPPLY OF CRUSHED ORE A continued increase in production requires the ore from the underground mines to be topped up with crushed ore from the open-pit mines in the Svappavaara field. A flexible supply of ore also reduces the risk of a shortage of crushed ore and increases the opportunities for consistently high pellet production. In the second quarter of 2016 the Leveäniemi open-pit mine began supplying crushed ore to the processing plants in both Malmberget and Kiruna. In Malmberget an average of 20 percent of the crushed ore for pellet production was made up of iron ore from Leveäniemi, while in Kiruna the figure was around 10 percent. More Leveäniemi ore for Malmberget Among other things, the proportion of crushed Leveäniemi ore that can be mixed with the ores from the underground mines depends on the iron content and the composition of the ores; the pellet product must meet product specifications. According to plan, Malmberget is expected to increase the proportion of crushed ore from Leveäniemi to around percent in 2017, while the processing plants in Kiruna will primarily use ore from the Kiruna underground mine with the Leveäniemi ore as a buffer for its production. Ramesh Abrahamsson hauls ore in the Leveäniemi open-pit mine. FEWER STOPPAGES MEANS SUSTAINABLE PRODUCTION The road to a profitable, competitive and sustainable LKAB involves increased production with lower costs and less environmental impact. An unstable production and processing chain with many short stoppages increases wear and tear on machinery, increases emissions and energy consumption and has a negative impact on production volumes and quality. Stability and predictability in the supply chain are vital for improved productivity and LKAB s growth target. PARTICULATE EMISSIONS One of LKAB s sustainability objectives is to reduce total emissions of particulates to air from our scrubbing equipment by at least 40 percent, from 17 mg/m 3 ntg in 2015 to 10 mg/m 3 ntg in mg/m3 No. of stops PRODUCTION VOLUME A profitable, competitive LKAB requires that we can make maximum use of the available capacity in existing processing plants. This means that we must stabilize and rationalize existing plants, processes and work methods. Mt No. of stops ENERGY CONSUMPTION PER TONNE One of LKAB s sustainability objectives is to reduce its energy intensity by 17 percent per tonne of finished product, from 166 kwh in 2015 to approximately 138 kwh in An objective of major significance for production costs and environmental impact. kwh/tonne No. of stops OPERATIONS AND IMPACT CARBON DIOXIDE EMISSIONS PER TONNE One of LKAB s sustainability objectives is to reduce carbon dioxide emissions by 12 percent per tonne of finished product, from 27.2 kg in 2015 to 23.9 kg in At the same time, emissions of nitrogen to air (NOx) are to reduce. An objective of major significance for costs and environmental impact. kg/tonne 28 No. of stops 900 SULPHUR DIOXIDE EMISSIONS In recent years LKAB has invested in flue gas scrubbing equipment at Malmberget and Svappavaara, and this has significantly reduced emission levels. Stable processes and additional flue gas scrubbing equipment are contributing to meeting our sustainability objective of reduced sulphur dioxide emissions 4. Tonnes 2100 No. of stops 900 NUMBER OF ACCIDENTS IN PRODUCTION LKAB has a sustainability objective to reduce the rate of accidents resulting in absence to 3.5 per million hours worked by Number of accidents per million hours worked 10 No. of stops No. of stops 1 One measurement point for particulates in Kiruna is reported separately see table of emissions from product manufacturing on page Energy consumption in 2012 and 2013 relates to Kiruna, Svappavaara, Malmberget, Luleå and Narvik, excluding electricity for ore trains. 3 Carbon emissions in 2012 and 2013 relates to Kiruna, Svappavaara and Malmberget, excluding electricity for ore trains. 4 Read more about reductions in sulphur dioxide in the table of emissions from product manufacturing on page 48 and the picture caption on page 49. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 PROCESSING 33

36 TRANSPORT TRANSPORT CHALLENGES Capacity and flexibility in the logistics chain must be ensured in order to achieve LKAB s long-term growth target. Trials involving increased axle loads on the whole of the Ore Railway will be carried out in Capacity-increasing measures and national infrastructure investments such as harbour dredging in Luleå and double tracks on the Ore Railway are being investigated. Resource and process optimization is a priority and work on reviewing which parts of the logistics system are to be staffed in-house or outsourced is continuing. This also applies to the planning of maintenance, as well as the review and optimization of operations in existing facilities. LKAB handles and delivers millions of tonnes of iron ore products every year, from mining below ground through processing to transport to the ports of Narvik and Luleå. Our competitiveness in the global marketplace is based on an efficient logistics chain both above and below ground. LKAB accounts for around 35 percent of the freight carried on Swedish railways, making us Sweden s largest freight company. The year in brief With relatively few possibilities for interim storage in depots and ports of shipment, one of LKAB s main objectives is to transport and deliver as much volume as possible at the steadiest pace possible. The focus in 2016 was on reviewing the organization and resource requirements, optimizing audit times and maintenance plans and increasing capacity and flexibility in the logistics chain. Efficiency gains have been achieved with the commissioning of the new terminals at the operating locations as well as the bentonite plant in Luleå. Successful trials involving increased axle loads have been carried out on the Ore Railway and the new ore quay in Narvik was officially opened during the year. 34 TRANSPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

37 The new shiploader at ore Quay 7 was taken into operation in April Streamlining freight reduces environmental impact In partnership with SSAB and Scania Ferruform, in 2016 LKAB began a pilot project of which the aim is to shift parts of the companies freight from road to rail. The idea is to exploit unused capacity on SSAB s rail freight services between Luleå and Borlänge, known as the steel shuttle. SSAB s trains depart three times a day all year round from both locations and changes are expected to have a number of positive effects, including increased delivery precision, reduced carbon dioxide emissions and reduced transport times and delivery costs. NEW ORE QUAY IN NARVIK OFFICIALLY OPENED In September 2016 LKAB s new ore Quay 7 in Narvik was officially opened. The capacity of Quay 7, with its mooring system, screening station, shiploader, weighing station and belt conveyors, is around 9,000 tonnes of pellets or 11,000 tonnes of fines per hour. It can be used in parallel with the older Quay 5 and in total the loading capacity in Narvik has increased by 50 percent, from 20 million tonnes to nearly 30 million tonnes of iron ore products per year. The investment cost is just over SEK 1.1 billion. The completion of Quay 7 means that over the past 10 years LKAB has invested more than SEK 4 billion in the ore port in Narvik. NEW SIGNALLING SYSTEM CREATES UNCERTAINTY To facilitate rail traffic between the countries of Europe, the EU has decided that a standardized signalling system known as the European Rail Traffic Management System (ERTMS) is to be introduced in all EU countries. In Sweden, ERTMS has been tested out on the Haparandabanan, Bothniabanan, Ådalsbanan and Västerdalsbanan lines. The plan is for introduction of the system to begin on the Ore Railway in 2021, despite the fact that the system is not yet fully developed and major teething problems have arisen on a number of sections. LKAB s position is that while the introduction of ERTMS is desirable, at the current time the system must be regarded as a serious business risk because of the uncertainty surrounding availability and delivery assurance on the Ore Railway. The total cost of the system to train operators has also not been guaranteed, and in addition all LKAB s locomotives will need to be adapted for the new system representing a risk of loss of capacity. TRIALS INVOLVING HEAVIER LOADS ON THE ORE RAILWAY It is vital for LKAB s logistics system that delivery capacity is ensured along the Ore Railway to the ports of Narvik and Luleå. When the transport capacity on the Ore Railway starts to reach its upper limit, the long-term solution is to build a double track. However, since this would be a major infrastructure investment that is far off in the future, trials involving increased axle loads from 30 tonnes to 32.5 tonnes have been carried out along the Malmberget to Luleå section. Initially, one of the five daily ore trains was loaded with an extra 680 tonnes, increasing to two in five trains towards the end of It is hoped that trials involving higher loads can also be carried out on the Kiruna to Narvik section in OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 TRANSPORT 35

38 SUPPLIERS CHALLENGES Cost-efficient and responsible purchasing is one of the ways that LKAB takes lasting responsibility. This requires cooperation with key suppliers, as well as a clear division of responsibility between LKAB s operating and purchasing organizations in order to ensure competition and to follow up and manage supplier performance. RESPONSIBLE AND EFFICIENT PURCHASING Responsible and efficient purchasing is a central part of LKAB s work to strengthen its competitiveness going forward. LKAB will choose to work with the most competitive and sustainable suppliers in order to create the greatest possible added value for the Group and, by extension, for our customers. LKAB s suppliers must always act in a sustainable way throughout the supply chain. There is particular focus on environmental aspects, the work environment, ethics and human rights. LKAB has a new approach to developing sustainable purchasing partnerships in which we strive to achieve sustainability throughout the whole value chain. In 2016 the focus was on developing higher-risk suppliers. Follow-up of higher risk suppliers, spreading the approach and emphasizing the importance of suppliers auditing their own suppliers from a sustainability perspective are priorities and challenges for LKAB. Compliance with LKAB s basic requirements is to be ensured by all suppliers. Of the existing suppliers, 51 percent 1 have approved the basic requirements to date. 1 Calculated for purchasing by the Parent Company, rolling 12 months. Suppliers LKAB is a significant buyer and has just over 4,000 suppliers in various sectors. Just over half of purchasing consists of contract work, transport and logistics. A further significant part is made up of purchases of equipment, raw materials and chemicals, as well as various types of services. LKAB s suppliers can be found in 35 different countries; mostly in Sweden and Norway, but also in the rest of Europe, the US and Asia. Our aim is to work with suppliers who set a good example of sustainable enterprise and who form a stable supplier base that contributes to reducing business risks and making savings. HOW LKAB CREATES SUSTAINABLE PURCHASING PARTNERSHIPS Since 1 January 2015, LKAB s suppliers have had to approve its basic requirements in order to be able to supply products and services to us. Higher-risk suppliers also make a self-declaration based on our Supplier Code of Conduct. However, it is not sufficient to rely entirely on this self-declaration. LKAB therefore follows up on site at the supplier s premises, in order to see how the requirements are being met and to discuss and run improvement projects. LKAB s work on sustainable purchasing is based on a risk perspective. The supplier base has been categorized using the Supply Chain Management Tool, which has its own risk index, known as the LKAB Supplier Risk Index. Among other things, this takes into consideration the industry, ownership structure and where in the world the supplier is located. Suppliers usually run a responsible, evolving business, but the follow-ups have nevertheless identified areas for improvement based on the requirements we set in our Supplier Code of Conduct. This way of working has a number of advantages: the improvement projects can result in cost savings, higher quality and fewer commercial risks, while at the same time LKAB s engagement in the relationship creates reassurance for the supplier. In this way, LKAB contributes to the development of both the supplier s and our own business. 36 SUPPLIERS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

39 SITE VISITS ENSURE SUSTAINABLE BUSINESS LKAB has identified 150 suppliers with a higher risk of potential shortcomings in compliance with our Supplier Code of Conduct. Supplier follow-up enables LKAB to help increase awareness of sustainability at the supplier and ensure that the Code of Conduct is complied with in practice. In 2016 a total of 42 supplier follow-ups were conducted in seven countries (China, India, Czech Republic, Finland, Netherlands, UK and Sweden). In some cases this follow-up resulted in LKAB choosing not to enter into a business relationship or ending its cooperation with the supplier. In these on-site visits LKAB examines the business, reviews such things as policies and procedures, tours production facilities, interviews employees and management and visits the supplier s subcontractors. Examples of areas for improvement include human rights, work and employment conditions, emergency management and fire safety, as well as training in business ethics. LKAB Trading in Asia A wholly owned subsidiary, LKAB Trading, which is a purchasing office for the whole Group, opened in Shanghai, China, in From here purchases are made all over Asia, which is part of LKAB s long-term strategy to expand its purchasing market, cut out unnecessary middlemen and reduce purchasing costs. A large part of this work is based on evaluating the suppliers to A relatively common deviation from the Code of Conduct is if the supplier does not follow up its own suppliers from a sustainability perspective. Spreading awareness of the importance of such work is one of LKAB s foremost challenges. The visits often end in constructive discussions that lead to a more developed approach. LKAB always gives the supplier a report on the follow-up detailing deviations identified and, above all, recommendations concerning areas of improvement which they should prioritize. The supplier then responds with an action plan that results in joint improvement projects, for example, within health and safety. ensure that they can meet defined supplier and quality requirements in accordance with our Supplier Code of Conduct. Processes of change are also encouraged by supporting suppliers with good potential to develop and improve; for example, by making sure that suppliers have proper terms of employment and clear anticorruption guidelines. BASIC REQUIREMENTS OF SUPPLIERS LKAB strives to achieve sustainability throughout the value chain, which includes all our suppliers. To be able to sign an agreement with LKAB, the suppliers must approve our basic sustainability requirements. Eight fundamental requirements have been defined on the basis of international guidelines such as the UN Global Compact, the OECD s Guidelines for Multinational Enterprises, the UN s Children s Rights and Business Principles and the UN Guiding Principles for Business and Human Rights. For the 150 or so of LKAB s suppliers considered to be at a higher risk1 of breaching the basic requirements, LKAB has introduced a more detailed set of requirements a Supplier Code of Conduct which consists of 80 requirements in seven areas of sustainability. In 2016 the Supplier Code of Conduct was expanded to include the requirement that our suppliers must not trade in what are known as conflict minerals minerals which directly or indirectly help finance conflict, for example, in the Democratic Republic of the Congo and neighbouring countries. 8 fundamental requirements defined on the basis of international guidelines 80 detailed requirements within seven areas of sustainability for suppliers considered to be higher risk1 42 follow-up ups were carried out in 2016 of 150 identified high-risk suppliers 1 within the Group, relating to the requirements in our Supplier Code of Conduct. 1 High or extreme risk (based on results from our risk analysis tool), as well as suppliers flagged up. Suppliers that are flagged up are not at a high risk of deviation from the supplier requirements, but may be associated with an industry or region involving risk and also have a major impact on production. OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SUPPLIERS 37

40 EMPLOYEES EMPLOYEES CHALLENGES A safe work environment means continued work on the safety culture, focusing on training and workplace-related efforts involving dialogue and follow-up. LKAB works to continually improve the physical, organizational and psychosocial work environment. Long-term human resource management and attractiveness are required for a successful LKAB. Despite rationalization and staff reductions, LKAB must continue to be an attractive employer. We are also continuing our partnerships with schools and universities and our cooperation with the local community. Responsible staff cuts are guided by a long-term approach to human resource management. LKAB has worked on matching surplus personnel with positions available based on the skills they have. Employees The total number of employees (average) in 2016, including parttime and fixed-term workers, was 4,224. 4,042 permanent employees, of whom 1,333 were white-collar workers and 3,068 were bluecollar workers. 34 people were employed part-time. 359 people were fixed-term workers. Full-time and part-time employment options are available for employees with young children. All LKAB employees in Sweden and Norway are covered by collective agreements, with the exception of Group management and the heads of subsidiaries. For reporting on LKAB s incentive programme, see Note 6 on page 106. It s the people that make LKAB. Our values form the basis of everything we do. Our employees commitment, innovation and responsibility form a basis for an LKAB that remains competitive. The active involvement of our employees in our improvement work is crucial to the success of both the company and our customers. LKAB must be an attractive employer with a culture characterized by safety, inclusion and opportunities to develop. A wide range of expertise is required to operate LKAB s large-scale modern iron ore mines, as well as our production plants and extensive logistics. Around 200 different positions in various professional categories are represented within LKAB from mineworkers, electricians and process operators to automation engineers, rockwork technicians and research engineers. Human resource management and attractiveness At the same time, we can offer a variety of career paths and an attractive environment in which to live in a beautiful region. There is a strong economy here alongside the mining operations, as well as a good quality of life for our employees and their families. Our long-term competitiveness is also based on our ability to attract and retain the right skills through professional challenges, broad career paths and personal development. This work is supported by our talent management process, which is aimed at succession planning and identifying talent and key positions. This process allows us to offer various different career paths. Annual staff reviews provide an important basis for our employees development. Commitment, innovation and responsibility Our values committed, innovative and responsible are about taking responsibility for the future of the company, being committed to our customers results and being innovative so that we continue to develop and improve all the time. 38 EMPLOYEES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

41 The proportion of women in the Group is 20.6 (20.0) percent and the proportion of female managers is 19.5 (17.7) percent. The aim is that by 2021 women will make up 25 percent of both employees and managers at LKAB. PROPORTION OF WOMEN AT LKAB Proportion of female managers Proportion of women % It is LKAB s ambition to set an international example in the mining industry as regards ethics, the work environment, equality and diversity. We observe internationally recognized declarations and conventions such as the UN Global Compact s ten principles, the Children s Rights and Business Principles, the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights. To ensure responsibility throughout the value chain we also have a Supplier Code of Conduct. LKAB has a threeyear diversity plan, and during the year the focus was on including diversity when producing standards and ground rules in the workplaces. LKAB s employee survey In December LKAB s employee survey was sent out to all employees in order to identify areas where LKAB can improve. The last employee survey was conducted in As in the 2013 survey, the questions fall into four main areas: Me as an employee, In my workplace, My boss and LKAB as an employer. This year s survey included more questions on diversity and questions linked with the management philosophy. The results of the employee survey will be compiled Kamilla Bruksås and Truls Johan Mojlanen in front of the new shiploader in Narvik. A ROCKET IN THE CAREER BAROMETER SURVEY In the 2016 Karriärbarometer 1 (Career Barometer) survey LKAB was one of the rockets in other words, one of the companies that has increased most in popularity. Compared with the previous year, LKAB rose 38 places among those with a Bachelor s degree in engineering and 12 places among those with a Master s degree in engineering. Swedish engineers place the company among the 70-highest ranked employers. Grete Solvang Stoltz was named by Universum as human resources director of the year for her work on strengthening LKAB s brand as an employer and establishing this among LKAB s management. In December Karriärföretagen named LKAB one of Sweden s best places to work, for the fifth consecutive year 2. 1 Karriärbarometern (the Career Barometer) is Universum s annual survey which asks young working graduates about employers and careers. 2 Karriärföretagen is an independent organization which each year names Sweden s 100 foremost employers Diversity The proportion of women within LKAB continues to increase. Although the total average number of employees decreased during the year, the trend towards a greater proportion of women was maintained. Of a total of 4,042 (4,278) permanent employees in 2016, 831 (857) were women. All employees, with their different qualities, backgrounds and life experiences, contribute to LKAB s diversity. Diversity and equality contribute to long-term sustainability. According to Statistics Sweden s analysis, 6.7 (6.5) percent of LKAB employees were born abroad. The percentage of white-collar employees who were born abroad is slightly higher at 8.8 (8.7) percent. Diversity is discussed at workplace meetings and at CPD days for health and safety representatives. Diversity is included in management training and seminars. LKAB also discusses diversity with suppliers and contractors. OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 EMPLOYEES 39

42 ACCIDENTS WITH ABSENCE, LKAB GROUP Number Number in 2016 Frequency/million hours worked Accidents The overall accident rate did not decrease during the year and remains at 6.9 accidents resulting in absence per million hours worked. A continued focus on preventive safety work has had a positive impact in parts of the operations, however. A strong safety culture is also a priority in the leadership and employeeship initiative that is taking place throughout LKAB. It remains the case that most of the accidents have undramatic causes such as slipping and tripping. The objective for 2021 is a maximum of 3.5 accidents per million hours worked. 3.7% Sick leave is at 3.7 percent, of which long-term sick leave accounts for just 0.8 percent. 1 case of corruption in which an employee exploited their position in the company for their own gain. 11 cases of arbitrary acts in which there were consequences for an employee under labour law because of breach of the employment contract FOCUS ON WORK ENVIRONMENT AND SAFETY CULTURE LKAB is working towards the goal of zero accidents, a good physical and psychosocial work environment, and employees who are healthy in the long term. This means ongoing systematic work on the safety culture and an improved physical, organizational and social work environment, so that all employees thrive, feel secure and are healthy in their workplace. Safety First! is the name of LKAB s continuous work for safe and secure workplaces. As part of developing a safety culture in the workplace, training and dialogue have been taking place out in the workplaces. The accident rate for 2016 remains at the same level as last year, despite systematic and extensive preventive efforts. The measures have had a positive impact in parts of the operations, however, and safety work continues to have a high priority. The psychosocial work environment has also been in focus during the year. Mandatory activities, psychosocial safety rounds and group discussions have taken place dealing with shared standards and ground rules based on the Code of Conduct. SPEAKUP A CHANNEL FOR WHISTLEBLOWERS Work on matters such as anti-corruption and non-discrimination has a high priority at LKAB, and our stated aim is for our Code of Conduct to be complied with throughout the organization. LKAB has a whistleblower programme, SpeakUp, which was launched in January SpeakUp supplements the Code of Conduct and employees can use the system to report anonymously anything that they feel is not right. Examples of Checking reinforcement work in the Printzsköld orebody in Malmberget. Another important area in terms of developing a good work environment for everyone who spends time within LKAB s operations is cooperation with, and clarity in, the requirements made of suppliers. In 2016 we investigated approaches, methods and management in the area of the work environment in preparation for the forthcoming certification according to the international work environment standard OHSAS Another priority is industry-wide consensus on work environment matters, and LKAB is driving these issues actively through its participation in GRAM- KO (the work environment committee of the mining industry) as well as in various external collaborations and research projects. issues that can be reported are breaches of the Code of Conduct, financial crime such as bribery, corruption and fraud, as well as security breaches, breaches of environmental rules, discrimination or harassment. The Code of Conduct sets out LKAB s guidelines in areas such as anti-corruption and discrimination. In 2017 interactive training in the Code is also being launched and implemented for LKAB employees. 40 EMPLOYEES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

43 Employee interview: Now my role is more operational and I can see the results directly. When LKAB and the market change, new opportunities for unexpected career leaps arise. Daniel Ulvefeldt took the step to something completely new. A former market analyst, he is now responsible for LKAB s treasury unit and currency trading. How did this leap come about? I heard about the position of treasury unit manager and currency trader and my curiosity was aroused. Previously my work was long-term and strategic, monitoring what was going on in the world and working on market analysis and statistics. My new job is different more operational and tangible. What are your feelings about the change of position? Was it what you thought it would be? I have had to get to grips with an awful lot in order to be able to take on this role and its responsibility, but I have learnt from my colleagues and from our counterparties. My role quickly became operational and now I can see the results of my work directly. I m also in contact with more people and subsidiaries around the organization than previously. It s enjoyable and I feel it is a privilege. What have you found useful from your previous job? Knowing how the iron ore and steel markets work has been a great advantage and market analysis remains a large part of my daily work, but now it is linked to my area of responsibility. The fact that I had also completed LKAB s trainee programme has also been valuable and given me a good understanding of LKAB s business, as well as the route that the ore takes from mine to port. LONG-TERM THINKING GUIDES STAFF CUTS Work on adapting LKAB to the market situation by reviewing the organization continued throughout The focus was on costs and efficiency. Within the framework of the Group s new structure, a new underlying organization based on divisions has been put in place and during the autumn 95 people were given notice that their employment would be terminated. Important starting points for this work were respect for the individual and LKAB s long-term skills requirements. Thanks to a stop on external recruitment, targeted pension solutions and matching of existing skills to vacant positions, the number of positions has been reduced without layoffs in the Parent Company. Matching of existing skills to vacant positions has been an important part of the adaptation work. WELL-DEVELOPED EMPLOYEESHIP AND LEADERSHIP To remain sustainable, a company must be flexible and able to adapt particularly under tough market conditions. Committed, involved employees are the key to such change work. In 2016 LKAB formulated its view of employeeship and leadership a pointer for how we should act as individuals, team members and leaders. It is centred on LKAB s continued development and how leaders and employees must work on improvements every day. The new philosophy will provide support for prioritization, decision-making and daily improvements, with successful customers as the end goal. Everything is always based on our values: committed, innovative and responsible. Dialogues and training Where leadership is concerned, relevant aspects include how LKAB s leaders show the way forward, create conditions, encourage participation and coach their team members. The employees in turn have responsibility for the quality of their own work, as well as continually seeing opportunities for improvements and delivering in line with the customer s expectations. Compliance with the Code of Conduct applies to everyone and ensures that we act responsibly and have an open corporate climate. Changing behaviours and how we work is a challenge. In 2017 the new approach will be implemented through dialogues and training at all levels within LKAB. 90 dialogues on diversity issues took place in LKAB s operations during the period 2013 to These dialogues formed part of the work on LKAB s diversity plan. OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 EMPLOYEES 41

44 SOCIAL RESPONSIBILITY CHALLENGES Securing the confidence of the world around us, including cooperation and good relations with the local community, is a challenge and a precondition for LKAB s operations. Great importance is attached to dialogue, accessibility and transparency, as well as actively dealing with concerns and discussing individual property owner s wishes. At the right time, at the right price and with mutual understanding are the watchwords for carrying out urban transformation in our operating locations. LKAB has taken on an active role in order to have control over scheduling and costs, and to ensure that development precedes phase-out. One of the ways we do this is by acting as a purchaser and offering replacement properties. SOCIAL RESPONSIBILITY The rich iron ore of northern Sweden generates considerable socioeconomic value. It laid the foundation for the communities in the Swedish orefields and was the reason for the development of Swedish hydroelectric power and of 500 km of railway track from the Atlantic to the Gulf of Bothnia. It has given rise to two ore ports and a steelworks, and contributed to one of the world s northernmost universities of technology. A cluster of primary industry, cutting-edge technology and research. Since LKAB was formed in 1890, its operations have been characterized by a long-term approach, cooperation and far-reaching social and environmental responsibility. We have a strong ambition to continue to take responsibility and be a positive force as a sustainable supplier to the steel industry, but also as a partner, employer and citizen of society. Cooperation with many different stakeholders LKAB s operations impact and are impacted by many different interests. Dialogue with our various stakeholders guides us when we prioritize and report on the issues that are most material in our sustainability work. At our operating locations in the Swedish orefields, relations with local residents and with the reindeer herding and tourism industries are key. Urban transformation in which development must always precede phase-out is one of the single most important issues for both LKAB and the operating locations. That our operating locations continue to be attractive communities where people want to live is also essential for attracting expertise: communities with a good housing market, good schools, a broad range of cultural and outdoor offerings, and attractive public spaces. For this it is essential that LKAB enjoys good cooperation with residents, communities, regional and local industries, landowners and authorities. Communication is vital LKAB operates in an industry that has a great impact on society and individuals. Transparency, accessibility and ongoing dialogue both within and outside of the company are therefore absolutely crucial if we are to retain the trust of those around us. Our main communication channels are the website lkab.com, the magazine LKAB Framtid ( LKAB Future ) and our activities in the operating locations. We communicate in the news media and also hold regular public and individual meetings and information sessions in various forums. Central Kiruna with the mine area and the terraces of Kirunavaara mountain in the background. 42 SOCIAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

45 RESEARCH & DEVELOPMENT COLLABORATION LKAB collaborates with a number of external parties and knowledge centres, nationally and internationally, in areas that are important focus areas for the company. The aim is to develop knowledge, attract competent employees, work to reduce energy and climate impact and secure the company s competitiveness. National and international collaboration with the mining industry, for example, through the Bergforsk arena, in the research programme STRIM, and in the Nordic Rock Tech Center and EIT Raw Materials. Collaboration and partnership with the Swedish and European steel industries, for example, through the Research Fund for Coal and Steel and Swerea MEFOS. Collaboration within process industry IT and automation takes place nationally and within the EU, including through the strategic growth programme PiiA and Vinnova. Close and long-term cooperation with Luleå University of Technology on a number of different platforms, programmes and projects. LONG-TERM SCHOOL INITIATIVES To secure LKAB s long-term human resource requirements we are involved in various kinds of school initiatives. This work aims to provide young people with good educational opportunities and a stable basis for the future. Schools also form a basis for an attractive community. We work closely with institutions such as Luleå University of Technology and are actively involved in the local compulsory and upper secondary schools, as well as through the LKAB upper secondary school. The foundation LKAB Academy provides financial support to pre-schools, compulsory schools and upper secondary schools in the Swedish orefields and Narvik. The aim is to encourage an interest in science and technology among children and young people. So far support has been given to more than 50 school projects in the orefield municipalities. In 2016 the foundation distributed around MSEK 3.6 to various development projects. Learning from a construction project During the year students from Lapland Upper Secondary School got to build a new assembly hall in LKAB Fastigheter s residential area in Gällivare. The build took place as a partnership between LKAB and the school, and students in the Building and Construction Programme were involved throughout the project. The focus was on the work environment, risk and learning the various elements involved in a construction project. Since autumn 2013 LKAB has been a partner of Narvik Equestrian Club an example of our local commitment. Sponsorship strengthens the brand LKAB works actively on sponsorship and partnerships as part of the company s commitment to the locations where we operate. LKAB s commitment consists mainly of donations to culture, sport, research and education in the communities where LKAB operates. We are also involved in sponsorship of sport and culture at a national level, primarily with a view to strengthening the brand in order to support future recruitment. Examples of major sponsorships include: Norrbottensteatern (Norrbotten Theatre) Teknikens Hus science centre Mining and Geology exhibition Tekniska Museet (Swedish National Museum of Science and Technology) The Mine exhibition jointly with industry organization SveMin Ice hockey Kiruna IF, Kiruna AIF and Luleå Hockey Cross-country skiing Charlotte Kalla and Marcus Hellner OPERATIONS AND IMPACT NEW SOCIAL SUSTAINABILITY OBJECTIVES FOR During the year new objectives for social sustainability were adopted that we will be working on over the period In addition to objectives for workplace safety and the percentage of women and female managers, we have defined the following objective: Compliance with LKAB s Code of Conduct and well-functioning dialogue with our stakeholders. This objective is being followed up as follows: All operations shall have carried out an impact analysis in respect of human rights and, if necessary, drawn up an action plan. Confidence in LKAB is to be maintained through the urban transformation process (annual SIFO surveys in Kiruna and Gällivare). All employees are to be trained in the Code of Conduct. Cooperation agreements are to be drawn up for Sami villages that have reindeer grazing lands neighbouring LKAB s mining operations. Audits of high-risk suppliers are to be carried out and agreed action plans followed up. We will work in partnership with our customers on sustainability initiatives. We will have a system in place for external grievances. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SOCIAL RESPONSIBILITY 43

46 Principles of the urban transformation Dialogue and collaboration In consultation with municipalities, residents, landowners, authorities, reindeer herders and others, LKAB is working to ensure that urban transformation provides security and foster belief in the future. Cooperation, collaboration and implementation agreements set out what has been agreed. Developing before phasing out One important aspect is that new housing, services and infrastructure should be completed and under construction before LKAB phases out older settlement areas. LKAB s responsibilities Under the Minerals Act, LKAB must compensate for the impact and costs of urban transformation necessitated by the company s mining. Compensation to owners of houses and other properties Those who own a property can choose to receive a replacement building that is equivalent to the current one or a sum of money corresponding to the market value plus 25 percent. Compensation to owners of cooperative housing units Owners of cooperative housing units will receive a sum of money in compensation. The compensation is an amount per square metre of living area that corresponds to the price per square metre for a newly built cooperative housing unit in the Swedish orefields plus a supplement based on the condition and standard of their current cooperative housing unit. Compensation to business owners, authorities and organizations Those who own their property will be offered a replacement property, while those who rent will be offered new premises with the rent increasing in stages over up to five years. In addition, LKAB will pay relocation expenses and compensate for loss of income due to relocation. Compensation to tenants Tenants who do not own a property will be compensated by staged rent increases and will be given priority access to both older and newer rental apartments. This means that the rent remains at the current level for the first year, and then increases in stages over seven years. Regardless of landlord, all tenants who must move are covered by LKAB s staged rent increases. URBAN TRANSFORMATION IN THE SWEDISH OREFIELDS Urban transformation in Kiruna and Malmberget is a consequence of the expansion of mining and the location of the orebodies. When mining takes place at a great depth, it has an impact on people and communities, which have to move in order for mining operations to continue. Urban transformation is a challenge for everyone involved. It is LKAB s ambition to facilitate this transformation and compensate for the direct impact that it has on the people and communities affected. Developing before phasing out For LKAB and our stakeholders it is essential that important social functions are complete or under construction before buildings are decommissioned. This will take place gradually with Mine City Parks being constructed as the areas are phased out, thereby creating soft transitions between 64% of Gällivare residents see the urban transformation as something positive and 80 percent have great confidence in LKAB s ability to shoulder its responsibility for the urban transformation.1 mine and community. LKAB s aim is that nobody should have to live or stay next to industrial fencing. Urban transformation is being carried out in partnership and consensus with our stakeholders. We are also playing an active role, both as a purchaser of new properties and as a collaborative partner, in order to identify suggestions for housing solutions and create freedom of choice in this area. We are also looking for constructive solutions for industrial and commercial properties together with the companies concerned. 64% of Kiruna residents see the urban transformation as something positive and 80 percent have great confidence in LKAB s ability to shoulder its responsibility for the urban transformation.1 1 Attitudes to urban transformation in the Swedish orefields are measured each year through a survey by SIFO aimed at various interest groups in the orefields, in Norrbotten County and nationally in Sweden. 44 SOCIAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

47 HERITAGE BUILDINGS PRESERVED A significant proportion of the buildings in the areas affected by the changes are of cultural historical value. A number are unique and popular, and some are also listed buildings. The phase-out work must therefore take place with great care and respect. LKAB and the Municipality of Kiruna have agreed that LKAB will be responsible for preserving several of the buildings. LKAB has undertaken to move around 21 buildings, including the church and Hjalmar Lundbohmsgården. Bolagshotellet is not covered by the agreement but is being moved on LKAB s own initiative. The first heritage buildings are being moved in In Malmberget around 30 heritage buildings will get a new address. By moving older buildings, LKAB is helping to ensure that there is a varied stock of homes. Older homes can be offered at a lower rent than newly built properties, which also adds to freedom of choice. To preserve the cultural environments LKAB is also financing and running an extensive project to document the buildings; this is also required by the County Administrative Board and the Swedish National Heritage Board. Hjalmar Lundbohmsgården, Kiruna. Provisions for and costs of urban transformation LKAB s provisions for urban transformations in the Swedish orefields amounted to MSEK 13,062 (12,234) at year-end. The costs of provisions for urban transformation during the year totalled MSEK 2,106 (1,568) and related primarily to costs resulting from impact boundary movement as well as revaluations of earlier provisions see also Note 31. AGREEMENT ON ROAD E10 IN KIRUNA During the autumn the Swedish Transport Administration and LKAB reached agreement on the financing and construction of a new section of road E10 around Kiruna. LKAB will finance the new route, which is essential for good communications in the new Kiruna. This will be a significant cost for LKAB, but the project is necessary in order to be able to continue mining iron ore in Kiruna. The Swedish Transport Administration and LKAB will work together to find possible efficiencies and savings in the project, for example, through technical solutions. Construction of the new section of road will begin in 2017 and is expected to be completed in RELOCATION IN MALMBERGET MOVES UP A GEAR During the year LKAB presented the detailed plans for purchases and relocations in Malmberget. A total of 1,740 homes are now covered by the current schedules. The increased pace of urban transformation is due to forecasts of future land movements caused by the mining. The plans mean that large parts of Malmberget will be vacated during The new timetable makes the future more predictable for the residents of Malmberget. In 2016 the tenants of 78 apartments in buildings owned by LKAB were affected by the move. The tenants were given assistance with moving into temporary accommodation and replacement homes. Within a few years municipal operations such as a sports hall, retirement home and school will also be affected. The Municipality of Gällivare will build these in new premises in Gällivare. Disbursements for the year totalled MSEK 1,035 (291). More detailed reporting on urban transformation can be found on the website lkab.com. Further details concerning provisions as a result of mining operations can be found in Note 1, on page 91 and in Note 31 on page 109. Urban transformation milestones in 2016 Kiruna The decision is taken to move Bolagshotellet to the Luossavaara area along with other cultural buildings. LKAB buys 10 key properties in central Kiruna from Telerit. LKAB announces that the company will finance the new E10 road. 16 new apartments are ready for occupancy in the Jägarskolan area. Negotiations with Ortdrivaren housing cooperative with a view to sale. This will be the first housing cooperative sold to LKAB. Malmberget The four communicated stages are detailed, resulting in the urban transformation stepping up a gear. The Board of Directors approves the investment for land and infrastructure works at Repisvaara in Gällivare. Around 120 plots are to be prepared for single-family homes. LKAB buys the ice rink in Malmberget, which was previously owned and run by the sports club Malmbergets Allmänna Idrottsförening (MAIF). LKAB and the Municipality of Gällivare reach agreement on compensation for municipal premises and land in affected areas of Malmberget. Jointly LKAB launches detailed principles for compensation to property owners, tenants and businesses. Increased dialogue between LKAB and the municipalities to secure building land in the development areas that are crucial for future mining. LKAB signs agreements with seven building contractors that will build replacement homes in the orefields. What s happening in 2017? The old railway station, LKAB s annex, Järnvägshotellet (the Railway Hotel), Hotell Rallaren and other buildings will be demolished in Kiruna. Start of construction of a new section of road E10. Hjalmar Lundbohmsgården and Bolagshotellet will be moved to Luossavaara in Kiruna. Ingenjörsvillan will be converted into an accommodation and conference building and moved to Luossavaara in Kiruna. Construction of homes will start in the Kommunalhemmet district, Hasseln district, in Repisvaara and in Koskullskulle in Gällivare. The first heritage buildings in Koskullskulle will be ready for occupancy, while the remaining 14 out of a total of 30 heritage buildings will be moved from Malmberget to Koskullskulle in Gällivare. OPERATIONS AND IMPACT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 SOCIAL RESPONSIBILITY 45

48 ENVIRONMENTAL RESPONSIBILITY ENVIRONMENTAL RESPONSIBILITY LKAB s mining operations have a significant environmental impact on the surrounding landscape and communities. Primarily from emissions to air and discharges to water, noise, vibrations and land impact from industrial and ore processing operations. LKAB technician Ulf Nilsson samples the water quality in the river Rakkurijoki, Municipality of Kiruna. LKAB is one of Sweden s biggest energy users. Streamlining energy use is important work, both to keep costs down and to limit impact on the environment. The sustainability objectives drive the direction and improvement work, which includes energy consumption, emissions to air and climate-smart products. The work is taking place within the focus areas of Resource-efficient Production and Responsible Operations. Permit requirements Activities are conducted within the Group that require permits under the Environmental Code. The most extensive permits relate to the mining and processing of iron ore and to the depositing of waste sand and barren rock in stockpiles. Pit and port operations also require permits. We regularly check how well LKAB is complying with permits issued and their conditions, and carry out checks on our environmental impact. How well we are complying with permits, conditions and other requirements is reported in the annual environmental reports, which are available on the website lkab.com. Our main activities are certified according to quality, energy and environmental management systems ISO 9001, ISO and ISO 14001, as are the main operations within LKAB. The impact on the surroundings caused by the mining operations is continually measured. This mainly concerns vibrations or atmospheric shock waves, noise and ground deformation and movements in the rock mass that are felt in the local communities. Land impact and deformation limits, and how they are to be checked and followed up, are regulated via conditions in the environmental permits. This is measured primarily through GPS measurement rods (approximately 372 rods in Kiruna and approximately 218 rods in Malmberget) distributed around the community. Vibrations and atmospheric shock waves are measured continuously by online meters at the operating locations of Kiruna, Malmberget, Svappavaara and Masugnsbyn. Noise is measured annually at a number of measurement points at all the operating locations in accordance with the Swedish Environmental Protection Agency s guidelines for emissions measurement of external industrial noise. Remediation LKAB is responsible for and obliged to restore areas affected by the mining operations through planned remediation. LKAB s guidelines on land use state that the aim is what is known as ecological remediation, which means creating new nature values on land used for industrial purposes. Biodiversity In remediation the aim is for there to be no net loss of biodiversity. The starting point is the location s possible biodiversity, either by imitating the surrounding landscape or by introducing new conditions. This work is based on what are known as the four stages of the consideration hierarchy: avoid, minimize, restore and offset. This approach requires great knowledge of types of nature and species even at the planning stage, as well as well documented nature values for both land and water. The work is preceded by consultation and dialogue with stakeholders affected. One example of how LKAB works to promote biodiversity is the cultivation trials that were conducted during the year to determine how new environments for calciphyte species can be created as part of remediation of the dolomite mine in Masugnsbyn. 46 ENVIRONMENTAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

49 MAJOR FOCUS ON MANAGEMENT OF MINING AND PROCESS WATER Ore processing requires large amounts of water. The water has a major impact on LKAB s concentrating and pelletizing processes, among other things. At the same time, LKAB s mine production and processing mean that there is a risk that undesirable pollutants, such as nitrogen, phosphorus, nickel and zinc, will get into surrounding watercourses as part of surplus process water. Emissions to water are regulated in the Environmental Code based on EU standards for environmental quality. The ruling by the European Court of Justice concerning dredging of the Weser River in Germany (the Weser case) has resulted in a tightening up of application of the rules on discharges to water. Good ecological status must be achieved, which under the new stricter requirements means that the water quality must not be impacted by human activity. In principle, this means that even very small changes are not acceptable. The new application of the environmental quality standards is of great significance for and has a great impact on LKAB. During the year extensive work was carried out, for example, to chart how mixing in new ores affects the process water and how the chemical composition in turn affects the pellet products and recirculation to watercourses. The objective of reducing nitrogen discharges to watercourses from explosives in mine production is also a major challenge. Here, we review various possibilities for making the use of explosives more efficient and tailoring the upgraded iron ore products further. MAJOR PERMIT EVENTS IN 2016 Our impact is regulated by current legislation and environmental permits. At the same time, LKAB has a stated aim to be one of the world s leading mining companies as regards resource-efficient production and minimizing environmental impact. Kiruna In February the Land and Environment Court of Appeal decided not to review the decision to reject LKAB s application to amend its permit to allow increased pellet production at KK4. LKAB has appealed the decision to the Supreme Court. LKAB decided to submit an application for a new basic permit that allows increased production in existing mining and processing operations. The decision means a full examination of the operations, for which preparatory work is in progress. The County Administrative Board decided that at the present time it would not approve LKAB s request for a new location for stockpiling barren rock within an existing industrial area. An application for a new permit for continued and expanded mining of dolomite in the Masugnsbyn open-pit mine was submitted to the Land and Environment Court in April. Dolomite is used for certain pellet products. Svappavaara In March 2016 LKAB applied to the Land and Environment Court to take measures to increase the capacity of LKAB s dams in Svappavaara. The main proceedings were held in early 2017 and LKAB is awaiting a ruling in the case. The County Administrative Board ordered LKAB to apply for a permit for measures involving the tailings pond in Svappavaara. LKAB s request for the decision to be reviewed was not granted, and, consequently, LKAB appealed the decision to the Land and Environment Court. The County Administrative Board submitted a notification of legal action in respect of action taken. LKAB had its trial period extended for the investigation of discharges to a recipient. Proposals are to be submitted by 2019 at latest for maximum discharge values for sulphates, zinc, copper and uranium, as well as a monthly mean value for uranium. As a safety measure LKAB may pump water from the Kalix River to the Liukattijoki watercourse in consultation with the County Administrative Board. Malmberget In July 2016 LKAB applied to the Land and Environment Court for an amendment that would allow extended stockpiling of sand and handling of external crushed ore during the period The application was supplemented at the request of the County Administrative Board. In December work began on preparing the application for a permanent permit amendment to allow extended stockpiling of sand and handling of external crushed ore with effect from An application for new barren rock stockpiling in REMEDIATION DURING THE YEAR Tingvalls kulle and the Viri pit was drawn up during the year. Submitted to the Land and Environment Court at the beginning of The content of particulates in overflow water from ore processing in Vitåfors was exceeded three times during the year and on several occasions was on the limit of the permitted level. Improvement measures taken include a new pumping station and dredging of the settling pond. The County Administrative Board requested an earlier submission and information on measures and plans to ensure compliance with this condition. Luleå An application for a new permit for LKAB s ore port in Luleå was submitted in May The application does not relate to any new operations, but aims for existing operations to be covered by a modern permit with appropriate terms. During the year LKAB received a number of complaints concerning dust from the ore port in Luleå. A measurement programme and action plan were produced and a comprehensive project to limit the dust was started early in Narvik In December 2015 the Norwegian Environment Agency ruled on the appeal by both neighbours and LKAB concerning parts of LKAB s permit for expanded operations from The Environment Agency ruled largely in LKAB s favour. In January 2016 a permit was granted with updated conditions. OPERATIONS AND IMPACT Settling pond, Kiruna. Remediation measures were taken mainly in LKAB s old operational areas. Among other things, a couple of old exploration areas were checked and remediation measures were taken; for example, casings were capped after having been left too long according to today s standard. In addition, remediation in the form of a clean-up was carried out at a domestic landfill site in Koskullskulle and in parts of the discontin- ued operating areas at Luossavaara and Tuolluvaara. As a result of the measures the remediated areas are now suitable for new residential building. Remediation work is carried out both gradually and after operations have ceased and must take into account safety, environmental, economic and aesthetic aspects. For details of provisions for remediation, refer to Note 10 on page 97. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 ENVIRONMENTAL RESPONSIBILITY 47

50 ENVIRONMENTAL IMPACT AND RESOURCE CONSUMPTION Our impact is regulated by current legislation and environmental permits. At the same time, LKAB has a stated aim to be one of the world s leading mining companies as regards resource-efficient production and minimizing environmental impact. EMISSIONS TO AIR LKAB s emissions to air come mainly from the ore processing plants and consist primarily of carbon dioxide, nitrogen oxides, particulates and acid gases such as sulphur dioxide, hydrogen fluoride and hydrogen chloride. One of LKAB s sustainability objectives is to reduce carbon dioxide emissions by at least 12 percent per tonne of finished product by 2021 compared with At the same time, emissions of nitrogen to air (NOx) are to reduce. Another sustainability objective is for total emissions of particulates to air from our scrubbing equipment to decrease by at least 40 percent by 2021 compared with We also measure and check other operations-generated dust and precipitated particulates at a number of measurement points in our production locations. CARBON DIOXIDE EMISSIONS, LKAB GROUP 1 % Per energy type % ktonne Coal Fuel oil Additives Diesel oil Other types of fuel Electricity District heating Carbon in pellets TOTAL 100% Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. CARBON DIOXIDE EMISSIONS PER TONNE OF PRODUCT Carbon dioxide (kg/tonne of product) Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. EMISSIONS FROM PRODUCT MANUFACTURING Emissions to air Particulates (t) Particulates (mg/m 3 ntg) Sulphur dioxide 4 (t) 372 1,136 3 Hydrogen fluoride (t) Hydrogen chloride 4 (t) Nitrogen oxide (t) 4,179 4,053 Nitrogen oxide (g/t product) Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. 2 Filter leakage in a single dust extraction facility in Kiruna substantially increased the average value for the year for all LKAB s facilities, to 57 mg/m 3 ntg. The average value for the year excluding the faulty facility was 21 mg/m 3 ntg. 3 As from 2015 a new measurement method has been in use in Svappavaara. 4 Decreased emissions of sulphur dioxide and hydrogen chloride in Effect of investments in flue gas scrubbing equipment in Svappavaara. Read more in the picture caption on page 49. CARBON EMISSIONS LKAB MINERALS, OUTSIDE SWEDEN Carbon dioxide (kt) ENERGY CONSUMPTION AND ENERGY INTENSITY ENERGY CONSUMPTION FOR THE LKAB GROUP 1 % Per energy type % GWh Electricity ,370 Coal ,217 Fuel oil Diesel oil Other types of fuel District heating Waste heat TOTAL 100% 4,250 1 Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. LKAB is one of Sweden s largest consumers of energy and accounts for a large proportion of the country s total electricity consumption. As energy represents a significant part of our total costs, we have a long-term strategy for managing both energy acquisition and energy efficiency. One of LKAB s sustainability objectives is to reduce energy intensity by at least 17 percent per tonne of finished product by 2021 compared with ENERGY INTENSITY PER TONNE OF PRODUCT Energy intensity (kwh/t product) Refers to facilities in Kiruna, Svappavaara, Malmberget, Luleå, Narvik and electricity for ore trains. ENERGY CONSUMPTION LKAB MINERALS, OUTSIDE SWEDEN Energy consumption (GWh) ENVIRONMENTAL RESPONSIBILITY LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

51 REDUCED EMISSIONS TO AIR Between 2012 and 2015 LKAB invested SEK 1.5 billion in flue gas scrubbing for the facilities in Malmberget and Svappavaara. In 2016 the flue gas scrubbing equipment was able to be fully utilized and this is clearly noticeable from the emissions levels measured. Emissions of sulphur dioxide decreased by more than 67 percent and hydrogen chloride emissions by around 76 percent compared with the previous year. LKAB s pelletizing plant in Svappavaara. RESOURCE USE, WASTE & STOCKPILING Most operational waste consists of types of rock that are not ore, known as barren rock, which is deposited mainly in stockpiles. LKAB also handles smaller volumes of waste lime/purification waste, scrap, industrial waste and hazardous waste. Crushed barren rock and waste lime are reused in our own concrete production for increased resource utilization and to reduce stockpiles and waste. The risks identified in connection with waste management, in addition to specific and controlled risks relating to hazardous waste such as waste lime, are associated with the risk of collapse when stockpiling. DISCHARGES TO WATER Ore processing requires large amounts of water, even if 75 percent is reused in the process. Surplus water is returned to rivers and lakes, many of which are tributaries to or included in Natura 2000 areas. Internal controls include biological and chemical measurements of water that is returned. Other water from production is led to the municipal sewerage systems for treatment. One of LKAB s sustainability objectives is to reduce emissions of nitrogen to water by at least 20 percent per tonne of finished product by 2021 compared with OPERATIONS AND IMPACT MINED VOLUMES, INPUT GOODS AND BY-PRODUCTS Mined amounts Crude ore, magnetite and hematite (Mt) Huntite (kt) Dolomite (kt) Input goods Explosives (kt) Concrete produced (103m 3 ) Additives (kt) By-products Barren rock (Mt) Tailings (Mt) Waste lime (Mt) Provisional data for 2016, to be confirmed in April DISCHARGES TO WATER Nitrogen (t) Nitrogen (g/t product) Phosphorus (kg) Emissions of trace metals Chromium (kg) Cadmium (kg) Copper (kg) Nickel (kg) Lead (kg) Zinc (kg) Arsenic (kg) TOTAL Trace metals (kg) The quantities are based on overflow water from ponds in Kiruna, Svappavaara and Malmberget. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 ENVIRONMENTAL RESPONSIBILITY 49

52 RISKS AND RISK MANAGEMENT The Safety First! programme brings risk management into focus and emphasizes work to strengthen the safety culture. All business operations involve risk. Within LKAB, the company s risks are identified and measured before decisions are made on how the risks are to be managed. The aim is to create a high level of awareness of the risks inherent in the operations for the Group as a whole. In 2016 LKAB s organization was changed and decision-making was decentralized. As a result, responsibility for the risks identified is being made clearer. The Chief Risk Officer coordinates the overall risk work and is responsible for coordinating and informing Group management of the company s risk exposure. The Board s Audit Committee is responsible for monitoring strategic and operational risk, as well as risks in the area of sustainable business. 50 RISKS AND RISK MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

53 STRATEGIC RISK LKAB is exposed to a number of different risks that are difficult to influence. The ways that LKAB manages strategic risk include monitoring the outside world, analyzing scenarios, building long-term customer relationships and having a flexible customer and product portfolio. RISK RISK MANAGEMENT Risk of not gaining access to land for mining operations Delays in the process of obtaining permission to use the land needed for continued mining operations entails a risk of LKAB having to reduce its rate of production or even stop parts of production. This would have a major impact on LKAB s earnings and cash flow. LKAB s impact on the communities in the Swedish orefields means that LKAB must have access to the land impacted by mining operations. Delays in the process could be caused by proceedings becoming drawn out, by incorrect prioritization or by property owners who oppose negotiated solutions. In order for the urban transformation process to continue in the way required, LKAB has clear guidelines and a good working relationship with the parties concerned. Urban transformation is long-term work that is based on a broad sustainability perspective. Control and follow-up of LKAB s impact on the land in the areas affected is necessary and takes place continually. There is also a preparedness to manage situations in which voluntary agreements cannot be reached. Risks relating to environmental permits LKAB conducts activities that require permits under the Minerals Act and the Environmental Code in the Parent Company as well as in the Swedish subsidiaries. Violations of applicable environmental legislation could result in criminal proceedings and enforcement actions. Permits in force could also be affected. Compliance with environmental requirements is of great importance in LKAB s operations. The present business cannot be conducted without environmental permits. The most extensive environmental permits relate to large-scale mining and facilities for processing iron ore products. This includes, in particular, permits for tailings ponds and barren rock deposition, and for crushing, dressing and pellet production. LKAB is forward-looking and uses long-term planning to ensure that the permits meet the needs of the operations as regards both extent and flexibility. LKAB s organization has been adapted so as to deal with essential permit matters in good time, based on what is needed for efficient production and the expected environmental requirements. Customer dependency The global iron ore and steel markets are made up of a small number of players. This concentration gives each individual player increased importance and results in considerable interdependence between supplier and customer. Significant economic fluctuations that could cause problems for LKAB s iron ore customers increase the risk of reduced sales volumes for LKAB. To ensure long-term profitability and competitiveness LKAB strives to ensure that, regardless of economic fluctuations, it can always sell everything it produces. This is achieved through close, long-term customer relationships, technical partnerships and long-term delivery scheduling. By ensuring flexibility in product portfolios, in customer portfolios and in production and logistics systems, LKAB is better prepared to cope with sudden fluctuations in the economy. LKAB always strives to consistently offer high-quality products and reliable delivery in order to create a competitive advantage during downturns in the market. LKAB Minerals has a more diversified customer base and product portfolio that helps dampen economic fluctuations, since different geographical regions, segments and minerals have different economic cycles. Political risk The countries in which LKAB s customers operate have varying degrees of political and commercial stability. Business risk may arise as a result of political decisions or changes in the legislation and regulations that exist within the industry. Should LKAB s customers be affected by one or more of these factors, this could have a negative impact on future demand for LKAB s products. LKAB actively monitors the outside world in order to manage political risk and cooperates with both national and international industry organizations in respect of these risks. Capital expenditure risk Due to the relatively long project periods for capital expenditure such as expenditure on new main haulage levels or new processing plants, there are risks including market risk, purchasing risk and the risk of technical change and changed environmental requirements. Risk of insufficient mineral reserves In order to secure LKAB enduring access to iron ore it is necessary to have a long-term plan, to mine under existing main haulage levels and/or to find new deposits through exploration. LKAB is a highly capital-intensive company. Capital expenditure on new main haulage levels or new pelletizing plants, for example, requires planning around 5 to 10 years ahead. To manage the risks inherent in capital expenditure, risk assessment is included as part of the capital expenditure process. Strategic capital expenditure plans are produced annually and presented to Group management and the Board for decisions. Mining relies on ore resources being utilized. Since the mid-1960s the underground mines in Kiruna and Malmberget have been lowered in stages. Work is continuously under way to document the extent of the deposits. To obtain information concerning mining under existing main haulage levels and in new mines, a forward planning horizon of around 10 years is required before commissioning can take place. Exploration work is conducted continuously in the surrounding area in order to find new deposits. LKAB has applied for and been granted several concessions for exploration in the Swedish orefields. Read more in the section on mineral reserves and mineral resources on pages CORPORATE GOVERNANCE LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 RISKS AND RISK MANAGEMENT 51

54 OPERATIONAL RISKS Through its operations LKAB is exposed to a number of operational risks, including risks associated with production facilities, environmental impact and personnel. The main operational risks are described below. RISK Risk of accidents and illness LKAB s employees and contractors are periodically exposed to risky situations which may involve a risk of accident and/or illness. RISK MANAGEMENT LKAB works systematically to secure the work environment and has well-established procedures to prevent illness and minimize the risk of future injuries. The Safety First! programme focuses on strengthening the safety culture in the company. Risk of dam accidents One risk scenario for LKAB and the mining industry in general is the risk of a dam accident with major financial, social and environmental consequences. LKAB works proactively and systematically on dam safety according to the industry s safety directive GruvRI- DAS. For damages to third parties caused by dam accidents, absolute and unlimited liability applies in Sweden. LKAB is insured through what is known as dam liability insurance. Risk of environmental impact through emissions Emissions to air, discharges to water and the generation of noise and waste, through accidents or temporarily exceeded permit levels or other applicable regulations, may adversely affect LKAB s credibility and thus its ability to continue to run the business. LKAB systematically measures emission levels to check compliance with applicable environmental conditions and permits, and makes any improvements considered necessary. Research and development are also carried out in order to comply with future laws and requirements. Risk of unplanned production stoppages LKAB s production largely consists of continuous processes in which unplanned stoppages can affect production volumes, product quality, emissions to air, discharges to water and financial results. Production disruption may be due to factors such as technical problems, seismicity in the mines, accidents or strikes. Safe, uninterrupted production is LKAB s backbone and is based on being large-scale with continuous optimization. The safety levels of all facilities are audited every year relative to LKAB s requirements and stoppage studies are conducted to determine the current level of risk. Active decisions on how the risk should be managed are taken based on the results. Historically, stoppages due to fire have resulted in the greatest economic losses, so fire prevention efforts are a top priority. To safeguard against unforeseen events the Group s facilities are insured. The largest single insurable risks relate to property and stoppages. To reduce the risk of major mining-induced seismic events there are rules on, among other things, firing salvos for production and development purposes. The mining sequences are controlled such that critical structures or weak zones are not overloaded. To reduce the risk of rockfalls due to mining-induced seismicity, rock reinforcement systems that are highly energy-absorbent and can therefore prevent rockfall are used. LKAB has made a riskreducing investment in Narvik in the form of a new shiploader and quay to achieve redundancy. LKAB tries to avoid disruption due to strikes by being an attractive employer and maintaining ongoing dialogue with the unions. Risk of uncompetitive production costs LKAB s major competitors mine their ore in open-pit mines and therefore have considerably lower production costs. LKAB s competitiveness is strongly linked to the continuous improvements implemented to increase efficiency in all the operations and to increase delivery volumes. In recent years LKAB has invested in increasing its production capacity with a view both to allowing it to grow with its customers and to improving cost efficiency by distributing fixed costs across increased volumes, thereby reducing the cost per unit produced and delivered. To achieve a competitive cost level, LKAB also carries out structured long-term work involving cost efficiency measures in which identified potential is continually evaluated and implemented. Risk of insufficient skilled workers Being able to attract and retain employees is a very important prerequisite for LKAB s long-term competitiveness. Young people in the labour market are willing to move, but mainly to areas that are considered attractive. LKAB is therefore strongly committed to the development of the communities in the Swedish orefields so they remain attractive, viable places to live. For example, LKAB provides a variety of support for the education of young people in the communities. This increases the possibility of recruiting persons with the necessary skills in the future. Risk of deficits in the supply chain Deficits in the supply chain could have a negative impact on LKAB s operations, reputation and financial results. Risk analyses are performed continually in respect of both existing and potential suppliers. LKAB has developed its own tool for grading risk, the main pillars being risk associated with business ethics, the environment and human rights. The risks are measured in relation to LKAB s Supplier Code of Conduct. Based on this grading of risk, each year LKAB performs sustainability audits on a number of suppliers identified as being high risk. Vulnerability analyses within the supply chain are also carried out continually, in order to ensure that critical deliveries to LKAB can continue in the event of an interruption. This is done by means of alternative supply channels. Risk of insufficient allocation of emission allowances LKAB s business is covered by the EU s emissions trading system (EU ETS) and LKAB has a free allocation of emission allowances in the current trading period, i.e., up until However, it is predicted that LKAB may need to supplement its supply of emission allowances in The free allocation applies until the next trading period, which begins in Should LKAB then lose its free allocation, this would be a competitive disadvantage as compared with competitors outside the EU s emissions trading system. LKAB is in dialogue with decision-makers in both Sweden and the EU concerning the future model for emission allowances. To meet the EU s and Sweden s long-term climate targets through the necessary investments in continued reductions in carbon emissions, the free allocation of emission allowances needs to continue. In a global perspective, LKAB s magnetite ore involves a lower level of carbon emissions than, say, hematite ore, which is used by many of its competitors. LKAB aims to reduce carbon emissions from the current level of 27 kg per tonne of finished products to 17 kg by Through ongoing efficiency improvements LKAB is attempting to find more environmentally attractive alternative fuels to replace coal and oil. As a first step towards achieving entirely fossil-free production, trials are being conducted using natural gas which would later be replaced by biogas. 52 RISKS AND RISK MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

55 FINANCIAL RISKS LKAB s financial risks are mainly associated with fluctuations in the global iron ore price and the USD/SEK exchange rate, but also with price risk in respect of raw materials and energy. Together, these factors could have a major negative impact on LKAB s income statement, balance sheet and/or cash flow. RISK Price risk of iron ore products Price volatility in the global iron ore market brings about substantial changes in LKAB s earnings and cash flows. The price of LKAB s products is affected mainly by the global price for iron ore and by pellet premiums. The price of iron ore changes daily with trading, while premiums are negotiated annually between LKAB and customers. RISK MANAGEMENT In 2016 the price risk for iron ore products and its effect on future cash flows were managed using the usual hedging instruments within the framework of the finance policy. In February 2017 a revised finance policy was adopted, in which the basic rule is that LKAB will not normally hedge price risk in the Group s forecast iron ore sales. Some exceptions may be made; for example, prices may be hedged for individual commercial flows where a binding contract provides certainty. CHANGE IN IRON ORE PRICE USD/tonne Source: The Steel Index, TSI (Platts) Currency risk LKAB is exposed to various types of currency risk. The main exposure stems from sales of iron ore where market pricing is in USD. This currency risk is called transaction exposure. Currency risks are also found in the translation of foreign subsidiaries assets and liabilities to the Parent Company s functional currency, known as translation exposure. In 2016 transaction exposure in USD and its effect on future cash flows were managed using the usual hedging instruments within the framework of the finance policy. In February 2017 a revised finance policy was adopted, in which the basic rule is that LKAB will not normally currency-hedge the Group s forecast future cash flows. Outstanding accounts receivable are hedged, however. LKAB does not normally hedge its translation exposure. The foreign subsidiaries within the Group operate mainly in their local currencies, and both investments and financing are mainly carried out in local currency in order to reduce translation exposure. CHANGE IN EXCHANGE RATE USD/SEK CORPORATE GOVERNANCE Source: Bloomberg LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 RISKS AND RISK MANAGEMENT 53

56 RISK Price risk for commodities and energy Commodity price risk refers to the change in the price of input goods and its impact on earnings. It is mainly changes in energy prices that constitute a large commodity price risk for LKAB. RISK MANAGEMENT Electricity prices are hedged at indexed prices and through relevant financial contracts in the electricity market for purchasing at a variable price. Interest rate risk Interest rate risk refers to how the return on an interest-bearing asset or the interest expense on an interest-bearing liability is affected by a change in interest rates. The level of interest rate risk is affected by changes in interest rates and by the asset s sensitivity to interest rates. LKAB is mainly exposed to interest rate risk with regard to short-term investments and cash and cash equivalents. LKAB s cash and cash equivalents are allocated to three portfolios: Liquidity portfolio Urban transformation portfolio Pension portfolio The finance policy governs the maximum average duration in each asset portfolio. The frameworks are set in relation to each portfolio s commitments or purpose and in relation to a range of risk measures and restrictions. Credit risks LKAB s credit risks are primarily associated with accounts receivable, derivatives and short-term investments. The Group s finance policy contains rules on rating new and existing customers from a credit risk perspective as well as rules on other credit risks. Financing risk Financing risk is the risk that LKAB cannot meet its commitments due to lack of liquidity or the inability to raise external loans for operating activities. The Group s finance policy defines the Group s financing needs, in the form of operating capital and needs caused by fluctuations in cash flow, planned expenditure for urban transformation commitments, pensions and remediation. Long-term financing is to cover these financing needs as a minimum. LKAB has a centralized finance function that manages financial risks in line with the finance policy established by the Board of Directors. In February 2017 a revised finance policy was adopted. The Group s aim is that financing activities will at all times support the business plan adopted and ensure that financial risks are identified, quantified and managed. SENSITIVITY ANALYSIS The following sensitivity analysis summarizes LKAB s earnings sensitivity to a hypothetical change in volumes, prices and currencies. Changes in the SEK/USD exchange rate, market prices and delivery volumes have the greatest impact on earnings. In the analysis, the delivery and price analysis refers to the Parent Company and the remaining factors to the entire Group. Iron ore price Dollar rate Delivery volumes Costs SENSITIVITY ANALYSIS Effect on operating profit, 2016 (MSEK) Effect on operating profit, 2015 (MSEK) Group Change Exposure 2016 Exposure 2015 Iron ore price 1 10% 14,715 1,463 14,494 1,445 Dollar rate 1 10% 1,738 1,472 1,802 1,454 Delivery volume 10% , ,114 Costs 2 10% 14,722 1,472 14,652 1,465 1 Not including effects of hedging 2 Excluding provisions for urban transformation and impairment of property, plant and equipment 54 RISKS AND RISK MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

57 GOVERNANCE AND CONTROL CORPORATE GOVERNANCE LKAB ANNUAL AND SUSTAINABILITY REPORT

58 CORPORATE GOVERNANCE REPORT We must maximize the value that LKAB adds at all stages, while at the same time minimizing the negative impact of the business. CHAIRMAN OF THE BOARD STEN JAKOBSSON: LKAB has had an intensive year, and it is pleasing to be able to state that the adaptation work begun in autumn 2015 is having results. We have seen good development towards higher volumes and greater cost efficiency. In 2016 the Board focused primarily on three major matters. Firstly, work to secure a more production-focused organization and a strategy that aims to rapidly bring about an improvement in LKAB s profitability and a return on investments made. Another key issue was the urban transformation and LKAB s ability to continue operating at all. In addition, sustainability continues to have a high priority at LKAB and the Board s ambitions for this work have been raised further. New organization and strategy Jan Moström was appointed as new CEO in autumn 2015, and under his leadership a new Group structure was implemented as early as 1 January 2016, with decentralized production divisions and major changes in Group management. The strategic work that was then carried out during 2016 was aimed at increasing volumes as quickly as possible and improving cost efficiency in order to achieve a return on the major investments that LKAB has made over the past decade. We are already seeing the results of this work, which is pleasing. Having ensured that LKAB is efficiently producing the volumes that the company has the capacity for and that are profitable, it is time to establish the strategy for the longer term. The market situation improved somewhat during the year, but iron ore prices remain at a level which means that, as far as LKAB is concerned, taking the openpit mine in Mertainen into production is not worthwhile. At the end of the year we therefore judged it necessary to write down the value of Mertainen. Urban transformation a challenge During the year negotiations to secure access to land for continued mining have sometimes been tough, in both Gällivare and Kiruna. We are satisfied with the important agreements reached during the year, but for LKAB the costs will be a challenge. However, the alternative jeopardizing production would hit both the company and its operating locations considerably harder. Our hope is, however, that in future phases of the urban transformation sustainable solutions will be found more quickly. At the forefront of sustainability In 2016 the Board adopted new, more stringent sustainability goals, which also focus more on what we consider to be the most material aspects. LKAB must set an example. That also applies in respect of safety work, where we need to do more to reduce the accident rate. Work to strengthen the safety culture is an important part of the leadership and employeeship initiative that is currently under way in the organization. LKAB has a great responsibility to the community as regards the environment, and we have set ourselves more stringent targets in order to bring down atmospheric pollution and discharges to water. LKAB must also remain at the forefront of progress as regards energy efficiency. We see this as a duty, but also as a prerequisite for maintaining our position as a leading sustainable supplier of iron ore products. The aim must be to maximize the value that LKAB adds at all stages, while at the same time minimizing the negative impact of the business. 56 CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

59 CORPORATE GOVERNANCE STRUCTURE LKAB s owner, the Swedish state, is ultimately responsible for making decisions on corporate governance. At the Annual General Meeting the owner (shareholder) appoints Board members, the Chairman of the Board and an auditor. The Board is responsible to the shareholder for the company s organization and the administration of its affairs. The diagram below summarizes how governance and control are organized at LKAB. The company functions are described in more detail on pages of the corporate governance report. 2 BOARD NOMINATIONS AGM OWNER (THE STATE) 1 3 AUDITOR 4 BOARD OF DIRECTORS 5 REMUNERATION COMMITTEE 6 FINANCE COMMITTEE 7 AUDIT COMMITTEE 8 PRESIDENT Elects/Appoints Informs/Reports to 1 ANNUAL GENERAL MEETING The AGM is LKAB s highest decision-making body and the forum at which the shareholder formally exercises its influence. At the AGM, decisions are made that include adoption of the income statement and balance sheet, discharge from liability of the Board, election of Board members and auditor, the remuneration of Board members and the auditor and guidelines for the remuneration of senior executives. Members of the Riksdag are entitled to attend LKAB s AGM. The meeting is also open to the public. 2 BOARD NOMINATIONS LKAB does not have a nomination committee. The preparation of decisions on the nomination of Board members instead takes place through a Board nomination process in accordance with the state s ownership policy. The work is coordinated by the Ministry of Enterprise and Innovation. See deviations from Code rules on page AUDITOR The auditor is responsible to the shareholder at the AGM and provides an audit report on the Annual Report and the Board s administration of the company. The auditors regularly report verbally and in writing to the Audit Committee on how the audit was conducted and on the auditor s assessment of order and control at the company. A summary of the annual audit is also submitted to the full Board. 4 BOARD OF DIRECTORS The Board of Directors is responsible for the company s organization and manages the company s affairs on behalf of the owner. The work of the Board includes continuously monitoring the company s financial situation and ensuring that the company is organized so that its bookkeeping, asset management and other financial circumstances are controlled in a satisfactory manner. The Board also appoints the President. 5 REMUNERATION COMMITTEE The committee prepares decisions on the President s terms of employment and supports the President s work on determining the salaries of senior executives. The committee also works on succession planning. 6 FINANCE COMMITTEE The committee prepares and monitors compliance with the company s finance policy, including the company s liquidity management, borrowing and hedging programmes for currency (USD), electricity prices and iron ore prices. 7 AUDIT COMMITTEE The committee oversees financial reporting by reviewing all critical accounting matters and other factors that could affect the quality of financial reporting content. 8 PRESIDENT The President is appointed by the Board of Directors. Besides instructions from the Board, the President is subject to the Swedish Companies Act and various other laws and regulations relating to the company s accounting, asset management and operational control. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT 57

60 GOVERNING POLICIES, GUIDELINES AND REGULATIONS OWNER S REQUIREMENTS MISSION, VISION, STRATEGY LKAB S VALUES The basis for corporate governance at LKAB is Swedish legislation, the Swedish Corporate Governance Code (the Code), the state s ownership policy and internal control documents. In the state s ownership policy and guidelines for state-owned companies, which are determined annually, the government describes its mission and objectives, applicable frameworks and its position on important principles related to corporate governance in state-owned companies (see Code of Conduct Forms the basis for how each person within the Group should act towards internal and external stakeholders. LKAB s operations must be characterized by a high standard of business ethics and integrity. Quality policy LKAB shall exceed its customers current and future expectations by involving everyone in continual improvement. We will work towards zero defects in everything we do, and each employee is responsible for the quality of his or her work. Work environment policy LKAB workplaces shall be safe, secure and stimulating. All employees have a responsibility for the safety of themselves and others, and must take responsibility accordingly. Environment and energy policy LKAB has a responsibility to continually improve our energy performance and to prevent and minimize our environmental impact. The goal is for operations to be sustainable in the long term. Staff policy Staff and management shall help the business develop by encouraging initiative taking, commitment and good effort. We set clear requirements, provide constructive feedback and continually develop skills. Finance policy All the Group s financial risks shall be identified, reported and managed in accordance with instructions from the Board and executive management. Communications policy LKAB shall provide employees, the world around it and other stakeholders with a true picture of the company and its operations. Human rights policy LKAB shall effectively identify, respect and manage risks associated with direct and indirect infringements of human rights. Insider policy LKAB shall manage insider information correctly and ensure that insider trading does not occur. LKAB s values and policies are described in more detail on the website lkab.com. DEVIATIONS FROM THE CODE The Swedish Corporate Governance Code (the Code) forms part of the state s ownership policy. LKAB s governance for the 2016 financial year deviates from the requirements contained in the Code on the following points: Code rule ITEM 1.1 Publication of information on shareholder s right of initiative. ITEM 2 The company shall have a nomination committee that represents the company s shareholders. ITEM 10.2 The corporate governance report shall contain information that indicates Board members are independent of major shareholders. Deviation and explanation/comment The purpose of this rule is to give shareholders the opportunity to prepare for the AGM in a timely manner and to have a matter included in the AGM notice. At wholly state-owned companies it is not necessary for this rule to be applied and therefore no information is published concerning the shareholder s right of initiative. Due to its ownership structure, LKAB does not have a nomination committee. The Board nomination process follows the policies outlined in the state s ownership policy and is coordinated by the Ministry of Enterprise and Innovation. Accordingly, the references to the nomination committee in items 1.2, 1.3, 4.6, 8.1 and 10.2 of the Code are not applicable. The provision is aimed primarily at protecting non-controlling shareholders in companies with dispersed ownership. In companies that are wholly owned by the state, it is not necessary to apply this rule. 58 CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

61 SHAREHOLDERS AND ANNUAL GENERAL MEETING SHAREHOLDERS LKAB is wholly owned by the Swedish state, represented in the government by the Ministry of Enterprise and Innovation. The government exercises its ownership via an annually established ownership policy, nominations to the Board and published reporting guidelines. The government s requirement for transparency is fulfilled by direct owner representation on the Board. Reports to the owner are key management tools for the continuous monitoring and assessment of the companies. State-owned companies should have at least the same level of transparency as listed companies. The Board, via the Chairman, coordinates its views on issues of decisive importance with the owner s representatives. Such issues include strategic changes to the company s operations, major acquisitions, mergers or disposals, as well as decisions affecting significant changes to the company s risk profile or balance sheet. ANNUAL GENERAL MEETING 2016 LKAB s Annual General Meeting took place on 28 April 2016 at Vetenskapens Hus in Luleå. The meeting was open to the public, who were given the opportunity to ask questions of the Board and management. The AGM was attended by about 80 people. The owner was represented by Erik Tranaeus of the Ministry of Enterprise and Innovation. Chairman of the meeting was Board Chairman Sten Jakobsson. The following decisions were made at the meeting: No dividend for the 2015 financial year. Re-election of Board members Leif Darner, Eva Hamilton, Maija-Liisa Friman, Lars-Åke Helgesson, Sten Jakobsson and Hanna Lagercrantz. Election of new Board members Bjarne Moltke Hansen and Ola Salmén. Re-election of Sten Jakobsson as Chairman of the Board. Remuneration of SEK 615,000 to the Chairman of the Board and SEK 270,000 to the other Board members elected at the AGM. Remuneration is not paid to Board members who are employed at the Government Offices, nor to employee representatives. Re-election of the registered public accounting firm Deloitte AB as auditor for a period of one year. Guidelines for remuneration and other terms of employment for senior executives. The minutes of the 2016 AGM and other recent years are available at LKAB s website, lkab.com. BOARD NOMINATIONS Instead of having a nomination committee, the election of Board members is prepared in accordance with the state s ownership policy. The work is coordinated by the Ministry of Enterprise and Innovation. LKAB s expertise requirements are analyzed based on the company s operations, situation and future challenges. Consideration is also given to the need for qualifications as regards sustainability issues. In order to be considered for a Board position, a person must have a high level of expertise relevant to current business operations, business development, industry expertise, financial issues or other relevant areas. They must also have a high level of integrity and the ability to act in the best interests of the company. AUDITOR On behalf of the owner, the auditor independently reviews the management of the Board and President, as well as the company s Annual Report and accounts. They also carry out a review of an interim report. The election of auditors is decided at the AGM. Auditors of state-owned companies are appointed for a term of one year. In the event that re-election of the auditor is being considered, the auditor s work is always evaluated. At the Annual General Meeting on 28 April 2016 Deloitte AB was re-elected as auditor for a period of one year. Authorized Public Accountant Peter Ekberg is the chief auditor. The remuneration paid to the auditor is specified in Note 7 on page 96 of the Annual Report. BOARD OF DIRECTORS COMPOSITION AND DIVISION OF DUTIES OF THE BOARD OF DIRECTORS LKAB s Articles of Association state that the company s Board of Directors shall consist of no fewer than six and no more than eleven AGM-elected members, excluding deputies. The Board consists of eight AGM-elected members. Employees are represented by three members and three deputies in accordance with the Board Representation (Private Sector Employees) Act. Board members have broad and extensive business experience and most maintain other duties as Board members of large companies. The Board s composition is shown in the presentation of the Board on pages The Board annually establishes rules of procedure for the Board, instructions to the President and instructions for financial reporting. These documents define the basic divisions of responsibility and powers between the Board, Board committees, the Chairman and the President. CHAIRMAN OF THE BOARD The duties of the Chairman are subject to the Swedish Companies Act, the Code and the ownership policy. They are further specified in the Board s rules of procedure. The Chairman s duties include organising and leading the work of the Board, ensuring that the Board fulfils its duties and that its decisions are implemented effectively, and that the Board evaluates its own work annually. Coordination responsibility is a special task assigned to the chairpersons of state-owned companies. This responsibility means that the Board, through the Chairman, must coordinate its views with representatives of the owner when the company faces important decisions or strategic changes to the company s operation. THE WORK OF THE BOARD OF DIRECTORS IN 2016 During the year the Board held nine meetings, including two telephone meetings and one constituent Board meeting. The meetings were held at the operating sites in Luleå, Malmberget and Narvik, as well as in Stockholm. The Board also made a collective visit to SSAB in Oxelösund in November The meetings follow a set agenda to ensure the Board s information needs are met. The first meeting is usually an annual accounts session attended by the auditor. At this meeting, the Board deliberates with the company s auditors without the presence of the Presi- LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT 59

62 dent or others from executive management. The Annual Report is discussed at the second Board meeting. The third to seventh meetings are devoted to matters such as operational, strategic and personnel issues, as well as market trends. At the last Board meeting of the year, decisions are made on budgets and the business plan for the coming year. LKAB s sustainability strategy and Code of Conduct form a basis for work on sustainable development. In 2016 the Board adopted new goals for economic, social and environmental sustainability. The goals have been reworded and the number of goals has been reduced from twelve to seven, with the aim of creating better focus. Sustainability objectives are monitored, with reporting to the Board and owner on a quarterly basis. In 2016 the Board s work was characterized by the market situation that LKAB finds itself in, with significantly lower iron ore prices and oversupply of iron ore on the world market. Other important matters on the Board s agenda were the urban transformation in the Swedish orefields, ongoing cost efficiency programmes and the adoption of an updated strategic plan for the Group. During the year the Board adopted a new policy on human rights and a new insider policy. In September 2016 the Board also approved the new Code of Conduct, which is available in six languages. Deputies to employee representatives participate in Board meetings. The President is not a Board member, but participates in Board meetings. Board member attendance at 2016 Board and committee meetings is shown on pages COMMITTEES According to the state s ownership policy, it is the Board s responsibility to assess the need for establishing special committees. LKAB s Board has an Audit Committee, a Finance Committee and a Remuneration Committee. Committee work is mainly of a preparatory and advisory nature. However, in special cases the Board may delegate decision-making powers to committees. Committee members and chairpersons are appointed at the constituent Board meeting that follows the AGM each year. December: Decisions on business plan and budgets for Decision not to take the open-pit mine in Mertainen into production and to write down the value of LKAB s assets by MSEK 1,192 as a consequence. Review of assessment of the Board of Directors and of the President for November: Board trip to Oxelösund, including study visit and meeting with SSAB management. October: Adoption of interim report for Q3. Decision on compensation to the Municipality of Gällivare for premises for municipal operations in Malmberget. OCT NOV DEC JAN February: Adoption of the year-end report. Review of 2015 audit. Discussions between Board and auditors without management being present. Matters relating to the Annual General Meeting. FEB MAR March: Approval of Annual and Sustainability Report. September: Appraisal of current policies and governing documents. Adoption of new policy on human rights and new insider policy. SEP AUG MAY APR April: Adoption of interim report for Q1. Annual General Meeting. Statutory Board meeting. August: Adoption of interim report for Q2. JUL JUN June: Decisions on updated strategy and new sustainability goals. 60 CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

63 Audit Committee The Audit Committee has four members: chairman Lars-Åke Helgesson, Hanna Lagercrantz, Ola Salmén and Stefan Fagerkull. The President and the CFO also attend the meetings. The committee is tasked with quality assurance of LKAB s financial reporting and with ensuring that the company has appropriate risk management and complies with established principles for financial reporting and internal control, that LKAB undergoes a qualified, effective and independent audit and with preparing the Board s proposed appropriation of profits for the financial year. In 2016 the committee also worked on, among other things, a number of different matters linked with the urban transformation in Kiruna and Malmberget, as well as the Group s new consolidation structure with reporting in three divisions: Northern Division, Southern Division and Special Products Division. In the course of the year the Audit Committee held six meetings. Finance Committee The Finance Committee has four members: chairman Ola Salmén, Lars-Åke Helgesson, Hanna Lagercrantz and Stefan Fagerkull. The President, CFO and company treasurer also attend the meetings. The Finance Committee s duties include preparing and monitoring that LKAB s liquidity management, financing and hedging activities for currency (USD), iron ore prices and electricity prices comply with the finance policy passed by the Board, and otherwise preparing financial matters that require Board approval. In 2016 the Finance Committee worked on matters such as an update of LKAB s finance policy, the Group s hedging strategy and credit exposure. The committee held five meetings during the year. Remuneration Committee The Remuneration Committee has four members: chairman Sten Jakobsson, Lars-Åke Helgesson, Hanna Lagercrantz and Tomas Strömberg. The Senior Vice President of Human Resources also attends the meetings. The Remuneration Committee s duties include preparing and evaluating remuneration terms for the President, establishing salary structure policies for members of Group management and annually evaluating the company s employee incentive programme. In 2016, the Committee also worked on LKAB s succession planning and talent management programmes in order to ensure that key positions within the company can be filled by competent employees in the future. The Remuneration Committee held one meeting during the year. ASSESSMENT ASSESSMENT OF THE BOARD OF DIRECTORS The Board s work is assessed once a year with questions on how the Board as a whole and the Board members individually fulfil their duties. The assessment is used in the Board s internal work. The Chairman is responsible for following up the results so that they can form a basis for discussions and improvements. In 2016 the assessment took the form of a questionnaire. The results and analysis of the assessment were presented to the entire Board as well as to the President, where appropriate. The Chairman of the Board notifies the owner of the results of the assessment before the election of new Board members. ASSESSMENT OF THE PRESIDENT The assessment of the President is a fundamental task of the Board of Directors. The Board continually assesses the President s work and has regular deliberations at Board meetings without the presence of executive management. In 2016 the assessment took the form of a questionnaire. The results and analysis of the assessment were presented to the entire Board as well as to the President. REMUNERATION POLICIES GUIDELINES The 2016 AGM decided on remuneration levels for Board members and auditors and on guidelines for the remuneration of senior executives. For the remuneration of Group management, the AGM decided that the government s currently applicable guidelines regarding employment terms for senior executives at state-owned companies are to be applied. Total remuneration is based on fixed remuneration, benefits and pension. No variable remuneration is paid to senior executives in Group management. Note 6 on pages of the Annual Report describes the guidelines for remuneration of senior executives and the related outcomes. INCENTIVE PROGRAMME AND OBJECTIVES LKAB s incentive programme for Group employees is designed to support the Group s strategic objectives for production volume, health and safety, product quality and production cost. In the past two years, 2015 and 2016, no incentive payments have been made to the Group s employees. The incentive programme is described in more detail in the section on Employees, page 39. REMUNERATION TO THE BOARD OF DIRECTORS Total fees to the Board members elected by the AGM amount to SEK 2,320,000 in See Note 6 on pages LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT 61

64 LKAB S MANAGEMENT GROUP MANAGEMENT AND GROUP MANAGEMENT STRUCTURE The President, who is also the Chief Executive Officer of the LKAB Group, is responsible for day-to-day management in accordance with the Swedish Companies Act. General responsibilities are stated in the President s instructions and the Board s rules of procedure. Since 1 January 2016 LKAB has had an new organizational structure in which the operations are split into three divisions: Northern Division, Southern Division and Special Products Division. Northern Division comprises the mine and processing plant in Kiruna, while Southern Division consists of mines and processing plants in Malmberget and Svappavaara. The Special Products Division comprises the subsidiaries LKAB Minerals, which produces and sells industrial minerals, and the drilling technology company LKAB Wassara. To support the divisions there are Group functions for Finance, HR and Sustainability, Operational Support and Business Development, Sales and Logistics, Communications and Community Contacts, and Urban Transformation. Governance of the major subsidiaries is through the companies being part of a division or unit, with Group management members chairing the subsidiaries boards. The subsidiaries run their businesses independently in accordance with the company s mission in the Group, as formulated in the Articles of Association. Responsibility and authority within the Group are assigned to individual executives, rather than to teams and committees. Information on the members of the Group management can be found on pages INTERNAL CONTROL OVER FINANCIAL REPORTING The Board s responsibility for internal governance and control is regulated by the Swedish Companies Act, Annual Accounts Act and Corporate Governance Code. The Board has overall responsibility for financial reporting, and its rules of procedure govern the internal division of duties of the Board and Audit Committee. After preparation by the Audit Committee, quality assurance of the company s financial reporting is handled by the Board, which deals with significant accounting issues and the financial reports issued by the company. The Board also deals with issues relating to internal control, compliance, material uncertainty in carrying amounts, uncorrected errors, events after the end of the reporting period, changes to estimates and assessments, any identified irregularities and other circumstances that affect the quality of the financial reports. CONTROL ENVIRONMENT LKAB s internal control structure is based on a defined division of responsibilities between the Board, Board committees and the President. The internal control structure is also based on the company s organization and the way business is conducted, including well-defined roles and responsibilities, delegation of powers, steering documents such as policies, and clearly defined planning and support processes. The most important elements of the control environment for financial reporting, including the preparation of the consolidated accounts, are dealt with in Group-wide steering documents relating to accounting, financial transactions and regulation of division of authority. The purpose of Group-wide guidelines and systems for reporting and consolidation of the Group accounts is to safeguard the financial reporting and ensure the accuracy of the consolidated accounts. RISK ASSESSMENT As part of internal governance and control, risks related to financial reporting are identified. Risk assessments are conducted continually for the most important processes in order to manage and minimize these risks. A number of higher risk areas for financial reporting were identified, such as in respect of accounting and tax issues linked to the urban transformation in the Swedish orefields and the large number of ongoing capital expenditure projects. Other more general risks are loss or misappropriation of assets and other significant errors in the company s reporting, such as accounting and measurement of balance sheet items, completeness of income statement items or deviation from disclosure requirements. 62 CORPORATE GOVERNANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

65 CONTROL ACTIVITIES Key elements of LKAB s control structure include control of business transaction approval (authorization instructions), division of authority descriptions and annual accounts instructions. There are also controls relating to the annual accounts process and the processes for interim results and the Annual Report that deal with more unique risks of errors that may occur in the financial reporting. The Group s legal entities that conduct business have financial managers, while reporting units have controllers. These participate in the analysis of earnings by subsidiaries and the reporting entities. The analyses cover assets, liabilities, income, expenses and cash flows. For the urban transformation and for strategic capital expenditure projects there are also designated controller resources that monitor, analyze, make forecasts and examine specific issues relating to the financial information. LKAB uses a Group-wide consolidation system for the preparation of its consolidated accounts where the companies CFOs/controllers are responsible for the accuracy of the financial information reported. Together with the comprehensive analysis performed at Group level, the aim is to limit the risk of material misstatement in the financial reporting. INFORMATION AND COMMUNICATION Information on governing documents such as policies, guidelines and procedures are available on the LKAB intranet. Changes to guidelines for financial reporting are updated regularly and communicated to the departments and operations concerned by , via the intranet and at meetings. There is a communications policy for communication with external parties that specifies guidelines for how information should be presented. The purpose of the policy is to ensure that all information obligations are met in an accurate and complete manner. External financial communications are issued through Annual Reports, interim reports, year-end reports, press releases and via lkab.com. FOLLOW-UP Alone, or with the support of external resources, the Group-wide controller function conducts audit activities relating to the business processes that are deemed to have a material impact on financial reporting. A plan for internal control activities is prepared annually by the Group-wide controller function. In 2016 the focus was on follow-up of prioritized internal processes, including the decision and procurement processes for capital expenditure projects and the acquisition process within the urban transformation. The results of the completed reviews are summarized in review reports and feedback is given to the operations concerned. Compliance with measures specified following the completion of reviews is followed up regularly by the Group-wide controller function. INTERNAL AUDIT The structure for monitoring internal control that currently exists at LKAB is deemed to meet the Board s requirements, and consequently no separate internal audit function has been established. The decision on internal audits is reconsidered annually by the Board. Luleå, 21 March 2017 The Board of Directors, through the Chairman Sten Jakobsson LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 CORPORATE GOVERNANCE REPORT 63

66 BOARD OF DIRECTORS STEN JAKOBSSON / CHAIRMAN LEIF DARNER Position Director Education MSc Business and Economics, School of Economics, Gothenburg, Masters in Business Administration, University of Gothenburg. Year elected 2015 Born 1952 Other directorships Board member at Flowserve Corporation Dallas US, I-Tech AB and Vicore Pharma Holding AB. Background Executive Board Member, AkzoNobel Amsterdam NL. Responsible for Performance Coatings and for Chemicals Managing Director Business Unit Marine & Protective Coatings, AkzoNobel London UK Director Worldwide Yacht & Protective Coatings, Courtaulds plc London UK Chief Executive Coatings Northern Europe, Courtaulds plc Gothenburg Chief Executive Protective Coatings Europe, Courtaulds plc London UK Managing Director of International Färg AB, Gothenburg Remuneration SEK 270,000 Board meeting attendance 9 of 9 meetings. MAIJA-LIISA FRIMAN Position Director Education MSc Chemical Engineering, Helsinki University of Technology Year elected 2008 Born 1952 Other directorships Chairman of the Board at Helsinki Deaconess Institute. Deputy Chairman at Neste Oyj. Board member at Svenska Cellulosa Aktiebolaget SCA, Finnair Oy, Boardman Oy and Värdepappersmarknadsföreningen, Finland. Background CEO at Aspocomp Group Oyj , CEO Vattenfall Oy , CEO Gyproc Oy , various managerial positions at Kemira Oyj in Finland, Mexico and the US Remuneration SEK 270,000 Board meeting attendance 7 of 9 meetings. EVA HAMILTON Position Director Education Dag Hammarskiöld College, Economics, University of Uppsala 1974, Bachelor s Programme in Journalism, Stockholm University 1976 Year elected 2015 Born 1954 Other directorships Chairman of the Board at Nexiko Media AB. Board member at Fortum Oyj, AB Lindex, Kungliga Dramatiska Teatern AB and 2 EGroup AB. Chairman of the Business Executives Council at the Royal Swedish Academy of Engineering Sciences (IVA) and member of the Academy s Executive Committee. Board member at the Nobel Center Committee. Background CEO at SVT Head of SVT Fiction Head of SVT News and Sport Journalist at Sydsvenska Dagbladet, Sundsvalls Tidning, Aftonbladet, SvD, Dagens Industri and Rapport/SVT. Remuneration SEK 270,000 Board meeting attendance 9 of 9 meetings. Position Director Education MSc Engineering Year elected 2012, Chairman since 2014 Born 1949 Other directorships Chairman of the Board at Power Wind Partners AB. Board Member at Saab AB, Stena Metall AB, FLSmidth A/S and Xylem Inc. Background President and CEO at ABB Sweden, Deputy CEO at Asea Brown Boveri AB Sweden, Business Area Manager for Business Area Cables, CEO at ABB Cables AB, CEO at Asea Cylinda, Production Manager at Asea Low Voltage Division, Asea central staff Production, Asea trainee. Remuneration SEK 615,000 Board meeting attendance 9 of 9 meetings. Remuneration Committee attendance 1 of 1 meeting. LARS-ÅKE HELGESSON Position Director Education Graduate engineer, MBA, School of Economics, Gothenburg. Year elected 2000 Born 1941 Other directorships Chairman of the Board at Translink Holding AB. Board member at Axel Christiernsson International AB, STS Holding AB and Crane Inc., Dalton MA, USA. Background President and CEO at Haldex , Division Manager at Stora , President and CEO of Stora Remuneration SEK 350,000 Board meeting attendance 8 of 9 meetings. Audit Committee attendance 6 of 6 meetings. Finance Committee attendance 5 of 5 meetings. Remuneration Committee attendance 1 of 1 meeting. HANNA LAGERCRANTZ Position Deputy Director, Ministry of Enterprise and Innovation Education MSc Business and Economics, Stockholm School of Economics, MPhil in Economics, Cambridge University Year elected 2010 Born 1970 Other directorships Board member at Svenska Rymdaktiebolaget and Swedfund International AB. Background Corporate Finance at S.G. Warburg, UBS, Brunswick-Warburg Market analyst and Investor Relations at SEB Swedish Government Offices since Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. Audit Committee attendance 6 of 6 meetings. Finance Committee attendance 5 of 5 meetings. Remuneration Committee attendance 1 of 1 meeting. BJARNE MOLTKE HANSEN OLA SALMÉN Position Director Education MSc Business and Economics, Stockholm University Year elected 2016 Born 1954 Other directorships Board member at Lernia AB, Svevia AB and Eniro AB. Background CFO Sandvik AB, CFO Vin & Sprit AB and CFO Adcore AB. Finance Director Handelsbanken Markets. Senior positions in finance and controlling within the groups Swedish Match and Stora. Remuneration SEK 330,000 Board meeting attendance 6 of 9 meetings. 1 Audit Committee attendance 3 of 6 meetings. 1 Finance Committee attendance 3 of 5 meetings. Position Group Executive Vice President (Koncerndirektør), Product Companies Division, FLSmidth & Co. A/S Education BSc Engineering Year elected 2016 Born 1961 Other directorships Deputy Chairman at RMIG A/S. Board member at BWSC A/S. Background Within the FLSmidth & Co. A/S group since 1984: previously Group Executive Vice President, Customer Services Division, FLSmidth , President Aalborg Portland Holding A/S , President Cembrit Holding A/S , various managerial positions at Unicon A/S Remuneration SEK 270,000 Board meeting attendance 5 of 9 meetings. 1 1 Joined the Board after the 2016 AGM. 1 1 Joined the Board after the 2016 AGM. 64 BOARD OF DIRECTORS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

67 THE BOARD S EMPLOYEE REPRESENTATIVES FULL/DEPUTIES AUDITOR AND SECRETARY AUDITOR Deloitte AB Peter Ekberg Authorized Public Accountant SECRETARY JAN THELIN / FULL MEMBER Position Welder Education Trained international welding specialist Year elected 2010 Born 1955 Other directorships Chairman of the union club Gruv 12:an in Kiruna, IF Metall Malmfälten. Board member at LKAB Fastigheter AB. Background Employee at LKAB and since Employed by various engineering firms Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. TOMAS STRÖMBERG / FULL MEMBER Position Ore developer Education Secondary education Year elected 2011 Born 1967 Other directorships Chairman of the union club Gruv 4:an, IF Metall Malmfälten. Background Employee at LKAB since Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. Remuneration Committee attendance 1 of 1 meeting. STEFAN FAGERKULL / FULL MEMBER Position Project manager Education Engineer, Mining and Civil Engineering, Bergsskolan Filipstad Year elected 2011 Born 1963 Other directorships Board member of the union club Ledarna in Kiruna. Background Employee at LKAB and since Studies and UN service Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. Audit Committee attendance 6 of 6 meetings. Finance Committee attendance 5 of 5 meetings. Malin Sundvall Legal Director, LKAB Secretary of the Board since 2008 CHANGES TO THE BOARD OF DIRECTORS Ola Salmén Joined the Board after the 2016 AGM Bjarne Moltke Hansen Joined the Board after the 2016 AGM PENTTI RAHKONEN / DEPUTY Position Process operator Education Secondary education, trade union training Year elected 2010 Born 1965 Other directorshipschairman of the union club Gruv 135:an, IF Metall Malmfälten. Board member at the Mine Workers Industry Forum. Background Employee at LKAB since Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. TOMMY WETTAINEN / DEPUTY Position Plant electrician Education Authorized electrician, secondary education, board training Year elected 2016 Born 1988 Other directorships Chairman, IF Metall Svartöstaden. Board member at the Mine Workers Industry Forum. Background Employee at LKAB since Remuneration SEK 0 Board meeting attendance 6 of 9 meetings. 1 DAN HALLBERG / DEPUTY Position R&D specialist Education BSc Chemical Engineering, Luleå University of Technology Year elected 2014 Born 1965 Other directorships Board member of the union club Unionen for Luleå & Malmberget. Board member of PRISMA (Centre for Process Integration in Steelmaking). Background Employee at LKAB since Remuneration SEK 0 Board meeting attendance 9 of 9 meetings. 1 Joined the Board after the 2016 AGM. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 BOARD OF DIRECTORS 65

68 GROUP MANAGEMENT JAN MOSTRÖM Position President and CEO 1 Education Mining Engineer, Bergsskolan Filipstad, 1983 Year employed 2015 Born 1959 Other engagements Board member at SveMin (industry association of mining, mineral and metal producers) and GAF (the Association of Mining Employers), member of the Advisory Council at SGU (the Geological Survey of Sweden), deputy board member at Svenskt Näringsliv (the Confederation of Swedish Enterprise). Background Boliden , Skellefteå municipality , Boliden Remuneration See Note 6, pages Neither the CEO nor any natural person or legal entity related to him has significant shareholdings or partnerships in companies with which LKAB has substantial business relationships. MAGNUS ARNKVIST Position Senior Vice President, Southern Division Education Mining Engineer, Bergsskolan Filipstad, 1994 Year employed 2016 Born 1967 Background Bergteamet AB , Kiruna Iron , Boliden Tara Mines , Rapallo Pty Ltd , Boliden Mineral AB , Bergteamet AB , Boliden- Mineral AB Remuneration See Note 6, pages LEIF BOSTRÖM Position Senior Vice President, Special Products Education MSc Business Economics, Luleå University of Technology, 1990 Year employed 1992 Born 1959 Other engagements Board member at Inlandsinnovation and EuroMin. Background NCC Remuneration See Note 6, pages PETER HANSSON Position Senior Vice President, Finance Education MSc Business Economics, Luleå University of Technology, 2000 Year employed 2016 Born 1970 Background Boliden Mineral AB , Riksskatteverket (National Tax Board) , Skatteverket (Swedish Tax Agency) Remuneration See Note 6, pages MARKUS PETÄJÄNIEMI Position Senior Vice President, Sales and Logistics Education MSc Urban Planning and Environmental Engineering, Luleå University of Technology, 1985; Mechanical engineering (4-year technical course), 1979 Year employed 2005 Born 1959 Background Sema/Schlumberger/Atos/WMdata , De-Icing Systems/Kiruna Industrial Systems , Kiruna Värmeverk och Renhållning , NAB (now Sweco) Remuneration See Note 6, pages STEFAN ROMEDAHL Position Senior Vice President, Northern Division Education MSc Engineering, Luleå University of Technology, 1994 Year employed 2016 Born 1967 Background Boliden Tara Mines , SKB , RTC Nordic Rock Tech Centre AB , Rio Tinto/Lundin Mining Group (Zinkgruvan Mining AB) , Boliden Group Remuneration See Note 6, pages GRETE SOLVANG STOLTZ Position Senior Vice President, HR and Sustainability Education MSc Business Economics, Luleå University of Technology, 1993 Year employed 2009 Born 1970 Other engagements Chairman of the Board at Career Centre, Luleå University of Technology, board member at SveMin and GAF (the Association of Mining Employers). Background LKAB , SCA , Northland Resources Remuneration See Note 6, pages ÅSA SUNDQVIST Position Senior Vice President, Operational Support and Business Development Education Licentiate in Engineering (1993) and PhD (1996) Water Engineering, Luleå University of Technology; MSc Urban Planning and Environmental Engineering, Luleå University of Technology, 1987 Year employed 2000 Born 1962 Background Expandum, Gällivare , NAB Industrikonsult AB/SWECO Industriteknik AB , Luleå University of Technology , NAB Arkitekter & Ingenjörer , Scandiaconsult VA-Teknik Remuneration See Note 6, pages GROUP MANAGEMENT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

69 AUDITOR S STATEMENT ON THE CORPORATE GOVERNANCE REPORT To the Annual General Meeting of the shareholders of Luossavaara-Kiirunavaara AB (publ), corporate identity number ENGAGEMENT AND RESPONSIBILITY It is the Board of Directors who is responsible for the corporate governance statement for the year 2016 on pages and that it has been prepared in accordance with the Annual Accounts Act. THE SCOPE OF THE AUDIT Our examination has been conducted in accordance with FAR s auditing standard RevU 16 The auditor s examination of the corporate governance statement. This means that our examination of the corporate governance statement is different and substantially less in scope than an audit conducted in accordance with International Standards on Auditing and generally accepted auditing standards in Sweden. We believe that the examination has provided us with sufficient basis for our opinions. OPINIONS A corporate governance statement has been prepared. Disclosures in accordance with chapter 6 section 6 second paragraph points 2 6 of the Annual Accounts Act and chapter 7 section 31 second paragraph of the same law are consistent with the annual accounts and the consolidated accounts and are in accordance with the Annual Accounts Act. Stockholm, 21 March 2017 Deloitte AB Peter Ekberg Authorized Public Accountant LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR S STATEMENT 67

70 AUDITOR S LIMITED ASSURANCE REPORT ON THE SUSTAINABILITY REPORT To Luossavaara-Kiirunavaara AB (publ) INTRODUCTION We have been engaged by the Board of Directors of Luossavaara- Kiirunavaara AB ( LKAB ) to undertake a limited assurance engagement of LKAB s Sustainability Report for the year The company has defined the scope of the Sustainability Report in conjunction with the table of contents on page 1. RESPONSIBILITIES OF THE BOARD OF DIRECTORS AND THE EXECUTIVE MANAGEMENT FOR THE SUSTAINABILITY REPORT The Board of Directors and the Executive Management are responsible for the preparation of the Sustainability Report in accordance with the applicable criteria, which are explained on pages of the Sustainability Report and are the parts of the Sustainability Reporting Guidelines (published by the Global Reporting Initiative (GRI)) which are applicable to the Sustainability Report, as well as the accounting and calculation principles that the Company has developed. This responsibility also includes the internal control relevant to the preparation of a Sustainability Report that is free from material misstatements, whether due to fraud or error. RESPONSIBILITIES OF THE AUDITOR Our responsibility is to express a conclusion on the Sustainability Report based on the limited assurance procedures we have performed. We conducted our limited assurance engagement in accordance with RevR 6 Assurance of Sustainability Reports issued by FAR. A limited assurance engagement consists of making inquiries, primarily of persons responsible for the preparation of the Sustainability Report, and applying analytical and other limited assurance procedures. The procedures performed in a limited assurance engagement vary in nature from, and are less in extent than for, a reasonable assurance engagement conducted in accordance with IAASB s Standards on Auditing and other generally accepted auditing standards in Sweden. The firm applies ISQC 1 (International Standard on Quality Control) and accordingly maintains a comprehensive system of quality control including documented policies and procedures regarding compliance with professional ethical requirements, professional standards and applicable legal and regulatory requirements. The procedures performed consequently do not enable us to obtain assurance that we would become aware of all significant matters that might be identified in a reasonable assurance engagement. Accordingly, we do not express a reasonable assurance conclusion. Our procedures are based on the criteria defined by the Board of Directors and the Executive Management as described above. We consider these criteria suitable for the preparation of the Sustainability Report. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion below. CONCLUSION Based on the limited assurance procedures we have performed, nothing has come to our attention that causes us to believe that the Sustainability Report is not prepared, in all material respects, in accordance with the criteria defined by the Board of Directors and Executive Management. Stockholm, 21 March 2017 Deloitte AB Peter Ekberg Authorized Public Accountant Lennart Nordqvist Expert Member of FAR 68 AUDITOR S ASSURANCE REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

71 MATERIALITY ANALYSIS An open stakeholder dialogue and broad business intelligence is the basis for assessment of what issues are material for LKAB to address in order to conduct sustainable mining. The materiality analysis maps the aspects that impact on LKAB s business and that we can influence. The material aspects are the basis of our sustainability reporting. MATERIALITY ANALYSIS LKAB conducts a materiality analysis every second year and the latest analysis was done in It included business intelligence, in-depth interviews, workshops and surveys in which different stakeholders conveyed what sustainability aspects mattered to them, from their perspective. For the full analysis, see the GRI appendix. The material aspects are presented briefly below. LKAB s focus areas for sustainabily and governance of materiality issues are further described in the GRI appendix. MORE SIGNIFICANT SIGNIFICANT Importance to stakeholders COMMUNICATE & MONITOR Closure plan Emergency preparedness Management of viewpoints on environment and society MONITOR & CONSIDER Environmental investments Union relations SIGNIFICANT Importance to LKAB GOVERNANCE AND COMMUNICATION Our material aspects are grouped into four categories. The strategy for managing these depends on how important LKAB and our stakeholders consider each to be in order to secure sustainable development. For matters that both LKAB and stakeholders consider crucial in terms of the Group s impact, the company is focused on improvment and development. We also communicate on how the company controls, manages and follows up on these issues. Responsible operations Resource-efficient production Attractive LKAB Attractive communities COMMUNICATE & MANAGE Responsible purchasing Interests of Sami villages Human rights Work environment, health and safety Biodiversity Environmental emissions MANAGE & INFORM Anti-corruption Compliance with the terms of environmental permits and legislation Economic performance Impact on land Environmental benefits of products Resource-efficient use of raw materials Urban transformation Energy use Impact on employment and infrastructure Employees and employment types Diversity and nondiscrimination MORE SIGNIFICANT COMMUNICATE & MANAGE Responsible purchasing By ensuring responsible purchasing, human and labour rights are respected and negative impact on the environment and society is reduced in our operations and global value chain. Environmental benefits of products The products bring environmental benefits when used in customers processes because of the low level of impurities in the raw material and consequently low carbon dioxide emissions. High iron content minimizes relative mining waste for landfill. Interests of Sami villages Respect for other industries and plenty of room for dialogue forms the basis of LKAB s principles for collaboration and understanding. The principles include mutual respect and willingness to negotiate, open dialogue and access to information at an early stage. Resource-efficient use of raw materials Mining of the natural resources of iron ore and minerals. Additives are used in production processes and in rock reinforcement. Resource-efficient use requires future planning in order to ensure adequate mineral reserves through exploration. Human rights Identification, management and follow-up of the operations direct and indirect impact on human rights, in order to take action to address such impact. Work environment, health and safety Ongoing and preventive work to ensure a safe work environment and the health of co-workers. This aspect has a long-term impact on the ability to recruit and retain competence. Urban transformation Gradual and responsible relocation of communities due to deformation or other factors enables continued mining and is a prerequisite for LKAB s operations. Transparency, planning, dialogue and collaboration with the communities, authorities, business community and local residents are essential. Biodiversity LKAB works proactively to prevent any loss of biodiversity and ecosystem services in the course of operations. The mitigation hierarchy s four steps govern the work: avoid, minimize, remediate and compensate harm with consideration for the landscape and habitat type. Environmental emissions Minimization of negative impact on our environment and surroundings due to emissions to air and discharges to water. This aspect includes e.g. greenhouse gases, NOx, SOx, surrounding rock, tailings and environmental incidents such as oil spills and chemical management. Impact on land LKAB affects society by, among others, exploration, mining, processing, transport and remediation. Due to that mining requires access to land, continuous work with focus on corporate responsibility to minimize our impact is performed. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MATERIALITY ANALYSIS 69

72 REPORTING PRINCIPLES AND GRI-INDEX Since 2008 LKAB has prepared an annual sustainability report in accordance with the GRI (Global Reporting Initiative) guidelines. As of the financial year 2014, LKAB applies version G4 in accordance with the Core reporting option. A report in accordance with GRI shall include the three sustainability areas economy, environment and social responsibility, and shall include both governance and results of the company s sustainability work. The report shall provide a balanced and adequate presentation of the sustainability work, including positive aspects and challenges. Since 2012 the sustainability report has been integrated with the annual financial report, which reflects the integration of sustainability issues into ongoing activities. The report has also taken the Mining and Metals Sector Supplement as a guideline. In accordance with the Owner Directive, the sustainability report has been reviewed by external auditors. Since the report has been reviewed in its entirety, external review has not been reported per disclosure item in the GRI index below. The auditor s report can be found on page 68. SCOPE, BOUNDARIES AND APPENDIX As in previous years, the report largely concentrates on the Nordic activities, focusing on the iron ore operations in Sweden and Norway. INDEX DESCRIPTION PAGE GENERAL STANDARD DISCLOSURES Strategy & Analysis G4-1 Comments from the CEO 5-6 Organizational Profile G4-3 Name of organization 1 G4-4 Primary brands, products and services G4-5 Location of headquarters 128 G4-6 Countries where the organization operates 116 G4-7 Ownership and legal form 1 G4-8 Markets G4-9 Scale of organization Insida, 2-3 G4-10 Description of total workforce 38 appendix G4-11 Percentage of workforce covered by collective bargaining agreements Appendix G4-12 Supply chain G4-13 Significant changes during the reporting period 2 G4-14 Application of precautionary principle Appendix G4-15 External charters, principles and initiatives Appendix G4-16 Memberships of associations Appendix Identified Material Aspects and Boundaries G4-17 Entities included in the organization s consolidated financial statements 70-71, 116 G4-18 Process for defining report content 69 Appendix G4-19 Material aspects 17, 69 G4-20 Boundaries for material aspects within the organization Appendix G4-21 Boundaries for material aspects outside the organization Appendix G4-22 Corrections of information in previous reports Appendix G4-23 Significant changes compared with previous years reports Appendix Stakeholder Engagement G4-24 Stakeholder groups 17, Appendix G4-25 Identification and selection of stakeholder Appendix G4-26 Approach to stakeholder engagement 17, 69 Appendix G4-27 Key topics raised through stakeholder engagement Appendix INDEX DESCRIPTION PAGE Report Profile G4-28 Reporting period 70 G4-29 Most recent report Appendix G4-30 Reporting cycle 70 G4-31 Contact point for the report 71 G4-32 GRI content index G4-33 Policy and practice with regard to external assurance 68, 70, Appendix Governance G4-34 Governance 56, 58 Ethics and Integrity G4-56 Code of conduct 40, 43, 58 SPECIFIC STANDARD DISCLOSURES Economic DMA Economic Performance 12-15, Appendix G4-EC1 + MM Direct economic value generated and distributed 16-17, Appendix G4-EC3 Coverage of the organization s defined benefit plan obligations DMA Indirect Economic Impact Appendix G4-EC8 Significant indirect economic impacts 14, 42 Environmental DMA Materials Appendix G4-EN1 Materials used by weight or volume 49 DMA Energy Appendix G4-EN3 Energy consumption within the organization 48 G4-EN5 Energy intensity 48 DMA + MM Biodiversity Appendix G4-EN12 + MM Significant impacts of activities, products, and services on biodiversity 46-47, Appendix MM2 Sites requiring biodiversity management plan 46-47, 97 Appendix MM = Metals and Mining Sector Specific Disclosures = Incomplete information. See GRI-appendix for information. 70 GRI-INDEX LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

73 Northern Division and Southern Division together represent about 90 percent of the Group s total sales. In addition, some material from Special Products Division, the subsidiaries LKAB Minerals and LKAB Wassara, is included. These have operations abroad, and in particular for LKAB Minerals this is considered relevant. The report continuously indicates in connection with the reporting of data which units are involved. Changes in the boundaries, scope or measurement methods compared with the previous year are explained in the report, either together with the data or in the separate GRI appendix. As in previous years, there is a separate GRI appendix available at LKAB s website in conjunction with the Annual and Sustainability Report. The appendix includes overall explanations of changes, a detailed description of the process for developing the materiality analysis, and more detailed descriptions of sustainability management for material aspects. The appendix also describes omissions made in the reporting, in accordance with G4 requirements. The GRI index below states whether the information has been included in the Annual and Sustainability Report and/or in the appendix. CONTACT The contact person for LKAB s sustainability reporting is Grete Solvang Stoltz, Senior Vice President, HR and Sustainability, grete.solvang.stoltz@lkab.com. INDEX DESCRIPTION PAGE DMA Emissions Appendix G4-EN15 Direct carbon dioxide emissions 48, Appendix G4-EN16 Indirect carbon dioxide emissions 48, appendix G4-EN21 + MM NOx, SOx and other significant air emissions 48, appendix DMA + MM Effluents and Waste Appendix G4-EN24 + MM Total number and volume of significant spills 49, Appendix MM3 Total amounts of overburden, rock, tailings, and sludges and their associated risks 49 DMA Products and Services Appendix G4-EN27 Mitigated environmental impacts of products and services 19,30,32 DMA Compliance, Environmental Appendix G4-EN29 Significant fines and other sanctions due to non-compliance with environmental laws and regulations Appendix DMA Supplier Environmental Assessment Appendix G4-EN33 Environmental impacts in the supply chain 36-37, Appendix DMA Environmental Grievance Mechanisms Appendix G4-EN34 Number of grievances about environmental impacts filed and addressed Appendix Social Labour Practices and Decent Work DMA + MM Employment Appendix G4-LA1 Total number and rates of new employee hires and employee turnover 38, Appendix DMA + MM Occupational Health and Safety Appendix G4-LA6 + MM Injuries, occupational diseases, lost days, absenteeism and work-related fatalities 40, Appendix DMA Diversity and Equal Opportunity Appendix G4-LA12 Diversity among the Board, Group management and workforce 39, 64-66, Appendix DMA Supplier Assessment for Labour Practices Appendix G4-LA15 Assessment of labour practices in the supply chain Appendix DMA Labour Practices Grievance Mechanisms Appendix G4-LA16 Number of grievances about labour practices filed and addressed Appendix INDEX DESCRIPTION PAGE Human Rights DMA Non-discrimination Appendix G4-HR3 Total number of incidents of discrimination 40 DMA + MM Indigenous Rights Appendix G4-HR8 Incidents of violations of rights of indigenous peoples 25, 43, appendix MM5 Total number of operations taking place in or adjacent to indigenous peoples territories 25, 43, Appendix DMA Human Rights Assessment Appendix G4-HR9 Operations that have been subject to human rights reviews or impact assessments 6,36-37, 43, 52, Appendix DMA Supplier Human Rights Assessment Appendix G4-HR11 Human rights impacts in the supply chain 36-37, Appendix DMA Human Rights Grievance Mechanisms Appendix G4-HR12 Number of grievances about human rights filed and addressed Appendix Society DMA + MM Local Communities Appendix G4-SO2 Operations with significant actual or potential negative impacts on local communities 25, 28-29, MM6 Land use disputes with local communities and indigenous peoples 25 DMA Anti-corruption Appendix G4-SO5 Incidents of corruption r 40 DMA Grievance Mechanisms for Impacts on Society Appendix G4-SO11 Number of grievances about impacts on society filed and addressed Resettlement) Appendix MM9 Households resettled, and effect on their livelihoods DMA Closure plan Appendix MM10 Operations with closure plans 46-47, 97 Appendix DMA Emergency preparedness 28, 46, Appendix LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GRI-INDEX 71

74 GROUP OVERVIEW GROUP From and including the fourth quarter 2016, the business is being managed and followed up according to a new Group structure. The operations have been split into three divisions: Northern Division, Southern Division and Special Products Division. Group-wide functions are followed up in the segment Other, where certain parts of the business are operated as wholly owned subsidiaries. These mainly supply products and services within the Group. Figures for full year 2016 and 2015 have been restated according to the new structure. The Group s earnings and the breakdown of earnings between operating segments are described below and in Note 3 on page 93. FINANCIAL OVERVIEW THE GROUP IN SUMMARY (MSEK) Net sales 16,343 16,200 Underlying operating profit 1 1,621 1,548 Costs for urban transformation provisions -2,106-1,568 Impairment of property, plant and equipment -1,192-7,136 Operating profit/loss -1,677-7,156 Net financial income/expense Profit/loss before tax -1,063-7,271 Profit/loss for the period ,686 1 Underlying operating profit is defined in Note 42 on page 117. NET SALES AND OPERATING PROFIT/LOSS Net sales 2016 Operating profit MSEK FINANCIAL POSITION ANALYSIS OF CHANGE IN OPERATING PROFIT (MSEK) 2016 Operating profit ,156 Delivery volumes and mix 1,825 Prices 672 Foreign currency effect 233 Hedging of currency and iron ore price -2,587 Costs for urban transformation provisions -538 Impairment of property, plant and equipment 5,944 Depreciation 54 Production volumes, stocks -694 Other expenses and other income 570 Operating profit ,677 For full year 2016, higher delivery volumes, improved prices and cost efficiencies contributed to the improved result. In contrast, hedges mainly entered into at the lower price levels that prevailed during the fourth quarter of 2015 and first quarter of 2016 had a negative impact. These were effected in order to alleviate the effects of price and exchange rate changes in the market, which meant that LKAB was not able to take full advantage of the price increase in During the year cost efficiency measures cut costs by around MSEK 700, which was according to plan. Impairment losses on property, plant and equipment had a negative effect on operating profit of MSEK 1,192, compared with MSEK 7,136 for full year Net financial income/expense for 2016 was MSEK 613 (-115), which is mainly due to a better return on investments, positive exchange gains and positive effects of hedging activities. NET FINANCIAL INDEBTEDNESS (MSEK) Loans payable 5,105 2,996 Provisions for pensions 1,877 1,860 Provisions, urban transformation 13,062 12,234 Provisions, remediation 1,276 1,253 Less: Cash and cash equivalents -2,624-4,335 Current investments -11,271-10,225 Financial investments -1, Net financial indebtedness 6,330 3,202 NET DEBT/EQUITY RATIO (MSEK) Net financial indebtedness, MSEK 6,330 3,202 Equity, MSEK 30,551 32,116 Net debt/equity ratio, % The net debt/equity ratio increased to 20.7 (10.0) percent as a result of increased net financial indebtedness and lower equity. Equity decreased primarily because of impairment losses for the Mertainen open-pit mine, the negative impact of hedging activities and increased costs for urban transformation provisions. The increase in net financial indebtedness is mainly due to increases in borrowing and in provisions for urban transformation. 72 GROUP OVERVIEW LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

75 OPERATING CASH FLOW AND INVESTMENTS OPERATING CASH FLOW MSEK PARENT COMPANY The Parent Company LKAB consists of Northern Division and Southern Division and the group-wide functions reported under Other Segments. The Parent Company includes the majority of LKAB s operating activities as well as the company s financial operations. THE PARENT COMPANY IN SUMMARY (MSEK) Net sales 14,904 14,770 Underlying operating profit ,010 Urban transformation costs -2,106-1,568 Impairment of property, plant and equipment -1,184-6,096 Operating profit/loss -2,388-6,654 OPERATING CASH FLOW (MSEK) CHANGE Cash flow from operating activities 3,569 3, Change in working capital -3, ,205 Capital expenditures (net) -3,288-6,204 2,916 Operating cash flow -2,762-2, Investments in property, plant and equipment 3,087 5,817 Depreciation -2,213-2,151 Deliveries of iron ore, Mt Production of iron ore, Mt Underlying operating profit is defined in Note 42 on page 117. Operating cash flow decreased compared to Cash flow from operating activities was in line with the previous year, however mainly due to improved profits, which were offset by increased expenditures for urban transformation. Working capital was negatively impacted by an increased level of capital tied up in pledged assets for outstanding hedging positions and for accounts receivable. Lower capital expenditures made a positive contribution. CAPITAL EXPENDITURE, TOTAL AND BY DIVISION (MSEK) Group 3,341 6,354 Northern Division 883 1,258 Southern Division 1,997 4,004 Special Products Division Other Segments 447 1,061 Capital expenditure for the year totalled MSEK 3,341. Of this, MSEK 2,240 was capital expenditure within the growth programme and MSEK 409 was for the new main haulage level in Kiruna s underground mine. At the underground mine in Kiruna, the fourth of five phases of the main haulage level at a depth of 1,365 metres was taken into operation. The fifth and final phase will be operational gradually over the coming year. In Narvik a new shiploader and quay, including new conveyor logistics and a screening station, were taken into operation during the year. In order to meet stricter environmental stipulations for atmospheric emissions, investments in flue gas scrubbing at the pelletizing plant in Svappavaara were taken into operation during the year. The year s capital expenditure on environmental protection, flue gas scrubbing and dam facilities amounts to MSEK 172 (487). OUTLOOK FOR 2017 LKAB expects the market situation to remain largely unchanged in The oversupply situation within iron ore fines is expected to endure, which means continued pressure on iron ore prices and thus also on LKAB s profitability. Demand for LKAB s pellets continues to be strong, and the strategy of maximizing pellet production remains in place. LKAB is continuing its adaptation work, focusing on profitability, productivity improvements and cost cutting in order to increase competitiveness. Work on the urban transformation is moving into a more intensive phase with continued provisions and an increased number of acquisitions, which means increased expenditure over the coming year. GUIDELINES FOR REMUNERATION OF SENIOR EXECUTIVES The guidelines passed by the AGM for 2016 and reporting on the compensation paid to senior executives can be found in Note 6 on pages The Board is proposing to the AGM to be held on 27 April 2017 that new guidelines are passed based on the government s guidelines for compensation and other employment terms for senior executives adopted on 22 December The Board s proposal is designed to ensure that LKAB can offer market competitive remuneration to attract and retain qualified employees to LKAB s Group management. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 GROUP OVERVIEW 73

76 DIVISIONS NORTHERN DIVISION The division produces both blast furnace pellets and pellets for steelmaking via direct reduction, known as DR pellets, in mines and processing plant in Kiruna. The processed iron ore products are transported along the Malmbanan and Ofotbanen railway lines to the port of Narvik for shipment to steelworks customers around the world. SOUTHERN DIVISION This division produces blast furnace pellets and fines in mines and processing plants in Malmberget and Svappavaara. The processed iron ore products are transported along the Malmbanan railway line, mainly to the port of Luleå for shipment to European steelworks customers. MSEK Net sales 10,376 8,606 Underlying operating profit 1 2,891 1,002 Costs for urban transformation provisions -1,727-1,308 Impairment of property, plant and equipment -3,641 Operating profit/loss 1,164-3,947 MSEK Net sales 7,162 5,998 Underlying operating profit 1 1, Costs for urban transformation provisions Impairment of property, plant and equipment -1,192-3,495 Operating profit/loss ,276 Capital expenditure 883 1,258 Depreciation -1,264-1,332 Capital expenditure 1,997 4,004 Depreciation Deliveries of iron ore, Mt Proportion of pellets, % Production of iron ore products, Mt Underlying operating profit is defined in Note 42 on page 117. Net sales for the year increased by 20 percent, mainly due to higher delivery volumes and somewhat improved iron ore prices compared to the previous year. Costs, excluding provisions for urban transformation and impairment losses, were lower than in the previous year. Higher costs resulting from increased production and delivery volumes and from chute renovation were offset by cost efficiency measures. In 2016 costs of urban transformation provisions increased, partly as an effect of the agreement between the Swedish Transport Administration and LKAB in which LKAB is to pay for the routing of road E10 through Kiruna. SPECIAL PRODUCTS The Special Products Division encompasses LKAB Minerals, which sells minerals for industrial use, and LKAB Wassara, which sells drilling technology systems for the mining and construction industries. MSEK Net sales 1,598 1,619 Operating profit before capital gain on sale of operations Operating profit/loss Capital expenditure Depreciation For full year 2016, net sales and operating profit before capital gain on sale of operations were higher than in the previous year. To counter the trend of lower prices, an efficiency programme was implemented within LKAB Minerals which had a positive effect on profits. In December a major contract was signed for deliveries of MagnaDense to the Tuxpan gas pipeline on the border between the USA and Mexico, strengthening the company s position in the offshore market. During the period LKAB Wassara received a large order relating to the supply of drilling and pumping equipment for the rebuilding of Slussen in Stockholm. Deliveries of iron ore products, Mt Proportion of pellets, % Production of iron ore products, Mt Underlying operating profit is defined in Note 42 on page 117. For full year 2016 sales increased as an effect of higher delivery volumes and somewhat improved iron ore prices compared to the previous year. Costs, excluding provisions for urban transformation and impairment losses, were higher than in the previous year. Increased costs are due mainly to higher production and delivery volumes as well as higher energy prices, which were offset to some extent by cost efficiency measures. In November an agreement was reached with the Municipality of Gällivare on compensation for premises for municipal operations and land in Malmberget. In December 2016 the company s Board decided to mothball the open-pit mine in Mertainen, resulting in impairment losses for property, plant and equipment of MSEK 1,192. OTHER SEGMENTS Group-wide functions and activities that take place in operating subsidiaries are brought together in Other Segments. This segment also encompasses financial operations, including transactions and profits relating to financial hedging for iron ore prices, currencies and the purchase of electricity. MSEK Net sales excl. hedging 1,918 2,250 Net sales hedging -2, Total net sales ,104 Operating profit/loss -2, Capital expenditure 447 1,061 Depreciation For full year 2016 hedging activities had a negative effect on net sales and operating profit of MSEK 2,733. Net sales excluding hedging mainly covers the operations within LKAB Berg och Betong. 74 GROUP OVERVIEW LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

77 CONTENTS FINANCIAL STATEMENTS THE GROUP 76 Income Statement 76 Statement of Comprehensive Income 76 Statement of Financial Position 77 Statement of Changes in Equity 78 Statement of Cash Flows 79 FINANCIAL STATEMENTS PARENT COMPANY 80 Income Statement 80 Statement of Comprehensive Income 80 Balance Sheet 81 Statement of Changes in Equity 83 Cash Flow Statement 84 NOTES 85 Note 1 Significant accounting principles 85 Note 2 Distribution of revenue 92 Note 3 Segment reporting 92 Note 4 Other operating income 94 Note 5 Other operating expenses 94 Note 6 Employees, employee benefit expenses and remuneration of senior executives 94 Note 7 Auditors fees and reimbursements 96 Note 8 Operating expenses by type 96 Note 9 Impairment of property, plant and equipment 96 Note 10 Net financial income/expense 97 Note 11 Appropriations 97 Note 12 Taxes 98 Note 13 Earnings per share 100 Note 14 Intangible assets 100 Note 15 Property, plant and equipment operations 101 Note 16 Property, plant and equipment urban transformation 103 Note 17 Participations in associated companies 103 Note 18 Holdings in joint operations 103 Note 19 Receivables from Group companies and associated companies 103 Note 20 Financial investments 104 Note 21 Other non-current securities holdings 104 Note 22 Non-current receivables and other receivables 104 Note 23 Inventories 104 Note 24 Accounts receivable 104 Note 25 Prepaid expenses and accrued income 104 Note 26 Equity 105 Note 27 Interest-bearing liabilities 105 Note 28 Liabilities to credit institutions 105 Note 29 Pensions 106 Note 30 Provisions 108 Note 31 Urban transformation 109 Note 32 Accrued expenses and deferred income 110 Note 33 Valuation of financial assets and liabilities at fair value and categorization 110 Note 34 Financial risks and risk management 112 Note 35 Investment commitments 115 Note 36 Pledged assets and contingent liabilities 115 Note 37 Related parties 115 Note 38 Group companies 115 Note 39 Untaxed reserves 116 Note 40 Specifications for statement of cash flows 116 Note 41 Events after the closing date 117 Note 42 Proposed appropriation of earnings 117 Note 43 Key ratios disclosures 117 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS 75

78 CONSOLIDATED INCOME STATEMENT 1 January 31 December MSEK Note Net sales 2, 3 16,343 16,200 Cost of goods sold 14, 15, 16, 31-17,116-22,280 Gross profit/loss ,080 Selling expenses Administrative expenses Research and development expenses Other operating income Other operating expenses Operating profit/loss 3, 6, 7, 8, 9-1,677-7,156 Financial income Financial expense Net financial income/expense Profit/loss before tax -1,063-7,271 Tax ,585 Profit/loss for the year ,686 Attributable to Parent Company shareholders ,686 Earnings per share before and after dilution (SEK) 13-1,397-8,122 Number of shares 700, ,000 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME Profit/loss for the year ,686 Other comprehensive income Items that will not be reclassified to profit for the year Actuarial gains and losses on defined-benefit pension plans Tax attributable to actuarial gains and losses Items that will be reclassified to profit for the year Translation differences on translation of foreign operations for the year Changes in fair value of available-for-sale financial assets for the year Changes in fair value of cash flow hedges for the year Changes in fair value of cash flow hedges transferred to profit for the year Tax attributable to components of cash flow hedges Total items reclassified to profit or loss Other comprehensive income Comprehensive income attributable to Parent Company shareholders for the year: -1,565-5, FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

79 CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December MSEK Note , 33, 34, 37 Assets 18, 35 Non-current assets Intangible assets Property, plant and equipment for operations 15 32,076 32,462 Property, plant and equipment for urban transformation 16 2,009 2,235 Participations in associated companies Financial investments 20 1, Non-current receivables Deferred tax assets Total non-current assets 35,461 35,558 Current assets Inventories 23 2,836 2,915 Accounts receivable 24 2,094 1,320 Prepaid expenses and accrued income Other current receivables 22 2,525 1,392 Current investments 20, 40 11,271 10,225 Cash and cash equivalents 40 2,624 4,335 Total current assets 22,164 20,470 Total assets 57,626 56,028 Equity and liabilities Equity 26, 42 Share capital Reserves Profit brought forward including profit for the year 30,224 31,264 Equity attributable to Parent Company shareholders 30,551 32,116 Total equity 30,551 32,116 Non-current liabilities Non-current interest-bearing liabilities 27 3,234 1,996 Other liabilities 4 Provisions for pensions and similar commitments 29 1,877 1,860 Provisions for urban transformation 30, 31 9,914 10,951 Other provisions 30 1,198 1,178 Deferred tax liabilities 12 1,512 1,915 Total non-current liabilities 17,740 17,900 Current liabilities Current interest-bearing liabilities 27 1,871 1,000 Trade payables 1,283 1,573 Other current liabilities 1, Accrued expenses and deferred income 32 1,559 1,560 Provisions for urban transformation 30, 31 3,148 1,283 Other provisions Total current liabilities 9,335 6,011 Total liabilities 27,075 23,911 Total equity and liabilities 57,626 56,028 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS 77

80 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY SEE NOTE 26 EQUITY ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS Reserves MSEK Share capital Translation reserve Fair value reserve Hedging reserve Retained ings including profit for the year Total equity Opening equity 1 Jan ,954 37,754 Profit/loss for the year -5,686-5,686 Other comprehensive income for the year Comprehensive income for the year ,551-5,499 Dividend Closing equity 31 Dec ,264 32,116 SEE NOTE 26 EQUITY ATTRIBUTABLE TO PARENT COMPANY SHAREHOLDERS Reserves MSEK Share capital Translation reserve Fair value reserve Hedging reserve Profit brought forward including profit for the year Total equity Opening equity 1 Jan ,264 32,116 Profit/loss for the year Other comprehensive income for the year Comprehensive income for the year ,040 1,565 Dividend Closing equity 31 Dec ,224 30, FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

81 CONSOLIDATED STATEMENT OF CASH FLOWS 1 January 31 December MSEK Note , 40 Operating activities Profit/loss before tax -1,063-7,271 Adjustment for items not included in cash flow 5,780 11,559 Income tax paid Expenditures, urban transformation 30, 31-1, Expenditures, other provisions Cash flow from operating activities before changes in working capital 3,569 3,672 Cash flow from changes in working capital Increase (-)/Decrease (+) in inventories Increase (-)/Decrease (+) in operating receivables -2, Increase (+)/Decrease (-) in operating liabilities Change in working capital -3, Cash flow from operating activities 526 3,834 Investing activities Acquisition of property, plant and equipment -3,341-6,354 Disposal of property, plant and equipment Change in financial assets Disposals/acquisitions (net) in current investments -1,046 1,279 Cash flow from investing activities -4,447-4,847 Financing activities Borrowing 2, Adjustment of other provisions -96 Dividends paid to Parent Company shareholders -139 Cash flow from financing activities 2, Cash flow for the year -1,807-1,044 Cash and cash equivalents at start of year 4,335 5,358 Exchange difference in cash and cash equivalents Cash and cash equivalents at end of year 2,624 4,335 MSEK Consolidated operating cash flow Cash flow from operating activities 526 3,834 Acquisition of property, plant and equipment -3,341-6,354 Disposal of property, plant and equipment Operating cash flow (excluding current investments) -2,762-2,370 Acquisition/disposal of financial assets (net) -1,159 1,357 Cash flow after investing activities -3,921-1,013 Cash flow from financing activities 2, Cash flow for the year -1,807-1,044 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS 79

82 INCOME STATEMENT PARENT COMPANY 1 January 31 December MSEK Note , 37 Net sales 2, 3 14,904 14,770 Cost of goods sold 15, 16, 31-16,687-20,675 Gross profit/loss -1,784-5,905 Selling expenses Administrative expenses Research and development expenses Other operating income Other operating expenses Operating profit/loss 6, 7, 8, 9-2,388-6,654 Earnings from financial items Earnings from participations in Group companies Income from other securities and receivables held as non-current assets Other interest income and similar profit/loss items Interest expense and similar profit/loss items Profit/loss after financial items 10-1,534-6,706 Appropriations ,645 Profit/loss before tax -2,285-5,061 Tax ,082 Profit/loss for the year -1,865-3,979 COMPREHENSIVE INCOME PARENT COMPANY Profit/loss for the year -1,865-3,979 Other comprehensive income Comprehensive income for the year -1,865-3, FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

83 BALANCE SHEET PARENT COMPANY As at 31 December MSEK Note , 33, 34 Assets 35 Non-current assets Intangible assets Property, plant and equipment for operations 15 26,449 27,076 Property, plant and equipment for urban transformation 16 2,009 2,235 Financial assets Participations in subsidiaries 38 2,120 1,884 Participations in associated companies Receivables from subsidiaries 19, 37 1,604 1,242 Other non-current securities Other non-current receivables Deferred tax asset 12 2,380 1,960 Total financial assets 6,501 5,365 Total non-current assets 35,007 34,714 Current assets Inventories 23 2,333 2,277 Current receivables Accounts receivable 24 1,785 1,063 Receivables from subsidiaries 37 1,201 1,324 Other current receivables 22 2, Prepaid expenses and accrued income Total current receivables 6,170 3,645 Current investments 40 11,115 11,800 Cash and bank balances 40 2,124 2,338 Total current assets 21,742 20,060 Total assets 56,748 54,774 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS 81

84 BALANCE SHEET PARENT COMPANY As at 31 December MSEK Note Equity and liabilities 1, 33, 34 Equity 26 Restricted equity Share capital (700,000 shares) Statutory reserve Non-restricted equity 42 Retained earnings 16,025 20,003 Profit/loss for the year -1,865-3,979 Total equity 15,557 17,422 Untaxed reserves 39 17,663 16,624 Provisions Provisions for urban transformation 30, 31 9,914 10,951 Other provisions 29, 30 1,486 1,526 Total provisions 11,400 12,478 Non-current liabilities Bond loans 28 3,234 1,996 Other non-current liabilities 4 Total non-current liabilities 3,238 1,996 Current liabilities Liabilities to credit institutions 28 1,871 1,000 Trade payables 929 1,099 Liabilities to subsidiaries 37 1,298 1,170 Other current liabilities Accrued expenses and deferred income 32 1,403 1,346 Provisions for urban transformation 30, 31 3,148 1,283 Other provisions Total current liabilities 8,890 6,254 Total equity and liabilities 56,748 54, FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

85 STATEMENT OF CHANGES IN EQUITY PARENT COMPANY SEE NOTE 26 RESTRICTED EQUITY NON-RESTRICTED EQUITY MSEK Share capital Statutory reserve Retained earnings Profit/loss for the year Total equity Opening equity 1 Jan ,142 21,539 Comprehensive income for the year -3,979-3,979 Dividend Closing equity 31 Dec ,003-3,979 17,422 SEE NOTE 26 RESTRICTED EQUITY NON-RESTRICTED EQUITY MSEK Share capital Statutory reserve Retained earnings Profit/loss for the year Total equity Opening equity 1 Jan ,025 17,422 Comprehensive income for the year -1,865-1,865 Dividend Closing equity 31 Dec ,025-1,865 15,557 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 FINANCIAL STATEMENTS 83

86 CASH FLOW STATEMENT PARENT COMPANY 1 January 31 December MSEK Note , 40 Operating activities Profit/loss after financial items -1,534-6,706 Adjustment for items not included in cash flow 5,267 10,169 Income tax paid Expenditures, urban transformation 30, 31-1, Expenditures, other provisions Cash flow from operating activities before changes in working capital 2,612 2,874 Cash flow from changes in working capital Increase (-)/Decrease (+) in inventories Increase (-)/Decrease (+) in operating receivables -2, Increase (+)/Decrease (-) in operating liabilities Change in working capital -2, Cash flow from operating activities -7 3,108 Investing activities Acquisition of property, plant and equipment -3,087-5,817 Disposal of property, plant and equipment Shareholder contribution paid Change in financial assets Disposals/acquisitions (net) in current investments -1,002 1,287 Cash flow from investing activities -4,390-4,206 Financing activities Borrowing 2, Group contribution received Adjustment of other provisions -96 Dividend paid -139 Cash flow from financing activities 2, Cash flow for the year -1,997-1,004 Cash and cash equivalents at start of year 4,126 5,108 Exchange difference in cash and cash equivalents Cash and cash equivalents at end of year 2,224 4, FINANCIAL STATEMENTS LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

87 NOTES TO THE FINANCIAL STATEMENTS NOTE 1 SIGNIFICANT ACCOUNTING PRINCIPLES 1 Compliance with standards and laws The consolidated financial statements were prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) as adopted by the EU. The Swedish Financial Reporting Board s Recommendation RFR 1 Supplementary Rules for Consolidated Financial Statements was also applied. The Parent Company applies the same accounting principles as the Group, except where stated below in the Parent Company s accounting principles section. The Annual Report and consolidated financial statements were approved for issue by the Board of Directors and President on 21 March The consolidated income statement, consolidated statement of comprehensive income and statement of financial position and the Parent Company's income statement and balance sheet are subject to approval at the Annual General Meeting on 27 April Measurement bases applied in preparing the financial statements Assets and liabilities are recognized at historical cost, apart from certain financial assets and liabilities that are measured at fair value. Financial assets and liabilities that are measured at fair value consist of derivatives, financial assets classified as financial assets measured at fair value via profit or loss, or available-for-sale financial assets. A defined-benefit pension liability/asset is recognized as the net of the fair value of plan assets and the present value of the defined-benefit liability, adjusted for any asset restrictions. 3 Functional currency and presentation currency The functional currency of the Parent Company is the Swedish krona (SEK), which is also the presentation currency for both the Parent Company and the Group. This means that the financial statements are presented in SEK. Unless otherwise stated, all amounts are rounded off to the nearest million SEK. 4 Assessments and estimates in the financial statements Preparing the financial statements in accordance with IFRS requires company management to make assessments, estimates and assumptions that affect the application of accounting principles and the recognized amounts of assets, liabilities, income and expenses. Actual outcomes may diverge from these estimates and assessments. These estimates and assumptions are reviewed regularly. Changes in estimates are recognized in the period in which the change is made if the change only affects that period, or the period in which the change is made and future periods if the change affects both current and future periods. Assessments made by company management when applying IFRS that have a significant effect on the financial statements and estimates that may lead to significant adjustments to the following year s financial statements are described in more detail in section 28, Significant estimates and assessments. 5 Significant accounting principles applied The following consolidated accounting principles were applied consistently to all periods that are presented in the consolidated financial statements, unless otherwise stated. The consolidated accounting principles were applied consistently in the presentation and consolidation of the Parent Company, subsidiaries and joint ventures. 6 Changes for Accounting principles changed due to new or amended IFRS New or amended standards and new interpretations have had no significant effect on the consolidated accounts for New IFRS that have not yet been applied Following is a summary of the new or amended IFRS that take effect in coming financial years and that are expected to apply to LKAB. None of these standards were adopted early so they do not apply to these financial statements. Applied in Standards financial year beginning: IFRS 9 Financial Instruments 1 January 2018 or later IFRS 15 Revenue from Contracts with Customers 1 January 2018 or later including amendments to IFRS 15: Date of application of IFRS 15 Clarification of IFRS 15 Revenue from Contracts with Customers 1 IFRS 16 Leases 1 1 January 2019 or later Amendments to IAS 7 Statement of Cash Flows 1 January 2017 or later ( Disclosure Initiative ) Amendments to IAS 12 Income Taxes (Recognition of 1 January 2017 or later deferred tax assets for unrealized losses) 1 Annual improvements to IFRS ( ) 1 1 Not yet approved for application within the EU. 1 January 2017 or later and 1 January 2018 or later New or amended standards that will affect consolidated financial reporting from 2017: Described below are the new and amended standards and interpretations that are expected to affect the consolidated financial statements in the period to which they are applied for the first time. IFRS 9 Financial Instruments will replace IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 contains new principles for the classification and measurement of financial assets. The measurement category in which a financial asset is to be placed depends partly on the company s business model (the purpose for which the company holds the asset) and partly on the financial asset s contractual cash flows. The new standard also contains new rules on impairment testing of financial assets that are based on past events/losses. As regards hedge accounting, the three types of hedge accounting models currently found in IAS 39 are retained. However, IFRS 9 provides greater flexibility as regards the transactions to which hedge accounting can be applied. The standard provides greater opportunity to hedge risk components in non-financial items and allows more types of instruments to be used in a hedging relationship. Moreover, a quantitative requirement of effectiveness is no longer required. Management s assessment is that IFRS 9 may affect the amounts recognized in the financial statements, but that the effects will not be significant. The effects of implementing IFRS 9 have not yet been analyzed in detail, so the effects cannot yet be quantified. IFRS 15 Revenue from Contracts with Customers will replace existing IFRS related to the recognition of revenue. IFRS 15 is based on recognizing revenue when control over goods or services transfers to the customer, which differs from the existing basis of the transfer of risks and benefits. IFRS 15 also introduces new ways of establishing how and when revenue is to be recognized, which involves a new approach compared with the way that revenue is currently recognized. There is significantly more guidance in IFRS 15 for specific areas, and the disclosure requirements are extensive. Management s assessment is that IFRS 15 and the clarification of IFRS 15 may affect the amounts recognized in the financial statements, but that the effects will not be significant. The effects of implementing IFRS 15 have not yet been analyzed in detail, so the effects cannot yet be quantified. IFRS 15 contains greater disclosure requirements in respect of revenue, which will expand the content of the notes. IFRS 16 Leases will replace IAS 17 Leases. For lessees, IFRS 16 means that almost all leases are to be recognized in the statement of financial position. Leases will thus no longer be classified as operating leases and finance leases. The exceptions are leases with a term of 12 months or less and leases where the underlying asset has a low value. Depreciation of the asset and interest expenses for the liability are recognized in the income statement. The new standard contains more extensive disclosure requirements than the present standard. Management s assessment is that IFRS 16 may affect the amounts recognized in the financial statements, but that the effects will not be significant. The effects of implementing IFRS 16 have not yet been analyzed in detail, so the effects cannot yet be quantified. Other new and amended standards and interpretations that have not taken effect are not expected by management to have any significant effect on the consolidated financial statements when they are applied for the first time. 8 Classification etc. Non-current assets and liabilities consist essentially of amounts that are expected to be recovered or paid more than twelve months from the end of the reporting period. Current assets and liabilities essentially consist of amounts that are expected to be recovered or paid within 12 months of the end of the reporting period. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 85

88 9 Operating segment reporting An operating segment is a part of the Group that engages in business operations from which it may generate income and incur expenses and for which independent financial information is available. An operating segment s earnings are also monitored by the company s chief operating decision-maker, which is Group management, to assess its performance and to allocate resources to the operating segment. There are three operating segments identified within the LKAB Group: Northern Division, Southern Division and Special Products. See Note 3 for a further description of the classification and presentation of operating segments. 10 Consolidation principles and business combinations 10.1 Subsidiaries Subsidiaries are companies that operate under the control of the Parent Company. Control exists if the Parent Company has influence over the object of investment, is exposed to or has rights to variable returns from its involvement and can use its influence over the investment to affect returns. In assessing whether control exists, potential voting shares and whether de facto control exists should be taken into account. Subsidiaries are recognized according to the acquisition method. This method means that acquisition of a subsidiary is regarded as a transaction whereby the Group indirectly acquires the subsidiary s assets and assumes its liabilities. The acquisition analysis determines the fair value on the date of acquisition of acquired identifiable assets and assumed liabilities and any non-controlling interest. In the case of business combinations where the transferred consideration, any non-controlling interest and fair value of previously owned participating interest (in the case of incremental acquisitions) exceed the fair value of the assets acquired and liabilities assumed, the difference is recognized as goodwill. When the difference is negative, a so-called low-cost acquisition is recognized directly in profit for the year Associated companies Associated companies are companies in which the Group has a significant but not controlling influence over operating and financial governance, normally by means of a shareholding of between 20 and 50 percent of votes. From the date when the company obtains a significant influence, participations in associated companies are included in the consolidated financial statements according to the equity method. The equity method means that the carrying amount of the Group s shares in associated companies is equivalent to the Group s proportion of their share capital. The Group s share of associated companies net profit is recognized under net financial income/expense. These profit shares represent the change in the carrying amount of participations in associated companies Transactions that are eliminated on consolidation Intra-group receivables and liabilities, income or expenses, and unrealized gains or losses arising from intra-group transactions between Group companies are eliminated entirely when preparing the consolidated financial statements. 11 Foreign currency 11.1 Foreign currency transactions Foreign currency transactions are translated into the functional currency at the exchange rate in effect on the transaction date. The functional currency is the currency of the primary economic environment where the companies conduct their operations. Monetary assets and liabilities in foreign currencies are translated into the functional currency at the exchange rate in effect at the end of the reporting period. Exchange rate differences that arise on translation are recognized in profit for the year. Non-monetary assets and liabilities that are recognized at historical cost are translated at the exchange rate in effect on the transaction date. Non-monetary assets and liabilities recognized at fair value are translated to the functional currency at the rate in effect on the date of measurement at fair value Financial statements of foreign entities Assets and liabilities in foreign operations, including goodwill and other group-related surpluses and deficits, are translated from the foreign operations functional currencies to SEK, the Group s presentation currency, at the exchange rate in effect at the end of the reporting period. Income and expenses in a foreign operation are translated to SEK at an average exchange rate that constitutes an approximation of the exchange rates that applied when the transactions occurred. Translation differences that arise from currency translation of foreign operations are recognized in other comprehensive income and accumulated in a separate component in equity called the translation reserve. When control of a foreign operation ceases, the accumulated translation differences attributable to the operation are realized, at which point they are reclassified from the translation reserve in equity to profit for the year. 12 Revenue 12.1 Sales of goods and rendering of services Income from the sale of goods is recognized in profit for the year when the significant risks and benefits associated with ownership of the goods have been transferred to the buyer. Income from services is recognized in profit for the year based on the stage of completion at the end of the reporting period. Income is not recognized if it is probable that the future economic benefit will not accrue to the Group. Income is recognized at the fair value of the consideration that is received or is expected to be received, less any discounts Sales of iron ore Iron ore trading is conducted in US dollars. LKAB prices iron ore according to a variable price model with an index-linked price based on the spot price. The sale of iron ore is recognized upon delivery to the customer in accordance with the terms of sale. Sales are recognized less value added tax and translation is at the current exchange rate. If sales are hedged by forward exchange contracts translation is at the hedged rate. In the variable price model, quarterly prices are applied and the price is determined after the end of the quarter. The price is mainly affected by the current quarter s average for 62%/65% sinter fines CFR in China. This means that income for the quarter is based on a preliminary price. After the end of the quarter, a price adjustment is made that is allocated to the quarter. Income is recognized in net sales Sales of industrial minerals The Minerals group trades in a number of different minerals, both minerals in its own possession such as magnetite, huntite and mica, and external minerals that are either further processed within the Group or sold on in unchanged form to the end customer. Trade in industrial minerals occurs either in the country s local currency or in a major currency like USD or EUR. The mineral magnetite is bought from the Parent Company. The prices are agreed upon quarterly and are based on the Parent Company s global price agreements for iron ore products. Other in-house minerals are priced internally, while external minerals are priced according to individual price agreements with each supplier that may be agreed annually or at shorter intervals. Sales of minerals are reported to customers in accordance with agreed upon sales terms. Sales are recognized less value added tax and translation is at the current exchange rate. Invoicing is carried out on delivery to the customer according to agreed upon prices and payment terms. Income is recognized in net sales Rental income Rental income from property is recognized on a straight-line basis in the income statement, based on the terms of the rental agreement. Rental income is recognized in other operating income Government grants Government grants are recognized in the statement of financial position as deferred income when there is reasonable assurance that the grant will be received and the Group will comply with the terms associated with the grant. Grants are accrued systematically in profit for the year in the same way and over the same periods as the costs for which the grants are intended to compensate. Government grants related to assets are recognized as a reduction in the asset s carrying amount. 13 Leasing Leases are classified in the consolidated financial statements as either finance leases or operating leases. A lease is considered a finance lease when the economic risks and benefits associated with ownership are, in essence, transferred to the lessee. If this is not the case, it is classified as an operating lease. The Group s leases are essentially operating leases. In operating leases, lease payments are recognized on a straight-line basis over the term of the lease. However, certain variable payments are usually expensed regularly. 14 Financial income and expense Financial income consists of interest income on invested funds, dividend income, gains from the disposal of available-for-sale financial assets, gains from changes in value of financial assets measured at fair value via profit or loss and gains on hedging instruments that are recognized in profit for the year. Interest income on financial instruments is recognized using the effective interest method (see below). Dividend income is recognized when the right to receive payment is established. Earnings from the disposal of financial instruments are recognized when the risks and benefits associated with ownership of the instrument are transferred to the buyer and the Group no longer has control over the instrument. Financial expenses consist of interest expenses on borrowings, interest expenses on provisions, interest expenses on defined-benefit pension obligations, remeasurement losses on financial assets measured at fair value via profit or loss, impairment of financial assets and losses on hedging instruments that are recognized in profit for the year. Borrowing costs are recognized in profit or loss using the effective interest method. Foreign exchange gains and losses are recognized net. The effective interest rate is the rate that makes the present value of all estimated future payments or receipts during the expected fixed interest term equal to the carrying amount of the receivable or liability. The calculation includes all fees paid or received by the contracting parties that are part of the effective interest rate, transaction costs and all other premiums or discounts. 86 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

89 15 Taxes Income tax consists of current tax and deferred tax. Income tax is recognized in profit for the year except when the underlying transaction is recognized in other comprehensive income or equity, in which case the associated tax effect is recognized in other comprehensive income or equity. Current tax is tax to be paid or received for the current year, applying the tax rates that were set or for all practical purposes were set at the end of the reporting period, as well as the adjustment of current tax attributable to prior periods. Deferred tax is calculated according to the balance sheet method, based on temporary differences arising between the carrying amount of assets and liabilities and their value for tax purposes. Temporary differences are not taken into consideration in consolidated goodwill, nor for differences that arise on initial recognition of assets and liabilities that are not business combinations and which on the date of transaction do not affect either recognized or taxable profit. Temporary differences attributable to participations in subsidiaries and associated companies that are not expected to be reversed in the foreseeable future are not taken into consideration either. The measurement of deferred tax is based on how the carrying amount of assets or liabilities is expected to be realized or settled. Deferred tax is calculated by applying the tax rates and tax regulations that were set or for all practical purposes were set at the end of the reporting period. Deferred tax assets related to deductible temporary differences and loss carryforwards are only recognized to the extent that it is probable they will be utilized. The value of deferred tax assets is reduced when it is no longer deemed probable that they can be utilized. Any additional income tax arising from dividends is recognized when the dividend is recognized as a liability. 16 Financial instruments Financial instruments recognized in the statement of financial position include assets such as cash and cash equivalents, loans receivable, accounts receivable, financial investments and derivatives. Liabilities include trade payables, loans payable and derivatives. Classification of consolidated financial assets and liabilities is indicated in Note 34 Financial risks and risk management. Recognition of financial income and expense is also discussed in the preceding Principle Recognition and derecognition in the statement of financial position A financial asset or financial liability is recognized in the statement of financial position when the company becomes party to the contractual terms of the instrument. A receivable is recognized when the company has delivered and a contractual obligation for the counterparty to pay exists, even if an invoice has not yet been sent. Accounts receivable are recognized in the statement of financial position when the invoice has been sent. Liabilities are recognized when the counterparty has delivered and there is a contractual obligation to pay, even if the invoice has not yet been received. Trade payables are recognized when an invoice is received. A financial asset is derecognized from the statement of financial position when the contractual rights are realized, expire or the company loses control over it. The same applies to a portion of a financial asset. A financial liability is derecognized from the statement of financial position when the contractual obligation is fulfilled or otherwise extinguished. The same applies to a portion of a financial liability. A financial asset and a financial liability are offset and the net amount is recognized in the statement of financial position only when there is a legally enforceable right to offset the amounts and there is an intention to settle the items on a net basis or to realize the asset and settle the liability. Acquisition and disposal of financial assets are recognized on the trade date, which is the date on which the company undertakes to acquire or dispose of the asset Classification and measurement Financial instruments that are not derivatives are initially recognized at cost, corresponding to the instrument s fair value plus transaction costs. This applies to all financial instruments except those classified as financial assets and liabilities carried at fair value via profit or loss, which are recognized at fair value less transaction costs. A financial instrument is classified on initial recognition based on the purpose for which it was acquired. The classification determines how the financial instrument is measured after initial recognition as described below. Derivatives are initially recognized at fair value, meaning that transaction costs are charged to profit for the period. Following initial recognition, derivatives are recognized as described below. If derivatives are used for hedge accounting and to the extent this is effective, changes in value of the derivative are recognized in the income statement at the same time and on the same line of the income statement as the hedged item. The value gain or loss on the derivative is recognized as income or expense in operating profit or net financial income/expense, based on the purpose of the derivative and whether its use is related to an operating item or a financial item. In hedge accounting, the ineffective portion is recognized in the same manner as changes in the value of derivatives not designated for hedge accounting. In accordance with IAS 39, LKAB has chosen not to include the interest component of forward exchange contracts in hedging relationships when applying hedge accounting in the Group. Changes in the value of forward exchange contracts attributable to the interest component are instead recognized as financial income or expense since the interest component is considered to be financial in nature. For option agreements, only the intrinsic value of the option as a hedging instrument is identified. Changes in an option s time value are recognized in the income statement as described above. Cash and cash equivalents consist of cash on hand and demand deposits with banks and similar institutions, and short-term liquid investments with maturities of three months or less from the date of acquisition that are subject to an insignificant risk of changes in value Fair value measurement Disclosures concerning financial assets and liabilities measured at fair value are based on a fair value hierarchy with three levels. Level 1: Quoted prices (unadjusted) on active markets for identical assets or liabilities. Level 2: Inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). Level 3: Inputs for the asset or liability that are not based on observable market data. Interest-bearing instruments The value of interest-bearing instruments is calculated using data from the interest-bearing securities market, obtained from Bloomberg. Shares and alternative investments The value of these investments is calculated using data from the stock market or received directly from brokers. Derivatives The fair values of derivative contracts are calculated using official quotations obtained from Bloomberg Financial assets measured at fair value via profit or loss This category consists of two sub-groups: financial assets held for trading and other financial assets that the company initially chose to place in this category (according to the fair value option). Financial instruments in this category are measured regularly at fair value and changes in value are recognized in profit for the year. The first sub-group includes derivatives with a positive fair value, except for derivatives that are a designated and effective hedging instrument. The fair value option category includes financial instruments that, in accordance with management s strategy, are held and appraised based on fair value Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not listed on an active market. These assets are measured at amortized cost. Amortized cost is determined on the basis of the effective interest calculated on the date of acquisition. Receivables are recognized at the amount expected to be received; that is, less bad debts Available-for-sale financial assets The available-for-sale category includes financial assets that are not classified in any other category or financial assets that the company initially classified in this category. Holdings of shares and participations not recognized as subsidiaries or associated companies are recognized here. Assets in this category are measured regularly at fair value, with changes in value recognized in other comprehensive income and the accumulated changes in value in a separate component of equity. Changes in value due to impairment, interest on debt instruments, dividend income and exchange differences on monetary items are recognized in profit for the year. On disposal of the asset the accumulated gain or loss previously recognized in other comprehensive income is recognized in profit for the year. Unlisted shares whose fair value cannot be reliably measured are measured at cost with regular impairment testing Financial liabilities measured at fair value via profit or loss This category consists of two sub-groups: financial liabilities held for trading and other financial liabilities that the company chose to place in this category (fair value option). See the description above under Financial assets measured at fair value via profit or loss. The first category includes the Group s derivatives with a negative fair value, with the exception of derivatives that are a designated and effective hedging instrument. Changes in fair value are recognized in profit for the year. The company has no financial liabilities in the fair value option category Other financial liabilities Loans and other financial liabilities, such as trade payables, are included in this category. Liabilities are measured at amortized cost. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 87

90 17 Derivatives and hedge accounting The Group s derivatives have been acquired in order to financially hedge cash flow risks that the Group is subject to: exchange rate exposure, changes in iron ore prices and changes in energy prices. Derivatives are initially recognized at fair value, which means that transaction costs are charged to profit for the period. Following initial recognition, derivatives are measured at fair value and changes in value are recognized as described below. An embedded derivative is recognized separately unless it is closely related to the host contract. Hedge accounting is applied when the requirements for hedge accounting are met. Under IAS 39, there must be a clear link to the hedged item. The hedge must also effectively protect the hedged item; hedging must be documented and its effectiveness measurable. The Group s derivatives to which hedge accounting is applied are classified as cash flow hedges of forecast transactions. The hedged flows can be both contracted and forecast. Derivatives used to hedge highly probable future cash flows are recognized in the statement of financial position at fair value. Changes in value for the period are recognized in other comprehensive income and accumulated changes in value are recognized in a separate component in equity (hedging reserve) until the hedged flow affects profit for the year, at which point the hedging instrument s cumulative changes in value are reclassified to profit for the year in conjunction with the hedged item s effect on profit for the year. This means that gains and losses on hedges are recognized in profit for the year at the same time as gains and losses for the items that are hedged. 18 Property, plant and equipment 18.1 Owned assets Property, plant and equipment is carried at cost less accumulated depreciation and any impairment. Cost includes the purchase price and costs directly attributable to the asset to put it in place in working order for use in accordance with the intended purpose. The cost of self-constructed non-current assets includes expenditures for materials, expenditures for employee benefits, and other fabrication costs directly attributable to the asset where applicable. Property, plant and equipment that consists of parts with different useful lives are treated as separate components. The carrying amount of a property, plant and equipment item is derecognized from the statement of financial position when the asset is disposed of or retired. The gain or loss arising from the disposal or retirement of an asset is the difference between the selling price and the asset s carrying amount less direct selling expenses. Gains and losses are recognized as other operating income/expense Exploration and evaluation expenditures Greater knowledge of the extent of the iron ore deposits is necessary to secure access to more ore and ensure the future development of operations. The orebody is surveyed and defined by means of exploration drilling, mainly via drifts adjacent to it. Ore deposit exploration in both existing and future mining areas is expensed. This principle is also applied in the exploration of areas outside existing mines. Evaluation of existing mineral assets is carried out to a lesser extent, mainly to provide a basis for a so-called mine plan for mineral assets, and this work is expensed Underground facilities Underground facilities from which iron ore is extracted can be divided into waste rock mining (development phase) and iron ore mining (production phase). Waste rock mining consists of work done to expose the orebody in conjunction with the construction of a new main haulage level, facilities pertaining to transport and maintenance functions such as railways, roads, drifts, shafts, inclined drifts (a system of access for vehicle traffic from surface level to the work site underground), and facilities for service and electrical and air supply. Expenditures for facilities intended for use over a period of more than one year are capitalized in the statement of financial position. Depreciation occurs systematically over the life of the main haulage level concerned. Iron ore mining mainly consists of development, cave drilling and loading, haulage and hoisting of the ore. Expenditures for these activities have a useful life of at most one year, which is why they are expensed as they are incurred Open-pit mines Iron ore mining above ground takes place in what are known as open-pit mines. Stripping is carried out to expose the orebody, and such things as moraine and barren rock are removed. This is called barren rock mining. During the development phase expenditures are capitalized as part of the cost of the mine and depreciation occurs systematically over the life of the mine. Expenditure on barren rock mining during the production phase that provide improved access to ore for future mining are recognized as assets and are depreciated according to the production-based method Remediation Future expenditure on dismantling and removing assets and restoring sites or areas where they are located (remediation costs) as relates to ongoing operations are capitalized. Capitalized amounts consist of the present value of estimated expenditures that are simultaneously recognized as provisions Subsequent expenditures Subsequent expenditures are added to the cost only when it is probable that future economic benefits associated with the asset will flow to the company and the cost can be measured reliably. All other subsequent expenditures are recognized as expenses in the period in which they arise. A subsequent expenditure is added to the cost if the expenditure relates to the replacement of identified components or parts thereof. In cases where a new component is created, the expenditure is also added to the cost. Any undepreciated carrying amounts on replaced components, or parts thereof, are retired and expensed in conjunction with the replacement. Repairs are expensed as incurred Amortization principles Depreciation is on a straight-line basis over the asset s estimated useful life; land is not depreciated. The Group applies component depreciation, which means that a component s estimated useful life forms the basis for depreciation. Facilities and equipment used in open-pit mines are normally depreciated over the lesser of expected life and the life span of the mine to which they relate. The following periods of use are applied to property, plant and equipment including future remediation costs: Properties used in operations, rental properties years Plant and machinery, open-pit mining Production-based Other plant and machinery 5 20 years Equipment, tools, fixtures and fittings 5 20 years Underground installations years Surface mining facilities As ore is extracted Capitalized remediation costs waste rock stockpile Capitalized remediation costs other As space for stockpile is utilized Estimated life of present production structure. Reviewed once new main haulage levels are put into use. Properties used in operations are mainly classified as buildings, land improvements and land. Buildings and land improvements consist of several components that are classified on the basis of function, such as roads, surfacing, service facilities, processing plants, etc. Rental properties consist of several components with varying useful lives. The main classifications are buildings and land. Buildings are divided into several components whose useful lives vary. The following main groups of components have been identified and form the basis for depreciation of rental properties. Frames, foundations and interior walls 100 years Water, sewage, electrical and heating systems 50 years Exterior facades 40 years Windows 50 years Interior finishing and appliances 15 years Depreciation methods, residual values and useful lives are assessed at the end of each year and adjusted as necessary Urban transformation Acquisition of properties When property is acquired as part of urban transformation, the cost is divided into a building component and a mine component. The distinction is based on the assumption that the building can be used for temporary rental for a limited period from acquisition until evacuation. The building component is calculated as the present value of the net cash flows from the rental. The mine component is defined as the property s total cost less the building component. The building component is expensed in the period in which the building is expected to be utilized. The mine component is expensed immediately on acquisition of property inside the impact boundary as LKAB has already consumed the economic benefits of the property. When property is acquired outside the impact boundary in an area designated for future mining, the mine component is instead expensed when the impact boundary encroaches upon the property in question so as to match the underlying production/consumption of the economic benefits. For a further description of urban transformation accounting principles, see Principle NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

91 Mine assets Mine assets related to future mining are recognized for Kiruna. In cases where there is an agreement or a clear, constructive obligation that defines a commitment related to a future impact area, the provision is recognized according to a contract boundary. The area between the contract boundary and the impact boundary constitutes an asset for future mining operations. The mine asset is expensed with respect to impact boundary movement, that is, when properties, infrastructure etc. are encroached upon by the impact boundary Replacement properties Two compensation options are offered to owners of rental properties and small houses: a replacement property equivalent to the existing property or financial compensation. For those choosing the replacement property option, all the costs of building the replacement property are recognized under property, plant and equipment. When the property is handed over this is offset against provisions for the commitment see also Note 31. When the financial compensation option is chosen the compensation is offset against provisions for the commitment. 19 Intangible assets 19.1 Goodwill Goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is tested annually for impairment; see accounting principles in section Mining rights Mining rights are measured at cost less accumulated amortization and any impairments Research and development Expenditures on research aimed at gaining new scientific or technical knowledge are expensed as incurred. Expenditures on development, whereby research findings or other knowledge are applied to produce new or improved products or processes, are recognized as assets in the statement of financial position if the product or process is technically and commercially feasible and the company has sufficient resources to complete development and then use or sell the intangible asset. The value includes directly attributable expenditures such as goods and services and employee benefits. If the above criteria are not met, the expenditures must be expensed. Because no such development expenditures have met these criteria thus far, LKAB expenses all expenditures for development as incurred Other intangible assets Other intangible assets such as software acquired by the Group are carried at cost less accumulated amortization (see below) and impairment losses Emission allowances LKAB participates in the EU s system for trade in emission allowances, which grants the right to emit carbon dioxide. Allowances are allocated across the European market. The emission allowances are recognized as intangible assets and deferred income on allocation, since the company has not qualified for any allowances at the time of issue. Qualification is at the same rate as actual emissions, when a liability to deliver emission allowances also arises. The charge is reversed from deferred income to provision for emission allowances. The liabilities are measured at the cost of allocated emission allowances. The income is accrued against the cost it is intended to cover. When emission allowances are reported, an equivalent number of emission allowances must be supplied. Thus the intangible non-current asset is exhausted and the provision for discharged emissions is settled. Where a liability to supply emission allowances exceeds the remaining allocation of emission allowances, the surplus amounts are carried as a liability measured at the current market value of the number of emission allowances necessary to settle the commitment. For information on amounts, see Note Subsequent expenditures Subsequent expenditures on capitalized intangible assets are recognized as assets in the statement of financial position only when they increase the future economic benefits of the specific asset to which they relate. All other expenditures are expensed as incurred Amortization principles Amortization is recognized in the income statement on a straight-line basis over the estimated useful life of intangible assets. Intangible assets that can be amortized are written off from the date they are available for use. The estimated useful lives are: Mining rights years Customer-related intangible assets 3 5 years Software 5 years 20 Inventories Inventories are measured at the lower of cost or net realizable value. The cost of inventories is calculated using the first-in, first-out (FIFO) principle and includes expenditures incurred in acquiring the inventory items and bringing them to their existing location and condition. For finished goods and work in progress, cost includes an appropriate share of overheads based on normal operating capacity. Net realisable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and selling expenses. 21 Impairments The Group s recognized assets are assessed at the end of each reporting period to determine whether there is any indication of impairment. IAS 36 is applied to the impairment of assets that are not dealt with by any other IAS standard Impairment of property, plant and equipment, intangible assets and participations in subsidiaries If impairment is indicated, the recoverable amount of the asset is calculated. The recoverable amount for goodwill is also calculated annually. If it is not possible to ascertain essentially independent cash flows for an individual asset, the assets are grouped at the lowest level at which it is possible to identify essentially independent cash flows (a so-called cash-generating unit). The recoverable amount is the higher of fair value less selling expenses or value in use. When calculating value in use, future cash flows are discounted using a discounting factor that reflects risk-free interest and the risks associated with the specific asset. An impairment loss is recognized when the carrying amount of an asset or cash-generating unit exceeds its recoverable amount. Impairment losses are charged to the income statement. Once impairment has been identified for a cash-generating unit, the impairment loss is initially allocated to goodwill, after which other assets in the unit are proportionally impaired Impairment of financial assets At each reporting date, the company assesses whether there is objective evidence that a financial asset or group of assets is impaired. Objective evidence means not only observable circumstances that have occurred and that have a negative effect on the ability to recover the acquisition value, but also any significant or prolonged reduction in the fair value of a financial investment that is classified as an available-for-sale financial asset. Impairment of receivables is determined based on historical experience of customer losses on similar receivables. Impaired accounts receivable are recognized at the present value of expected future cash flows. Receivables close to their due date are not discounted. Upon impairment of an equity instrument classified as an available-for-sale financial asset, accumulated gains or losses previously recognized in equity are reclassified to profit for the year via other comprehensive income. The amount of the accumulated loss that is reclassified from equity to profit for the year via other comprehensive income is the difference between the acquisition cost and the current fair value, less any impairment loss on the financial asset previously recognized in profit for the year. Impairment of available-for-sale financial assets is recognized in profit for the year under net financial income/expense Reversal of impairment An impairment of assets included in the scope of IAS 36 is reversed if there is an indication that the impairment no longer exists and there has been a change in the assumptions underlying the calculation of the recoverable value when the asset was impaired. However, impairment of goodwill is never reversed. Impairment is reversed only to the extent that the asset s carrying amount after reversal does not exceed the carrying amount that would have been recognized, less amortization if appropriate, if no impairment had been recognized. Impairment losses on loans and accounts receivable are reversed if the previous reasons for impairment no longer exist and full payment from the customer is expected. Impairment of equity instruments classified as available-for-sale financial assets and previously recognized in profit for the year is reversed via other comprehensive income instead of profit for the year. The impaired value is the value from which subsequent revaluations are made, which are recognized in other comprehensive income. 22 Capital payments to shareholders 22.1 Dividends Dividends are recognized as liabilities once they have been approved at the Annual General Meeting. 23 Earnings per share The calculation of earnings per share is based on consolidated profit for the year attributable to the Parent Company shareholders and on the weighted average number of shares outstanding during the year. An asset s residual value and useful life are tested at the end of each reporting period and adjusted as necessary. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 89

92 24 Employee benefits 24.1 Defined-contribution pension plans Defined-contribution pension plans are those for which the company s obligation is limited to the amount that it agrees to pay. In such cases the size of the employee s pension depends on the contributions the company pays to the plan or to an insurance company and the return on capital generated by the contributions. Consequently it is the employee who bears the actuarial risk (that benefits will be lower than expected) and investment risk (that the invested assets will be insufficient to meet expected benefits). The company s obligations for defined-contribution plans are recognized as an expense in profit for the year as they are earned by the employees performing services for the company over a given period Defined-benefit pension plans Defined-benefit plans are plans for post-employment benefits other than defined-contribution plans. The Group s net obligation in respect of defined-benefit pension plans is calculated separately for each plan by estimating the amount of future benefit that employees have earned through their service in current and prior periods. This benefit is discounted to a present value. The discount rate is the rate at the end of the reporting period on a high-quality corporate bond, including mortgage bonds, with a maturity corresponding to the Group s pension obligations. When there is no viable market for such corporate bonds, the market rate for government bonds with a similar maturity is used instead. The calculation is performed by a qualified actuary using the Projected Unit Credit Method. The fair value of any plan assets are also calculated at the reporting date. The Group s net obligation is the present value of the obligation, less the fair value of plan assets adjusted for any asset restrictions. Revaluation effects consist of actuarial gains and losses, the difference between the actual return on plan assets and the amount included in net interest income and any changes in the effects of asset restrictions (excluding interest included in net interest income). Actuarial gains and losses arise either because the actual outcome deviates from previous assumptions or the assumptions change. Revaluation effects are recognized in other comprehensive income. When the calculation leads to an asset for the Group, the carrying amount of the asset is restricted to the lower of the surplus in the plan or the asset restriction calculated using the discount rate. The asset restriction is the present value of the future economic benefits in the form of reduced future contributions or a cash refund. In calculating the present value of future reimbursements or payments, any minimum funding requirement is taken into account. Changes to or reductions in a defined-benefit plan are recognized on the earliest of the following dates: a) when the change in the plan or reduction occurs, or b) when the company recognizes related restructuring costs and termination benefits. The changes/ reductions are recognized immediately in profit for the year. The special employer s contribution is part of the actuarial assumptions. Special employer's contributions related to the difference between how the pension obligation is determined in a legal entity and in the Group are recognized as part of the net obligation. Provisions and receivables are not calculated to present value. In a legal entity, the part of the special employer s contribution that is calculated based on the Pension Obligations Vesting Act is recognized for simplicity s sake as an accrued expense rather than as part of the net obligation/asset. Net interest expense/income on the defined-benefit obligation/asset is recognized in profit for the year under net financial income/expense. Net interest income is based on the interest that arises when discounting the net obligation; that is, interest on the obligation, plan assets and the effect of any asset restrictions. Other components are recognized in operating profit Short-term benefits Short-term employee benefits are calculated without discounting and recognized as an expense when the related services are received. A current liability is recognized for the expected cost of profit-sharing and bonus payments when the Group has a present legal or constructive obligation to make such payments as a result of services rendered by employees and the obligation can be estimated reliably Termination benefits Benefits associated with the termination of employment are expensed at the earlier of the date that the company can no longer withdraw the offer to the employee or the date that the company recognizes restructuring costs. 25 Provisions A provision differs from other liabilities because there is uncertainty about the date of payment or the amount required to settle the provision. A provision is recognized in the statement of financial position when there is a present legal or constructive obligation as a result of a past event and it is probable that an outflow of economic resources will be required to settle the obligation and a reliable estimate of the amount can be made. Provisions are made at the amount which is the best estimate of the expenditure required to settle the present obligation at the end of the reporting period. Where the effect of payment timing is important, provisions are determined by discounting the expected future cash flow at a pre-tax rate that reflects current market assessments of the time value of money and, if appropriate, the risks specific to the liability Provisions for urban transformation See section below Provisions for remediation See section below. 26 Contingent liabilities A disclosure concerning a contingent liability is made when there is a possible commitment arising from past events whose existence is confirmed only by one or more uncertain future events beyond the company s control, or when there is a commitment that is not recognized as a liability or provision because it is not probable that an outflow of resources will be required or this cannot be measured with sufficient reliability. 27 Parent Company accounting principles The Parent Company has prepared its annual report according to the Swedish Annual Accounts Act (1995:1554) and the Swedish Financial Reporting Board s recommendation RFR 2 Accounting for Legal Entities. Also applied are the Swedish Financial Reporting Board s recommendations for listed companies. RFR 2 states that in the annual report for the legal entity, the Parent Company shall apply all IFRS and interpretations adopted by the EU as far as possible within the framework of the Annual Accounts Act, Pension Obligations Vesting Act and considering the relationship between accounting and taxation. The recommendation specifies the exceptions from and additions to IFRS that must be made Differences between Group and Parent Company accounting principles The differences between Group and Parent Company accounting principles are detailed below. The specified accounting principles for the Parent Company were applied consistently to all periods presented in the Parent Company s financial statements Changed accounting principles in 2016 Changes to RFR 2 have had no material effect on the Parent Company s financial reports for Unless otherwise stated below, the Parent Company s accounting principles in 2016 changed in accordance with what is stated above for the Group Changes to RFR 2 that have not yet been applied The company management expects that changes to RFR 2 which have not yet come into effect will have no material effect on the Parent Company s financial reports when applied for the first time Classification and presentation The Parent Company uses the terms income statement, balance sheet and cash flow statement for the reports that in the Group are called consolidated income statement, statement of financial position and statement of cash flows respectively. The income statement and balance sheet for the Parent Company are presented in accordance with the Annual Accounts Act, while the corresponding Group reports are based on IAS 1 Presentation of Financial Statements and IAS 7 Statement of Cash Flows. The most significant differences from the consolidated statements relate primarily to recognition of financial income and expenses, financial assets and equity, and the fact that provisions are recognized under a separate heading in the balance sheet Subsidiaries and associated companies Participations in subsidiaries and associated companies are recognized in the Parent Company using the cost method. This means that transaction costs are included in the carrying amount of holdings in subsidiaries and associated companies Financial instruments and hedge accounting Owing to the relationship between accounting and taxation, the rules on financial instruments and hedge accounting in IAS 39 are not applied in the Parent Company as a legal entity. In the Parent Company, financial assets are measured at cost less any impairment and financial current assets at the lower of cost or market. Financial current assets are measured at the lower of cost or market. Interest-bearing securities, shares and alternative investments are measured at portfolio level. This means that for instruments in the same portfolio, unrealized gains are offset against unrealized losses. Excess losses are recognized as a reduction in interest income under other interest income and similar items. Excess gains are not recognized. Liabilities are measured at amortized cost. Derivatives used for hedging forecast cash flows to which hedge accounting is applied are not carried in the balance sheet. Changes in value of derivatives are recognized in the same period as the hedged cash flows. Derivatives with a negative value and to which hedge accounting is not applied are recognized as financial liabilities (other current liabilities) and measured at the amount most favourable to the company upon settlement or transfer of the obligation at the end of the reporting period. When hedging receivables in foreign currencies using forward exchange contracts, the spot rate for the hedging date is used to measure the hedged receivable. The difference between the forward and spot rates at the contract s inception (forward premium) is accrued over the term of the forward exchange contract. Accrued forward premiums are recognized as interest income or interest expense. 90 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

93 27.7 Financial guarantees The Parent Company s financial guarantee agreements consist primarily of guarantees that benefit subsidiaries. Financial guarantees mean that the company is committed to reimbursing the holder of a debt instrument for losses it incurs because a specified debtor fails to make payment when due according to the contractual terms. The Parent Company applies one of the easing rules permitted by the Financial Reporting Board compared with the rules of IAS 39 in its recognition of financial guarantee agreements issued on behalf of subsidiaries. The Parent Company recognizes financial guarantees as provisions in the balance sheet when the company has a commitment for which payment will probably be required to settle the commitment Anticipated dividends Anticipated dividends from subsidiaries are recognized in cases where the Parent Company is solely entitled to decide on the size of the dividend and has decided on the size of the dividend before publishing its financial statements Operating segments The Parent Company does not report segments broken down in the same way and to the same extent as the Group, but instead discloses the breakdown of net sales to the Parent Company s various business streams Property, plant and equipment With reference to RFR 2, IAS 16 (4), estimated future expenditures for dismantling and removing assets and restoring sites or areas where they are located (remediation costs) in legal entities are not capitalized. Instead, the provision for these expenditures is made gradually over the useful life Intangible assets Research and development All research and development expenditures are recognized as expenses in the Parent Company income statement Employee benefits Defined-benefit plans Where a pension premium is paid to an insurance company, the Parent Company recognizes a defined-benefit plan as a defined-contribution plan. The Parent Company applies principles other than those described in IAS 19 when estimating defined-benefit plans. The Parent Company complies with the provisions of the Pension Obligations Vesting Act and the regulations of the Financial Supervisory Authority since this is a prerequisite for tax deductibility. The most significant differences from IAS 19 are how the discount rate is determined, that estimation of the defined-benefit obligation is based on current salary levels without consideration of future salary increases and that all actuarial gains and losses are recognized in the income statement. Pension obligations secured by transfer of funds to a pension fund are recognized as a provision in the Parent Company only if the fair value of the fund assets is less than the amount of the obligations. No asset is recognized if the fund assets are greater than the obligations. The value of the company s obligations in respect of future pension payments is to be calculated in accordance with paragraph 2 above Taxes In the Parent Company balance sheet, untaxed reserves are recognized without dividing these into equity and deferred tax liabilities, in contrast to the Group. Similarly, the Parent Company does not allocate any part of appropriations to deferred tax in the income statement Group and shareholder contributions Group contributions are recognized as appropriations. Shareholder contributions are recognized as an increase in the participations in Group companies item by the donor. The recipient recognizes shareholder contributions directly in unrestricted equity. 28 Significant estimates and assessments The preparation of financial statements requires management and the Board of Directors to make assessments and assumptions that affect recognized assets, liabilities, income and expenses and other information provided, such as contingent liabilities. Listed below are the estimates and assessments that are considered most important for an understanding of the financial statements. Conditions for LKAB s operations change gradually, which means that these assessments also change Provisions resulting from mining operations Provisions for urban transformation LKAB has extracted iron ore in Norrbotten for more than 120 years. The techniques used in ore mining in underground mines leads to deformations in the form of fissures in the ground where mining is conducted. The deformations are already or will become so extensive that it is necessary to gradually move parts of Kiruna and Malmberget. Although there are many similarities between conditions in Kiruna and Malmberget, the geological conditions differ. In Kiruna there is a gradual spread of deformations with continuous fissuring, while in Malmberget there is widespread undermining of the ground in the city centre. The deformations are a direct result of mining operations. For Malmberget it can be said that the impact area from the mining of several different orebodies has essentially encircled central Malmberget, which means that it is not able to function as a normal city centre. LKAB has already had, and will continue to have, significant expenses related to these urban transformations. For instance, LKAB will incur expenses for the acquisition of properties and municipal infrastructure such as electricity, water and sewage systems in the affected areas. The expenditures arise from LKAB s mandatory obligation to compensate damage resulting from its mining activities. Provisions for the damage caused by the deformations are made for damage already confirmed and damage not yet confirmed but that will occur a year or so later as a result of mining. LKAB recognizes a provision: 1. When there is a present legal or constructive obligation towards a third party 2. As a result of past events 3. When it is expected to result in an outflow of economic resources from the company at settlement 4. When a reliable estimate of the amount can be made. In cases where there is an agreement or a clear, constructive obligation that defines a commitment related to a future impact area, the provision is recognized according to a contract boundary. In other cases, a commitment is only recognized when the so-called impact boundary encroaches on the property boundary or infrastructure. The impact boundary is the boundary for impact-related compensation for mining carried out to date that has been defined by LKAB. The impact boundary in Kiruna is based on the existing environmental conditions boundary according to rulings from the environmental court. A two-year safety zone period is added to cover movement that is expected to occur even if mining were to cease. A further addition is made for what is known as the Mine City Park, whose conversion period of about seven years will take it from urbanized area to park to industrial area. The impact boundary is moved each year to meet the spreading of ground deformations. The movement of the impact boundary is linked to deformation forecasts in order to manage the effect of ground deformations not being continuous. Forecast movement according to the current deformation forecast is distributed equally over the period covered by the forecast. This is reconciled against updated forecasts of ground deformations. The amount of the provision is calculated on the basis of objective valuation methods for each type of asset (residential properties, land, infrastructure, etc.) and a present value is assigned. For the provisions recognized according to the contract boundary, the area between the contract boundary and the impact boundary is defined as a mine asset related to future mining operations. All damages/compensation claims that are within the area delimited by the impact boundary are calculated and recognized as an expense in the income statement, in light of the fact that LKAB consumed the economic benefits that the mining generated. The impact boundary s movement is expensed each year, either through expensing of the mine asset or through an increase in provisions. In the case of Malmberget, the environmental conditions have been examined by the Land and Environment Court but its ruling has not yet become legally effective. A new deformation forecast has been produced, resulting in additional provisions for eastern Malmberget in addition to earlier provisions. The impact will continue for many years ahead and there will be uncertainty regarding geological consequences, assumptions about market values, demolition and waste disposal costs, etc. The uncertainty in the estimates made so far will decrease as the experience gained is taken into account in future estimates. Provisions for urban transformation at year-end amounted to MSEK 13,062 (12,234) Provisions for remediation Obligations for remediation, dismantling and decontamination as a result of mining operations arise mainly as a result of legal environmental requirements. The Group recognizes provisions for remediation costs for all legal and constructive obligations. Future expenditures for remediation are those resulting from closed operations and ongoing operations. The company collaborates with regulatory authorities to devise long-term plans for remediation of the mining areas. Provisions for ongoing operations are based on these remediation plans. The amount of the provision is calculated based on acreage and an assessment of future expenditures based on present day technology and other circumstances. The provision is assigned a present value. Future expenditures for closed operations are expensed so as to match underlying production/consumption of the economic benefits. Future expenditures for ongoing operations are capitalized and are depreciated over their useful life. Reviewing and updating of provisions is done as needed when the mine assets estimated useful lives, costs, technical conditions, regulations or other conditions change. The uncertainty in the estimates made so far will decrease as the experience gained is taken into account in future estimates. Provisions for remediation at year-end amounted to MSEK 1,276 (1,254). LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 91

94 28.2 Impairment testing of property, plant and equipment The Group reports significant values in the balance sheet in respect of property, plant and equipment. Property, plant and equipment is tested for impairment in accordance with the accounting principles described in section 21.1 above. The recoverable amounts of cash-generating units are established by calculating value in use. The cash flow forecasts on which the values in use are calculated are based on estimates of future cash flow and assumptions concerning factors such as long-term iron ore prices, the USD/SEK exchange rate and levels of capital expenditure. The calculation of value in use indicates a high level of sensitivity to changes in the assumptions. For 2016 the Group has recognized impairment losses of MSEK 1,192 (7,136), as described further in Note 9 Impairment of property, plant and equipment Useful life and depreciation method for property, plant and equipment Depreciation periods for main haulage levels, facilities and equipment in mines is dependent on future ore extraction and the mine s life span. It is essential that changes in production and the ore base are reflected in the applied depreciation method and useful life, which is of particular importance when deciding on new main haulage levels. To achieve this, the useful lives and depreciation methods must be continuously reassessed. Changes in assessments could have a material impact on consolidated earnings and financial position. The carrying amount of property, plant and equipment for operations at year-end amounted to MSEK 32,076 (32,462). Depreciation for the year amounted to MSEK 2,746 (2,800) Retirement benefits Several assumptions are important components in the actuarial methods used to calculate pension provisions, which may have a significant impact on the recognized net obligation and annual pension cost. The discount rate and expected return on plan assets are two critical assumptions used in the calculation of pension cost for the year and the present value of pension obligations. These assumptions are assessed annually for each pension plan in each country. The discount rate enables the measurement of future cash flows to present value on the measurement date. This rate must correspond to the yield on either high-quality corporate bonds including mortgage bonds or, if there is no viable market for such bonds, government bonds. A lower discount rate increases the present value of the pension provision and the annual cost. To determine the expected return on plan assets, LKAB considers the current and anticipated categories of the assets as well as historical and expected returns on the various categories of assets. Several factors do not change as often, such as personnel turnover and retirement age. For financial and other reasons, actual outcomes often differ from actuarial assumptions. Provisions for pensions at year-end amounted to MSEK 1,877 (1,607) Taxes Significant assessments are made to determine current tax assets and liabilities as well as deferred tax assets and liabilities. LKAB must assess the likelihood that deferred tax assets will be utilized to offset future taxable profits. Actual outcomes may differ from the estimates, for instance due to changed tax legislation or the outcome of final reviews of tax returns by tax authorities and tax courts. A deferred tax liability (net) of MSEK -1,482 (-1,896) was recognized at year-end. The corresponding amount for current tax is a net tax asset of MSEK 63 (62) Disputes LKAB is involved in a number of disputes and legal proceedings in the ordinary course of business. Management consults with legal counsel on matters related to litigation and other experts both within and outside the company on matters concerning the ordinary course of business. Management s considered opinion is that neither the Parent Company nor any subsidiary is currently involved in any legal or arbitration proceedings that are expected to have a material effect on the business, its financial position or operational earnings. NOTE 2 DISTRIBUTION OF REVENUE NOTE 3 SEGMENT REPORTING Segment information Group The Group s business is divided into operating segments based on the parts of the business monitored by the Group s chief operating decision maker. This is known as a management approach. Group management follows up on the results of the operations and decides how resources are to be allocated based on the products that the Group produces and sells, and these operations form the Group s operating segments. Each operating segment is headed by a person with day-to-day responsibility for the operations who regularly reports to Group management on the results of the operating segment s performance and the resources needed. The Group s internal reporting is structured so as to allow Group management to follow up on the operating segments performance and results. An operating segment s results, assets and liabilities include items directly attributable to that segment and items which can be allocated to that segment in a reasonable and reliable way. Intra-group prices between segments are based on the arm s length principle; that is, between parties that are independent of each other, well-informed and with an interest in completing transactions. In the income statement, all items other than net financial income/expense and tax expense have been allocated to operating segments. Assets that have been allocated are property, plant and equipment; other assets have not been allocated. As regards liabilities, provisions for urban transformation and remediation have been allocated and other liabilities have not been allocated. All tangible investments are included in the segments capital expenditures on property, plant and equipment. The Group comprises the following operating segments: Parent Company MSEK Net sales: Sale of goods iron ore 17,386 14,313 17,386 14,494 Sale of goods industrial minerals 1,521 1,533 Net sales iron ore hedging -2, , Other Total 16,343 16,200 14,904 14,770 Northern Division. The Northern Division mines and processes iron ore products in Kiruna. The division produces both blast furnace pellets and pellets for steelmaking via direct reduction, known as DR pellets. Southern Division. The Southern Division mines and processes iron ore products in Malmberget and Svappavaara. The division produces blast furnace pellets and fines. Special Products. The Special Products Division encompasses LKAB Minerals, which sells minerals for industrial use, and LKAB Wassara, which sells drilling systems for the mining and construction industries. Other Segments. Other Segments covers supporting operations such as group-wide functions (for HR, communications, finance and strategic R&D and exploration) and operations that take place in certain subsidiaries such as LKAB Berg och Betong. Other operating segments also include financial operations, including transactions and gains or losses relating to financial hedging for iron ore prices, currencies and the purchase of electricity. The above new group structure and division into operating segments was implemented in From and including the fourth quarter 2016, the business is being managed and followed up according to the new structure. Comparative figures for 2015 have been restated according to the new segmentation. 92 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

95 NOTE 3 SEGMENT REPORTING (CONT.) Operating segment Group Division North Division South Special Products Other Total Group-related adjustments and eliminations Group MSEK External income 10,301 8,519 6,998 5,860 1,542 1,556-2, ,282 16, ,343 16,200 Internal income ,744 1,839 2,039 2,127-2,039-2,127 Total income 10,376 8,606 7,162 5,998 1,598 1, ,104 18,321 18,327-1,978-2,127 16,343 16,200 Operating profit/loss 1,164-3, , , ,699-7, ,677-7,156 Net financial income/expense Profit/loss before tax -1,063-7,271 Tax 85 1,585 Profit/loss for the year ,686 Significant non-cash items Depreciation of property, plant and equipment -1,264-1, ,746-2,800-2,746-2,800 Impairment of property, plant and equipment -3,641-1,192-3,495-1,192-7,136-1,192-7,136 Costs for urban transformation provisions -1,727-1, ,106-1,568-2,106-1,568 Assets 16,234 16,983 10,266 10, ,413 7,424 34,085 34,697 34,085 34,697 Unallocated assets 23,541 21,331 Total assets 57,626 56,028 Investments in property, plant and equipment 884 1,258 1,997 4, ,061 3,341 6,354 3,341 6,354 Liabilities 8,441 7,700 5,594 5, ,338 13,459 14,338 13,459 Unallocated liabilities 12,737 10,452 Total liabilities 27,075 23,911 1Refers to intra-group transactions and group-related adjustments, including those based on adjustment of the consolidated pension liability under IAS 19 and internal gains. Geographic areas The vast majority of Group sales are made essentially from Sweden and, therefore, from Swedish companies. Nearly all of the Group s products are made exclusively in Sweden. Capital expenditures have mainly been made in Sweden. The carrying amount of assets by country/region is based on where the assets are located, and the income for the Group is recognized based on where sales, production, delivery and invoicing occur, regardless of where the customers are located. Group MSEK Sweden Rest of Europe Middle East & Asia Rest of world External income 14,929 14, Property, plant and equipment 30,836 31,758 3,235 2, Investments in property, plant and equipment 3,053 5, Information about major customers Under IFRS 8, the company must disclose information about major customers. The LKAB Group has five major customers, each of which represents more than ten percent of Group sales. Sales to these customers accounted for 28 (28) percent, 19 (16) percent, 16 (12) percent, 13 (11) percent and 11 (10) percent of sales and are recognized in the Division North and Division South operating segments. Parent Company MSEK Division North Division South Other Segments Total Parent Company Net sales 10,376 8,606 7,162 5,998-2, ,904 14,770 Parent Company MSEK Europe Middle East & Asia Rest of world Parent Company Net sales by geographic market 9,983 10,301 4,252 3, ,904 14,770 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 93

96 NOTE 4 OTHER OPERATING INCOME Group Parent Company MSEK Rental income, properties Gain on sale of non-current assets 9 68 Exchange gain on receivables/liabilities related to operations Insurance compensation 1 5 Rental and leasing income 1 Other NOTE 5 OTHER OPERATING EXPENSES Group Parent Company MSEK Property costs Loss on sale of non-current assets Exchange loss on receivables/liabilities related to operations Insurance costs Other NOTE 6 EMPLOYEES, EMPLOYEE BENEFIT EXPENSES AND REMUNERATION OF SENIOR EXECUTIVES Average number of employees Of whom women Of whom men Of whom women Of whom men Parent Company Sweden 3,219 20% 80% 3,366 20% 80% Parent Company total 3,219 20% 80% 3,366 20% 80% Subsidiaries Sweden % 80% % 82% China 36 36% 64% 38 32% 68% Netherlands 28 32% 68% 29 28% 72% Norway % 90% % 90% United Kingdom % 74% % 76% Germany 19 47% 53% 20 50% 50% Other countries 66 17% 83% 66 20% 80% Subsidiaries total 1,005 20% 80% 1,097 19% 81% Group total 4,224 20% 80% 4,463 20% 80% Gender distribution in company management as at 31 December Parent Company 2016 Percentage women 2016 Percentage men 2015 Percentage women 2015 Percentage men Board of Directors 27% 73% 27% 73% Other senior executives 25% 75% 33% 67% Salaries and other remuneration of senior executives and other employees along with social costs in the Parent Company Parent Company MSEK Salaries and other remuneration Senior executives (19 persons) Other employees Total Senior executives (22 persons) Other employees Sweden 22 1,700 1, ,737 1,802 Parent Company total 22 1,700 1, ,737 1,802 Social costs Of which pension costs Total 94 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

97 Remuneration of senior executives Senior executives Senior executives refers to Board members, the President and other senior executives. Other senior executives refers to salaried employees who are members of Group management together with the President. Guidelines for the remuneration of senior executives The remuneration of the Chairman of the Board and Board members is decided at the Annual General Meeting, AGM. There are additional special fees for committee work. For the remuneration of Group management, the AGM resolved to apply the most current government employment guidelines for persons in managerial positions and for incentive programmes for employees in state-owned enterprises. In 2016 the government guidelines from April 2009 applied. New guidelines were adopted in December Agreements concluded prior to the AGM on 27 April 2017 have followed the government guidelines in place at the time. Preparation and decision-making processes for determining the remuneration of senior executives Remuneration terms for the President and salary-setting principles for Group management are prepared by a remuneration committee appointed by the Board of Directors. Four board members make up the committee. The Board takes decisions based on committee proposals. The Chairman of the Board approves the annual salary reviews of other Group management executives. Principles for the remuneration of senior executives The President and other Group management executives are paid fixed salaries. The salaries are pensionable. President Jan Moström s monthly salary was SEK 434,500. Retirement age for the President is 65. The President s pension plan is a defined-contribution plan whereby LKAB makes a yearly provision of 30 percent of the President s current fixed annual salary for a pension plan chosen by the President, which may include the ITP plan. The portion of the premium allowance that is not used to cover premiums for the ITP plan can be used by the President for a complementary pension plan. The retirement age for other senior executives is 65. They have a defined-contribution pension plan to which LKAB allocates 30 percent of annual fixed salary. Mutual notice of termination is six months for senior executives. Severance pay equivalent to 18 monthly salaries is paid when notice of termination is given by the company. For further information, see the table Remuneration and other benefits to members of Group management in Remuneration and other benefits to the Board SEK thousand 2016 Board fees 2015 Board fees Chairman of the Board Sten Jakobsson Board member Leif Darner Board member Maija Liisa Friman Board member Eva Hamilton Board member Lars-Åke Helgesson Board member Hanna Lagercrantz 2 Board member Bjarne Moltke Hansen 180 Board member Ola Salmén Board member Hans Biörck Board member Lars Pettersson Board member Maud Olofsson 83 Total 2,320 2,127 1 The fee also includes remuneration for work on the Board s audit committee and finance committee. 2 No board fees are paid to representatives of the Ministry of Enterprise and Innovation. Remuneration and other benefits to members of Group management in 2016 SEK thousand Basic salary Other benefits1 Pension cost Total President Jan Moström 5, ,604 7,001 Senior Vice President Magnus Arnkvist 2, ,734 Senior Vice President Leif Boström 2, ,276 Senior Vice President Peter Hansson 2 1, ,531 Senior Vice President Markus Petäjäniemi 2, ,719 Senior Vice President Stefan Romedahl 3 2, ,164 Senior Vice President Grete Solvang Stoltz 2, ,926 Senior Vice President Åsa Sundqvist 2, ,488 Total 22, ,831 29,838 1 Other benefits include car, subsistence and life insurance benefits. 2 From 1 April From 1 March LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 95

98 Remuneration and other benefits to members of Group management in 2015 SEK thousand Basic salary Severance pay and termination benefits 1 Other benefits2 President Jan Moström 4 1, ,672 Senior Vice President Monica Bellgran 2,238 4, ,659 Senior Vice President Anders Furbeck 2,314 4, ,752 Senior Vice President Frank Hojem 1,653 3, ,724 Senior Vice President Katarina Holmgren 2,387 5, ,308 Senior Vice President Per-Erik Lindvall 2,697 5, ,215 Senior Vice President Markus Petäjäniemi 2, ,667 Senior Vice President Grete Solvang Stoltz 1, ,695 Senior Vice President Peter Schmid 2,391 5, ,379 Former President Lars-Eric Aaro 5 3,080 7, ,363 Former Senior Vice President Anders Kitok 6 1,377 4, ,986 Total 24,780 40, ,749 73,420 1 Severance pay, termination benefits, other premiums and pension expenses associated with termination of employment. 2 Other benefits include car, subsistence and life insurance benefits. 3 Pension cost excluding special employer s contribution. 4 From 15 August Until 15 August Until 15 August 2015 For additional information including post-employment benefits, see Note 29 Pensions. Pension cost3 Total NOTE 7 AUDITORS FEES AND REIMBURSEMENTS Group Parent Company MSEK Deloitte Audit engagements Other auditing 0 0 Tax consulting Other services Other auditors Audit engagements 0 0 Audit engagements refer to statutory auditing of annual and consolidated financial statements and bookkeeping as well as the Board s and President s administration of the company, along with audits other reviews performed as agreed upon or contracted. This includes other tasks that are incumbent on the company s auditor to perform, as well as consultancy or other assistance occasioned by observations during such reviews or the performance of such other tasks. NOTE 8 OPERATING EXPENSES BY TYPE Group Parent Company MSEK Employee benefit expenses 3,342 3,530 2,645 2,781 Materials, etc. 3,379 3,147 2,578 2,394 Energy 1,470 1,328 1,241 1,121 Transport ,568 1,551 Provisions for urban transformation 2,106 1,568 2,106 1,568 Depreciation, amortization and 3,947 9,953 3,397 8,247 impairment Other operating expenses 3,473 3,677 3,771 3,797 18,247 23,676 17,306 21,459 NOTE 9 IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT Impairment losses on property, plant and equipment are split between cash-generating units within the Production North and Production South divisions as shown below. The impairment losses do not affect other segments. Group Parent Company MSEK Kiruna -3,642-3,086 Malmberget -1,725-1,517 Svappavaara -1,192-1,769-1,184-1,493 Effect on operating profit -1,192-7,136-1,184-6,096 Tax effect 262 1, ,341 Effect on profit/loss for the year , ,755 The breakdown by asset type within property, plant and equipment is shown in Notes 15 and 16. LKAB s assets are tested regularly for impairment and when there is an indication that the assets have decreased in value. Due to the decision to mothball the open-pit mine in Mertainen, which falls within the Southern Division, the individual assets for this mine have been separated from the cash-generating unit s other assets and written down to fair value less costs to sell. The assets affected are primarily production assets such as crushers and mining machinery. Fair value calculation: The method and assumptions used to establish fair value are inputs that are not based on observable market data (level 3). Measurement of fair value has been based on assessments of the market value of relevant production assets. These values may be affected by how the iron ore market develops in the future. 96 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

99 NOTE 10 NET FINANCIAL INCOME/EXPENSE Group MSEK Financial income Assets at fair value (fair value option) - Interest-bearing securities net gain Shares and alternative investments net gain Assets at fair value (held for trading) - Derivatives Return on plan assets Other interest income 8 6 Share of associated companies net profit 1 Exchange rate fluctuations including foreign exchange 307 derivatives (net) Total financial income Financial expense Liabilities at fair value (held for trading) - Derivatives -93 Forward exchange contracts interest component Interest expense - Interest-bearing liabilities Provision for remediation costs Defined-benefit pension obligations Other Fees for loan facility Other financial expense Share of associated companies net loss -7 Exchange rate fluctuations including foreign exchange -97 derivatives (net) Total financial expense Net financial income/expense Exchange rate changes refers mainly to remeasurement of receivables in foreign currency. Other financial expense refers primarily to transaction costs for derivatives and to banking and administration expenses. Income from participations Parent Company in Group companies MSEK Dividend Capital gain on divestment of participations Income from Other interest other securities and income and similar receivables held as profit/loss items Parent Company non-current assets MSEK Interest income, Group companies Interest income, other Return on shares and alternative investments Income from options (net) 221 Exchange rate fluctuations including foreign exchange derivatives (net) Dividends on shares that are financial assets refers to holdings in SSAB. Interest income and similar profit/loss items includes return on interest-bearing securities of MSEK 163 (68). Interest expense and Parent Company similar profit/loss items MSEK Interest expense, Group companies -1-1 Interest expense, interest-bearing liabilities Interest expense, remediation costs Interest expense, other Interest expense, forward exchange contracts Expense, options (net) -86 Fees for loan facility Other financial expense Exchange rate fluctuations including foreign exchange derivatives (net) Exchange rate changes refers mainly to remeasurement of receivables in foreign currency. Other financial expense refers primarily to transaction costs for derivatives and to banking and administration expenses. NOTE 11 APPROPRIATIONS Parent Company MSEK Difference between recognized depreciation/ amortization and depreciation/amortization according to plan: Land and buildings 1 Machinery and equipment -1,039 1,519 Group contribution received Group contribution paid Total ,645 Deferred tax on appropriations (excluding Group contributions) amounts to MSEK -229 (334). Deferred tax on appropriations is recognized only in the consolidated income statement. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 97

100 NOTE 12 TAXES Recognized in the income statement Group MSEK Current tax expense (-) Tax expense for the year Adjustment of tax attributable to prior years Deferred tax income (+) Deferred tax on temporary differences 142 1, ,640 Total recognized Group tax 85 1,585 Reconciliation of effective tax Group MSEK 2016 (%) (%) 2015 Profit/loss before tax -1,063-7,271 Tax as per effective tax rate for Parent Company 22.0% % 1,600 Non-deductible expenses -0.3% % -8 Non-taxable income 0.2% 2 0.0% 3 Tax attributable to prior years -0.3% % -8 Standard interest on tax allocation reserve -0.9% % -24 Tax effect, reclassification of impairment losses -12.2% -130 Other -0.5% % 22 Recognized effective tax 8.0% % 1,585 Parent Company MSEK Current tax expense (-) Tax expense for the year Adjustment of tax attributable to prior years Deferred tax income (+) Deferred tax on temporary differences 420 1, ,088 Total recognized Parent Company tax 420 1,082 Parent Company MSEK 2016 (%) (%) 2015 Profit/loss before tax -2,285-5,061 Tax as per effective tax rate for Parent Company 22.0% % 1,113 Non-deductible expenses 0.1% 2 0.0% 0 Non-taxable income 2.5% % 0 Tax attributable to prior years 0.0% 0-0.1% -6 Standard interest on tax allocation reserve -0.4% % -24 Tax effect, reclassification of impairment losses -5.7% -130 Other -0.1% % -1 Recognized effective tax 18.4% % 1,082 Tax attributable to other comprehensive income Group MSEK Cash flow hedges Actuarial gains and losses Recognized in the statement of financial position and the balance sheet Recognized deferred tax assets and liabilities Deferred tax assets and liabilities are attributable to the following: Deferred Deferred Group tax asset tax liability Net MSEK Property, plant and equipment ,365-2,152-1,601-1,327 Current investments Tax allocation reserve 3 3-1,994-1,994-1,991-1,991 Contingency reserve Pension provisions Provisions, urban transformation 1, , Other provisions Cash flow hedges Loss carryforwards Other Tax assets/liabilities 3,058 2,437-4,540-4,333-1,482-1,896 Offset -3,028-2,418 3,028 2,418 Tax assets/liabilities, net ,512-1,915-1,482-1,896 The loss carryforwards relate entirely to the Parent Company. There are no time limits on the utilization of the loss carryforwards. 98 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

101 Deferred Deferred Parent Company tax asset tax liability Net MSEK Property, plant and equipment Pension provisions Provisions, urban transformation 1, , Loss carryforwards Other Tax assets/liabilities 2,380 1,960 2,380 1,960 Change in deferred tax in temporary differences and loss carryforwards Group MSEK Balance at 1 Jan 2015 Recognized in income statement Recognized in other comprehensive income Other changes Balance at 31 Dec 2015 Property, plant and equipment -2,505 1,178-1,327 Current investments Tax allocation reserve -1,991-1,991 Contingency reserve Pension provisions Provisions, urban transformation Other provisions Cash flow hedges Loss carryforwards Other ,379 1, ,896 Group MSEK Balance at 1 Jan 2016 Recognized in income statement Recognized in other comprehensive income Other changes Balance at 31 Dec 2016 Property, plant and equipment -1, ,601 Current investments Tax allocation reserve -1,991-1,991 Contingency reserve Pension provisions Provisions, urban transformation ,124 Other provisions Cash flow hedges Loss carryforwards Other , ,482 Parent Company MSEK Balance at 1 Jan 2015 Recognized in income statement Balance at 31 Dec 2015 Property, plant and equipment Pension provisions Provisions, urban transformation Loss carryforwards Other ,088 1,960 Parent Company MSEK Balance at 1 Jan 2016 Recognized in income statement Balance at 31 Dec 2016 Property, plant and equipment Pension provisions Provisions, urban transformation ,124 Loss carryforwards Other , ,380 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 99

102 NOTE 13 EARNINGS PER SHARE The number of shares amounted to 700,000 in both 2016 and Earnings attributable to Parent Company shareholders are MSEK -978 (-5,686) and earnings per share are thus SEK -1,397 (-8,123). There are no options or potential ordinary shares, so there is no dilution. NOTE 14 INTANGIBLE ASSETS All of the Group s intangible assets are acquired. Group Goodwill Mining Other Total MSEK rights Cost of acquisition Opening balance, 1 Jan Change in emission allowances 2 2 Disposals and retirements Exchange rate differences Closing balance, 31 Dec Opening balance, 1 Jan Change in emission allowances Exchange rate differences Closing balance, 31 Dec Depreciation Opening balance, 1 Jan Depreciation for the year -1-1 Exchange rate differences Closing balance, 31 Dec Opening balance, 1 Jan Depreciation for the year -1-1 Disposals and retirements Exchange rate differences 1 1 Closing balance, 31 Dec Impairment Opening balance, 1 Jan Exchange rate differences 1 1 Closing balance, 31 Dec Opening balance, 1 Jan Exchange rate differences -2 Closing balance, 31 Dec Carrying amount At 1 Jan At 31 Dec Depreciation and impairment are included in the following lines of the income statement Group MSEK Cost of goods sold -1-1 Of which impairment -1-1 Parent Company Mining MSEK rights Other Total Cost of acquisition Opening balance, 1 Jan Change in emission allowances 2 2 Closing balance, 31 Dec Opening balance, 1 Jan Change in emission allowances Closing balance, 31 Dec Depreciation Opening balance, 1 Jan Closing balance, 31 Dec Opening balance, 1 Jan Closing balance, 31 Dec Carrying amount At 1 Jan At 31 Dec At 1 Jan At 31 Dec Impairment testing of cash-generating units containing goodwill The LKAB Minerals Ltd cash-generating unit, which forms parts of the segment Special Products, has substantial recognized goodwill value relative to the Group s total recognized goodwill value. MSEK LKAB Minerals Ltd Units without significant goodwill value, combined The cash-generating units recoverable amounts are based on the same important assumptions. Impairment testing is based on measurement of value in use. This value is based on cash flow forecasts for which the first three years are based on the three-year business plan determined by the management of the segment Special Products. The total length of the forecast period corresponds to the useful life of the units most important assets. The cash flows forecast after the first three years were based on annual growth of 2 3 (2 3) percent, which corresponds to the long-term growth rate of the units markets. The forecast cash flows were calculated to present value using an individual discount rate (WACC). The important assumptions in the three-year business plan are described below. At 1 Jan At 31 Dec Important variables Market growth Employee benefit expenses Method for estimating value Demand for these products has historically followed economic cycles. Expected market growth is based on a transition from the prevailing economic situation to the anticipated long-term growth. The forecast for employee benefit expenses is based on expected inflation and certain real wage growth. The forecast agrees with previous experience. The recoverable amount of the LKAB Minerals Ltd cash-generating unit exceeds the carrying amount by MSEK 4. The discount rate before tax is (12.15) percent. 100 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

103 NOTE 15 PROPERTY, PLANT AND EQUIPMENT FOR OPERATIONS Plant Equipment Group Land Underground and tools, fixtures Construction MSEK and buildings installations machinery and fittings in progress Total Cost of acquisition Opening balance, 1 Jan ,963 6,478 31,485 7,055 10,028 64,009 Acquisitions ,176 6,354 Capitalization of remediation 8 8 Reclassifications 232 1, ,184 5 Disposals and retirements Exchange rate differences Closing balance, 31 Dec ,062 7,621 31,143 7,164 14,492 69,482 Opening balance, 1 Jan ,062 7,621 31,143 7,164 14,492 69,482 Acquisitions ,065 3,341 Capitalization of remediation Reclassifications 1, , ,529-8 Disposals and retirements Exchange rate differences Closing balance, 31 Dec ,318 7,371 39,651 7,284 8,134 72,758 Depreciation Opening balance, 1 Jan ,370-3,964-15,317-3,549-26,200 Depreciation for the year , ,800 Reclassifications Disposals and retirements Exchange rate differences Closing balance, 31 Dec ,662-4,251-16,888-4,017-28,818 Opening balance, 1 Jan ,662-4,251-16,888-4,017-28,818 Depreciation for the year , ,746 Reclassifications Disposals and retirements Exchange rate differences Closing balance, 31 Dec ,902-4,396-18,528-4,312-31,138 Impairment Opening balance, 1 Jan ,608 Impairment for the year , ,388-6,764 Disposals and retirements Closing balance, 31 Dec , , ,376-8,202 Opening balance, 1 Jan , , ,376-8,202 Impairment for the year -8-1,184-1,192 1 Reclassifications Closing balance, 31 Dec , , ,660-9,544 Carrying amount 1 January ,049 2,115 15,671 3,496 9,870 36, December ,032 2,481 11,247 2,586 12,116 32,462 1 January ,032 2,481 11,247 2,586 12,116 32, December ,814 2,123 17,272 2,393 5,474 32,076 1 Impairment losses in the Group amount to MSEK 1,192 and relate to the Mertainen open-pit mine. Capitalized remediation costs amount to MSEK 813 (785), while cumulative depreciation and impairment losses amount to MSEK -597 (-575). Of the net amount of MSEK 216 (210), MSEK 179 (171) is recognized as land and buildings and MSEK 37 (39) as plant and machinery. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 101

104 Depreciation and impairment are included in the following lines of the income statement Group MSEK Cost of goods sold -3,909-9,489 Of which impairment -1,192-6,731 Selling expenses -5 Administrative expenses Of which impairment -3 Research and development Of which impairment -30 Other operating expenses ,938-9,564 Plant Equipment Parent Company Land Underground and tools, fixtures Construction MSEK and buildings installations machinery and fittings in progress Total Cost of acquisition Opening balance, 1 Jan ,823 6,478 29,936 1,215 9,172 52,624 Acquisitions ,651 5,817 Reclassifications 118 1, ,001-4 Disposals and retirements Closing balance, 31 Dec ,072 7,621 29,627 1,289 13,305 57,914 Opening balance, 1 Jan ,072 7,621 29,627 1,289 13,305 57,914 Acquisitions ,830 3,087 Reclassifications , ,272 4 Disposals and retirements Closing balance, 31 Dec ,140 7,371 38,063 1,365 6,530 60,469 Depreciation Opening balance, 1 Jan ,274-3,964-14, ,534 Depreciation for the year , ,151 Reclassifications Disposals and retirements Closing balance, 31 Dec ,514-4,251-15, ,679 Opening balance, 1 Jan ,514-4,251-15, ,679 Depreciation for the year , ,213 Reclassifications Disposals and retirements Closing balance, 31 Dec ,627-4,396-17,465-1,037-25,525 Impairment Opening balance, 1 Jan ,605 Impairment for the year , ,193-5,724 Disposals and retirements Closing balance, 31 Dec , , ,181-7,159 Opening balance, 1 Jan , , ,181-7,159 Impairment for the year -1,184-1,184 Reclassifications Closing balance, 31 Dec , , ,476-8,495 Carrying amount 1 January ,006 2,115 14, ,014 29, December ,463 2,481 10, ,124 27,076 1 January ,463 2,481 10, ,124 27, December ,196 2,123 16, ,054 26,449 Total impairment losses in the Parent Company amount to MSEK 1,184 and relate to the Mertainen open-pit mine. 102 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

105 Depreciation and impairment are included in the following lines of the income statement Parent Company MSEK Cost of goods sold -3,385-7,823 Of which impairment -1,184-5,691 Administrative expenses -4-5 Of which impairment -3 Research and development Of which impairment -30-3,397-7,875 NOTE 16 PROPERTY, PLANT AND EQUIPMENT FOR URBAN TRANSFORMATION Group and Parent Company MSEK Cost of acquisition Buildings and land Construction in progress Total Opening balance, 1 Jan , ,472 Capitalization of mine asset Reassessment of mine asset Reclassifications Closing balance, 31 Dec , ,438 Opening balance, 1 Jan , ,438 Capitalization of mine asset Acquisitions Reclassifications Closing balance, 31 Dec , ,964 Expensing Opening balance, 1 Jan Expensing of mine asset and mine component Closing balance, 31 Dec Opening balance, 1 Jan Expensing of mine asset and mine component Closing balance, 31 Dec ,571-1,571 Impairment Opening balance, 1 Jan 2015 Impairment for the year Closing balance, 31 Dec Opening balance, 1 Jan Reclassification Closing balance, 31 Dec Carrying amount 1 January , , December , ,235 1 January , , December , ,009 Expensing and impairment are included in the following lines of the income statement Group and Parent Company MSEK Cost of goods sold ,059 Of which impairment ,059 The balance sheet item includes the following assets: Group and Parent Company MSEK 31/12/ /12/2015 Mine asset 1,092 1,896 Replacement properties Other property acquisitions ,009 2,235 Regarding reporting of replacement properties refer to Note 1, Principle See also Note 31 for an overall picture of items associated with urban transformation. NOTE 17 PARTICIPATIONS IN ASSOCIATED COMPANIES Group Summary financial information for non-material holdings in associated companies, based on amounts included in the consolidated financial statements, is detailed below. MSEK 31/12/ /12/2015 Carrying amount Group s share of: Result for continuing operations -7 1 Total comprehensive income -7 1 Parent Company MSEK 31/12/ /12/2015 Carrying amount The holding refers to Norrskenet AB, corporate ID number , domiciled in Kiruna. The number of shares held is 2,500 which corresponds to 33.3 percent of the voting power and capital. NOTE 18 HOLDINGS IN JOINT OPERATIONS Group The Group has a 50 percent co-ownership in the company Likya Minerals and its subsidiary Likya Minerals Export, whose main products are minerals with flame retardant properties (UltraCarb). Likya operates out of Turkey. Likya is a separate company but co-ownership is still considered to be a joint operation. The assessment is based on the fact that the co-owners have a commitment to buy all services that Likya provides and consequently finances Likya s entire operation in order to settle its liabilities. 80 percent of Likya s sales relate to companies within the LKAB Group. NOTE 19 RECEIVABLES FROM GROUP COMPANIES AND ASSOCIATED COMPANIES Parent Company MSEK 31/12/ /12/2015 Accumulated acquisition value Opening balance, 1 January 1,395 1,698 Lending 442 Amortization Conversion of loan into unconditional shareholder contribution -153 Exchange rate fluctuation Closing balance, 31 December 1,604 1,395 Accumulated impairment At beginning of year Reversed impairment 153 Closing balance, 31 December Carrying amount at year-end 1,604 1,242 LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 103

106 NOTE 20 FINANCIAL INVESTMENTS Group MSEK 31/12/ /12/2015 Financial investments held as non-current assets Shares and participations available-for-sale assets Financial assets for funded pension obligations , Financial investments held as current assets Interest-bearing securities initially measured at fair value 7,775 7,111 Shares and alternative investments initially measured at fair value 3,496 3,014 Interest-bearing securities held to maturity ,271 10,225 Shares and participations mainly refers to shares in SSAB. The carrying amount of the SSAB shares significantly exceeds the cost of acquisition. Change in value during the year is recognized directly in other comprehensive income. NOTE 21 OTHER NON-CURRENT SECURITIES Parent Company MSEK 31/12/ /12/2015 Accumulated acquisition value At beginning of year Acquisitions Closing balance, 31 December Parent Company MSEK 31/12/ /12/2015 Specification of other non-current securities Market value or equivalent Carrying amount Market value or equivalent Carrying amount SSAB Other holdings Other holdings relate primarily to Vindln AB. NOTE 22 NON-CURRENT RECEIVABLES AND OTHER RECEIVABLES Group MSEK 31/12/ /12/2015 Other receivables that are current assets Receivables, collateral for derivatives 1,326 Receivables, credit institutions Tax assets Recoverable VAT Derivatives Receivables from clients Tax account PRI balance Other ,525 1,392 Parent Company MSEK 31/12/ /12/2015 Non-current receivables Company-owned endowment insurance Other current receivables Receivables, collateral for derivatives 1,326 Receivables, credit institutions Tax assets Recoverable VAT PRI balance Tax account 0 82 Other , Parent Company MSEK 31/12/ /12/2015 Non-current receivables Accumulated acquisition value At beginning of year Amortization -42 Change in value of endowment insurance 3 15 Closing balance, 31 December NOTE 23 INVENTORIES Group MSEK 31/12/ /12/2015 Raw materials and consumables 1,802 1,907 Work in progress 4 5 Finished goods and goods for resale 1,030 1,003 2,836 2,915 Parent Company MSEK 31/12/ /12/2015 Raw materials and consumables 1,615 1,681 Finished goods ,333 2,277 NOTE 24 ACCOUNTS RECEIVABLE Accounts receivable are recognized after taking into account consolidated bad debt losses for the year amounting to MSEK 13 (4). Regarding credit risks in accounts receivable see Note 34. NOTE 25 PREPAID EXPENSES AND ACCRUED INCOME Group Parent Company MSEK 31/12/ /12/ /12/ /12/2015 Prepaid insurance premiums Prepaid option 2 48 premiums Prepaid expenses, fair value of derivatives Accrued income, iron ore derivatives Other prepaid expenses Other accrued income NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

107 NOTE 26 EQUITY Specification of equity reserves MSEK Translation reserve Opening translation reserve Translation differences for the year Closing translation reserve Fair value reserve Opening fair value reserve Available-for-sale financial assets: Revaluation recognized directly against other comprehensive income Closing fair value reserve Hedge reserve Opening hedge reserve Cash flow hedges Recognized directly in other comprehensive income Transferred to the income statement Tax attributable to revaluations for the year Closing hedge reserve Total reserves Opening reserves Change in reserves for the year: Translation reserve Fair value reserve Hedge reserve Closing reserves Share capital As at 31 December 2016, the registered share capital comprised 700,000 (700,000) ordinary shares. The share capital consists of only one type of share and all shares have equal rights. Holders of ordinary shares are entitled to a dividend that is determined in due course, and each share entitles the holder to one vote at the AGM. The quota value is SEK 1,000 per share. Translation reserve The translation reserve covers all exchange rate differences that arise in translating the financial statements of foreign entities whose financial statements were prepared in currencies other than the Group s reporting currency. The Parent Company and Group present their financial statements in SEK. Fair value reserve Available-for-sale financial assets The fair value reserve includes the accumulated net change in the fair value of available-for-sale financial assets up until the assets are derecognized from the statement of financial position. Any impairment is recognized in the income statement. Hedge reserve The hedge reserve includes the effective portion of the accumulated net change in the fair value of cash flow hedging instruments attributable to hedging transactions that have not yet occurred. Dividend The Board proposes to the AGM that no dividend is paid to the owner. The AGM will be held on 27 April The dividend proposed by the Board is in line with the decisions made at the AGM for the past two years. Parent Company Restricted reserves Restricted reserves cannot be reduced through distribution of profits. Statutory reserve The purpose of the statutory reserve is to save a portion of net profit that is not used to cover losses brought forward. Non-restricted equity Profit brought forward Comprises the previous year s non-restricted equity after any distribution of profits. Together with profit for the year, it comprises non-restricted equity; that is, the amount that is available as a dividend to shareholders. NOTE 27 INTEREST-BEARING LIABILITIES Group MSEK Non-current liabilities Issued corporate bonds 2,984 1,996 Other bond financing 250 3,234 1,996 Current liabilities Issued commercial papers 800 1,000 Liability, repurchase agreements 1,071 1,871 1,000 Terms and payback periods MSEK Maturity Interest Nom. amount Recog. value Nom. value Recog. value Bonds fixed interest % 1,600 1,597 1,600 1, % 1, % Bonds variable interest 2019 Commercial papers month STIBOR % ,000 1,000 Liability, repurchase agreements ,071 1,071 Total interestbearing liabilities 5,112 5,105 3,000 2,996 Financial liabilities are classified as other financial liabilities and are measured at amortized cost using the effective interest method. For more information about the company s exposure to interest rate risk, see Note 34. NOTE 28 LIABILITIES TO CREDIT INSTITUTIONS Parent Company MSEK Non-current liabilities Issued corporate bonds 2,984 1,996 Other bond financing 250 3,234 1,996 Current liabilities Issued commercial papers 800 1,000 Liability, repurchase agreements 1,071 1,871 1,000 Of liabilities, MSEK 250 mature later than five years after the end of the reporting period. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 105

108 NOTE 29 PENSIONS Defined-benefit pension plans Group MSEK Present value of unfunded obligations Present value of wholly or partially funded obligations 3,416 3,267 Total present value of obligations 4,126 3,983 Fair value of plan assets -2,557-2,376 Present value of net obligations 1,569 1,607 Effect of limitation rule for net assets Net amount in statement of financial position 1,569 1,607 The net amount is recognized in the following items in the statement of financial position: Financial investments Provisions for pensions, non-current liabilities 1,877 1,860 Net amount in statement of financial position 1,569 1,607 Defined-benefit pension plans Most of LKAB s pension plans for employees in Sweden are defined-benefit plans, which means that LKAB guarantees pensions based on a percentage of salary. Pension provisions in Sweden are secured by the company via accrued provisions, of which most are secured through credit insurance from FPG (Försäkringsbolaget PRI Pensionsgaranti). In 2013 an internal company pension fund was started for vested defined-benefit pension plans. Promises of future retirement before the age of 65 are to a certain degree contingent upon working underground and are secured by the company via accrued provisions without credit insurance. Commitments for retirement pensions and survivor benefits for salaried employees in Sweden are secured through insurance policies from Alecta. According to a statement from the Swedish Financial Reporting Board, UFR 10, this is a defined-benefit plan that involves several employers. The company has not had access to such information as is necessary for recognizing this commitment as a defined-benefit plan. The ITP2 pension plan insured via Alecta is therefore recognized as a defined-contribution plan. The premium for the defined-benefit retirement and survivors pension is individually calculated and depends on factors such as salary, previously earned pension and expected remaining years of service. Alecta s surplus can be distributed to the policyholders and/ or the insured parties. At the end of 2016, Alecta s collective reserve surplus amounted to 148 (153) percent, which is within the normal spread of percent stated in Alecta s consolidation policy for these insurance policies. The premium to Alecta is determined by assumptions about interest rates, longevity, operating expenses and yield tax, and is calculated so that constant payment of premiums until the retirement date is sufficient for the entire target benefit, which is based on the insured s current pensionable salary and which must be earned. There is no set of fixed rules for how deficits that may arise should be handled, but losses should primarily be covered by Alecta s collective solvency capital and thus will not lead to increased expenses through higher contractual premiums. There are also no rules for how any surplus or deficit should be distributed when plans are terminated or a company withdraws from the plan. In Norway, the UK and Germany, LKAB has defined-benefit pension plans as a complement to local social insurance. In the UK pensions are secured via a company-managed pension fund and in Germany via internal accrued provisions combined with credit insurance. In Norway pensions are secured via a combination of a company-managed pension fund, internal accrued provisions and credit insurance. Changes in the present value of obligations for defined benefit plans Group MSEK Obligation for defined-benefit plans as at 1 January 3,983 4,183 Benefits paid Cost of service, current period Past service cost -45 Interest expense Remeasurements: - Actuarial gains and losses on 0 changed demographic assumptions - Actuarial gains and losses on changed financial assumptions - Actuarial gains and losses on experience-based adjustments Other changes Exchange rate differences on obligation and recognized actuarial loss Obligation for defined-benefit plans as at 31 December 4,126 3,983 The present value of the Swedish portion of the obligation is divided between the plans members as follows: - Active members 50 (55) percent - Paid-up policy holders 9 (7) percent - Retirees 41 (38) percent Changes in fair value of plan assets Group MSEK Changes in fair value of plan assets at 1 January 2,376 2,317 Contributions Benefits paid Return Actuarial gain (+)/loss (-) Other -2 Exchange rate differences on obligation and recognized actuarial loss Fair value of plan assets at 31 December 2,557 2,376 Plan assets consist of the following Group MSEK Shares Interest-bearing assets including bonds 1,143 1,095 Alternative investments ,557 2,376 Cost recognized in profit for the year Group MSEK Current service cost Past service cost Interest expense on obligation Return on plan assets Total net cost in income statement NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

109 Cost is recognized on the following lines of the income statement: Group MSEK Cost of goods sold Financial income (recognized in net financial income/ expense) Financial expense (recognized in net financial income/ expense) Cost recognized in other comprehensive income Group MSEK Remeasurements: Actuarial gains (-) and losses (+) Difference between actual return and return according to discount rate on plan assets Net recognized in other comprehensive income Assumptions for defined-benefit obligations. The most significant actuarial assumptions at the end of the reporting period assessed for each country but expressed as weighted averages are given below. Group Percent Discount rate as at 31 December Return on plan assets as at 31 December Future salary increase Employee turnover Future pension increase Assumptions about future mortality are based on published statistics and mortality rates. The average life expectancy of an individual retiring at age 65 is 23 years for men and 25 years for women. The actual return on plan assets for 2016 was 6.4 (3.4) percent. Sensitivity analysis The following table presents possible changes in actuarial assumptions at year-end, other assumptions being unchanged, and how these would affect the defined-benefit obligation. The calculation of the change in pension commitments only includes the Swedish commitments, which represent around 50 percent of Group commitments. Group Increase in Decrease in MSEK assumption assumption + (decrease)/- (increase) in debt Discount rate (0.5% change) Expected mortality (1-year change) Future salary increase (0.5% change) Future pension increase (0.5% change) At 31/12/2016 the weighted average duration of the obligation was 16.4 (16.4) years. Historical information Group MSEK Present value of definedbenefit obligations 4,126 3,983 4,183 3,791 3,822 Fair value of plan assets -2,557-2,376-2,317-2,181-1,101 Net obligations 1,569 1,607 1,866 1,610 2,721 Net liability recognized in balance sheet Parent Company MSEK 31/12/ /12/ Present value of obligation (calculated according to Swedish principles) as relates to wholly or partially funded pension plans 1,082 1,055 - Fair value at end of period for specifically separated assets (in pension funds and corresponding) -1,117-1,046 = Surplus in pension fund or the like (-)/net obligation (+) Of which, recognized in the Parent Company balance sheet Present value of obligations (calculated according to Swedish principles) for unfunded pension plans = Net recognized for pension obligations Changes in net liability Parent Company MSEK 31/12/ /12/2015 Net liabilities at start of year for pension provisions + Cost of company-managed pension scheme excluding taxes as recognized in the income statement - Pension payments /- Other Fair value of assets in trust by main category Parent Company MSEK 31/12/ /12/2015 Shares Bonds Other interest-bearing assets Other assets 24 1,117 1,046 Costs relating to pensions Parent Company MSEK Company-managed pension schemes Cost Cost of company-managed pension schemes Pension through insurance policy Insurance premiums Subtotal Special employer s contribution on pension costs Cost of credit insurance, administrative expenses, other 1 6 Recognized net cost attributable to pensions Net pension cost is recognized on the following lines of the income statement: Parent Company MSEK Cost of goods sold The Group estimates that MSEK 43 will be paid in 2017 to funded and unfunded defined-benefit plans and MSEK 26 is expected to be paid in 2017 to the defined-benefit plans that are recognized as defined-contribution plans. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 107

110 Assumptions for defined-benefit obligations The most significant actuarial assumptions at the end of the reporting period (expressed as weighted averages) Parent Company Percent Discount rate as at 31 December Defined-contribution pension plans In Sweden, the Group has defined-contribution pension plans for employees that are fully paid by the companies. Outside of Sweden, there are defined-contribution plans that are financed partly by the subsidiaries and partly by employee contributions. Payments into these plans are made regularly in accordance with the terms of each plan. Group Parent Company MSEK Costs for definedcontribution pension plans In 2016 retirement solutions were paid out through insurance plans in the amount of MSEK (24). NOTE 30 PROVISIONS Group MSEK 31/12/ /12/2015 Provisions Urban transformation 13,062 12,234 Emission allowances for carbon dioxide Remediation costs 1,276 1,254 Other Total 14,391 13,564 Parent Company MSEK 31/12/ /12/2015 Provisions Urban transformation 13,062 12,234 Emission allowances for carbon dioxide Remediation costs Other 17 Total 14,032 13,219 Group MSEK Urban transformation Emission allowances Remediation costs Other provisions Total Opening balance, 1 Jan , , ,988 Provisions for the year Reassessment of previous years provisions Utilized provisions Interest adjustment on liabilities for the year Inflation increase for the year Reclassification Emissions for the year Settlement of previous years emissions Closing balance, 31 Dec , , ,564 Less: expenditures for replacement properties Closing balance, 31 Dec 2015 (net) 12, , ,385 Of which to be paid out in , ,435 Of which to be paid out , ,296 Of which to be paid out after , ,654 Opening balance, 1 Jan , , ,564 Provisions for the year ,017 Reassessment of previous years provisions Utilized provisions Interest adjustment on liabilities for the year Inflation increase for the year Emissions for the year Settlement of previous years emissions Closing balance, 31 Dec , , ,391 Less: expenditures for replacement properties Closing balance, 31 Dec 2016 (net) 12, , ,888 Of which to be paid out in , ,279 Of which to be paid out , ,723 Of which to be paid out after Expenditures for replacement properties refers to expenses incurred which are reported as property, plant and equipment see Note 16. The provisions and the property, plant and equipment item are offset when the replacement property is handed over. For an overall picture of items related to urban transformation refer to Note NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

111 Parent Company MSEK Urban transformation Emission allowances Remediation costs Other provisions Total Opening balance, 1 Jan , ,632 Provisions for the year Reassessment of previous years provisions Utilized provisions Interest adjustment on liabilities for the year Inflation increase for the year Reclassification Emissions for the year Settlement of previous years emissions Closing balance, 31 Dec , ,219 Less: expenditures for replacement properties Closing balance, 31 Dec 2015 (net) 12, ,040 Of which to be paid out in , ,433 Of which to be paid out , ,216 Of which to be paid out after , ,391 Opening balance, 1 Jan , ,219 Provisions for the year ,011 Reassessment of previous years provisions Utilized provisions Interest adjustment on liabilities for the year Inflation increase for the year Emissions for the year Settlement of previous years emissions Closing balance, 31 Dec , ,032 Less: expenditures for replacement properties Closing balance, 31 Dec 2016 (net) 12, ,529 Of which to be paid out in , ,279 Of which to be paid out ,644 Of which to be paid out after NOTE 31 URBAN TRANSFORMATION LKAB has already had, and will continue to have, significant costs related to urban transformation. Provisions for urban transformation are recognized in accordance with the criteria of IAS 37. In order to finance future urban transformation payments, funds are allocated in accordance with the current board-approved financing policy. The purpose of such asset management is to ensure LKAB s ability to pay and that the return on allocated funds will cover inflation over time. Net cost of urban transformation The company s net cost consists of the following components: Group and Parent Company MSEK Costs for urban transformation, current period -1,578-1,218 Effect of changed assumptions and assessments Impairment of mine asset ,106-1,940 Due to the current level of interest rates, provisions for urban transformation are not discounted and hence no interest expense is recognized. The net cost of urban transformation is recognized on the following line of the income statement: Group and Parent Company MSEK Cost of goods sold -2,106-1,940-2,106-1,940 Provisions for urban transformation Provisions are recognized on the following lines of the balance sheet: Group and Parent Company MSEK 31/12/ /12/2015 Current liabilities 3,148 1,283 Non-current liabilities 9,914 10,951 13,062 12,234 Since 2006 LKAB has paid out MSEK 4,621 in respect of previous years provisions. Pay-outs in 2016 amount to MSEK 1,035. There will also be subsequent requirements arising from future mining. LKAB regularly assesses these future requirements. The assessments are subject to considerable uncertainty. At the end of the reporting period, LKAB determined that the Group s actual short- and long-term capital commitments for urban transformation are significant. The recognized provision for urban transformation does not include LKAB s own need to replace properties affected by urban transformation. New capital expenditure of MSEK 670 has been approved for replacement of the company s own properties and relocation of existing properties. Property, plant and equipment for urban transformation The balance sheet item includes the following assets: Group and Parent Company MSEK 31/12/ /12/2015 Mine asset 1,092 1,896 Replacement properties Other property acquisitions ,009 2,235 Replacement properties refers to expenditures for the construction of replacement properties for those property owners who have chosen this option. Commitments for replacement properties are recognized as a provision until handover of the replacement property. At this point, the provision is offset against expenditures for the replacement property. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 109

112 NOTE 32 ACCRUED EXPENSES AND DEFERRED INCOME Group Parent Company MSEK 31/12/ /12/ /12/ /12/2015 Electric power Payroll and employee benefit expenses Forward exchange contracts interest discount 22 7 Accrued trade payables Deferred income, iron ore derivatives Deferred income, fair value of derivatives Other ,559 1,560 1,403 1,346 NOTE 33 VALUATION OF FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE AND CATEGORIZATION Classification and fair value and level of measurement hierarchy The following is a summary of the fair values of consolidated financial assets and liabilities with a breakdown by measurement category. Information is also provided about to which fair value level the respective financial assets and liabilities belong. Group 2016 MSEK Financial assets measured at fair value Note Carrying amount Held for trading Initially identified at fair value Hedging instruments Loans and receivables Fair value Availblefor-sale financial Other assets liabilities Total Level 1 Level 2 Total Shares, financial assets Shares and alternative investments, short-term holding 20 3,496 3,496 3,496 3,496 Interest-bearing, short-term holding 20 7,775 7,775 7,775 7,775 Interest-bearing (cash and cash equivalents) Derivatives for hedging , ,145 Financial assets not measured at fair value Shares, financial assets Accounts receivable 2,094 2,094 Other receivables 22 2,318 2,318 Accrued income Cash and bank balances (cash and cash equivalents) 40 2,524 2,524 6, ,040 Financial liabilities measured at fair value Other derivatives for hedging 17 1,136 1, , ,136 1,153 Financial liabilities not measured at fair value Issued commercial papers Liability, repurchase agreements 27 1,071 1,071 Issued bond loans 27 2,984 2,984 3,007 3,007 Other bond financing Trade payables 1,283 1,283 Other liabilities Accrued expenses 32 1,335 1,335 7,810 7, NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

113 Group 2015 MSEK Financial assets measured at fair value Note Held for trading Carrying amount Initially identified at fair value Hedging instruments Investments held to maturity Loans and receivables Fair value Availablefor-sale financial Other assets liabilities Total Level 1 Level 2 Total Shares, financial assets Shares and alternative investments, short-term holding 20 3,014 3,014 3,014 3,014 Interest-bearing, short-term holding 20 7,111 7,111 7,111 7,111 Interest-bearing (cash and cash equivalents) 40 1,787 1,787 1,787 1,787 Derivatives for hedging , ,539 Financial assets not measured at fair value Shares, financial assets Interest-bearing, short-term holding Loans Accounts receivable 1,320 1,320 Other receivables Accrued income Cash and bank balances (cash and cash 40 equivalents) 2,548 2, , ,800 Financial liabilities measured at fair value Other derivatives for hedging Financial liabilities not measured at fair value Issued commercial papers 27 1,000 1,000 Issued bond loans 27 1,996 1,996 1,960 1,960 Trade payables 1,573 1,573 Other liabilities Accrued expenses 32 1,324 1,324 6,014 6,014 Shares, financial assets not recognized at fair value refers to unlisted holdings, mainly in VindIn AB. Fair value cannot be reliably estimated as there is no quoted market price in an active market. The shares are instead measured at cost and are tested regularly for impairment. For issued commercial papers and repo liabilities, the carrying amount represents a reasonable approximation of fair value because of the short time to maturity. The carrying amount of accounts receivable, other receivables, accrued income, cash and cash equivalents, trade payables, other liabilities and accrued expenses represent a reasonable approximation of fair value. No transfers have been made between Levels 1 and 2. Parent Company The following table provides information about the financial assets and liabilities of the Parent Company where there are differences between fair value and cost. For other assets and liabilities of the Parent Company the carrying amount is estimated to be a reasonable approximation of fair value; see information about the Group above. Regarding fair value measurement please refer to the description above for the Group. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 111

114 Parent Company 2016 MSEK Held for trading Carrying amount Initially identified at fair value Hedging instruments Loans and receivables Fair value Availablefor-sale financial Other assets liabilities Total Level 1 Level 2 Total Shares, financial assets Current investments 11,114 11,114 11,371 11,371 Forward exchange contracts for hedging Other derivatives Issued bond loans -2,984-2,984-3,007-3, , ,984 8,239 Parent Company 2015 MSEK Held for trading Carrying amount Initially identified at fair value Hedging instruments Loans and receivables Fair value Availablefor-sale financial Other assets liabilities Total Level 1 Level 2 Total Shares, financial assets Current investments 11,800 11,800 11,912 11,912 Forward exchange contracts for hedging Other derivatives Issued bond loans -1,996-1,996-1,960-1, , ,996 9,915 1 Carrying amount refers to accrued forward premium and measurement of accounts receivable at the forward rate. 2 Carrying amount refers to accrued option premium and also negative values for derivatives to which hedge accounting is not applied. NOTE 34 FINANCIAL RISKS AND RISK MANAGEMENT Framework for financial risk management The Group s activities expose it to a variety of financial risks. LKAB s financial risk management is regulated by a finance policy established by the Board. The finance policy provides a framework of guidelines and rules in the form of risk mandates and limits for financial activities. The LKAB Treasury Centre is the company s central treasury function, which manages the Group s overall financial risk and is also the Group treasury. The Board s finance committee is responsible for continuously monitoring the management of financial risks, objectives of risk exposure, administration, credit limits, limits and reporting procedures, as well as checking that all this is done in accordance with the finance policy. The Group s aim is that financing activities will at all times support the business plan adopted and ensure that financial risks are identified, quantified and managed. In February 2017 a revised finance policy was adopted. The description below relates to the finace policy that applied in Cash flow risk in SEK The LKAB Group is exposed to a variety of cash flow risks which can be subject to positive or negative covariance. LKAB s main cash flow risk in SEK is related to iron ore product sales in the Parent Company. Cash flow risk means that fluctuations in the global iron ore price and exchange rates between USD and SEK can together have a negative impact on the company s income statement, balance sheet and/or cash flow. Another significant cash flow risk is energy price risk. The finance policy describes procedures and regulations for identifying and reporting total consolidated cash flow risk and the frameworks within which hedging of cash flow risks should or may occur. All cash flows exposed to market prices are taken into consideration and account is also taken of historical covariance between different exposures. The finance policy establishes frameworks for hedging cash flow risk, which includes a hedging period and a maximum degree of hedging during that period. The flows are normally hedged against a rolling forecast months into the future with a maximum hedging degree of between 100 percent down to 60 percent. It is possible to hedge for longer periods following specific decisions. Hedging is done through a combination of hedging strategies, agreements and financial contracts. The Group classifies its derivatives that are used for cash flow hedging of forecast transactions in accordance with the regulations of IAS 39. Hedge accounting is applied when the requirements for hedge accounting are met; see Note 1 Significant accounting principles, Principle 17 Derivatives and hedge accounting. At 31 December 2016, 18 (31) percent of the total cash flow forecast in SEK for 2017 (2016) was hedged. For sensitivity analyzes concerning cash flow risks, please refer to the Administration Report. Price risk of iron ore products Price volatility in the global iron ore market makes LKAB s prices change substantially in both the long and short terms. The price of iron ore products in USD is dependent on future expected prices for LKAB s products, which in turn are dependent on the global commodity price and the global pricing mechanism for iron ore. Price risk for iron ore products is hedged using generally available commodity derivatives. The fair value of derivatives related to price risk of iron ore products amounted to MSEK -889 (282) at 31 December 2016, of which MSEK 22 (306) was recognized as assets and MSEK -911 (24) as liabilities. Hedge accounting is applied to derivatives with a value of MSEK -911 (253). In 2016 MSEK -253 (26) was transferred from the hedging reserve via other comprehensive income to profit for the year as part of net sales. The fair value of derivatives is expected to be recognized in profit for the year in Currency risks The Group is exposed to various types of currency risks. The main exposure stems from Group sales of iron ore where market pricing is in USD. This currency risk in forecast and contracted payment flows is called transaction exposure. Currency risks are also found in the translation of foreign subsidiaries assets and liabilities to the Parent Company s functional currency, known as translation exposure. Transaction exposure The finance policy governs the framework for hedging; see the Price risk for iron ore products section above. Hedging of transaction exposure in USD is done with derivative contracts that are generally available on the currency market, primarily forward exchange contracts. The Group s transaction exposure in USD in 2016 amounted to MUSD 1,860 (1,759). The fair value of forward exchange contracts amounted to MSEK -187 (41) as at 31 December In 2016 MSEK -29 (387) was transferred from the hedging reserve via other comprehensive income to profit for the year as part of net sales. The fair value of currency derivatives is expected to be recognized in profit for the year in For other companies within the Group transaction exposure arises principally through the purchase of raw materials in foreign currencies. Each subsidiary is responsible for its currency exposure and all forward cover occurs through the LKAB Treasury Centre. The Group s transaction exposure in other currencies amounts to MNOK 330 (478), MEUR 64 (85) and MCNY 17 (30). Translation exposure LKAB does not normally hedge its translation exposure. The foreign subsidiaries within the Group operate mainly in their local currencies and investments as well as financing are mainly carried out in the local currency in order to reduce translation exposure. Consolidated net foreign assets are divided into the following currencies (millions of local currency). 112 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

115 Currency EUR 9 11 GBP USD 5 3 DKK NOK CNY HKD TRL Consolidated profit for the year includes foreign exchange rate differences of MSEK -193 (-602) in operating profit and MSEK 307 (-97) in net financial income/expense. Energy price risk Commodity price risk refers to the change in the price of input goods and its impact on earnings. It is mainly changes in energy prices that constitute a large commodity price risk for the LKAB Group. The Group s energy costs make up 8 (8) percent of operating costs before impairment. Hedging of electricity prices occurs through indexed prices and through relevant financial contracts in the electricity market for purchase at variable prices. The fair value of derivatives related to electricity price risk amounted to MSEK -38 (-147) at 31/12/2016. In 2016 MSEK 50 (1) was transferred from the hedging reserve via other comprehensive income to profit for the year as part of operating expenses. The fair value of derivatives is expected to be recognized in profit for the year at MSEK 11 in 2017 and MSEK -49 over the period. Interest rate risk and share price risk Interest rate risk refers to how the return on an interest-bearing asset is affected by a change in interest rates. The level of interest rate risk is affected by changes in interest rates and by the asset s sensitivity to interest rates (duration). LKAB is mainly exposed to interest rate risk with regard to short-term investments and cash and cash equivalents. The LKAB Group s total assets are allocated to three portfolios: liquidity portfolio, urban transformation portfolio and pension portfolio. The finance policy governs the maximum average duration in each asset portfolio. The frameworks are set in relation to each portfolio s commitment or purpose and in relation to a range of risk measures and restrictions. The Parent Company s interest-bearing investments amounted to MSEK 7,875 (8,898) at the end of December The average duration was 938 (587) days. The Group s policy also contains guidelines/directives for debt management where the duration targets relate to directives for the net debt/equity ratio. Consolidated borrowing amounted to MSEK 4,034 (2,996) at 31 December The fixed interest term for financial liabilities is 1,059 (797) days. Credit risks LKAB s credit risks are primarily associated with accounts receivable, derivatives and short-term investments. Maximum credit risk exposure MSEK Credit risks in financial activities The financial activities of the Group entail exposure to credit risks. This is primarily counterparty risks in conjunction with receivables from banks and other counterparties involved in the purchase of financial investments. The finance policy contains special counterparty rules stating the maximum credit exposure for various counterparties and for each designated asset portfolio. The International Swaps and Derivatives Association s (ISDA) master agreement is used with all counterparties in derivative transactions. The Group has no assets that have fallen due or have been impaired that resulted in credit losses. LKAB has not experienced any credit losses in short-term investments over the past five years. Credit risks in accounts receivable Commercial credit risks are a natural part of the LKAB Group s business and normally arise from the sale of goods and services. Commercial credit risks are related to the customer s or counterparty s solvency; that is, their credit standing, the amount of credit granted and the credit period. The Group s finance policy contains a regulatory framework for credit rating that defines the criteria for evaluating new and existing customers from a credit perspective. The framework includes approval processes, credit limits and monitoring procedures. Each customer is risk-classified from both a financial and a sustainability perspective. The average collection period on accounts receivable was 31 (33) days in Based on historical data, LKAB estimates that no impairment of accounts receivable that are not yet due is necessary as of the end of the reporting period. The majority of outstanding accounts receivable comprise customers with a good credit standing that are known to the Group. Offsetting and similar contracts Counterparty risk in derivative contracts is reduced through netting agreements; that is, netting of positive and negative values in all derivative contracts with one and the same counterparty. For exchange-traded derivatives there are clearing agreements that include netting. For all other counterparties in derivative transactions there are netting agreements (ISDA) supplemented by agreements on surety for net exposures (Credit Support Annex or CSA agreements). The clearing agreements and ISDA agreements do not meet the criteria for offsetting in the statement of financial position. Under the master agreements, the parties may only settle their exposures net (that is, assets are offset against liabilities) in cases of severe credit events. The information in the following table shows financial assets and liabilities that are subject to a legally binding master netting agreement or similar agreement that is not offset in the balance sheet. Group 2016 MSEK Financial assets/ liabilities, Offset gross amounts Net amount in statement of financial position Related amounts that are not offset Financial instruments that are not offset Collateral provided Net amount Financial assets Derivatives Financial liabilities Derivatives -1, , , Total -1, , , Derivatives Interest-bearing instruments, short-term holding 7,775 7,211 Interest-bearing instruments, short-term holding (portion of cash and cash equivalents) 100 1,787 Accounts receivable and other current receivables 4,412 1,919 Accrued income Total 12,377 11,449 Group 2015 MSEK Financial assets/ liabilities, Offset gross amounts Net amount in statement of financial position Related amounts that are not offset Financial instruments that are not offset Collateral provided Net amount Financial assets Derivatives Financial liabilities Derivatives Total LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 113

116 Liquidity risks Liquidity risk is the risk that the LKAB Group cannot meet its commitments due to lack of liquidity or the inability to raise external loans for operating activities. Mining legislation and consequent requirements for urban transformation in the Swedish orefields place special demands on liquidity. The Group s finance policy defines liquidity targets for the purpose of managing the Group s short- and long-term commitments. Available funds as at 31 December 2016 are shown below. All credit facilities are subject to 100 percent retention of title. Credit facilities Utilized Nominal (nominal) Available Certificate programme, maturing , ,200 Bond programme 7,000 4,009 Maturing ,991 Maturing ,000 Other bond financing Credit facility 5,000 5,000 Total 17,250 4,041 13,209 Cash and cash equivalents (excluding pledged 2,503 assets) Total available funds 15,712 Maturity structure of financial liabilities undiscounted cash flows Group MSEK Total <1 month 1 3 months months 1 year 1 5 years >5 years Total <1 month 1-3 months 3 months 1 year 1 5 years >5 years Certificates , Liability, repurchase agreements 1,071 1,071 Bond loans 3,234 2, ,996 1,996 Derivatives 1, Trade payables , Other liabilities and accrued expenses 1, Total 8,298 2,962 1, , ,055 1, ,093 The consolidated maturity structure of trade payables, other liabilities and accrued expenses are considered to resemble the Parent Company s in all material respects. The above information is taken from the Parent Company. Maturity structure of financial assets undiscounted cash flows Group MSEK Total <1 month 1 3 months 3 months 1 year 1-5 years >5 years Total <1 month 1 3 months 3 months 1 year 1-5 years >5 years Interest-bearing securities 7, , ,898 1, ,131 4, Derivatives Accounts receivable 2,586 1, , Total 10,497 1,957 1, , ,566 2,522 1,104 2,337 4, The Group s maturity structure is considered to resemble the Parent Company s in all material respects. The information in the maturity structure for interest-bearing securities refers to the Parent Company. Asset management LKAB s financial risk management is regulated by a finance policy approved by the Board. The Board s finance committee is responsible for continuously monitoring the management of financial risks, objectives of risk exposure, administration, credit limits, limits and reporting procedures, as well as checking that all this is done in accordance with the finance policy. LKAB defines its managed assets as equity in the Group excluding unrealized changes in the value of derivatives that are recognized directly in equity. Assets under management amounted to SEK 31.4 (32.0) billion at the end of the reporting period. According to the Board s finance policy, the Group s financial objective is to have a good capital structure and financial stability, thereby providing a basis for continued development of business activities and future societal changes. The Board s ambition is to maintain a balance between high returns and the advantages and security offered by a sound capital structure. The capital structure target is a net debt/equity ratio of 0 20 percent. The net debt/ equity ratio is defined as the net of interest-bearing liabilities and provisions as well as interest-bearing assets, divided by equity. The net debt/equity ratio was 20.7 (10.0) percent at the end of the reporting period. The Group s profitability target is a return on equity of 12%. The return for 2016 was negative (negative). LKAB has a dividend policy in which the dividend to the owner in the long term shall constitute 30 to 50 percent of earnings after tax and be adjusted to an average earnings level over a business cycle. No dividend is proposed for the 2016 financial year. No changes were made to the Group s asset management during the year. LKAB Försäkring AB is the only company in the Group that has a statutory capital requirement of EUR 3,200,000, which corresponded to MSEK 31 (29) at the end of the reporting period. 114 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

117 NOTE 35 INVESTMENT COMMITMENTS At year-end, the Group had contractual commitments to acquire property, plant and equipment. The commitments are forecast at MSEK 1,521 (2,461), of which MSEK 960 (2,380) is expected to be settled in the following financial year. Major projects include increasing capacity in Svappavaara and a new main haulage level in Kiruna (KUJ 1365). The Parent Company s commitments are forecast at MSEK 1,426 (2,219), of which MSEK 865 (2,138) is expected to be settled in NOTE 36 PLEDGED ASSETS AND CONTINGENT LIABILITIES Group Parent Company MSEK 31/12/ /12/ /12/ /12/2015 Pledged assets As pledged assets for own liabilities and provisions Company-owned endowment insurance Deposit of cash and cash equivalents Collateral provided, derivatives 1, , Pledged assets, bonds 1,071 1,071 Total pledged assets 2, , Contingent liabilities Guarantees, FPG/PRI Guarantees, GP plan Guarantee commitments, Swedish Tax Agency Surety given for subsidiaries Collateral, remediation Other 3 40 Total contingent liabilities Company-owned endowment insurance is intended to cover pension commitments for the President, former President and members of Group management under the old defined-benefit pension scheme. The value of endowment insurance changes concurrently with payment of premiums/pension disbursements and changes in market value. Deposits of cash and cash equivalents are intended to cover future expenditures for remediation measures and other restoration measures at mines after mining activities cease. Collateral provided, derivatives refers to security provided for outstanding hedging positions, mainly hedging of iron ore prices. Pledged assets, bonds refers to security for short-term financing in the form of repurchase agreements. Guarantees for PRI Pensionstjänst and the mine plan corresponded to 2% of commitments at the end of the reporting period. The PRI commitment relates to ITP2 premiums for salaried employees and vested obligations for collectively affiliated employees in the mine plan. NOTE 37 RELATED PARTIES Relationships with related parties The Group is under the controlling influence of the Swedish state. In addition to the close relationships that the Parent Company has with its subsidiaries (see Note 38), the Group also has close relationships with Vattenfall AB and the Swedish Transport Administration. Parent Company Relationships with related parties MSEK Year Sale of goods to Interest related and dividends parties (net) Purchase of goods from related parties Liabilities to related parties, 31 December Related party receivables, 31 December Subsidiaries ,298 2,805 Subsidiaries ,517 1,170 2,566 Transactions with related parties are priced on market terms. Of related party receivables, 1,604 (1,242) are loans receivable. LKAB s mining has impacted the existing railway infrastructure and made it impossible for facilities to remain in their present location. LKAB is compensating the Transport Administration for expenditures incurred in conjunction with construction of the new railway infrastructure. Purchases from the Transport Administration amounted to MSEK 55 (53). For remuneration paid to the Board of Directors and senior executives, see Note 6. NOTE 38 GROUP COMPANIES Parent Company MSEK 31/12/ /12/2015 Accumulated acquisition value At beginning of year 1,892 1,781 Reclassification Disposal -1 Capital contributions Closing balance, 31 December 2,128 1,892 Accumulated impairment At beginning of year Reclassification 5 Closing balance, 31 December -8-8 Carrying amount at year-end 2,120 1,884 Reclassification in 2016 refers to the acquisition cost of land that was reclassified as Buildings and land upon transfer of the properties to the Parent Company. Reclassification in 2015 refers to the reclassification of participations in Norrskenet AB as Participations in associated companies. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 115

118 Specification of the Parent Company s and Group s holdings of shares in Group companies The following table does not include dormant Group companies. Subsidiary / Corporate ID number / Domicile Swedish subsidiaries Number of shares Share in % 2016 Share in % /12/2016 Carrying amount 31/12/2015 Carrying amount Gällivare Mark AB / / Gällivare LKAB Fastigheter AB / / Kiruna 5, LKAB Wassara AB / / Stockholm 20, LKAB Berg & Betong AB / / Kiruna 24, LKAB Nät AB / / Kiruna LKAB Minerals AB / / Luleå 1,600, LKAB Försäkring AB / / Luleå 10, LKAB Malmtrafik AB / / Kiruna 208, Foreign subsidiaries LKAB Norge AS / / Narvik, Norway 300, LKAB S.A. / / Brussels, Belgium LKAB Schwedenerz GmbH / HRB 718 / Essen, Germany LKAB Trading (Shanghai) Co., Ltd. / Shanghai, China Indirect holdings via subsidiary LKAB Minerals AB LKAB Minerals B.V. / / Breda, Netherlands LKAB Minerals Inc / / Cincinnati, Ohio, USA LKAB Minerals GmbH / HRB / Essen, Germany LKAB Minerals Asia Pacific Ltd / / Hong Kong, China LKAB Minerals OY / / Helsinki, Finland LKAB Minerals AS / A/S / Nuuk, Greenland LKAB Minerals Tianjin Minerals Co / / Dongli District Tianjin, China LKAB Minerals Limited / / Derby, UK LKAB Minerals Richmond Ltd / / Derby, UK Indirect holdings via subsidiary LKAB Berg & Betong AB LKAB Mekaniska AB / / Kiruna LKAB Kimit AB / / Kiruna Indirect holdings via subsidiary LKAB Malmtrafik AB LKAB Malmtrafikk AS / / Narvik, Norway Parent Company total 2,120 1,884 NOTE 39 UNTAXED RESERVES Parent Company MSEK 31/12/ /12/2015 Accumulated depreciation in excess of plan: Land and buildings Opening balance, 1 January 3 4 Excess depreciation dissolved -1 Closing balance, 31 December 3 3 Machinery and equipment Opening balance, 1 January 7,553 9,072 Dissolution/depreciation in excess of plan for the 1,039-1,519 year Closing balance, 31 December 8,592 7,553 Tax allocation reserve Provision for taxation ,600 3,600 Provision for taxation ,960 2,960 Provision for taxation ,858 1,858 Provision for taxation Closing balance, 31 December 9,068 9,068 Total untaxed reserves 17,663 16,624 NOTE 40 SPECIFICATIONS FOR STATEMENT OF CASH FLOWS Cash and cash equivalents Group MSEK 31/12/ /12/2015 The following subcomponents are included in cash and cash equivalents: Cash and bank balances 2,524 2,548 Current investments, on a par with cash and cash equivalents ,787 Total in statement of financial position and statement of cash flows 2,624 4,335 Cash and cash equivalents Parent Company MSEK 31/12/ /12/2015 The following subcomponents are included in cash and cash equivalents: Cash and bank balances 2,124 2,338 Current investments, on a par with cash and cash equivalents ,787 Total in balance sheet and statement of cash flows 2,224 4,126 1 Cash and cash equivalents include current investments (interest-bearing securities) that were classified as cash and cash equivalents based on the following: They have an insignificant risk of fluctuations in value They can be easily converted to cash They have a maximum maturity of three months from date of acquisition. 116 NOTES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

119 Shares and alternative investments MSEK 31/12/ /12/2015 Opening balance 2,902 2,090 Acquisitions 1,404 1,823 Disposal -1,067-1,011 3,239 2,902 Interest paid and dividend received Group Parent Company MSEK Dividend received Interest received Interest paid Adjustments for items not included in cash flow Group Parent Company MSEK Depreciation 2,746 2,800 2,213 2,151 Impairment 1,192 7,136 1,184 6,096 Exchange differences Earnings from sale and retirement of property, plant and equipment Change in other receivables/ liabilities, derivatives Provisions for pensions Provision for urban transformation 2,106 1,568 2,106 1,568 Other provisions Other non-cash items ,780 11,559 5,267 10,169 Change in working capital Working capital in 2016 was negatively impacted by an increased level of capital tied up in pledged assets for outstanding hedging positions and for accounts receivable. Consolidated working capital was encumbered by MSEK 653 (-527) related to the change in the hedging reserve recognized in consolidated equity and by MSEK 83 (-231) in respect of derivatives. The amounts did not affect the consolidated cash flow and therefore are not included in the change in working capital in the statement of cash flows. Group Parent Company Tax paid MSEK Tax expense in income statement 85 1, ,082 Change in tax assets/liabilities Adjustment for deferred tax , , NOTE 41 EVENTS AFTER THE CLOSING DATE There are no significant events after the closing date to report. NOTE 42 PROPOSED APPROPRIATION OF EARNINGS The Board and the President propose that the MSEK 14,160 in unappropriated earnings, of which MSEK 1,865 represents profit for the year, be allocated as follows: Carried forward MSEK 14,160 Total MSEK 14,160 NOTE 43 KEY RATIOS DISCLOSURES Alternative key ratios The company also presents certain non-ifrs financial benchmarks and key ratios in the interim report. The management considers this supplementary information to be important if readers of this report are to obtain an understanding of the company s financial position and performance. Definitions Return on equity: Underlying operating profit: Operating cash flow: Net financial indebtedness: Net debt/equity ratio: Operating assets: Growth in net sales: Operating margin: Profit margin: Return on total capital Return on operating assets: Equity/assets ratio: Profit after tax as a percentage of average equity (rolling 12-month figures). Operating profit excluding costs for urban transformation provisions and impairment of property, plant and equipment. Cash flow from operating activities and investing activities relating to property, plant and equipment. Interest-bearing liabilities less interest-bearing assets. Net financial indebtedness divided by equity. Intangible fixed assets, Property plant and equipment, Inventories, Accounts receivable and Other receivables. Change in net sales as a percentage of the previous year s net sales. Operating profit as a percentage of net sales. Net financial income/expense as a percentage of net sales for the year. Profit after financial income/expense + financial expense as a percentage of net sales. Operating profit as a percentage of average operating assets. Equity as a percentage of total assets. Reconciliation Underlying operating profit MSEK Operating profit/loss -1,677-7,156 Less: Costs for urban transformation provisions 2,106 1,568 Impairment of property, plant and equipment 1,192 7,136 Underlying operating profit 1,621 1,548 Operating cash flow Reconciliation of operating cash flow is provided in the consolidated statement of cash flows on page 79. LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 NOTES 117

120 THE BOARD S ATTESTATION The Board of Directors and the President attest that the Annual Report was prepared in accordance with generally accepted accounting principles in Sweden and that the consolidated financial statements were prepared in accordance with international finan cial reporting standards as referred to in Regulation 1606/2002/EC of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards. The Annual Report and the consolidated financial statements give a fair presentation of the Parent Company s and the Group s financial position and earnings. The Administration Report for the Parent Company and the Group provides a fair review of developments in the Parent Company s and the Group s operations, financial position and earnings and describes significant risks and uncertainties faced by the Parent Company and the companies included in the Group. Proposed appropriation of earnings The Board and the President propose that the MSEK 14,160 in unappropriated earnings, of which MSEK 1,865 represents profit for the year, be allocated as follows: Carried forward MSEK 14,160 Total MSEK 14,160 Luleå, 21 March 2017 Sten Jakobsson Chairman of the Board Ola Salmén Board member Leif Darner Board member Maija-Liisa Friman Board member Eva Hamilton Board member Lars-Åke Helgesson Board member Hanna Lagercrantz Board member Bjarne Moltke Hansen Board member Stefan Fagerkull Employee representative Tomas Strömberg Employee representative Jan Thelin Employee representative Jan Moström President and CEO As stated above, the Annual Report, consolidated financial statements and sustainability report were approved for publication by the Board of Directors on 21 March The consolidated income statement, consolidated statement of comprehensive income and statement of financial position and the Parent Company s income statement and balance sheet are subject to approval at the Annual General Meeting on 27 April Our audit report was issued on 21 March Deloitte AB Peter Ekberg Authorized Public Accountant 118 THE BOARD S ATTESTATION LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

121 AUDITOR S REPORT To the general meeting of the shareholders of Luossavaara- Kiirunavaara AB (publ) corporate identity number REPORT ON THE ANNUAL ACCOUNTS AND CONSOLIDATED ACCOUNTS Opinions We have audited the annual accounts and consolidated accounts of Luossavaara-Kiirunavaara AB (publ) for the financial year The annual accounts and consolidated accounts of the company are included on pages 2-3, 20-21, 38-40, 44-47, and in this document. In our opinion, the annual accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of parent company as of 31 December 2016 and its financial performance and cash flow for the year then ended in accordance with the Annual Accounts Act. The consolidated accounts have been prepared in accordance with the Annual Accounts Act and present fairly, in all material respects, the financial position of the group as of 31 December 2016 and its financial performance and cash flow for the year then ended in accordance with International Financial Reporting Standards (IFRS), as adopted by the EU, and the Annual Accounts Act. The statutory administration report is consistent with the other parts of the annual accounts and consolidated accounts. We therefore recommend that the general meeting of shareholders adopts the income statement and balance sheet for the parent company and the group. Basis for Opinions We conducted our audit in accordance with International Standards on Auditing (ISA) and generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Key Audit Matters Key audit matters of the audit are those matters that, in our professional judgment, were of most significance in our audit of the annual accounts and consolidated accounts of the current period. These matters were addressed in the context of our audit of, and in forming our opinion thereon, the annual accounts and consolidated accounts as a whole, but we do not provide a separate opinion on these matters. Recognition of revenues from sales of iron ore products at the appropriate price and in the correct period The group s sales of iron ore products are to a large extent priced in US dollars. Prices are determined using a variable price model based on the spot price where quarterly prices are determined after the end of the quarter. This means that revenues during the quarter is based on a preliminary price which is adjusted at the end of the quarter. Contractual prices are hedged for variations in iron ore prices and currency exchange rates. Taken together, this requires good practices to ensure that revenues are recognized at agreed prices adjusted for the effects from hedging and that revenues are recognized in the correct period. For the group s accounting principles for revenue recognition please refer to note 1 section For the group s revenues by geographical area please refer to note 3 and revenues disaggregated on all types of revenue please refer to note 2. Our audit procedures Our audit procedures included, but were not limited to: review of the group s accounting policies for revenue recognition for compliance with IFRS, evaluating the group s internal controls for recognizing revenues at appropriate prices and in the correct accounting period, on a sample basis testing of sales transactions against sales contracts, invoices and shipping documents to assess that revenues have been recognized at appropriate prices and in the correct accounting period. Valuation of intangible and tangible assets The group s intangible and tangible assets represent significant amounts. Impairment testing of these assets is based on production plans, which in turn are based on assumptions about future iron ore prices, USD/SEK exchange rate and capital expenditure levels. Especially changes in market prices for iron ore and USD/ SEK exchange rate have a significant impact on the group s future cash flows and thus the estimated recoverable value of intangible and tangible assets and any impairment. During the year the Board decided to mothball the open-pit mine in Mertainen. Impairment test for tangible assets attributable to Mertainen was based on fair value less costs of disposal. For the group s principles to prepare impairment tests for intangible and tangible assets please refer to note 1 section and for significant assumptions applied in the impairment tests, please refer to note 9. Our audit procedures Our audit procedures included, but were not limited to: review of the group s process and principles for impairment reviews for compliance with IFRS, evaluation of key assumptions such as estimated life of mines, production plans, iron ore prices, USD/SEK exchange rate and the sensitivity to any changes in these assumptions, and evaluation of significant assumptions used to assess fair value less costs of disposal for assets attributable to the open-pit mine in Mertainen. Provisions for urban transformation The group has significant obligations due to deformations in the ground caused by the mining operations. The deformations are already or will become so extensive that it is necessary to gradually move parts of Kiruna and Malmberget. The group has an obligation by law to compensate damage resulting from its mining activities. The Group therefore recognizes significant provisions for urban transformation in Kiruna and Malmberget as the obligations arise. Provisions for these obligations are dependent on geological consequences, estimates of damage and compensation claims from affected parties, future inflation and discount rates. Changes in these estimates and assumptions could have a significant impact on the group s earnings and financial position LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR S REPORT 119

122 For the group s accounting principles for urban transformation please refer to note 1 section and note 30 and 31 for the group s urban transformation provisions. Our audit procedures Our audit procedures included, but were not limited to: review that the group has adopted principles and guidelines for compensating affected parties and that they are applied uniformly and consistently over time, review that the group has a clear governance framework for the payment of compensation to affected parties including internal controls for approval and that these are monitored and reported accurately, review of the group s procedures to identify obligations and assess the extent of the obligations including the assumptions made and review of accounting policy and calculations for urban transformation provisions for compliance with IFRS. Accounting and valuation of financial instruments The group is exposed to changes in among other iron ore prices, currency exchange rates, energy prices and interest rates. To reduce its exposure in sales commitments the group uses various types of financial instruments, including derivatives. The accounting for financial instruments is complex and may have significant impact on the group s earnings and financial position. For the group s financial risks and management of these risks please refer to page and note 34, refer to note 1 section 15 and 16 for the group s principles for the valuation of financial instruments, including financial derivatives and hedge accounting. Our audit procedures Our audit procedures included, but were not limited to: review of the group s financial policy and hedging strategies, evaluation of the group s internal controls within the treasury function, review of hedging activities on a sample basis to ensure that these have been properly authorized and accounted for in accordance with IFRS, and review of the relevance of market data and methodologies used to determine valuation of financial instruments. Other information than the annual accounts and consolidated accounts This document also contains other information than the annual accounts and consolidated accounts and is found on pages 4-37, 41-43, and The Board of Directors and the Managing Director are responsible for this other information. Our opinion on the annual accounts and consolidated accounts does not cover this other information and we do not express any form of assurance conclusion regarding this other information. In connection with our audit of the annual accounts and consolidated accounts, our responsibility is to read the information identified above and consider whether the information is materially inconsistent with the annual accounts and consolidated accounts. In this procedure we also take into account our knowledge otherwise obtained in the audit and assess whether the information otherwise appears to be materially misstated. If we, based on the work performed concerning this information, conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of the Board of Directors and the Managing Director The Board of Directors and the Managing Director are responsible for the preparation of the annual accounts and consolidated accounts and that they give a fair presentation in accordance with the Annual Accounts Act and, concerning the consolidated accounts, in accordance with IFRS as adopted by the EU. The Board of Directors and the Managing Director are also responsible for such internal control as they determine is necessary to enable the preparation of annual accounts and consolidated accounts that are free from material misstatement, whether due to fraud or error. In preparing the annual accounts and consolidated accounts, the Board of Directors and the Managing Director are responsible for the assessment of the company s and the group s ability to continue as a going concern. They disclose, as applicable, matters related to going concern and using the going concern basis of accounting. The going concern basis of accounting is however not applied if the Board of Directors and the Managing Director intends to liquidate the company, to cease operations, or have no realistic alternative but to do so. Auditor s responsibility Our objectives are to obtain reasonable assurance about whether the annual accounts and consolidated accounts as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinions. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs and generally accepted auditing standards in Sweden will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these annual accounts and consolidated accounts. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the annual accounts and consolidated accounts, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinions. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of the company s internal control relevant to our audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the Board of Directors and the Managing Director. Conclude on the appropriateness of the Board of Directors and the Managing Director s use of the going concern basis of accounting in preparing the annual accounts and consolidated accounts. We also draw a conclusion, based on the audit evidence obtained, as to whether any material uncertainty exists related to events or conditions that may cast significant doubt on the company s and 120 AUDITOR S REPORT LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

123 the group s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the annual accounts and consolidated accounts or, if such disclosures are inadequate, to modify our opinion about the annual accounts and consolidated accounts. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause a company and a group to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the annual accounts and consolidated accounts, including the disclosures, and whether the annual accounts and consolidated accounts represent the underlying transactions and events in a manner that achieves fair presentation. Obtain sufficient and appropriate audit evidence regarding the financial information of the entities or business activities within the group to express an opinion on the consolidated accounts. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our opinions. We must inform the Board of Directors of, among other matters, the planned scope and timing of the audit. We must also inform of significant audit findings during our audit, including any significant deficiencies in internal control that we identified. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Opinions In addition to our audit of the annual accounts and consolidated accounts, we have also audited the administration of the Board of Directors and the Managing Director of Luossavaara-Kiirunavaara AB (publ) for the financial year and the proposed appropriations of the company s profit or loss. We recommend to the general meeting of shareholders that the profit to be appropriated in accordance with the proposal on page 99 and that the members of the Board of Directors and the Managing Director be discharged from liability for the financial year. Basis for Opinions We conducted the audit in accordance with generally accepted auditing standards in Sweden. Our responsibilities under those standards are further described in the Auditor s Responsibilities section. We are independent of the parent company and the group in accordance with professional ethics for accountants in Sweden and have otherwise fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinions. Responsibilities of the Board of Directors and the Managing Director The Board of Directors is responsible for the proposal for appropriations of the company s profit or loss. At the proposal of a dividend, this includes an assessment of whether the dividend is justifiable considering the requirements which the company s and the group s type of operations, size and risks place on the size of the parent company s and the group s equity, consolidation requirements, liquidity and position in general. The Board of Directors is responsible for the company s organization and the administration of the company s affairs. This includes among other things continuous assessment of the company s and the group s financial situation and ensuring that the company s organization is designed so that the accounting, management of assets and the company s financial affairs otherwise are controlled in a reassuring manner. The Managing Director shall manage the ongoing administration according to the Board of Directors guidelines and instructions and among other matters take measures that are necessary to fulfill the company s accounting in accordance with law and handle the management of assets in a reassuring manner. Auditor s responsibility Our objective concerning the audit of the administration, and thereby our opinion about discharge from liability, is to obtain audit evidence to assess with a reasonable degree of assurance whether any member of the Board of Directors or the Managing Director in any material respect: has undertaken any action or been guilty of any omission which can give rise to liability to the company, or in any other way has acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. Our objective concerning the audit of the proposed appropriations of the company s profit or loss, and thereby our opinion about this, is to assess with reasonable degree of assurance whether the proposal is in accordance with the Companies Act. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with generally accepted auditing standards in Sweden will always detect actions or omissions that can give rise to liability to the company, or that the proposed appropriations of the company s profit or loss are not in accordance with the Companies Act. As part of an audit in accordance with generally accepted auditing standards in Sweden, we exercise professional judgment and maintain professional scepticism throughout the audit. The examination of the administration and the proposed appropriations of the company s profit or loss is based primarily on the audit of the accounts. Additional audit procedures performed are based on our professional judgment with starting point in risk and materiality. This means that we focus the examination on such actions, areas and relationships that are material for the operations and where deviations and violations would have particular importance for the company s situation. We examine and test decisions undertaken, support for decisions, actions taken and other circumstances that are relevant to our opinion concerning discharge from liability. As a basis for our opinion on the Board of Directors proposed appropriations of the company s profit or loss we examined whether the proposal is in accordance with the Companies Act. Stockholm, March Deloitte AB Peter Ekberg Authorized Public Accountant LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 AUDITOR S REPORT 121

124 MINERAL RESERVES AND MINERAL RESOURCES Mineral reserves and mineral resources are the basis of a mining company s operations and their determination requires successful exploration. In addition to exploration, mining costs and ore prices are important factors which influence the size of mineral reserves and mineral resources. Exploration takes place in areas adjacent to existing mines and in new areas. With airborne geophysical surveys large areas with potential mineralizations can be mapped within a short period of time. 122 MINERAL RESERVES AND MINERAL RESOURCES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

125 LKAB s exploration efforts during the past 10 years have resulted in considerable increases in both mineral resources and mineral reserves, above all, in the operating open-pit mines of the Svappavaara field. Focus will now be placed on improving the basis for production planning and increasing knowledge of the mineral resources in existing open-pit mines and underground mines prior to decisions with respect to future main levels. MINERAL RESERVES AND MINERAL RESOURCES 2016 Each year LKAB presents a summary of its mineral resources and mineral reserves. Estimates and summaries are made in accordance with recommendations from the Swedish minerals and metals trade association SveMin. Kiruna Quantity, Mt Malmberget Quantity, Mt Kiruna The exploitation concession Kiirunavaara K No. 5 has been granted and 70 Mt previously measured or indicated mineral resources has therefore been upgraded to proven mineral reserves. The mineral resource has been reduced after critical review of previous estimates. Gruvberget Quantity, Mt Malmberget There have been minor changes in mineral reserves and mineral resources. The first ore estimates after test drilling at greater depth have been made and the drill-hole spacing analysis shows only inferred mineral resources Leveäniemi Quantity, Mt Gruvberget magnetite The mineral reserve is decreasing as mining progresses and the open pit will be mined out during The mineral resource consists partly of a mineralization accessible via a southerly extension of the existing open pit and partly of a mineralization under the open pit. In estimating the mineral resource, underground sublevel caving has been assumed. Leveäniemi The geological model, block model and production block model have been revised during the year. This has resulted in marginal changes in both mineral reserves and mineral resources, and in grades that correspond better with yields. Mertainen A decision to mothball Mertainen has been taken; therefore, no mineral reserve is reported. Further supplementary core drilling and subsequent modelling indicate an increase in the mineral resource. Gruvberget hematite No investigative work with respect to mineral reserves or mineral resources has been conducted during the year. An acceptable process concept is lacking. Summary LKAB s mineral reserves, which amount to more than one billion tonnes, have increased by a quantity corresponding to just over one year s production volume. Mineral resources have increased by about the same amount Mertainen Quantity, Mt Quantity, Mt Gruvberget hematit Proven/Probable Mineral Reserve Inferred Mineral Resource Measured/Indicated Mineral Resource Production LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINERAL RESERVES AND MINERAL RESOURCES 123

126 MINERAL RESERVES AS OF 31 DECEMBER 2016 (TO SORTING PLANT) Quantity, Mt Percent, Fe Kiruna Proven Probable Malmberget Proven Probable Gruvberget Proven Probable Leveäniemi Proven Probable MINERAL RESOURCES BESIDES MINERAL RESERVES AS OF 31 DECEMBER 2016 (TO SORTING PLANT) Quantity, Mt Percent, Fe Kiruna Measured Indicated Inferred Malmberget Measured Indicated Inferred Gruvberget magnetite Measured Indicated Inferred Leveäniemi Measured Indicated Inferred Mertainen Measured Indicated Inferred Gruvberget hematite Measured Indicated Inferred DEFINITIONS Classification Mineral resources and mineral reserves are estimated separately and divided into different categories. LKAB s mineral reserves are not included in the mineral resources. When mineral resources are upgraded to mineral reserves, the quantity is subtracted from mineral resources. A mineral resource is a concentration or occurrence of material of intrinsic economic interest in or on the earth s crust in such form, quality and quantity that there are reasonable prospects for eventual economic extraction. Mineral reserves are subtracted from that part of measured or indicated mineral resources that can be mined once the company s profitability requirements have been met, while considering factors such as the quantity of waste rock mixed with mined ore, ore losses and yields. Inferred mineral resources Inferred mineral resource is that part of a mineral resource for which tonnage, grade and mineral content can be estimated with a low level of confidence. It is inferred from geological evidence and assumed but not verified geological/or grade continuity. It is based on information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. This information may be of limited or uncertain quality and reliability. Indicated mineral resources Indicated mineral resources are mineral resources for which estimates of contained metal, grade and tonnage have been made at a reasonable level of confidence. It is indicated from geological evidence and assumed but not verified geological/or grade continuity. It is based on information gathered through appropriate techniques for prospecting, sampling and testing. However, the data points are too sparsely or inappropriately distributed to ascertain the continuity of the geology and/or grade. Measured mineral resources Measured resources are mineral resources for which tonnage, shape, grade and mineral content can be estimated with a high level of confidence. It is based on information gathered through appropriate techniques for prospecting, sampling and testing. The data points are sufficiently dense to verify the continuity of the geology and/or grade. Probable mineral reserves A probable mineral reserve is the part of indicated, and in some circumstances, measured mineral resources, that can be mined and processed in an economically viable fashion, based on the company s mining engineering and feasibility studies. Proven mineral reserves A proven mineral reserve is the part of measured mineral resources that can be mined and processed in an economically viable fashion, based on the company s mining engineering and feasibility studies. 124 MINERAL RESERVES AND MINERAL RESOURCES LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

127 Basis for estimates LKAB has the requisite environmental permits and exploitation concessions for all mines currently operated by the company. Mineral resources are protected by exploitation concessions or exploration permits. Estimates are made on the basis of the following factors: Metal prices Mineral resources and mineral reserves provide a basis for the company s long-term planning and will be mined for many years to come. Therefore, a planning price is used, which is an expected average price for iron ore and currencies over the coming business cycle. Density For iron ores, which are LKAB s mineral resources and mineral reserves, an equation based on the content or the ores is used. The calculation is verified with density measurements. In other cases, tests/measurements are done for the different ores or minerals which affect the density. Dilution In mining, a certain quantity of waste rock is mixed with the mined ore. This varies in degree depending on mining method, orebody geometry and other geological factors. LKAB systematically monitors the quantity of waste rock mixed with mined ore and this data is included in all estimates of mineral reserves. Ore losses Depending on the mining method employed, orebody geometry and other technical factors, some sections of the ore must be left in the mine. In the mineral reserves estimates these factors, based on the probable mining methods and current knowledge at the time of estimation, have been taken into consideration. Standards, codes and recommendations LKAB s mineral reserves and mineral resources have been estimated and compiled in accordance with recommendations from the Swedish trade association for mining and metals companies, SveMin, the so-called FRB standard. This is an independent set of recommendations but it is based on the International Template for the Public Reporting of Exploration Results, Mineral Resources and Mineral Reserves, July 2006, produced by the Committee for Mineral Reserves International Reporting Standards (CRIRSCO) in an effort to harmonize international reporting practice. The FRB standard therefore complies with international recommendations such as the Australasian Institute of Mining and Metallurgy s JORC Code and CIM Standards on Mineral Resources and Mineral Reserves, Definitions and Guidelines, which corresponds to sections of the Ontario Securities Commission s (OSC) National Instrument , which stipulates how mineral reserves and mineral resources are to be reported. Mineral reserves and mineral resources compiled and presented in this report have been reviewed and approved by Håkan Selldén, Mineral Rights Specialist, LKAB. Håkan Selldén is a Qualified Person accredited by SveMin. March 2017 Håkan Selldén Qualified Person accredited by SveMin LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 MINERAL RESERVES AND MINERAL RESOURCES 125

128 TEN-YEAR OVERVIEW INCOME STATEMENTS (SEK MILLION) Net sales 16,343 16,200 20,615 23,873 26,971 31,122 28,533 11,558 23,128 16,385 Cost of goods sold -17,116-22,280-18,781-14,994-15,183-15,190-15,276-10,029-12,166-9,509 Gross profit ,080 1,834 8,879 11,788 15,932 13,257 1,529 10,962 6,876 Selling expenses Administrative expenses Research and development expenses Other operating income/expenses Operating profit -1,677-7, ,639 10,589 14,705 12, ,327 6,148 Financial income Financial expenses Profit before tax -1,063-7, ,768 10,977 14,801 12,381 1,192 10,389 6,344 Tax 85 1, ,736-2,224-3,842-3, ,748-1,665 Profit for the year , ,032 8,753 10,960 9, ,641 4,679 Attributable to: Parent company shareholders , ,032 8,753 10,960 9, ,641 4,679 Planned depreciation on property, plant and equipment 2,746 2,800 2,865 2,432 1,952 1,891 1,821 1,812 1,452 1,168 BALANCE SHEETS (SEK MILLION) Intangible fixed assets Property, plant and equipment 34,085 34,697 39,529 33,759 30,315 26,285 23,087 21,551 19,893 16,702 Financial fixed assets 1, ,018 1,197 1,120 1,124 1,675 1,827 1,094 2,416 Total fixed assets 35,461 35,558 40,775 35,213 31,712 27,679 25,083 23,688 21,415 19,447 Inventories 2,836 2,915 2,253 2,611 2,493 2,449 2,074 2,301 2,715 1,635 Accounts receivable 2,094 1,320 1,908 3,291 3,060 4,593 3,395 2,276 1,946 1,922 Other receivables 3,340 1,674 1,037 1,210 2, ,515 1, Cash & cash equivalents and current investments 13,895 14,561 16,861 15,497 18,672 18,201 14,562 6,195 9,643 5,991 Total current assets 22,165 20,470 22,359 22,609 26,232 26,051 21,546 11,867 14,916 10,233 Total assets 57,626 56,028 63,133 57,822 57,944 53,730 46,629 35,555 36,331 29,680 Total operating assets 42,567 40,820 45,254 41,128 38,151 34,405 30,392 27,533 25,594 21,273 Equity 1 30,551 32,116 37,756 41,472 41,085 37,335 32,951 25,375 25,218 22,251 Non-current liabilities 17,740 17,900 18,402 11,670 12,485 11,933 9,555 7,512 6,836 4,963 Current liabilities 9,335 6,011 6,976 4,680 4,374 4,462 4,123 2,668 4,275 2,466 Total equity and liabilities 57,626 56,028 63,135 57,822 57,944 53,730 46,629 35,555 36,329 29,680 CASH FLOW ANALYSES Cash flow before payment of urban transformation and pension funds and changes in working capital Urban transformation payments NA NA NA NA Payment to pension funds Changes in working capital Cash flow from operating activities Investment in existing activities Disposal Operating cash flow Acquisition of companies and intangible assets Acquisition / disposals in current investments Change financial assets Cash flow after investments Borrowing Dividend Cash flow for the year Deliveries, Mt 27,0 24,2 26,0 25,5 26,3 25,7 26,0 18,7 22,7 25,1 Deliveries pellets, % 84,0 83,9 83,2 82,8 83,6 81,7 80,1 76,5 79,0 71,3 KEY FIGURES FOR THE GROUP Net sales, SEK million Growth in net sales, % 0,9-21,4-13,6-11,5-13,3 9,1 146,9-50,0 41,2 12,1 Operating margin, % -10,3-44,2 2,8 32,0 39,3 47,2 43,2 5,7 44,7 37,5 Profit margin, % -6,5-44,9 2,9 32,5 40,7 47,6 43,3 10,3 44,9 38,7 Return on total capital, % -1,4-11,5 1,8 14,3 20,3 30,3 31,0 3,8 33,0 24,2 Return on equity, % -3,1-16,3 0,9 14,7 22,2 30,9 31,5 2,8 32,2 22,6 Return on operating assets, % -4,0-16,6 1,4 19,3 29,2 45,4 42,4 2, Equity/assets ratio, % 53,0 57,3 59,8 71,7 70,9 69,5 70,7 71,4 69,4 75,0 Average number of employees Adjustment 2011 for changed reporting (net) of remediation expenses. 2 Reported on own row of cash flow analysis from Definitions Operating assets: Tangible and intangible fixed assets, Inventories, Accounts receivable, Other receivables. Non-financial assets, cash & cash equivalents and current investments. Operating liabilities: Total liabilities reduced by deferred tax in untaxed reserves, deferred tax liabilities and non-current liabilities. Growth in net sales: Change in net sales as a percentage of the previous year s net sales. Operating margin: Operating profit as a percentage of net sales. Profit margin: Profit after financial items as a percentage of the year s net sales. Return on total capital: Profit after financial items + financial expenses as a percentage of average balance total. Return on equity: Profit for the year according to the income statement as a percentage of average equity. Return on operating assets: Operating profit as a percentage of average operating assets. Equity/assets ratio: Equity as a percentage of total assets. 126 TEN-YEAR OVERVIEW LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

129 TERMS AND DEFINITIONS ARBITRARY ACT: A case in which an employee who knowingly breaches the terms of an employment contract is subject to legal action. BARREN ROCK: Barren rock is a collective term for waste rock surrounding an ore. BLAST FURNACE PELLETS: Iron ore pellets that are reduced to crude iron in a steelworks blast furnace. BENCH MINING: A method for mining ore in open-pit mines. CONCENTRATION: Beneficiation of finely ground ore by separation into a concentrate of iron ore powder with very high purity, so-called slurry. CORRUPTION: The abuse of entrusted power by an employee for private gain. CRUDE ORE: Designation for input to ore processing plants. CRUDE IRON/HOT METAL: Molten iron from a blast furnace that is subsequently refined in a steelworks. CRUSHED ORE: The untreated ore broken loose from the deposit. DEFORMATION ZONE: Ground area affected by subsidence due, for example, to mining. Deformation zone boundaries are defined at the point where seismic instruments first indicate disturbance. DIRECT REDUCTION PELLETS: DR pellets, iron ore pellets adapted for reduction with natural gas to DRI, which is used to produce steel in an electric arc furnace. DRI, direct reduced iron: (Sponge iron). Input material for steelmaking in an electric arc furnace. GRI: Global Reporting Initiative, international guidelines for sustainability reporting. HOT-ROLLED COIL (HRC): One of the most common flat steel products, manufactured in large volumes and in varying widths and thicknesses. INDICATORS: Quantifiable key values as defined by the GRI sustainability areas Economy, Environment, and Society. LANDFILL: Area in which materials such as tailings or waste rock are stored indefinitely. LARGE-SCALE SUBLEVEL CAVING: A cost-effective method for mining ore underground. MAIN LEVEL: Main haulage level in an underground mine from which ore is transported to surface level via skip hoists. ORE: A mineral that is deemed profitable to mine. ORE YIELD: The ratio between the recovered crude ore and the theoretical quantity of intact ore in the ground. PELLETIZING: Process whereby slurry is mixed with binder and rolled together into green balls. The balls are sintered in a pelletizing plant. The finished product is pellets. PERFORMANCE IN IRONMAKING: LKAB s promise to customers. SEISMIC EVENT: Rock tremor, earthquake. SINTERING: Heating of fine-grained ore (fines) until it starts to melt. The ore is then fused (sintered) into lumps (sinter) that can be used in a blast furnace. SORTING: Rough sorting, crushing and screening to separate waste rock and increase the iron concentration of the ore. VALUES: LKAB s values: Committed, Innovative and Responsible. WASTE GENERATED IN OPERATIONS: Material that is landfilled; in LKAB s case, consisting largely of rock that is not ore. WASTE ROCK: Waste rock is collective term for the rock that is not ore. MINERALS HEMATITE: Mineral, iron ore (Fe2O3), also known as bloodstone, with non-magnetic properties. MICA: A mineral that is used in a variety of applications, including reinforcement and thermal insulation in plastics and as a decorative material in ceramics. HUNTITE: Mineral that can be used for example as halogen-free flame-retardant additive in plastics and cable. MAGNETITE: Mineral, magnetic iron ore (Fe3O4), also known as black ore which, in refined form, is used for iron and steelmaking. Other applications for magnetite include water purification, noise and vibration dampening and as ballast in highdensity concrete. OLIVINE: A mineral that is used as an additive in the manufacture of blast furnace pellets. UNITS AND ABBREVIATIONS g: Gram GWh: Gigawatt hour kg: Kilogram kt: Kilotonne kwh: Kilowatt hour m3: Cubic metre mg: Milligram mg/m3 NDG: Milligram per normal cubic metre dry gas MSEK: Million Swedish kronor Mt: Million tonne TJ: Terajoule TWh: Terawatt hour LKAB ANNUAL AND SUSTAINABILITY REPORT 2016 TERMS AND DEFINITIONS 127

130 INFORMATION AGM DATE LKAB s Annual General Meeting will be held on 27 April 2017, at 3.00 p.m. in Luleå, Sweden. PARTICIPANTS The AGM is open to the public. NOTICE TO ATTEND Notice to attend the AGM, financial information and other information, is available on LKAB s website, lkab.com. Printed financial information may be ordered by at info@lkab.com. A printed version of the Annual and Sustainability Report will be availabe from 27 April FINANCIAL INFORMATION INTERIM REPORTS 27 April Interim Report, 1st Quarter August Interim Report, 2nd Quarter October Interim Report, 3rd Quarter 2017 February 2018 Interim Report, 4th Quarter 2017, together with Year End Report 2017 CONTACTS Please direct any questions regarding LKAB s financial information to Peter Hansson, Senior Vice President, Finance and/or Jan Moström, President and CEO Please direct any questions regarding LKAB s Sustainability Report to Grete Solvang Stoltz, Senior Vice President, HR and Sustainability LKAB ADDRESSES LKAB Group Head Office Box 952 SE Luleå, Sweden Tel Fax info@lkab.com Jan Moström, President and CEO Further addresses available at LKAB s website, lkab.com. 128 INFORMATION LKAB ANNUAL AND SUSTAINABILITY REPORT 2016

131 LKAB s competitiveness is based on the capacity to deliver high-quality iron ore products to customers with high product requirements. Björn Åström - General Manager, Projects. LKAB s Annual and Sustainability Report 2016 is produced by LKAB in cooperation with Rippler Communications and Berger & Pihl. Translation: Språkbolaget. Photos: Fredric Alm and Runar Guðmundsson, Alm & ME, Tonje Rønnevig and LKAB. Printing: Lule Grafiska. 129