annual report 05 - lkab · 2017-06-03 · ported as part of liquid assets. in-stead, they are...

F O R S K N I N G O C H U T V E C K L I N G

L K A B Å R S R E D O V I S N I N G 2 0 0 5 4

ANNUAL REPORT

05

A N I N T E R N AT I O N A L H I G H - T E C H M I N E R A L S G R O U P



LKAB in briefLKAB is an international high-tech minerals group,

a world-leading producer of upgraded iron ore pro-

ducts for the steel industry and a growing supplier

of industrial minerals products to other sectors.

Most of the iron ore products are sold to European steelmills. Other important markets are North Africa, the Middle East and Southeast Asia. Sales of industrial minerals are mainly to custo-mers in Europe, but Asia and the USA are growing markets. The LKAB Group has more than 3,500 employees and consists of about 30 companies in 15 countries. There are iron ore mi-nes, processing plants and ore harbors in northern Sweden and northern Norway, and sales companies in Belgium, Germany and Singapore. Companies and production facilities for industrial minerals are located in Sweden, Finland, Greenland, the UK, Germany, the Netherlands, Greece, Turkey, Thailand, Hong Kong, China and the USA.

MISSION

LKAB’s mission is, based on the Swedish Orefi elds, to manufac-ture and deliver to the world market upgraded iron ore products and services that create added value for its customers. Other closely related products and services that are based on LKAB’s know-how and support the main business can also be included in the company’s operations.

VISION

LKAB will be perceived by the customers as the supplier that provides the most added value and is thereby the leader in its selected market segments.

OWNERSHIP AND MANAGEMENT

LKAB is wholly owned by the Swedish state, represented by the Ministry of Industry, Employment and Communications. Chair-man of the Board: Björn Sprängare. President and Group CEO: Martin Ivert

ORGANIZATION

Operations are organized in divisions:The Market Division sells iron ore products to the steel industry.

The Mining Division mines and upgrades iron ore and delivers iron ore products.

The Minerals Division develops, produces and marketsindustrial mineral products.

The Special Businesses Division supports Group companies with services and technical development.

Cover photo:Ice sculpture of the new ore caroutside Icehotel, Jukkasjärvi.

Contents 3 Summary

4 President’s report

6 Strategies

10 Divisional operations

18 Markets and competition

20 Investments and development projects

24 Prospecting, ore reserves and mineral

resources

26 Sustainability

38 Risks and risk management

40 Group overview

41 Report of the Directors

100 Auditors’ report

101 Corporate governance

106 Board of Directors and Auditors

108 Group Management

110 Addresses

111 Reporting dates 2006

Two generations of pelletizing plants in Malmberget. The steel belt plant (left) was built in 1973, and right, the new MK3, under construction.

Highlights of 2005• World production of crude steel increased by 6% and

trade in seaborne iron ore by 12%. Iron ore prices in-creased by 70-80%.

• LKAB’s production of iron ore products increased by1 million tonnes to 23.3 Mt. The price of LKAB’s blastfurnace pellets increased by 85%. Sales of industrialminerals increased by 35%.

• The Group’s net sales increased by 60% to MSEK 14 337 (8 988). The profi t margin increased to 45%. Return on equity amounted to 36.6%.

• Approved and ongoing capital expenditures totaling10 billion kronor for increased pellet production capacity in Kiruna and Malmberget as well as a new ore harbor in Narvik.

• Start of olivine mining in Greenland, and of a production facility for mica in Finland.

• Certifi ed quality management system throughout the en-tire group. Ongoing certifi cation of the environmental and energy management systems.

• Start of LKAB high school in the Orefi elds communities.

LINES OF BUSINESS

MSEK Mining** Minerals Special Eliminations, Division Division Businesses adjustments Group

External revenue 12 191 2 018 128 14 337

Intra-Group revenue 158 141 963 -1 262

Total revenue 12 349 2 159 1 091 -1 262 14 337

Operating income 5 720 148 100 141 6 109

– operating margin, % 46.3 6.9 9.2 42.6

NET SALES AND OPERATING INCOME

EARNING CAPACITY

EXTERNAL SALES PER DIVISION 2005

SALES PERMARKET REGION 2005Both iron ore products and industrialminerals are sold mainly to customersin Europe, but Minerals’ sales aregrowing in Asia.

0

3 000

6 000

9 000

12 000

15 000

0504030201

Net sales Operating income

MSEK

** Market Division’s sales included in sales for Mining Division.

GROUP SUMMARY

MSEK 2005 2004

Net sales 14 337 8 988

Operating income 6 109 1 941

– operating margin, % 42.6 21.6

Income after fi nancial items 6 451 2 023

– profi t margin % 45.0 22.5

Tax -1 904 -456

Net income for the year 4 547 1 567

Fixed assets 9 798 6 746

Current assets 10 776 6 911

Shareholders’ equity 14 802 10 044

Cash fl ow for the year * 544 -176

Return on equity, % 36.6 16.5

Equity/assets ratio, % 72.0 73.6

Capital expenditures 2 648 965

Average number of employees 3 563 3 482

* According to IFRS, certain short-term investments cannot be re-ported as part of liquid assets. In-stead, they are reported as part of investing activities. During the year, MSEK 1 846 (1 748) has beenplaced in short-term investments.

The price increase on iron ore products increased the Mining Division’s share of the Group’ssales. Earnings for Special Busi-nesses derive mainly from Intra-Group sales.

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Driven by demand from China, the iron ore market saw continued strong growth. There was a shortage of ore, which meant dramatic price increases of 70 to 80%. The price increases are, of course, the main reason for the strong earnings trend and the boost in sales for the Min-ing Division.

The Minerals Division has also seen positive develop-ment, not least in China. During 2005, mining of olivine commenced in Greenland. Olivine sales complement the iron ore business and have attracted great market interest.

Three years ago, we set a goal for the Mining Division. By 2006, we would produce 23 million tonnes (Mt) of iron ore products per year – without appreciable increases in capital expenditures and with the same number of em-ployees. The division reached this target in 2005, produc-ing 23.3 Mt, which exceeded the previous year’s produc-tion by 1 Mt.

Despite the pressure to meet demand, costs have been kept under control, a factor that has also contributed to the positive outcome. At the same time, we managed to maintain a high degree of service to our customers, which is important, since quality and service are two of our key competitive factors.

CLEAR GROWTH STRATEGY, STRONG BELIEF

IN THE FUTURE

For the Mining Division, we have a clearly defi ned stra-tegy based on the product that gives us the greatest com-petitive advantage: pellets. The strategy is scrutinized and revised each year, a process which has led during the past year to several major investment decisions.

Fifty years ago, LKAB built the fi rst pelletizing plant in Malmberget. The route that was then chosen proved to be a prerequisite for the company’s long-term survival. The focus on pellets has meant that LKAB has been able to stay in the competitive game, despite higher costs in comparison to those of open-pit mining operations in Bra-zil and Australia.

In late-2004, the Board took the decision to invest 2.6 bil-lion kronor in a new pelletizing plant in Malmberget that was to be operational at the turn of the year 2006/2007. The project has progressed well, and the production start-up will be about two months earlier than planned. This is particularly positive, considering the prevailing market situation.

At the same time, plans have been drawn up for a new pelletizing plant in Kiruna. In December 2005, the Board approved an investment of 6.4 billion kronor and a

President’s reportWith record-high production and earnings, 2005 was a fantastic year for LKAB.

A return on equity of 36.6% exceeds the return requirement of 12% measured

over a business cycle, by a wide margin. Targets for volumes, earnings and

profi tability throughout the Group were also reached.

planned production start-up during the fi rst half of 2008. In the long term, this implies an increase in production capacity from a current 23 Mt to 30 Mt.

Two thirds of our deliveries are shipped via the harbor in Narvik. To improve effi ciency and environment, this fa-cility will be rebuilt at a cost of nearly 1 billion kronor. To-taling 10 billion kronor, these three investment decisions send a clear message to our customers that we are willing and able to meet their volume demands.

FOCUS ON PRODUCTION AND MAINTENANCE

The strategy for the Mining Division is to develop pellet manufacture in terms of both volume and quality. Produc-tion increased in 2005 to 16.5 (16.0) Mt. Several produc-tion units set new volume records while maintaining or improving the level of quality.

A few years ago, we began a maintenance-improve-ment program that has subsequently become a very stra-tegically important activity. Developments in the past year have confi rmed that we chose the right path. The aim is to stabilize manufacturing at a higher production level, which will mean greater productivity, better quality, bet-ter delivery service and, not least, an improved working environment.

INDUSTRIAL MINERALS, COMPLEMENTARY BUSINESS

The Minerals Division has continued its investment in industrial minerals. Olivine mining has commenced in Greenland, and the fi rst deliveries have been shipped to customers and to our own pellet plants.

Sales of magnetite to non-steel customers are also growing. Access to suffi cient quantities is the limiting fac-tor, which is why it is strategically important to secure vol-umes for the Minerals Division.

COMMON VALUES AND SYSTEMS

In recent years, LKAB has grown from a Swedish iron ore producer into an international minerals group with global operations. The Board has adopted several policies that have been communicated throughout the Group. The in-tention is to make LKAB a group with shared values.

We have also decided to introduce a joint way of work-ing throughout the Group and to improve the effi ciency of administrative processes. The fi rst step is to implement a standardized business management system. Starting in the fi rst half of 2006, this will be rolled out through the entire Group.

P R E S I D E N T ` S R E P O R T

L K A B A N N U A L R E P O R T 2 0 0 5

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CertifiCAtion of quALity And environmentAL mAnAgement

Aswesee it,quality isnotonlyaquestionof technicalquality;italsoentailscontinuousimprovementinallas-pectsandwiththecommitmentofallemployees.Despitethegreatpressureonproduction,thequalityofourprod-uctshas improvedandwehavestrengthenedourposi-tionasaquality-leadingcompany.

The quality effort is largely a matter of maintaininggood order and following clearly-defined procedures.During2005,allofourISO9001certificateshavebeenre-assessedandapproved.

CertificationofourISO14001environmentalmanage-ment system began during the year. Our operations inSvappavaaraandourlogisticsoperation,whichincludesrailwaysandharbors,havebeencertified.Thegoalistoachieve full certification for the Group by 2007. At thesame time, implementation of an energy managementsystem according to a new Swedish standard began.Here,Svappavaarawasthefirstindustrialoperationinthecountrytobecertified.

Our organization is heavily burdened by the fact thatourproductionapparatusisoperatingunderpressureofgreatdemandatthesametimeasweareimplementingmajor investments and introducing new managementsystems.Thatwearesucceedingisindicativeofourde-termination,capabilityandcommitment.Iamverysatis-fiedwiththetotaleffort.

A sAfer, heALthier LKAB

Severalyearsago,weraisedourtargetsforimprovedoc-cupationalhealthandsafetyandaccident-freeworkplac-es.Zeroaccidentsistheundisputedgoal.

The driving force is, of course, consideration for thewellbeingofouremployees;butwealsowant tobeanattractivecompany for futureco-workers.Manypeople,notleastofallyoungpeople,considertheminingindus-trytobehazardous.Ifwearetosucceedincompetingforthebestpeopleinthelabormarket,wemustdispelthisreputation.

For2005,wesetthetargetoffewerthan10accidentsper million working hours. We reduced the number to10.5,whichishalfasmanyaccidentsastherewereade-cadeago.Thefiguresaremoving in the rightdirection,butnotquitequicklyenough.

Absenteeism due to illness has also been given a lotofattention,andhere, too,wearewitnessingahealthi-ertrend.Duringthepastthreeyears,therateofsicknessabsencehasfallenfrom6.2to4.3%.Short-termabsenceduringthepastyearwas2.4%.Inthisregard,LKABhasbecomeahealthiercompany.

ControL viA Key rAtios And inCentives

Two years ago, we abandoned the traditional budgetmethod in favorofasystembasedon12-monthrolling

forecasts thatarerevisedaftereachquarterandcontrolviakey ratios.Tobeable tomanage thecompanyopti-mally,thesystemofcontrolviakeyratiosisrefinedonanongoingbasis.

By “taking the company’s temperature” in differentwaysaftereachshift,dailyandweekly,weareabletode-termineifweareontherightcourseorwhetheradjust-mentshavetobemade.Thisapproachisfundamentallyimportant for developing a future, modern organizationinwhichresponsibilitiesandauthorityaredelegated.Byimplementingkey-ratiocontrol,wecanalsobreakdownourstrategiesandtherebygainacceptanceforthemwith-intheorganization.

Ourincentiveprogramwasmodifiedin2005tosupportthismanagementprocess.Thisisbasedonhowwellwemeetourproductionandqualitytargetsandhowwellwesucceedinourefforttoimproveoccupationalhealthandsafety.The important thing is thatallofouremployeescaninfluencetheseparameters.

The maximum reward is 30 000 kronor per year andfull-time employee. For 2005, the reward amounted to27000kronor,whichisagoodmeasureofouremployees’success.

the outLooK for 2006

WeforeseecontinuedpositivetrendsforalloftheGroup’slinesofbusiness,bothinthecomingyearandinthelongterm.

GrowthisstronginAsia,incountrieswithlargepopula-tions, where infrastructural expansion, housing construc-tion,etc.,requiresmuchsteel.Thismeansthatwearenowadaptingtothenewglobalmarketsituationthathasarisen.

Certainly, the iron ore and metal markets will fluctu-ateinthefuture,butourassessmentisthatthiswilltakeplaceatahigherlevelthanpreviously,andthattotalcon-sumptionwillremainhigh.

p r e s i d e n t ´ s r e p o r t

L K A B A n n u A L r e p o r t 2 0 0 5

MartinIvertPresident

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It was found that the company’s most important assets are the magnetite ore of the Orefi elds and the knowledge and expertise in production processes and products that has been amassed over the years. There are suffi cient ore reserves to ensure mining far into the foreseeable future; just how long the operation will continue is more a ques-tion of economics than of technology. The fundamental business concept, LKAB’s corporate mission, is essential-ly unchanged, but it has been updated and approved by the Board.

MISSION

LKAB’s mission is, based on the Swedish Orefi elds, to manufacture and deliver to the world market upgraded iron ore products and services that create added value for its customers. Other closely related products and services that are based on LKAB’s know-how and support the main business can also be included in the company’s opera-tions.

VISION

LKAB will be perceived by the customers as the supplier that provides the most added value and is thereby the leader in its selected market segments.

POLICIES

An important aspect of the strategy review was to estab-lish policies for quality management, environmental and energy management and ethics. These have subsequent-ly been clearly communicated throughout the Group. Dur-ing 2005, an information policy was established.

THE STRATEGIC PROCESS

The strategic plan is based on a thorough, annual busi-ness-intelligence analysis of markets and product, pro-cess and technological development. In addition, the company’s strengths, weaknesses, threats and opportuni-ties are analyzed. The entire process results in the strat-egy document that is adopted by the Board at the Decem-ber meeting.

The strategy document contains various business-in-telligence analyses and the conclusions that have been reached, all of which are expressed as a number of con-crete strategic activities. Finally, the strategy is comple-mented with fi nancial forecasts and simulations.

An important aspect of the management of operations

StrategiesDuring 2002 and 2003, LKAB’s mission, vision and strategies were

subjected to a thorough review. This review resulted in an annual

strategy process, which is revised in December when the Board

establishes a new rolling plan for the coming three years.

is that the strategy be broken down into activities that can be realized at different points within the organization. This is done in conjunction with the rolling prognoses that are revised after each interim report. Together with the rel-evant business-ratio control, this makes for a more dy-namic process than the classic budgetary control method that was formerly applied.

Each year, on about 20 occasions, the president gives presentations for employees in Sweden and Norway, out-lining the strategy and the current status of the various activities. Achieving consensus in this way is a very con-siderable undertaking, but when introducing a new strat-egy, one of the greatest obstacles is a lack of awareness or understanding among employees.

The general assessment is that demand for iron ore products will remain high in the coming years. This has created market conditions that will allow LKAB to grow by investing in, among other things, new pelletizing plants and main levels.

Exploration drilling in both Kiruna and Malmberget has indicated greater mineral resource potential at depth, which is, of course, a prerequisite for continued opera-tion. In Kiruna, particularly, the mineralization at depth is high-grade, wide and with low impurity content.

Another important factor is that LKAB can take advan-tage of the strong fi nancial platform upon which it now stands. The earnings trend shows that the company is ca-pable of fi nancing its extensive program of growth, pro-vided the current dividend policy is maintained.

LKAB will continue to have high fi xed costs in the form of depreciation and amortization. Self-fi nancing of capital expenditures allows the company to avoid the fi xed costs that are associated with borrowing.

According to the above reasoning, LKAB’s fi nancial strategy can best be expressed as: maintaining a high eq-uity-assets ratio that will enable self-fi nancing of capital expenditures while retaining a buffer to alleviate the ef-fects of a possible cyclical downturn.

OVERALL GROUP STRATEGY

The LKAB Group’s overall strategy can be summarized as follows:• Maintain a niche strategy based on pellets as the product,

with added value for the customer. Pellets give us consid-erable competitive and environmental advantages.

• Full utilization of production capacity. For reasons per-

S T R AT E G I E S


7

taining to cost and quality, the facilities now in opera-tion will be run at full capacity. A program is now under way to enable greater production fl exibility, i.e., shift production between different plants in the event of an economic downturn.

• Volume growth through better utilization of plant and human resources (lean growth). This program, based on an intensive maintenance effort, has been very suc-cessful in recent years.

• Selective and ongoing ‘lean’ expansion of pellet capac-ity. The most recent examples are the investments in new pelletizing plants in Malmberget and Kiruna, which imply a dramatic boost in production volume. These in-vestments are largely in line with our customers’ strat-egies and ambitions. The lean-growth philosophy will also be applied to increase capacity in the new plants.

• Organizational development for greater productivity and better work environment. We enable ‘good work’ when we delegate responsibility and authority in a sys-tematic way. Only by creating and offering attractive workplaces can we attract future co-workers and, not least, increase the number of women in the company.

• Development of industrial minerals. The intention is both to support the iron ore business (with among oth-er things, olivine) and to respond to growing demand in interesting application areas for iron ore products such as water treatment, coal washing and heavy concrete. Potential for profi table growth is also foreseen for other important industrial minerals for which we have know-how and resources.

MINING DIVISION

Increasing profi tability in order to satisfy the owner’s re-quirements cannot be realized simply by cutting costs; in-stead, growth must be achieved through greater volume and/or a higher degree of upgrading. Of decisive impor-tance is the volume LKAB can produce in existing facili-ties.

Since Mining has recently introduced new products for both blast furnaces and direct reduction, in the short term, customers seek product care (uniform quality) and adap-tations. To be able to maintain LKAB’s competitive posi-tion, continued efforts in product and process develop-ment are also necessary.

Research and development in pelletizing will assure a leading position where products are concerned. There-

fore, the groundwork is being laid for an Agglomeration Center (pelletizing center) linked to an experimental pel-letizing plant. The experimental blast furnace (EBF) is now a valuable asset, and an experimental pelletizing plant will help to optimize the total process: concentrate-pel-lets-blast furnace.

The importance of maintenance for production stabili-ty, in terms of both quality and volume, has been underes-timated in Swedish industry, even in the Mining Division. An ambitious program, begun in 2002, continues to have high priority. The production level is decided by the speed at which production facilities are operated, and it appears to be possible to gradually increase the rate of production without jeopardizing quality.

LKAB’s is a characteristically energy-intensive process industry in which energy issues are a primary concern, both in terms of cost and environment. In day-to-day op-erations and when new technology and new equipment is introduced, optimization of energy effi ciency must always be in focus.

One limiting factor is often the very extensive and time-consuming concession bargaining. Initially, the idea is to take full advantage of existing concessions, and in future to make use of simpler environmental impact assess-ments for marginal volumes.

The most important activities during the coming years:• Commissioning of the new pelletizing plant in Malm-

berget.• Construction of the new pelletizing plant in Kiruna.• Construction of the new ore harbor in Narvik.• Successive introduction of new, modern work organi-

zation.• Continued focus on the maintenance process.

MINERALS DIVISION

The division produces and markets selected minerals, customized for industries throughout the world. Control over fi rst-class mineral assets is the basis for long-term stability.

For Minerals, the objective is to gain full control, from raw-material source to end user, of several selected min-erals. At present, the selected minerals are magnetite, bentonite, olivine, mica and minerals with fl ame retardant properties (UltraCarb).

Products are often developed in collaboration with cus-tomers, and product differentiation is one of the keys to

S T R AT E G I E S


Minerals has started mining olivine in Greenland.The fi rst delivery was shipped in December 2005.

The Mining Division’s main product is iron ore pellets, a sampleof which is shown here by Seija Forsmo.

8

success. Within its organization, the division now has con-siderable expertise concerning the various minerals, and development of more products and services is ongoing.

Growth areas for magnetite are, above all, applications for heavy concrete, water treatment and coal washing.Historically, the main market for Minerals has beenEurope, but the future growth is expected to take place in Asia and North America.

Thanks to the acquisition of the Seqi olivine deposit in Greenland, the division has entered the market with its own source of raw material. The customer structure is somewhat similar to that of the Mining Division; i.e., the European steel industry. Being able to supply both pellets and olivine, the Group has thereby strengthened its posi-tion. Other major application areas for olivine are in the foundry and refractory industries.

Minelco Asia Pacifi c has worked mainly with marketing and sales of external suppliers’ mineral products on the Asian market. The strategy is to successively expand the product portfolio with the company’s own products.

When Likya Minelco was formed in Turkey in 2004, Min-erals secured access to a signifi cant deposit of a unique mineral, thereby assuring the long-term supply of raw material for the manufacture of fl ame retardants (Ultra-Carb products).

With the acquisition of a mica plant in Finland, the divi-sion has gained exclusive access to a unique high-grade mineral deposit, thereby expanding its product portfolio. Investment to increase capacity for fi ne wet-ground prod-ucts in being implemented and a new plant will be opera-tional in Siilinjärvi, Finland, in mid-2006. This will mean a boost for the traditional markets for mica, with products for surface coating, building construction, sound damp-ening and plastics.

For Minerals, the most important activities in the coming years are:• Realization of full-scale olivine operations in Green-

land.• Establishment of upgrading of magnetite products in

the USA.

SPECIAL BUSINESSES DIVISION

The mission for Special Businesses is to support the Group through services and technical development of drilling systems, mining engineering and concrete work, explosives and property management.

Operations are organized in the subsidiaries Wassara AB (owned jointly by Sandvik), AB Kiruna Grus och Sten-förädling, with Kimit and KGS Mekaniska, and Fastighets AB Malmfälten.

With its main product, the patented Wassara Hammer, Wassara AB will develop and market systems that offer better total solutions for customers’ production drilling.

Wassara will establish the drilling systems on the mar-kets Mining and Construction within market niches in which rapid growth in sales volumes can be achieved. Wassara will apply the technical knowledge gained from external markets so as to help LKAB to reduce its drilling costs over the long term. Wassara’s organization will be-come successively more market oriented.

Kiruna Grus och Stenförädling AB (KGS) upgrades LKAB’s waste rock to road and concrete ballast, blasts, crushes and hauls mineral products, processes concrete and works with rock reinforcement in the mining and construction industry. KGS is planning for a dramatic in-crease in tunnel construction in the Mining Division, as well as increased concrete production. Shotcreting will be marketed in conjunction with Kimit’s sales of explosives for construction, mining and tunnel driving.

KGS Mekaniska fabricates technically advanced steel structures and mechanical components for the engineer-ing, mining and construction industries. For KGS Me-kaniska, together with the bogie manufacturer, a major activity is to realize LKAB’s transition to ore cars with a 30-tonne axle load.

Kimit’s mission is to support LKAB’s iron ore operation by developing, manufacturing, purchasing, stocking and delivering explosives, as well as developing explosives systems and providing consultancy services.

Kimit’s main business is to supply LKAB with effective and effi cient explosives and related services. To be able to quickly meet an increasing demand, Kimit is improv-ing its fl exibility and production and distribution capacity. The technical and product know-how gained by Kimit is transferred to LKAB and thereby strengthens the group’s competitiveness.

Over the long term and with good profi tability, Fas-tighets AB Malmfälten (FAB) will provide customers with well-maintained, well-situated residential properties in the locations where LKAB operates. This is important fac-tor for future recruiting and is part of our strategy for cre-ating attractive working and living environments.

FAB is LKAB’s resource for the transition that is tak-ing place in the communities of Kiruna and Malmberget. Business is conducted with normal requirements for fi -nancial returns. With respect to the deformation caused by underground mining activities, FAB will establish and update a plan for developing and decommissioning hous-ing in Kiruna and Malmberget-Gällivare.

S T R AT E G I E S


9S T R AT E G I E S


The new pelletizing plant in Malmberget is one of the major investment projects in the Orefi elds. The plant will be operational in autumn 2006.

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MINING DIVISIONThe Mining Division mines and upgrades iron ore for products for steelmaking, principally pellets, which are the division’s main product, and magnetite products for the Minerals Division’s customers. Sales to steel produc-ers are the responsibility of the Market Division, which has sales offi ces in Luleå, Essen, Brussels and Singapore.

The Mining Division’s process chain stretches all the way from the iron ore deposits to the customers. It starts with the production of crude ore in underground mines and upgrading of iron ore in processing plants at surface level, and continues with rail transport of fi nished prod-ucts to shipping harbors and loading to vessels for deliv-ery to the customers.

PRODUCTION RESULTS 2005

The focus during the year has been on improving capac-ity, speed and availability in the production facilities in order to increase the volume of mining and processing while maintaining high quality.

In the underground mines in Kiruna and Malmberget, 36.6 Mt of crude ore was mined. The volume of iron ore products produced reached 23.3 Mt, which exceeded the previous year’s production by 1 Mt.

Production of pellets was 16.5 (15.9) Mt and of fi nes 6.7 (6.3) Mt. Deliveries totaled 23.2 (22.8) Mt.

Through continuous improvement, greater effi ciency and the elimination of bottlenecks, production in existing

Divisional operations 2005LKAB’s operations are organized in the divisions Market, Mining, Minerals and Special

Businesses. The Market Division sells iron ore products to the steel industry and the

Mining Division is responsible for mining, processing and logistics. The Min erals Division

produces and markets customized industrial mineral products. Special Businesses

supports Group companies with services and technical development.

facilities has increased in the past four years from 20 to 23 Mt/yr.

MINING

Large-scale is a keyword where LKAB’s mining operations are concerned. Concentration to fewer and larger produc-tion units has yielded considerable gains in effi ciency and productivity.

Efforts are concentrated on improving the yield from mining operations, i.e., minimizing ore losses and extract-ing the maximum amount of iron in relation to the quan-tity of ore mined. Measures include improvements in drill-ing, blasting technology, loading and haulage.

As the orebodies are mined, new main levels must be built to continue mining at depth. In the past, main lev-els in the Kiruna mine have be built at the 275, 320, 420, 540 and 775- meter levels (below the original peak of Ki-irunavaara). The current main level is at 1 045 m. During 2005, the decision was taken to begin preliminary work for yet another new main level in Kiruna, at the 1 365-m level.

Malmberget consists of several orebodies, which from the beginning were mined at 50-meter intervals down to 450 meters below the original peak of Välkomma. Sub-sequently, deeper levels have been built at 600, 815 and1 000 meters.

FINANCIAL HIGHLIGHTS – MINING DIVISION(Parent company)

MSEK 2005 2004

Net sales 12 349 7 560

Operating income 5 720 1 669

Fixed assets 8 015 6 273

Current assets 10 597 6 900

Adjusted shareholders’ equity 13 153 9 581

Return on equity % 45.2 30.6

Return on operating assets 69.6 23.3

Average number of employees 2 797 2 694

Production, Mt 23.3 22.3

Deliveries, Mt 23.2 22.8

Stocks, Mt 1.9 2.3

SALES PER MARKET REGION

D I V I S I O N A L O P E R AT I O N S 2 0 0 5


More than 70% of Mining’s sales are to the NorthernEuropean steel industry.

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In2005,thedecisionwastakentoextendthe1000-me-terlevel.Thispresentsspecialconditions,sincesectionsofthecommunityliewithintheareaaffectedbytheexten-sion.Atthesametime,planningofthenextmainlevel,at1,250mhascommenced.

upgrAding, produCts

Intheoreprocessingplantsatsurfacelevel,thecrudeoreisupgradedtosinterfinesandpellets.pelletsaretheMin-ing Division’s main product and account for more than77%oforesales.

pelletsareproducedbymixingfinelygroundironorewithvariousbindersandadditives,andthenshapingthemixtureintocentimeter-sizedspheres,whicharesinteredatatemperatureof1250°C.LKAB’smagnetite-basedpel-letshavehighironcontentandarelessenergydemand-ing and therefore more environmentally friendly thancompetingpelletproducts.

Blastfurnacepellets(BFpellets)aredeliveredmainlytosteelmillsinEuropeandareusedinthecoke-basedblastfurnaceprocess,whichisthemostcommonmethodforproducing hot metal, the first stage in the steelmakingprocess.

DRpelletsareused in thedirect reductionprocess toproduce sponge iron, which in an alternative processroute, is also an initial stage in the chain of production

fromirontosteel.TheDRprocessisbasedontheuseofnaturalgasandhasbecomeincreasinglycommoninoil-producing countries and other countries with access toinexpensivenaturalgas.

unlike pellets, fines must be sintered to form largerpieces before being used in the blast furnaces. In Kiru-na, thefinesproduct isproducedby crushingand thengrinding the crude ore to a sand-like consistency. FinesfromMalmbergetisascreenedproductfromthemine.Itisprocessedinsortingandconcentratingplantsbygrind-ingandseparation.

The trend towards more customer-tailored productswill continue. Considerable effort is therefore being de-votedtoproducingthesameproductinseveralpelletizingplantsinordertoensuremaximumflexibility.

ConstructionofanewpelletizingplantinMalmberget(MK3)isnowinprogress,andtheplantisexpectedtobeoperationalintheautumnof2006.AnewpelletizingplantinKiruna(KK4)willbeoperationalin2008.

Followingtheexpansion,theKirunaprocessingplantswillproducedifferenttypesofironorepelletsexclusively,whichwillsimplifyproductionflowsattheKirunamine.productioncapabilityforfinesproductswillexistonlyinMalmberget.pelletswillcontinuetobethemainproductfromMalmberget.

LogistiCs

Thefinishedproductsaretransportedfromtheorepro-cessing plants to customers by rail and by ship via theshippingportsatNarvikandLuleå.Railtransportsareop-eratedunderthecompany’sownmanagement.

During2005,atotalofabout23.4MtwashauledtoNar-vikandLuleå,thehighestvolumein25years.Disruptionsinproductionanddeliveryhavebeenminimal.

Thetransportsystemisupgradedcontinuallythroughthe ongoing replacement of locomotives and ore cars.Newso-calleduADK-typecarshavebeentakenintooper-ationduringtheyear.Developmentofanewcardesignedfora30-tonneaxleloadisunderway,andthefirstcars,witha100-tonnepayload,havebeendelivered.

From the harbor in Luleå, ore products are deliveredmainly to customers in the near-lying market. The Nar-vikoreharborcanaccommodatevesselsofupto350000dwt.TheBoardhasfinalizedadecisiononmajorimprove-

pRODuCTIONANDpRODuCTIvITy

Production volume increased by 4% during �005. Productivity has increased successively in recent years.

d i v i s i o n A L o p e r At i o n s 2 0 0 5

L K A B A n n u A L r e p o r t 2 0 0 5

Intheconcentratingplant,theoreisgroundinrotatingmills. Fromhiscontrolpanel,DanielSedigcontrolsloadingofpelletstorailcars.

12

ments in effi ciency and modernization of the harbor in Narvik. The new harbor will operational in autumn 2008.

OBJECTIVES

LKAB is exposed to tough competition from considerably larger iron ore producers who, in addition to their size, also enjoy the cost advantages associated with open-pit mining. LKAB’s goal is to cope with competition and ensure the company’s long-term survival by constantly improving cost-effectiveness, raising the quality and knowledge content of the products, and maintaining re-source-effi cient growth.

Improving maintenance, including preventive mainte-nance, is strategically very important. The aim is to stabi-lize production at a higher and more consistent level. This is aided by greater use of new technology and a focus on maintaining good order.

The work of assuring quality in the company’s process-es has high priority, and here, too, the keyword is stabil-ity. Consistent quality, the right quality and delivery assur-ance are the most important success factors for customer

relations. Work also focuses on establishing best practice and making production more fl exible to enable maximum capacity utilization.

MARKET TRENDS 2005

During 2005, the global demand for iron ore remained strong, pressing iron ore exporters to increase produc-tion to the limits of capacity. According to preliminary es-timates, global trade in seaborne iron ore increased to 650 (580) Mt, of which China’s share of imports rose by over 32% to about 275 Mt.

Preliminary statistics from the International Iron and Steel Institute indicate that world production of crude steel increased in 2005 by 6%. Production thereby reached a new benchmark of more than 1.1 billion tonnes. Asia, the Middle East and Africa accounted for most of the growth.

The greatest production increase was seen in China, where crude steel production reached about 350 Mt, an increase of 25%. Japan realized about the same produc-tion fi gure as in 2004, while production in the EU 15 fell by slightly more than 4 Mt or 2.5%.

During the year, Chinese authorities took measures to gain better control over the infl ow of iron ore. The intro-duction of import licences and restrictions on the number of importers did not appear to have any great impact on iron ore imports. China was only able to assure its supply of ore by increasing production in its own high-cost mines and by buying expensive iron ore on the spot market.

Globally, the production of hot metal, which is midway



GLOBAL IRON ORE EXPORT AND PRODUCTION OF CRUDE STEEL

PRICE TRENDS, IRON ORE PRODUCTS

THE LARGEST STEEL-PRODUCING COUNTRIES

Change

Mt 2005 2004 between years

1. China 349.4 280.5 24.6%

2. Japan 112.5 112.7 -0.2%

3. USA 93.3 99.7 -6.4%

4. Russia 66.1 65.6 0.9%

5. South Korea 47.8 47.5 0.5%

6. Germany 44.5 46.4 -4.0%

7. Ukraine 38.6 38.7 -0.3%

8. India 38.1 32.6 16.7%

9. Brazil 31.6 32.9 -3.9%

10. Italy 29.2 28.5 2.6%

25. Sweden 5.7 6.0 -4.2%

World total 1 128.7 1 065.0 6.0%

Source: IISI, 21 January 2006

13D I V I S I O N A L O P E R AT I O N S 2 0 0 5


between iron ore and steel in the process chain, rose by 8% to a new record of around 785 Mt. However, in LKAB’s important market area of Northwestern Europe, hot metal production declined; in Germany by 4%, in Belgium by 12% and in Sweden by 4%. In Southern Europe, produc-tion increased; in Italy by 8%, in Spain by 3% and in Tur-key by 2%.

Production of sponge iron (DRI/HBI), which in 2004 grew to a record 55 Mt, increased in 2005 by 7%, reaching yet a new record of more than 58 Mt.

As a result of the shortage of iron ore at the close of 2004, the world market prices of Brazilian and Australian iron ore were increased by as much as 71.5%. On the ba-sis of benchmark market prices, LKAB reached an initial agreement in March for price hikes of more than 70% on fi nes and nearly 85% blast furnace pellets.

Despite the shift in production from north to South-western Europe, LKAB’s deliveries of blast furnace pellets to contract customers in Northwestern Europe remained unchanged, indicating increased market shares in the near-lying market area. Other contributing factors were the strong demand for iron ore in Asia, high sea freight rates and the shortage of iron ore on the world market. LKAB’s deliveries of pellets to contract customers in the Middle East and North Africa increased considerably, while deliveries to the Far East ceased.

MARKET OUTLOOK 2006

For iron ore producers, favorable market conditions are expected to persist throughout 2006. Leading industry an-alysts foresee an increase in world crude steel consump-tion of 4 to 5%.

Increases in consumption are expected throughout the world, though these are expected to be somewhat weaker in Europe and stronger in Asia. In Europe, steel invento-ries appear to have normalized during the third quarter of 2005, and the major steel producers foresee increased de-mand and rising prices during the fi rst quarter of 2006.

In the Middle East, an important market for LKAB’s DR pellets, infrastructural expansion and industrial growth have resulted in a shortage of steel. Dramatic increases in the price of scrap and pig iron have stimulated investments in increased direct reduction capacity in the region.

The major iron ore producers have decided to invest several billion dollars to increase capacity. For example, during 2005, the decision was taken to build two new pel-letizing plants in Brazil. These investments have, howev-er, been largely covered by increased demand and will take several years to realize.

Many projects are burdened by rising costs and a short-age of qualifi ed labor. Consequently, it is expected that the world iron ore market will continue to face shortages in 2006. For LKAB, the potential for sales is expected to continue to exceed production capacity.

Kristina Nyström and Bernt Lundstedt monitor production from the control room of Malmberget’s concentrating plant.

14

MINERALS DIVISIONThe Minerals Division, which operates under the name Minelco on the global market, develops, produces and markets industrial mineral products.

Minelco supplies industrial minerals to customers in many different industries and for many different appli-cations. Among the most important are applications for heavy concrete, building construction, the oil and gas industry, the rubber, plastics and paint industries, the chemical industry, the automotive industry, foundries and manufacturers of refractory materials.

Operations are managed from Sweden, with represen-tation in Europe, Asia and the USA. Minerals Division has about 400 employees, most of them outside Sweden.

There are subsidiaries with processing plants in Fin-land, Greenland, the UK, the Netherlands, Greece, Turkey and China. The company has additional subsidiaries in Germany, the USA and Hong Kong, as well as representa-tive offi ces in the Czech Republic and Thailand.

With sales of about 2.2 billion kronor, Minerals opera-tions are expansive, now accounting for 14% of the LKAB Group’s total sales. Thanks to greater market shares and sales volumes, the earnings trend developed favorably during 2005.

The Minerals Division focuses on selected minerals and ownership or control of the entire process chain from source to end user. Direct sale to end users and an ex-tensive knowledge of mining, production, processes, ap-plications and markets enable the company to customize products to meet specifi c customer needs, thereby ensur-ing maximum value for customers. This, in combination with Minelco’s expertise and service, will contribute to im-proved profi tability for the customers.

In many application areas, the Minerals Division has achieved a leading position. This position is based on a high degree of expertise in mineral technology, produc-tion, applications and markets, as well as the ability to de-



velop materials and processes in close collaboration with customers.

Most of the division’s production facilities are now qual-ity-certifi ed according to ISO 9001:2000. Facilities underdevelopment in Turkey, Finland and Greenland will be certifi ed during 2006.

SALES AND EARNINGS 2005

The Minerals Division’s sales amounted to MSEK 2 159 (1 598), an increase of 35% over the previous year. Opera-ting income amounted to MSEK 148 (122).

Sales volumes increased within several business seg-ments and within all market areas. At the same time, high freight rates had a negative impact on earnings.

Compared to the previous year, the volume of sales of magnetite remained unchanged. In total, approximately1 Mt of magnetite was delivered, mainly for use in civil engineering projects, sponge iron for powder metallurgy, water treatment chemicals and coal washing.

The global expansion is evident. Growth in China con-tributed to a doubling in sales of industrial minerals in Asia, which now accounts for 30% of Minelco’s sales.

The Minerals Division’s capital expenditures, which were mainly attributable to investments in production in Greenland, Turkey and Finland, amounted in 2005 to MSEK 117 (85).

PRODUCTS AND PRODUCTION

The product portfolio includes more than 30 different industrial minerals. Priority minerals include magnetite, bentonite, olivine, mica and minerals with fl ame retardant properties (UltraCarb).

Magnetite

The world market for magnetite industrial applications is estimated at slightly more than 2 Mt per year. With sales

FINANCIAL HIGHLIGHTS – MINERALS DIVISION

MSEK 2005 2004

Net sales 2 159 1 598

Operating income 148 122

Fixed assets 750 545

Current assets 777 591

Adjusted shareholders’ equity 397 284

Return on equity % 24.2 25.1

Average number of employees 372 371

SALES PER MARKET REGION

Minerals’ sales are mainly to customers in Europe,but are growing in Asia.



of 1 Mt, Minelco is a market leader. Currently, there is very high demand from customers who use magnetite prod-ucts in the manufacture of heavy concrete.

Magnetite from the Orefi elds offers strong competitive advantages, thanks to its high quality, which is especially evident in applications in which the chemistry of the prod-uct is important. For products intended for the chemical and polymer industries, the magnetite is processed in the company’s own production facilities.

Olivine

During 2005, the Seqi olivine deposit in Greenland was acquired. The acquisition will enable the division to ad-vance its position on the olivine market, a market that ab-sorbs approximately 4 Mt per year. The Minerals Division will handle about 1 Mt of olivine annually, and the deposit will satisfy demand for olivine for many years to come. The results of geophysical surveys and drilling campaigns indicate reserves in excess of 100 Mt.

Construction of production facilities began during the summer, and in December, the fi rst shipments were de-livered to European steel customers and to LKAB for use in pellet production. The mine has been planned for year-round operation and is equipped for a capacity of about 1.7 Mt per year. Full production will be possible during the latter half of 2006.

UltraCarb

Via a joint venture with a Turkish company in Likya Minel-co, the company has secured access to a signifi cant min-eral deposit, thereby assuring the long-term supply of raw material for the manufacture of one of the company’s most important products, UltraCarb.

UltraCarb has many unique properties that make it an ideal material for many different applications. Above all, it is a natural, and thereby environmentally friendly, fl ame retardant for use in the cable industry and other polymer industries.

During the year, the division has invested in both the mine and processing plant in Turkey. The plant was com-missioned in early-2006.

Mica

In late-2004, Minelco acquired a production plant for processing mica from Kemira GrowHow in Finland. The

agreement gives Minelco exclusive access to the mica that is produced as a byproduct at Kemira GrowHow’s mine in Siilinjärvi.

Mica is used in a range of applications, though princi-pally as a functional fi ller in the paint and plastics indus-tries. The Minerals Division has long been an important supplier on the market for mica products and is the Euro-pean market leader.

During 2005, deliveries of mica products from Finland began at the same time as a decision was taken to invest in increased capacity. A new plant is expected to be op-erational in mid-2006.

Other products

Zircon is a strategically important mineral for Minerals, and thanks to a long-term agreement with the world’s largest zircon producer, Australian Iluka, the division has secured a signifi cant market share in Asia. Zircon is used in many different industries; among others, the ceramics, glass, chemical and refractory industries.

More and more sales are made to areas applications in-volving liquid metals. Among other products, the division manufactures and sells slag darts for the steel industry and ceramic products for foundries. The trend is towards a greater number of proprietary products that bring great-er value to customers.

Europe accounts for more than half of sales. With raw material sources in Europe, Minelco is at a considerable advantage compared to competitors in e.g., China, when freight rates are high. Domestic consumption of industrial minerals in China is also driving price increases.

OBJECTIVES

The division’s objectives are based on the company’s position in strategic business areas, a broad geographic presence and an effective network of production facilities and logistics systems. The target for organic growth is on average at least 10% per year.

In addition to the growth target, improved capital ef-fi ciency is also an objective. With less capital tied up in inventories and accounts receivable, greater returns and profi tability will be realized. Furthermore, a continued ef-fort is being made to coordinate and take advantage of synergies within the division, and thereby improve cost effectiveness.

Loading of mineral products at the Minerals Division’s plant in Flixborough, England.

16

LKAB has organized most of its subsidiaries under the Special Businesses Division. These companies are today mainly subcontractors to the Mining Division and the Minerals Division, but also support the Group by contrib-uting towards effi ciency improvement and technical de-velopment.

The companies in Special Businesses have their origin in LKAB’s know-how as a manufacturer and user of prod-ucts or services. Wassara AB develops drilling systems. AB Kiruna Grus- och Stenförädling (KGS) works with rock, concrete, explosives manufacture and engineering servic-es. Fastighets AB Malmfälten (FAB) manages properties in locations where LKAB operates.

Kimit AB, which is part of KGS, manufactures explo-sives. Together with its subsidiary MTAS, Malmtrafi k AB, which is responsible for rail transports from the mines to the harbors, has been integrated into the Mining Division during 2005 as Logistics. Minelco AB is part of the Miner-als Division.

The subsidiaries are wholly owned by LKAB, with the exception of Wassara AB, in which LKAB has a 40% in-



FINANCIAL HIGHLIGHTS - SPECIAL BUSINESSES DIVISION

MSEK 2005 2004

Net sales 1 091 951

Operating income 100 94

Assets 1 808 1 180

Liabilities 1 056 397

Capital expenditures 205 286

Depreciation 128 135

Operating margin,% 9.2 9.9

Average number of employees 394 416

SPECIAL BUSINESSES DIVISIONterest. In addition to these subsidiaries, there are wholly owned foreign sales companies in the Market Division and several small companies associated with the opera-tion in Narvik.

LKAB also has an electricity network company with a concession as an electricity distributor, as well as its own insurance company. LKAB Försäkring AB works in the same way as most other insurance companies with property and risk insurance, though only within the LKAB Group.

WASSARA AB

Wassara develops and markets water-powered drilling systems. The method combines high productivity, sup-erior precision and long holes, which enables large-scale mining methods and greater cost effectiveness in produc-tion. Important markets are the Swedish mining industry, where LKAB is the largest customer, and mining compa-nies in South Africa and South America.

Wassara markets products to construction companies that do foundation work. In this area, Wassara has estab-lished itself as a principal supplier of hammers for work on Malmö’s City Tunnel project.

Development work is focused on extending product lifecycles. Two years of research and development work has resulted in the introduction of a new hammer model in 2005. LKAB has taken a number of decisions that con-fi rm the benefi ts of the Wassara method. The next gener-ation production drill rigs will be equipped with the Was-sara hammer.

MARKET OUTLOOK 2006

Thanks to investments made in 2005, Minerals Division has built a good foundation for continued growth.

The general upswing in the metal and minerals indus-try is expected to have positive consequences for the di-vision. Demand for the division’s products is expected to increase during 2006.

Acquisition of the unique mineral deposit in Turkey will allow the division to develop its product offerings and take a greater share of the market for fl ame retardants.

Acquisition of the mica plant in Finland enables Miner-als to offer a complete product portfolio of minerals with different characteristics for the paint and plastics industry.

Thanks to the investment in Greenland, enabling an an-nual production capacity of more than a million tonnes of olivine, the division can cover one quarter of the total olivine market.

Traditionally, Europe has been the Minerals Division’s home market, and it is here that the company still has the greater share of its business. Although Europe accounts for more than half of sales, the major growth is occurring in other markets.

In the future, Europe’s relative signifi cance will dimin-ish and sales will be more evenly distributed over Europe, Asia and the USA. Minelco’s rate of growth in Asia is ex-pected to exceed the general growth rate in the region, and there are good possibilities for increasing sales in the USA during 2006.

With considerable resources in production, application know-how and service, the division will strengthen itsofferings globally and win greater market shares.



AB KIRUNA GRUS- OCH STENFÖRÄDLING (KGS)

The KGS Group has operations in four main areas: • Concrete manufacturing and rock reinforcement, main-

ly for LKAB, but also for other mining and construction companies.

• Mining and crushing of industrial minerals for the Min-ing Division’s pellet production and crushing of special product based on iron ore for the Minerals Division.

• Mechanical engineering, and fabrication of steel struc-tures and steel components, under the management of AB KGS Mekaniska.

• Development and manufacturing of explosives, under the management of Kimit AB.

Important events during 2005 included the opening of a new concrete plant in Malmberget and the production of new ore cars for the Mining Division.

In the past two years, 110 ore cars of the UADK type, with a 25-tonne axle load, have been manufactured for Mining. KGS Mekaniska, as part of a consortium with sev-eral other Orefi elds engineering fi rms, has participated in the manufacture of the new cars. The decision was taken in 2005 to build a new type of ore car with a 30-tonne axle load. The fi rst 70 cars in a trial series will be delivered in the spring of 2006.

At the close of 2005, the decision was taken to terminate the OKE joint venture, between Kimit and Orica, thereby enabling Kimit to sell its products on the Nordic market.

FASTIGHETS AB MALMFÄLTEN (FAB)

FAB manages about 2,000 apartments in Kiruna, Malm-berget and Koskullskulle. In 2005, the company achieved occupancy rates of 99% in Kiruna and 98% in Malmberget, which is indicative of the increased residential demand in the Orefi elds.

As a result of the expansion of mining operations, 60 apartments in Malmberget have been mothballed or cleared during the year. FAB is the LKAB Group’s resource for the transformation process in both mining locations and will help the company to meet the demand for hous-ing in connection with future construction projects.

The new concrete station in Malmberget was commissioned in 2005.

18

IRON ORE PRODUCTS

Three large players, whose combined share of the market is more than 70%, dominate world trade in iron ore. In global terms, LKAB, with only 3%, is considered a small player, but commands a leading position as a pellet pro-ducer and a strong position on the home market, which is northern Europe.

Global trends in the steel industry indicate that hot metal is, and will in the near future continue to be, the dominating raw material for steel production. At the same time as blast furnace productivity increases, with fewer and larger production units, the use of coke is expected to diminish in favor of coal-powder injection, oil or natural gas. Reduction of carbon dioxide emissions is an impor-tant challenge for the future, and the regulatory system for trading in emissions rights affects competition. LKAB participates in an EU program for reducing carbon diox-ide emissions in steel production.

Developments in the blast furnace process are pro-gressing quickly, and the reduced use of coke places higher demands on the iron-bearing component of the blast furnace burden with respect to mechanical strength and other characteristics. Throughout the world, there are many plans for increased pelletizing capacity, and the supply of iron ore pellets is expected to increase by 12% in 2006.

Although the direct reduction processes are develop-ing quickly, they still account for no more than 7% of ore-based iron production. The growth is occurring in regions where there is an inexpensive supply of natural gas. Tech-nical developments in the DR processes also place new demands on LKAB’s products with respect to, among oth-er features, pellet size and coating.

During recent years, several of LKAB’s strong competi-tive factors have been further strengthened. Ore reserves have increased in terms of both quantity and quality; the company’s fi nancial position has been reaffi rmed by suc-cessively better earnings trends, and our position as a pel-let supplier has become an ever greater success factor.

Underground mining constitutes a competitive disad-vantage, since LKAB is now the only underground opera-tor among the larger ore producers. Other weaknesses include our US-dollar dependency, energy dependency, tight logistics from mine to harbor, the position of ore re-serves under urban areas, and the weak economic struc-ture of the Orefi elds region.

Markets and competitionThe Mining Division supplies customized iron ore products for production of hot metal

in blast furnaces and direct reduction processes. The main product is pellets. Blast

furnace pellets are delivered to steelmills in Europe (north of the Alps). DR pellets are

sold to North Africa and the Middle East. The Minerals Division produces and markets

customized mineral products for industrial applications throughout the world.

LKAB’s great competitive advantage is our high-quality magnetite ore, which is very energy-effi cient during the process of upgrading to pellets and sinter fi nes. Techno-logically, LKAB is very competitive when it comes to the actual pelletizing operation.

The positive market trend and growth via production increases and effi ciency improvement present the great-est opportunities for the company. Potential threats are seen in a possible collapse in China’s economic growth, a weak dollar, falling pellet prices, and the possibility that new environmental and energy legislation may distort competition.

INDUSTRIAL MINERALS

The Minerals Division has broad and extensive operations on an international market. Products are supplied to cus-tomers in the rubber and plastics industries, the chemi-cal industry, foundries and manufacturers of refractory materials, civil engineering, the oil and gas industry and others.

In terms of competition, the industrial minerals market is highly fragmented, with many different players of vary-ing sizes. Competition also varies depending on market region and application area.

Price trends on the Minerals Division’s markets differ from those on the iron ore market. Price developments on the industrial minerals markets have been consider-ably less dramatic. Industrial sector, application area and usage decide pricing. The global market for the product areas in which the Minerals Division is active is estimated at over 20 billion kronor.

The division’s most important strengths are its broad product portfolio and widespread geographic distribu-tion, as well as the fact that it is part of a fi nancially strong group with considerable intra-group use of minerals and process know-how. Opportunities are in, among other areas, olivine production, increased demand for mag-netite, positive environmental trends in water treatment products and fl ame retardants, and growth in China and the USA. The most apparent potential threats are a major economic downturn, higher freight rates and poorer ex-change rates.

The Chinese market is undergoing tremendous growth, and the Minerals Division is actively involved in the devel-opment of two production facilities in Tianjin, a seaport near Beijing. These factories produce ceramic and refrac-

M A R K E T S A N D C O M P E T I T I O N


19

tory products, mainly for the Chinese steel and foundry industries. The company foresees good development for these ventures, which are being pursued in partner-ship with two leading producers in the respective productareas.

Selected minerals

In Europe, where Minelco is the market leader in magne-tite, competition is mainly from other minerals and tech-nologies. During 2005, market successes were achieved on among other continents Asia and North America, both of which are growth markets for the division.

Demand for magnetite products in the oil and gas in-dustry for underwater gas pipelines has remained strong. Greater environmental awareness throughout the world has become an important driver of growth in the mar-ket for water treatment chemicals, a market in which the Minerals Division’s importance as a supplier of magnetite products is increasing.

The olivine market comprises three major application areas: the steel, refractory and foundry industries. TheEuropean and North American market for olivine amounts to 4 Mt per year.

In steelmaking, olivine improves steel quality and con-tributes to lower energy consumption compared to alter-native products. For the foundry industry, olivine is more environmentally advantageous than competing products. The Mining Division is a large consumer of olivine, which is a key ingredient in pellet manufacture.

The potential for UltraCarb products is very good. Above all, continued global market growth is expected for environmentally friendly fl ame retardants in the cable in-dustry and other polymer industries. The Turkish deposit, which is the world’s largest, offers unique quality and is economically competitive, thanks to cost-effi cient produc-tion.

Mica is used in a range of applications, principally as a functional fi ller in the paint and plastics industries. Minel-

co has long been an important supplier on the market for mica products and is a market leader in Europe.

Collaboration with Finnish Kemira GrowHow has given the company exclusive access to mica that is produced as a byproduct at Kemira’s mine in Siilinjärvi.

OTHER OPERATIONS

The Special Businesses Division supports the Group by providing drilling systems and explosives, and carrying out mining engineering and concrete work. Outside the LKAB Group, the Division also has business with other mining companies and construction and civil engineering fi rms.

Wassara markets its patented drilling system to the mining industries in Sweden, South Africa and South America, as well as to companies in tunnel construction and oil and gas exploration. Wassara’s drilling system has promising business potential, and marketing efforts are being intensifi ed.

Compared to alternative drilling systems, the water-powered Wassara Hammer assures environmentally friendly drilling without any additives. Other systems are either driven with oil or use oil as an additive in the fl ush-ing agent, which directly contaminates the environment or increases the presence of oil products in the mine.

Kiruna Grus och Stenförädling AB is planning for a dra-matic increase in tunnel construction in the Mining Divi-sion, as well as increased concrete production. Shotcret-ing will be marketed to other mines and civil engineering and tunnel driving enterprises.

Kimit’s main business is to supply LKAB with effective and effi cient explosives and related services, but is also able to sell its products on the Nordic market, since the joint venture between Kimit and Orica is being terminated.

Fastighets AB Malmfälten owns rental properties and has a strong position on the local housing market.

M A R K E T S A N D C O M P E T I T I O N


A basket of iron ore pellets at the metal-lurgical laboratory in Malmberget.

Olivine in the hands of Ken Green of Minelco Minerals in Flixborough.

X X X X X X X X X X X X X


The development projects are being realized by the new unit, Technology & Business Development. The unit’s task is to assume responsibility for strategy issues, to develop new technology and build new production facilities, and to develop new products and business opportunities. Re-search and development is conducted within the strategic research areas metallurgy, mining engineering, process technology and logistics and infrastructure.

INVESTMENTS IN IRON ORE PRODUCTION

Global steel production has increased dramatically in recent years and demand is expected to remain strong. Several of LKAB’s pellet customers have planned, or are deciding to invest in, increased production capacity.

Investments in increased production and greater logis-tical effi ciency will raise LKAB’s delivery capacity for iron ore products from a current 23 million tonnes to 25 Mt by 2007 and to 30 Mt by 2008.

Ongoing projects:• New concentrating and pelletizing plants in Malmber-

get, ready in October 2006.• New pellet capacity in Kiruna; via increased haulage

capacity, new concentrating and pelletizing plants and loading terminal, ready in April 2008.

• New ore harbor in Narvik, ready in October 2008.• New ore cars with 100-tonne payload; fi rst deliveries

2005-2006.• Preliminary planning for new main levels in Malmber-

get and Kiruna, projected for commissioning in 2010 and 2012, respectively.

INDUSTRIAL MINERAL PROJECTS

During 2005, the Minerals Division began to launch oliv-ine products from the mining operation in Greenland. This has been done in close cooperation with LKAB’s sales or-ganization, which enables a faster commercialization of olivine within priority segments.

The investment in a mine and processing plant in Tur-key, owned jointly with a Turkish partner, will be com-pleted in early-2006. The new Turkish plant, together with a facility in Lund, England, will manage the future produc-tion of UltraCarb products, minerals with fl ame retardant properties.

Investments and development projectsTo increase the company’s capacity for producing iron ore pellets, an extensive program of

investment, amounting to about 10 billion kronor, is being implemented. The program in-

cludes new pelletizing and concentrating plants in Malmberget and Kiruna, increased capa-

city in the Kiruna mine, and investment in a new ore harbor in Narvik. The Minerals Division

has commenced mining of olivine in Greenland and completed construction of a production

facility for UltraCarb in Turkey.

In China, Minelco initiated a partnership in 2005 with a company that is a leading supplier of high-tech refractory products for steelmaking as well as innovative refracto-ries for the foundry market. The trend is towards an even greater number of highly upgraded proprietary products. The Minerals Division is expected to take advantage of the economic growth in China as a growing supplier to the domestic market.

NEW PELLETIZING PLANT AHEAD OF SCHEDULE

The investment decision for a new plant in Malmberget was taken in November 2004 and construction began im-mediately. The project includes, in addition to a pelletiz-ing plant for 4 Mt, extension of an existing concentrating plant and a terminal for rail transports.

Construction work will be carried out according to the Partnering principle, whereby the client, consultants and contractors form an integrated project organization to work towards agreed goals with respect to function, scheduling and total economy. The project is about two months ahead of the original schedule. At most, 370 peo-ple have been employed at the construction sites.

The investment amounts to MSEK 2 600 and production is expected to begin in October 2006. This will be LKAB’s fi fth pelletizing plant. For the fi rst few years, crude ore will

FACTS ON THE PELLETIZING PLANTS

As of January 2006, LKAB has four full-scale pelletizing plants in operation. These are in Kiruna, Malmberget and Svappavaara. The fi fth, MK3 in Malmberget, will be commissioned in the autumn of 2006 at the same time as the smaller, so-called steel-belt plant will be closed. KK4, the new plant in Kiruna, will be the sixth pelletizing plant in operation.

LKAB’s fi rst pelletizing plant, a so-called vertical shaft kiln, began operating in Malmberget in 1955. Kiruna’s fi rst pelletizing plant (KK1) started up 10 years later. Both plants have since been demolished.

Plant Starting year

Svappavaara, Svp 1969Malmberget, BUV 1973Kiruna, KK2 1979Kiruna, KK3 1995Malmberget, MK3 2006Kiruna, KK4 2008

I N V E S T M E N T S A N D D E V E L O P M E N T P R O J E C T S


21I N V E S T M E N T S A N D D E V E L O P M E N T P R O J E C T S


Construction of the new pelletizing plant in Kiruna started immediately after the decision was taken in December.

be supplied by the Kiruna mine. The plant will employee about 35-40 people.

INCREASED PELLET CAPACITY IN KIRUNA

The decision for the biggest investment in the company’s 115-year history was taken in December 2005. The total investment of 6.4 billion kronor will increase capacity in Kiruna by 5 Mt. The investment includes pelletizing and concentration plants, mine hoisting equipment, a rail-way terminal, and environmental improvement measures such as exhaust-gas cleaning.

This will be Kiruna’s third pelletizing plant and LKAB’s sixth in operation. The new plants will be built adjacent to the existing processing plants and will be operational in the spring of 2008.

Following the expansion, the Kiruna processing plants will produce different types of iron ore pellets exclusively. The transition to 100 percent pellets will streamline the fl ow of crude ore in the Kiruna mine, which will result in a greater tonnage of crude ore for pellet manufacture. It will only be possible to produce fi nes products in Malm-berget.

The new plants will initially produce about 5 Mt pellets per year. This means that LKAB’s total production capac-ity will increase, in the long term, to 30 Mt. The possibility exists for a further increase to 6 Mt through complemen-tary investments.

At most, 800 people will be involved in the project.

RENOVATION OF THE NARVIK HARBOR

The ore harbor in Narvik is a strategically important link in LKAB’s process chain, since most of the products are shipped from here. The Board voted in November 2005 to refurbish the ore harbor at a cost of MSEK 970. The up-grade will signifi cantly improve effi ciency as well as the environment.

Ore storage silos will be built underground, and the entire harbor structure will be adapted to handle larger ore trains and greater volumes of iron ore products. The heavier trains and greater volumes will necessitate a ma-jor structural overhaul of the harbor area.

Above a battery of storage silos blasted out of the rock, trains will enter a tunnel and bottom-discharge their loads into silos intended for the product they are carrying via so-called rolling discharge. The total storage volume will be about 1.5 Mt.

When the new harbor is fully operational, the person-nel requirement will be reduced from the current 237 to 108 workers.

GREATER RAIL CAPACITY

All nine of the new IORE locomotives have been ope-rating on the Ore Railway since 2004. The Malmberget-Luleå section of the line has been upgraded for a 30-tonne axle load and is now traffi cked by the fi rst train set of 100-tonne cars, which were delivered from South Africa.

LKAB, together with K-Industrier, has developed a new, larger ore car adapted for a 30-tonne axle load and with a 100-tonne payload. The fi rst car was delivered in autumn 2005, and during the winter, about four cars per week have been rolled out from the Kiruna Wagons assembly shop at LKAB in Kiruna. Final delivery of the 70 cars that have been ordered was made in march 2006. Later in the year, Group management will assess the demand for ad-ditional cars.

The amount of ore per car will be increased from 80 to 100 tonnes, while each train set will consist of 68 cars in-stead of 52. The tonnage per train set is thereby increased from 4 000 to nearly 7 000 tonnes, which means a reduc-tion in both energy consumption and freight costs.

Work on the upgrade of the Ore Railway’s northern section to Narvik to accommodate a 30-tonne axle load continues. Among other things, work remains to be done on sidings and terminals. Work will be completed by the time the new Narvik ore harbor is operational, in autumn 2008.

Once the Kiruna-Narvik section of the line has been fully upgraded for a 30-tonne axle load and all terminals, includ-ing the new Narvik ore harbor, are ready to receive the new cars, the capacity increase will have been realized.

THE MINING DIVISION’S ONGOING

DEVELOPMENT PROJECTS

In Kiruna, about MSEK 300 has been spent during the year on ongoing projects to improve the effi ciency of existing production processes. Several of these projects are: phosphorus sampling, indirect coal-powder com-bustion, pellet samplers, mine de-watering, the southern operating station, ground remediation and dam safety measures, and replacement of switchgear.

In Svappavaara, the concentrate transport equipment has been rebuilt to achieve higher pellet capacity. New

22

switchgear/substation is in the planning stage. LKAB is replacing or rebuilding switchgear/substations according to a 10-year plan. This will improve working environment and reduce hazards and magnetic fi elds.

In Malmberget, several development projects have been in progress: upgrading of hoisting equipment, re-placement of switchgear in the concentrating plant, new process water line to the high reservoir, renovation of tun-nels for media supply, and improvement of indoor climate in the steel-belt plant (pelletizing).

During 2005, the Board allocated funding for measures to improve working environment at the plant. Production has more than doubled since the start in 1973, but ventila-tion and other conveniences have not been modernized to a comparable degree.

PRE-STUDIES FOR NEW MAIN LEVELS

As production capacity is expanded, new main levels and hoisting systems for future mining operations are being studied. In Malmberget, mining will pass the present main level in 2010, while in Kiruna, this will occur in 2012.

Pre-studies have been done for both mines. In both cas-es, several alternatives have been considered, though no defi nitive choices have yet been made.

Certain critical and time-consuming projects have be-gun, such as driving of inclined drifts towards the new main levels. At the same time, the extent of the ore re-serves is being further verifi ed by extensive test drilling. For both mines, permits for developing new areas must be granted. This will also have consequences for urban planning.

I N V E S T M E N T S A N D D E V E L O P M E N T P R O J E C T S


RESEARCH AND DEVELOPMENTLKAB invests about MSEK 150 annually in research. Part of the R&D strategy is to intensify collaboration with LuleåUniversity of Technology (LTU) through, among other initiatives, the Hjalmar Lundbohm Research Center forMining and Metallurgy. Research activities will be con-ducted in four main areas with the overall aim of satis-fying LKAB’s long-term technology needs.

MINING ENGINEERING PROJECTS

In the fi eld of rock mechanics, there are several activities having to do with the new main levels. These include geo-modeling of the mines in Kiruna and Malmberget.

In both mines, so-called chemical gassing to sensitize the explosive emulsion in development work has been in-troduced. In sublevel caving, the explosive is sensitized with micro-spheres. Here, a new method has been tested and will be further tested in large-scale production trials. Both methods will result in considerable savings.

Trials on a new caving layout with parallel drifts will continue during 2006. A system for online measurement of loader bucket weight has been tested and is being in-stalled on all LHD machines in Malmberget. Requirement specifi cations for the next generation of production drill-ing rigs have been produced and agreements have been reached for development and delivery of a prototype rig.

In applied research, two doctoral thesis projects have been started during the year. One project will increase knowledge concerning blasting against compacted rock, and another project seeks to improve the long-term prog-noses of hanging wall deformations with the help of nu-merical calculations. During 2005, an employee in the mining engineering department defended a thesis enti-tled “Interaction between shotcrete and rock”.

DEVELOPMENT OF PROCESS TECHNOLOGY

An overall goal is to increase production without jeopardi-zing product quality. The processes that are being develo-

level m

0

142

1 045 m main haulage levelExploration pass

1 060 m

Exploration

drilling

Sea level

Crushing

Buffer

Hoisting and air

Railway to Narvik

Ore processing

plants

19101910

19201920

19301930

19401940

19501950

19601960

19701970

19801980

19901990

20002000

20052005

19651965

1910

1920

1930

1940

1950

1960

1970

1980

1990

2000

2005

1965

230

320

420

540

740

775

1045

1175

275

Hoisting

190019001900

Upplandslaven

Allians-shaftTingvallskulle

JosefinaJohannes

Printzschöld

Belt conveyor, inclined shaft

1 050 meters

1 000 m level

815 m level

600 m levelVitåfors shaft

Vitåforsindustrial siteGropen - The Pit

Hematite

Malmberget

Allians shaft

Dennewitz

Kapten

Fabian

Parta

Vitåfors/Riddarstolpe

A cross-section of the Kiruna mine shows how mining progresses successively deeper. The orebody is about4 km long and has an estimated depth of 2 km.

The Malmberget mine consists of about 20 orebodies, of which ten are currently mined.

23I N V E S T M E N T S A N D D E V E L O P M E N T P R O J E C T S


ped are the pellet lines in Malmberget, Svappavaara and Kiruna. In addition to conventional sampling, multivariate analysis has been applied. In Kiruna, we are investing in an online monitoring system to gain a better understanding of the variables that infl uence the quality of DR pellets.

A simulation model has been created for determining production capacity in the Kiruna mine. The model cov-ers the fl ow from loading to product bin and includes con-trol and automation technology, statistics on disruptions, maintenance requirements and production speeds.

Possibilities for increasing sorting and concentrating capacity in Malmberget are being investigated. The in-crease will be gradual, and the ultimate goal is for Malm-berget to produce 8 Mt of pellets by 2010.

To test control of the new pelletizing plant in Malmber-get (MK3), a simulator with models of the process has been built. Results of the simulations have been used for dimensioning various sections of the plant. The system will be further used for training process operators and other production personnel, which will shorten the com-missioning time.

New electronic instruments for measuring green-pellet strength enable detailed study of the effects of different variables on the pelletizing process. Among other things, this has resulted in new knowledge about binding mecha-nisms that will have a direct impact on capacity and qual-ity in the production plants.

A pre-study for a pellet research center has been pre-sented. The study points out the potential for highlight-ing this research area, and thereby strengthening LKAB’s leading position in pelletizing.

Owing to the steadily increasing need for landfi lling and deposition of waste material, landfi ll sites in conjunction with mining operations entail high costs. In collaboration with Zinkgruvan, Boliden and the waste-management company Multiserve, a method for better utilizing these sites, and thereby lowering costs, is being developed.

PRODUCT DEVELOPMENT OF IRON ORE PELLETS

In a DR-product development project conducted in colla-boration with ANSDK in Egypt, new blends are being tes-ted in basket trials in the DR furnace shaft. The tests have

resulted in a new recipe in which some of the dolomite has been replaced with limestone, which results in bet-ter metallization, carburization and compression strength during reduction.

LKAB is involved in the research projects The New Blast Furnace and New Natural Gas Based Steelmaking. The fi rst project involves two campaigns in the experimental blast furnace (EBF), which is being rebuilt as an oxygen blast furnace with CO2 extraction. In the second project, two EBF campaigns have been carried out with pre-re-duced burden material. The results show that there is po-tential for reducing coke consumption in the blast furnace by up to 50%.

The ULCOS project is an initiative of the International Iron & Steel Institute (IISI) to investigate the possibilities for cutting steel-industry carbon dioxide emissions by 50%. LKAB has contributed the use of the EBF for stud-ies of how CO2 emissions from blast furnaces can be re-duced. Work has been completed and reports have been presented.

PRODUCT DEVELOPMENT – INDUSTRIAL MINERALS

Minerals research and product development are applica-tion-oriented and are conducted in close cooperation with customers. In addition to the LKAB Group’s research orga-nization, the resources of the Minerals Division’s UK sub-sidiary are available. Minerals also collaborates with uni-versities and research institutes in Europe and the USA.

Where the mineral olivine is concerned, the LKAB Group has a high level of expertise, combining unique knowledge of the product’s characteristics and a vast knowledge of the market and product applications. LKAB introduced olivine as an ingredient in pellets for ironmak-ing and has since become a world leader in this applica-tion area. The Minerals Division is now amassing knowl-edge of application areas even outside the steel industry.

One example of technical development is an environ-mentally friendly technique for producing foundry cores, a project that will have a signifi cant impact on the Miner-als Division’s business opportunities in the foundry indus-try, particularly with respect to the mineral olivine.

Anna-Karin Rosberg works with R&D in Malmberget.

24

Prospecting, ore reservesand mineral resourcesA continuous supply of new ores and minerals is fundamental to all mining

and minerals companies. To ensure future operations, prospecting and sur-

veying are necessary to secure concessions for mining new deposits and to

defi ne and extend known deposits while they are being mined.

Within the Mining Division, prospecting and defi nition ex-ploration are conducted in conjunction with ongoing mi-ning operation in Kiruna and Malmberget. The intention is to further defi ne and verify the extent of the orebodies, mainly at depth, but also in terms of the area of ore within the existing mining area.

In the Minerals Division, mining concessions for new deposits are obtained mainly through acquisitions, and exploration is conducted to only a very limited extent by the company itself.

PROSPECTING – MINING DIVISION

The Mining Division’s strategy is to defi ne and verify mi-neable quantities of ore that will provide the basis for future mining beyond the current main levels, in Kiruna1 045 and in Malmberget 1 000 meters below pre-defi ned leveling points at the surface.

The orebodies must be defi ned so that the economic value of the requisite equipment for mining under current levels can be assessed, decided upon, built and commis-sioned before the current levels are mined out.

During 2005, LKAB invested MSEK 30 (40) on explora-tion work in extension to the mines in Kiruna and Malm-berget.

Kiruna

During the year, in Kiruna, exploration drilling has been done via drifts adjacent to the orebody. Work has focused mainly on determining the extent at depth of the northern and southern parts of the orebody.

Results thus far confi rm the continuity and extent of the ore and will provide a basis for development work and mining below the present main level. Continued mining under 1 045 meters will be assessed and a decision as to construction of new facilities for this will be taken. Preli-minarily, mining at a new main level will begin in 2012.

The extent of the orebody is such that future mining of the Kiruna ore will directly impact parts of the city of Kiruna. This mainly concerns LKAB’s residential area, as well as road and railway infrastructure, switchgear and substations. Concerned parties, the Municipality of Kiru-na, the County Administrative Board, the National Road Administration, the National Rail Administration, Vatten-

fall and LKAB have reached consensus in preparing al-ternative solutions for a new key plan and alterations to the road and railway infrastructure. Discussions are being held with other concerned parties.

After a new key plan with a new residential area has been established, tentatively by the end of 2006, prepara-tions for various public works projects can be made. Initi-ally, new switchgear and substations are planned, as well as rerouting of the railway by 2012.

Malmberget

During the year, exploration work has been focused on verifying the extent at depth of several orebodies. Explo-ration work under built-up areas of the town of Malmber-get has been conducted under existing permits, and three new permits have been granted during 2005 for which ex-ploration work has not yet begun. In the fi nal months of the year, the application process to obtain a mining con-cession for the Fabian orebody, under Elevhensområdet, was begun.

Exploration work focuses on defi ning the orebodies for future mining beyond current levels and to provide a basis for decisions on new equipment and infrastructure, with a preliminary production start in 2010. The results of exploration work during 2005 are not included in the cur-rent ore estimates due to the fact that new geological mo-deling of the orebodies in Malmberget is in progress.

Future mining operations will have an impact on parts of the community of Malmberget. LKAB is planning the necessary measures in cooperation with the Municipality of Malmberget and other public authorities. Closure of parts of LKAB’s residential areas Johannes and Hermelin has commenced.

PROSPECTING – MINERALS DIVISION

During the year, the Minerals Division has primarily up-graded raw material from Mining and purchased mate-rial from other sources. To a limited degree, the division upgrades material from deposits in Greece and Turkey in which the company has an ownership interest. LKAB has therefore elected not to report deposits partly owned by Mineral’s in the formal reporting of mineral resources and ore reserves.

P R O S P E C T I N G , O R E R E S E R V E S A N D M I N E R A L R E S O U R C E S


25

During 2005, the Seqi olivine deposit in Greenland was acquired. The acquisition will enable the division to ad-vance its position on the olivine market, a market that ab-sorbs approximately 4 Mt per year.

The Minerals Division will handle about 1 Mt of olivine annually, and the deposit will satisfy demand for olivine for many years to come. The results of geophysical sur-veys and drilling campaigns indicate reserves in excess of 100 Mt.

Results of geophysical surveys of the olivine deposit in Greenland do not enable full reporting of the extent of the mineral resources as of 31 December 2005. More detailed testing will be done during 2006.

MINERAL RESOURCES – MINING DIVISION

Prospecting and exploration provide a survey of minera-lizations which, according to certain criteria, can be clas-sifi ed as mineral resources; i.e., an occurrence of minerals in the bedrock.

Mineral resources are classifi ed as ‘inferred resources’ when quantities, grades and mineralizations can be esta-blished with a low degree of certainty. Detailed explora-

MINERAL RESOURCES IN ADDITION TOORE RESERVES

per 31 December 2005

(to dressing plant) Quantity, Mt Fe, %

KirunaMeasured 189 47.9Indicated 89 48.0 Inferred 166 46.9

SvappavaaraMeasured 80 47.1 Indicated 30 47.0 Inferred - -

MalmbergetMeasured 84 42.4Indicated 18 39.5 Inferred 84 43.0

ORE RESERVES MINING

per 31 December 2005

(to dressing plant) Quantity, Mt Fe, %

Kiruna Proven 695 48.6Probable 103 46.5

Malmberget Proven 104 43.6Probable 71 43.6

tion can result in the classifi cation of mineral resources as ‘indicated resources’.

The information that has been amassed from drilling campaigns and other sampling is suffi cient to enable technical and fi nancial calculations. After additional dril-ling campaigns and sampling, the deposit may be clas-sifi ed as ‘measured’, whereby mine plans and fi nancial assessments can be produced. The mine plans and pro-cesses form the basis of technical and fi nancial analyses that are performed to determine the potential profi tability of future mining of the deposit.

ORE RESERVES – MINING DIVISION

The sections of the measured and indicated mineralresources that can be mined and processed on the ba-sis of LKAB’s profi tability requirements are referred to as the company’s ore reserves. Ore reserves are classifi ed as either ‘probable’ or ‘proven’, the latter being the more precisely documented of the two.

Ore reserves and mineral resources are quoted in quantities and grades after mining; i.e., with allowance for losses during extraction.

LKAB reports ore reserves in compliance with re-commendations adopted by SveMin, applicable sec-tions of which correspond to the Ontario Securiti-es Commission’s (OSC) National Instrument 43-101, which stipulates how ore reserves and mineralresources are to be reported.

Mineral resources in Kiruna down to 1 500 meters (from leveling point) are reported. Below this level, there is in-suffi cient data to enable an estimate of grades and quanti-ties. Mineral resources in Malmberget, within existing concessions, are reported for the eastern fi eld down to 1 250 meters and between 600 and 800 meters for the western fi eld. At deeper levels, there is insuffi cient data to enable an estimate of grades and quantities. LKAB also has mining concessions for Gruvberget and Mertainen.

Estimates of LKAB’s mineral resources and ore reserves have been compiled under the direction of Carlos Quinteiro, Mineral Resources and Mineral Econo-mics Specialist with the Technology and Business Development unit. Carlos Quinteiro is recognized as a ‘Qualifi ed Person’ by SveMin and has more than 10 years of experience in the mining and minerals industry.

P R O S P E C T I N G , O R E R E S E R V E S A N D M I N E R A L R E S O U R C E S


26

SustainabilityLKAB’s information on sustainability covers the following areas: ethics and social re-

sponsibility, personnel, human-resources development, working environment, environ-

mental impact and energy consumption. The fundamental control documents for the

company’s sustainability are the ethics policy, quality policy, environmental and energy

policy, and information policy, which were adopted by the Board in 2005.

S U S T A I N A B I L I T Y


ETHICS POLICYLKAB will strive to be perceived by customers, share-holders, suppliers, employees and the community as a company that conducts a sound and successful business operation with integrity and moral correctness.

• LKAB will always comply with the laws and regulations that apply in the countries in which LKAB operates, and in so doing LKAB will respect the United Nations Uni-versal Declaration of Human Rights and similar agre-ements.

• LKAB will strive to uphold impeccable business ethics.• In realizing its objective of maintaining a fi nancially

sound and successful business operation, LKAB will strive to protect the environment and use energy re-sponsibly.

• LKAB will strive to maintain strong and enduring rela-tions with its employees.

GENERAL PRINCIPLES

LKAB’s chief task is to develop and maintain a fi nan cially sound and successful business operation. LKAB has a long-term responsibility. In the countries, communities and environments in which LKAB operates, we have a long-term responsibility towards our employees, busi-ness partners and society in general.• We will always comply with the laws and regulations

that apply in the countries in which we operate. • We will respect the United Nations Universal Declara-

tion of Human Rights, and we will accept our responsi-bility to observe the rights of employees and society to the extent that they are affected by our operations.

• We will strive to manage our business operation with integrity and moral correctness.

• We will strive to adopt an attitude of openness india logue with those who are affected by our operations.

• Wherever possible and wherever we exercise infl uence, we will strive to ensure that our suppliers and subcon-tractors adhere to the principles of our ethical guide-lines.

BUSINESS ETHICS

LKAB will not use methods such as bribery and other cor-rupt and unfair competitive practices that distort markets and hinder economic, social and democratic develop-ment.• LKAB will not contravene applicable laws governing

competition. • Bribery is strictly prohibited in LKAB’s business

relations.

EMPLOYEE RELATIONS

It is very important for LKAB to uphold a strong and en-during relationship with employees that is based on mu-tual respect and dignity. The terms of employment offe-red will comply with national legislation.• LKAB will provide a working environment that is safe

and sound with respect to the nature of our operations, and we will strive continuously to implement improve-ments. *Special, written health and safety instructions shall be issued and will apply in all workplaces.

• LKAB acknowledges employees’ right to organize under the applicable labor laws and principles of the respec-tive countries in which we operate.

• LKAB strives to give all people equal opportunities, regardless of race, color, gender, nationality, religion, ethnic origin or any other distinguishing characteristic. LKAB does not tolerate discrimination or harassment. LKAB does not tolerate discrimination or harassment.

• LKAB prohibits forced labor and other forms of invo-luntary labor in our workplaces. LKAB does not tolerate the use of methods that restrict employees’ freedom of movement. LKAB does not tolerate the use of methods that restrict employees’ freedom of movement.

• LKAB does not employ persons younger than 15 years of age or the higher age that may be stipulated by local legislation.

ENVIRONMENT

LKAB’s work shall be characterized by concern for the en-vironment; for which reason LKAB has adopted an Envi-ronmental and Energy Policy that will guide our actions while acknowledging our objective to maintain a fi nan-cially sound and successful business operation.

27

QUALITY POLICYLKAB will exceed customers’ present and future expec-tations by involving all employees in the process of con-tinuous improvement. We will strive for zero defects in everything we do, and each employee is responsible for the quality of his or her own work.

CERTIFICATION OF MANAGEMENT SYSTEMS

The Total Quality Management unit is responsible for the Group’s quality and environmental management systems. For LKAB, a systematic quality effort is essential for deve-loping processes and product quality. The Total Quality concept stands for a holistic approach to quality mana-gement, covers all operations and is based on customer orientation and above all, continuous improvement.

LKAB’s quality management system has been certifi ed according to ISO 9001:2000 since 2002. In 2005, certifi ca-tion of the Minerals Division was conducted. Most of the plants operated by the division are quality-certifi ed accor-ding to ISO 9001:2000. All plants will achieve certifi cation during 2006.

After an audit of the entire quality management system in 2005, which resulted in approval of the system, LKAB will retain its certifi cate for a further year.

LKAB decided in 2003 to adopt an energy and en-vironmental management system, partly because the company’s operations are very energy-intensive and part-ly to meet the requirements of the new system of trade in emissions rights.

In June 2005, an audit of the energy management sys-tem in Svappavaara was carried out, and LKAB became the fi rst company in Sweden to be awarded a certifi cate stating that the system complies with the SS 627750 stan-dard. Svappavaara already has an approved environmen-tal management system.

During the autumn, the environmental and energy ma-nagement systems for Mining Logistics, which includes the Ore Railway and harbors in Narvik and Luleå, were certifi ed. Work on certifi cation of the processing plants in Kiruna and Malmberget continues and will be completed during the spring of 2006. The environmental and energy management system will be fully implemented and certi-fi ed throughout the LKAB Group during 2007.

LKAB has introduced a system for trade in emissions rights during the year. The system has been verifi ed by SP Certifi ering.



ENVIRONMENTAL ANDENERGY POLICYThrough continuous improvement of the working envi-ronment, the natural environment and energy use, LKAB’s operations will promote long-term sustainability and pro-fi table development.• This policy applies to companies within the LKAB Group

as well as suppliers operating on LKAB’s premises. • Established laws, bylaws, regulations and other com-

mitments to which LKAB is subject are minimum re-quirements.

• LKAB shall strive to create a working environment that is safe and stimulating for employees.

• Our employees will receive ongoing training in environ-mental issues.

• New technologies and technical advances will be assessed with consideration to the working environment, environ-mental protection and the effi cient use of resources.

• Suppliers working outside LKAB’s facilities and premises will be encouraged to work in compliance with our policy.

• In dialogue and cooperation with public administrations and society, our attitude shall be characterized by open-ness and factuality.

INFORMATION POLICYLKAB’s employees will always be well informed with re-spect to the company’s operations, its business environ-ment, goals, strategies and results, and of their own work-place and their role in the company’s operations. LKAB’s others stakeholders will be given, on an ongoing basis, timely and correct information that provides a represen-tative view of the company and its operations.

GUIDELINES

The Group’s corporate communications will contribute to greater knowledge and trust among the company’s stake-holders. LKAB’s ethics policy, with guidelines, will also guide the work of corporate communications.

Each line manager is responsible for communication, the ongoing dialogue, in his or her workplace. Similarly,each line manager is responsible for ensuring thatco-workers have continuous access to current and nec -es sary information about their workplace and its role in the company’s operations.

The President has the overall responsibility for exter-nal communications. Members of Group Management are responsible for external communications with respect to their individual areas of responsibility. The Chairman of the Board issues statements pertaining to ownership issues.

The mass media are an important channel of infor-mation in society – and thereby for all of the company’sstakeholders. LKAB will work actively and openly with the mass media to present a positive image and foster confi -dence in the company. There must be particular reasons for declining to comment or give information. This may

be information pertaining to fi nance, safety, competition, ongoing negotiations or other information that might be detrimental to the company if disclosed. Great care must be taken to safeguard personal integrity.

LKAB will strive to follow the rules of corporate infor-mation disclosure that are recommended for companies listed on the Stockholm Stock Exchange. No fi nancial in-formation other than offi cial year-end or interim reports may be disclosed to external parties.

28

HUMAN RESOURCESDuring 2005, the Group’s management structure was re-organized to achieve a greater focus on e.g., human re-sources and fi nance issues. At the same time, the number of levels of management below president was reduced from six to four in Finance and Human Resources.

The positive outlook for the future implies a conti-nued strong demand for labor. The company is applying a long-range strategy, preparing for planned production increases, higher demands on qualifi cation, and future re-tirements.

LONG-TERM COMPETENCE SUPPLY

To ensure the future supply of qualifi ed personnel, LKAB cooperates closely and extensively with universities and colleges, above all, Luleå University of Technology, the secondary schools in the region, training companies and others.

In all instances of cooperation in education, efforts are being made to increase the numbers of women in traditio-nally male-dominated study programs. This is important for ensuring the future supply of qualifi ed personnel, but also because we know that effi ciency and health improve in organizations with a more even gender distribution.

One of these education initiatives is the LKAB high school. The fi rst ten students began their studies in au-tumn 2005, at Välkommaskolan i Malmberget. The study programs include industrial technology, vehicles, electrical engineering and energy, and one third of study time is rela-ted specifi cally to LKAB. The program is very popular, and there were six applicants for every place. 40% of admis-sions were girls, which can be considered trend-setting.

In autumn 2006, a similar LKAB industrial technology program, for 16 students, will be offered at Hjalmar Lund-bohmsskolan in Kiruna. A study program in electrical au-tomation will also be included.

In the spring of 2005, seven trainees, of which fi ve were women, began a one-year program that combines regu-lar work duties with education and other activities. The objective is to facilitate networking and give participants insight into, and knowledge of, the entire LKAB organiza-tion. In 2006, a new group of trainees will be recruited.

EQUALITY AND DIVERSITY

Gender equality is a strategic issue for LKAB. Competence supply characterized by greater gender equality is expec-

ted to improve the working environment, productivity and effi ciency, as well as contributing to the company’s over-all development.

The fundamental control document for work with equa-lity and diversity in LKAB, adopted by the Board, is the ethics policy and guidelines for Employee Relations, which states: LKAB strives to give all people equal opportunities, regardless of race, color, gender, nationality, religion, eth-nic origin or any other distinguishing characteristic. LKAB does not tolerate discrimination or harassment.

Based on this policy and the Equal Opportunities Act, yearly action plans for equality are established by Group Management. More uniform gender distribution is the ul-timate goal. To reach this target, the plan of action focuses on sub-goals and activities that will ensure that workpla-ces function for both women and men, that employment can be combined with parenthood, that sexual harass-ment and wage discrimination do not occur, and that wo-men are actively recruited and developed in their work roles.

MORE UNIFORM GENDER DISTRIBUTION

The proportion of women and the number of women in managerial positions in the Group have increased in recent years. This trend has continued in 2005. The pro-portion of female employees is 10.2% and of women in managerial positions 11%. The number of women in tra-ditionally male-dominated occupations is growing at a slower rate than in other areas of the Group, but a change is under way, thanks to among other efforts, the ongoing educational initiatives with secondary school in the Ore-fi elds region.

The entire Group is characterized by low personnel tur-nover. During 2005, 197 employees have been recruited to LKAB. The proportion of employees over the age of 55 is 22%, or 770 people, which means that there will be large numbers of retirements in coming years, above all in mining production and ore processing in the Mining Division.

In 2005, the Minerals Division increased its workforce by 2.4%, with China accounting for the greatest increase. Two new companies have joined the division during the year: Minelco Oy in Finland and Minelco Likya in Turkey. The production plant in Knottingley, in the UK, was closed in 2005, affecting 5 persons, and the plant in Yate, where



Students at the LKAB high school in Malmberget. Kristoffer Öberg and Josefi n Nilsson.

29

16 employees will be affected, will be closed at the end of 2006.

Intra-Group recruitment has increased and will be a natural aspect of competence supply in future. The pro-cess began relatively recently, but continues to develop. Personnel mobility within the Group is important. We are convinced that this promotes development and positive operating results.

COMPETENCE DEVELOPMENT

LKAB’s strategic plan emphasizes the importance of de-legating greater responsibility and authority to the indi-vidual employee. The goal is to improve the company’s effi ciency by making workplaces even more attractive. Employeeship must be characterized by the will and the means to infl uence conditions in one’s own workplace and to deliver good results. Ultimately, this will result in fewer levels of management.

Work on the new pelletizing plant in Malmberget has in-tensifi ed, leading up to commissioning in 2006. In addition to new construction and technology, the project also in-volves the development of new working methods for pro-duction and maintenance personnel. In the workplace and in the work of continuous improvement, more responsibi-lity and authority will be delegated to employees.

The competence of each employee in and around LKAB is a key factor of success. Continuous learning is therefore a self-evident necessity, and training methods are adapted to employees’ different prerequisites and learning styles.

Traditional classroom teaching still predominates, but is complemented with other forms of training. One form that has been tested and has gained greater acceptance during 2005 is interactive training, so-called e-learning. For ex-ample, the safety training program for contractors is now interactive. This has led to more effective training with greater fl exibility, which is good for everyone involved.

Experience has shown that e-learning is very success-ful, and more interactive courses will be introduced in 2006. This will mean greater opportunity for fl exiblelearning, both for LKAB employees and our partners.

In the Minerals Division, an extensive sales seminar has been held. The aim has been to reach targets in the re-spective business areas more effectively by strengthening the sales force.

MANAGEMENT

Good management is decisive for LKAB’s success. LKAB has formulated very specifi c managerial requirements and is determined to recruit and develop managers who can lead and who like to lead others. The ability of our ma-nagers to implement changes that promote the develop-ment of operations and personnel will remain in focus.

Today, the LKAB Group is growing internationally and consists of about 30 companies in 15 countries. To strengthen the Group’s team spirit, an international ma-nagement seminar involving top-level managers was conducted in the autumn. The focus was on the Group’s strategy and cultural aspects.

Conditions differ among the Group’s various divisions and companies. Common to all is that each brings benefi t to the Group; but at the same time, distinct local differen-ces can be a point of departure for developing the opera-tions of the individual unit. The seminar opened channels for many contacts throughout the Group and laid a good foundation upon which to build.

TERMS OF EMPLOYMENT AND INCENTIVE SYSTEMS

During the year, a new wage system within the framework of Metall’s bargaining agreement has been established, a program that began in 2004. Objectives are being met and the system has contributed to increased competence de-velopment and delegation of responsibility and authority.

The incentive system that was introduced in 2004 has been retained in 2005. The reward is maximized at SEK 30 000 per year and full-time employee. The President and other senior executives are not entitled to rewards under the incentive system.

The system, which follows the owner’s guidelines for incentive schemes, is based on three factors: quality, work environment and production targets. The system has contributed to drawing greater attention to these im-portant factors. Quality has been high, production volume has increased signifi cantly in existing facilities, and com-mitment to improving the working environment has been strengthened.

Compared to the previous year, the outcome of the incentive program improved signifi cantly, increasing to SEK 27 400 per full-time employee. All three para meters warranted a high reward during the year, with the para-



A crew in the Kiruna mine: Susanna Jokinen, Anders Salomonsson, Ann-Britt Häggroth, Örjan Lingebrand, Svante Kuru and Thomas Mikko.

30

meters for production and working environment meriting maximum reward. The incentive system has been revie-wed and adjusted for 2006.

In LKAB, nearly half (49%) of employees work accor-ding to various shifts, which is necessitated by the fact that production facilities operate around the clock, all year round. However, shift work has certain negative ef-fects. To implement and assess various measures to alle-viate the negative effects of shift work, a project involving LKAB’s employer organization Metallgruppen, the trade union organization IFMetall and Arbetsmarknadsförsäk-ringar (AFA) is under way.

Increased awareness of health and lifestyle through training programs for shift workers and managers, chan-ges in working environment and trials of new shift sys-tems are activities that are planned or in progress. Health aspects and conditions for competence development are thereby being addressed more directly than previously and the demand for temporary labor will be reduced. The results will be discernable in the long term, but some de-gree of assessment in 2006 is deemed possible.

SAFER AND HEALTHIER WORKPLACES

LKAB’s workplaces must be safe and stimulating for em-ployees, and we actively encourage our suppliers to work according to our environmental policy. The total rate of sickness absence continues to decline. During 2005, the rate of absenteeism due to illness declined by 25%, i.e., from 5.6% to 4.3%, with 2.4% short-term and 1.9% long-term absence.

This trend is the result of preventive measures and me-asures to assist employees to return to work or to conti-nuing working in the event of ill health. An example is the training program, for all managers and safety offi cers, on recognizing the early warning signs of alcoholism and drug abuse as well as corrective measures for these con-ditions. Training programs on working environment con-tinue to constitute LKAB’s single largest training effort.

To further encourage employees to assume responsibility for adopting a healthier lifestyle, the company has extended opportunities for employer-paid use of fi tness training facili-ties in the operating locations in the Orefi elds and Luleå.

Where accident frequency is concerned, we are also seeing a long-term decline. The number or accidents per million working hours was 10.5, which is a decrease of 13% compared to 2004. However, this is still somewhat off the target, which is ten accidents per million hours.

Nearly all accidents and incidents in LKAB are the result of failure to follow correct procedure. Only a few are the result of unsafe environments. Efforts have been made to increase involvement in accident-prevention work. Among other things, this has led to a dramatic increase in incident reports, from about 30 incidents per accident resulting in absence in 2004 to 92 in 2005.

Our effort to continuously improve working environme-nts will persist; but, above all, attitudes to health and safe-ty must be changed for the better. Therefore, we are now introducing a working method under the concept “Safety First”, which will encourage and support the realization of the goal to create an accident-free working environment.



SICKNESS ABSENCE WORK-RELATED ACCIDENTS

Two typical LKAB workplaces: the mill hall in the Svappavaara concentrating plant. Robert Wikström, control room operatorat the pelletizing plant in Kiruna.

31S U S T A I N A B I L I T Y


ENVIRONMENTAL AND

ENERGY REPORTING

Mining and processing of minerals impact the environme-nt through alteration of the landscape, energy consump-tion, emissions to the air and discharges to the water. LKAB seeks to limit this impact through good planning. Among other things, this means that the environmental consequences of decisions and measures are always ta-ken into consideration. The environmental work must be forward-looking and aimed at enabling the company to meet tougher environmental requirements in the future.

OVERALL ENVIRONMENTAL AND ENERGY OBJECTIVES

• LKAB will reduce the proportion of industrial waste that is deposited.

• LKAB will reduce the spread of particulate matter.• LKAB will reduce the specifi c fuel consumption in the

pelletizing process.• In planning and procurement, LKAB will seek to reduce

the proportion of road transports in favor of rail trans-port or other energy-effi cient modes.

ORGANIZATION AND RESPONSIBILITY

The President bears the overall responsibility for environ-mental issues. Operational responsibility is delegated to the heads of divisions and unit managers.

The specialist function External Environment is re-sponsible for the entire Group’s environmental work, ensuring that the company complies with terms, condi-tions and laws by applying for mandatory permits and providing advice and support. External Environment also handles sampling, surveys and reporting to authorities.

LKAB’s environmental monitoring is carried out by the company, in consultation with supervisory authorities, in accordance with established programs that measure both emissions/discharges and environmental impact. An en-vironmental report for each operating location is submit-ted annually to the authorities concerned.

The Chemicals Committee in LKAB handles all matters pertaining to chemical products, for example, approval of new products.

LKAB’s Occupational Health unit works above all with preventive measures. The unit’s work is based on a broad knowledge of medicine, technical and behavioral science, work organization and rehabilitation methodology.

Environmental and energy issues are also addressed in various trade organizations. LKAB is an active member of SveMin (the Association of Mines, Mineral and Metal Producers in Sweden, formerly the Swedish Mining As-sociation) and the Swedish Steel Producers Association. LKAB also supports and actively participates in a number of environmental research programs. The company is an active member of the Torne and Kalix Rivers’ Water Con-servation Association.

ENVIRONMENTAL AND ENERGY MANAGEMENT SYSTEM

To promote energy conservation and environmental im-provement, LKAB is working towards the implementa-tion of an environmental and energy management sys-tem that will be integrated with the company’s quality management system. The management system will also ensure that LKAB complies with current energy and en-vironmental legislation. The environmental and energy management system will be fully implemented and certi-fi ed throughout the LKAB Group during 2007.

PROGRAM FOR ENERGY EFFICIENCY

LKAB has applied and been accepted for participation in the Swedish Energy Agency’s Program for Energy Effi -ciency (PFE) during 2005. LKAB applied for participation for fi ve operating units: Svappavaara ore processing, Kiruna ore processing, Kiruna mining, Malmberget ore processing and Malmberget mining. The Energy Agency approved LKAB’s applications in June 2005.

Through participation in PFE, LKAB will introduce an energy management system according to Swedish Stan-dard (SS). In addition to introducing a standardized sys-tem, LKAB will carry out an energy audit and analysis. This means that energy consumption will be described and measures for conserving electricity will be defi ned. Special procedures for planning and purchasing will be introduced, which means that the most energy effi cient solutions will be chosen whenever technically feasible. Measures and results will be submitted for approval by the Swedish Energy Agency, which will also approve con-tinued participation in the program.

In June 2005, an audit of the energy management sys-tem for Svappavaara’s ore processing was carried out. LKAB became the fi rst company in Sweden to be award-ed a certifi cate according to the Swedish standard and elected to apply the PFE requirements.

INDUSTRY COLLABORATION IN BAS-EL

Electricity is an important resource for LKAB, and the company is concerned about the current energy supply and rising electricity prices.

Together with 19 other energy-intensive companies in Sweden, LKAB has therefore decided to form BasEl AB, a company that will safeguard the interests of member companies and Swedish primary industry with respect to the long-term stability and competitiveness of electri-cal power supply. BasEl was formed by its member com-panies’ in response to concerns that the current energy supply in Sweden cannot meet the demand for electricity at competitive prices.

32 S U S T A I N A B I L I T Y


BasEl was formed together with several other electrici-ty-intensive companies, mainly in the forestry, steel, che-mical and mining industries with operations in Sweden and abroad. These companies have a combined power consumption of about 25 TWh (terawatt hours) per year, which corresponds to about half of Sweden’s total indu-strial electricity consumption.

The company will work with concrete projects of which the aim is to increase the availability of competitively pri-ced electricity in Sweden. These projects may concern power production, in Sweden or abroad, as well as trans-mission capacity. BasEl’s objective is to bring about an increase in the supply of electricity on the Swedish market of about 10 terawatt hours per year.

ENVIRONMENTAL PERMITS AND INVESTMENTS

The new pelletizing plant now under construction in Malmberget will be commissioned during 2006. The en-vironmental permit for Malmberget entitles LKAB to pro-duce 6.7 Mt of pellets per year. A new permit application for “Increased capacity in Malmberget”, which refers to the entire operation, is being made.

The Board of LKAB has voted to spend 1 billion Swedish kronor to build a new ore harbor in Narvik. This will impro-ve the effi ciency of operations as well as the harbor envi-ronment. Ore storage silos will be built underground, and the entire harbor structure will be adapted to handle larger ore trains and greater volumes of iron ore products.

The storage silos will be blasted out of the bedrock. Above the storage area, the ore trains will enter a tun-

nel and bottom-discharge their loads via so-called rolling discharge. This reduces noise and dust. The silos will be equipped for dust evacuation. A de-icing station will be installed near the tunnel entrance.

In December 2005, the Board voted to build additional concentrating and pelletizing plants in Kiruna. The Envi-ronmental Court of Appeal had already granted LKAB a permit for Kiruna to produce 14.8 Mt of pellets per year. The new plants are expected to be operational in 2008.

An application has been submitted to the Environ-mental Court regarding expansion of the dolomite quarry in Masugnsbyn to meet demand from increased pellet production in Kiruna.

The Minerals Division’s olivine mine in Greenland is now operational and complies with local environmental legislation.

Kiruna Grus- och Stenförädling (KGS) has invested in equipment that will signifi cantly reduce the company’s consumption of natural gas. This consists of a screen-ing plant for processing shotcrete gravel from waste rock from the Kiruna mine. KGS has also built a concrete sta-tion in Malmberget, which is advantageous from the point of view of both operations and environment.

THE ENVIRONMENTAL ADVANTAGES OF

LKAB’S PRODUCTS

Ore from LKAB’s mine consists mainly of magnetite. It re-quires lower energy input during processing, which re-sults in lower carbon dioxide emissions. It is therefore more environmentally friendly than other ores.

In LKAB’s pelletizing process, an oxidation from magnetite to hematite takes place, which liberates energy. Most of the thermal energy needed in pellet manufacture comes from this oxidation.

ENERGY SUPPLY IN LKAB’S PELLETIZING PROCESS

Thanks to systematic efforts, fuel economy in the pelletizing plants has successively improved.

ENERGY CONSUMPTION

Renovation of the ore harbor in Narvik has begun. Ore will be stored in underground silos for better environment.



Pellet manufacture at LKAB’s mines results in one-se-venth the quantity of emissions compared with sintering at the steelmills. This is because thermal energy from the process is utilized in production. The environmental im-pact must be regarded in a global perspective. Pelletizing and sintering now take place to a greater extent at the mines. This means that some of the emissions have been moved from the steel mills to the mine locations.

The Minerals Division, which produces and markets selected industrial minerals, has operations in several countries on different continents. The division offers pro-ducts that are made from naturally occurring minerals, which is advantageous from a life-cycle perspective and means that materials with a negative environmental im-pact can in some cases be replaced.

In summer 2005, LKAB’s operation in Svappavaara was awarded the Municipality of Kiruna’s environment prize, thanks to the fact that Svappavaara achieved certifi cation of its environmental and energy management system, and was the fi rst in Sweden to do so.

In 2004, this prize was awarded to the subsidiary Kimit, which managed to reduce nitrogen emissions from its ex-plosives plant in Kiruna. Thanks to new procedures and better care of equipment, emissions had been reduced by more than 95% since 1995.

ENERGY CONSUMPTION

LKAB’s operations are energy-intensive. With more than 1% of Sweden’s total electricity consumption, the com-pany is one of the country’s largest electricity consumers. Energy consumption per tonne of iron ore produced and processed has declined steadily. Primarily, oil consump-tion has decreased. At the same time, there has been a changeover from oil to other energy sources.

The predominant iron mineral in LKAB’s mines is mag-netite, which has the advantage that energy is liberated

during oxidation from magnetite to hematite during the oxidation process. Approximately 65% of the thermal en-ergy needed during pellet manufacture comes from the iron ore, which reduces the need for external fuel.

Most other pellet producers in the world use hematite ore, which requires a greater input of energy in the up-grading process, approximately 15 liters of oil per tonne of fi nished product. By comparison, LKAB’s pellet plant in Malmberget uses only 5 liters of oil per tonne of pellets, with 10% hematite in the raw material.

Some of the most important energy effi ciency improve-ments have been the installation of waste gas boilers in the pellet plants, which has reduced energy consumption, and the changeover from oil to low-sulfur coal.

In Kiruna, LKAB recovers excess heat from the pelleti-zing process for space heating in its own plants. Some of the heat is also redirected to the municipal district heating system.

ATMOSPHERIC EMISSIONS

Most of LKAB’s atmospheric emissions come from pel-let manufacture, which gives rise to emissions of sulfur dioxide, fl uorides, chlorides, nitrogen oxides and particu-late matter. The environmental impact must be regarded in a global perspective. Pelletizing and sintering now take place to a greater extent at the mines. This means that some of the emissions have been moved from the steel mills to the mine locations.

Pellet manufacture at LKAB’s mines results in one-se-venth the quantity of emissions compared with sintering at the steelmills. This is because thermal energy from the sintering process is utilized in production. An increased use of pellets in the European steel industry has made it possible to reduce the total impact on the environment, since atmospheric emissions that exceed specifi ed limits have diminished substantially.

For several years, energy consumption has been directly proportionalto pellet production. Effi ciency improvements will contribute to areduction in energy consumption in relation to the number of tonnesof pellets produced.

ENERGY CONSUMPTION PER TONNE PELLETS

Carbon dioxide emissions are reduced when LKAB pellets are used as the iron raw material. A sinter-based steelmill releases seventimes as much carbon dioxide and emissions from hematite-based pellets are more than three times higher compared to LKAB pellets.

EMISSIONS OF CO2

34 S U S T A I N A B I L I T Y


LKAB’s capacity expansion is taking place in keeping with strict en-vironmental standards. Since 1980, emissions of particulates, sulfur dioxide and fl uorine have been more than halved, at the same time as pellet production has more than doubled.

Mean values of emissions from the pelletizing plants in Kiruna, Svappavaara and Malmberget. The fl ue gas cleaning equipment in the pelletizing plants has reduced emissions of, above all, sul-fur and particulates.

ATMOSPHERIC EMISSIONSEMISSIONS PER TONNE PELLETS

LKAB has conducted pilot-scale trials of treatment of ni-trous oxides using so-called selective catalytic reduction (SCR). So far, the object of the trials has been to determi-ne how the SCR unit reacts to LKAB’s exhaust gases. The trials have been successful. However, a thorough evalua-tion of the trial period is necessary before any conclusions can be drawn.

In addition to investigating possible techniques for trea-ting NO, a project for reducing emissions through process improvement is now under way. During 2005, equipment for continuous monitoring of nitrous oxide has been in-stalled in Kiruna’s KK2 pelletizing plant. This is to verify previous measurements and the effects of process impro-vement measures.

The climatic impact resulting from emissions of fossil carbon dioxide (CO2) is clarifi ed by the following example: The total CO2 emissions from a modern sinter-basedsteelmill are on the order of 2,000 kg of CO2 per tonne of crude steel, where sintering accounts for about 254 kg per tonne of crude steel. If LKAB pellets are used as the iron raw material instead of sinter, emissions from pellet manufacture are only 35 kg per tonne of crude steel – a reduction of CO2 emissions by 85%.

If hematite-based pellets are used as the iron raw ma-terial, the CO2 emissions in pelletizing are on the order of 115 kg CO2 per tonne of crude steel, just under half com-pared with sintering, but still more than three times hig-her than for LKAB pellets.

TRADE IN EMISSIONS RIGHTS

LKAB is involved in the EU’s system of trade in greenhou-se gas (GHG) emissions rights. The period 2005-2007 is a trial period for the greenhouse gas carbon dioxide (CO2). Thereafter, all countries that are parties to the Kyoto Pro-tocol will be subject to a new trading period, 2008-2012.

One emissions right entitles the holder (the owner of

an industrial plant) to release one tonne of carbon dioxide during the course of a given trading period. Rights are al-located by the state or they can be purchased. A surplus of rights can be sold.

A reduction in emissions within the trade area is achie-ved by placing a limit on the total number of rights allo-cated, and thereby on the emissions within the area. For the period 2005-2007, all Swedish companies that applied for emissions rights have been allocated rights, free of charge, by the state.

In Sweden, more than 600 industrial plants are affected. Per defi nition, LKAB has three plants that are subject to the trading system. These are in Kiruna, Malmberget and Svappavaara. They include pelletizing plants and central boiler plants. Carbon dioxide emissions from these plants come from the combustion of coal and oil, the release of CO2 from organic binders and carbonate-based additives such as dolomite and limestone. Combustion of oil in cen-tral boiler plants generates carbon dioxide.

In autumn 2004, LKAB was granted permits for CO2-emitt-ing plants in accordance with the Emissions Trading Act. The granting authority is the County Administrative Board of Norrbotten. The permit regulates how LKAB, in a reliable way, controls, monitors and reports emissions. There are special rules for quality assurance of emissions trading.

LKAB has been allocated 1.35 million emissions rights for the period 2005-2007. This corresponds to about 90% of LKAB’s total requirement for planned production. LKAB must therefore purchase additional emissions rights during the current trading period. LKAB appealed the Swedish Environmental Protection Agency’s allocation decision, but the appeal was rejected by the County Ad-ministrative Court of Stockholm. A request for review dis-pensation has been submitted to the Administrative Court of Appeals.



The 438,780 tonnes of carbon dioxide (emissions rights) allocated by the state to LKAB for 2005 are insuffi cient. To be able to produce more iron ore, LKAB must successively purchase more rights. During 2005, 10 000 emissions rights have been acquired, and in April 2006, LKAB must have suffi cient rights to cover actual CO2 emissions for 2005.

By purchasing emissions rights, LKAB can increase production and carbon dioxide emissions without contri-buting to any increase in total emissions in Sweden or Europe. Overall reduction of GHG emissions is the prime concern – not where these emissions occur.

NOISE, VIBRATION AND DUST

Noise and vibration are emitted from many sources in LKAB’s different activities; for example, from fans, vehic-les and blasting. Blasting in the mines causes vibration, which can be considered annoying in some residential areas even though the measured values lie below the re-commended limits.

Dust (particulate matter) is created during ore handling in harbors and outdoor stockpiles. Handling of waste rock for backfi lling of Kaptensgropen, the “Captain’s Pit”, in Malmberget, has at times also caused disturbances. Dust control measures have included paving of haulage roads and watering, as well as minimizing of the active dum-ping area.

Contractors inspect the area daily to determine if the-re is a dust risk. Watering is done whenever necessary. During spring 2005, dust-barrier nets were installed, and in 2006 installation of a new remote-controlled sprinkler system in Kaptensgropen in Malmberget is planned.

Renovation of the Narvik ore harbor will improve the environment in and around the harbor area. Storagesilos will be blasted out of the bedrock and equipped with dust evacuation systems. The ore trains will enter a tunnel above the storage and bottom-discharge their loads. This reduces noise and dust. There has been an environmen-tally effi cient ore harbor in Luleå since 1996.

DISCHARGES TO WATER

Most of LKAB’s process water is taken from mine drai-nage. After the water has been used in processing, it is led via an internal treatment system to LKAB’s dam system for separation of particulate matter. More than 75% of the process water is pumped back to the processing plants

through recirculation systems. The rest is discharged into lakes and rivers, which are recipients of surplus water.

The main pollutant that affects water quality is nitro-gen, which comes from the explosives used in the mines. A study is being conducted in Kiruna aimed at minimizing nitrogen discharges to water by more effi cient use of ex-plosives. The results of the investigation have been sub-mitted to the Environmental Court. The report presents the measures adopted in the project, proposals for addi-tional measures, and current discharges of nitrogen.

Waste rock dumping can also give rise to discharges to water. Weathering processes start after the waste is dump-ed. If the rock contains sulfi des, an acidic, metalliferous leachate is formed. Waste rock from LKAB’s mines has a relatively low sulfi de content and contains a surplus of neutralizing substances that counteract acidifi cation.

DAM SAFETY

LKAB has an extensive dam-safety program. LKAB devo-tes great efforts to dam safety. All of the company’s dams in Kiruna, Malmberget and Svappavaara are designed with the aid of independent experts in accordance with RIDAS (the Power Industry’s Guidelines for Power Dam Safety).

The dams are inspected every year, and regular checks are made by LKAB personnel. At all locations, control cen-ters are manned round-the-clock, and there are automatic alarms and daily inspections.

In the summer, after approval by the Environmental Court, preventive safety measures were implemented in Svappavaara. A review of the dam system in Malmberget has been carried out during and an application was sub-mitted to the Environmental Court regarding measures to enhance safety in increase deposition capacity.

In Svappavaara, pilot tests for depositioning higher proportions of solid matter have been carried out. Rais-ing the height of the tailings impoundment dams may be delayed or avoided if this technique is successful. Dam safety has improved as a result of greater geotechnical stability due to the low water content of the tailings sand impoundment.

An extensive review of future deposition has been con-cluded during the year. The main principle for deposition should be to raise the height of dams, instead of using more land.

Water quality in the lakes around the mines is monitored continuously. Rune Skarpvärd with a sample.

36

DEFORMATION AND ALTERATION OF THE LAND-

SCAPE IN THE OREFIELDS

The major visible effects of mining are open-pit mines, deformation zones, waste rock heaps, and pond systems for mine and process water.

Another visible impact of the Mining Division’s ope-rations in Malmberget is Kaptensgropen, the “Captain’s Pit”, a 20-hectare area in the middle of the community. In keeping with the remediation plan, the pit is now being backfi lled, which will stabilize the area.

LKAB has surveyed new ore deposits in the southernpart of Malmberget. The ore is a continuation of the so-called Fabian orebody and extends under residentialbuildings in Elevhemsområdet.

At the close of 2005, an application for a mining conces-sion was submitted, with the provision that the ground surface will not be affected. If and when a risk for impact to the ground surface is foreseen, LKAB will apply for a change in the terms of the concession.

In Kiruna, the southern portion of Luossajärvi Lake has been drained to permit mining of the Lake Ore – the por-tion of the orebody that extends in under the lake. Mining began in 2003. The dry lake bottom has been sown with seed to counteract dust formation, and trees and plants have been planted. Remediation costs for the area have totaled MSEK 15.

In Kiruna, investigations are being conducted to ascer-tain the extent of the orebody towards the north. Since 2004, two new investigation permits have enabled further test drilling. These deep-drilling campaigns are expected to provide a better picture of the extent of the orebody.

In Kiruna, the consequences of mining for the surroun-ding community, in the form of deformation, are now be-coming apparent. During autumn 2005, a new temporary bicycle and pedestrian path to LKAB’s industrial site was built, since the old pathway was within the deformation zone.

In early-2006, the road to LKAB’s industrial site will also be rerouted around the drained section of Luossajärvi Lake. The old road will be closed and a bicycle and pede-strian path will be built along the new road.

Underground infrastructure will also be altered. Today, water from Luossajärvi Lake is led via a culvert to Ala Lombolo Lake. Since it will no longer be possible to use this culvert, new alternatives for discharging Luossajärvi Lake are being studied.

As a consequence of the ground deformation resulting from mining operations, obligations (both formal and in-formal) with respect to structural transitions in Kiruna may arise, which may entail considerable costs for the compa-ny. For LKAB, the economic consequences are estimated to be in the order of 2.5 billion kronor. Some of these costs are attributable to LKAB’s own residential properties.

SITE REMEDIATION

Site remediation is a statutory obligation where conside-ration must be given to safety, environmental and esthe-tic aspects. LKAB cooperates with the environmental aut-horities in devising long-range remediation plans for the mining sites.

LKAB may have to provide fi nancial guarantees to co-ver possible remediation costs and other measures to remedy the effects of operations for which permits are granted. Following the most recent ruling of the Environ-mental Court with respect to increased concentrating and pelletizing capacity in Kiruna, a bank guarantee has been pledged to the supervisory authority (the County Admi-nistrative Board of Norrbotten).

Some examples of initiated measures are backfi lling of open pits, planned disposition of waste rock, grass so-wing and tree planting. The total cost for remediation of the mining sites cannot be accurately determined until complete and approved plans exist.

In Luleå, demolition work preparatory to site remedia-tion of the former ore harbor site has been completed. Here, two contaminated areas will be remediated in 2006.

Survey of contaminated areas in all operating locations has commenced. This so-called MIFO inventory will be re-ported to the supervisory authority during 2006.

During 2004, LKAB began remediation of a former de-position site for oil-contaminated soil. The soil is mixed with specially cultured bacteria. Decontamination conti-nued through 2005 and treatment of sections of the depo-sition area has been completed. The remaining sections will be treated during 2006.

Surveying, decontamination and remediation of areas in all operating locations is done on an ongoing basis.



Mining operations have an impact on the landscape. Excavation for the new pelletizing plant in Kiruna.



In Malmberget, Kaptensgropen (the Captains Pit), has a visible impact on the community. To stabilize the area, the pit is being backfi lled.

RESOURCE CONSUMPTION, PRODUCTION AND EMISSIONS

2005 2004 2003 2002 2001 2000 1999 1998 1997 1996

Input materials

Crude ore (Mt) 37.3 35.9 34.7 31.5 33.0 33.4 30.6 33.4 32.9 32.9

Explosives (kt) 15.2 13.7 13.1 12.3 12.8 13.2 13.1 12.3 14.0 13.7

Additives1) (kt) 613 632 568 536 549 572 508 590 590 568

Energy2) (GWh) 3 069 2 930 2 919 2 741 2 676 2 854 2 669 3 053 2 659 2 727

Products and residual products, etc.

Pellets (Mt) 16.5 16.0 15.3 14.1 13.8 14.9 13.0 15.1 15.4 15.1

Fines (Mt) 6.8 6.2 6.2 6.2 5.7 5.7 5.9 5.9 6.5 6.3

Residual products:

Waste rock (Mt) 10.7 10.8 10.0 9.6 10.2 10.1 11.6 12.8 11.5 10.9

Tailings (Mt) 3.4 3.8 3.7 3.6 3.3 3.5 3.5 3.9 3.4 3.1

Recovered excess heat (GWh) 163 139 191 159 143 122 66 93 115 109

Atmospheric emissions

Particulates (tonnes) 2 450 1 360 1 565 1 760 1 575 2 000 1 355 1 850 1 490 1 500

SO (tonnes) 1 695 1 540 1 540 1 385 1 495 1 760 1685 1 695 1 900 1 775

HF (tonnes) 190 179 148 127 171 191 183 215 220 200

HCl (tonnes) 385 389 347 330 307 315 330 350 385 385

NOx (tonnes) 2 920 3 050 2 765 2 620 2 585 2 460 2 640 3 550 3 200 3 380

CO2 (kilotonnes) 4504) 433 479 434 401 438 337 381 383 388

Discharges to water

Nitrogen (tonnes) 468 379 237 211 283 315 273 250 200 190

Total phosphorus (kg) 644 478 366 364 641 691 398 500 300 295

Trace metals3) (kg) 378 303 171 187 265 315 177 174 205 194

1) Olivine, dolomite, bentonite, lime and quartzite. 2) Electricity, oil and coal. 3) Cr, Cd, Cu, Ni, Pb, Zn and As.4) Preliminary fi gure

38

LKAB’s major competitors mine their ore in open pits. They therefore face considerably lower production costs. For LKAB, consistently high quality and cost effi ciency are critical factors for remaining competitive.

The great advantage compared to competitors is our high-quality magnetite ore. Potential threats are seen in a possible collapse in China’s economic growth, a weak dol-lar, falling pellet prices, new environmental and energy legislation, and the availability of emissions rights.

The Minerals Division’s most important strengths are its broad product portfolio and widespread geographic distribution. The most apparent potential threats are a major economic downturn, higher freight rates and poo-rer exchange rates.

OPERATING RISKS

Volume dependence

Since pellets are largely used for the purpose of raising productivity during expansionary periods and can be re-placed by cheaper lump ore during recessionary periods, LKAB with a pellet share of 65-70% is particularly sensi-tive to business cycle fl uctuations.

In recent years, LKAB has been able to sell all of its pro-ducts, but the company must improve its preparedness for future cyclical fl uctuations. This is realized through greater fl exibility in production and fi nancial strength.

LKAB has a high proportion of fi xed costs; therefore, high capacity utilization is decisive for profi tability. An in-

Risks and risk managementDemand for LKAB’s iron ore products is determined largely by busi-

ness cycles on the global market for steel and iron. Most of LKAB’s

iron ore and industrial mineral products are sold on the European

market.

crease in capacity utilization by one percentage point leads to an earnings improvement in the order of MSEK 120.

Price dependence

Iron ore trading is conducted in US dollars and the pri-ce is set once a year in direct negotiations. Normally, an agreement between one of the major mining companies and the Japanese or European steel industry sets a global benchmark. A premium is paid for pellets compared with fi nes, and the price of DR pellets is generally higher than that of blast furnace pellets.

Ocean freight costs have a great infl uence on the to-tal price picture, since world market prices are compared with the freight cost included. LKAB is favored on the Eu-ropean market by high freight rates, while the competi-tiveness of more distant mines increases when ocean freight rates are low. Many sales include delivery to the customer’s premises, which entails a cost risk, since no extra charge can subsequently be added to compensate for higher freight costs.

Customer dependence

The global iron ore and steel market is subject to ongoing structural changes, and the number of players has dimi-nished. The Mining Division therefore has relatively few customers, which means that the importance of each in-dividual customer has increased.

Long-term customer relationships and a customer structure spread out among various markets have a cer-tain stabilizing effect. High and consistent product quality in combination with value-adding services is an important risk-mitigating factor.

In order to minimize the risk of bad debt losses, the Group is working actively with the payment systems allo-wed by the banking systems. The Group is judged to have an effective credit monitoring function.

With its diversifi ed customer base, the Minerals Divi-sion is able to spread its risks more effectively. To a de-gree, this helps to counteract the effects of fl uctuations in business cycles, since different customer segments are subject to different trends. However, the company is still affected by changes in general economic cycles.

R I S K S A N D R I S K M A N A G E M E N T


SENSITIVITY ANALYSIS (PARENT COMPANY)

Factor Exposure Change Effect on 2005 earnings

Deliveries 23.2 Mt 1 Mt 340 MSEK 1)Price 1% 130 MSEK 1)Personnel costs 1 949 MSEK 10% 195 MSEKEnergy costs 746 MSEK 10% 75 MSEKTransport costs 894 MSEK 10% 90 MSEKDepreciation 791 MSEK 10% 79 MSEKDollar rate– without hedging 1 506 MUSD 2) 10 öre 151 MSEKInterest level 5 750 MSEK 1% 58 MSEK

1) Average value, fi gured on unchanged product mix.2) The total exposure in 2005 was MUSD 1 506, of which MUSD 1 266 was hedged.

39

FINANCIAL RISKS

LKAB is exposed to various types of fi nancial risks. Finan-cial risks are associated with fl uctuations in the company’s earnings and cash fl ow as a result of currency exchange-rate fl uctuations, interest rates, refi nancing and credit risks.

Financial risks are managed according to Group poli-cies established by the Board. LKAB has a centralized fi -nance function, LKAB Treasury Center, which manages most of the Group’s fi nancial risks. A selective strategy is applied, whereby potential costs and benefi ts are ba-lanced, the aim being to minimize and neutralize risks in commercial fl ows.

LKAB Treasury Center also acts as the Group’s internal bank and supports subsidiaries with fi nancing, invest-ment and currency trading, and functions as an advisor with respect to fi nancial issues.

Currency risks

Both LKAB’s future payment fl ows (transaction exposure) and revaluation of receivables and liabilities in foreign currencies (revaluation exposure) are exposed to risks as-sociated with fl uctuations in exchange rates. Other com-panies in the Group mainly conduct business in their local currencies, and both investment and fi nancing are done mainly in local currencies so as to minimize translation exposure.

Transaction exposure

The greatest transaction exposure within the LKAB Group is within the Mining Division.

All prices of iron ore are set in US dollars, which means that the transaction risk is high without hedging. The ex-act magnitude of this risk is diffi cult to ascertain far in ad-vance, since it is largely dependent on the market price of iron ore, which is normally set annually. During 2005, the transaction exposure amounted to MUSD 1 500, and the effect of a difference of SEK 0.1 in the USD/SEK exchange rate on LKAB’s operating profi t, without hedging, is there-fore MSEK 150 (Note 30).

The goal of LKAB’s current currency policy is to minimi-ze the impact of exchange rate fl uctuations on the income statement by means of selective risk-taking, so the value of future transaction exposure is periodically hedged.

The Board has set up a currency committee that conve-nes whenever necessary to advise the Board on hedging of the Mining Division’s commercial fl ows. For other compa-nies in the Group, transaction exposure arises mainly when raw materials are purchased in foreign currencies. All hed-ging of commercial transactions by subsidiaries must be done through the LKAB Treasury Center (Note 30).

Translation exposure

LKAB does not normally hedge its translation exposure. Over time, this is not considered to add any value for the

Group, even though the level of exposure has increased in recent years due to the expansion of the Minerals Divi-sion. (Note 30)

Interest rate risk

LKAB’s fi nancing sources are shareholders’ equity, provi-sions and short-term operating credits, which means that LKAB is mainly exposed to interest rate risks with regard to investments of liquid assets. According to LKAB’s in-vestment policy, the average duration of money-market investments may not exceed three years.

At maximum duration, a change of one percentage point in the market rate of interest affects LKAB’s earnings by about MSEK 80-120, depending on composition of the instruments in the portfolio.

As of 31 December 2005, LKAB’s investments in mo-ney-market instruments amounted to MSEK 5 947 (3 917). The duration was 356 (386) days. A one-percent increase in the market rate as of closing day would have affected income negatively by MSEK 54 (42).

Credit risk

LKAB’s credit risks are mainly associated with trade ac-counts receivable and short-term investments. As far as credit risks in trade accounts receivable are concerned, LKAB prioritizes long-term customer relations, which me-ans that the majority of the customers are well-establis-hed contacts. Export letters of credit are used when de-emed necessary. LKAB has not had any bad debt losses in the past fi ve years.

According to LKAB’s investment policy, investments may only be made in borrowers with high creditworthi-ness and high liquidity such as the Swedish state, com-panies wholly owned by the Swedish state, county coun-cils, municipalities or companies with the highest credit rating.

As of closing day, 96% (96%) of investments in money-market instruments were issued by the Swedish state and Swedish banks. LKAB has not had any bad debt losses in short-term investments in the past fi ve years. LKAB does not have any substantial concentration of credit risks in any single customer or counterparty.

Liquidity risks

LKAB maintains good fi nancial preparedness by following guidelines which regulate risk-taking and the investment horizon. LKAB has a high proportion of liquid assets and a low debt/equity ratio. A good balance between short and long investment horizons will meet the long-range fi -nancing need. Liquid assets are invested primarily on the Swedish money market in securities with high liquidity.

R I S K S A N D R I S K M A N A G E M E N T


40 G R O U P O V E R V I E W


Group overview

* according to IFRS, provisions are divided into long-term and short-term liabilitie

Defi nitions

Operating margin: Operating income as a percentage of net sales Profi t margin: Income after fi nancial items as a percentage of net sales for the yearReturn on total capital: Income after fi nancial items + fi nancial expenses as apercentage of average total assetsReturn on equity: Income after fi nancial items less tax as a percentage of averageshareholders’ equity

CONSOLIDATED STATEMENTS OF INCOME (MSEK) 2005 2004 2003 2002 2001 2000 1999 1998

Net sales 14 337 8 988 7 466 5 186 4 870 4 882 3 985 5 129Cost of goods sold -7 535 -6 180 -5 959 -4 515 -4 383 -4 150 -3 891 -4 023Gross income 6 802 2 808 1 507 671 487 732 94 1 106

Selling expenses -174 -289 -285 -135 -86 -80 -63 -67Administrative expenses -349 -353 -247 -192 -246 -218 -255 -276R&D expenses -159 -235 -116 -101 -116 -93 -118 -148Other operating revenues/expenses -11 10 64 50 28 132 -106 32Operating income/loss 6 109 1 941 923 293 67 473 -448 647

Financial items 550 227 181 191 125 198 246 369Financial expense -208 -145 -129 -88 -130 -80 -42 -56Income/loss after net fi nancial items 6 451 2 023 975 396 62 591 -244 960

Tax -1 904 -456 -286 -96 -15 -179 11 -281Net income for the year 4 547 1 567 689 300 47 412 -233 679

Attributable to: Parent Company shareholders 4 546 1 568 690 305 54 421 239 686Minority share 1 -1 -1 -5 -7 -9 -6 -7Includes depreciation according to plan 952 1 079 1 049 994 954 920 838 776

CONSOLIDATED BALANCE SHEETS (MSEK)

Intangible assets 477 211 182 22 8 8 10 11Tangible assets 7 928 6 316 6 476 6 583 7 056 6 970 6 962 6 821Financial assets 1 393 219 245 322 261 328 198 176Total fi xed assets 9 798 6 746 6 903 6 927 7 325 7 306 7 170 7 008

Inventories 1 423 1 006 976 870 870 707 675 585Accounts receivable 1 846 1 194 1 198 724 711 635 504 529Liquid assets 7 091 4 516 2 944 3 045 2 780 3 060 3 101 3 602Other receivables 416 195 316 117 245 317 200 481Total current assets 10 776 6 911 5 434 4 756 4 606 4 719 4 480 5 197

Total assets 20 574 13 657 12 337 11 683 11 931 12 025 11 650 12 205

Shareholders’ equity 14 802 10 044 9 004 8 673 8 609 8 789 8 412 8 882Minority interest 4 3 4 3 46 41 34 154Provisions* 2 209 2 154 2 160 2 096 2 278 2 210Long-term liabilities 3 598 2 230 2 2 41 66 96 5Current liabilities 2 170 1 380 1 118 851 1 075 1 033 830 954Total shareholders’ equity and liabilities 20 574 13 657 12 337 11 683 11 931 12 025 11 650 12 205

CONSOLIDATED STATEMENTS OF CASH FLOW (MSEK)

Cash fl ow before change in working capital 6 073 2 776 1 782 1 356 978 1 340 554 1 412Change in working capital -553 79 -556 -172 -19 -51 307 215Cash fl ow from operating activities 5 520 2 855 1 226 1 184 959 1 289 861 1 627

Investments in existing operations -2 525 -973 -592 -532 -1 050 -952 -1 004 -1 212Operating cash fl ow 2 920 1 882 634 652 -91 337 -143 415

Acquisition of operation/minority -75 -29 -384 -41 -124 Short-term investments -1 846 -1 748 Cash fl ow after investments 1 074 105 250 611 -91 337 -267 415

Dividends -520 -281 -351 -254 -233 -233 -233 -299Other from fi nancing activities -92 44 -145 -1 -12Cash fl ow for the year 554 -176 -101 265 -280 -41 -501 104

GROUP KEY RATIOS

Net sales MSEK 14 337 8 988 7 466 5 186 4 870 4 882 3 985 5 129Growth in net sales % 59.5 20.4 44.0 6.5 -0.2 22.5 -22.3 0.7Operating margin % 42.6 21.6 12.4 5.6 1.4 9.7 -11.2 12.6Profi t margin % 45.0 22.5 13.1 7.6 1.3 12.1 -6.1 18.7Return on total capital % 38.9 16.7 9.2 4.1 1.6 5.7 -1.7 8.5Return on equity % 36.6 16.5 7.8 3.5 0.5 4.8 -2.7 7.7

Equity/assets ratio, % % 72.0 73.6 73.0 74.3 72.5 73.4 72.5 74.0Average number of employees 3 563 3 482 3 433 3 078 3 172 3 210 3 279 3 568

41

Report of the Directors

R e p o R t o f t h e d i R e c t o R s

L K A B A n n u A L R e p o R t 2 0 0 5

The Board of Directors and the President and CEO of Luossavaara-Kiirunavaara AB (LKAB), (Corp. ID No. 556001-5835) hereby submit their Annual Report and consolidated financial statements covering operations in 2005.

owneR stRuctuRe

LKAB is wholly owned by the Swedish state. The company conducts business as a limited company and its registered office is in Luleå, Sweden.

GRoup

The consolidated financial statements cover the operations in 2005 of the Parent Company and its subsidiaries, together referred to as the Group. The Group also has ownership interests in joint ventu-re companies.

The LKAB Group includes the Mining Division (iron ore operations and the Parent Company), the Minerals Division and Special Busi-nesses.

MininG division

General

The Mining Division mines and processes iron ore for products for steelmaking. The Mining Division’s process chain stretches all the way from the iron ore reserve to the customers. It starts with the production of crude ore in underground mines and upgrading of iron ore in processing plants at surface level, and continues with rail transport of finished products to shipping harbors and loading to vessels for delivery to the customers. Operations are conducted in Luleå, Malmberget, Svappavaara, Kiruna and Narvik.

Pellets are the Mining Division’s main product and account for more than 77% of ore sales. Pellets are produced by mixing fine-ly ground iron ore with various binders and additives, and then sha-ping the mixture into centimeter-sized balls, which are sintered at a temperature of 1 250°C. LKAB’s magnetite-based pellets have high iron content and are less energy demanding than competing pellet products.

objectives

LKAB is exposed to tough competition from considerably larger iron ore producers who enjoy the cost advantages associated with open-pit mining. LKAB’s goal is to cope with competition and ensure the company’s long-term survival by constantly improving cost-effective-ness, raising the quality and knowledge content of the products, and maintaining resource-efficient growth. Therefore, efforts are direc-ted towards improving maintenance efficiency, including preventive maintenance. The aim is to stabilize production at a higher and more consistent level. The work of assuring quality in the company’s pro-cesses has high priority, and here, too, the keyword is stability. Con-sistent quality, the right quality and delivery assurance are the most important success factors for the division’s customer relations. Work also focuses on establishing best practice and making production more flexible to enable maximum capacity utilization.

the steel and iron ore market

During 2005, the global demand for iron ore remained strong, pres-sing iron ore exporters to increase production to the limits of capa-city. According to preliminary statistics from the International Iron and Steel Institute (IISI), world production of crude steel increased in 2005 by 6% to reach a new record level, for the sixth consecutive year, of more than 1.1 billion tonnes. Asia and Africa accounted for

most of the growth. The strongest growth was seen in China, where crude steel production reached 350 (280) Mt, an increase of 25%.

As a result of the shortage of iron ore at the close of 2004, the world market prices of Brazilian and Australian iron ore were in-creased by 71.5%. On the basis of benchmark market prices, LKAB reached an initial agreement in March for price hikes of more than 70% on fines and nearly 85% blast furnace pellets. Despite the shift in production from Northern to Southwestern Europe, LKAB’s deli-veries of blast furnace pellets to contract customers in Northwes-tern Europe remained unchanged, indicating increased market sha-res in the near-lying market area. Other contributing factors were the strong demand for iron ore in Asia, high sea freight rates and the shortage of iron ore on the world market. LKAB’s deliveries of pellets to contract customers in the Middle East and North Africa increased considerably, while deliveries to the Far East ceased.

production results 2005

In 2005, the focus has been on improving capacity, speed and avai-lability in the production facilities in order to increase the volume of mining and processing while maintaining high quality. Mining of iron ore during 2005 amounted to 36.6 (35.2) Mt of crude ore. The volu-me of upgraded products amounted to 23.3 (22.3) Mt, of which pel-lets accounted for 16.5 (15.9) Mt. Deliveries to customers totaled 23.2 (22.8) Mt. Through continuous improvement, greater efficien-cy and the elimination of bottlenecks, production in existing facilities has increased in the past four years from 20 to 23 Mt/yr, or 15%.

capital expenditures

Global steel consumption and steel production have increased dra-matically in recent years and demand is expected to remain strong. Several of LKAB’s pellet customers have planned, or are deciding to invest in, increased production capacity.

Investments in increased production and greater logistical effi-ciency will raise LKAB’s production capacity for iron ore products from a current 23 million tonnes to 25 Mt by 2007 and to 30 Mt by 2008. In order to achieve these capacity increases, the Board deci-ded in December 2005 to invest MSEK 6 400 in a new pelletizing plant, a concentrating plant and a new rail terminal in Kiruna. The new plants will initially produce 5 Mt pellets per year. The new pel-letizing plant in Kiruna (KK4) will be operational in 2008. At he same time, a decision has been taken to begin preliminary work for new main level in Kiruna, at the 1 365-m level.

The ore harbor in Narvik is a strategically important link in LKAB’s process chain, since most of the products (about 2/3) are shipped from here. The Board voted in November 2005 to spend MSEK 970 to refurbish the ore harbor. The upgrade will significantly improve ef-ficiency as well as the environment. Ore products will be stored in silos, and the entire harbor structure will be adapted to handle larger ore trains and greater volumes of iron ore products. The new harbor is expected to be fully operational in 2009.

Construction of a new pelletizing plant in Malmberget (MK3) is now in progress, and the plant is expected to be operational in the autumn of 2006.

Of the year’s investments in fixed assets amounting to MSEK 2 314 (614), MSEK 1 300 refers to the new pelletizing plant in Malmberget. MSEK 188 has been invested in new locomotives and ore cars. Other investments in capacity increases amount to more than MSEK 300.

Research and development (R&d)

Annually, LKAB invests about MSEK 150 in research, and the com-

42 R E P O R T O F T H E D I R E C T O R S


pany has intensifi ed collaboration with Luleå University of Technolo-gy (LTU), through among other initiatives, the Hjalmar Lundbohm Re-search Centre.

Research and development in pelletizing will help LKAB to main-tain its leading position concerning product quality. Therefore, the groundwork is being laid for an agglomeration center (pelletizing center) linked to an experimental pelletizing plant. Today, LKAB’s experimental blast furnace (EBF) is now a valuable asset, and an ex-perimental pelletizing plant will help to optimize the total process: concentrate-pellets-blast furnace.

The overall objective of research activities is to secure the compe-titiveness of LKAB’s product portfolio. During the year, work on im-proving the process effi ciency of production facilities has continued to be a priority area. Ultimately, this will contribute to maximizing LKAB’s total production capacity and improving product quality.

LKAB is involved in the ULCOS research project (Ultra Low CO2 Steelmaking), an initiative of the International Iron & Steel Institute (IISI) to investigate the possibilities for reducing steel-industry car-bon dioxide emissions. LKAB has contributed the use of the EBF for studies of how CO2 emissions from blast furnaces can be reduced.

LKAB is involved in two of the sub-projects projects: The New Blast Furnace and New Natural Gas Based Steelmaking. The fi rst project involves two campaigns in the experimental blast furnace (EBF), which is being rebuilt as an oxygen blast furnace with CO2 ex-traction. In the second project, two EBF campaigns have been car-ried out with pre-reduced burden material. The results show that there is potential for reducing coke consumption in the blast furn-ace by about 50%.

Operating income

Net sales for Mining (Parent Company) amounted to MSEK 12 349 (7 560). Operating income amounted to MSEK 5 720 (1 669). The improvement is mainly attributable to price increases and greater delivery volumes. Income after fi nancial items reached MSEK 6 049 (1 869).

MINERALS DIVISION

General

The Minerals Division, which operates under the name Minelco on the global market, develops, produces and markets industrial min-eral products. Minelco supplies industrial minerals to customers in many different industries and for many different applications. Among the most important are building construction, the oil and gas indu-stry, the rubber, plastics and paint industries, the chemical industry, the automotive industry, foundries and manufacturers of refractory materials. Operations are managed from Sweden, with representa-tion in Europe, the USA and Asia. Operations are therefore global. The division has about 400 employees, most of them outside Sweden. There are subsidiaries with processing plants in Finland, the UK, the Netherlands, Greece, Turkey and China. The company has sales companies in Germany, the USA and Hong Kong, as well as representative offi ces in the Czech Republic and Thailand.

The division focuses on selected minerals, with control of the en-tire process chain from source to end user. Direct sale to end users and an extensive knowledge of mining, production, processes, appli-cations and markets enable the company to adapt products to meet specifi c customer needs, thereby ensuring maximum value for custo-mers. This, in combination with the organization’s expertise and ser-vice, will contribute to improved profi tability for the customers.

In many application areas for minerals, Minelco has achieved a leading position. This position is based on a high degree of expertise in mineral technology, production, applications and markets, as well as the ability to develop materials and processes in close collaboration

with customers. Most of the division’s production facilities are now quality-certifi ed. In Sweden, work on verifi cation of the quality ma-nagement system was concluded in 2005, when quality certifi cation according to ISO 9001:2000 was achieved.

Objectives

The Minerals Division’s objectives are based on the company’s posi-tion in strategic business areas, a broad geographic presence and an effective network of production facilities and logistics systems. The target for organic growth is an average at least 10% per year. Be-sides the ambition to grow in strategic areas, the division has also identifi ed a number of special priority areas. One of these is to conti-nue to improve capital effi ciency.

Market and production

Sales volumes increased within several business segments and within all market areas. At the same time, high freight rates had a ne-gative impact on earnings. The world market for industrial magnetite is estimated at slightly more than 2 Mt per year. With sales of 1 Mt, Minelco is a market leader.

Currently, the company is experiencing very high demand from customers who use magnetite products in the manufacture of hea-vy concrete. Compared to the previous year, the volume of sales of magnetite remained unchanged. In total, approximately 1 Mt of mag-netite was delivered, mainly for use in construction projects, sponge iron for powder metallurgy, water treatment chemicals and coal washing. The global expansion is evident. Growth in China contribu-ted to a doubling in sales of industrial minerals in Asia, which now ac-counts for 30% of Minelco’s sales.

Minelco’s product portfolio includes more than 30 different indu-strial minerals. Priority minerals include magnetite, bentonite, oliv-ine, mica and minerals with fl ame retardant properties (UltraCarb). For the selected minerals, the strategy is to control the process from deposit to customer. For bentonite, exclusive access to a raw-mat-erial source has not yet been secured.

Capital expenditures

During 2005, the Seqi olivine reserve in Greenland was acquired. The acquisition will enable Minelco to advance its position on the olivine market, a market that absorbs approximately 4 Mt per year. Minelco will handle about 1 Mt of olivine annually, and the results of geophysi-cal surveys and diamond drilling campaigns indicate that the reserve will satisfy demand for olivine for many years to come.

Construction of production facilities began during the summer, and in December, the fi rst shipments were delivered to European steel customers and to LKAB for use in pellet production. The mine, which will operate year-round, has been equipped for a capacity of about 1.7 Mt per year. Full-scale production will be possible during the latter half of 2006.

Minerals research and product development are application-orien-ted and are conducted in close cooperation with customers. In ad-dition to the LKAB Group’s research organization, the resources of the Minerals Division’s UK subsidiary are available. Minerals also collaborates with universities and research institutes in Europe and the USA.

Operating income

Net sales increased to MSEK 2 159 (1 598). Operating income amounted to MSEK 148 (122). The improvement is largely attribut-able to increased market shares and greater sales volumes.


LKAB has organized most of its subsidiaries under the Special Businesses Division. These companies are today mainly subcontrac-

43R E P O R T O F T H E D I R E C T O R S


tors to the Mining Division and the Minerals Division, but also sup-port the Group by contributing towards effi ciency improvement and technical development.

The companies in Special Businesses have their origin in LKAB’s know-how as a manufacturer and user of products or services. Was-sara AB develops drilling systems. AB Kiruna Grus- och Stenförädling (KGS) works with rock, concrete, explosives manufacture and engi-neering services. Fastighets AB Malmfälten (FAB) manages proper-ties in locations where LKAB operates.

Explosives manufacturer Kimit AB has been part of KGS since the close of 2004. Malmtrafi k AB manages rail transports from the mines to the harbors.

LKAB Nät AB is an electricity network company with a concession as an electricity distributor. The Group’s intra-group insurance com-pany is LKAB Försäkring AB. The company works globally to provide the LKAB Group with property and risk insurance.

The subsidiaries are wholly owned by LKAB, with the exception of Wassara AB, in which LKAB has a 60% interest.

Operating income

Net sales increased to MSEK 1 091 (951). Operating income amoun-ted to MSEK 100 (94). The improvement is mainly attributable to the increased volume of services delivered to the Mining Division.

GROUP

Sales and income

The Group’s net sales increased to MSEK 14 337 (8 988), which is mainly attributable to an increase in the price of iron ore for the year of more than 80 (25)%. As a direct result of price increases, operating income increased to MSEK 6 109 (1 941). In addition to the price increase, a higher delivery volume contributed to the im-provement in income. The Group’s net fi nancial income amounted to MSEK 342 (82). Capital gains of MSEK 89 realized on the sale of shares in SSAB are included. Return on market portfolios amounted during the year to MSEK 212 (24), of which unrealized appreciation amounts to MSEK 101 (-).

Capital expenditures

Of the year’s investments in fi xed assets amounting to MSEK 2 648 (965), MSEK 2 314 (614) refers to Parent Company expenditures.

Risks

Risks can be divided into three main categories: operating risks, fi nancial risks and other risks. Operating risks consist mainly of vol-ume dependency, price dependency and customer dependency. The fi nancial risks can be divided into currency risk, transaction expos-ure, translation exposure, interest risk, credit risk and liquidity risk (see Note 30). Among other signifi cant risks may be mentioned risks associated with environmental requirements, e.g., increased charges and taxes for energy and access to carbon-dioxide emissions rights.

LKAB’s major competitors mine their ore in open pits. They there-fore face considerably lower production costs and realize higher pro-ductivity in the mining process. For LKAB, cost effi ciency is crucial for remaining competitive. Operating costs are dependent on vol-ume, degree of upgrading and infl ation. Other operating costs follow price trends on the markets in which the Group operates.

Some of the operating risk is implicit in the nature of the business conducted; see the section below on Structural changes in the Ore-fi elds, and Note 33.

Environmental information

LKAB’s work will be characterized by concern for the environ-ment. For this reason, LKAB has adopted an Environmental and

Energy Policy that will guide LKAB’s actions while acknowledging the company’s objective to maintain a fi nancially sound and success-ful business operation.

In the Parent Company and the subsidiary Kimit, the Group con-ducts operations that are subject to regulations embodied in the Environmental Code. The biggest environmental impact factors are alteration of the landscape due to mining; emissions to air and discharges to water arising from production; noise, dust and vibra-tion, and energy consumption. Two environmental permits refer to handling of iron ore products and binders at the harbor facilities. The impact of these operations on the external environment is mainly a result of emissions of particulate matter and dust. Three environ-mental permits refer to large-scale mining and facilities for proces-sing iron ore products. Two environmental permits refer to mining of additives for ore processing. These operations impact the envi-ronment through alteration of the landscape, emissions to the air, discharges to the water, and noise.

Most of the Parent Company’s blue-collar employees are employ-ed in production, in the above-mentioned operations, that is sub-ject to environmental regulation. Two environmental permits refer to Kimit AB’s manufacture of explosives. The environmental impact of this activity is mainly the result of discharges of nitrogen compounds to the municipal sewage system. Site remediation, which can be done successively and/or after operations are concluded, is a statutory obli-gation where consideration must be given to safety, environmental, economic and esthetic aspects. LKAB cooperates with the environ-mental authorities in devising long-range remediation plans for the mining sites. The total cost for remediation of the mining sites cannot be accurately determined until complete and approved plans exist.

In 2003, the European Commission submitted a proposal for a mining waste directive, which has subsequently been reviewed by the European Parliament and Council of Ministers. The European Parliament and Council of Ministers reached an agreement on the directive proposal during a conciliation meeting in December 2005. The directive will be formally adopted in Feb.-March 2006, and mem-ber states will then have two years to transpose the directive into na-tional law. As a consequence of the new directive, LKAB may have to provide fi nancial guarantees for future remediation costs. Similar-ly, with respect to permit approval for dam systems, application of the current Environmental Code may also require posting of fi nancial guarantees for future site remediation. Following the Environ-mental Court’s ruling of November 2005, in accordance with the Environmental Code, with respect to ore processing in Kiruna, a guarantee amounting to MSEK 63 has been pledged in 2006 to the County Administrative Board of Norrbotten.

The EU’s solution for reducing greenhouse gas emissions (GHG) is based upon, among other measures, a system of trade in carbon-dioxide emissions rights. In the current system, which includes only EU member states, LKAB is the only pellet supplier that is active on the global market. The system also implies direct and indirect costs for the company. Ideally, the system of trade in emissions rights should become a global-market based system for reducing atmospheric emissions. At this level, such a system would increase competitive-ness among companies like LKAB that use energy and C02-effi cient technology, and consequently, emissions could be globally reduced. An assessment of carbon-dioxide emissions during 2005, which is the fi rst year of the EU’s three-year trial period, shows that actual emissions from the pellet plants and oil-fi red boiler plants exceed the allocated rights. Therefore, emissions rights have been acquired on the open market. The forecast for the entire trial period indicates a defi cit of 10%, which must be covered through the purchase of ad-ditional emissions rights.

LKAB appealed the allocation decision from 2004, but the appeal was rejected by the County Administrative Court of Stockholm in

44 R E P O R T O F T H E D I R E C T O R S


December 2005. A request for review dispensation has been sub-mitted to the Administrative Court of Appeals.

Secured electricity deliveries

LKAB is one of Sweden’s largest electricity consumers and accounts for about 1% of the country’s electricity consumption. Assured deli-veries of competitively priced electricity are strategically very impor-tant. Via a long-term energy agreement reached with Vattenfall in 1998, LKAB secured power deliveries at a predetermined price. The third phase of the agreement, which expired in 2004, was renegoti-ated during 2005, whereby a 10-year agreement was reached. This also takes into consideration future power demands for the new pel-letizing plants to be built in Malmberget and Kiruna.Reward system

LKAB’s reward system was introduced at mid-year 2000. The Pre-sident and senior executives are not included. The system, which follows the owner’s guidelines for incentive schemes, is based on three factors: quality, work environment and production targets. The reward is maximized at SEK 30 000 per year and full-time employee. All three factors led to rewards in 2005. The outcome was 27 400 (2 500) kronor per full-time employee, which adds up to about MSEK 92 (10). An extra bonus of 10 000 kronor per full-time employee, totaling about MSEK 35, was paid out as a reward for the improve-ment in fi nancial results in 2004.

Foreign branch

LKAB currently has one foreign branch, in Narvik, Norge. The decisi-on has been taken to form a company for operations in Narvik. This is expected to be fi nalized by 2007.

Change in accounting principle

As of 1 January 2005, LKAB applies the EU-approved International Financial Reporting Standards (IFRS). Introduction of the new stan-dards has meant a change in accounting principles and has a con-siderable impact on the balance sheet for 2005. To achieve compara-bility regarding the Group’s performance and position, the compari-son year has been recalculated.

IAS 39 Financial Instruments: Recognition and Measurement will be applied from 1 January 2005. There is no requirement for conver-sion of fi nancial instruments for the comparative year. Valuation of fi nancial instruments at market (fair) value has entailed an effect of MSEK 1 212 as per 1 January 2005 and is reported directly against shareholders’ equity (see Note 39).

As from 1 January 2005, the Parent Company has adopted RR 32 Accounting for Legal Entities.

The Board of Directors during 2005

Up until the Annual General Meeting for 2005, the Board of Directors consisted of nine members elected by the Annual General Meeting, plus three members with three deputies appointed by the employ-ees. After the extraordinary meeting in September, the Boardhas consisted of eight AGM-elected members. At the Annual General Meeting, two board members, Hans Christer Olson and Carl Wilhelm Ros, stepped down from the Board. At an extraordinary meeting on 18 September, Anna-Greta Sjöberg was elected a mem-ber of the Board of Directors of LKAB.

The President is not a member of the Board.

The Board of Directors’ rules of procedure

Each year, the Board of Directors establishes its rules of procedure, essentially following the recommendation issued by the Ministry of Industry, Employment and Communications. The Board held seven ordinary meetings during fi nancial year 2005.

The meetings follow a set annual calendar aimed at satisfying the Board’s need for information and are otherwise governed by the spe-

cial rules of procedure followed by the Board. Normally, six meetings are held each year.

A board meeting held at the end of each quarter considers the in-terim fi nancial reports for the most recent quarter as well as the fore-cast for the coming four quarters. This allows the Board to make an ongoing assessment of strategies and delegations to the President and to decide on specifi c investment projects.

Normally the fi rst meeting of the year is at the year-end closing, when LKAB’s auditors also participate. The second is a strategy meeting with an emphasis on personnel issues. The third and fourth meetings also address issues pertaining to operations and strategy. The emphasis of the fi fth meeting is on the market situation. At the sixth and fi nal meeting, the strategic plan for the coming three to four years is revised.

Since 2004, the traditional annual budget has been replaced with a rolling business plan and 12-month forecast, updated after each quarter. The rolling business plan is then monitored with key ratios and is driven by activities of various kinds.

The work of the Board is evaluated once per year. A written sur-vey of the Board’s work, prepared annually, includes questions con-cerning how the Board collectively, and each member individually, has fulfi lled the tasks at hand. The evaluation report supports the work of the Board. The Chairman is responsible for following up the results, which form a basis for discussion and improvement. The work of the Chairman is normally assessed by the owner, but this may also be part of the work of the Board.

Dividend policy and proposed distribution of unappropriated

earnings

LKAB’s dividend policy entails that the dividend to the owner will, over the long term, amount to 30-50% of income after tax and be adapted to the average earnings level over a business cycle. The proposal for distribution of unappropriated earnings for the year is given on page 75.

Structural changes in the Orefields

LKAB’s expansion in the operating locations in the Orefi elds entails a successive expansion of deformation zones. Amendments to munici-pal plans are therefore inevitable in the long term. Together with oth-er concerned parties, government and local authorities, other com-panies and residents, LKAB is seeking to fi nd solutions. Discussions concerning the necessary measures and funding are in progress.

LKAB intends to assume its share of the costs. Therefore, as agre-ements are reached or where an informal obligation exists as a result of operations, LKAB is successively allocating funds for this purpo-se (see Note 28). As a consequence of the deformation zone resul-ting from mining operations thus far in Kiruna, considerable costs for LKAB will arise during the coming years. As soon as the necessary measures have been approved and the extent of commitments can be ascertained with reasonable certainty, an allocation for costing can be made, which will be duly noted in the annual strategy pro-cess (see Note 33).

During the year, LKAB has paid MSEK 60 to the Municipality of Gällivare for the acquisition of property for future mining in Malm-berget (see Note 13).

Anticipated future developmentLKAB foresees continued posi-tive trends for all of the Group’s lines of business, both in the co-ming year and in the long term. Growth is strong, mainly in Asia, and in countries with large populations, where infrastructural expan-sion, housing construction, etc., requires much steel. This means that LKAB is adapting to a new market situation.

For further information concerning the company’s fi nancial resultsand status, please see the following statements of income and balance sheets with accompanying comments.

45

Statement of Income - LKAB Group

1 January - 31 December

MSEK Note 2005 2004

1, 34

Revenue 2, 3 14 337 8 988

Cost of goods sold -7 535 -6 180

Gross profi t 6 802 2 808

Selling expenses -174 -289

Administrative expenses -349 -353

Research and development expenses -159 -235

Other operating income 4 248 207

Other operating expenses 5 -259 -197

Operating income 3, 6, 7, 8, 31 6 109 1 941

Financial income 550 227

Financial expenses -208 -145

Net fi nancial income/expense 9 342 82

Income before tax 6 451 2 023

Tax 11 -1 904 -456


Attributable to:

Parent Company shareholders 4 546 1 568

Minority interest 1 -1

4 547 1 567

Earnings per share (kronor) 26 6 494 2 240

S T AT E M E N T O F I N C O M E – L K A B G R O U P


NET SALES AND OPERATING INCOME COST STRUCTURE 2005

-1 000

1 000

3 000

5 000

7 000

9 000

11 000

13 000

15 000

0504030201009998


MSEK

Group

46 B A L A N C E S H E E T – L K A B G R O U P


As of 31 December 2005

MSEK Note 2005 2004

1, 34

Assets 16, 32

Intangible assets 12 477 211

Tangible assets 13,14 7 928 6 316

Participations in associated companies and joint ventures 15 4 33

Financial investments 19, 30 1 327 124

Long-term receivables 21 62 62

Total fi xed assets 9 798 6 746

Inventories, etc. 22 1 423 1 006

Income taxes recoverable 153 8

Receivables 23 1 846 1 194

Prepaid expenses and accrued revenues 24 69 83

Other receivables 21 194 104

Short-term investments 19, 30 4 049 2 028

Cash and bank balances 37 3 042 2 488

Total current assets 10 776 6 911

Total assets 20 574 13 657

Shareholders’ equity 25, 38, 39

Share capital 700 700

Other reserves 666 -11

Accumulated profi t or loss 13 436 9 355

Shareholders’ equity attributable to Parent Company shareholders 14 802 10 044

Minority interest 4 3

Total shareholders’ equity 14 806 10 047

Liabilities

Other long-term liabilities 2 2

Provisions for pensions 27, 28 1 690 1 504

Other provisions 28 303

Deferred tax liability 11 1 603 724

Total long-term liabilities 3 598 2 230

Accounts payable - trade 833 497

Income tax payable 77 168

Other liabilities 171 130

Accrued expenses and prepaid revenues 29 921 469

Provisions for pensions 27, 28 109 116


Total current liabilities 2 170 1 380

Total liabilities 5 768 3 610

Total shareholders’ equity and liabilities 20 574 13 657

For information concerning the Group’s assets pledged and contingent liabilities, see Note 33.

Balance Sheet - LKAB Group

47C O M P I L AT I O N S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y – L K A B G R O U P


Shareholders’ equity attributable to Parent Company shareholders

MSEK Retained

earnings Total share-

Note Share incl. profi t Minority holders’

1 capital Reserves for the year Total interest equity

Opening balance 1 January 2004 700 8 304 9 004 4 9 008

Adjustment for change in accounting principle -240 -240 -240

Adjusted shareholders’ equity 1 Jan. 2004 700 8 064 8 764 4 8 768

Change in translation reserve for the year 25 -11 4 -7 -7

Net income recognized directly in

equity, excluding transactions with

the Company’s owners -11 4 -7 -7

Net income for the year 1 568 1 568 -1 1 567

Net income excluding transactions

with the Company’s owners -11 1 572 1 561 -1 1 560

Dividends -281 -281 -281

Shareholders’ equity 31 December 2004 700 -11 9 355 10 044 3 10 047

Shareholders’ equity attributable to Parent Company shareholders

MSEK Retained

earnings Total share-

Note Share incl. profi t Minority holders’

1 capital Reserves for the year Total interest equity

Opening balance 1 January 2005 700 -11 9 355 10 044 3 10 047

Adjustment for change in accounting principle 1 157 55 1 212 1 212

Adjusted shareholders’ equity 1 Jan. 2005 700 1 146 9 410 11 256 3 11 259

Change in translation reserve for the year 25 25 25 25

Change in fair value reserve for the year 25 355 355 355

Change in hedge reserve for the year 25 -860 -860 -860

Net income recognized directly in

equity, excluding transactions with

the Company’s owners -480 -480 -480

Net income for the year 4 546 4 546 1 4 547


with the Company’s owners -480 4 546 4 066 1 4 067

Dividends -520 -520 -520

Shareholders’ equity 31 December 2005 700 666 13 436 14 802 4 14 806

Compilations of changes in shareholders’ equity - LKAB Group

48


MSEK Note 2005 2004

1, 37

Operating activities


Adjustments for items not included in cash fl ow, etc. 1 156 1 084

Income taxes paid -1 534 -318

Cash fl ow from operating activities before change in working capital 6 073 2 776

Cash fl ow from changes in working capital

Increase (-)/Decrease (+) in inventories -417 -32

Increase (-)/Decrease (+) in operating receivables -728 126

Increase (+)/Decrease (-) in operating liabilities 592 -15

Cash fl ow from operating activities 5 520 2 855

Investing activities

Acquisition of tangible assets -2 648 -965

Disposal of tangible assets 23 11

Acquisition of intangible assets -75 -22

Acquisition of shares in joint ventures -29

Disposal of fi nancial assets 100 3

Short-term investments -1 846 -1 748

Cash fl ow from investing activities -4 446 -2 750

Financing activities

Dividends paid to Parent Company shareholders -520 -281

Cash fl ow from fi nancing activities -520 -281

Cash fl ow for the year 554 -176

Liquid assets at start of period 2 488 2 664

Liquid assets at year-end 3 042 2 488

Statement of Cash Flow - LKAB Group (indirect method)

S T AT E M E N T O F C A S H F L O W – L K A B G R O U P ( I N D I R E C T M E T H O D )


49S T AT E M E N T O F I N C O M E – PA R E N T C O M PA N Y



MSEK Note 2005 2004

1, 34

Revenue 2, 3 12 349 7 560

Cost of goods sold -6 158 -5 234

Gross profi t 6 191 2 326




Other operating income 4 210 162

Other operating expenses 5 -181 -128

Operating income 3, 6, 7, 8, 31 5 720 1 669

Financial items:

Income from participations in Group companies 17 55

Income from participations in associated companies -5 -1

Income from other securities and receivables held as fi xed assets 149 47

Other interest income and similar credits 305 182

Interest expense and similar charges -137 -83

Profi t after fi nacial items 9 6 049 1 869

Appropriations 10 -1 568 -173


Tax 11 -1 251 -460


Statement of Income - Parent Company

NET SALES AND OPERATING INCOME DELIVERIES

-1 000

1 000

3 000

5 000

7 000

9 000

11 000

13 000

15 000

0504030201009998


MSEKParent company

50 B A L A N C E S H E E T – PA R E N T C O M PA N Y



MSEK Note 2005-12-31 2004-12-31

1, 34

ASSETS 32

Fixed assets

Intangible assets 12 119 1

Tangible assets 13 6 437 4 968

Financial assets

Participations in Group companies 35 607 607

Participations in associated companies 17 1 1

Receivables from Group companies 18 373 267

Receivables from associated companies 18 35 40

Other long-term securities held as fi xed assets 20, 30 110 121

Other long-term receivables 21, 30 107 77

Deferred tax asset 11 226 191

Total fi nancial assets 1 459 1 304

Total fi xed assets 8 015 6 273

Current assets

Inventories, etc. 22 993 697

Current receivables

Accounts receivable 23 1 555 936

Receivables from Group companies 904 705

Income taxes recoverable 154 -

Other receivables 21 155 88

Prepaid expenses and accrued revenues 24 26 54

Total current receivables 2 794 1 783

Short-term investments 19 3 874 2 028

Cash and bank balances 37 2 936 2 392

Total current assets 10 597 6 900

Total assets 18 612 13 173

Balance Sheet - Parent Company

INVESTMENTS AND DEPRECIATION LIQUID ASSETS AND SHORT-TERM INVESTMENTS

0

500

1 000

1 500

2 000

2 500

0504030201009998

Investments Depreciation

MSEK

51B A L A N C E S H E E T – PA R E N T C O M PA N Y


MSEK Note 2005-12-31 2004-12-31

SHAREHOLDERS’ EQUITY AND LIABILITIES 1, 34

Shareholders’ equity 25

Restricted equity

Share capital (700,000 shares) 700 700

Statutory reserve 697 697

Non-restricted equity

Accumulated profi t or loss 5 241 4 792


Total shareholders’ equity 9 868 7 425

Untaxed reserves 36 4 562 2 994

Provisions

Provisions for pensions and similar commitments 27, 28 1 542 1 349


Total provisions 1 902 1 349

Long-term liabilities

Liabilities to Group companies 13 13

Total long-term liabilities 13 13

Current liabilities


Liabilities to Group companies 929 461

Current income tax liabilities 147


Accrued expenses and prepaid revenues 29 566 371


Total shareholders’ equity and liabilities 18 612 13 173

Pledged assets and contingent liabilities - Parent Company


MSEK Note 2005-12-31 2004-12-31

Assets pledged 33 148 55

Contingent liabilities 33 452 26

Balance Sheet - Parent Company

52 C O M P I L AT I O N S O F C H A N G E S I N S H A R E H O L D E R S ’ E Q U I T Y – PA R E N T C O M PA N Y


see note 25 Restricted equity Non-restricted equity Total

Statutory Accumulated Net income shareholders’

MSEK Share capital reserve profi t or loss for the year equity

Opening balance 1 January 2004 700 697 5 178 6 575

Group contribution -146 -146

Tax 41 41

Net income recognized directly

in equity, excluding transactions with

the Company’s owners -105 -105



with the Company’s owners -105 1 236 1 131

Dividends -281 -281

Shareholders’ equity 31 December 2004 700 697 4 792 1 236 7 425

Restricted equity Non-restricted equity Total

Statutory Accumulated Net income shareholders’

MSEK Share capital reserve profi t or loss for the year equity

Opening balance 1 January 2005 700 697 6 028 7 425


Tax 104 104

Net income recognized directly

in equity, excluding transactions with

the Company’s owners -267 -267



with the Company’s owners -267 3 230 2 963

Dividends -520 -520

Shareholders’ equity 31 December 2005 700 697 5 241 3 230 9 868

Compilations of changes in shareholders’ equity - Parent Company

SOLIDITY %

53S T AT E M E N T O F C A S H F L O W – PA R E N T C O M PA N Y ( I N D I R E C T M E T H O D )



MSEK Note 2005 2004

1, 37

Operating activities


Adjustments for items not included in cash fl ow, etc. 1 176 949

Income tax paid -1 483 -295

Cash fl ow from operating activities before change in working capital 5 741 2 523

Cash fl ow from changes in working capital

Increase (-)/Decrease (+) of inventories -296 -5

Increase (-)/Decrease (+) in operating receivables -857 169

Increase (+)/Decrease (-) in operating liabilities 1 022 -17

Cash fl ow from operating activities 5 610 2 670

Investing activities

Acquisition of tangible assets -2 314 -614

Disposal of tangible assets 21 11

Change in long-term receivables -136 2

Acquisition of fi nancial assets -100

Disposal of fi nancial assets 100 11

Short-term investments -1 846 -1 748

Cash fl ow from investing activities -4 175 -2 438

Financing activities

Dividends paid -520 -281


Cash fl ow from fi nancing activities -891 -426

Cash fl ow for the year 544 -194

Liquid assets at start of period 2 392 2 586

Liquid assets at year-end 2 936 2 392

Statement of Cash Flow - Parent Company (indirect method)

54

Notes to the fi nancial statements

N O T E S T O T H E F I N A N C I A L S T AT E M E N T S


NOTE 1 Accounting principles

(a) Conformity with norms and legislation

The consolidated fi nancial statements have been prepared in accordance with International Financial Reporting Standards (IFRS), published by the International Accounting Standards Board (IASB), and in accordance with interpretations by the International Financial Reporting Interpretations Committee (IFRIC) as approved by the European Commission for applica-tion within the EU. This annual report, together with the consolidated fi nancial statements, is the fi rst complete fi nancial report to be prepared in accordance with IRFS. In the transition to reporting in accordance with IFRS, IFRS 1 is used, which describes how the transition to IFRS is to be reported. In addition, Swedish Financial Accounting Standards Council (SFASC) recommendation RR 30 Complementary Reporting Rules for Groups is used.

The Parent Company applies the same accounting principles as the Group, except in the cases indicated under the section ”Parent Company’s accounting principles”. The variations between Parent Company and Group accounting principles arise from the limitations in applying IFRS in the Parent Company as a result of the Swedish Annual Report Act and the Swedish Act on Safeguarding of Pension Commit-ments, and in certain cases for tax reasons.

Notes 38 and 39 provide a summary and explanation of how the transition to IFRS has affected the Group’s fi nancial outcome and repor-ted cash fl ows.

(b) Conditions applying to the preparation of Parent Company and

Group fi nancial reports

The presentation currency for the Group and Parent Company is the Swedish krona, which means that fi gures in the fi nancial reports are Swedish kronor. Unless otherwise indicated, all amounts are rounded off to the nearest million kronor. Assets and liabilities are stated at historical acquisition values, accept for certain fi nancial assets and liabilities that are reported at fair value. Financial assets and liabilities stated at fair value consist of derivatives, fi nancial assets classifi ed as fi nancial assets reported at fair value in the income statement, or as fi nancial assets that can be sold.

Fixed assets and disposal groups that are held for sale are reported at the lower of the earlier reported value and fair value after deduction for selling expenses.

To present the fi nancial reports in accordance with IFRS, the manage-ment must make certain estimates and assumptions that affect the app-lication of the accounting principles and the reported amounts pertaining to assets, liabilities, revenue and expenses. The estimates are based on historical experience and several other factors that are deemed reaso-nable under the prevailing circumstances. The result of such estimates and assumptions is then used to assess the reported value of assets and liabilities that cannot clearly be determined from other sources. Actual outcomes may differ from these estimates and assumptions.

The estimates and assumptions are regularly reviewed. Changes in estimates are reported in the period in which the change is made if the change affects only that period, or in the period in which the change is made and future periods if the change affects both the current and future periods.

The Group accounting principles listed below have been consistently applied to all periods presented in the Group’s fi nancial reports, unless otherwise stated below, and in preparing the Group’s balance sheet as of 1 January 2004, which explains the transition from previously applied accounting principles to IFRS. Group accounting principles have been consistently applied to the accounts and consolidation of subsidiaries, associated companies and joint venture companies.

Changed accounting principles

For the Group, the transition to reporting in accordance with IFRS is pre-sented according to IFRS 1 and is described in Note 38. In accordance with voluntary exceptions in IFRS 1, IAS 39 is not applied to the compa-rative fi gures for 2004, but is applied prospectively from 1 January 2005. Application of IAS 39 has had a net effect on shareholders’ equity of MSEK 1 212 Mkr per 1 January 2005. The effect of IAS 39 in the income statement during 2005 amounts to MSEK 101. For the comparative year 2004, the same accounting principles are applied with respect to fi nancial instruments as for the Parent Company.

New IFRS and interpretations that will be applied during coming

periods

As of 1 January 2006, IFRS 6 ”Exploration for and Evaluation of Mineral Assets” applies to LKAB. For LKAB, the effect of the transition is not ex-pected to entail any signifcant changes in existing accounting principles with respect to exploration and evaluation expenses.

The change implies that, e.g., in fi nancial reports, disclosures must be made concerning the amounts that arise as a result of exploration and evaluation of mineral assets, the purpose of which is to facilitate un-derstanding of the magnitude of, point in time and probability of, future revenue infl ows from each reported exploration and evaluation asset.

As Of 2006, a reviced IAS 19 ”Benefi ts to Employees” allows a further alternative for reporting actuarial gains and losses; namely, to re-cognize these directly in shareholders’ equity. The alternatives according to the earlier version IAS 19 are retained, which means that LKAB will continue to report pension commitments according to the same accoun-ting principles for 2004 and 2005.

(c) Segment reporting

In the accounts, a segment is an identifi able part of the Group that either offers products and services (lines of business), or goods or services within a certain economic environment (a geographic region) that is exposed to risks and opportunities that differ from those that apply to other segments.

Segment disclosures are reported in accordance with IAS 14 for the Group only.

(d) Classifi cation, etc.

Fixed assets and long-term liabilities in the Parent Company and Group consist for the most part solely of amounts that are expected to be recovered or paid more than twelve months after the balance sheet date. Current assets and long-term liabilities in the Parent Company and Group consist for the most part solely of amounts that are expected to be recovered or paid within twelve months of the balance sheet date.

(e) Consolidation principles

(I) Subsidiaries

Subsidiaries are companies in which the Parent Company exercises a controlling infl uence over the operational and fi nancial management. Controlling infl uence implies a direct or indirect right to decide the company’s fi nancial and operative strategies with an aim to realizing economic advantages. When assessing whether a decisive, controlling infl uence exists, potential shares with voting rights that can be utilized without delay shall be taken into account.

Subsidiaries are reported according to the purchase method. The acquisition of a subsidiary is considered a transaction through which the Group indirectly acquires the subsidiary’s assets and assumes its liabi-lities and contingent liabilities. The analysis establishes the acquisition value of the shares or business, and the fair value of acquired identifi able assets and assumed liabilities and contingent liabilities. The acquisition value of subsidiaries’ shares or business comprises the fair values as per date of transfer of the assets, accrued or assumed liabilities and emitted equity instruments given in payment for the acquired net assets and transaction costs that are directly attributable to the acquisition. Where the acquisition cost exceeds the net value of acquired assets, assumed liabilities and contingent liabilities, the difference is reported as goodwill. If the acquisition value is less than the fair value of the acquired company’s net assets, the difference is reported directly in the income statement.

The subsidiary’s fi nancial reports are included in the consolidated accounts as of the date of acquisition and are excluded from the consoli-dated accounts as of the date the decisive infl uence no longer exists.

(II) Associated companies

Associated companies are companies in which the Group has a signifi -cant, but not controlling, infl uence in the operational and fi nancial mana-gement, generally through a holding of 20-50% of the voting rights. From the point in time at which the signifi cant infl uence is acquired, the inte-rest in the associated company is reported in the consolidated accounts according to the equity method. According to this method, the value of

55N O T E S T O T H E F I N A N C I A L S T AT E M E N T S


the shares in the associated companies reported in the consolidated ac-counts corresponds to the Group’s interest in the associated companies’ stockholders’ equity, the consolidated goodwill, and other residual values that might exist in the consolidated fair value adjustments. In the Group income statement, the Group’s share in the associated companies’ net earnings after tax and minority interest adjusted for depreciation, write-downs and resolution of acquired fair value adjustments is reported under ’Participations in associated companies’. Dividends obtained from the associated company reduce the reported value of the investment.

On acquisition, any differences between the acquisition value of the holding and the owner’s share of the net fair value of the associated company’s identifi able assets, liabilities and contingent liabilities are reported in accordance with IFRS 3, Business Combinations.

When the Group’s share of reported losses in the associated com-pany exceeds the reported value of the shares in the Group, the value of the shares is reduced to zero. Deductions for losses are also made against unsecured long-term fi nancial transactions, which in their econo-mic substance constitute part of the owning company’s net investment in the associated company. Further losses are not reported unless the Group has undertaken to cover losses arising in the associated company. The equity method is applied until the signifi cant infl uence ceases to exist.

(III) Joint ventures

For accounting purposes, joint ventures are companies in which the Group has entered into collaboration agreements with one or several parties to share a controlling interest in their operational and fi nancial management. In the consolidated accounts, holdings in joint ventures are reported according to the principle of proportional consolidation. This method implies that the Group’s share of the joint venture’s assets, lia-bilities, revenue and expenses, is reported in the Group’s balance sheet and income statement. To do so, the joint owner’s share of assets, liabi-lities, revenue and expenses in a joint venture is combined item-by-item with corresponding items in the joint owner’s consolidated accounts. Only shareholders’ equity accruing after acquisition is reported in the Group’s shareholders’ equity. The proportional consolidation principle is applied from the point in time at which the joint controlling infl uence is obtained until it ceases to exist.

(iv) Transactions to be eliminated on consolidation

Intra-group receivables and payables, revenue or expenses, and un-realized profi ts or losses arising from intra-group transactions between subsidiaries are eliminated in their entirety when the consolidated accounts are prepared.

Unrealized profi ts arising from transactions with associated com-panies and jointly controlled companies are eliminated to an extent corresponding to the Group’s share of the ownership of the company. Unrealized losses are eliminated in a similar fashion to unrealized profi ts, but only if there is no indication that a write-down is required.

(f) Foreign currencies

(I) Transactions in foreign currencies

Foreign currency transactions are translated to the functional currency at the exchange rate applying on the transaction day. Functional currency is the currency in the primary economic environments in which the companies operate. In the assessment of the Group Management, in compliance with IAS 21, the Swedish krona is the functional currency for the Swedish operations. Monetary assets and liabilities in foreign cur-rency are translated to the functional currency at the rate prevailing on the balance sheet date. Exchange rate differences resulting from trans-lations are reported in the income statement. Non-monetary assets and liabilities reported at their historical acquisition value are translated at the exchange rate applying on the transaction day. Non-monetary assets and liabilities reported at fair value are translated to the functional currency at the rate applying at the time the fair value was established. Exchange rate fl uctuations are reported in the same way as other changes in value in respect of assets or liabilities.

(II) Financial reports in foreign entities

Assets and liabilities in foreign entities, including goodwill and other fair value consolidation adjustments, are translated from the functional cur-rency to Swedish kronor at the rate applying on the balance sheet date. Revenue and expenses in foreign entities are translated to Swedish kronor at the average rate that constitutes an approximation of the rates applying when the transaction occurred. Revenue and expenses in foreign entities in countries with hyperinfl ation are translated to the functional currency at the rate applying on the balance sheet date.

Differences that arise when translating currency in foreign entities are reported immediately in shareholders’ equity as a translation reserve.

Before currency translation of fi nancial reports in foreign entities in countries with hyperinfl ation, the fi nancial reports are adjusted with the help of a reliable infl ation index. This is done to take into account chan-ges in purchasing power in the company’s functional currency, which is normally the local currency. Only the fi nancial reports for the reported fi scal year in question are adjusted with the help of an infl ation index.

(III) Net investment in a foreign entity

The differences that occur in connection with translating a foreign net investment and the related effects of hedging net investments are repor-ted directly in the translation reserve in shareholders’ equity. On disposal of a foreign entity, the cumulative translation difference relating to the entity, after deductions for currency hedges, where applicable, is realized in the Group’s income statement.

The cumulative translation differences for foreign entities are presen-ted as a separate capital category and include the translation differences accumulated as of 1 January 2004. Accumluated translation differences prior to 1 January 2004 are distributed over other separate capital catego-ries and are not disclosed.

(g) Revenue recognition

(I) Sale of goods and rendering of services

Revenue from the sale of goods is reported in the income statement when signifi cant risks or benefi ts associated with ownership of the goods has been transferred to the buyer. Revenue from the rendering of services is reported in the income statement based on the degree of completion as per the balance sheet date. The degree of completion is measured via evaluation of work performed on the basis of completed surveys. Revenue is not recognized if it is probable that future economic benefi t will not accrue to the Group. If there is considerable uncertainty as to payment, associated costs or risk of returns, and if the seller re-tains the controlling interest that is normally associated with ownership, no revenue is recognized.

(II) Revenue from the sale of property

Unless the risks and benefi ts associated with ownership have been transferred to the buyer on an earlier date, revenue from the sale of property is normally recognized on the date on which posession is taken. Control over the asset may have been transferred at a point in time prior to the date when possession was taken; in which case, revenue from sale of the property is recognized on this earlier date. When establishing the date of revenue recognition, consideration is given to what has been agreed by the parties concerning risks and benefi ts, and controlling inte-rest in the management of the asset. In addition, consideration is given to circumstances beyond the control of the seller and/or buyer that may affect the outcome of the sale of the property.

(III) Rental income

Rental incomes from investment properties are reported in a linear man-ner in the income statement, based on the terms of the lease.

(IV) Government grants

Government grants are recognized on the balance sheet as deferred income when there is a reasonable assurance of compliance with condi-tions attached to the grants and that the grants will be received. Grants are periodized systematically; i.e., recognized in the same way and during the period in which the costs that the grants are intended to cover are reported. Government grants related to assets are recognized on the balance sheet as a reduction in the reported value of the assets.

(h) Operating expenses and fi nancial income/expenses

(I) Costs associated with operating leases

Costs associated with operating leases are recognized in the income statement on a straight-line method over the term of the lease. Benefi ts received upon entering a leasing agreement are recognized in the income statement on a straight-line method over the term of the lease. (II) Finance leases

Minimum lease payments are allocated to interest expenses and amortization of the outstanding liability. Interest expenses are distributed over the period of the lease, so that each accounting period is charged with an amount corresponding to a fi xed rate of interest for the liability reported in the respective period. Variable fees are expensed in the period in which they arise.

56 N O T E S T O T H E F I N A N C I A L S T AT E M E N T S


(III) Financial revenue and expenses

Financial revenue and expenses include interest revenue from bank assets, receivables and interest-bearing securities, interest expenses related to loans, exchange rate differences, unrealized and realized gains on fi nancial investments, and derivative instruments used in fi nancial operations.

Interest revenue from receivables and interest expenses related to liabilities are estimated using the effective interest method. The effective interest is the rate that ensures that the present value of all future re-ceipts or payments through the expected life of a fi nancial instrument is the same as the reported value of the receivable or payable. The interest element of fi nancial leasing payments is reported in the income state-ment by using the effective interest method. Interest revenue includes periodized amounts of transaction expenses and discounts, premiums and other variations between the original value of the receivable and the amount received on maturity.

Dividend income is recognized as revenue when the right to obtain payment is certain.

The Group and Parent Company do not include capitalized interest in the acquisition value of assets.

(i) Financial instruments

Financial instruments are valuated and reported in the Group’s accounts as of 1 January 2005 in accordance with the rules specifi ed in IAS 39 without retroactive application to the comparative year.

Financial instruments reported as assets on the balance sheet include, on the assets side, liquid assets, accounts receivable, shares and other equity instruments, credit claims and bond premiums, and derivatives. Liabilities and shareholders’ equity include accounts payable, borrowing and derivatives.

Financial instruments are initially recognized at cost which cor-responds to the instrument’s fair value plus transaction costs for all instruments except those classifi ed as fi nancial assets, which are recognized at fair value in the income statement. The way in which they are recognized depends on how the fi nancial instruments are classifi ed, as described below.

A fi nancial asset or fi nancial liability is entered on the balance sheet when the company becomes engaged by contract. Accounts receivable are entered on the balance sheet when an invoice has been issued. Lia-bilities are entered when the counterparty has performed and the agreed liability is due for payment, even if an invoice has not yet been received. Accounts payable are entered when an invoice is received.

A fi nancial asset is removed from the balance sheet when the rights in the agreement are realized, expire or the company loses control over them. The same applies for a portion of a fi nancial asset. A fi nancial liability is removed from the balance sheet when the undertakings in the agreement have been fulfi lled or extinguished. The same applies for a portion of a fi nancial liability.

Acquisition and disposal of fi nancial assets is recognized on the trade day, i.e., the day upon which the company undertakes to acquire or dispose of the asset.

For listed fi nancial assets, fair values correspond to the asset’s buying rate on the balance sheet date. Fair value of non-listed fi nacial assets is determined by means of valuation and measurement concepts such as comparison with recent transactions, prices of similar instruments, and discounted cash fl ow.

On each reporting occasion, the company assesses whether there are objective indications that a fi nancial asset or group of fi nancial assets needs to be written down. If a write-down is required for an asset in the category available-for-sale assets, the previously reported accumulated depreciation recognized against shareholders’ equity is restored to the income statement.

IAS 39 classifi es fi nancial instruments in categories. Classifi cation depends on the intention underlying the acquisition of the fi nancial instrument. Corporate management determines the classifi cation on acquisition. The categories are as follows:

Financial assets recognized at fair value in the income statementThis category consists of two sub-groups: fi nancial assets held for trading and other fi nancial assets that the company initially decided to invest in this category. A fi nancial asset is classifi ed as held for trading if the intention is to sell it in the short term. Derivatives are classifi ed as held for trading, except when they are used in hedge accounting. Assets in this category are measured at fair value and changes in fair value are recognized in the income statement.

Loans and receivables Loans and receivable are non-derivative fi nancial assets with fi xed payments or determinable payments, which are not quoted on an active market. Receivables arise when companies provide money, goods or services directly to the borrower without intent to trade in receivables. The category also includes acquired receivables. Assets in this category are valued at the accrued acquisition value. Accrued acquisition value is determined based on the effective rate of interest calculated on acquisi-tion.

Held-to-maturity investments Held-to-maturity investments are fi nancial assets with fi xed or determi-nable payment fl ows, with a fi xed term, and which a company intends and is able to hold to maturity. Assets in this category are valued at the accrued acquisition value. Accrued acquisition value is determined based on the effective rate of interest calculated on acquisition. This means that fair value adjustments and direct transaction expenses are periodi-zed over the term of the instrument.

Available-for-sales assets/assets held for sale The available-for-sale category includes fi nancial assets that are not clas-sifi ed in any other category or fi nancial assets that the company initially classifi ed in this category. Assets in this category are valued continuously at fair value, with changes in value reported against shareholders’ equity. When the investments are derecognized from the balance sheet, the previously reported accumulated gain or loss in shareholders’ equity is restored to the income statement.

Other fi nancial liabilities Financial liabilities not held for trading are valued at their accrued acquisition value. Accrued acquisition value is determined based on the effective rate of interest calculated when the liability was recognized. Consequently, fair value adjustments and direct issue expenses are periodized over the term of the liability.

Derivatives used in hedge accountingAll derivatives are recognized at fair value on the balance sheet. Changes in fair value are recognized in the income statement when the fair value is hedged. When net investments in foreign currencies are hedged, changes in the fair value are recognized in equity until the hedged item is recognized in the income statement. Hedge accounting is described in detail below.

Liquid assets

Liquid assets are cash and immediately available credit in banks and similar institutions, and current investments with a maturity of less than three months from acquisition that are exposed to only very marginal risk for fl uctuations in value.

Financial investments

Financial investments are either fi nancial fi xed assets or current invest-ments depending on why they are held. If the term or the expected period for which they are held is longer than one year, they are fi nancial fi xed assets; if they are to be held for less than one year, they are current investments.

Financial investments consisting of shares belong either to the category of fi nancial assets valued at fair value through the income statement or available-for-sale fi nancial assets.

Interest-bearing securities acquired with the intention of being held until maturity are classifi ed as held-to-maturity investments and are valuated at accrued acquisition value. Interest-bearing securities not acquired with the intention of being held until maturity are classifi ed as fi nancial assets recognized at fair value in the income statement or available-for-sale fi nancial assets.

On fair value valuation through the income statement, the change in value is reported in net fi nancial items.

Long-term receivables and other receivables

Long-term receivables and other current receivables arise when the com-pany provides money directly to the borrower without intent to trade in receivables. If they are expected to be held for longer than one year, they are deemed long-term receivables, and if they are expected to be held for less than one year, they are categorized as other receivables. Such receivables are categorized under ’Loans and receivables’.

Accounts receivable

Accounts receivable are classed as ’Loans and receivables’. Accounts



receivable are reported in the amount at which they are expected to be received, less a deduction for bad debts, which are assessed individually. The anticipated duration of accounts receivable is short, which is why the value is reported at nominal amount without discounting. Write-downs of accounts receivable are reported in operating expenses.

Liabilities

Liabilities are classifi ed as other fi nancial liabilities, which means that they are initially reported as the amount received after deductions for transaction expenses. After acquisition, the loans are valued at the accrued acquisition value according to the effective rate method. Long-term liabilities have an expected term of longer than one year, whereas current liabilities are expected to mature in less than one year.

Accounts payable

Accounts payable are classifi ed as other fi nancial liabilities. Accounts payable have a short expected term and are valued without discount at nominal value.

(j) Derivatives and hedge accounting

Derivative instruments consist of forward exchange contracts, options and swaps that are used to cover risks for fl uctuations in exchange rates. Fluctuations in fair value of derivative instruments are reported on the balance sheet based on the intention of the holding. In hedge accounting, the derivative’s accumulated change in value is transferred to the income statement, where it meets and matches the effects of the hedged transaction. Even if hedge accounting is not applied, increases or decreases in the value of the derivative are reported as income or expense, respectively, within the operating profi t/loss or net fi nancial income/expense, based on the intended use of the derivative instrument and whether that use relates to an operating item or to a fi nancial item. In hedge accounting, the ineffective part is reported in the same way as fl uctuations in the value of derivatives that are not used in hedge accounting.

To comply with IAS 39 requirements concerning hedge accounting, there must be a clear link between the hedging instrument and the corresponding hedged item. Furthermore, the hedging instrument must effectively protect the hedged item, hedging must be documented and the effectiveness must be measurable. Hedging gains and losses are reported in the income statement at the same point in time as gains and losses for the corresponding hedged items are reported.

In cases where the requirements for hedge accounting can no longer be fulfi lled, the derivative instrument is recognized at fair value with fl uctuations in value via the income statement, according to the principle above.

Receivables and liabilities in foreign currenciesTo hedge assets or liabilities against currency risk, forward exchange contracts are used. For these hedges, no hedge accounting is required, since both the hedged item and the hedging instrument are valuated at fair value with fl uctuations in value recognized over the income state-ment with respect to exchange rate differences. Changes in value with respect to operating-related receivables and liabilities are recognized in operating profi t/loss, while changes in value with respect to fi nancial receivables and liabilities are recognized in net fi nancial income/expense.

Transaction exposure - cash fl ow hedgesCurrency exposure with respect to future forecast fl ows is hedged either via forward exchange contracts or currency options. Forward exchange contracts or currency options that protect the forecast fl ow are to be recognized at fair value on the balance sheet. Changes in value are reported in a hedging reserve directly against shareholders’ equity until the hedged fl ow is reported on the balance sheet, whereby the hedging instrument’s accumulated change in value is transferred to the income statement, where it meets and matches the profi t/loss effects of the hedged transaction. The hedged fl ows can be either contracted or forecast transactions.

When the hedged future cash fl ow refers to a transaction that is capitalized on the balance sheet, the hedging reserve is dissolved when the hedged item is reported on the balance sheet. If the hedged item is a non-fi nancial asset or a non-fi nancial liability, the dissolved hedging reserve is included in the original acquisition value of the asset or liability. If the hedged item is a non-fi nancial asset or a non-fi nancial liability, the hedging reserve is dissolved successively against the income statement at the same rate at which the hedged item effects the profi t/loss.

When a hedging instrument expires, is sold or no longer qualifi es as a hedge, or when the company deems that a hedge no longer meets the

criteria for hedge accounting before the hedged transaction occurs and the forecasted transaction is still expected to occur, cumulative gains or loss on the hedging reserve recognized in equity is retained there until the forecasted transaction occurs.

If a hedged transaction is no longer expected to occur, the net cumu-lative gain or loss recognized is transferred to the income statement, according to the principles for derivative instruments described above.

(k) Tangible assets and investment properties

(I) Owned assets

Tangible assets are reported as assets on the balance sheet if it is likely that future fi nancial benefi ts will accrue to the company and the acquisi-tion value of the asset can be calculated in a reliable manner.

Tangible assets are reported in the Group accounts at acquisition va-lue after deductions for accumulated depreciation according to plan and any write-downs. The acquisition value includes the purchase price and expenses directly pertaining to the asset, such as the costs associated with delivery and installation of the asset such that it can be utilized to fulfi ll the purpose of the acquisition. Such costs include cost of delivery and handling, installation, title deeds, consulting services and legal servi-ces. Borrowing costs are not included in the acquisition value of tangible assets produced by the company.

The acquisition value of tangible assets produced by the company includes costs of material, payroll expenses, other fabrication costs di-rectly attributable to the tangible asset, if applicable, and estimated costs of disassembly and removal of the assets and remediation of the site or area in which it has been used.

Tangible assets whose parts differ with respect to useful life are treated as separate components of tangible assets.

The reported value of a tangible asset is struck from the balance sheet when the asset is retired or disposed of or when no future econo-mic value is expected to accrue from the use or retirement/disposal of it. Gain or loss arising from the disposal or retirement of an asset is the difference between the selling price and the asset’s reported value with deductions for direct selling expenses. Gain or loss is reported as other operating income/expense.

(II) Underground installations

Installations underground, from which iron ore is extracted, can be clas-sed as installations for waste rock mining and installations for iron ore mining. Waste rock mining consists of work done to expose the orebody in connection with the construction of a main haulage level, construc-tion pertaining to transport and maintenance functions such as railways, roads, tunnels, shafts, inclined drifts (a system of access for vehicle traffi c from surface level to the work site underground), and facilities for service and electrical and air supply. These expenses, referring to plant that intended to be used for more than a year, are activated on the balance sheet. The average useful life of this category of tangible assets is 12 years.

Iron ore mining consists mainly of activities including development, cave drilling and loading. Expenses for these activities have a useful life of at most one year, which is why they are expensed on a current basis.

(III) Investment properties

Investment properties are properties held for the purpose of receiving rental revenues or realizing appreciation in value, or a combination of the two. Investment properties are reported according to the same principles as tangible assets. Concerning fair value of investment properties, see Note 14.

Rental income and income from the sale of property is reported according to the principles described under the section on revenue recognition.

(IV) Leased assets

The LKAB Group applies IAS 17. Leases are classifi ed in the consolidated accounts as either fi nance leases or operating leases. A lease that trans-fers substantially all the risks and rewards of ownership to the lessee is classifi ed as a fi nance lease. All other leases are normally classifi ed as operating leases.

Assets leased under fi nance lease contracts have been reported as assets on the Group’s balance sheet. Commitments for future rental payments have been reported as long-term and current liabilities. The leased assets are depreciated according to plan, while rental payments are reported as interest and amortization on liabilities.

Operating leasing entails that rental payments are expensed over the entire period starting with the initial use of the asset, which may differ from what is in fact paid in rent over the course of a year.



Assets leased out under fi nance leases are not recognized as tangible assets, since the risks associated with ownership are transferred to the lessee. Instead, future minimum rental payments are booked as a fi nancial receivable.

(V) Additional expenditures

Additional expenditures are added to the acquisition value if it is probable that future economic benefi t associated with the asset will accrue to the company, and if he acquisition value can be calculated in a reliable way. All other additional expenditures are expensed in the period in which they arise.

Whether additional expenditures are added to the acquisition value is decided on the basis of whether the expenditure refers to replacement of identifi ed components of the asset, or parts thereof, whereupon such expenditures are capitalized. In cases where a new component is created, the expenditure is also added to the acquisition value. Any unde-preciated reported values on replaced components, or parts thereof, are retired and expensed in connection with the replacement. Repairs are expensed on a current basis.

(VI) Depreciation principles

The assets are depreciated on a straight-line basis over useful life. Land is not depreciated. The Group applies component depreciation, whereby the estimated useful life of the component constitutes the basis for depreciation.Estimated useful life:

- operating properties, investment properties, 15 - 100 years- machinery and other technical plant 5 - 20 years- inventories, tools and installations 5 - 20 years- underground installations (average) 12 years

Operating properties are classifi ed mainly as buildings, land improve-ments and land. Buildings and land improvements consist of several components that are classifi ed on the basis of function; e.g., roads, surfacing, service facilities, processing plants, etc.

Investment properties consist of several components that differ with respect to useful life. The main classifi cations are buildings and land. The land component is not depreciated, since its useful life is considered to be unlimited. Buildings, however, consist of several components of varying useful life. The useful life of these components ranges from 15 to 100 years.

The following main groups of components have been identifi ed and are the basis for depreciation of investment properties.

- Framework, foundation and interior walls 100 years- Water, sewage, electrical and heating systems 50 years- Facade 40 years- Windows 50 years- Interior fi nishing and appliances 15 years

Machines and other technical plant consist of several components with varying useful life. The useful life of these components ranges from 5 to 20 years.

Residual value and useful life are assessed annually.

(l) Intangible assets

(I) Goodwill

Goodwill represents the difference between the acquisition value of a business acquisition and the fair value of the acquired assets, assumed liabilities and contingent liabilities.

In respect of acquisitions occurring before 1 January 2004, after amortization requirements are assessed, goodwill is recognized at an acquisition value corresponding to the value reported according to accounting principles applied earlier. Classifi cation and reporting of business acquisitions made prior to 1 January 2004 have not been reas-sessed according to IFRS 3 when preparing the Group’s opening balance per 1 January 2004 according to IFRS (see Note 38).

Goodwill is valued at the acquisition value less any accumulated write-downs. Goodwill is broken down into cash-generating units and is not amortized, but is instead tested annually for impairment. Goodwill arising from the acquisition of associated companies is included in the reported value of participations in associated companies.

Where the acquisition cost is less than the net value of acquired assets, assumed liabilities and contingent liabilities, the difference is reported directly in the income statement.

(II) Research and development

Expenditures for research aimed at acquiring new scientifi c or technical knowledge are expensed in the period in which they are incurred.

Development expenditures, i.e., expenses for research of which the results or other knowledge is applied to realize new or improved products or processes, are recognized as an asset on the balance sheet if the product or process is technically and commercially viable and the company has suffi cient resources to complete the development and sub-sequently use or sell the intangible asset. The reported value includes expenditures for material, direct payroll expenses or other indirect expen-ses that are reasonably and consistently attributable to the asset. Other expenditures for development are reported in the income statement as expenses in the period in which they are incurred. On the balance sheet, reported development costs are recognized at their acquisition value less accumulated amortization and write-downs.

Expenditures for survey/exploration work conducted underground are expensed when they are incurred.

(III) Other intangible assets

Other intangible assets that have been acquired by the Group are recognized at their acquisition value less accumulated amortization (see below) and write-downs.

(IV) Additional expenditures

Additional expenditures for capitalized intangible assets are recognized as an asset on the balance sheet only when they increase the future economic benefi ts for the specifi c asset to which they pertain. All other expenditures are expensed as they arise.

(V) Emissions rights

In January 2005, LKAB received carbon-dioxide emissions rights for the years 2005 - 2007. LKAB reports allocated emissions rights as intangible assets and these are valuated at the lowest of either the acquisition value or market (fair) value. The corresponding value is included in Provi-sions and Other liabilities. Settlement is made annually and any defi cit is reported as accrued expense.

(VI) Amortization

Amortizations are reported in the income statement straight-line across the estimated useful life of the intangible assets, provided such useful life can be determined. Goodwill and intangible assets with indetermi-nate useful life are assessed for write-down requirement, either annually or as soon as there are indications that the value of the asset in question has diminished. Depreciable intangible assets are written off from the date upon which they are available for use. The estimated periods of useful life are:

- Mining rights 30 - 50 years- Tenancy right 10 years

(m) Inventories, etc.

Inventories are valuated at the lower of acquisition value or net realizable value/net selling price. Net selling price is the estimated selling price (realizable value) in current operations, after deductions for estimated costs of completion and for realizing a sale.

In the case of manufactured and semi-manufactured inventories, cost consists of direct manufacturing costs and a reasonable portion of indi-rect costs. Normal capacity utilization is taken into account in valuation.

Acquisition value of other inventories is calculated on the basis of the fi rst-in, fi rst-out (FIFO) method and includes costs arising from the acquisition of the inventory assets and transport of them to their current location. In the case of manufactured goods and work in progress, acquisition value includes a reasonable portion of indirect costs based on normal capacity.

(n) Write-downs

Reported values for the Group’s assets - with the exception of invest-ment properties, inventories, plan assets used for fi nancing or remunera-tion to employees and deferred tax assets - are checked on each balance sheet date to ascertain whether any write-down need is indicated. If a need for write-down is indicated, the recoverable value of the asset is calculated. For the exceptional assets mentioned above, assessment is done according to the respective standard.

For goodwill and other intangible assets with indeterminate useful life, and intangible assets that are not yet ready for use, the recoverable amount is calculated annually.



If largely independent cash fl ows attributable to a single asset cannot be ascertained, when the write-down requirement is assessed, assets will be grouped at the lowest level at which largely independent cash fl ows can be identifi ed (a so-called cash-generating unit). A write-down is reported when an asset or cash-generating unit’s reported value exceeds its recoverable value. A write-down is charged to the income statement.

Write-down of assets attributable to a cash-generating unit (group of units) is fi rst allocated to goodwill. Subsequently, a proportionate write-down of other assets in the unit (group of units) is done.

Goodwill and was assessed for write-down requirement as of 1 January 2004 (date of transition to IFRS), even though there was at that time no apparent indication of a need for write-down.

When impairment in fair value of fi nancial assets that can be sold has previously been reported directly against shareholders’ equity and there is objective evidence that there is need for a write-down, the accumula-ted loss that is booked in shareholders’ equity is to be transferred to the income statement. The impairment that is reported in the income state-ment is the difference between the acquisition value and the current fair value, with deductions for any previous expensed write-downs.

(I) Calculation of recoverable amount

The recoverable amount of assets belonging to the categories held-to-maturity securities and loan receivables and accounts receivable, which are reported at amortized cost, is calculated as the present value of expected future cash fl ows, discounted at the original effective interest rate (i.e., the effective interest rate computed at initial recognition of these fi nancial assets). Receivables with a short duration are not discounted.

The recoverable amount of other assets is the greater of their fair value minus selling expenses and value in use. In assessing value in use, the estimated future cash fl ows are discounted to their present value using a pre-tax discount rate that refl ects risk-free interest and the risks specifi c to the asset. For an asset that does not generate largely independent cash infl ows, the recoverable amount is determined for the cash-generating unit to which the asset belongs.

(II) Reversal of write-downs

Write-downs in respect of a held-to-maturity securities or loan recei-vables and accounts receivable, which are reported at amortized cost, are reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the write-down was recognized.

Write-downs in respect of goodwill are not reversed.In respect of other assets, write-downs are reversed if there has been

a change in the estimates used to determine the recoverable amount.A write-down is reversed only to the extent that the asset’s carrying

amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no write-down had been recognized.

(o) Shareholders’ equity

(I) Dividends

Dividends are recognized as a liability after they have been approved by the Annual General Meeting.

(p) Employee benefi ts

(I) Defi ned-contribution plans

For defi ned-contribution plans, costs are expensed in the income state-ment as the contributions are paid in.

(II) Defi ned-benefi t plans

The Group’s net obligation for defi ned benefi t plans is calculated separa-tely for each plan by estimating the future compensation that employees have earned through employment in present and previous periods. This compensation is discounted to present value and the fair value of plan assets is deducted.. The discount rate is the interest rate on the closing day for a fi rst-class corporate bond with a maturity corresponding to the Group’s pension obligations. When there is no active market for such corporate bonds, the market interest rate on government bonds with a similar maturity is used instead. The calculation is made by a qualifi ed actuary using the projected unit credit method.

When the compensation in a plan improves, the portion of the increased compensation attributable to the employees’ services in previ-ous periods is expensed through the income statement on a straight-line basis over the average period until the compensation is fully vested. If the compensation is fully vested, an expense is recognized directly through the income statement.

All actuarial gains and losses as of 1 January 2004, the date of transi-tion to IFRS, have been reported. For actuarial gains and losses that arise from the calculation of the Group’s obligations for different plans after 1 January 2004, the so-called corridor rule is applied. This means that the portion of the cumulative actuarial gains and losses exceeding 10 percent of the higher of the commitments’ present value and the fair value of plan assets is recognized over the expected average remaining period of employment of the employees covered by the plan. Actuarial gains and losses otherwise are not taken into account.

When the calculation leads to an asset, the carrying amount is limited to the lesser of the estimated asset and sum of unrecognized actuarial losses and unrecognized costs associated with employment in previous periods as well as the present value of future repayments from the plan or reduced future payments to the plan.When there is a difference in how the pension cost is determined for a legal entity and the Group, a provision or receivable for the special employer’s contribution arises based on this difference. No present-value computation for the provision or receivable is made.

(III) Other long-term employee benefi ts

The Group’s net obligation for other long-term compensation, besides pensions, corresponds to the value of future compensation earned by employees as remuneration for the services they have performed during the present period and previous periods. The obligation is calculated ac-cording to the so-called projected unit credit method and is discounted to present value and the fair value of plan assets is deducted. The discount rate is the interest rate on the closing day for a fi rst-class corporate bond with a maturity corresponding to the term of the obligations. When there is no active market for such corporate bonds, the market interest rate on government bonds with a similar maturity is used instead.

(IV) Severance

A provision is recognized in connection with termination of personnel only if the company is obligated to terminate an employment before the customary time, e.g., when compensation is paid in connection with a voluntary termination offer. In cases where the company terminates personnel, a detailed plan is drafted containing at the minimum the work-places, positions and approximate number of individuals affected as well as compensation for each personnel category or position and a schedule for the plan’s implementation.

(q) Provisions

A provision is recognized on the balance sheet when the Group has a legal or informal obligation owing to an event that has occurred and it is likely that an outfl ow of economic resources will be required to settle the obligation and a reliable estimate of the amount can be made. Where it is important when in time payment will be made, provisions are estima-ted by discounting the forecast future cash fl ow at a pre-tax interest rate that refl ects current market estimates of the time value of money and, where appropriate, the risks associated with the liability.

(I) Restructuring

A provision for restructuring is recognized when a detailed, formal restructuring plan has been established and the restructuring has either begun or been publicly announced. No provision is made for future operating losses.

(II) Remediation of contaminated land

In accordance with the Group’s publicly announced environmental principles and applicable legal requirements, provisions for soil and land remediation are recognized when the land/soil has been contaminated. Financial guarantees may have to be provided to cover possible remedia-tion costs.

(r) Taxes

Income taxes consist of current tax and deferred tax. Income taxes are recognized in the income statement unless the underlying transaction is recognized directly in shareholders’ equity, in which case the related tax effect is also recognized in shareholders’ equity.

Current tax is the tax paid or received for the current year, applying the tax rates that have been set or essentially set as of the closing day to taxable income and adjusting for current tax attributable to previous periods.

Deferred tax is calculated according to the balance sheet method ba-sed on temporary differences between the carrying value of assets and liabilities and their value for tax purposes. The following temporary dif-ferences are not taken into account: temporary differences arising when



goodwill is fi rst reported; the initial reporting of assets and liabilities in a transaction other than a business combination and which, at the time of the transaction, do not affect either the recognized or taxable result; temporary differences pertaining to shares in subsidiaries and associated companies that are not expected to be reversed in the foreseeable future. The valuation of deferred tax is based on how reported values of assets and liabilities are expected to be realized or paid. Deferred tax is calculated by applying the tax rates and tax legislation that has been determined, or in practice determined, on the balance sheet date.

Deferred tax assets from deductible temporary differences and tax loss carryforwards are only recognized to the extent it is likely that they will be utilized. The value of deferred tax assets is reduced when it is no longer considered likely that they can be utilized.

Any additional income tax arising on dividends is reported at the same time as the dividend is reported as a liability. (s) Contingent liabilities

A contingent liability is reported if there is a possible commitment stemming from events whose occurrence is dependent on one or more uncertain future events as well as when there is a commitment that is not recognized as a liability or provision because it is unlikely that an outfl ow of resources will be required.

THE PARENT COMPANY’S ACCOUNTING PRINCIPLES

The Parent Company complies with the Swedish Annual Accounts Act (1995:1554) and SFASC recommendation RR 32 Reporting for Legal Entities. RR 32 entails that the Parent Company in preparing the annual accounts for the legal entity shall apply all IFRS and statements approved by the European Union as far as possible within the framework of the Swedish Annual Report Act and taking into account the relationship bet-ween reporting and taxation. The recommendation states the exceptions and supplements that shall be made with respect to the IFRS.

Changed accounting principles

The change in Parent Company accounting principles has been reported in accordance with the stipulations in IAS 8, but also taking into account the transition regulations in RR 32.

Pursuant to the transition regulations in RR 32, the Company has chosen not to apply Chapter 4, §14a-e of the Swedish Annual Report Act, which permits the valuation of certain fi nancial instruments at fair value. As of 1 January 2006, the principles in Chapter 4, §14 a-e of the Swedish Annual Accounts Act will be applied. This will entail a change in accounting principles. The effect on shareholders’ equity as of 1 January 2006 amounts to MSEK 775.

Differences between Group and Parent Company accounting

principles

Differences between Group and Parent Company accounting principles are detailed below. The Parent Company accounting principles stated have been consistently applied during all the periods presented in the Parent Company’s fi nancial reports.

Subsidiaries, associated companies and joint ventures

Shares in subsidiaries, and holdings in associated companies and joint ventures are recognized by the Parent Company according to the acquisi-tion cost method. Revenue includes only dividends received, provided that they stem from profi ts earned after acquisition. Dividends exceeding those earnings are considered a repayment of the investment and reduce the carrying value of the shares.

Revenues

Sale of goods and rendering of services

In accordance with the Swedish Annual Accounts Act, Chap. 2, 4 §, revenue from service assignments is recognized in the Parent Company income statement when the service is completed. Until then, as-signment work in progress is reported at the lowest of either acquisition value or net selling price on the balance sheet date.

Anticipated dividends

Anticipated dividends from subsidiaries are reported only in cases where the Parent Company has the sole right to decide the size of the dividend and the Parent Company has decided the size of the dividend before the Parent Company has published its fi nancial reports.

Financial instruments

The Parent Company does not apply the valuation principles in IAS 39.

However, what has been written above in respect of fi nancial instru-ments also applies to the Parent Company. Financial fi xed assets are valued in the Parent Company at acquisition value less write-down, where applicable, and fi nancial current assets are valued at the lower of cost or net realizable value.

Derivatives and hedge accounting

Currency exposure with respect to future forecasted fl ows is hedged either via forward exchange contracts or currency options. Forward ex-change contracts or currency options that protect the forecasted fl ow are not reported on the balance sheet. Changes in value in forward contracts are reported in the same period as the forecasted fl ow occurs. Since at most 80% of the forecasted fl ow is hedged, no ineffi ciencies that should be taken to income arise. Forecasted fl ows can be either invoiced or forecasted transactions.

The hedged volume in US dollars is matched against the estimated net infl ow of US dollars. If the hedged volume exceeds the value of the expected net infl ow and there is an unrealized exchange loss, it is recognized as a fi nancial expense. If there is an unrealized exchange gain, it is not reported.

Other hedging is normally in GBP and EUR. These currencies can be tied to special orders concerning the purchase and sale of industrial minerals.

Accrual of forward exchange discounts and premiums is done in ac-cordance with recommendation No. 7 of the Swedish Accounting Stan-dards Board. The difference between the average exchange rate and the year-end rate on forward exchange contracts entered into is reported as a contingent liability if the year-end rate is higher than the average rate.

Tangible assets

Owned assets

Tangible assets are reported in the Parent Company accounts, in the same way as in the Group accounts, at acquisition value after deductions for accumulated depreciation according to plan and any write-downs, but also taking into account any possible write-ups.

Leased assets

In the Parent Company, all leasing contracts are reported according to the principles for operating leases.

Intangible assets

Research and development

In the Parent Company, all development expenditures are reported as expenses in the income statement.

Employee benefi ts

Defi ned-benefi t plans

In the Parent Company, principles other than those described in IAS 39 are applied when calculating defi ned-benefi t plans. The Parent Company complies with the provisions of the Law on Safeguarding of Pension Commitments and the regulations of the Financial Supervisory Authority, since this is a condition for tax deductibility. The essential differences, compared to IAS 39, are the way in which the discount rate is determi-ned, that calculation of defi ned-benefi t commitments is based on current salary levels without assuming any future salary increases, and that all actuarial gains and losses are reported in the income statement when they arise.

Taxes

In the Parent Company, deferred tax liabilities are recognized as part of untaxed reserves. In the consolidated accounts, untaxed reserves are divided between deferred tax liabilities and shareholders’ equity.

Group contributions and shareholders’ contributions for legal

entities

The company reports group contributions and shareholder contributions in accordance with pronouncement issued by the SFASC Emerging Issues Task Force. Shareholder contributions are taken directly to shareholders’ equity by the receiver and capitalized in the shares and participations by the giver, to the extent that no write-down is required. Group contributions are reported based on their economic signifi cance. This means that group contributions rendered for the purpose of minimi-zing the Group’s total tax are reported directly against retained earnings after deducting their current tax effect.

Group contributions equated with dividends are recognized as a dividend. This means that Group contributions received and the effect on current tax are recognized through profi t or loss. Group contributions



The Group’s reporting system is designed to track the rate of return on the Group’s goods and services, due to which business segments are its primary segment reporting format.

Intra-group prices between segments are set based on the arm’s length principle, i.e., between parties that are independent of each other, well-informed and have a stake in the transactions.

Income, assets and liabilities for the segments include directly attribu-table items and items that can be distributed by segment in a reasonable and reliable manner. Non-distributed items consist of net fi nancial income/expense and tax expenses. The segments’ investments in intan-gible and tangible fi xed assets include all investments with the exception of those in short-term inventory and inventory of minor value.

NOTE 2 Revenue distribution Group Parent Company

MSEK 2005 2004 2005 2004

Revenue:

Iron ore 12 191 7 419 12 349 7 560

Industrial minerals 2 018 1 489

Other 128 80

Total 14 337 8 988 12 349 7 560

Lines of business Special

Group Mining Division Minerals Division Businesses Eliminations Group

MSEK 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004

External revenue 12 191 7 420 2 018 1 489 128 79 14 337 8 988

Internal revenue 158 140 141 109 963 872 -1 262 -1 121

Total revenue 12 349 7 560 2 159 1 598 1 091 951 -1 262 -1 121 14 337 8 988

Operating income per line of business 5 720 1 669 148 122 100 94 -6 5 974 1 879

Consolidation adjustments 141 62 141 62

Operating income 5 720 1 669 148 122 100 94 141 56 6 109 1 941

Net fi nancial income/expense 342 82


Tax expense for the year -1 904 -456


Assets 18 612 11 594 1 527 1 093 1 808 1 180 -1 373 -210 20 574 13 657

Liabilities 5 459 3 118 1 130 241 1 056 397 -1 877 -149 5 768 3 607

Capital expenditures*) 2 314 614 192 85 205 286 12 31 2 723 1 016

Depreciation 791 919 33 31 128 135 8 952 1 093

Write-downs 3 3

*) refers to tangible assets

Lines of business

Lines of business are the Group’s primary segments. The Group consists of the following lines of business: • Mining Division The Mining Division mines and processes iron ore for products for steelmaking.• Minerals Division The Minerals Division develops, produces and markets industrial mineral products for several application areas and customers in many different industries throughout the world. • Special Businesses LKAB has organized most of its subsidiaries under the Special Businesses Division. These companies are mainly suppliers to the Mining Division and the Minerals Division. Geographic areas are the Group’s secondary segments. Information on the segment’s revenue refers to geographic areas grouped by customer locations. Segment assets and investments in tangible and intangible fi xed assets during the period are based on the geographic areas and are grouped on the basis of where the assets are located.

NOTE 3 Segment reporting

paid and the effect on current tax are recognized directly in retained earnings.

Group contributions equated with shareholders’ contributions are re-cognized by the recipient directly in retained earnings taking into account

the effect on current tax. The contributor recognizes Group contributions and the effect on current tax as an investment in shares in Group compa-nies to the extent that no write-down is required.

62

Lines of business Special

Parent Company Mining Division Minerals Division Businesses Eliminations Group

MSEK 2005 2004 2005 2004 2005 2004 2005 2004 2005 2004

Revenue 12 349 7 560 - - - - - - 12 349 7 560

Geographic areas Parent

Parent Company Europe Asia Rest of world Company

MSEK 2005 2004 2005 2004 2005 2004 2005 2004

Revenue 8 982 5 465 2 310 1 582 1 057 513 12 349 7 560

Geographic areas

Group Europe Asia Rest of world Group

MSEK 2005 2004 2005 2004 2005 2004 2005 2004

External revenue: 9 964 6 295 3 053 1 924 1 320 769 14 337 8 988

Assets 20 418 13 545 88 77 68 35 20 574 13 657

Capital expenditures*) 2 720 1 016 3 - - - 2 723 1 016

*) refers to tangible assets

NOTE 3 Segment reporting (cont.)

NOTE 4 Other operating revenuesGroup

MSEK 2005 2004

Rental revenue, investment properties 115 111

Gain on sale of fi xed assets 18 6

Exchange rate gains on receivables/liabilities of an operating nature 12 12

Other 103 78

248 207

Parent Company

MSEK 2005 2004

Gain on sale of fi xed assets 18 11

Exchange rate gains on receivables/liabilities of an operating nature 8 6

Other 184 145

210 162

NOTE 5 Other operating expenses Group Parent Company

MSEK 2005 2004 2005 2004

Property expenses, investment properties 82 83

Other 177 114 181 128

259 197 181 128



63

NOTE 6 Employees and staff costsAverage number of employees

2005 of which of which 2004 of which of which

women men women men

Parent Company

Sweden 2 615 9% 91% 2 515 9% 91%

Norway 182 12% 88% 179 11% 89%

Total, Parent Company 2 797 9% 91% 2 694 9% 91%

Subsidiaries

Sweden 323 9% 91% 340 9% 91%

China 49 18% 82% 40 22% 78%

Netherlands 22 18% 82% 22 18% 82%

Norway 73 1% 99% 79 3% 97%

UK 247 18% 82% 256 16% 84%

Germany 17 65% 35% 17 65% 35%

Other countries 35 34% 66% 33 33% 67%

Total in subsidiaries 766 14% 86% 789 14% 86%

Group total 3 563 10% 90% 3 482 10% 90%

Gender distribution in corporate management

2005 2005 2004 2004

Share of Share of Share of Share of

women men women men

Parent Company

Board of Directors 27% 73% 17% 83%

Other senior executives 0% 100% 0% 100%

Group total

Board of Directors 5% 95% 3% 97%

Other senior executives 0% 100% 0% 100%

Salaries, other remuneration and social security expenses

2005 2004

Salaries and Social security Salaries and Social security

MSEK Remuneration expenses Remuneration expenses

Parent Company 1 129 790 976 542

(of which pension expenses) 1) (418) (206)

Subsidiaries 287 136 278 101

(of which pension expenses) (66) (37)

Group total 1 416 926 1 254 643

(of which pension expenses) 2) (484) (243)

1) Of the Parent Company’s pension expenses, MSEK 13 (28) (inclu-

ding special employer’s contribution MSEK 3 (5)) refers to the group

Board, President and former President. Of this, MSEK -3 (16) refers

to former President and MSEK 6 (1) to former Vice President. The

company’s outstanding pension commitments to the group Board,

President and former President amount to MSEK 66 (57) (excluding

special employer’s contribution). Of this, MSEK 27 (28) refers to

former President and MSEK 13 (10) to former Vice President.

2) Of the Parent Company’s pension expenses, MSEK 19 (35) (inclu-

ding special employer’s contribution MSEK 3 (6)) refers to the group

Board, President and former President. The Group’s outstanding

pension commitments to these amount to MSEK 72 (64) (excluding

special employer’s contribution).



64

Salaries and other remuneration by country and between Board members, other executives and other employees

2005 2004

Board Other Board Other

MSEK and President employees and President employees

Parent Company

Sweden 7 1 020 101) 888

Norway 102 78

Parent Company, total 7 1 122 10 966

(of which variable remuneration/incentive systems) (1)2) (100) (3)2) (34)

Subsidiaries in Sweden 6 125 5 118

(of which variable remuneration/incentive systems) (1) (0) (1)

Foreign subsidiaries

China 0 1 1

Netherlands 1 8 1 7

Norway 42 36

UK 10 68 9 75

Germany 3 7 1 9

Other countries 6 10 5 11

Subsidiaries, total 26 261 21 257

(of which variable remuneration/incentive systems) (0) (4) (0) (1)

Group total 33 1 383 31 1 223

(of which variable remuneration/incentive systems) (1) (104) (3) (35)

1) The amount includes total remuneration to Board members, MSEK 1.0 (0.9), approved by the AGM. It also includes

MSEK 0.5 (0.4) in remuneration to employee representatives on the Board.

2) Refers to former President, MSEK 0.1 (2.8) and former Vice President, MSEK 0.6 (0.5).

NOTE 6 Employees and staff costs (cont.)

SICKNESS ABSENCE (in Parent Company, employees in Sweden only)

2005 2004

Total sickness absence as percentage of regular working hours 4.7% 5.4%

Percentage of total sick leave related to extended absences of 60 days or more 61.7% 66.6%

Sickness absences by gender:

Men 4.8% 5.5%

Women 3.9% 4.7%

Sickness absences by age category:

29 years or younger 1.9% 1.8%

30-49 years 4.0% 4.2%

50 years or older 6.4% 8.1%

For information on post-employment benefi ts, etc., see Note 27 Employee benefi ts.



65

NOTE 7 Auditors’ fees and compensation

Group Parent Company

MSEK 2005 2004 2005 2004

KPMG

Audit assignments 5 4 2 1

Other assignments 4 3 3 2

Other auditors

Audit assignments 0 0

NOTE 8 Operating expenses by nature of expense


MSEK 2005 2004 2005 2004

Personnel costs 2 394 1 973 1 949 1 564

Materials, etc. 2 272 1 806 1 181 1 035

Energy 832 631 746 551

Transport costs 512 372 894 964

Depreciation 959 1 080 791 919

Other operating expenses 1 507 1 392 1 278 1 020

8 476 7 254 6 839 6 053

Audit assignments involve examination of the annual report and

fi nancial accounting as well as the administration by the Board and

the President, other tasks related to the duties of the company’s

auditors and consultation or other services that may result from

observations noted during such examinations or implementation of

such other tasks.. All other tasks are defi ned as other assignments.

NOTE 9 Net fi nancial income/expense

Group

MSEK 2005 2004

Interest income 137 133

Dividends 47 36

Other investments including derivatives

Capital gain on sales of fi nancial assets held for sale 89

Return on market portfolio 212 24

Result from plan assets 41 34

Net change from revaluation of fi nancial assets -5

Net exchange rate differences 29

Income from fi nancial items 550 227

Interest expenses -191 -104

Write-down of receivables in associated companies -1

Net exchange rate differences -34

Other fi nancial expenses -17 -6


Net fi nancial income/expense 342 82

Of other operating expenses, MSEK 241 refers to costs arising from

mining operations in Kiruna, see Note 28. MSEK 104 for restructuring

of operations in Narvik is included in the Group’s personnel costs. The

corresponding amount for the Parent Company is MSEK 74.



66

NOTE 9 Net fi nancial income/expense (cont.)

Parent Company

Income from participations Income from participations

in Group companies in associated companies

MSEK 2005 2004 2005 2004

Dividend 17 37

Write-downs -5 -1

Group contributions 18

17 55 -5 -1

The write-down of MSEK 5 refers to a long-term receivable in an associated company.

The receivable has been discounted to present value and a write-down requirement of MSEK 5 has arisen.

Parent Company

Income from other

securities and

receivables held Interest expense and

as fi xed assets similar profi t/loss items

MSEK 2005 2004 2005 2004

Interest income, Group companies 24 18 20 20

Interest income, others 131 131

Return on market portfolio 89 111 24

Dividends, shares 36 29 11 7

Exchange rate differences, foreign currency 32

149 47 305 182

Interest income and similar income statement items include returns

on money market instruments and bonds amounting to MSEK 121

(93).

Capital gains of MSEK 89 on the sale of available-for-sale fi nancial

assets refer to the sale of shares in SSAB. Return on market portfolio

refers to an increase in the market value of the market portfolio

of MSEK 212. The considerable change in comparison to 2004 is

explained by the fact that unrealized surplus value did not affect net

fi nancial income/expense for 2004. The change is due to application

of IAS 39, Financial Instruments: Reporting and Valuation.

Net change from revaluation of fi nancial assets refers to a write-

down on a long-term receivable in an associated company. The

receivable has been discounted to present value and a write-down

requirement of MSEK 5 has arisen.

Of interest expenses, MSEK 105 (101) refers to interest on

pension liabilities and MSEK 84 (0) refers to forward exchange

discounts/premiums.

Other fi nancial expenses consist mainly of bank and administra-

tion costs.

Parent Company

Interest expense and

similar profi t/loss items

MSEK 2005 2004

Interest expenses, Group companies -7 -5

Interest expenses, pension liability -34 -40

Forward exchange discounts/premiums -84

Interest expenses, other -1 -4

Exchange rate differences, foreign currency -30

Other -11 -4

-137 -83

Interest expenses on pension liabilities have been calculated at an interest rate of 4.2 (5.1) %.

Other fi nancial expenses consist mainly of bank and administration costs.

In income from securities held as fi xed assets, return on market

portfolios refers to redemption of shares in SSAB. Dividends refer to

dividends on holdings in SSAB.

Interest income and similar income statement items include re-

turns on money market instruments and bonds amounting to MSEK

121 (93). Return on shares amounted to MSEK 111 (24). Valuation of

shares and money market investments is done at the portfolio level.

This means that for instruments included in the same portfolio,

unrealized gains are offset against unrealized losses. Surplus losses

are reported as reduction in interest income. Surplus gains are not

reported.



67

NOTE 10 AppropriationsParent Company

MSEK 2005 2004

Difference between book depreciation and appreciation according to plan:

Underground installations 3 2

Buildings and land 2 2

Machinery and inventories -163 183

Tax allocation reserve, provisions for the year -1 410 -500

Tax allocation reserve, reversal for the year 140

Total -1 568 -173

Deferred tax on appropriations amounted to MSEK -439 (-48). Deferred tax is only reported in the consolidated income statement.

NOTE 11 TaxesReported in income statement

Group

MSEK 2005 2004

Current tax expense (-)

Tax expense for the period -1 297 -460

Adjustment for taxes related to previous years -1 3

-1 298 -457

Deferred tax expense (-) /tax recoverable (+)

Deferred tax related to temporary differences -606 1

Total reported tax expense in Group -1 904 -456

Parent Company

MSEK 2005 2004

Current tax expense (-)

Tax expense for the period -1 284 -467

Adjustment for taxes related to previous years -2 6

-1 286 -461

Deferred tax expense (-) /tax recoverable (+)

Deferred tax related to temporary differences 35 1

Total reported tax expense in Parent Company -1 251 -460



68

NOTE 11 Taxes (cont.)

Reconciliation of effective tax

Group

MSEK 2005 (%) 2005 2004 (%) 2004


Tax according to current tax rate for Parent Company 28.0% -1 806 28.0% -566

Effect of other tax rates for foreign Group companies 0.0%

Non-deductible expenses 0.7% -45 0.4 -8

Tax-exempt income -0.2% 11 -0.9 19

Tax related to previous years 0.0% -3 -0.1 3

Standard interest on tax allocation reserve 0.1% -9

Other 0.9% -52 -4.9 96

Reported effective tax rate 29.5% - 1 904 22.5 -456

Parent Company

MSEK 2005 (%) 2005 2004 (%) 2004


Tax according to current tax rate for Parent Company 28,0% -1 255 28.0 -475

Non-deductible expenses 0.1% -7 0.3 -5

Tax-exempt income -0.2% 8 -0.8 14

Tax related to previous years 0.0% -2 -0.4 6

Standard interest on tax allocation reserve 0.2% -8

Other -0.2% 13

Reported effective tax rate 27.9% -1 251 27.1 -460

Tax items reported directly in shareholders’ equity

Group

MSEK 2005 2004

Deferred tax attributable to change in accounting principles -471

Deferred tax attributable to fi nancial assets: forward exchange contracts -138

Deferred tax attributable to fi nancial assets: SSAB shares 334

-275

Parent Company

MSEK 2005 2004

Tax on Group contributions paid 104 41

104 41



69

NOTE 11 Taxes (cont.)

Reported on balance sheet

Reported deferred tax recoverable and liabilities

Deferred tax recoverable and liabilities refer to the following:

Group

Deferred Deferred

tax recoverable tax liability Net

MSEK 2005 2004 2005 2004 2005 2004

Buildings and land 16 -12 -12 16

Machinery and inventories -747 -650 -747 -650

Pension provisions 265 217 265 217

Tax allocation reserves -717 -312 -717 -312

Provisions for insurance claims -99 -42 -99 -42

Financial assets -320 -320

Forward exchange contracts 66 66

Short-term investments -49 -49

Loss carryforwards 3 3

Other liabilities -1 -2 -1 -2

Other 8 49 8 49

Tax recoverable/liabilities 342 282 -1 945 -1 006 -1 603 -724

Offset -342 -282 342 282

Tax recoverable/liabilities, net - - -1 603 -724 -1 603 -724

Parent Company

Deferred Deferred

tax recoverable tax liability Net

MSEK 2005 2004 2005 2004 2005 2004

Buildings and land 23 25 - - 23 25

Pension provisions 200 155 - - 200 155

Other 3 11 - - 3 11

Taxes recoverable 226 191 - - 226 191



70

NOTE 11 Taxes (cont)

Parent Company

MSEK Opening balance Reported in Reported in Closing balance

1 Jan. 2004 income statement Shareholders’ equity 31 Dec. 2004

Buildings and land 26 -1 - 25

Pension provisions 155 - - 155

Other 9 2 - 11

190 1 - 191

MSEK Opening balance Reported in Reported in Closing balance

1 Jan. 2005 income statement Shareholders’ equity 31 Dec. 2005

Buildings and land 25 -2 23

Pension provisions 155 45 200

Other 11 -8 3

191 35 226

Change in deferred tax in temporary differences and loss carryforwards

Group

MSEK Opening balance Reported in Reported in Other Closing balance

1 Jan. 2004 income statement Shareholders’ equity changes 31 Dec. 2004

Buildings and land 14 2 16

Machinery and inventories -689 39 -650

Pension provisions 162 51 4 217

Tax allocation reserves -209 -103 -312

Provisions for insurance claims -42 -42

Other liabilities -5 5 -2 -2

Other - 49 49

-727 1 2 -724

MSEK Opening balance Reported in Reported in Other Closing balance

1 Jan. 2005 income statement Shareholders’ equity changes 31 Dec. 2005

Buildings and land 16 -28 -12

Machinery and inventories -650 -97 -747

Pension provisions 217 48 265

Tax allocation reserves -312 -405 -717

Provisions for insurance claims -42 -57 -99

Financial assetsr -320 -320

Forward exchange contracts 66 66

Short-term investments -28 -21 -49

Loss carryforwards 3 3

Other liabilities -2 1 -1

Other 49 -43 2 8

-724 -606 -275 2 -1 603



71

NOTE 12 Intangible assets

Group

MSEK Mining

Goodwill rights Other Total

Accumulated acquisition values

Opening balance 1 Jan. 2004 176 161 18 355


Reclassifi cations 11 11

Exchange rate differences for the year -2 -2

Closing balance 31 Dec. 2004 205 161 18 384

Opening balance 1 Jan. 2005 205 161 18 384


Allocation of emissions rights 175 175

Disposal, emissions rights -57 -57

Reclassifi cations 17 45 62

Exchange rate differences for the year 13 13

Closing balance 31 Dec. 2005 235 281 136 652

Accumluated amortization and write-downsr

Opening balance 1 Jan. 2004 -161 -12 -173

Amortization for the year -1 -1

Exchange rate differences for the year

Closing balance 31 Dec. 2004 -161 -13 -174

Opening balance 1 Jan. 2005 -161 -13 -174

Write-downs for the year -1 -1

Reconciliation of emissions rights for the year -57 -57

Disposal, emissions rights 57 57

Closing balance 31 Dec. 2005 -1 -161 -13 -175

Reported values

1 Jan. 2004 176 0 7 183

31 Dec. 2004 205 0 6 211

1 Jan. 2005 205 0 6 211

31 Dec. 2005 234 120 123 477

Amortization and write-downs

Amortization and write-downs, and reconciliation of emissions rights, are reported in the following lines in the income statement

MSEK Koncernen

2005 2004

Cost of goods sold -58 -1

-58 -1



72

Parent Company

MSEK Mining

rights Other Total


Opening balance 1 Jan. 2004 161 161

Other capital expenditures 1 1

Closing balance 31 Dec. 2004 161 1 162

Opening balance 1 Jan. 2005 161 1 162

Allocation of emissions rights 175 175

Disposal, emissions rights -57 -57

Closing balance 31 Dec. 2005 161 119 280

Accumulated amortization

Opening balance 1 Jan. 2004 -161 -161

Closing balance 31 Dec. 2004 -161 -161

Opening balance 1 Jan. 2005 -161 -161

Reconciliation of emissions rights for the year -57 -57

Disposal, emissions rights 57 57

Closing balance 31 Dec. 2005 -161 - -161

Reported values

1 Jan. 2004 0 -

31 Dec. 2004 0 1 1

1 Jan. 2005 0 1 1

31 Dec. 2005 0 119 119

Reconciliation of emissions rights is reported in the following lines in the income statement

MSEK Group

2005 2004

Cost of goods sold -57

-57

NOTE 12 Intangible assets (cont.)



73

NOTE 13 Tangible assetsGroup

Machinery inventories,

Buildings Underground and other tools and Construction

MSEK and land installations technical plant installations in progress Total

Acquisition value

Opening balance 1 January 2004 2 644 3 874 9 491 1 916 379 18 304

Acquisitions 44 74 146 293 408 965

Reclassifi cations 22 29 153 39 -226 17

Disposals and retirements -91 -148 -446 -163 -9 -857

Exchange rate differences -3 -4 0 -7

Closing balance 31 December 2004 2 616 3 829 9 340 2 085 552 18 422

Opening balance 1 January 2005 2 616 3 829 9 340 2 085 552 18 422

Acquisitions 37 49 409 72 2 0811) 2 648

Reclassifi cations -20 2 116 164 -355 -93


Exchange rate differences 19 22 5 46

Closing balance 31 December 2005 2 648 3 868 9 835 2 310 2 237 20 898

Assessment of write-down requirement is based on value in use.

This value is based on cash-fl ow forecasts over 17 years, of which

the fi rst three are based on the three-year business plan establis-

hed by the corporate management of the Minerals Division. The

total forecast period (17 years) corresponds to the useful life of the

unit’s most important assets. The cash fl ow forecast after the fi rst

three years has been based on an annual growth rate of 1%, which

corresponds to the long-term growth rate of the unit’s markets.

The forecast cash fl ows have been valuated at present value with a

discount rate of 11% before tax. Important assumptions with respect

to the three-year business plan are described below.

It is the corporate management’s assessment that no reasonable

changes in these assumptions will result in recoverable amounts

that are lower than the reported values of the units.

Write-downs for the year

A minor goodwill item attributable to holdings in Microfi ne Hellas

has been written down during the year by MSEK 1. Book value after

the write-down is 0 kronor. The write-down is due to the fact that

continued mineral extraction in the mine is no longer possible, since

the permit from the Greek authorities has expired and it has not

been possible to renew it.

NOTE 12 Intangible assets (cont.)

Important variables Method of estimating value

Market share and growth Historically, demand for these

products has kept pace with econo-

mic cycles. Expected market growth

is based on a transition from the

prevailing economic situation to the

expected long-term growth. The

forecast is in line with previous

experience.

Personnel costs The forecast for personnel costs

is based on the expected rate of

infl ation, certain real wage/sa-

lary increases (historical average) and

planned improvements in production

effi ciency (according to a fi xed plan).

The forecast is in agreement with

previous experience.

Exchange rates Exchange-rate forecasts are based

on currently quoted exchange rates.

Existing forward exchange contracts

have been taken into account.

Write-down requirements for cash-generating units containing goodwill

The following cash-generating units, which are part of the primary segment Minerals Division, have signifi cant

goodwill values in relation to the Group’s total reported goodwill value.

MSEK 2005 2004

Minelco Specialities Ltd 108 100

Minelco Minerals Ltd 46 43

Minelco OY 37 20

191 163

Units without signifi cant goodwill value, compiled 43 42

234 205

Assessment of the recoverable amounts of cash-generating units is based on the same important principles..



74

NOTE 13 Tangible assets (cont.)

Tax assessment value

Group 2005-12-31 2004-12-31

Tax assessment value, buildings (in Sweden) 708 701

Tax assessment value, land (in Sweden) 78 67

Depreciation and write-downs are included in the following lines in the income statement

Group

MSEK Depreciation

2005 2004

Cost of goods sold 931 1 052

Selling expenses 3 3

Administrative expenses 8 12

Research and development 11 11

953 1 078

Machinery inventories,



Depreciation and write-downs

Opening balance 1 January 2004 -1 749 -2 230 -6 819 -1 030 -11 828

Depreciation for the year -52 -231 -625 -170 -1 078

Reclassifi cations -31 16 -15

Disposals and retirements 85 134 444 148 811

Exchange rate differences 1 3 4

Closing balance 31 December 2004 -1 715 -2 327 -7 028 -1 036 -12 106

Opening balance 1 January 2005 -1 715 -2 327 -7 028 -1 036 -12 106

Depreciation for the year -50 -233 -502 -166 -951

Write-downs for the year -1 -1 -2

Reclassifi cations 46 2 -1 47


Exchange rate differences -6 -15 -4 -25

Closing balance 31 December 2005 -1 723 -2 548 -7 506 -1 193 -12 970

Reported values

1 January 2004 895 1 644 2 672 886 379 6 476

31 December 2004 901 1 502 2 312 1 049 552 6 316

1 January 2005 901 1 502 2 312 1 049 552 6 316

31 December 2005 925 1 320 2 329 1 117 2 237 7 928

1) This includes MSEK 60 for the acquisition of land for future mining operations in Malmberget.



75

Parent Company

Machinery Inventories,



Acquisition value

Opening balance 1 January 2004 2 185 3 874 9 220 511 363 16 153

Acquisitions 40 74 86 20 393 613

Reclassifi cations 26 29 129 43 -227

Disposals and retirements -90 -148 -455 -89 -782

Closing balance 31 December 2004 2 161 3 829 8 980 485 529 15 984

Opening balance 1 January 2005 2 161 3 829 8 980 485 529 15 984

Acquisitions 29 49 372 27 1 8371) 2 314

Reclassifi cations 24 2 132 26 -184


Closing balance 31 December 2005 2 211 3 868 9 442 527 2 141 18 189

Depreciation

Opening balance 1 January 2004 -1 182 -1 782 -6 050 -392 -9 406



Closing balance 31 December 2004 -1 149 -1 925 -6 295 -354 -9 723

Opening balance 1 January 2005 -1 149 -1 925 -6 295 -354 -9 723



Closing balance 31 December 2005 -1 188 -2 149 -6 742 -384 -10 463

Write-downs

Opening balance 1 January 2004 -395 -448 -580 -11 -1 434


Closing balance 31 December 2004 -387 -402 -495 -9 -1 293

Opening balance 1 January 2005 -387 -402 -495 -9 -1 293

Disposals and retirements 1 3 4

Closing balance 31 December 2005 -386 -399 -495 -9 -1 289

Reported values

1 January 2004 608 1 644 2 590 108 363 5 313

31 December 2004 625 1 502 2 190 122 529 4 968

1 January 2005 625 1 502 2 190 122 529 4 968

31 December 2005 637 1 320 2 205 134 2 141 6 437

1) This includes MSEK 60 for the acquisition of land for future mining operations in Malmberget.




76

Tax assessment value

Parent Company 2005-12-31 2004-12-31



Depreciation is included in the following lines in the

Parent Company

MSEK income statement

2005 2004

Cost of goods sold 776 900

Selling expenses - -

Administrative expenses 5 10

Research and development 10 9

791 919


NOTE 14 Investment propertiesGroup

Investment properties are reported, in the Group, according to the acquisition value method and are included under Buildings

and land according to Note 13.

Group

MSEK 2005-12-31 2004-12-31

Accumulated fair values*)

At start of year 70 342

At year-end 76 70

Group

MSEK 2005-12-31 2004-12-31



New acquisitions 3

294 291

Accumulated depreciation according to plan

At start of year -170 -165

Accumulated depreciation for the year -5 -5

-175 -170

Reported value at end of period 119 121

*) Fair values are based on valuations by qualifi ed, independent assessors who have current knowledge

of property assessment principles relevant to the type of property and locations in question.

Investment properties - effect on profi t/loss for the period

Group

MSEK 2005-12-31 2004-12-31

Rental income 115 111

Direct costs associated with investment properties -82 -83

Tax assessment value - investment properties

Group

MSEK 2005-12-31 2004-12-31





77

Parent Company

Information concerning fair value of investment properties (if acquisition value method is applied)

Investment properties are reported according to the acquisition value method.

Parent Company

MSEK 2005-12-31 2004-12-31

Accumulated fair values


At year-end 19 20

Parent Company

MSEK 2005-12-31 2004-12-31



166 166

Accumulated depreciation according to plan

At start of year -78 -75

Accumulated depreciation for the year -3 -3

-81 -78

Reported value at end of period 85 88

Investment properties - effect on profi t/loss for the period

Parent Company

MSEK 2005-12-31 2004-12-31

Rental income 6 7

Direct costs associated with investment properties -1 -1

Tax assessment values - investment properties

Parent Company

MSEK 2005-12-31 2004-12-31

Tax assessment values, buildings (in Sweden) 153 153


NOTE 14 Investment properties (cont.)

NOTE 15 Participations in associated companies and joint venturesGroup

MSEK 2005-12-31 2004-12-31

Reported value at start of year 33 5

Acquisitions 29

Reclassifi cation -29

Write-down -1

Reported value at year-end 4 33

During the year, the holding in the joint venture company Likya

Minelco, Turkey, has been reclassifi ed. As of 2005, this holding is

reported according to the proportional method, see Note 16.

Of the above stated MSEK 4, MSEK 3 refers to the subsidiary

Kimit’s holdings in the associated company Orica Kimit Explosives AB.

The Parent Company’s holdings in associated companies are repor-

ted in Note 17.



78

NOTE 16 Participations in joint venturesGroup

The Group has a 50-percent interest in the joint venture company Likya Minelco.

In the Group’s fi nancial reports, the following items comprise the Group’s share of the joint venture company’s assets,

liabilities, income and expenses.

MSEK 2005 2004

Net sales 2

Expenses -2

Profi t/loss 0

Intangible assets 32

Current assets 3

Total assets 35

Current liabilities -1

Long-term liabilities -2

Total liabilities -3

Net assets / net liabilities 32

NOTE 17 Parent Company’s participations in associated companiesParent Company

MSEK 2005-12-31 2004-12-31



Closing balance 31 December 2 2

Accumulated write-downs

At start of year -1

Write-downs for the year -1

Closing balance 31 December -1 -1

Reported value at year-end 1 1

Specifi cation of the Parent Company’s direct ownership of participations in associated companies Associate company Corp. ID No. and registered offi ce Voting and equity

2005 share in percent Reported value

Associated companies

Swedish associated companies

Progressum AB/556540-0768/Kiruna 42.8 0

Norrskenet AB/556537-7065/Kiruna 33.3 0

Expandum AB/556252-3281/Gällivare 33.3 0

Gruv Grus AB/556103-9933/Gällivare 50.0 0

MCC AB/556644-8295/Kiruna 33.3 0

Foreign associated companies

Nord Norsk Spedisjon AS/-/Narvik, Norway 40.0 1

Futurum AS/-/Narvik, Norway 23.8 0

1



79

NOTE 18 Receivables from Group companies and associated companiesParent Company Receivables from Receivables from

Group companies associated companies

MSEK 2005-12-31 2004-12-31 2005-12-31 2004-12-31

Accumulated acquisition values 267 277 40 40

Net change 106 -10

Closing balance 31 December 373 267 40 40

Accumulated write-downs

Write-downs for the year -5

Closing balance 31 December -5

Reported value at year-end 373 267 35 40

The write-down of MSEK 5 refers to a long-term receivable in Norrskenet AB.

NOTE 19 Financial investmentsGroup

MSEK 2005-12-31 2004-12-31

Financial investments that are tangible assets

Financial assets held for sale

Shares and participations 1 253 121

Financial assets attributable to reserves for pension commitments 74 3

1 327 124

Short-term investments that are current assets

Financial assets held for sale

Shares and participations 784 341

Interest-bearing securities 3 265 1 687

4 049 2 028

Financial investments that are tangible assets refer to shares in SSAB and are valuated at fair value as of 31 Dec. 2005 in accordance with IAS 39.

Parent Company

MSEK 2005-12-31 2004-12-31

Market value Reported Market value Reported

or similar value or similar value

Specifi cation of securities

Money market instruments 5 961 5 951 3 928 3 917

Listed shares/mutual funds 784 619 404 341

Transfer to liquid assets1) -2 696 -2 696 -2 230 -2 230

4 049 3 874 2 102 2 028

Short-term investments include both money market and stock market investments.

1) Liquid assets include short-term investments that have been classifi ed as liquid assets according to IAS 7.



80

NOTE 20 Other long-term securities held as fi xed assetsParent Company

MSEK 2005-12-31 2004-12-31



Sales -11


The change for the year of MSEK 11 refers to redemption of shares in SSAB.

Parent Company

Specifi cation of other long-term securities 2005-12-31 2004-12-31

Market value Reported Market value Reported

MSEK or similar value or similar value

SSAB 1 253 109 770 120

Other - 1 - 1

1 253 110 770 121

NOTE 21 Long-term receivables and other receivablesGroup

MSEK 2005-12-31 2004-12-31

Long-term receivables that are tangible assets

Receivables from associated companies 35 40

Other 27 22

62 62

Other receivables that are current assets

Receivables from associated companies 2 2

Receivables from related parties 2

Custody accounts 107 19

Other 83 83

194 104

Parent Company

MSEK 2005-12-31 2004-12-31

Long-term receivables

Company-owned endowment insurance 85 57

Other 22 20

107 77

Other receivables (current)

Custody accounts 107

Other 48 88

155 88

Parent Company

MSEK 2005-12-31 2004-12-31

Long-term receivables



Net change 30 -8




81

NOTE 22 Inventories, etc.Group

MSEK

2005-12-31 2004-12-31

Raw materials and consumables 750 563

Work in progress 2 9

Finished products and goods for resale 671 434

1 423 1 006

Stocks of fi nished products were reduced during the year. A change in product mix increased the inventory value.

Write-downs on inventories, according to the lowest-value principle, amounted to MSEK 3 (-).

Parent Company

MSEK

2005-12-31 2004-12-31

Raw materials and consumables 539 373

Finished products and goods for resale 454 324

993 697

Of the Parent Company’s stocks of fi nished iron ore products, MSEK 1 (136) or 0 (42)% has been valuated at net selling price.

NOTE 23 Accounts receivableAccounts receivable are reported taking into account bad debts that have arisen in the Group. These amounted during the year to MSEK 2 (-).

NOTE 24 Prepaid expenses and accrued revenues Group Parent Company

MSEK 2005-12-31 2004-12-31 2005-12-31 2004-12-31

Interest, forward exchange contracts 30 30

Insurance premiums 5 3

Other 64 53 23 24

69 83 26 54



82

NOTE 25 Shareholders’ equity The Group’s specifi cation of the shareholders’ equity item reserves

Translation reserve

MSEK 2005 2004

Opening translation reserve -11

Transfer, opening translation reserve -4

Translation differences for the year 25 -7

Closing translation reserve 14 -11

Fair value reserve

MSEK 2005 2004

Opening fair value reserve 468

Revaluation to fair value 1 January 2005 650

Tax attributable to revaluation item -182

Financial assets held for sale:

Revaluations reported directly in shareholders’ equity 558

Dissolved through income statement -47

Tax attributable to revaluations for the year -156

Closing fair value reserve 823 468

Hedge reserve

MSEK 2005 2004

Opening hedge reserve 689

Revaluation to fair value 1 January 2005 957

Tax attributable to revaluation item -268

Cash-fl ow hedges

Reported directly in shareholders’ equity -237

Dissolved through income statement -689

Tax attributable to hedges for the year 66

Closing hedge reserve -171 689

Total reserves

MSEK 2005 2004

Opening reserves 1 146

Change in reserves for the year

Translation reserve 25

Fair value reserve 355

Hedge reserve -860

Closing reserves 666 1 146



83

Note 26 earningspersharethenumberofsharesfortheyears2005and2004,respectively,is700,000.netincomeattributable

toparentCompanyshareholdersamountstomSeK4,546(1,568).earningspersharetherebyamount

to6,494(2,240)kronorpershare.

MseK 2005 2004

2143(743)SeKpercommonshare 1500 520

1500 520

share capital

Asof31december2005,theregisteredsharecapitalcomprised

700000(700000)commonshares.

theholderofcommonsharesisentitledtoadividendthatis

decidedbytheAnnualgeneralmeeting,andeachshareentitlesthe

holdertoonevotingright.

translation reserve

thetranslationreservecoversallexchangeratedifferencesthat

ariseinthetranslationoffinancialreportsofforeignsubsidiaries

andassociatedcompanieswhosecountsarereportedinacurrency

otherthanthegroup’sreportingcurrency.theparentCompanyand

groupaccountsarereportedinSwedishkronor.

fair value reserve

financial assets

thefairvaluereserveincludesthenetchangeinfairvalueofavaila-

ble-for-salefinancialassetsupuntiltheassetsareremovedfromthe

balancesheet.

hedge reserve

thehedgereserveincludestheeffectiveshareoftheaccumulated

netchangeinfairvalueofacash-flowhedginginstrumentattributa-

bletohedgingtransactionsthathavenotyetoccurred.

dividend

Afterthebalancesheetdate,theBoardhasproposedthefollowing

dividend.thedividendissubjecttoapprovalbytheAnnualgeneral

meetingon25April2006.

Note 25 Shareholders’equity(cont.)

n o t e s t o t h e f i n A n c i A L s t At e M e n t s

L K A B A n n u A L R e p o R t 2 0 0 5

parent company

Restricted reserves

Restrictedreservesmaynotbereducedthroughdividends.

statutory reserve

thepurposeofthestatutoryreserveistosaveapartofthenet

profitthatisnotusedtocoverlossbroughtforward.

non-restricted equity

profit brought forward

Comprisesthepreviousyear’snon-restrictedequityafteranypro-

visionsforreservesandafteranydividendhasbeenpaid.together

withnetprofitfortheyearandanyfairvaluereserve,itmakesup

non-restrictedequity,i.e.,thesumthatisavailabletobepaidasa

dividendtoshareholders.

84

NOTE 27 Employee benefi tsGroup

MSEK 2005 2004

Present value of wholly or partially funded obligations 947 707

Fair value of assets under management -891 -655

Net, wholly or partially funded obligations 56 52

Present value of unfunded obligations 1 961 1 527

Present value of net obligation 2 017 1 579

Unreported actuarial gains (+) and losses (-) -282 36

Unreported costs for previous years’ employment -10 2

Net reported obligation, defi ned-benefi t plans (see below) 1 725 1 617

The net amount is reported in the following balance sheet items:

Other fi nancial assets -74 -3

Provisions for pensions 1 799 1 620

Net balance sheet amount 1 725 1 617

Defi ned-benefi t plans

Most of LKAB’s pension plans for employees in Sweden are defi ned-

benefi t plans, which means that LKAB guarantees pensions based

on a certain percentage of salary. Pension commitments are secured

by the company mainly through credit insurance, but also via provi-

sions reported on the balance sheet. Promises of future retirement

before the age of 65 are to a degree contingent upon underground

work and are secured by the company via provisions reported on

the balance sheet.

Commitments for retirement pensions and survivor benefi ts

for salaried employees in Sweden are insured by Alecta. Accor-

ding to a pronouncement from the Swedish Financial Accounting

Standards Council’s Emerging Issues Task Force, URA 42, this is

a defi ned-benefi t plan that involves several employers. For the

fi nancial year 2005, the company has not had access to the informa-

tion that is necessary for reporting this plan as a defi ned-benefi t

plan. The ITP pension plan insured via Alecta is therefore reported

as a defi ned-contribution plan. Alecta’s surplus can be distributed

to the policyholders and/or the insured parties. At year-end 2005,

Alecta’s surplus in the form of the collective funding ratio amounted

to 128.5 percent (128.0). The collective funding ratio is the market

value of Alecta’s assets as a percentage of the insurance obligations

calculated according to Alecta’s actuarial assumptions, which does

not conform to IFRS.

For employees in Belgium, Norway, the UK and Germany, LKAB

has defi ned-benefi t plans as a complement to social insurance. In

Belgium, pensions are secured via pension insurance; in the UK, via

two company-managed pension funds; in Germany, via provisions

reported in the balance sheet and through credit insurance, and in

Norway via a company-managed superannuation fund, via provi-

sions reported in the balance sheet and through credit insurance.

Changes in the net obligation for defi ned-benefi t plans reported on the balance sheet

Group

MSEK 2005 2004

Net obligation for defi ne-benefi t plans as of 1 January 1 617 1 654

Compensation paid -109 -104

Deposits to pension fund -137 -95

Cost reported in income statement 328 165

Effects of acquired/sold operations - -3

Exchange rate differences 26

Net obligation for defi ned-benefi t plans as of 31 December 1 725 1 617



85

Cost reported in income statement

Group

MSEK 2005 2004

Costs for employment during current period 222 98

Interest expense for obligation 105 101

Assumed return on assets under management -41 -34

Reported actuarial gains (-) and losses (+) 4

Effects of reductions and settlements 38

Total net cost in income statement 328 165

The cost is reported on the following lines in the income statement:

Group

MSEK 2005 2004

Cost of goods sold 264 98

Income from fi nancial items -41 -34

Financial expenses 105 101

328 165

Assumptions for defi ned-benefi t obligations

Signifi cant actuarial assumptions as of closing day (expressed as weighted averages)

Group

Percent 2005 2004

Dicount rate, 31 December 4.0 5.0

Assumed return on assets under management, 31 December 5.0 6.0

Future salary increase 3.0 3.0

Employee turnover 3.5 3.5

Future increase in pensions 2.0 2.0

Parent Company’s pension obligation

MSEK 2005 2004

Provisions subject to the Act on Income Security 818 794

Provisions not subject to the Act on Income Security 724 555

1 542 1 349

Of which credit guarantees via FPG/PRI 472 466

MSEK Group Parent Company

2005 2004 2005 2004

Amount of provision expected to be paid after 12 months 1 690 1 504 1447 1255

NOTE 27 Employee benefi ts (cont.)



86


Defi ned-contribution plans

In Sweden, the Group has defi ned-contribution pension plans for

which the company assumes full cost. For the Group, the ITP plan

premiums fi nanced in Alecta amounted to MSEK 11 (11), and for

the SAF-LO Collective Pension fi nanced via premiums to FORAM

amounted to SEK 41 (42). The corresponding amounts for the Pa-

rent Company were MSEK 10 (10) and MSEK 37 (36), respectively.

In foreign subsidiaries, defi ned-contribution plans are fi nanced

partly by the companies and partly by contributions paid by the

employees.

Premiums for these plans are paid on a current basis in accor-

dance with regulations for each plan.

Personnel costs

Senior executives’ remuneration

Senior executives

Senior executives include members of the highest level of Group

Management and other senior executives. Members of the highest

level of Group Management are the Chairman of the Board, and

the Group President and CEO. The group ’other senior executives’

includes eight employees who are members of Group Management,

which also includes the President.

The preparation and decision process for establishing remuneration

to senior executives

Compensation for the President as well as salary setting principles

are drafted and determined by a compensation committee that is ap-

pointed by the Board. The committee consists of the Chairman and

two other board members. The Board votes on the proposals of the

committee. The Chairman of the Board approves the annual salary

review of other members of Group Management.

Principles for remuneration to senior executives

The President and seven other members of Group Management

are paid a fi xed salary. Remuneration to the Vice President, Market

Division, is a combination of a fi xed salary and variable remunera-

tion. The variable remuneration amounts to a maximum of 50% of

the fi xed salary, at 15% return on the Parent Company’s Operating

assets over a period. Both portions of the salary are pensionable.

Retirement age for the President is 60 years. Pension is payable

at 65% of the pension-carrying salary (defi ned according to ITP plan,

and free car benefi t) at the time of retirement for the period up to the

age of 65. The pension commitment is secured via endowment or

pension insurance taken out by LKAB with an insurance company.

The pension commitment is benefi t-defi ned and vested.

From the age of 65, pension is payable in accordance with the ITP

plan with a supplement for old-age pension of at least 50% of the

pension-carrying salary (defi ned according to ITP plan) at the time

of retirement. The supplementary pension commitment is secured

via endowment or pension insurance taken out by LKAB with an

insurance company. In addition to the ITP plan’s family pension

(survivor annuity), a special family pension is payable (extended

survivor annuity).

Any bonus paid on endowment or pension insurance policies ac-

crues in its entirety to the President as increased pension.

The President is entitled to a period of notice of two years on

termination by the company and six months on termination by the

President. No severance payments are made.

For other senior executives (eight persons, of which two retired

during 2005) who were members of Group Management at the start

of 2005, the retirement age is 60 years. Pension is payable at 65%

(75% for the two persons who retired in 2005) of the pension-carry-

ing salary (defi ned according to ITP plan, and free car benefi t) at the

time of retirement for the period up to the age of 65. The pension

commitment is secured via endowment or pension insurance taken

out by LKAB with an insurance company. The pension commitment

is benefi t-defi ned and vested.

From the age of 65, pension is payable in accordance with the

ITP plan with a supplement for salary segments between 30 and 50

base amounts. The supplement is 32.5% of the pensionable salary

(defi ned according to the ITP plan). The obligation above and bey-

ond the general pension plan is secured via endowment insurance

taken out by LKAB with an insurance company. In addition to the ITP

plan’s family pension (survivor annuity), a special family pension is

payable (extended survivor annuity).

Any bonus paid on endowment or pension insurance policies ac-

crues in its entirety to the senior executives as increased pension.

For the senior executives (two persons) who were appointed to

Group Management during 2005, the retirement age is 62 years. The

pension is contribution-defi ned and is secured via endowment in-

surance taken out by LKAB with an insurance company. Premiums

amount to 14-17% of basic annual salary.

For other senior executives, notice of termination is six months

for both parties. When notice of termination of employment is given

by the company, the severance pay is the equivalent of 18 monthly

salaries.

The term of notice for the former President expired on 31 Decem-

ber 2005.

Remuneration and benefi ts to Board members and senior manage-

ment

The Chairman of the Board, Björn Sprängare, received a director’s

fee of MSEK 0.2 for 2005. Other members of the Board, elected by

the Annual General Meeting, received MSEK 0.1 (0.1) each. Remune-

ration in addition to a director’s fee was not paid to Board members

who are not employed by the company. Employee representatives

who are Board members have each received MSEK 0.1 (0.1). A sum-

mary of taxable remuneration and benefi ts, as well as pension costs

for the President and other senior executives in 2005 is given below

(amounts in SEK ’000).



87

Remuneration and other benefi ts during the year

Variable Other Total Pension

Salary remuneration benefi ts 3) remuneration costs 4)

President and CEO Martin Ivert 3 898 69 3 967 10 412*

VP Håkan Sundin 1) 1 145 608 38 1 791 6 046

VP Lars-Eric Aaro 1 876 101 1 977 1 340

VP Leif Boström 2) 796 31 827 356

VP Anders Furbeck 1 630 76 1 706 1 034

VP Bengt Hjärpe 1 441 723 14 2 178 7 155

VP Jan-Erik Jatko 1 766 75 1 841 2 724

VP Ola Johnsson 2 012 66 2 078 1 099

VP Mats Pettersson 2) 835 31 866 317

VP Leif Rönnbäck 1) 1 534 794 66 2 394 7 589

VP Per-Erik Lindvall 1 851 121 1 972 1 677

Total 18 784 2 125 688 21 597 39 749

1) VP Håkan Sundin retired from LKAB with pension 15 September 2005.

VP Leif Rönnbäck retired from LKAB with pension 31 December 2005.

2) Only part of 2005.

3) Other benefi ts include allowances for car, food, life insurance benefi ts and housing allowances for two people.

4) Pension cost includes special employer’s contribution (tax).

* the corresponding pension cost for 2004 amounted to 11 130 000 kronor, of which 843 000 kronor was prepaid for 2005.

In accordance with the Board’s decision, the system of variable remuneration to members of Corporate Management, with the exception

of those who have only a short time remaining until retirement or who have retired during the year, has been terminated during 2005.




88

NOTE 28 ProvisionsGroup

MSEK 2005-12-31 2004-12-31

Provisions that are long-term liabilities

Pensions 1 690 1 504

Deferred tax liability 1 891 724

Other provisions 303

Totalt 3 884 2 228

Provisions that are current liabilities

Pensions 109 116

Emissions rights 59

Total 168 116

Parent Company

MSEK 2005-12-31 2004-12-31

Provisions

Pensions and similar commitments 1 542 1 349

Other provisions 360

Total 1 902 1 349

Payments

MSEK 2005-12-31 2004-12-31

Group

Amount of provision expected to be paid after more than 12 months 3 716 2 112

Parent Company

Amount of provision expected to be paid after more than 12 months 1 807 1 255

MSEK 104 for restructuring of operations in Narvik is included in

the Group’s pension provisions. The corresponding amount for the

Parent Company is MSEK 74.

Other provisions include MSEK 241 attributable to ground

deformations in Kiruna that have been caused by mining. LKAB

has reached agreements with Vattenfall and Banverket concer-

ning compensation for facilities that must be relocated as a result

of deformations. In addition, MSEK 119 is included for allocated

emissions rights for 2006 and 2007, of which MSEK 59 is reported as

short-term liability in the Group.

NOTE 29 Accrued expenses and prepaid revenues Group Parent Company

MSEK 2005-12-31 2004-12-31 2005-12-31 2004-12-31

Electricity 52 37 46 31

Payroll and employee costs 335 281 294 245

Forward exchange contracts, deduction 61 61

Forward exchange contracts 237

Accrued accounts payable 160 91 136 64

Other 76 60 29 31

921 469 566 371



89

LKAB is exposed to various types of fi nancial risks. Financial risks

are associated with fl uctuations in the company’s earnings and cash

fl ow as a result of currency exchange-rate fl uctuations, interest

rates, refi nancing and credit risks. Financial risks are managed ac-

cording to policies established by the Board. LKAB has a centralized

fi nance function, LKAB Treasury Center, which manages most of

the Group’s fi nancial risks. A selective strategy is applied, whereby

potential costs and benefi ts are balanced, the aim being to minimize

and neutralize risks in commercial fl ows. LKAB Treasury Center also

acts as the Group’s internal bank and supports subsidiaries with

fi nancing, investment and currency trading, and functions as an

advisor with respect to fi nancial issues.

Currency risk

Both LKAB’s future payment fl ows (transaction exposure) and

revaluation of receivables and liabilities in foreign currencies (reva-

luation exposure) are exposed to risks associated with fl uctuations

in exchange rates. Other companies in the Group mainly conduct

business in their local currencies, and both investment and fi nancing

are done mainly in local currencies so as to minimize revaluation

exposure.

Transaction exposure

The greatest transaction exposure within the LKAB Group is within

the Mining Division. All prices of iron ore are set in US dollars,

which means that the transaction risk is high without hedging. The

exact magnitude of this risk is diffi cult to ascertain far in advance,

since it is largely dependent on the market price of iron ore, which

is normally set annually. During 2005, the transaction exposure

amounted to MUSD 1 500, and the effect of a difference of SEK 0.1

in the USD/SEK exchange rate on LKAB’s operating profi t, without

hedging, is therefore MSEK150.

The goal of LKAB’s current currency policy is to minimize the

impact of exchange rate fl uctuations on the income statement by

means of selective risk-taking, so the value of future transaction

exposure is periodically hedged. The Board has set up a currency

committee that convenes whenever necessary to advise the Board

on hedging of the Mining Division’s commercial fl ows. For other

companies in the Group, transaction exposure arises mainly when

raw materials are purchased in foreign currencies. All hedging of

commercial transactions by subsidiaries must be done through the

LKAB Treasury Center.

NOTE 30 Financial risks and fi nance policies

The Group’s transaction exposure, distributed over the following

contract currencies:

Group

2005 Effect on

Currency Amount Change profi t

USD +1.500 SEK 0.01 MSEK 15

NOK -200 SEK 0.01 MSEK 2

GBP +10 SEK 0.01 MSEK 0.1

Transaction exposure in US dollars during 2005 was hedged to 84%

via currency derivatives.

Outstanding forward exchange contracts at closing day

Maturity MUSD Hedging rate

2006 -1.035 7.60

2007 -180 8.03

The Group applies hedge accounting and classifi es its forward cont-

racts used to hedge forecasted transactions as cash fl ow hedges.

The net fair value of forward exchange contracts used to hedge fore-

casted fl ows amounted to MSEK -298 (987) as of 31 December 2005.

Translation exposure

LKAB does not normally hedge its translation exposure. Over time,

this is not considered to add any value for the Group, even though

the level of exposure has increased in recent years due to the expan-

sion of the Minerals Division

Group

2005

Currency Amount in millions

EUR 22

GBP 22

USD 10

DKK 66

Interest rate risk

LKAB’s fi nancing sources are shareholders’ equity, provisions and

short-term operating credits, which means that LKAB is mainly

exposed to interest rate risks with regard to investments of liquid

assets. According to LKAB’s investment policy, the average dura-

tion of money-market investments may not exceed three years. At

maximum duration, a change of one percentage point in the market

rate of interest affects LKAB’s earnings by about MSEK 80-120, de-

pending on composition of the instruments in the portfolio. As of 31

December 2005, LKAB’s investments in money-market instruments

amounted to MSEK 5 947 (3 917). The duration was 356 (386) days.

A one-percent increase in the market rate as of closing day would

have affected income negatively by MSEK 54 (42).



90

NOTE 30 Financial risks and fi nance policies (cont.)

Fair value

Fair value and reported value are stated on the balance sheet below.

Group

Reported Fair Reported Fair

value value value value

MSEK 2005 2005 2004 2004

Financial fi xed assets 1 253 1 253 121 771

Interest-bearing instruments, short-term holdings 3 265 3 265 1 687 1 699

Shares, short-term holdings 784 784 341 404

Trade accounts receivable and other receivables 2 102 2 102 1 360 1 360

Liquid assets (incl. short-term investments, equated with liquid assets) 3 042 3 042 2 488 2 488

Forward exchange contracts (USD) -298 -298 30 987

Embedded derivatives -4 -4 - 1

Accounts payable and other liabilities -1 006 -1 006 -629 -629

9 138 9 138 5 398 7 081

Undisclosed profi ts 1 683

Parent Company

Reported Fair Reported Fair

value value value value

MSEK 2005 2005 2004 2004

Financial fi xed assets 110 1 253 121 771

Interest-bearing instruments, short-term holdings 3 255 3 265 1 687 1 699

Shares, short-term holdings 619 784 341 404

Trade accounts receivable and other receivables 3 129 3 129 2 113 2 113

Liquid assets (incl. short-term investments, equated with liquid assets) 2 936 2 936 2 392 2 392

Forward exchange contracts (USD) -61 -298 30 987

Embedded derivatives 0 -4 0 1

Accounts payable and other liabilities -1 714 1 714 -887 -887

8 274 9 351 5 797 7 480

Undisclosed profi ts 1 077 1 683

Fair value calculation

The following is a summary of the principal methods and assump-

tions used in determining the fair value of fi nancial instruments

reported in the table above.

Securities

For listed fi nancial assets, fair values correspond to the asset’s

buying rate on the balance sheet date.

Derivative instruments

Forward exchange contracts are valuated at current market price by

using quoted market prices. The discount rate used is the market

interest rate on similar instruments quoted on closing day.



Credit risk

LKAB’s credit risks are mainly associated with trade accounts

receivable and short-term investments. As far as credit risks in

trade accounts receivable are concerned, LKAB prioritizes long-term

customer relations, which means that the majority of the customers

are well-established contacts. Export letters of credit are used when

deemed necessary. LKAB has not had any bad debt losses in the

past fi ve years.

According to LKAB’s investment policy, investments may only

be made in borrowers with high creditworthiness and high liquidity

such as the Swedish state, companies wholly owned by the Swedish

state, county councils, municipalities or companies with the highest

credit rating. As of closing day, 96% (96%) of investments in money-

market instruments were issued by the Swedish state and Swedish

banks. LKAB has not had any bad debt losses in short-term invest-

ments in the past fi ve years. LKAB does not have any substantial

concentration of credit risks in any single customer or counterparty.

Liquidity risks

LKAB maintains good fi nancial preparedness by following guideli-

nes which regulate risk-taking and the investment horizon. LKAB

has a high proportion of liquid assets and a low debt/equity ratio. A

good balance between short and long investment horizons will meet

the long-range fi nancing need. Liquid assets are invested primarily

on the Swedish money market in securities with high liquidity.

91

NOTE 31 Operating leasingLeasing agreements in which the company is the lessee

Non-cancelable lease payments amount to:

Group

MSEK 2005 2004

Within one year 5

Between one and fi ve years 12

Longer than fi ve years 10

27

NOTE 33 Assets pledged and contingent liabilities Group Parent Company

MSEK 2005-12-31 2004-12-31 2005-12-31 2004-12-31

Assets pledged

In the form of assets pledged for liabilities and provisions

Chattel mortgaes 3 3

Company-owned endowment insurance 86 55 85 55

Deposit of liquid assets 63 - 63 -

Total assets pledged 152 58 148 55

Contingent liabilities

Guarantees, FPG/PRI 9 9 9 9

Guarantees, GP plan 1 1 2 1

Sureties 8 - 16

Other 48 - -

Forward exchange contracts 441 -

Total contingent liabilities 66 10 452 26

The Group’s future leasing fees are dominated by a land lease. The

remaining term of the leasing agreement is 13 years. In the fi nancial

statement for 2005, an expense that refers to operating leasing in

the Group is reported at MSEK 3 (-), of which MSEK 3 (-) is attributa-

ble to minimum leasing fees and MSEK - (-) variable fees.

There are no signifi cant leasing agreements in the Parent

Company.

NOTE 32 Contractual obligations

At year-end, the Group’s remaining contractual obligations to

acquire tangible fi xed assets amounted to MSEK 4 125. Of these

obligations, MSEK 1 997 is expected to be paid during the fi scal

year 2006. The Parent Company’s obligations amounted to 3 926, of

which MSEK 1 882 is expected to be paid during 2006.

There are obligations (both formal and informal) with respect to

structural transitions in Kiruna. As a consequence of the deforma-

tion zone resulting from mining operations, considerable costs for

LKAB can arise during the coming years. The future costs, or the

share of costs to be assumed by LKAB, cannot be estimated in a

reliable way, which is why no provisions have yet been made.

Future closure of operations may entail statutory requirements

for site remediation, etc. The future costs cannot be estimated in a

reliable way, which is why no provision for costs is made.



92

NOTE 34 Related parties

Deliveries of iron ore to SSAB have amounted during the year to

5.3 (5.4) Mt. For information concerning related-party transactions

with Vattenfall AB, please refer to the section on Secured electricity

deliveries in the Report of the Directors.

In 1997, LKAB made a participating loan with a nominal amount

of MSEK 40 to the associated company Norrskenet AB.

The loan has a remaining maturity of 6 years. Interest is paid an-

nually and amounted to SEK 172 000 (80 000) in 2005.

Related-party relations

The Group is subject to the controlling infl uence of the Swedish

state. Aside from the close relationships that the Parent Company

has with its subsidiaries (see Note 35), the Group has related-party

transactions with Svenskt Stål AB (SSAB) via shareholding, and with

Vattenfall AB via a long-term energy agreement.

Summary of related-party transactions

Group

Sales of Purchase of Liabilities to Receivables from

goods to goods from Related parties Related parties

Related-party relation Year Related parties Related parties 31 December 31 December

Associated companies 2005 13 1 37

Associated companies 2004 11 - 42

Parent Company

Sales of Purchase of Liabilities to Receivables from

goods to goods from Related parties Related parties

Related-party relation Year Related parties Related parties 31 December 31 December

Subsidiaries 2005 237 1 102 942 1 277

Subsidiaries 2004 203 978 474 972

Associated companies 2005 13 1 35

Associated companies 2004 11 - 40

The principal will be repaid in full in 2011, at which time profi t

shares will also be distributed.

Transactions with key individuals in leading positions are repor-

ted in Note 6 and Note 27.

Transactions with related parties are priced and conducted in ac-

cordance with commercial principles.

NOTE 35 Group companiesParent Company

MSEK 2005-12-31 2004-12-31



Purchases 100

Sales -11




93

Specifi cation of the Parent Company’s ownership of participations in associated companies

Ownership Ownership 2005-12-31 2004-12-31

in % in % Reported Reported

Subsidiary / Corp. ID No. / Registered offi ce Total shares 2005 2004 value value

Swedish subsidiaries

Fastighets AB Malmfälten /556009-8849/ Kiruna 5 000 100.0 100.0 0 0

Wassara AB /556331-8566/ Stockholm 12 000 60.0 60.0 5 5

AB Kiruna Grus & Stenförädling /556074-8237 /Kiruna 24 000 100.0 100.0 47 47

LKAB Nät AB /556059-9796/ Kiruna 10 100.0 100.0 0 0

Minelco AB /556223-1786 /Luleå 2 000 000 100.0 100.0 200 200

LKAB Försäkrings AB /516406-0187 / Luleå 10 000 100.0 100.0 100 100

Malmtrafi k i Kiruna /556031-4808 / Kiruna 208 000 100.0 100.0 252 252

Foreign subsidiaries

AS Bukserbåter /918 271 252/ Narvik, Norway 99 99.0 99.0 0 0

AS Taraldsvik /918 400 184/ Narvik , Norway 200 100.0 100.0 0 0

LKAB Far East Pte Ltd /198401144W/ Singapore, Singapore 200 000 100.0 100.0 1 1

LKAB S.A. /403 455 761/ Brussels 100 100.0 100.0 0 0

LKAB Schwedenerz GmbH /HRB 718/ Essen 100 100.0 100.0 2 2

Total, Parent Company 100.0 100.0 607 607

Indirect ownership via the subsidiary Minelco AB

Minelco B.V /24236591/ Breda, Netherlands 100.0 100.0

Minelco Inc /02-0551509/ Cincinnati, USA 100.0 100.0

Minelco GmbH /HRB 16692/ Essen, Germany 100.0 100.0

Minelco Asia Pacifi c Ltd /876455/ Hong Kong, Hong Kong 100.0 100.0

Minelco Ltd /0245817/ Welton, UK 100.0 100.0

Minelco OY /1934671-4/ Helsingfors, FInland 100.0 100.0

Likya Minelco/-/Izmir, Turkey 50.0

Seqi Olivine AS/A/S277716/Nuuk, Greenland 100.0 50.0

Minelco Holding Ltd / 04621769/ Derby, UK 100.0 100.0

Minelco Tianjin Minerals Co /70051551-5/ Dongli District Tianjin, China 100.0 100.0

Minelco Minerals Ltd /00103751/ Derby, UK 100.0 100.0

Quay Minerals Ltd /02732626/ Flixborough, UK 100.0 100.0

Tianjin Jindalai Mineral /60089030-X/ Dongli District Tianjin, China 100.0 100.0

Fergusson Wild & Co Ltd /2529921/ West Sussex, UK 100.0 100.0

Fordamin Company Ltd /00925517, UK 100.0 100.0

Minelco Specialities Ltd /1151578/ Derby, UK 100.0 100.0

Microfi ne Hellas A.E./-/Thessaloniki, Greece 100.0 100.0

Indirect ownership via the subsidiary AB Kiruna Grus & Stenförädling

AB KGS Mekaniska /556013-3059/ Kiruna 100.0 100.0

AB KGS Contracting /556412-5010/ Kiruna 100.0 100.0

Kimit AB /556190-6115/ Kiruna 100.0 100.0

Indirect ownership via the subsidiary Malmtrafi k i Kiruna AB

Malmtrafi kk AS /974 644 991/ Narvik, Norway 100.0 100.0

Indirect ownership via the subsidiary AS Taraldsvik

LKAB Norge AS /930 033 510/ Narvik, Norway 100.0 100.0

NOTE 35 Group companies (cont.)



94

NOTE 36 Untaxed reservesParent Company

MSEK 2005-12-31 2004-12-31

Accumulated depreciation in excess of plan:

Buildings and land

Opening balance 1 January 15 17

Accelerated depreciation -2 -2


Machinery and inventories

Opening balance 1 January 1 882 2 065

Accumulated depreciation in excess of plan 163

Accelerated depreciation -183


Construction in progress



Underground installations


Accumulated depreciation in excess of plan

Disposals, retirements and dissolution -3 -2


Tax allocation reserves

Allocated at 2001 assessment 73 73






Total untaxed reserves 4 562 2 994



95

NOTE 37 Cash fl ow statementLiquid assets - Group

MSEK 2005-12-31 2004-12-31

The following sub-components are included in liquid assets

Cash and bank balances 336 238

Short-term investments, equated with liquid assets 2 706 2 250

Total according to balance sheet 3 042 2 488

Total according to cash fl ow statement 3 042 2 488

Liquid assets - Parent Company

MSEK 2005-12-31 2004-12-31

The following sub-components are included in liquid assets

Cash and bank balances 240 162

Short-term investments, equated with liquid assets1) 2 696 2 230

Total according to balance sheet 2 936 2 392

Total according to cash fl ow statement 2 936 2 392

1) Liquid assets include short-term investments that have been classifi ed as liquid assets according to the following:

• They entail insignifi cant risk for value fl uctuations

• They can be easily converted to cash

• They have a maturity of at most three months from date of acquisition

Interest paid and dividends received


MSEK 2005 2004 2005 2004

Dividends received 47 35 65 91

Interest received 362 125 400 161

Interest paid -2 -2 -8 -8

407 158 457 244

Adjustments for items not included in cash fl ow


MSEK 2005 2004 2005 2004

Depreciation 951 1 079 791 919

Write-downs 8 - 5

Unrealized exchange rate differences -34 5

Changes in value of fi nancial instruments -101

Income from sale and retirement of tangible assets 55 37 34 27

Income from sale of fi nancial assets -89 - -89

Provisions for pensions 108 -37 193 2

Other items that do not affect liquidity 14 - 1

Other provisions 244 - 242

1 156 1 084 1 176 949

Tax paid


MSEK 2005 2004 2005 2004

Tax expense according to income statement -1 904 -456 -1 251 -460

Change in tax recoverable/liability -236 161 -302 145

Adjustment for deferred tax 606 -3 -35 -1

Regulation of provisions for taxes - -20 - -20

Adjustment for tax effect of Group contributions 105 41

- 1 534 -318 -1 483 -295



96

This fi nancial report for the Group is the fi rst prepared according to

IFRS, as indicated in Note 1.

The accounting principles in Note 1 have been applied in the pre-

paration of the Group’s fi nancial reports for fi scal year 2005 and for

the comparative year, 2004, as well as for the Group’s opening ba-

lance on January 1, 2004, with the exception of IAS 32 and 39, which

in accordance with exceptions in IFRS 1,are applied only to 2005.

NOTE 38 Explanations with regard to the transition to IFRS

In the preparation of the Group’s opening balance sheet, amounts

reported according to previously applied accounting principles have

been adjusted to IFRS. Explanations on how the transition from

previous accounting principles to IFRS has affected the Group’s

fi nancial position, fi nancial results and cash fl ows are provided in

the following tables and explanations.

With regard to the application of IAS 32 and 39 as of January 1,

2005, see Note 39.

Reconciliation of shareholders’ equity

Effect of Effect of

Previous transition Previous transition

principles to IFRS IFRS principles to IFRS IFRS

MSEK Note 1 Jan. 2004 31 Dec. 2004

Assets

Intangible assets A 182 182 198 13 211

Tangible assets 6 476 6 476 6 316 6 316

Participations in associated companies and joint ventures 4 4 33 33

Financial investments 121 121 124 124

Long-term receivables 71 71 62 22

Total fi xed assets 6 855 6 855 6 733 13 6 746

Inventories, etc. 976 976 1 008 -2 1 006

Taxes recoverable 9 9 8 8

Accounts receivable 1 198 1 198 1 194 1 194

Prepaid expenses and accrued revenues 106 106 83 83

Other receivables 201 201 102 2 104

Short-term investments 712 -432 280 2 690 -662 2 028

Cash and bank balances 2 232 432 2 644 1 826 662 2 488

Total current assets 5 434 5 434 6 911 6 911

Total assets 12 289 12 289 13 644 13 13 657

Shareholders’ equity

Share capital 700 700 700 700

Other reserves -11 -11

Accumulated profi t or loss B 8 064 8 064 9 342 13 9 355

Shareholders’ equity attributable to Parent Company shareholders 8 764 8 764 10 031 13 10 044

Minority interest 4 4 3 3

Total shareholders’ equity 8 768 8 768 10 034 13 10 047

Liabilities

Other long-term liabilities 2 2 2 2

Provisions for pensions 1 654 1 654 1 620 -116 1 504

Other provisions 20 20 1 1


Total long-term liabilities 2 403 2 403 2 347 -116 2 231

Accounts payable - trade 523 523 497 497

Income tax payable 8 8 168 168

Other liabilities 161 161 129 129

Accrued expenses and prepaid revenues 426 426 469 469

Provisions for pensions 116 116

Total current liabilities 1 118 1 118 1 263 116 1 379

Total liabilities 3 521 3 521 3 610 3 610

Total shareholders’ equity and liabilities 12 289 12 289 13 641 13 13 657



97

NOTE 38 Explanations with regard to the transition to IFRS (cont.)

Notes to reconciliation of shareholders’ equity

(A) In the Group’s fi nancial reports, IFRS 3 has been applied with respect to all acquisitions made from 1 January 2004, the date of transition

to IFRS. As of 1 January 2004, goodwill is no longer amortized. Instead it is tested for impairment annually or when there is an indication of

diminished value.

As a result of the above-stated adjustments, the reported value of goodwill has increased by MSEK 13. Reversals of goodwill amortization

from 2004 amount to SEK 13 (reported among cost of goods sold).

(B) The effect of the above-stated adjustments on accumulated profi t or loss is reported in the table below.

Group

MSEK 1 January 31 December

2004 2004

Goodwill 13

Total adjustments in shareholders’ equity 13

Attributable to:

the Parent Company’s shareholders 13

Minority interest 13

Reconciliation of income statement for 2004

Group

Effect of

According to transition According

MSEK Note Sw GAAP to IFRS to IFRS

Net sales 8 988 8 988

Cost of goods sold A -6 193 13 -6 180

Gross margin 2 795 13 2 808




Other operating expenses -197 -197

Other operating revenues 207 207

Operating income 1 928 13 1 941

Income from fi nancial items 227 227


Net fi nancial income/expense 82 13 82

Income before tax 2 010 13 2 023

Tax -456 -456

Net income for the year 1 554 13 1 567

Attributable to:

Parent Company shareholders 1 555 13 1 568

Minority interest -1 -1

Earnings per share 2 221 2 240



98

Reconciliation of shareholders’ equity

Effect of

transition to

MSEK 2004-12-31 IAS 39 2005-01-01

Assets

Intangible assets 211 211

Tangible assets 6 316 6 316

Participations in associated companies and joint ventures 33 33

Financial investments 124 650 774

Long-term receivables 62 62

Total fi xed assets 6 746 650 7 396

Inventories, etc. 1 006 1 006

Taxes recoverable 8 8

Accounts receivable 1 194 1 194

Prepaid expenses and accrued revenues 83 959 1 042

Other receivables 104 104

Short-term investments 2 028 74 2 102

Cash and bank balances 2 488 2 488

Total current assets 6 911 1 033 7 944

Total assets 13 657 1 683 15 340

Shareholders’ equity

Share capital 700 700

Other reserves -11 1 157 1 146

Accumulated profi t or loss 9 355 55 9 410

Shareholders’ equity attributable to Parent Company shareholders 10 044 1 212 11 256

Minority interest 3 3

Total shareholders’ equity 10 047 1 212 11 259

Liabilities

Other long-term liabilities 2 2

Provisions for pensions 1 504 1 504



Total long-term liabilities 2 231 471 2 702


Income tax payable 168 168


Accrued expenses and prepaid revenues 469 469

Provisions for pensions 116 116


Total liabilities 3 610 471 4 081

Total shareholders’ equity and liabilities 13 657 1 683 15 340

According to IFRS, fi nancial assets are classifi ed as ”Financial assets

held for sale” and all derivative instruments have been recognized

at fair value.

The effect of recognizing shares and share-related securities, clas-

sifi ed as fi nancial assets held for sale, at fair value is that fi nancial

assets and fair value reserve increase by MSEK 650 and MSEK 468,

respectively, as of 1 January 2005. Deferred tax amounts to MSEK

182.

NOTE 39 Change in accounting principles 1 January 2005

Valuation of forward exchange contracts at fair value has

increased the reported value of derivative instruments and the

hedging reserve by MSEK 959 and MSEK 691, respectively, as of 1

January 2005. Deferred tax amounts to MSEK 268.

The income for 2005 has not been affected, since all changes in

value have been booked against shareholders’ equity.

For further information, see the note on ”Compilations of chan-

ges in shareholders’ equity - LKAB Group”.



99P R O P O S E D D I S P O S I T I O N O F U N A P P R O P R I AT E D E A R N I N G S


The Board of Directors and President propose that unappropriated earnings of MSEK 8 471 be distributed as follows:Dividend, 700 000 shares x 2 143 kronor per share MSEK 1 500Funds to be carried forward MSEK 6 971

Total MSEK 8 471

The Board of Directors and the President certify that, to the best of our knowledge, the fi nancial statements have been prepared in accordance with generally accepted accounting principles. The information presented is consistent with the actual conditions and that nothing of material importance has been omitted that would affect the picture of the Group and Parent Company presented in the fi nancial statements.

Luleå, 22 February 2006

Proposed disposition of unappropriated earnings

The Annual Report and consolidated fi nancial statements have, as stated above, been approved for publication by the Board of Directors on 22 February 2006. The consolidated income statement and balance sheet, and the Parent Company income statement and balance sheet will be subject to approval by the Annual General Meeting on 25 April 2006.

Our Audit Report was submitted on 7 March 2006.

KPMG Bohlins AB

Roland Nilsson Annicka Brännström Authorized public accountant Authorized public accountant Chief accountant

Björn Sprängare Chairman

Christer Berggren Stina Blombäck Per-Ola Eriksson

Lars-Åke Helgesson Anna-Greta Sjöberg Ursula Tengelin Egil M. Ullebø

Tomas Nilsson Bertil Thornberg Karl Wikström Employee representative Employee representative Employee representative

Martin Ivert President and CEO

100 R E V I S I O N S B E R Ä T T E L S E


We have audited the annual accounts, the consolidated accounts, the accounting records and the administration of the board of directors and the managing director of Luossavaara-Kiirunavaara AB for the year 2005. The board of di-rectors and the managing director are responsible for these accounts and the administration of the company as well as for the application of the Annual Accounts Act when preparing the annual accounts and the application of Interna-tional Financial Reporting Standards IFRSs as adopted by the EU and the Annual Accounts Act when preparing the consolidated accounts. Our responsibility is to express an opinion on the annual accounts, the consolidated accounts and the administration based on our audit.

We conducted our audit in accordance with generally accepted auditing standards in Sweden. Those standards re-quire that we plan and perform the audit to obtain high but not absolute assurance that the annual accounts and the consolidated accounts are free of material misstatement. An audit includes examining, on a test basis, evidence sup-porting the amounts and disclosures in the accounts. An audit also includes assessing the accounting principles used and their application by the board of directors and the managing director and signifi cant estimates made by the board of directors and the managing director when preparing the annual accounts and the consolidated accounts as well as evaluating the overall presentation of information in the annual accounts and the consolidated accounts. As a basis for our opinion concerning discharge from liability, we examined signifi cant decisions, actions taken and circumstan-ces of the company in order to be able to determine the liability, if any, to the company of any board member or the managing director. We also examined whether any board member or the managing director has, in any other way, acted in contravention of the Companies Act, the Annual Accounts Act or the Articles of Association. We believe that our audit provides a reasonable basis for our opinion set out below.

The annual accounts have been prepared in accordance with the Annual Accounts Act and give a true and fair view of the company’s fi nancial position and results of operations in accordance with generally accepted accounting princi-ples in Sweden. The consolidated accounts have been prepared in accordance with International Financial Reporting Standards IFRSs as adopted by the EU and the Annual Accounts Act and give a true and fair view of the group’s fi nan-cial position and results of operations. The statutory administration report is consistent with the other parts of the an-nual accounts and the consolidated accounts.

We recommend to the annual meeting of shareholders that the income statements and balance sheets of the pa-rent company and the group be adopted, that the profi t of the parent company be dealt with in accordance with the proposal in the administration report and that the members of the board of directors and the managing director be discharged from liability for the fi nancial year.

Audit ReportTo the annual meeting of the shareholders of Luossavaara-Kiirunavaara ABCorporate identity number 556001-5835

Luleå, 7 March 2006KPMG Bohlins AB

Roland Nilsson Annicka Brännström Authorized public accountant Authorized public accountant

Chief accountant

Corporate Governance of LKABLKAB is wholly owned by the Swedish state. The basis for corporate governance

of LKAB is Swedish legislation, guidelines from the state and internal guidelines.

The State Ownership Policy dictates that the Swedish Code of Corporate Governance (the Code) must serve as part of the government’s framework for ownership admi-nistration.

LKAB has decided to adhere as much as possible to the Code, accept in areas where state ownership does not permit. Introduction of appropriate sections of the Code is expected to be completed during 2006.

LKAB’S OPERATIONS

LKAB’s operations are capital intensive. Compared to oth-er iron ore companies, nearly all of which mine their ore in open pits, LKAB has a heavier capital burden, since under-ground mining demands more extensive investments.

The operation is also strongly dependent on business cycles. Therefore, LKAB must have substantial fi nancial strength to be able to cope with cyclical fl uctuations over several years and to be able to fi nance the heavy invest-ments that will secure the company’s future.

Against this background, the long-term requirement on rate of return on operating assets has been set at 10%, measured over a business cycle. During the years 2002-2005, return on operating assets has been 2, 11, 23 and 58%, respectively.

LKAB has built up a high proportion of liquid assets and has a low debt/equity ratio. Liquid assets are inves-ted primarily on the Swedish money market in securities with high liquidity and low credit and interest-rate risk. The goal is that the rate of return on managed cash as-sets should exceed the money-market index over the long term.

LKAB is in a phase of strong development, due in part to the broadening into new minerals and market seg-ments that is now under way, and partly owing to strong growth in the Mining Division. Our assessment is that de-mand for LKAB’s products will grow in the coming years. This will create conditions for further growth through in-vestments in, for example, new pelletizing plants and new main levels.

The Board believes that the company is capable of ma-naging this growth if the current dividend policy is main-tained. LKAB can then use the strong fi nancial platform the company now has to ensure continued profi table de-velopment within its business areas.

OWNERSHIP

LKAB is wholly owned by the Swedish state, represen-ted by the government and the Ministry of Industry,

Employment and Communications. The owner’s princi-pal objective is to create value. State-owned companies can in principle be divided into two groups: companies that primarily have special societal interests to fulfi ll and companies operating under market conditions and requi-rements. LKAB, which belongs to the latter category, will develop a successful business operation by mining, pro-cessing and marketing minerals.

The owner’s income and yield requirements for LKAB are on normal market terms. LKAB’s dividend policy en-tails that the dividend to the owner will, over the long term, amount to 30-50% of income after tax and be adapted to the average earnings level over a business cycle. The state exercises its ownership via an established owner-ship policy, nominations to the Board and requirements for fi nancial and other reporting. The state’s requirement of insight is assured by direct owner representation on the Board. Reports to the owner are important steering instruments for the ongoing monitoring and assessment of the companies. State-owned companies should have at least the same level of transparency as listed companies.

In the Board’s instructions, distribution of responsi bility between the Board and the owner is regulated. According to the Board’s statutory instructions, the Board, via the Chairman, coordinates its views on issues of decisive im-portance with the owner’s representatives. Such issues include strategic changes in the company’s operations, major acquisitions, mergers or divestments, as well as decisions affecting signifi cant changes in the company’s risk profi le or balance sheet.

ANNUAL GENERAL MEETING

LKAB’s Annual General Meeting is open to the public. No-tice of the Annual General Meeting is made via LKAB’s website and via newspaper advertisements. The public is entitled to submit questions to the AGM. Questions to the AGM may also be submitted via the website. As of 2005, the minutes of Annual General Meetings are posted on LKAB’s website.

The meeting decides on remuneration to the Chairman and other board members, as well as any remuneration for committee work.

The Annual General Meeting for 2005, which was LKAB’s fi rst shareholders’ meeting open to the public, was held on 28 April. About 100 people attended the meeting. An extraordinary general meeting was held on 18 September.

CORPORATE GOVERNANCE REPORT

C O R P O R AT E G O V E R N A N C E O F L K A B

L K A B A N N U A L R E P O R T 2 0 0 5 101

NOMINATIONS/ APPOINTMENT OF MEMBERS OF

THE BOARD AND AUDITORS

Since LKAB is wholly state-owned, it does not have a no-mination committee per se, as defi ned by the Code. The nomination committee prepares the meeting’s decisions on matters relating to appointments. The chair of the meetings is appointed by the owner’s representative at the meeting.

BOARD OF DIRECTORS

According to LKAB’s Articles of Incorporation, the Board of Directors will consist of not less than six and not more than 11 members with not more than seven deputies. The President is responsible for ensuring that newly elected board members undergo an introductory course. Owing to the introduction of the Code and the new Companies Act, the Articles of Incorporation will be updated during 2006.

Normally six ordinary meetings are held each year: in February, April, June, August, November and December. The meetings follow a fi xed calendar to ensure that the Board’s need for information is satisfi ed.

A board meeting held at the end of each quarter consi-ders the interim fi nancial reports for the most recent quar-ter as well as the forecast for the coming four quarters. This allows the Board to make an ongoing assessment of strategies and delegations to the President and to decide on specifi c investment projects.

Normally the fi rst meeting of the year is at the year-end closing, when LKAB’s auditors also participate. The second is a strategy meeting with an emphasis on person-nel development matters combined with a presentation of the interim accounts. The third and fourth meetings also address issues pertaining to operations and strategy.

The emphasis of the fi fth meeting is on the market si-tuation. At the sixth and fi nal meeting, the strategic plan for the coming three to four years is revised.

Each year, the Board of Directors establishes its rules of procedure, essentially following the recommendation issued by the Ministry of Industry, Employment and Com-munications.

COMPOSITION OF THE BOARD

The Board of Directors of LKAB has consisted during the year of eight members who have no relation to the com-pany or its senior management and have been elected by the Annual General Meeting, plus three members withthree deputies appointed by the employees. Deputies of the employee representatives also participate in board meetings. The Board has an independent legal advisor who is also the permanent secretary. The President is not a member of the Board, but attends meetings of the Board. The Chairman is elected, as are the other board members, by the general meeting of shareholders, for one year.

THE WORK OF THE BOARD OF DIRECTORS DURING 2005

At the Annual General Meeting on 28 April, two board members, Hans Christer Olson and Carl Wilhelm Ros, stepped down from the Board. At an extraordinary meetingon 18 September, Anna-Greta Sjöberg was elected a mem-ber of the Board.

During the year, the Board has held seven meetings, one via telephone. Meetings are normally held in loca-tions where LKAB has operations, in Stockholm, or in conjunction with trips to LKAB’s market areas. In 2005, the Board visited Brazil. Attendance of the members of the Board is presented in the table below.

BOARD COMMITTEES

Currency committee

The Board has appointed a currency committee that will prepare and oversee the hedging program. The com-mittee, which is led by the Chairman of the Board, Björn

ATTENDANCE OF THE MEMBERS OF THE BOARD DURING 2005

24/2 28/4 20-21/6 25/8 4/11 19-23/11 15/12 (telephone)

Björn Sprängare x x x x x x x

Christer Berggren x x x x x x x

Stina Blombäck x x x x x x

Per-Ola Eriksson x x x x x x

Lars-Åke Helgesson x x x x x x x

Hans Christer Olson x

Carl Wilhelm Ros x

Anna-Greta Sjöberg x x x

Ursula Tengelin x x x x x x x

Egil M Ullebö x x x x x x x

Bertil Tornberg x x x x x x x

Tomas Nilsson x x x x x x x

Karl Wikström x x x x x x x

Hans Fängvall x x x x x x x

Tomas Kohkoinen x x x x x x x

Torsten Thorneus x x x x x x



Sprängare, includes board members Anna-Greta Sjöberg and Christer Berggren, Martin Ivert, President, Leif Boström, Vice President Finance, Clas-Göran Bergbom and Karl Wikström (employee representative on LKAB’s Board). The committee held three meetings during 2005. Minutes and reports from the meetings are submitted to LKAB’s Board.

Remuneration committee

The Board appoints a remuneration committee to prep-are decisions on terms of employment for the President. The remuneration committee can also support the work of the President in establishing the salaries of senior ex-ecutives and other key personnel. Proposals for incentive programs or other remuneration are prepared by the re-muneration committee for the decision of the Board or presentation to the annual general meeting of sharehol-ders. Decisions are documented and kept on record by the secretary of the Board.

Audit committee

The Board is responsible for the company having a for-malized and transparent system which ensures that the established principles for fi nancial reporting and internal control are complied with and that functional relations with the company’s auditors are maintained. The normal tasks of the audit committee have been performed by the Board during 2005.

An audit committee has been appointed in February 2006.

ASSESSMENT OF THE WORK OF THE BOARD

A written survey of the Board’s work, prepared annually, includes questions concerning how the Board collective-ly, and each member individually, has fulfi lled the tasks at hand. The evaluation report supports the work of the Board. The Chairman is responsible for following up the re-sults, which form a basis for discussion and improvement. The work of the Chairman is normally assessed by the ow-ner, but this may also be part of the work of the Board.

In recent years, the Board has assessed its work bymeans of a questionnaire completed by each board mem-ber. For 2004, this procedure was replaced by an in-depth interview, whereby the Chairman interviewed each AGM-elected board member and the employee representatives. The entire Board has access to the results of this evalua-tion, as does the President, where applicable.

ASSESSMENT OF THE WORK OF THE PRESIDENT

Evaluation of the President’s work is a fundamental task of the Board. A summary of the Board’s views is made by the Chairman, who presents a detailed outline of the President’s strengths and weaknesses as identifi ed by the Board.

FINANCIAL REPORTING AND INTERNAL CONTROL

The Board ensures the quality of fi nancial reporting and internal control in consultation with the company’s audi-

tors, who normally attend the fi rst board meeting of the year, which normally concerns the year-end fi nancial sta-tements.

To ensure the quality of the fi nancial statements, the Board considers all critical accounting questions and the fi nancial reports presented by the company. The Board also considers issues of internal control, compliance with regulations, signifi cant uncertainties in reported values, non-remedied errors, events after closing day, changes in estimates, any possible improprieties, and other condi-tions affecting the quality of fi nancial reporting.

EXTERNAL AUDITORS

The Annual General Meeting of 2003 appointed as the company’s auditors KPMG Bohlins until the close of the Annual General Meeting of 2007. The Chief Accountant is Roland Nilsson.

Remuneration to the auditors is stated in Note 7 of the Report of the Directors.

The auditors are engaged to review the interim reports as of 2005.

EXECUTIVE MANAGEMENT

The executive management consists of nine persons. The President’s duties and obligations are stated in the ins-tructions and formal work plan for the Board and Presi-dent. According to these, the President shall:• manage, plan, develop and control the company’s op-

erations in accordance with goals and strategies estab-lished by the Board;

• make provisions to ensure that the company’s accoun-ting complies with the law and that fi nancial assets are managed in a satisfactory manner;

• oversee the company’s operations with respect to com-pliance with legislation and regulations, ensure that the decisions of the Board and other decided measures per-taining to the operation of the company are implemen-ted, and that the company’s operations are organized in a functional manner and conducted in accordance with the Articles of Incorporation;

• assume responsibility for presentations and other re-porting to the Board;

• establish instructions and functional descriptions that are deemed necessary but have not been established by the Board;

• assume responsibility for the company’s ongoing media contacts; media contacts with respect to issues pertain-ing to ownership and major structural considerations are the responsibility of the Chairman;

• ensure that introductory courses are provided for newly elected members of the Board.

The Chairman of the Board approves any directorships held by the President outside of the company.

Luleå, 22 February 2005Board of Directors


L K A B A N N U A L R E P O R T 2 0 0 5 103

According to the Swedish Companies Act and the Swe-dish Code of Corporate Governance, the Board of Direc-tors is responsible for internal control. This report has been prepared according to the Swedish Code of Corpo-rate Governance, sections 3.7.2 and 3.7.3, and accordingly is limited to internal control over fi nancial reporting. This report is not a part of the formal annual report.

Description of the internal control over

fi nancial reporting

CONTROL ENVIRONMENT

The basis of internal control is the control environment within LKAB. This includes the organization, decision-ma-king processes, authorities and responsibilities, as well as the management culture adopted by the Board and Ma-nagement. The keyword within the Group is quality. As expressed in the quality policy, the basis for quality is that each individual must assume responsibility for the quality of his or her work and strive for zero-defects in everything he or she does. Upholding these values entails a process of continuous improvement. Personnel turnover is low, and policies and procedures are well established within the Group. This is indicative of a long-term approach and stability in the company. Controlling documents such as the policies for ethics, fi nance, currency, information and quality are published on the company’s intranet. LKAB has an incentive system, but this is not directly dependent on the company’s fi nancial outcome.

Responsibilities and roles concerning fi nancial re-porting have been defi ned and communicated to employ-ees in the fi nance and fi nancial control functions.

FINANCIAL MANUAL/INSTRUCTIONS

To maintain a good level of expertise within the fi nance function, regular training programs are given. During the past year, controllers have received instruction in among other areas, IFRS requirements. Finance personnel meet regularly throughout the year, and prior to preparation of the year-end statements, instructions for year-end fi nan-cial reporting are distributed.

The most important procedures and principles for fi -nancial reporting have been summarized in a fi nancial manual.

RISK ASSESSMENT

Where fi nancial information is concerned, LKAB’s objec-tive, as established by the Swedish state, is that fi nancial reporting should maintain the same level as that of listed companies.

The company identifi es, analyzes and decides on ma-nagement of risks, both in operations and with respect to fi nancial reporting. Work on structuring this process has

begun. Where the balance sheet and income statement are concerned, the most important processes have been identifi ed, and these will be successively documented as risks are identifi ed. Work on identifying and structuring the Group’s most central processes began during 2005 and is expected to be completed during 2006.

The company has successfully introduced quality and environmental and energy management systems. Accor-ding to the same model and philosophy, a management system for quality assurance of fi nancial reporting will also be introduced.

CONTROL ACTIVITIES

Important aspects of LKAB’s control structure are autho-rization manuals, descriptions of authorities, and instruc-tions for year-end fi nancial reporting. In addition, there are specifi c control procedures for managing unique risks of errors in fi nancial reporting. Together with the identi-fi ed risks, the control activities are being documented in the ongoing process review.

INFORMATION AND COMMUNICATION

Information on the applicable control structure is avail-able on LKAB’s intranet, to which all employees haveaccess. Procedures for managing identifi ed shortcomings are being updated. The aim is to be able, as of 2006, to re-gularly review the changes in, and underlying reasons for, the existing controls, and to develop these so that good internal control of fi nancial reporting can be maintained.

FOLLOW-UP

In conjunction with review of the control structure, re-sponsibility for ensuring that the control structure is in place and is known, and that controls are carried out in the manner prescribed, is identifi ed. This follow-up pro-cedure is also documented.

Controllers in each line of business receive the fi nancial information and comment upon it. During 2006, the con-trollers will review the fi nancial information with mana-gers at the operational level.

LKAB’s central fi nance and control function follows up the fi nancial outcome and key ratios on an ongoing ba-sis and closely monitors current investments and capital expenditures within LKAB. Expenditures exceeding MSEK 10 are subject to the approval of the President.

STATEMENT 2005

In accordance with pronouncements by the Swedish Cor-porate Governance Board, the Board of Directors will not express an opinion on how well the internal control has functioned during the year.

LKAB has at present no internal auditing function. The

THE BOARD OF DIRECTORS’ REPORT ON INTERNAL CONTROL



Board fi nds that the existing structures for follow-up and evaluation of the internal control provide a satisfactory basis for the Board’s assessment of the internal control. For certain special audits, external auditing work may also be done. The decision is reviewed annually.

In February 2006, the Board has established an audit committee whose tasks will include preparation of the Board’s work towards quality assurance of the company’s fi nancial reporting.

Luleå, 22 February 2006Board of Directors

Sweden’s “State ownership policy 2005” outlines the Government’s principles for ownership control and guidelines for employment and exter-nal reporting. Below, LKAB’s compliance with these guidelines is summarized.

GOVERNMENT GUIDELINES

Requirement



Ethical policy ✓ Page 26Environmental policy ✓ Page 27Global Responsibility - Ambition, see Ethical policyGender equality ✓ Page 28Diversity ✓ See Ethical policy page 26Healthier workplaces ✓ Page 30, Note 6Public AGM ✓ As of 2005Swedish Code for Corporate Governance ✓ Full implementation 2006

Guidelines concerning terms of employment

The Annual Report must provide information on terms of employmentfor persons in managerial positions: Note 27 – Salary, pension costs, all remuneration and benefi ts ✓

– Terms of pension and severance agreements ✓

Fees for the Board of Directors: Note 27 – Chairman ✓

– Board members ✓

Incentive schemes for employees: Page 30 – should include all personnel except the president ✓

– should be directly linked to the company’s overall performance ✓

– clear relationship between goals and the performance of the individual employee ✓

– reasonable in relation to the company’s performance; no reward if a loss is posted ✓

– time-limited, scope for revision, can be terminated ✓

– rules for different forms of employment and upon termination of employment ✓

– no incentive programs introduced for persons in senior management ✓

Guidelines for external reporting

Interim reports, year-end statements and annual reports will comply with theAnnual Accounts Act, generally accepted accounting principles andStockholmsbörsens Listing Agreement. ✓

Environment-related information must be integrated with other reporting. ✓ Page 31

The company shall submit quarterly reports within two months of the close of the reporting period ✓

Quarterly reports, year-end statements and annual reports will be published on the company’s website. ✓

The annual report will contain:– General description of market conditions ✓ Page 6 – Financial goals, operating objectives and performance reports ✓ Page 3, 4, 10, 11, 12, 14, 15, 30, 101– Risk and sensitivity analysis, operating risks and fi nancial risks ✓ Page 38, Note 30 – Gender equality policy, diversity, and incentive schemes ✓ Page 28, 30 – Composition of the Board and the work of the Board ✓ Page 102, 106 – An account of dividend policy ✓ Page 44 – Environmental policy, environmental targets and impact, energy and resource consumption and environmental management systems ✓ Page 31

Compliance Remarks

105

B O A R D O F D I R E C T O R S A N D A U D I T O R S


Board of Directors and Auditors

Chairman, Björn Sprängare (1940)

DirectorElected to the Board in 1997.Graduate Forester 1967; Dr. of Forestry Skogshögskolan 1973; President and CEO Mo och Domsjö AB 1981-1986; President and CEO Trygg Hansa 1986-1994; Governor of the Royal Palaces 1996-2004. Other directorships: Chairman of Concert House Foundation in Stockholm; Chairman of Skogssällskapet; member of the Royal Swedish Academy of Engineering Sciences; member of the Royal Swedish Academy of Agriculture and Forestry.

Christer Berggren (1944)

Deputy Director, Ministry of Industry, Employment and CommunicationsDeputy director of the Board in 2001, elected to the Board in 2002.MA Pol. Sci., Stockholm University 1972; employed with Statens Pris- och Kartellnämnd (SPK) 1971-1978; employed with the Ministry of Industry, Employment and Communi-cations since 1978.Other directorships: Board member of AB Göta kanalbo-lag, IRECO Holding AB, the Swedish Ships’ Mortgage Bank, SP Swedish National Testing and Research Institute, and Zenit Shipping AB.

Stina Blombäck (1951)

President of Billerud Karlsborg ABElected to the Board in 2002.MSc Chem. Eng., Royal Institute of Technology 1974.Various positions in the Swedish forestry industry 1974-1999: ASSI Karlsborg, Billerud Gruvön, ASSI Kraftliner, ÅF-IPK and AssiDomän. Director of Research AssiDomän 1999-2001 and President Billerud Karlsborg since 2001.Other directorships: Member of the Business Executives’ Council of the Royal Swedish Academy of EngineeringSciences; STFI-Packforsk AB and Swedish Paper and Cel-lulose Engineers Association – SPCI.

Per-Ola Eriksson (1946)

Governor, County of NorrbottenBoard Member 1991-1999 and since 2004.Member of Parliament 1982-1998; Chairman and Vice Chairman of the Standing Committee on Finance 1991-1998; Chairman, Landshypotek AB 1994-2005; Director General, NUTEK 1999-2003, Chairman, Teracom AB 2001-2003, and Governor of Norrbotten County since 2004. Other directorships: Chairman, Längmanska företagar-fonden, Norrbottens läns Hushållningssällskap, Läns-arbetsnämnden i Norrbotten and Skogsvårdsstyrelsen Norrbotten.

Karl Wikström Hans Fängvall Torsten Thorneus Tomas Kohkoinen

Björn Sprängare Christer Berggren Stina Blombäck Per-Ola Eriksson Lars-Åke Helgesson

Anna-Greta Sjöberg Ursula Tengelin Egil M Ullebø Tomas Nilsson Bertil Thornberg

106

B O A R D O F D I R E C T O R S A N D A U D I T O R S


Lars-Åke Helgesson (1941)

DirectorElected to the Board in 2000.Secondary Engineer; MBA, Handelshögskolan Göteborg 1971; President and CEO,Haldex 1981-1988; Division Mana-ger, Stora 1988-1992; President and CEO, Stora 1992-1998. Other directorships: Chairman of the Boards of Ballingslöv International AB, Generic Sweden AB, TransLink Holding AB, and Swedish Academy of Directors. Vice Chairman, British-Swedish Chamber of Commerce. Board member Axel Christiernsson AB, Crane AB, and the Royal Swedish Academy of Engineering Sciences.

Anna-Greta Sjöberg (1967)

COO Royal Bank of Scotland, Nordic Region and CFO and VP RSB Nordisk Renting AB.Elected to the Board in 2005.MBA, Handelshögskolan Stockholm 1989; Sandvikde Mexico 1989-1991; BPA 1991-1993; Bergaliden AB1993-1998 (VP 1997-1998), and RSB Nordisk Renting ABsince 1998.

Ursula Tengelin (1956)

Secretary-General of the Swedish Cancer SocietyElected to the Board in 1999.BA, Lund University 1983; Executive MBA Handelshögsko-lan Stockholm 2000; employed with Roussel Nordiska AB 1979-1995 (VP 1989-1995); VP Hoechst Marion Roussel AB, Nordic and Baltic region 1995-1999; VP Proffi ce Sverige AB 2000-2002 and Swedish Cancer Society since 2003.Other directorships: Samhall AB and Norrland Center AB.

Egil M. Ullebø (1941)

DirectorElected to the Board in 2001.MSc Norges tekniske høgskole; MSc Bus. Adm. Norges Handelshøgskole, and studies at Tempelton College,Oxford. Employed in executive positions with the Orkla Group since 1970, current assignments with Orkla Foods AS, Bor-regaard Industries Ltd.,Borregaard Skoger AS and Salve-sen & Thams Communicastions AS.Other directorships: Chairman, Østfold Energi AS and Rygge Sivile Lufthavn AS. Board member of Hustadmar-mor AS, Northern East West Freight Corridor AS and Inno-vasjon Norge Oslo/Akershus/Østfold.

EMPLOYEE REPRESENTATIVES

Tomas Nilsson (1965)

Ore developerElected to the Board in 2004.Secondary school and Runöskolan. Employed with LKAB since 1985.Other directorships: Chairman of the Swedish Metal-workers’ Union chap. 604, Malmberget.

Bertil Thornberg (1950)

Process operatorElected to the Board in 2003.Commercial secondary school. Employed with LKAB since 1970.Other directorships: Chairman, SAK-klubben; Secretary and Treasurer, Swedish Metalworkers’ Union chap. 612, Kiruna.

Karl Wikström (1951)

Head of operations for mining law mattersElected to the Board in 2003, Deputy director 1993-1999; Employee representative for PTK.Mining engineering qualifi cation. Employed with LKAB since 1969.Other directorships: Vice Chairman and Treasurer,Ledarklubben LKAB.

Hans Fängvall (1963)

Process servicemanDeputy director since 2003.Secondary school, natural sciences, and training in forestry management. Formerly employed with Modo and Domän-verket. LKAB since 1989; Other directorships: Chairman of the Swedish Metalworkers’ Union chap. 635, Svappavaara.

Torsten Thorneus (1946)

Ore harbor workerDeputy director since 1999.Trade school. Employed with LKAB since 1968.Other directorships: Chairman,Klubb Svartöstaden,Swedish Metalworkers’ Union chap. 179, Luleå.

Tomas Kohkoinen (1965)

Chief design engineerDeputy director since 1999. Employee representativefor PTK.Secondary engineer, el/tel and training in electricalengineering/design, maintenance. Employed withLKAB since 1986.

SECRETARY

Göran Ekdahl (1940)

Attorney in the law fi rm of Bird & Bird Advokatbyrå.Secretary of the Board since 1984.

AUDITORS

KPMG Bohlins AB

Roland Nilsson (1943)

Authorized public accountant Chief accountantAnnicka Brännström (1958)

Authorized public accountant

107

G R O U P M A N A G E M E N T


Group Management

Martin Ivert (1948)

President and Group CEO.Education: MSc, Royal Institute of Technology, 1972.Employment: SKF 1974-2001, divisional manager1995-2001; LKAB since 2002.Directorships: Chairman, SveMin and Underhållsföretagen.

Lars-Eric Aaro (1956)

Vice President, Technology & Business Development.Education: MSc, Luleå University of Technology, 1981.Employment: LKAB 1976-1986. Boliden 1988-1989 and 1992-1998; Secoroc 1989-1992; ASSI Domän 1998-2001; LKAB since 2001.Directorships: Board member, Luleå University ofTechnology and Mefos.

Leif Boström (1959)

Vice President, Finance.Education: MBA, Luleå University of Technology, 1990.Employment: NCC 1980-1992; LKAB since 1992.

Anders Furbeck (1957)

Vice President, Total Quality Management.Education: MBA, Göteborg University, School of Business, Economics and Law, 1985.Employment: LKAB since 1985.Directorships: Board member, WM-Data i Norr ABand Euromines.

Bengt Hjärpe (1947)

Vice President, Market Division.Education: MSc, Royal Institute of Technology, 1972.Employment: SKF 1974-1994; LKAB since 1994.

Martin Ivert Lars-Eric Aaro Leif Boström Anders Furbeck Bengt Hjärpe

Jan-Erik Jatko (1949)

Vice President, Special Businesses Division.Education: MBA, Stockholm University, 1976Employment: LKAB since 1976.Directorships: Board member, SveMin, Expandum ABand Norrskenet AB.

Ola Johnsson (1955)

Vice President, Mining Division.Education: MSc Mechanical Engineering, Luleå University of Technology, 1980.Employment: HTM 1980-1982; Luleå University ofTechnology 1982-1984; LKAB since 1984.Directorships: Board member, Progressum AB.

Per-Erik Lindvall (1956)

Vice President, Minerals Division.MSc, Luleå University of Technology, 1980.Employment: LKAB 1980-1989; Bergbygg AB 1989-1991; Boliden 1991-2000; LKAB since 2001.Directorships: Board member, SGU.

Mats Pettersson (1965)

Vice President, Human Resources.Education: MBA Umeå University, Umeå School ofBusiness, 1991.Employment: LKAB since 1991.

Jan-Erik Jatko Ola Johnsson Per-Erik Lindvall Mats Pettersson

108

G R O U P M A N A G E M E N T


ORGANIZATION

LKAB is organized according to a clear division of operations and business development. Operations are organized in four divisions. Development work and issues pertaining to quality, environment, human resources, fi nance and information within the entire group are managed by several units.

In order to achieve a greater focus on recruiting and human-resour-ces development to meet future needs, during 2005, the organiza-tion was changed to the extent that Administration was divided into the units Finance, Human Resources and Communication.

As of 2006, all development work has been organized in the Techno-logy & Business Development unit, enabling a clearer management structure for investment programs, ongoing process and product development, and long-term research and development efforts.

PRESIDENT AND GROUP CEOMartin Ivert

TECHNOLOGY & BUSINESS DEVELOPMENTLars-Eric Aaro

FINANCELeif Boström

TOTAL QUALITY MANAGEMENTAnders Furbeck

COMMUNICATIONMartin Ivert

HUMAN RESOURCESMats Pettersson

MARKET DIVISIONBengt Hjärpe

MINING DIVISIONOla Johnsson

MINERALS DIVISIONPer-Erik Lindvall


Jan-Erik Jatko

109

A D D R E S S E S


Addresses

LKAB

Group Offi ce, Box 952, SE-971 28 Luleå, Sweden.Phone +46 920 380 00. Fax +46 920 195 05

Martin Ivert, President and Group CEO

MARKET DIVISION

LKAB Norden

Sweden, Norway, Finland, Denmark, IcelandBox 952, SE-971 28 Luleå, Sweden.Phone +46 920 380 00. Fax +46 920-148 [email protected]

Stig Nordlund, Sales Manager

LKAB S.A.

Benelux, France, UK, Italy, Spain,Portugal, Turkey, Africa, AmericaChaussée de la Hulpe 150, BE-1170 Bryssel, Belgium.Phone +32 2 663 36 70. Fax +32 2 675 05 [email protected]

Staffan Stenström, President

LKAB SCHWEDENERZ GmbH

Germany, Austria, Central EuropeRüttenscheider Strasse 14, DE-45128 Essen, GermanyPhone +49 201 879 440. Fax +49 201 879 [email protected]

Göran Ottoson, President

LKAB FAR EAST Pte. Ltd

Far East, Southeast Asia, Middle East, Australia300 Beach Road #29-02, The Concourse, Singapore 199555Phone +65 6392 49 22. Fax +65 6392 49 [email protected]

Johan Heyden, President

MINING DIVISION

LKAB

SE-981 86 Kiruna, Sweden.

Phone +46 980 710 00. Fax +46 980 109 02.

LKAB

983 81 Malmberget, Sweden.Phone +46 970 760 00. Fax +46 970 236 00.

LKAB, Narvik malmhamn

Postboks 314, NO-8504 Narvik, Norway.Phone +47 769 238 00. Fax +47 769 449 25.Svein Sivertsen, General Manager

LKAB, Luleå malmhamn

Box 821, SE-971 25 Luleå, Sweden.Phone +46 920 380 50. Fax +46 920 380 60.Lars Andersson, General Manager

MINERALS DIVISION

MINELCO AB

Box 952, SE-971 28 Luleå, Sweden.Phone +46 920 381 60. Fax +46 920 190 [email protected] Lindvall, President

Minelco Oy

P.O. Box 57Phone +358 17 266 0160. Fax +358 17 266 0161FI-718 01 Siilinjärvi, Finland

Kari Laukkanen, President

Minelco Inc.

2020 Scripps Center, 312 Walnut StreetCincinnati, OH 45202, USAPhone +1 513 322 5530. Fax +1 513 322 [email protected] Drugge, President

Minelco Specialities Ltd.

Raynesway, Derby, DE21 7BE, EnglandPhone +44 1332 673131. Fax +44 1332 [email protected] Larbey, President

Minelco Minerals Ltd

Flixborough Industrial Estate, Flixborough, North Lincolnshire,DN15 8SG, EnglandPhone +44 1724 277411. Fax +44 1724 [email protected] Boulton, President

Minelco GmbH

P.O. Box 10 25 54, DE-450 25 Essen, GermanyPhone +49 201 45060. Fax +49 201 4506 [email protected] Yates, President

Minelco B.V.

Vlasweg 19, Harbour M164, P.O. Box 16,NL-4780 AA Moerdijk, The NetherlandsPhone +31 168 388 500. Fax +31 168 388 [email protected] Peter Duifhuis, President

Minelco Asia Pacifi c Ltd.

4502 China Resources Building, 26 Harbour Road, Wanchai, Hong KongPhone +852 2827 4138. Fax +852 2827 [email protected] Engel, President

Minelco (Tianjin) Minerals Co., Ltd.

Yicun Industrial Park, Jungliangcheng, Dongli District, Tianjin,P.R. China 300301

Phone +86 22 8845 1706. Fax +86 22 8845 1708

[email protected]

Bin Zhou, President

Minelco Thailand

Representative Offi ce Bangkok, 36th Floor, CRC Tower, All Seasons Place, 87/2 Wireless Road, Phatumwan, Bangkok 10330, ThailandPhone +66 625 3121. Fax +66 625 3171Nick Mellor, President

Seqi Olivine A/S

Boks 1329.Phone +299 1991 10DK-3900 Nuuk, GreenlandRobert Näslund, President


Wassara AB

Group Offi ce, Götgatan 62, SE-118 26 Stockholm, Sweden.Phone +46 8 84 95 50. Fax +46 8 84 02 [email protected] Gustafsson, President

AB Kiruna Grus & Stenförädling

KGS Mekaniska, Box 817, SE-981 28 Kiruna, Sweden.Phone +46 980 681 90. Fax +46 980 832 79Kjell Klippmark, President

Fastighets AB Malmfälten

SE-981 86 Kiruna, Sweden.Phone +46 980 710 00, Fax +46 980 728 95Lennart Thelin, President

110



Annual General Meeting: 25 April 2006

LKAB will publish the following fi nancial reports for 2006:> 25 April 2006, Interim report for the period 1 January – 31 March.> 21 August 2006, Interim report for the period 1 January – 30 June.> 25 October 2006, Interim report for the period 1 January – 30 September.

Financial information is available on the Group’s website: www.lkab.com

Printed versions are available on request from:LKAB Information, Box 952, SE-971 28 Luleå, Sweden.Phone: +46 (0)920-380 00, fax: +46 (0)920-195 05, e-mail: [email protected]

Reporting dates 2006

LKAB ANNUAL REPORT 2005 Produced by LKAB in cooperation with JOB media & reklambyrå AB, Luleå. Photo: Jennie Segerberg and LKAB. Translated by: Mark Wilcox. Printed by: Luleå Alltryck AB, Luleå 2006.


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