Annual Report on the Activity

Alcomet AD

ANNUAL REPORT ON THE ACTIVITY

OF “АLCOMET” АD for 2011

SHUMEN

March 5, 2012

COMPANY’S PROFILE AND DEVELOPMENT PROSPECTIVES

1. General information

Alcomet AD (the Company) is a joint-stock company, registered under company file №41 from 1999 of the Shumen District court.

Alcomet AD is a public company according to the Public Offering of Securities Act and is registered in Bulgaria in compliance with the Commercial Act, the seat and head office of the Company is in the city of Shumen, Second industrial zone.

The main activity of the Company is production of aluminum extruded and rolled products, trade with these products on domestic and international markets and rendering of services.

The share capital amounts to 17 952 959 BGN, distributed in 17 952 959 voting shares with a nominal value of 1 BGN each.

The shareholders’ structure of the Company includes 81 entities that possess 98.43% of the share capital and 2 612 individuals with 1.57% of the share capital. The shareholders owning more than 1% of the Company’s shares are presented in the table below:

"Аlumetal" АD / 73.25%
"FAF Metal Sanayii VE Ticaret" AS / 16.86%
"Аllianz Bulgaria" Pension Fund / 2.44%

Essential contracts leading to actions changing the Company’s control at public offering as well as agreements between the Company, the Supervisory Board and the Managing Board for compensation upon leaving or dismissal concerning auction offering are not concluded.

During the reported period there are no transactions with related parties, as well as there are no unusual events occurred, which could substantially influence the Company’s financial position or results.

The present Management Report of “ALCOMET” AD is prepared according to the requirements of Art. 100n, paragraph 4, item 2 of the Public Offering of Securities Act.

Alcomet AD has a two-tier system of management – Supervisory board and Managing board. The Supervisory board consists of 7 members and the Managing board is of 6 members.

Members of the Supervisory board, the Managing board, and the senior management do not own Company’s shares.

The Company is represented and managed by two Executive Directors - Huseyin Yorucu and Huseyin Umut Ince.

The reportcontains analysisand commentary onthe financial statements, based on the the Company’s management point of view, intended for use by shareholders andinvestors to help them toform theirassessments of the Company’s position and prospects.

The forecasts and assessments made, may differ from the real future financial results.

2. Operating results

In 2011 there are no unusual or sporadic events, transactions or substantial economic changes, which significantly affect the Company’s sales.

The main production raw material is aluminum in the shape of primary aluminum, secondary aluminum, scrap, extrusions and coils. During 2011 for production use are supplied the following raw materials:

Raw material (tons)
Type of raw material / 2011 / 2010
primary aluminum / 43 783 / 44 047
secondary aluminum / 4 895 / 4 893
scrap / 976 / 898
coils / 3 034 / 19
extrusions / 5 095 / 2 874
Total / 57 783 / 52 731

The increased quantity of the raw material supplied in 2011 is due to the increase in the quantity of the coils and extrusions purchased.

Except the raw material, 230 tons of secondary aluminum and 215 tons of scrap were toll processed during the reporting period.

In 2011 the produced by the Casting workshop stock amounts to 64,316 tons.

Stock produced / 2011
(tons) / 2010
(tons)
1.Total / 64 316 / 63 668
2. Coils / 46 164 / 45 893
3. Extrusions / 18 152 / 17 775

In 2011 the produced by the Rolling and Extrusion workshop finished goods are 52 754 tons, which is with 7.92 % more than the produced finished goods in 2010.

Finished goods / 2011
(tons) / 2010
(tons)
1.Total / 52 754 / 48 883
2. Rolling workshop / 35 729 / 33 894
3. Extrusion workshop / 17 025 / 14 989

In comparison with 2010, the produced by the Rolling workshop finished goods increase with 5.41%, and the produced by the Extrusion workshop finished goods increase with 13.58%.

Althoughduring the reportingperiod new facilitieswere notput in operation, the increase in the production is due to the improved management organizationinall departments of the Company, as well as to the improvedinteraction between them.

As a result of investments realizedfrom2001to2011, optimization of theproduction process,implementation ofrational managementof human resources,effectivemarketing,improvedcash flow managementand optimizationof supply, the Company continuouslyincreases the quantity of the finished goods produced andrealized.

In 2011 the sold finished goods are 52 450 tons and analysis by type, markets and monthly sales are presented below:

Sales
tons / 2011 / 2010 / Growth
%
1.Total / 52 450 / 48 180 / + 8.86
2.Domestic market
- rolled products
- extruded products / 4 475
3 639
836 / 3 450
2 683
767 / +29.71
+35.71
+ 8.74
3.Export
- rolled products
- extruded products / 47 975
31 953
16 022 / 44 730
30 775
13955 / + 7.25
+ 3.83
+14.81

The ratio between thesaleson both marketsis91.47%to8.53%, and the export is realized towards 23 countries.

Alcomet AD is a company, whosesales in2011are characterized bystabilityand growth,due to the proper Company’s investment and tradepolicy.

The following comparative data for the sales in 2011 and 2010 present the Company’s favorable development:

- Growth of sales of production by 8.86%;

- 100 % use of the production capacity;

- Increase in the turnover by 18.6%;

- Increase of the average premium by 4.3%;

- Growth of sales of rolled products by 6.38%;

- Growth of sales of extruded products by 14.50%;

- Increase in the domestic market sales by 29.71%;

- Export sales increase by 7.25%.

Regarding export, the greatest increase is in the sales of sheets – 23%, strips – 18%, standard profiles – 31%, anodized profiles – 76%. On the domestic market incredible is the increase in the quantity of the sheets sold – 51%, household foil – 121%, profiles – 32%, special profiles – 18%, anodized profiles – 107%.

In 2011 main product for the Company are the aluminum profiles with 32% share in the total sales, followed by household foil - 26%, strips – 21%, sheets – 12%, technical foil – 6%, lubricated foil – 2%.

The export of the Company is focused mainly towards clients from the European market, as Germany remains at the highest level – 27%, followed by Poland, - 15%, Italy – 12%, Denmark and France – each holding 7%, Austria – 5% and others.

In 2011 the Company sustained its position of main supplier of household foil on the European market with market share of 18%.

The presentinvestment in a newrolling milland in a new line forcontinuous casting is expected to increase thecapacity of the Rollingworkshop by30%.In this respect, the strategy of the Company is to develop newrolledproducts in order to expand theopportunities for participation onnew markets andmarket niches.Alloys5754, 5005, 3005 are in process of implementationfor production ofsheets and strips, as well as new types ofaluminum foil,finstok and a line for barspacersfor specificuse.

During the present yearefforts were made on a projectfor utilization ofanodizedprofilesfor finalproducts, such aswindow sills,moldings andothers, mainly for the Germanmarket.The goal is department Anodizing tobe suppliedwith orders.

1. Analysis of the Statement of Financial Position

The analysis of the structure of the Statement of financial position for the reporting period shows a trend of 41% increase in the inventories amount, due to increase of the raw materials and the work in progress.

Trade and other receivables decrease by 12%. The receivables from clients and the advances granted sustain at their previous levels, and the amount of the taxes refundable is decreased by 35%.

Non-current assets remain on the levels from 2010. In 2011 net investments in property, plant and equipment are at the amount of BGN 9,381 thousand.

Compared to 2010, the non-current liabilities increase by 13.72%. The ZUNK liabilities decrease by 23.38%, and long-term loans received increase by 26.06%. The received new resources are used for the acquisition of non-current assets. Current assets decrease by 5.16% in comparison with 2010. Short-term bank loans decrease by 7.45%, and payables to suppliers increase by 43.14%.

In 2010 a stable trend of improvement in the amounts of the net current assets was established and in 2011 these amounts turned to positive figures.

1. Analysis of the Income Statement

For 2011 the net revenue from sales amounts to BGN 273 753 thousand, out of which the total net revenue from sales of finished goods is BGN 267 508 thousand.

The revenue from sales of finished goods analyzed by type of products is as follows:

Revenue from sales BGN’000 / 2011 / 2010 / Growth %
Revenue by type of products
- rolled products / 185 111 / 158 840 / 16.54%
- extruded products / 82 397 / 66 724 / 23.49%
Total revenue from sales / 267 508 / 225 564 / 18.60
Export sales / 246 126 / 210 439 / 16.96
Domestic market sales / 21 382 / 15 125 / 41.37

The growthof revenue from sales of finished goods is 18.60%.

The fluctuation of the average monthly sales for the years from 2004 till 2011 is as follows:

This comes as a result of the following:

-growth of sales of production by 9.15%;

-comparatively stable price level of the raw material (aluminum) and demand increase on the markets, basically during the first half of 2011, which led to increase of the finished goods price rates (for 2011 the average sales price is 8.76% higher, compared to 2010);

-increase of revenue from sales of extruded products and rolling products by 23.49% and 16.54%, respectively;

-export sales increase by 17% and the domestic market sales increase by 41%;

-investments made by the Company and improved organization of the production process;

-improved quality of the production of Alcomet AD, according to the European standards and the specific clients’ requirements

-consistent trade and price strategy of the Company during the crisis period, intending to retain the main Company’s clients, operating in the manufacturing industry, which led to positive reputation of Alcomet AD as a trustworthy supplier.

In 2011 the total amount of the operating expenses increased by 20.13%, compared to 2010. Materials expenses increase by 19.9% and represent 89.72% of the total operating expenses (in 2010 – also 89.71%). The analysis displays that the main factor is the cost of metal, representing 90% of the total materials expenses.

In 2011 the investments made are at the amount of BGN 9,4 million and equipment at the amount of BGN 1,2 million was brought into operation, as follows:

- a separator KAMPF SEPEMAT;

- an ERP system “Microsoft Dynamic NAV”;

- systems for cooling of 1300 and 1800 ton presses;

- a new digital telephone exchange system;

- a new waste treatment plant;

- a storehouse for gas canisters;

- infrastructure projects implemented;

- inner - factory communications and others.

The investments made in fixed assets under construction amount to BGN 15,9 million.

OnMay 4, 2011a certificatefor investmentclass A wasissued toAlcometAD for the project“Bringing into operationof castinglineNo VIand a “MINO” thin strip rolling mill”.

As a result of the increased efficiency of electricity and gas use and of the implementing of new energy-saving production technologies, the nature gas and electricity consumption in comparison with 2010 was reduced, and for 2011 the nature gas consumption is 166 cubic meters per ton and the electricity consumption is 1,183 KWh per ton.

Personnel expenses increase by 19.4% due to increase of the salaries since January 1, 2011 and interest expenses increase by 9%.

For the reporting period the Company’s profit after tax amounts to BGN 7 907 thousand (2010: BGN. 7 612 thousand). Profitability of sales before interest is 4.3% (2010 4.8%).

The profit after tax of the Company for the last five years is as follows:

5. Earnings per share

Earnings per share are as follows:

2011 / 2010
Average number of shares / 17 952 959 / 17952 959
Profit for the period in BGN thousand / 7 907 / 7 612
Earnings per share in BGN / 0.44 / 0.42

In2011the quotationof the sharesof the Company was verydynamic, starting at
BGN5.80per share, passing through a peak ofBGN7.28per share andat the end of the yearthe rate wasBGN5.82per share.During thisperiodon the Bulgarian Stock Exchange the Company's shareswere announcedfor “sharesof the week” forthree times.

6. Related parties

Related parties of the Company are:

1. Alumetal AD – Sofia – Parent company;
2. FAF Metal Sanayj Ve Ticaret AS –Istanbul, Turkey – a company with significant influence over the Company through direct and indirect interest in the Company’s capital;
3. Euromet EOOD - Shoumen – a subsidiary;
4. FFT LIMITED – Great Britain;
5. Ferroal Limited –Nassau, Bahamas – controlling the Parent company shareholder.

The adjustments regarding the consolidation of the subsidiary Euromet AD, are limited to elimination of participation in the share capital of the supsidiary against the investment in the subsidiary, amounting to BGN 5 thousand, which is completely insignificant and does not lead to other changes in the financial position of Alcomet AD. Euromet EOOD has no commercial activity, therefore the financial results from the operating activity and the cash flows of the Group Alcomet remain unchanged, as presented in the separate financial statements of Alcomet AD.

The financial statements of Alcomet AD present a loan granted to Euromet AD, which was further provided to a third party under the same terms, consequently when eliminating the intracompany account balances with the subsidiary there will be no change in the financial statements of Alcomet AD.

As a result of this, the preparation, and respectively, the publication of consolidated financial statements is meaningless and will not provide any additional information to the final user. Also, all owners of the Group are informed and agree that the Parent-company does not prepare consolidated financial statements.

Due to the above mentioned circumstances, annual and quarterly consolidated financial statements of the Group Alcomet AD are not prepared and published.

The main transactions with related parties during 2011 and 2010 are as follows

December 31, 2011 / December 31, 2010
Parent company
Repayments of loans received / 522 / 661
Accrued interest on loans received / 239 / 264
Interest paid on loans received / 160 / 158
Entity with significant influence over
the Company
Services granted / 14 / 14
Subsidiaries
Interest on loans granted to Euromet EOOD / 253 / 253

There are no unusual terms or conditions associated with these transactions or variances from the average market prices contracted with third parties under the same conditions.

The outstanding account receivables from related parties include:

December 31,2011 / December 31,2010
Subsidiaries
Evromet EOOD – trade receivable / 5 / 5
Evromet EOOD – loans granted / 5,092 / 4,839
Total receivables from related parties / 5,097 / 4,844

The outstanding amounts payable to related parties are as follows:

December 31,2011 / December 31,2010
Controlling shareholder of the Parent company
Ferroal Limited – trade loan received / 1,300 / 1,300
Parent company
Alumetal AD– trade loans received / 7,657 / 8,101
Company with significant influence over
the Company
FAF Metal / 18 / 24
Total payables to related parties / 8,975 / 9,425

For 2011 and 2010 the remunerations of the directors and other members of the management comprise only of short-term benefits, amounting to BGN 1,944 thousand and BGN 1,121 thousand, respectively. As of December 31, 2011 and 2010 the outstanding liabilities to the key management personnel are amounting to BGN 62 thousand and BGN 89 thousand, respectively.

7. Risk analysis

The financial instruments used expose the Company to market, credit and liquidity risk.

Market risk is the risk that the fair value or the future cash flows of financial instruments may vary due to the changes in market prices and the associated market risk could be foreign currency risk, interest risk or price risk.

The Company enters into international transactions, denominated in foreign currencies. The risk related to eventual foreign currency fluctuations, concerning the USD exchange rate, is insignificant because the Company’s transactions related to purchases of raw materials and sales of finished goods are denominated mainly in EUR. The Company does not have any loans received or granted, denominated in USD, except the ZUNK loan, which is hedged. Transactions in EUR do not expose the Company to foreign currency risk as since
January 1, 1999 the Bulgarian lev has been pegged to the Euro at a fixed exchange rate.

The sensitivity analysis of foreign currency risk is calculated at a change of 3 % of the USD/BGN exchange rate. The Management believes that this change is reasonably possible, based on statistical data for the dynamics in variations for the previous year. If as at December31, 2011 the USD/BGN exchange rate had decreased with 3 %, and, with all other variables held constant, the profit after taxation would have decreased by BGN 63 thousand (2010: BGN 93 thousand), mainly as a result of exchange rate differences arising from revaluation of trade receivables and payables, denominated in USD. The profit after taxation for 2011 is more sensitive to changes in the exchange rate of the USD as compared to the profit for 2010, mainly due to decrease in trade payables, denominated in USD. The liabilities under the ZUNK loan are excluded from the above analysis, as they are hedged and the changes in the foreign currency rates do not affect the financial result for the respective periods.

The sales of the Company are concentrated in countries from the European Union, including Bulgaria, as almost 91% of all finished goods sales are realized in this regioun. Transactions with customers from these countries are negotiated in EUR, which basically eliminates the foreign currency risk. In addition, owing to the increasing importance of the Euro as a global currency, the Company has the opportunity to realize some of its sales in EUR outside the European Union as well, that further mitigates the foreign currency risk.

The Company is exposed to interest rate risk, because the main part of the loans received are contracted under the clauses of floating interest rate, negotiated as a base interest rate (base rate, SOFIBOR, LIBOR, EURIBOR) with a certain mark-up, which varies between 2,3 % and 4 %. In 2011 and 2010 the loans with floating interest rate are denominated in BGN and EUR.

The Company continuously monitors and analyses its main interest exposures and develops certain scenarios in regard to their optimization, including re-financing, renewal of existing loans, alternative financing (sales contracts and leaseback of assets) and estimates the impact of the interest rate fluctuations in a certain range over the financial result.

Price risk isassociated withpossible changes inmarket prices ofequity instrumentsavailable for saleandfinished goods, produced by the Company.

Changes in selling prices of production are mainly determined from the price variations of aluminum on the world stock markets. The Company uses forward contracts to hedge risks, associated with changes in market prices of the primary aluminum on the London Metal Exchange. Such contracts are classified as cash flow hedges as they hedge the risk of cash flows variability that is attributable to the particular price risk associated with forecasted sale and purchase transactions.