TIDMKZG
RNS Number : 0586L
KazakhGold Group Ltd
29 April 2010
DIRECTORS' RESPONSIBILITY STATEMENT
Mr Evgueni I. Ivanov, Chairman and CEO of KazakhGold Group Limited confirms on
behalf of the Board of Directors that:
(a) the consolidated financial statements for the years 2008-2009, prepared in
accordance with International Financial Reporting Standards as issued by the
International Accounting Standards Board, give a true and fair view of the
assets, liabilities, financial position and profit or loss of KazakhGold Group
Limited and its consolidated subsidiaries; and
(b) the management report for the years 2008-2009 includes a fair review of the
development and performance of the business and the position of KazakhGold Group
Limited, together with a description of the principal risks and uncertainties
that it faces.
Neither KazakhGold Group Limited nor the directors accept any liability to any
person in relation to the management report except to the extent that such
liability could arise under English law. Accordingly, any liability to a person
who has demonstrated reliance on any untrue or misleading statement or omission
shall be determined in accordance with Section 90A of the Financial Services and
Markets Act 2000.
EVGUENI I. IVANOV
Chairman and CEO
29 April 2010
Management report
Management's discussion and analysis of financial condition and results of
operations for 2008-2009
This Management report should be read in conjunction with KazakhGold's
consolidated financial statements and the related notes thereto.
The KazakhGold Group is a leading gold miner in the Republic of Kazakhstan with
a broad gold reserves and resources base KazakhGold Group's key operating mines
are located in Northern Kazakhstan, and it also has development properties in
Eastern Kazakhstan and Romania, as well as potential development opportunities
in Kyrgyzstan. Global Depositary Receipts representing the shares of KazakhGold
Group Limited are traded on the main market of the London Stock Exchange under
the symbol of KZG.
In July 2009 a 50.15% stake in KazakhGold was acquired by Jenington
International, an indirect wholly owned subsidiary of Polyus Gold, the leading
Russian gold producer and one of the largest gold mining companies globally.
This report represents the management's discussion of KazakhGold's operating and
financial results, including:
· key performance indicators;
· financial position as at 31 December 2009 and 31 December 2008;
· results of operations for the years ended 31 December 2009 and 31
December 2008;
· the Company's liquidity, solvency and capital resources;
· significant events affecting the Company's operating performance for
these periods;
· description of principal risks;
· description of the key features of internal control and risk management
system in relation to the financial reporting process.
Table of contents
1.KazakhGold's acquisition by Polyus Gold and recent developments
2. KazakhGold Group's operating results
2.1 External market factors affecting the financial results of the KazakhGold
Group
2.2. Discussion of results of operations for the years ended 31 December 2009
and 2008
2.3. Gold sales
2.4. Cost of gold sales
2.5. Selling, general and administrative expenses
2.6. Other expenses, net
2.7. Finance costs, income from investments and foreign exchange gain/(loss)
2.8. Income tax
2.9. Other sales and cost of other sales
3.Review of financial sustainability and solvency
3.1. Analysis of Balance sheet items
3.2. Cash flow analysis
4.Description of principal risks
5.Main features of the internal control and risk management systems in relation
to the financial reporting process
6.Corporate governance report
1. KazakhGold's acquisition by Polyus Gold and recent developments
In June 2009, the Board of Directors of KazakhGold recommended to shareholders
and holders of KazakhGold GDR's to accept a Partial Offer made by Jenington, an
indirect wholly owned subsidiary of Polyus Gold , to acquire a 50.15% stake in
KazakhGold. On 30 July 2009, Jenington announced that the Partial Offer had
become unconditional as to acceptances and on 14 August 2009 announced that the
Partial Offer had become unconditional in all respects.
Prior to completion of the Partial Offer, a lack of working capital and
protracted underinvestment led to serious problems at all production units.
Regular maintenance works had not been performed on either mining or processing
equipment, resulting in an increasing number of emergency shutdowns and a
significant amount of downtime. Defects in boiler operations led to breakdowns
of the ventilation systems in the mines, resulting in disruption of blasting
works in the winter period.
The mills used to process ore were found to be in an extremely deteriorated
condition: the lack of proper armature had led to the deformation of drums and
the plants had not been equipped with adequate controlling and measuring
instrumentation resulting in inadequate monitoring, controlling, and management
of the production process. Due to the high level of deterioration of the mills
and the pumping equipment, ore processing operations were subject to frequent
interruptions. In addition, a failure to perform adequate maintenance had also
led to the freezing of sludge lines at the Bestobe plant.
In June 2009, there was a fire at an important administrative site in
Stepnogorsk. During the fire and subsequent cleanup, substantially all
historical financial information in respect of the activities of KazakhGold's
subsidiaries were destroyed. Moreover, the accounting information and databases
for the periods prior to 1 January 2009 were subsequently lost as a result of
technical breakdowns with the subsidiaries' servers. The series of fires and
other disruptions at the KazakhGold Group has led to the destruction of
significant historical data, including the loss of historical financial
information. Project documentation which remains available is mostly outdated or
is incomplete. The new management of KazakhGold has expended substantial time
and effort to gather information to understand the historical transactions which
contributed to the KazakhGold Group's current difficult financial situation.
The KazakhGold Group's liquidity crisis in the first half of 2009 also resulted
in delays to salary payments, and there was a substantial outflow of qualified
personnel.
Following the completion of the Partial Offer, a majority of the incumbent
Board of Directors were replaced by representatives of Polyus Gold, and a new
executive management team was installed. The new management immediately
undertook efforts to arrest the deterioration in production levels and stabilise
the KazakhGold Group's financial situation. The new management identified that
KazakhGold Group required an immediate injection of working capital and the
performance of urgent maintenance and repairs works at its mines, improvements
to its operations, strengthening of its internal systems of control and
reconstruction of a significant portion of its production facilities.
The new management has initiated an extensive series of measures aimed at
streamlining the KazakhGold Group's structure, improving control systems,
upgrading production assets and strengthening its reserves base.A new long-term
comprehensive strategy is being developed. Based on its initial assessment the
new management estimates that the KazakhGold Group may require up to USD 600
million of investment in order to raise gold output, improve efficiency and
increase reserves.
Since their appointment, following completion of the Partial Offer, the new
management has taken a number of actions aimed at intensifying production and
exploration activities, accelerating the implementation of measures required in
order to undertake an audit of the KazakhGold Group's reserves in accordance
with the JORC Code and improving controls over its operating and financial
activities.
In the third quarter of 2009, modernization began at the three main production
units of KazakhGold, located in Stepnogorsk region of Akmolinsky area of
Kazakhstan: Aksu, Bestobe and Zholymbet. In the final five months of the 2009
total investments into these assets amounted to USD7 million.
During the final five months of 2009, an upgrading programme of underground
mine equipment was initiated at all mines, and repair works were performed at
all mills. At Zholymbet, the construction of hypochlorite preparation and
tailings neutralization workshops was completed. In addition, KazakhGold Group
performed capital and repair works at its production workshops, administration
building and mines.
Other projects in the final five months of 2009 included: the resumption of
production at the heap leaching complexes at Aksu and Bestobe; the completion of
capital repair works at the Ventilyatsionnaya shaft at Bestobe; the
reconstruction of the sludge line at Bestobe; the installation of a water
cleaning system at Bestobe to ensure the stable supply of drinking water; and
the performance of capital repair works at the KazakhGold Group's administration
complex.
At Aksu, the modernisation of shafts Nos. 39-40 was completed and operations
resumed, and capital repair works at the administration complex at shaft No. 40
were performed. In addition, capital and maintenance repair works at a number
of production and administration facilities were carried out.
Investment plans for 2010
The investment budget for 2010 is USD 66 million, comprising USD 35 million for
an upgrade of production facilities and USD 31 million for exploration. As a
result of the ongoing production upgrades, improved gold production results are
expected in 2010 and management is currently targeting an annual gold production
of approximately 130 thousand ounces.
Following the completion of the planned JORC Code audit referred to above, the
KazakhGold Group's proved and probable reserves in accordance with JORC Code are
expected to reach 8 million ounces in 2010, and a further increase, to 10
million ounces, is anticipated in 2011. There can be no assurance that this
audit will be completed, or that the expected amount of proved and probable
reserves will be realised.
Restatement of the consolidated financial statements
Since their appointment following completion of the Partial Offer, and as a
result of fires and other disruptions which destroyed significant historical
information, the new management has been focusing on recovering and restoring
KazakhGold's primary accounting and production documentation, in order to
understand and confirm the historical accounting information of the KazakhGold
Group. In the course of preparing the consolidated financial statements for
2009, certain errors have been identified in respect of the previously published
consolidated financial statements of KazakhGold for the years ended 31 December
2008 and 2007. Moreover, the new management team has reconsidered certain
accounting policies and presentations and has addressed these items in the
preparation of the financial statements for the year ended 31 December 2009.
The information included in this Management report is based on the consolidated
financial statements for the years 2008 and 2009, prepared by the new management
of KazakhGold. Information in this Management report includes the effects of
the restatements of the previously published consolidated financial statements
for 2008. Details of these changes are set below:
Common control transactions
In 2009, management of the Group changed its accounting policy for accounting
for common
control transactions. Previously, the accounting for the
acquisition of the entire share capital
of Romanshorn LC AG by KazakhGold
Group Limited from the common controlling party
(this acquisition occurred
during the year ended 31 December 2005) was accounted as capital contribution
with the acquired assets and liabilities initially recognised at fair value
and
the corresponding increase to equity within Capital contribution.
Management concluded that a change in accounting policy for common control
transactions will result in the financial statements providing more reliable and
relevant information about the effects of such transaction and the Group's
financial position and results of its financial performance and will be more
comparable to the Group's peers.
Revaluation model for property, plant and equipment
With effect from 1 January 2009 the Group has changed its accounting from the
historical cost method to a revaluation model for subsequent measurement of its
property, plant and equipment.
In June 2009, before the acquisition of the Group by Polyus Gold and after the
issuance of the consolidated financial statements of the Group prepared in
accordance with IFRS for the year ended 31 December 2008, there was a fire at
the Group's premises which led to the loss of a significant amount of historical
information including purchase and construction costs of property, plant and
equipment. As a result of these circumstances, management was unable to restore
information on opening balances for property, plant and equipment and the
revaluation model for the measurement of property, plant and equipment became a
tool to provide reliable and relevant information about the Group's assets.
As of 1 January 2009, the Group has revalued all classes of property, plant and
equipment based on a valuation performed by an independent professionally
qualified valuer. Most of the assets subject to revaluation represent
specialised items of property, plant and equipment that are not widely traded on
secondary markets. The Group used the depreciated replacement cost approach as
the main approach to valuation of property, plant and equipment. The Group
primarily used a market based approach for valuation of land.
Accounting for the acquisition of Norox Mining Company Limited
In 2009, management identified an error in the original accounting for the
acquisition of 100% of the share capital of Norox Mining Company Limited in
2007. Norox Mining Company Limited is
the owner of 66.7% of the share
capital of Talas Gold Mining Company. At the time of the original accounting,
the acquisition of Norox Mining Company Limited was treated as an asset
acquisition. The fair values of identifiable net assets were determined and the
difference between consideration transferred and fair value of identifiable net
assets acquired was recognised as "Negotiation Rights" within intangible assets.
Management determined in 2009 that the Negotiation Rights did not meet the
recognition criteria for intangible assets at the date of acquisition of Norox
Mining Company Limited as these rights did not arise from contractual or other
legal rights.
Capitalisation of certain construction, repair and maintenance works during the
year ended 31 December 2008
In 2009, management identified errors in the treatment of certain costs that
were recorded as asset additions during 2008. These costs did not meet the
criteria for asset recognition and should have been expensed when incurred,
together with finance costs capitalised on those assets, instead of reflected as
asset additions. In 2008, comparative financial information has been restated to
write off these additions and to reflect them as costs during the period.
In addition, management has made an assessment of taxes and penalties to which
the Group is exposed due to inappropriate capitalisation of the property, plant
and equipment. As a result, additional value added tax has been recorded in the
2008 restated statement of financial position.See "KazakhGold Group's operating
results - Discussion of results of operations for the years ended 31 December
2009 and 2008 - Other expenses, net". The correction of the errors reduced
retained earnings by USD 193 million at 31 December 2008.
Advances paid to contractors and revenue from sales of gold
In 2008, the Group recorded revenue from gold sales in the amount of USD 36,739
thousand to a customer, as part of a series of offsetting arrangements with
certain suppliers to the Group. Accounts receivable from these gold sales were
not repaid by 31 December 2008, but were reportedly settled by the customer with
the Group's suppliers. As a result of such reported settlement, advances paid to
suppliers of the same amount were recorded in the Group's consolidated financial
statements for the year ended 31 December 2008.
In 2009, management performed an investigation of the relevant transactions and
concluded that there was no substance to the transactions. The financial effect
of this error has been corrected and the consolidated financial statements have
been restated to reflect the reversal of previously recorded revenues and trade
and other receivables..
Other errors
The new management also identified other errors which have been adjusted at 31
December 2008. Individually they are not as significant as those discussed
above, and are described in detail in the consolidated financial statements.
The analysis in this Management report refers to results after adjusting for the
aforementioned errors, reclassifications, and changes in accounting policy. The
new management of KazakhGold is continuing to review and analyse the information
it has received regarding these errors and the circumstances giving rise to
these errors. Management has implemented a series of measures to improve its
internal controls, including instituting stricter controls and monitoring
processes.
Senior Notes
On 1 October 2009, KazakhGold notified the Trustee for its USD200,000,000 Senior
Notes due 2013 (the "Senior Notes") that it had decided not to publish interim
financial statements for the first six months of 2009, covering the period prior
to the completion of the Partial Offer, as required by the terms of the Senior
Notes. On 15 February 2010 KazakhGold further notified the Trustee that the
entry into the USD 50 million loan agreement with Jenington on 4 February 2010
did not comply with certain terms and conditions of the Senior Notes. Although
KazakhGold has not received any enforcement notice from the Trustee, KazakhGold
cannot be certain that Noteholders holding at least 25% of the outstanding
Senior Notes will not take enforcement action in respect of this event of
default, upon which the Senior Notes, together with accrued interest, will
become immediately due and payable. KazakhGold is considering all its options
with respect to the Senior Notes. As a result of the events of default, the
Senior Notes have been re-classified as current liabilities in KazakhGold's
financial statements. See "Review of financial sustainability and solvency-
Capital and liabilities".
The Placing
In connection with the Partial Offer, Jenington agreed with KazakhGold to
underwrite an announced USD 100 million placing of new ordinary shares of
KazakhGold pursuant to the Backstop Underwriting Agreement. The Backstop
Underwriting Agreement only ceases to be binding on Jenington if (i) KazakhGold
fails to obtain all necessary consents and regulatory approvals in respect of
the Placing, (ii) KazakhGold breaches its warranties or obligations under the
Backstop Underwriting Agreement or (iii) in the event of force majeure. The
Backstop Underwriting Agreement provided that in the event that there was
insufficient investor demand for the Placing or the Placing was not completed by
14 December 2009, then Jenington would underwrite the entire USD 100 million
Placing at the placing price equal to USD 1.50 per GDR.
On 16 February 2010 KazakhGold announced that it had agreed with Jenington to
extend Jenington's obligation to underwrite the Placing until 1 May 2010, in
order to allow time for KazakhGold to obtain necessary Kazakh regulatory
approvals in connection with the Placing.
Loan Agreements with Jenington
On 14 August 2009, KazakhGold entered into a USD 50 million loan agreement with
its controlling shareholder, Jenington, in order to fund the consent
solicitation fee payable in connection with the January 2009 consent
solicitation with respect to its Senior Notes. The loan bears interest at the
rate of USD one month LIBOR for the applicable period plus 6%. Interest may be
capitalized provided that the aggregate of the principal amount outstanding
under the loan and accrued interest would not exceed USD50 million. The loan is
repayable no later than three months from the date on which KazakhGold receives
the proceeds of the Placing. Jenington may elect to convert, in whole or in
part, its rights to repayment of the loan into Shares at a conversion price of
USD1.50 per Share, although it may not exercise this right before the date on
which Polyus and Jenington have agreed the initial allocations for the Placing.
On 4 February 2010, KazakhGold entered into a USD 50 million loan agreement with
its controlling shareholder, Jenington, for working capital purposes until the
completion of Placing. The loan bears interest at the rate of 9.27% per annum.
Interest is capitalized during the term of the loan. The loan is repayable no
earlier than the date on which KazakhGold receives the proceeds of the Placing
and no later than three months from such date, but in any event no later then
nine months from the date of the loan agreement. KazakhGold may elect to
convert, in whole or in part, Jenington's rights to repayment of the loan,
together with the accrued interest, into Shares or GDRs at a conversion price
per share or GDR equal to the average of the closing prices of the GDRs on the
London Stock Exchange for the period of 20 trading days ending on a trading day
immediately preceding the date on which the conversion notice is served on the
lender.
The loans are expected to be repaid by KazakhGold from the proceeds of the
Placing and are convertible into KazakhGold securities.
2. KazakhGold Group's operating results
2.1 External market factors affecting the financial results of the KazakhGold
Group
The KazakhGold Group's operating results are affected by movements in the
currency exchange rates, and the price of gold, as well as the price of other
commodities, such as oil and steel.
The market price of gold is one of the most significant external factors
influencing the profitability of the KazakhGold Group. During 2009, the global
gold price experienced high volatility, reaching its lowest level of USD 810 per
troy ounce (London p.m. fixing) in January and its highest level of USD 1,212.5
per ounce in December. The average annual gold price in 2009 (London p.m.
fixing) was USD 972.4 per ounce, compared to USD 872 per ounce in 2008. The
global price of gold increased by 24% from USD 874.5 on 2 January to USD 1087.5
per ounce on 30 December (the first and the last business days of 2009,
respectively). In 2008, the average gold price reached a record of USD 871.96
per troy ounce, which is 25% higher than the previous record set in 2007 of USD
695.39 per troy ounce (in nominal values). The price peaked in March 2008 at
USD 1,011.25 per troy ounce, surpassing the historic maximum in 1980, when the
price of a gold troy ounce was USD 850 (in nominal value).
The results of the KazakhGold Group are also affected to a significant extent by
currency exchange rates. The KazakhGold Group's revenue from gold sales is
denominated in USD, whereas most of the operating expenses of KazakhGold are
denominated in the Kazakh tenge. In February 2009, in response to deterioration
of global macroeconomic conditions, the National Bank of Kazakhstan devalued the
tenge by adjusting the exchange rate band for the tenge, which led to an
immediate increase in the tenge exchange rate from tenge 120 per USD to tenge
150 per USD.
A significant portion of costs included in the cost of sales of the KazakhGold
Group are also directly or indirectly impacted by the prices of oil and steel.
Changes in oil prices impact the prices of heating oil, diesel fuel, gasoline
and lubricants for mining and construction equipment. Steel forms the basis for
the price of all rolled metal products, pipes, machinery and vehicles. Global
prices for oil and steel had been increasing through the second half of 2008,
prior to a substantial decline following the deterioration of global markets in
the second half of 2008.
2.2. Discussion of results of operations for the years ended 31 December 2009
and 2008
The following table sets forth a summary of results of the operations of the
KazakhGold Group for the years ended 2009 and 2008.
+-------------------------------------------------------------+-----------+-----------+------------+
| | Year ended 31 | 2009 |
| | December | against |
| | | 2008 |
+-------------------------------------------------------------+-----------------------+------------+
| | 2009 | 2008(1) | % |
+-------------------------------------------------------------+-----------+-----------+------------+
| | (US dollars in | |
| | thousands, | |
| | except for per | |
| | share amount) | |
+-------------------------------------------------------------+-----------------------+------------+
| Gold sales | 58,434 | 54,262 | 7.7 |
+-------------------------------------------------------------+-----------+-----------+------------+
| Other sales | 1,943 | - | 100 |
+-------------------------------------------------------------+-----------+-----------+------------+
| Total revenue | 60,377 | 54,262 | 11.3 |
+-------------------------------------------------------------+-----------+-----------+------------+
| Cost of gold sales | (57,296) | (71,304) | (19.6) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Cost of other sales | (2,846) | - | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Gross profit/(loss) | 235 | (17,042) | 101.4 |
+-------------------------------------------------------------+-----------+-----------+------------+
| Gross profit/(loss) | 1,138 | (17,042) | (106.7) |
| on gold sales | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Gross profit margin | 0.4% | (31.4%) | (101.2) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Selling, general and | (39,746) | (28,595) | 39.0 |
| administrative | | | |
| expenses | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Other expenses, net | (32,621) | (204,254) | (84.0) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Finance costs | (31,841) | (25,285) | 25.9 |
+-------------------------------------------------------------+-----------+-----------+------------+
| Net income from | - | 7,509 | (100) |
| investments | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Foreign exchange | (45,927) | 452 | (10,260.8) |
| (loss)/gain, net | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Loss before income | (149,900) | (267,215) | (43.9) |
| tax | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Pre-tax margin | (248.3%) | (492.5%) | (49.6) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Income tax benefit | 6,161 | 10,200 | (49.6) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Loss for the year | (143,739) | (257,015) | (44.1) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Net loss attributable | (840) | - | 100 |
| to minority interest | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Net profit | (142,899) | (257,015) | (44.4) |
| attributable to | | | |
| shareholders of the | | | |
| parent company | | | |
| ........................................................... | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
| Net profit margin | (238.1%) | (473.7%) | (49.7) |
+-------------------------------------------------------------+-----------+-----------+------------+
| Loss per share - | (2.70) | (4.89) | (44.8) |
| basic and diluted | | | |
| (USD) | | | |
+-------------------------------------------------------------+-----------+-----------+------------+
(1) The Unaudited information for 2008 reflects adjustments made in connection
with the effect of changes in accounting policies, reclassifications and
correction of errors.
2.3. Gold sales
The following tables show the results and volumes of gold sales for the years
ended 2009 and 2008:
+-----------------------+---------+----------+
| | Year ended 31 |
| | December |
+-----------------------+--------------------+
| | 2009 | 2008(1) |
+-----------------------+---------+----------+
| | (US dollars in |
| | thousands) |
+-----------------------+--------------------+
| Gold sales (USD | 58,434 | 54,262 |
| thousands) | | |
| ........... | | |
+-----------------------+---------+----------+
| Gold sales (thousand | 69.34 | 110.57 |
| troy ounces), | | |
+-----------------------+---------+----------+
| Weighted-average gold | 842.7 | n.d. |
| selling price (USD | | |
| per troy ounce) | | |
| ..................... | | |
+-----------------------+---------+----------+
| Average p.m. fixing | 972.4 | 872 |
| price in London (USD | | |
| per troy ounce)(12) | | |
| ................. | | |
+-----------------------+---------+----------+
| Excess/(deficit) of | (129.7) | n.d. |
| average selling price | | |
| over/(under) average | | |
| evening fixing price | | |
| (USD per troy ounce) | | |
| . | | |
+-----------------------+---------+----------+
(1) The Unaudited information for 2008 reflects adjustments made in
connection with the effect of changes in accounting policies, reclassifications
and correction of errors.
(2) Source: London Bullion Market Association.
Gold sales revenue increased by 7.7% to USD 58,434 thousand in 2009 from USD
54,262 thousand in 2008, primarily due to higher realized gold prices, which
offset the reduction in sales volumes. In 2009 KazakhGold Group sold 69.34 troy
ounces of gold in the form of sludge, floatation and gravitation concentrates
and other semi-products. The continuing decline in production during these
years was due to a protracted period of underinvestment and mismanagement,
which led to the deterioration of production facilities and created operating
inefficiencies.
The table below shows a breakdown of the KazakhGold Group's revenue by product
category for the year 2009.
+-----------------------------------------+---------+
| USD, 000 | 2009 |
+-----------------------------------------+---------+
| Product | |
+-----------------------------------------+---------+
| Cathodic | 27,236 |
| gold.................. | |
+-----------------------------------------+---------+
| Free | 6,109 |
| gold.......................... | |
+-----------------------------------------+---------+
| Other................................. | 25,089 |
+-----------------------------------------+---------+
| Total.................................. | 58,434 |
+-----------------------------------------+---------+
In accordance with its modernization plans, in the future the KazakhGold Group
intends to produce more higher-margin products such as cathodic gold and gold
doré.
Kazakhaltyn sells all of its cathodic and free gold pursuant to arrangements
with Metalor SA, a specialist in gold and precious metals processing based in
Neuchatel in Switzerland. Under the terms of these arrangements, Metalor SA
pays Kazakhaltyn per ounce of gold doré supplied at a fixed percentage discount
to the price fixed by the LBMA and bears the cost of insurance from the time the
products are transferred for international transportation by air. On May 15,
2007 the contract was extended.
The table below contains information on the KazakhGold Group's major customers
in 2009, the type of products purchased from the KazakhGold Group, their
location and the percentage of the KazakhGold Group's total revenue from the
sale of gold products during that year:
+--------------+---------------+-------------+--------+
| Customer | Type | Location | USD. |
| | of | of | 000 |
| | Product | Customer | |
+--------------+---------------+-------------+--------+
| CJSC | Gravity | Russia | 22,915 |
| Karabashmed | and | | |
| | flotation | | |
| | concentrates, | | |
| | quartzite ore | | |
+--------------+---------------+-------------+--------+
| Metalor | Cathodic | Switzerland | 34,487 |
| Technologies | and free | | |
| | gold | | |
+--------------+---------------+-------------+--------+
| Other | | | 1,032 |
+--------------+---------------+-------------+--------+
.
Investments to upgrade KazakhGold's operating capacity, as well as the overall
restructuring programme, began immediately after the acquisition of the
KazakhGold by the Polyus Gold in August 2009. Those measures are expected to
increase production to approximately 130 k oz in 2010.
In 2009, the weighted-average gold selling price was USD 842.7 per troy ounce
compared to benchmark of 972.4. This discount reflects the fact that gold
produced and sold by KazakhGold are semi-products and require further
processing.
2.4. Cost of gold sales
Cost of gold sales decreased by 19.6% in 2009, to 57,296 thousand in 2009, from
USD 71,304 thousand in 2008. The decrease was primarily due to decreases in
production volumes, as well as a decline in the costs of key cost drivers
denominated in KZT (salaries, and overheads), which declined in USD as a result
of devaluation of the KZT.
2.5. Selling, general and administrative expenses
Selling, general and administrative expenses increased by 39.0% to USD 39,746
thousand in 2009 from USD 28,595 thousand in 2008, primarily as a result of
increased costs related to the Partial Offer, as well as consent fees paid to
bondholders in connection with the Partial Offer.
2.6. Other expenses, net
Other expenses in 2009 primarily relate to the effects of new management's
efforts to address many of the issues identified upon the takeover, including
identifying and disposing of unneeded assets and inventory, clarifying bad
debts and allowances, and settling uncertain provisions. Other expenses in
2008 in the amount of USD 204,254 thousand consist primarily of expenditures
which were previously capitalised, which do not meet the criteria of assets, and
therefore the expenditures were recorded as expenses. See "Recent
Developments". These expenses principally comprised of payments made under
contracts, but for which there was insufficient evidence that services or goods
were received . The KazakhGold Group is investigating the circumstances
surrounding such contracts. The new management team presumes the contracts to
be with related parties. Recoverable taxes on these inappropriate expenses have
been accrued as payable. In 2009, other expenses represent accruals for bank
guarantee provision of USD 11,650 thousand due to the supplier defaulting, a
loss on revaluation of property, plant and equipment of USD 11,079 thousand, and
other items.
2.7. Finance costs, income from investments and foreign exchange gain/(loss)
+-----------------------------------------------+----------+----------+-----------------------+
| | Year ended 31 | 2009 |
| | December | against |
| | | 2008 |
+-----------------------------------------------+---------------------+-----------------------+
| | 2009 | 2008(1) | % |
+-----------------------------------------------+----------+----------+-----------------------+
| | (US Dollars in | |
| | thousands) | |
+-----------------------------------------------+---------------------+-----------------------+
| Finance |(31,841) |(25,285) | 25.9 |
| costs........................................ | | | |
+-----------------------------------------------+----------+----------+-----------------------+
| Income from | - | 7,509 | (100) |
| investments.................... | | | |
+-----------------------------------------------+----------+----------+-----------------------+
| Foreign exchange |(45,927) | 452 | (10,260.8) |
| (loss)/gain | | | |
| ............. | | | |
+-----------------------------------------------+----------+----------+-----------------------+
(1) The Unaudited information for 2008 reflects adjustments made in
connection with the effect of changes in accounting policies, reclassifications
and correction of errors..
The substantial portion of the KazakhGold Group's finance costs are coupon
payments for the Senior Notes. In addition, in June 2009, KazakhGold obtained
a USD 31.0 million subordinated loan from Gold Lion Holdings Limited, then its
controlling shareholder, in order to fund an interest payment on the Senior
Notes and redemption payments on its outstanding Kazakh bonds, as well as for
its immediate working capital requirements. In August 2009 KazakhGold also
obtained a USD 50 million loan from Jenington, to provide it with funds for
working capital purposes and to fund the consent fee payable to holders of the
Senior Notes in connection with the Partial Offer.
In 2009 the KazakhGold Group's finance costs amounted to USD 31,841 thousand, an
increase of 25.9% from USD 25,285 thousand in 2008. The finance costs included
the interest on loans and borrowings in the amount of 27,436 thousand, the major
portion being interest paid on Senior Notes in the amount of USD 19,484
thousand. The rest was related to interest payments on bank loans from
Sberbank, Kazkommertzbank and HSBC in the amount of USD 2,063 thousand, and
interest in respect of loans from Gold Lion, and Jenington.
In 2009, currency exchange losses amounted to USD 45,927 thousand, arising
primarily from financing activities. The most significant loans are USD
denominated, and the underlying records are in tenge. The effect of the
depreciation in value of the tenge has led to an exchange loss at the subsidiary
level.
2.8. Income tax
Effective income tax rates for 2009 and 2008 of 4.1% and 3.8%, respectively,
were substantially below the rate effective in Kazakhstan of 20%, as a
significant portion of the expenses are not deductible for tax purposes.
Moreover, a tax recovery is not recognised as there is uncertainty over future
collection.
2.9. Other sales and cost of other sales
In 2009, other sales amounted to USD 1,943 thousand. The cost of other sales
amounted to USD 2,846 thousand. Other sales included revenues from hotels and
ancillary services. The cost of other sales included non-mining operating
expenses, such as hotel operations, and other ancillary services.
3. Review of financial sustainability and solvency
As at 31 December 2009, the Group had a working capital deficiency of USD
277,394 thousand. The deficit is primarily resulting from the amount owed on
the Senior Notes in the amount of USD 200,000 thousand having an original
maturity in 2013. The Senior Notes have been classified as current liabilities
as at 31 December 2009 as a result of the Group's default on its financial and
reporting covenants. Management believes that it can successfully negotiate the
repayment of the Senior Notes to 2013, the original maturity, or refinance it
with another facility. The Group has modified its operational structure and
increased its production at facilities during the period from August 2009. As a
result of these adjustments, the Group has been able to decrease its loss in
2009 compared to 2008. If the maturity date of the Senior Notes, which are
guaranteed byPolyus Gold, is not renegotiated or the Group's improved
productivity is not sufficient to fund the Group's operations, the Group has the
ability to obtain additional funding from its new parent, Jenington
International Inc., or Polyus Gold. Jenington provided loan facilities to the
Group of up to USD 50,000 thousand in 2009, and a further USD 50,000 thousand in
February 2010. As part of the Partial Offer whereby Jenington acquired 50.15% of
the Group, Jenington committed to underwrite a USD 100,000 thousand placement of
shares in KazakhGold. Management intends to continue improving the operational
results that were initiated in August 2009 as the new management continues to
address maintenance shortcomings and underinvestment.
Based on the information discussed above, management believes that it will be
able to meet its borrowings obligations and continue to finance its operational
activities. Management has prepared a detailed forecast of cash flows for 2010
financial year and believes that future cash flows from operating and financing
activities will be sufficient for the Group to meet its obligations as they
become due.
3.1. Analysis of Balance sheet items
KazakhGold's consolidated balance sheet as at 31 December 2009 and 2008 was as
follows:
+----------------------------------------------------------------+----------+-+-+----------+-+-----------+----------+----------+----------+----------+----------+
| Year ended 31 December |
+---------------------------------------------------------------------------------------------------------------------------------------------------------------+
| | | | 2009 | | 2008(1) | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| (US dollars in thousands) | |
+----------------------------------------------------------------------------------------------------------------------------------------------------+----------+
| ASSETS | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Non-current | | | 199,918 | | 260,389 | | |
| assets......................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Property, plant and | | | 197,051 | | 258,439 | | |
| equipment...................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Inventories | | | 2,867 | | 1,950 | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Investments in | | - | | - | |
| securities and other | | | | | |
| financial | | | | | |
| assets............................................. | | | | | |
+----------------------------------------------------------------+-------------------------+-------------+----------+---------------------+---------------------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Current assets | | | 25,835 | | 41,363 | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Inventories....................................................... | | | 14,265 | | 17,567 | | |
| ......................................................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Trade and other | | | 2,124 | | 6,591 | | |
| receivables.......................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Advances paid to | | | 1,905 | | 1,267 | | |
| suppliers........................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Income tax | | | 3,057 | | 1,972 | | |
| prepaid.......................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Other current | | | 953 | | - | | |
| assets........................................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Cash and cash | | | 3,531 | | 13,966 | | |
| equivalents............................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| TOTAL | | | 225,753 | | 301,752 | | |
| ASSETS............................................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| EQUITY AND LIABILITIES | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Share capital and | | | (127,170) | | (21,217) | | |
| reserves............................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Share | | | 9 | | 9 | | |
| capital..................................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Additional paid-in | | | 220,950 | | 220,950 | | |
| capital............................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Capital | | | 12,686 | | 12,686 | | |
| contribution........................................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Revaluation | | | 7,787 | | - | | |
| surplus........................................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Option premium on convertible | | | 15,598 | | - | | |
| debt............ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Translation | | | 25,401 | | 11,840 | | |
| reserve......................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Accumulated | | | (409,601) | | (266,702) | | |
| losses........................................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Equity attributable to | | | (127,170) | | (21,217) | | |
| shareholders of the | | | | | | | |
| parent | | | | | | | |
| company............................................ | | | | | | | |
+----------------------------------------------------------------+------------+------------+-------------+----------+----------+----------+---------------------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Minority | | | - | | - | | |
| interest.............................................. | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Non-current | | | 49,694 | | 235,549 | | |
| liabilities................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Borrowings....................................................... | | | 20,812 | | 203,272 | | |
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Environmental | | | 13,356 | | 20,106 | | |
| obligations............................. | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Deferred tax | | | - | | 6,772 | | |
| liabilities...................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Long-term obligations under finance | | | - | | 1,370 | | |
| lease. | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Other non-current | | | 15,526 | | 4,029 | | |
| liabilities........................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Current | | | 303,229 | | 87,420 | | |
| liabilities.......................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Borrowings....................................................... | | | 257,816 | | 41,306 | | |
| ......................................................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Short-term obligations under | | | - | | 568 | | |
| finance lease. | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Trade | | | 1,771 | | 14,976 | | |
| payables................................................ | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Other payables and accrued | | | 18,897 | | 5,724 | | |
| expenses......... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Income tax | | | - | | - | | |
| payable......................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| Other taxes | | | 24,745 | | 24,846 | | |
| payable......................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| TOTAL | | | 352,923 | | 322,969 | | |
| LIABILITIES.................................... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| TOTAL EQUITY AND | | | 225,753 | | 301,752 | | |
| LIABILITIES.......... | | | | | | | |
+---------------------------------------------------------------------------+---+------------+-----------+----------+---------------------+----------+----------+
| | | | | | | | | | | | |
+----------------------------------------------------------------+----------+-+-+----------+-+-----------+----------+----------+----------+----------+----------+
(1) The Unaudited information as at 31 December 2008 reflects adjustments
made in connection with the effect of changes in accounting policies,
reclassifications and correction of errors.
3.1.1. Assets
Non-current assets
The table below sets forth the components of the KazakhGold Group's property,
plant and equipment at 31 December 2009 and 2008:
+---------------------------------------------------------------+----------+----------+----------+
| | As at 31 December, | |
+---------------------------------------------------------------+---------------------+----------+
| | 2009 | 2008(1) |
+---------------------------------------------------------------+----------+---------------------+
| | (US dollars in | |
| | thousands) | |
+---------------------------------------------------------------+---------------------+----------+
| Exploration and evaluation | 3,872 | 5,129 |
| assets | | |
| ........................... | | |
+---------------------------------------------------------------+----------+---------------------+
| Mining assets | 140,850 | 207,137 |
| ............................................................. | | |
+---------------------------------------------------------------+----------+---------------------+
| Non-mining assets | 2,777 | 1,342 |
| ..................................................... | | |
+---------------------------------------------------------------+----------+---------------------+
| Capital | 49,552 | 44,831 |
| construction-in-progress | | |
| ............................. | | |
+---------------------------------------------------------------+----------+---------------------+
| Total property, plant and | 197,051 | 258,439 |
| equipment | | |
| ....................... | | |
+---------------------------------------------------------------+----------+---------------------+
| | | | |
+---------------------------------------------------------------+----------+----------+----------+
(1) The Unaudited information as at 31 December 2008 reflects adjustments
made in connection with the effect of changes in accounting policies,
reclassifications and correction of errors.
KazakhGold's property, plant and equipment amounted to USD 197,051 thousand as
at 31 December 2009 and USD 258,439 thousand as at 31 December 2008. The lack
of capital investments over the three year period contributed to a decline in
production.
Capital expenditure levels remained low in 2009 due to the KazakhGold Group's
shortage of resources. The new strategy for KazakhGold is under development, and
is expected to involve a significant increase in capital expenditures.
Current assets
Current assets amounted to USD 25,835 thousand as at 31 December 2009, a 37.5%
decrease from USD 41,363 million as at 31 December 2008. The main contributor
to the decrease was a reduction in cash and cash equivalents, which decreased
from USD13,966 thousand as at 31 December 2008 to USD 3,531 as at 31 December
2009.
3.1.2. Capital and liabilities
Share capital and reserves
As at 31 December 2009 the KazakhGold Group's had a deficit of share capital and
reserves of USD127,170 thousand, compared to deficit of USD21,217 thousand as
at 31 December 2008.
Non-current liabilities
As at 31 December 2009, the KazakhGold Group's non-current liabilities amounted
to USD 49,694 thousand, compared to USD 235,549 thousand in 2008. The change
was primarily attributed to a decrease in the "Loans and borrowings" from USD
203,272 thousand as at 31 December 2008 to USD 20,812 thousand as at 31 December
2009. This decrease was due to the occurrence of an event of default under the
Senior Notes which is continuing and the subsequent reclassification of
obligations under the senior Notes as current liabilities. In addition, in June
2009, KazakhGold obtained a USD 31,025 thousand subordinated loan from Gold
Lion, then its controlling shareholder, in order to fund an interest payment on
the Senior Notes and redemption payments on its outstanding Kazakh bonds, as
well as for its working capital requirements. In August 2009 KazakhGold also
obtained a USD 50 million loan from Jenington, to provide it with funds for
working capital purposes and to fund the consent fee payable to holders of the
Senior Notes in connection with the Partial Offer.
Current liabilities
As at 31 December 2009, the KazakhGold Group's current liabilities amounted to
USD 303,229 thousand, compared to USD 87,420 thousand as at 31 December 2008.
The increase was attributable to reclassification as current liabilities of the
Senior Notes for the reasons discussed above.
3.2. Cash flow analysis
The following table shows KazakhGold's consolidated cash flow statement for the
years ended 31 December 2009, and 2008.
+--------------------------------------+------+--+-----------+--+-----------+
| | | | 2009 | | 2008 |
| | | | | | As |
| | | | | | restated* |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Operating activities | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Loss before income tax | | | (149,900) | | (267,215) |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Adjustments for: | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Amortisation and depreciation | | | 17,659 | | 20,164 |
+--------------------------------------+------+--+-----------+--+-----------+
| Loss on revaluation of property, | | | 11,079 | | - |
| plant and equipment | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Finance costs | | | 31,841 | | 25,285 |
+--------------------------------------+------+--+-----------+--+-----------+
| Foreign exchange loss/(gain), net | | | 45,927 | | (452) |
+--------------------------------------+------+--+-----------+--+-----------+
| Bank guarantee provision | | | 11,650 | | - |
+--------------------------------------+------+--+-----------+--+-----------+
| Non-recoverable value added tax on | | | 5,219 | | 27,112 |
| construction, repair, maintenance | | | | | |
| and exploration works | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Change in allowance for doubtful | | | 3,594 | | 6,002 |
| debts | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Loss on disposal of property, plant | | | 1,859 | | 8,957 |
| and equipment | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Income from investments | | | - | | (7,509) |
+--------------------------------------+------+--+-----------+--+-----------+
| Other | | | 1,881 | | (17,090) |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | (19,191) | | (204,746) |
+--------------------------------------+------+--+-----------+--+-----------+
| Movements in working capital: | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Inventories | | | (2,842) | | (5,203) |
+--------------------------------------+------+--+-----------+--+-----------+
| Trade and other receivables | | | (229) | | 62,682 |
+--------------------------------------+------+--+-----------+--+-----------+
| Advances paid to suppliers | | | (990) | | (546) |
+--------------------------------------+------+--+-----------+--+-----------+
| Other current assets | | | (851) | | (955) |
+--------------------------------------+------+--+-----------+--+-----------+
| Trade payables | | | (10,470) | | (6,534) |
+--------------------------------------+------+--+-----------+--+-----------+
| Other payables and accrued expenses | | | 11,177 | | (11,753) |
+--------------------------------------+------+--+-----------+--+-----------+
| Other taxes payable | | | (1,672) | | 16,719 |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Cash flows used in operations | | | (25,068) | | (150,336) |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Interest paid | | | (22,457) | | (15,735) |
+--------------------------------------+------+--+-----------+--+-----------+
| Income tax paid | | | (1,462) | | (19,489) |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Net cash used in operating | | | (48,987) | | (185,560) |
| activities | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Investing activities | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Purchase of property, plant and | | | (7,372) | | (64,159) |
| equipment | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Proceeds from sale of property, | | | - | | 3,412 |
| plant and equipment | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Interest received | | | - | | 7,509 |
+--------------------------------------+------+--+-----------+--+-----------+
| Proceeds from sale of other | | | - | | 31,760 |
| financial assets | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
| Net cash used in investing | | | (7,372) | | (21,478) |
| activities | | | | | |
+--------------------------------------+------+--+-----------+--+-----------+
(1) The Unaudited information for the year ended 31 December 2008 reflects
adjustments made in connection with the effect of changes in accounting
policies, reclassifications and correction of errors.
KazakhGold has incurred losses in each of the past three years. Cash outflows
from operations totalled more than USD 250 million for 2009 and 2008. On 5 May
2009, KazakhGold was unable to make the scheduled interest payment on its Senior
Notes. In June 2009, KazakhGold obtained a USD 31 million subordinated loan
from Gold Lion Holdings Limited, then its most significant shareholder, in order
to fund this interest payment on the Senior Notes and redemption payments on its
Kazakh bonds, as well as for working capital requirements. At the time, most
creditor payments were delayed, and salaries for many of the staff were in
arrears. In August 2009 KazakhGold also obtained a USD 50 million loan from
Jenington, to provide it with funds for working capital purposes and to fund the
consent fee payable to holders of the Senior Notes in connection with the
Partial Offer.
Investing activities have declined in 2009, and this has contributed to the
significant deterioration in production, sales, and to the large losses. Total
cash balances have declined as the funds have been ineffectively spent, and not
contributed to improving the productive capacity of the KazakhGold Group. From
2008, the KazakhGold Group has had very restricted access to cash, and
therefore has out of necessity reduced cash outflows.
4. Description of principal risks
The KazakhGold Group's activities are exposed to a number of risks, which may
negatively impact its production and financial results.
The KazakhGold Group's risk management system is aimed at strengthening its
internal controls while ensuring the achievement of its business targets. The
KazakhGold Group's risk management system includes identification and assessment
of key parameters of potential threats, as well as the development and
implementation of measures aimed at mitigating the negative impact of risks it
may face.
A summary of risks that may affect the KazakhGold Group and its business,
operating results or financial condition is set forth below. Additional risks
and uncertainties that KazakhGold is not aware of or that KazakhGold currently
believes are immaterial may also adversely affect the KazakhGold Group's
business, operating results and financial condition.
- The financial results of companies operating in the gold mining industry
depend largely on the price of gold, which may be subject to significant
volatility.
- The gold mining industry is highly competitive.
- Success in the gold mining industry depends on maintaining a highly qualified
skilled workforce, including qualified geologists and other mining specialists.
- Gold exploration and the development of mines involves a high degree of risk
and uncertainty.
- The volume and grade of the ore the KazakhGold Group recovers may not conform
to current expectations.
- The KazakhGold Group's business could be adversely affected if it fails to
obtain, maintain or renew necessary contracts, licenses and permits, including
subsoil licenses, or fails to comply with the terms of its contracts, licenses
and permits.
- The KazakhGold Group is subject to mining risks.
- The KazakhGold Group is subject to extensive environmental controls and
regulation.
- The KazakhGold Group's operations depend to a significant extent on external
contractors.
- The KazakhGold Group is responsible for maintaining part of the social and
physical infrastructure in some of the regions in which it operates.
- The KazakhGold Group's level or scope of insurance coverage may not be
adequate.
- The KazakhGold Group is subject to exchange rate risks.
- Kazakh currency control regulations may hinder the KazakhGold Group's ability
to conduct business.
- Emerging markets such as Kazakhstan are subject to greater risks than more
developed markets, including significant legal, economic and political risks.
- The KazakhGold Group may not be able to generate sufficient cash to service
its debt.
- KazakhGold is currently in default of the terms of the Senior Notes.
- The KazakhGold Group requires significant capital expenditures, which may
require external financing that may not be provided.
- KazakhGold is a holding company for the KazakhGold Group and is entirely
dependent on the trading performance of members of the KazakhGold Group and
their ability to make distributions to KazakhGold.
- The Kazakh state may be entitled to exercise pre-emptive rights over assets
acquired by the KazakhGold Group, transfers of shares in KazakhGold's
subsidiaries and the issuance of new depositary receipts over its shares.
- Kazakh competition regulations and procedures are subject to uncertainties.
- If transactions that KazakhGold and its subsidiaries have entered into are
challenged for non-compliance with applicable Kazakh legal requirements, the
transactions could be invalidated or liabilities imposed on the KazakhGold
Group.
5. Main features of the internal control and risk management systems in
relation to the financial reporting process
Following the completion of the Partial Offer, the new management team took an
active role in addressing improvements needed in the internal control and risk
management systems in relation to the financial reporting process.
On 14 August 2009 the composition of the Board of Directors was changed and four
representatives of Polyus Gold were appointed to the Board. The Board
established a newly- composed Audit Committee with Steven Oke appointed
Chairman. Oleg Ignatov, a member of the Committee, is the Chief Financial
Officer of the Polyus Group, and has financial education and experience, and
German Pikhoya, the third member of the Audit Committee, has a degree in
economics and a broad experience in finance.
On March 17, 2010, Steven Oke resigned from the Board of Directors. A new member
was appointed, Adrian Coates, who was also appointed as the chairman of the
Audit Committee. Mr. Coates has a MA degree in Economics from Cambridge
University and a MBA from the London Business School.
Further steps with regard to control over financial reporting are expected to be
implemented by the new Board and management in 2010.
6. Corporate governance report
6.1. As at 31 December 2009 the composition of the Board of Directors was the
following:
Evgueni I. Ivanov
Chairman and Chief Executive Officer
Graduated from the State Finance Academy. Major - International Economic
Relations. After the graduation he worked in the banking sector, including the
State Bank of the USSR, and the Central Bank of the Russian Federation. In 1997
he came to work in Unexim Bank, where he created and headed Precious Metals
Department. In 1999 - 2000 he worked as Vice-Chairman of the Rosbank, being in
charge of the relationship with the clients. In 2000 Evgueni Ivanov became the
Chairman of Rosbank, and in the 2003 - the bank's President and Chairman of the
Board. In March 2006 Mr. Ivanov was elected General Director (CEO) of the newly
formed OJSC Polyus Gold.
German R. Pikhoya
Non-Executive Director
Graduated from history department of Urals State University. Later conducted
post-graduate research in Bowdoin College (Brunswick, State of Maine, USA).
Graduated from the Russian State Service Academy, specializing in economics. In
1994-1995 he worked as Project Manager at MOSEXPO company. In 1995-1997 he
served as General Director of Palamos company. From 1994 to 1998 German Pikhoya
also occupied position of General Director of Eurogold Financial and Industrial
Group Managing Company. From 1998 to 2002 he served as Deputy Head of
representative office in Russia and New Business Development Manager for Placer
Dome International Ltd. In 2002 German Pikhoya joined Polyus Gold Mining Company
as Deputy General Director for Corporate Development. Then he was named as
Polyus Group Vice-President for Corporate Development. In July 2007 Mr. Pikhoya
assumed the position of Deputy General Director for Strategy and Corporate
Development at OJSC Polyus Gold public company.
Member of the Audit Committee
Boris A. Zakharov
Non-Executive Director
Mr. Zakharov graduated from the Moscow Institute of Steel and Alloys in 1978.
Mr. Zakharov held or continues to hold, as applicable, the following other
posts: From 1977 to 1985 - various positions of measuring-floatation shop of
processing plant of Norilsk Mine, the final position being chief foreman; From
1985 to 1992 - chief foreman of processing plant at Erdenet mine in Mongolia;
From 1992 to 2008 - deputy head of mesuring-floatation shop of Norilsk
processing plant, chief engineer of processing plant, head of R&D department of
OJSC Norilsk Nickel.
Mr. Zakharov has been Deputy General Director on production of CJSC Polyus since
November 1, 2008.
The candidate of technical sciences.
Member of the Remuneration Committee
Oleg V. Ignatov
Non-Executive Director
Oleg Ignatov graduated from Moscow machine-tool institute in 1992, degree in
electrical engineering.
In 1998 Mr. Ignatov graduated with honors from the Finance Academy under the
government of the Russian Federation, with a degree in finance and credit. He
worked in Unexim Bank and Rosbank, where he was gradually promoted to Seniour
vice-president. In 2002 he was appointed Deputy general director, finance of
OJSC Chelyabenergo.
Since 2003 till 2005 he worked as first deputy city head of Norilsk. In 2005 -
2008 he worked as Deputy director, economy and finance of Zapolyarny unit of
OJSC MMC Norilsk Nickel.
Member of the Remuneration Committee and the Audit Committee
Aidar K. Assaubayev
Non-Executive Director
Aidar Assaubayev graduated with honours from the Kazakh National Technical
University in 2000, where he specialised in engineering and economics. In 2006
he received a Doctor of economics degree from the Institute of Systemic Analysis
in Moscow.
David Netherway
Non-Executive Independent Director
David Netherway is a mining engineer with over 30 years of experience in the
mining industry. He is currently the CEO of Shield Mining Limited, an Australian
listed company exploring for gold and base metals in Mauritania. From April 2002
until the completion of its takeover by Eldorado Gold Corporation in 2005, he
served as the President and Chief Executive Officer of the Toronto listed Afcan
Mining Corporation, a China focused gold mining company. He is a mine developer
and operator who was involved in the construction and development of the
Iduapriem, Siguiri, Kiniero and Samira Hill gold mines in West Africa and has
mining experience which includes Australia, Canada, India, Nepal, Oman and
Malaysia. Prior to joining Afcan, he held senior management positions in a
number of mining companies, including Golden Shamrock Mines, Ashanti Goldfields
and Semafo Inc.
He received a B.E. in Mining Engineering from the University of Melbourne in
1975 and a Certified Diploma in Accounting and Finance from the Chartered
Association of Certified Accountants in the United Kingdom in 1985.
Chairman of the Remuneration Committee
Stephen Oke
Non-Executive Independent Director
Mr. Stephen Oke is a qualified geologist and was formerly Head of International
Corporate Finance at Standard Bank in London. Mr. Oke specialises in providing
senior level corporate finance and capital markets advice to metals and mining
sector companies
Chairman of the Audit Committee
8.3. Accounting policies
The Group's financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS and IFRIC interpretations), as
adopted by the European Union and also in accordance with the Companies
(Jersey) Law 1991.
8.4. Share capital and reserves
Details of the Group's authorised and issued share capital as at 31 December
2009 are contained in Note 16 of the consolidated financial statements.
8.5. Substantial shareholdings
The Group is aware of the following beneficial shareholdings, representing 10
per cent or more of the issued ordinary share capital of the Group, as at 31
December 2009.
+------------------------+---------------------+----------------+
| | Number of ordinary | % of issued |
| | shares | share capital |
+------------------------+---------------------+----------------+
| Gold Lion Holdings | 10 599 539 | 20.02 |
| Limited | | |
+------------------------+---------------------+----------------+
| Jenington | 26 550 495 | 50.15 |
| International Inc. | | |
+------------------------+---------------------+----------------+
| BNY (Nominees) | 15 791 632 | 29.83 |
| Limited1 | | |
+------------------------+---------------------+----------------+
1 BNY (Nominees) Limited holds these shares as depository, against Global
Depositary Receipts issued, each representing one ordinary share with a nominal
value of GBP0.0001.
8.6. Corporate governance
There are no corporate governance recommendations applicable to companies
incorporated in Jersey, but the Group intends as far as it is able, taking into
account its size and stage of development, to comply with the recommendations of
the Combined Code on Corporate Governance for UK registered and listed
companies.
Board
The Board of Directors is composed of seven members: the Executive Chairman
(Evgueni Ivanov) and six Non-Executive Directors (German Pikhoya, Boris
Zakharov, Oleg Ignatov, David Netherway, Aidar Assaubayev and Stephen Oke),
including two independent directors (David Netherway and Stephen Oke). The Board
has established: Audit and Remuneration Committees with formally delegated
duties, responsibilities and written terms of reference. From time to time,
separate committees may be set up by the Board to consider specific issues as
and when the need arises.
Audit Committee
The Audit Committee assists the Board in discharging its responsibilities with
regard to financial reporting, external and internal audits and controls,
including reviewing the Company's annual financial statements, reviewing and
monitoring the extent of the non-audit work undertaken by external auditors,
advising on the appointment of external auditors and reviewing the effectiveness
of the Company's internal audit activities, internal controls and risk
management systems. The ultimate responsibility for reviewing and approving the
annual report and accounts and the half yearly reports remains with the Board.
The Combined Code recommends that the audit committee should comprise of at
least three members who should all be independent non executive directors, and
that at least one member should have recent and relevant financial experience.
The membership of the Company's Audit Committee is composed of three members
Steve Oke, German Pikhoya and Oleg Ignatov. Steve Oke is considered by the Board
to have recent and relevant financial experience. The Chairman of the Audit
Committee is Steve Oke. The Company therefore considers that it complies with
the Combined Code recommendations regarding the composition of the Audit
Committee.
The Audit Committee meets formally at least three times a year and otherwise as
required.
Remuneration Committee
The Remuneration Committee assists the Board in determining its responsibilities
in relation to remuneration, including making recommendations to the Board on
the Company's policy on executive remuneration, determining the individual
remuneration and benefits package of each of the executive directors and
recommending and monitoring the remuneration of senior management below Board
level. The Combined Code provides that the Remuneration Committee should consist
of at least three members who are all independent non executive directors.
The membership of the Company's Remuneration Committee comprises three Non
Executive Directors (Oleg Ignatov and Boris Zakharov). The Chairman of the
Remuneration Committee is David Netherway. The Company therefore considers that
it complies with the Combined Code recommendations regarding the composition of
the Remuneration Committee.
The Remuneration Committee meets formally at least twice a year and otherwise as
required.
8.7. Directors and officers liability insurance
The Group has in place a Directors and Officers insurance policy to cover
relevant individuals against claims arising from their work on behalf of the
company. The Board intends to keep the level of cover provided under annual or
more frequent review, as appropriate.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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Kazera Global (LSE:KZG)
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Kazera Global (LSE:KZG)
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