TIDMKZG
RNS Number : 4513F
KazakhGold Group Ltd
26 April 2011
kazakhgold group limited
CONSOLIDATED FINANCIAL STATEMENTS FOR the YEAR ENDED 31 DECEMBER
2010
INDEX Page
Statement of management's responsibilities for the preparation
and approval of the consolidated financial statements for the year
ended 31 December 2010 1
Independent auditors' report 2-3
Consolidated financial statements for the year ended 31 December
2010:
Consolidated statement of operations 4
Consolidated statement of comprehensive loss 5
Consolidated statement of financial position 6
Consolidated statement of cash flows 7-8
Consolidated statement of changes in equity 9
Notes to the consolidated financial statements 10-41
kazakhgold group limited
STATEMENT OF MANAGEMENT'S RESPONSIBILITIES FOR THE PREPARATION
AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR the year
ended 31 December 2010
Management is responsible for the preparation of the
consolidated financial statements that present fairly the financial
position of the Group as of 31 December 2010, and the results of
its operations, cash flows and changes in equity for the year then
ended, in compliance with International Financial Reporting
Standards as issued by the International Accounting Standards Board
("IFRS").
In preparing the consolidated financial statements, management
is responsible for:
-- properly selecting and applying accounting policies;
-- presenting information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
-- providing additional disclosures when compliance with the
specific requirements in IFRS are insufficient to enable users to
understand the impact of particular transactions, other events and
conditions on the Group's consolidated financial position and
financial performance; and
-- making an assessment of the Group's ability to continue as a
going concern.
Management is also responsible for:
-- designing, implementing and maintaining an effective and
sound system of internal controls, throughout the Group;
-- maintaining adequate accounting records that are sufficient
to show and explain the Group's transactions and disclose with
reasonable accuracy at any time the consolidated financial position
of the Group, and which enable them to ensure that the consolidated
financial statements of the Group comply with IFRS;
-- maintaining accounting records in compliance with statutory
legislation and accounting standards in the jurisdictions in which
the Group operates;
-- taking such steps as are reasonably available to them to
safeguard the assets of the Group; and
-- preventing and detecting fraud and other irregularities.
The consolidated financial statements of the Group for the year
ended 31 December 2010 were approved by Management on 20 April
2011:
On behalf of the Management:
_____________________________
Ivanov E. I.
Chief Executive Officer
KazakhGold Group Limited
20 April 2011
independent auditors' report
To: Shareholders of KazakhGold Group Limited
We have audited the accompanying consolidated financial
statements of KazakhGold Group Limited and its subsidiaries (the
"Group"), which comprise the consolidated statement of financial
position as at 31 December 2010, and the consolidated statements of
operations, comprehensive loss, changes in equity and cash flows
for the year then ended, and a summary of significant accounting
policies and other explanatory information.
Management's responsibility for the consolidated financial
statements
Management is responsible for the preparation and fair
presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards as
issued by the International Accounting Standard Board, and for such
internal control as management determines is necessary to enable
the preparation of consolidated financial statements that are free
from material misstatement, whether due to fraud or error.
Auditor's responsibility
Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. We conducted
our audit in accordance with International Standards on Auditing.
Those standards require that we comply with ethical requirements
and plan and perform the audit to obtain reasonable assurance
whether the consolidated financial statements are free from
material misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditor's
judgement, including the assessment of the risks of material
misstatement of the consolidated financial statements, whether due
to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the Group's preparation and
fair presentation of the consolidated financial statements in order
to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Group's internal control. An audit also
includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management,
as well as evaluating the overall presentation of the consolidated
financial statements.
We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our audit
opinion.
Opinion
In our opinion, the consolidated financial statements present
fairly, in all material respects, the financial position of the
Group as at 31 December 2010, and its financial performance and its
cash flows for the year then ended in accordance with International
Financial Reporting Standards as issued by the International
Accounting Standards Board.
Emphasis of matter
Without modifying our opinion, we draw your attention to Note 1
to the consolidated financial statements which describes the
working capital deficiency and the Group's involvement in legal
proceedings, the resolution of which is uncertain at the date of
issuance of these consolidated financial statements and which may
have a material impact on the Group's future operations and which
may cast significant doubt about the Group's ability to continue as
a going concern.
Moscow, Russia
20 April 2011
Kazakhgold group limited
CONSOLIDATED STATEMENT of operations
FOR the year ended 31 December
(in thousands of US Dollars)
Notes 2010 2009
-------- ---------
Gold sales 114,448 58,434
Other sales 1,246 1,943
-------- ---------
Total revenue 115,694 60,377
Cost of gold sales (76,997) (57,296)
Cost of other sales (3,306) (2,846)
-------- ---------
Gross profit 35,391 235
Selling, general and administrative
expenses (24,260) (39,746)
Other expenses, net 6 (35,230) (32,621)
Finance costs 7 (32,929) (31,841)
Foreign exchange gain/(loss), net 1,086 (45,927)
-------- ---------
Loss before income tax (55,942) (149,900)
Income tax (expense)/benefit 8 (1,329) 6,161
-------- ---------
Loss for the year (57,271) (143,739)
======== =========
Attributable to:
Shareholders of the Company (56,265) (142,899)
Non-controlling interests (1,006) (840)
-------- ---------
(57,271) (143,739)
======== =========
Loss per share
Basic and diluted (US Dollars) 9 (0.66) (2.70)
The accompanying notes are an integral part of these
consolidated financial statements.
kazakhgold group limited
CONSOLIDATED statement of comprehensive LOSS
FOR the year ended 31 December
(in thousands of US Dollars)
2010 2009
-------- ---------
Loss for the year (57,271) (143,739)
-------- ---------
Other comprehensive (loss)/income
Revaluation surplus on property,
plant and equipment
(2009: net of tax of USD 1,598 thousand) - 8,627
Effect of translation to presentation
currency (2,867) 13,561
-------- ---------
Other comprehensive (loss)/income
for the year (2,867) 22,188
-------- ---------
Total comprehensive loss for the
year (60,138) (121,551)
======== =========
Attributable to:
Shareholders of the Company (59,133) (121,551)
Non-controlling interests (1,005) -
(60,138) (121,551)
======== =========
The accompanying notes are an integral part of these
consolidated financial statements.
kazakhgold group limited
CONSOLIDATED statement of financial position
AT 31 DECEMBER
(in thousands of US Dollars)
Notes 2010 2009
--------- ---------
ASSETS
Non-current assets
Property, plant and equipment 10 190,151 197,051
Inventories 12 2,245 2,867
Other non-current assets 11 1,583 -
193,979 199,918
--------- ---------
Current assets
Inventories 12 27,891 14,265
Reimbursable value added tax 4,538 -
Trade and other receivables 13 1,812 2,124
Advances paid to suppliers 14 2,560 1,905
Prepaid income tax 1,765 3,057
Cash and cash equivalents 15 8,162 3,531
Other current assets 1,019 953
47,747 25,835
--------- ---------
TOTAL ASSETS 241,726 225,753
========= =========
NEGATIVE EQUITY AND LIABILITIES
Capital and reserves
Share capital 16 332,392 233,645
Revaluation surplus 7,787 7,787
Option premium on convertible debt 17 15,598 15,598
Translation reserve 22,533 25,401
Accumulated losses (465,866) (409,601)
--------- ---------
Negative equity attributable to shareholders
of the Company (87,556) (127,170)
Non-controlling interests (1,005) -
--------- ---------
(88,561) (127,170)
Non-current liabilities
Borrowings 17 24,155 20,812
Environmental obligations 18 20,758 13,356
Other non-current liabilities 19 4,458 15,526
49,371 49,694
--------- ---------
Current liabilities
Borrowings 17 249,310 257,816
Trade, other payables and accrued expenses 20 27,507 20,668
Income taxes payable 1,332 -
Other taxes payable 2,767 24,745
--------- ---------
280,916 303,229
--------- ---------
TOTAL LIABILITIES 330,287 352,923
--------- ---------
TOTAL NEGATIVE EQUITY AND LIABILITIES 241,726 225,753
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
kazakhgold group limited
CONSOLIDATED STATEMENT of cash flows
FOR the year ended 31 December
(in thousands of US Dollars)
2010 2009
-------- ---------
Operating activities
Loss before income tax (55,942) (149,900)
Adjustments for:
Amortisation and depreciation 18,116 17,659
Loss on revaluation of property, plant and
equipment - 11,079
Impairment of property, plant and equipment 26,544 -
Finance costs 32,929 31,841
Foreign exchange (gain)/loss, net (1,086) 45,927
Bank guarantee provision - 11,650
Non-recoverable value added tax on construction,
repair, maintenance and exploration works - 5,219
Bad debt (release)/expense (65) 3,594
Loss on disposal of property, plant and equipment 574 1,859
Other 1,996 1,881
-------- ---------
23,066 (19,191)
Movements in working capital:
Inventories (12,493) (2,842)
Trade and other receivables 383 (229)
Advances paid to suppliers (565) (990)
VAT reimbursable (5,259) -
Other current assets (62) (851)
Trade, other payables and accrued expenses (2,599) 707
Other taxes payable (20,401) (1,672)
Cash flows used in operations (17,930) (25,068)
Interest paid (24,546) (22,457)
Income tax paid (1,410) (1,462)
-------- ---------
Net cash used in operating activities (43,886) (48,987)
-------- ---------
Investing activities
Purchase of property, plant and equipment (33,548) (7,372)
Net cash used in investing activities (33,548) (7,372)
-------- ---------
kazakhgold group limited
CONSOLIDATED STATEMENT of cash flows
FOR the year ended 31 December (CONTINUED)
(in thousands of US Dollars)
Notes 2010 2009
-------- --------
Financing activities
Proceeds from borrowings 49,960 91,288
Repayments of borrowings (60,841) (43,145)
Repayments of finance lease obligations - (501)
Repayment of bank guarantee liability (4,967) -
Proceeds from issue of Company's share
capital 16 100,000 -
Expenses on issue of Company's share
capital (1,253) -
Net cash generated by financing activities 82,899 47,642
-------- --------
Net increase/(decrease) in cash and
cash equivalents 5,465 (8,717)
-------- --------
Cash and cash equivalents at beginning
of the year 3,531 13,966
-------- --------
Restricted cash 11 (862) -
-------- --------
Effect of foreign exchange rate changes 28 (1,718)
-------- --------
Cash and cash equivalents at end of
the year 15 8,162 3,531
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
kazakhgold group limited
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR the YEAR ended 31 december
(in thousands of US Dollars)
Equity attributable to shareholders of the Company
---------------------------------------------------------------------------
Option
premium on
Share Translation Revaluation convertible Accumulated Non-controlling
Notes capital reserve surplus debt losses Total interests Total
-------- ------------ ------------ ------------ ------------ --------- ---------------- ---------
Balance at 1
January 2009 233,645 11,840 - - (266,702) (21,217) - (21,217)
Loss for the
year - - - - (142,899) (142,899) (840) (143,739)
Other
comprehensive
income (net of
tax in the
amount of USD
1,598
thousand) - 13,561 7,787 - - 21,348 840 22,188
-------- ------------ ------------ ------------ ------------ --------- ---------------- ---------
Total
comprehensive
loss - 13,561 7,787 - (142,899) (121,551) - (121,551)
Issuance of
convertible
debt 17 - - - 15,598 - 15,598 - 15,598
Balance at 31
December 2009 233,645 25,401 7,787 15,598 (409,601) (127,170) - (127,170)
Loss for the
year - - - - (56,265) (56,265) (1,006) (57,271)
Other
comprehensive
loss - (2,868) - - - (2,868) 1 (2,867)
-------- ------------ ------------ ------------ ------------ --------- ---------------- ---------
Total
comprehensive
loss - (2,868) - - (56,265) (59,133) (1,005) (60,138)
Issuance of
ordinary
shares 98,747 - - - - 98,747 - 98,747
Balance at 31
December 2010 332,392 22,533 7,787 15,598 (465,866) (87,556) (1,005) (88,561)
======== ============ ============ ============ ============ ========= ================ =========
The accompanying notes are an integral part of these
consolidated financial statements.
1. GENERAL information
Organisation
KazakhGold Group Limited (the "Company" or "KazakhGold") was
incorporated in Jersey on 26 September 2005. The principal
activities of the Company and its subsidiaries (the "Group") are
the extraction, production and sale of cathodic gold, free gold and
other gold-bearing products. Mining and processing facilities of
the Group are located in the northern part of the Republic of
Kazakhstan. The Group also performs research and exploration works,
primarily in the existing production locations, in Central and
Eastern Kazakhstan and in Romania. Details regarding the nature of
the business and of the significant subsidiaries of the Group are
presented below:
Effective % held(1)
---------------------
Country of Nature of
Subsidiaries incorporation business 2010 2009
---------------- ------------------ ---------- ---------
JSC MMC
Kazakahltyn Kazakhstan Mining 100.0 100.0
Mining
Romaltyn Mining (Exploration
S.R.L. Romania stage) 100.0 100.0
Romaltyn Mining
Exploration (Exploration
S.R.L. Romania stage) 100.0 100.0
Mining
Talas Gold (Exploration
Mining Company Kyrgyzstan stage) 66.7 66.7
(1 ) Effective % held by the Company, including holdings by
other subsidiaries of the Company.
On 30 July 2009, a 50.2% interest in the Group was acquired by
Open Joint Stock Company ("OJSC") Polyus Gold through its 100%
owned subsidiary Jenington International Inc. ("Jenington")
(hereinafter, is referred to as "Polyus Gold" or the "Ultimate
Parent"). On 1 July 2010, the Company issued 66,666,667 ordinary
shares, resulting in gross proceeds of USD 100 million. Polyus
Gold, through its subsidiary Jenington, subscribed for 51,194,922
of these shares thereby increasing its ownership interest in the
Company to 65% of the issued share capital.
Authorisation for issuance
The consolidated financial statements of the Group have been
authorised for issuance by the Board of Directors on 20 April
2011.
Going concern assumption
Subsequent to the acquisition of KazakhGold by Polyus Gold in
2009, management has focused on cost reduction and investing in
mining infrastructure as a means of facilitating increases in
production. As a result of these actions, combined with the
increase in gold prices, the Group's gross profit has increased to
USD 35,391 thousand for the year ended 31 December 2010 from USD
235 thousand for the year ended 31 December 2009 and selling,
general and administrative expenses have decreased to USD 24,260
thousand for the year ended 31 December 2010 from USD 39,746
thousand for the year ended 31 December 2009.
Despite the improvement in operations, the Group continued to
incur losses in 2010 of USD 57,271 thousand (2009: USD 143,739
thousand), and has negative working capital of USD 233,169 thousand
at December 2010 (2009: USD 277,394 thousand) and had cash outflows
from operations in 2010 of USD 43,886 thousand (2009: USD 48,987
thousand).
At 31 December 2010 the Group has the following borrowings (Note
7):
-- Senior notes in the amount of USD 200,000 thousand (the
"Notes") guaranteed by Polyus Gold;
-- A loan from Jenington of USD 49,310 thousand); and
-- A loan from Gold Lion Holdings Limited ("Gold Lion") of
24,155 thousand, a former related party.
Pursuant to the agreement relating to the Notes, the Group is
obligated to comply with a number of restrictive covenants,
including limitations on obtaining additional indebtedness, and
meeting certain financial reporting timelines. At 31 December 2010
and 2009, the Group was not in compliance with certain of these
covenants and as a consequence, the Group classified the Notes as a
current liability. In addition, the loan from Jenington is also due
in 2011. The Group's working capital deficit has primarily resulted
as a consequence of this breach of covenants.
In addition to the Group's financial difficulties as described
above, there is currently a dispute between the former and current
shareholders of the Company whereby the current shareholders are
asserting that the former shareholders were negligent in their
fiduciary responsibilities related to the Group. On 25 June 2010,
Polyus Gold filed a lawsuit with the High Court in London against
the former controlling shareholders.
Subsequent to that date, the Government of the Republic of
Kazakhstan (the "Government") has taken various actions against the
current management and directors that have had both a direct and an
indirect impact on the Group's operations. These actions include
the following:
-- on 12 July 2010, JSC MMC Kazakhaltyn ("Kazakhaltyn"), a major
production subsidiary of the Company located in the Republic of
Kazakhstan, received notification from the Ministry of Industry and
New Technologies of the Republic of Kazakhstan indicating that the
previous decisions of the competent authorities in Kazakhstan
providing a waiver of the state's pre-emptive right to acquire the
Company's securities had been annulled. These waivers were obtained
in connection with (a) Jenington's acquisition of 50.2% of the
shares of the Company in July 2009, (b) the issuance of shares by
the Company in July 2010 that resulted in gross proceeds of USD 100
million, and (c) the proposed merger of Polyus Gold and the Company
announced on June 30, 2010;
-- on 2 August 2010, the KazakhAltyn received legal notification
that a freeze had been placed by the Agency on Economic and
Corruption Crimes ("AECC") in Kazakhstan on certain bank accounts
held in Kazakhstan by Kazakhaltyn. This freeze is in connection
with an investigation by the AECC into allegations of fraud by
three members of its current Board of Directors. After
clarification, Kazakhaltyn was permitted limited access to make
payments to employees and certain key suppliers;
-- on 23 August 2010, an unscheduled tax audit of Kazakhaltyn
commenced relating to fiscal years 2009 and 2010. This tax audit
subsequently resulted in the reopening of 2007 and 2008 for
additional tax audits; and
-- on 7 September 2010, major production assets owned by
Kazakhaltyn were frozen under an AECC order which had been made in
connection with its investigation. The restriction prohibits the
Group from disposing of property, plant and equipment owned by
Kazakhaltyn, but has no Kazakhaltyn's current operating
activities.
Management of the Group believe that based on the rapid sequence
of these events, the actions of the Government are in direct
response to the legal proceedings brought by the current
shareholders against the former shareholders.
The Group is unable to predict the outcome of the actions taken
by the Government and therefore cannot reasonably predict the
impact that the ultimate resolution of such matters will have on
its operations, ability to meet its obligations or ability to
realise its assets.
On 8 December 2010, the Company entered into an agreement (the
"Original Principal Agreement") to sell all of its operating
subsidiaries in Kazakhstan, Romania and Kyrgyzstan (JSC MMC
Kazakhaltyn, Romaltyn Mining S.R.L., Romaltyn Exploration S.R.L.
and CJSC Talas Gold Mining Company) to AltynGroup, the former
controlling shareholders of the Group for payment in two tranches
totaling USD 509 million. The first tranche was due not later than
11 March 2011. The former controlling shareholder did not pay the
first tranche in accordance with the terms of the Original
Principal Agreement, resulting in termination of the Original
Principal Agreement.
Following the termination of the Original Principal Agreement,
the Company has continued with negotiations regarding the sale of
the operating subsidiaries to the former shareholders. In April
2011, the Company and AltynGroup entered into a Restated and
Amended Principal Agreement (the "RAPA") and a settlement deed in
which the Company would release the claims against the former
shareholders.
Pursuant to the RAPA, AltynGroup will acquire all of the
Company's operating subsidiaries in exchange for total
consideration of USD 509 million comprised of cash consideration,
and forgiveness of outstanding loans to Gold Lion Holdings Limited,
an entity controlled by AltynGroup. The first tranche must be
settled no later than 12 September 2011 for an amount equal to USD
259,590 thousand. On or before first tranche completion AltynGroup
will provide funds to the Company in order to repay its shareholder
loan from Jenington, a subsidiary of Polyus Gold. In addition to
this consideration, AltynGroup must replace Polyus Gold as
guarantor of the Group's Notes prior to the first tranche
expiration date. The remaining consideration may occur in more than
one tranche at the option of AltynGroup, but must be settled no
later than 31 December 2012. The completion of the RAPA is subject
to governmental approvals and consents as well as AltynGroup's
ability to obtain the funds necessary to complete these
transactions.
There can be no assurance that the conditions to the
transactions contemplated by the RAPA will be satisfied, or that
the transactions will be completed.
The Directors of the Company have concluded that the factors
described above relating to the Group's financial position at 31
December 2010, coupled with the actions taken by the government,
indicate the existence of a material uncertainty that casts
significant doubt upon the Group's ability to continue as a going
concern and that therefore, the Group may be unable to realise its
assets and meet its obligations in the ordinary course of
business.
Management has considered the following in determining whether
or not these consolidated financial statements should be prepared
on a going concern basis:
-- Polyus Gold guarantee of the Group's Notes
-- Polyus Gold has confirmed its intention to support the
Company's operations for a period to 30 April 2012, as long as it
continues to be the Company's parent. Polyus Gold has a historical
track record of profit from operations and generates sufficient
cash flows to provide the Group with funding for its operations;
and
-- KazakhAltyn, the Company's largest operating subsidiary,
continues to be a significant employer in the regions in Kazakhstan
where it operates and therefore management believes that
KazakhAltyn would obtain support from the local government
authorities to continue operating in that region.
Based on this assessment, management believes that it is
reasonable that the Group will be able to finance its operations
and meet its obligations for a period not less than twelve months
from the date of issuance of these consolidated financial
statements. Accordingly, management has continued to adopt the
going concern basis of accounting in preparing the consolidated
financial statements for the year ended 31 December 2010.
2. Application of new and revised international financial
reporting standards
Statement of compliance
The consolidated financial statements of the Group have been
prepared in accordance with International Financial Reporting
Standards ("IFRS"). IFRS includes standards and interpretations
approved by the International Accounting Standards Board ("IASB"),
including International Accounting Standards ("IAS") and
interpretations issued by the International Financial Reporting
Interpretations Committee ("IFRIC").
New and revised standards and interpretations adopted in the
current period
The following new standards, amendments to standards or
interpretations are adopted by the Group and effective for the
financial year commencing 1 January 2010:
-- IFRS 2 "Share-based payment" - amendment;
-- IAS 39 "Financial instruments: recognition and measurement" -
amendment;
-- IFRIC 17 "Distributions of non-cash assets to owners";
and
-- Annual improvements to IFRS (April 2009)
The first time application of the aforementioned amendments to
standards and interpretations from 1 January 2010 had no material
effect on the consolidated financial statements of the Group.
Standards and interpretations in issue not yet adopted
At the date of approval of the Group's consolidated financial
statements, the following new and revised Standards and
Interpretations have been issued, but are not effective for the
current year:
Effective for
annual periods
beginning on
or after
---------------
IAS 12 "Income taxes" - amendment 1 January 2012
IAS 24 "Related party disclosures" - revision 1 January 2011
IAS 32 "Financial instruments: presentation" - 1 February
amendment 2010
IFRS 7 " Financial Instruments: Disclosures" - 1 July 2011
amendment
IFRS 9 " Financial instruments" - amendment 1 January 2013
IFRIC 19 "Extinguishing financial liabilities with 1 July 2010
equity"
Annual improvements to IFRS (May 2010) 1 January 2010
The impact of the adoption of these Standards and
Interpretations in the preparation of the consolidated financial
statements in future periods is currently being assessed by Group
management, however no material effect on the Group's financial
position or results of its operations is anticipated.
3. SIGNIFICANT ACCOUNTING POLICIES
Basis of preparation
The consolidated financial statements of the Group are prepared
on the historical cost basis, except for periodic revaluation of
property, plant and equipment in accordance with IAS 16 Property,
Plant and Equipment, and certain financial instruments that are
measured at fair values, as explained in the accounting policies
below.
The entities of the Group maintain their accounting records in
accordance with the laws, accounting and reporting regulations of
the jurisdictions in which they are incorporated and registered.
The accounting principles and financial reporting procedures in
these jurisdictions may differ substantially from those generally
accepted under IFRS. Accordingly, financial statements of such
entities have been adjusted to ensure that the consolidated
financial statements are presented in accordance with IFRS.
Basis of consolidation
The consolidated financial statements of the Group include the
financial statements of the Company and its subsidiaries, from the
date that control effectively commenced until the date that control
effectively ceased. Control is achieved where the Company has the
power to govern the financial and operating policies of an entity
so as to obtain benefits from its activities.
Non-controlling interest in the net assets of consolidated
subsidiaries is identified separately from the Group's equity
therein. The interests of non-controlling shareholders may be
initially measured at fair value or at the non-controlling
interests' proportionate share of the fair value of the acquiree's
identifiable net assets. The choice of measurement is made on an
acquisition-by-acquisition basis. Subsequent to acquisition, the
carrying amount of non-controlling interests is the amount of those
interests at initial recognition plus the non-controlling
interests' share of subsequent changes in equity. Total
comprehensive loss is attributed to non-controlling interests even
if this results in the non-controlling interests having a deficit
balance.
All intra-group balances, transactions and any unrealised
profits or losses arising from intra-group transactions are
eliminated in full on consolidation.
Changes in the Group's ownership interests in existing
subsidiaries
Changes in the Group's ownership interests in subsidiaries that
do not result in the Group losing control over the subsidiaries are
accounted for as equity transactions. The carrying amounts of the
Group's interests and the non-controlling interests are adjusted to
reflect the changes in their relative interests in the
subsidiaries. Any difference between the amount by which the
non-controlling interests are adjusted and the fair value of the
consideration paid or received is recognised directly in equity and
attributed to owners of the Company.
When the Group loses control of a subsidiary, the profit or loss
on disposal is calculated as the difference between (i) the
aggregate of the fair value of the consideration received and the
fair value of any retained interest and (ii) the previous carrying
amount of the assets (including goodwill), and liabilities of the
subsidiary and any non-controlling interests. When assets of the
subsidiary are carried at revalued amounts or fair values and the
related cumulative gain or loss has been recognised in other
comprehensive (loss)/income and accumulated in equity, the amounts
previously recognised in other comprehensive (loss)/income and
accumulated in equity are accounted for as if the Company had
directly disposed of the relevant assets (i.e. reclassified to
profit or loss or transferred directly to retained earnings as
specified by applicable IFRSs). The fair value of any investment
retained in the former subsidiary at the date when control is lost
is regarded as the fair value on initial recognition for subsequent
accounting under IAS 39 Financial Instruments: Recognition and
Measurement or, when applicable, the cost on initial recognition of
an investment in an associate or a jointly controlled entity.
Business combinations
Acquisitions of businesses, other than acquisitions from
entities under common control, are accounted for using the
acquisition method. The cost of the business combination is
measured as the aggregate of the fair values (at the date of
acquisition) of assets given, liabilities incurred or assumed, and
equity instruments issued by the Group in exchange for control of
the acquiree. Acquisition related costs are generally recognised in
profit and loss as incurred.
The acquiree's identifiable assets, liabilities and contingent
liabilities that meet the conditions for recognition are recognised
at their fair values at the acquisition date, except for
non-current assets (or disposal groups) that are classified as held
for sale in accordance with IFRS 5 Non-current Assets Held for Sale
and Discontinued Operations, which are recognised and measured at
fair value less costs to sell and deferred tax assets or
liabilities, which are recognised and measured in accordance with
IAS 12 Income Taxes.
Goodwill
Goodwill arising on acquisition is recognised as an asset and
initially measured at cost, being the excess of the cost of the
business combination over the Group's interest on the net fair
value of the identifiable assets, liabilities and contingent
liabilities recognised. If the Group's interest in the net fair
value of the acquiree's identifiable assets, liabilities and
contingent liabilities exceeds the cost of the business
combination, the excess is recognised immediately in the statement
of operations.
Goodwill is not amortised but is reviewed for impairment at
least annually. For the purpose of impairment testing, goodwill is
allocated to each of the Group's cash-generating units expected to
benefit from the synergies of the combination. Cash-generating
units to which goodwill has been allocated are tested for
impairment annually, or more frequently when there is an indication
that the unit may be impaired. If the recoverable amount of the
cash-generating unit is less than the carrying amount of the unit,
the impairment loss is allocated first to reduce the carrying
amount of any goodwill allocated to the unit and then to the other
assets of the unit pro-rata on the basis of the carrying amount of
each asset in the unit. An impairment loss recognised for goodwill
is not reversed in a subsequent period.
On disposal of a subsidiary, the attributable amount of goodwill
is included in the determination of the gain or loss on
disposal.
Common control transactions
Subsidiaries acquired from entities under common control are
recorded in the Group's financial statements at the transferor's
carrying values of the assets and liabilities of such subsidiaries.
Any difference between the carrying value of the net assets of
subsidiaries acquired, and the consideration paid by the Group is
accounted for as an adjustment to shareholder's equity. The net
assets of the subsidiaries and their results are retrospectively
recognised from the date on which control of the subsidiaries was
obtained by the transferor.
Assets acquired from entities under common control (outside of
business combinations) are recognised at the transferor's carrying
value as of the date of the transaction. Any difference between the
carrying value of the assets acquired and the consideration paid by
the Group is accounted for as an adjustment to equity.
Functional and presentation currency
The individual financial statements of the Group's subsidiaries
are prepared in their functional currency.
The US Dollar ("USD") is the functional currency of the Company.
Kazakh Tenge ("KZT") is the functional currency of the Company's
subsidiaries located in the Republic of Kazakhstan. The functional
currencies of other subsidiaries operating with significant degrees
of autonomy are presented below:
Subsidiary Functional
currency
----------
Romaltyn Mining S.R.L. Romanian
Lei
Romaltyn Exploration S.R.L. Romanian
Lei
Talas Gold Mining Company Kyrgyz Som
The Group has chosen to present its consolidated financial
statements in USD, as management believes it a convenient
presentation currency for international users of the consolidated
financial statements of the Group. The translation of the financial
statements of the Group entities from their functional currencies
to the presentation currency is made as follows:
-- All assets and liabilities, both monetary and non-monetary,
are translated at closing exchange rates at each reporting period
end date;
-- All income and expenses in each statement of operations are
translated at the average exchange rates for the years
presented;
-- Resulting exchange differences are included in other
comprehensive (loss)/income and presented as Effect of translation
to presentation currency within Translation reserve; and
-- In the statement of cash flows, cash balances at beginning
and end of each reporting period presented are translated at
exchange rates at the respective dates. All cash flows are
translated at the average exchange rates for the years presented,
except for significant transactions that are translated at rates on
the date of the transaction. Resulting exchange differences are
presented as Effect of translation to presentation currency.
Exchange rates used in the preparation of the consolidated
financial statements were as follows:
2010 2009
------ ------
KZT/USD
31 December 147.40 148.36
Average for the year 147.35 147.51
Romanian Lei/USD
31 December 3.20 2.94
Average for the year 3.18 3.05
Kyrgyz Som/USD
31 December 47.10 44.09
Average for the year 45.99 42.99
Foreign currencies
Transactions in currencies other than the entity's functional
currencies (foreign currencies) are recorded at the exchange rates
prevailing on the dates of the transactions. All monetary assets
and liabilities denominated in foreign currencies are translated at
the exchange rates prevailing at the reporting date. Non--monetary
items carried at historical cost are translated at the exchange
rate prevailing on the date of transaction. Non-monetary items
carried at fair value are translated at the exchange rate
prevailing on the date on which the most recent fair value was
determined. Exchange differences arising from changes in exchange
rates are recognised in the consolidated statement of
operations.
Property, plant and equipment
Estimated ore reserves
Estimated proven and probable ore reserves reflect the
economically recoverable quantities which can be legally recovered
in the future from known mineral deposits. The majority of the
Group's reserves are estimated in accordance with the Former Soviet
Union and Romanian National Agency for Mineral Resources
classification codes.
Exploration and evaluation assets
Exploration and evaluation assets represent capitalised
expenditures incurred by the Group in connection with the
exploration for and evaluation of gold resources, such as:
-- Acquisition of rights to explore potentially mineralised
areas;
-- Topographical, geological, geochemical and geophysical
studies;
-- Exploratory drilling;
-- Trenching;
-- Sampling; and
-- Activities in relation to evaluating the technical
feasibility and commercial viability of extracting a gold
resource.
Exploration and evaluation expenditures are carried at
historical cost. Exploration and evaluation expenditures are
capitalised when it is expected that they will be recouped by
future exploitation or sale, and when the exploration and
evaluation activities have not reached a stage that permits a
reasonable assessment of the existence of commercially recoverable
gold reserves. When the technical feasibility and commercial
viability of extracting a gold resource are demonstrable,
capitalised exploration and evaluation assets are reclassified to
mining assets.
Impairment of exploration and evaluation assets
Exploration and evaluation assets are assessed for impairment
when facts and circumstances suggest that the carrying amount of an
exploration and evaluation asset may exceed its recoverable amount.
The following facts and circumstances, among others, indicate that
exploration and evaluation assets must be tested for
impairment:
-- The term of exploration license in the specific area has
expired during the reporting period or will expire in the near
future, and is not expected to be renewed;
-- Substantive expenditure on further exploration for and
evaluation of gold resources in the specific area is neither
budgeted nor planned;
-- Exploration for and evaluation of gold resources in the
specific area have not led to the discovery of commercially viable
quantities of gold resources and the decision was made to
discontinue such activities in the specific area; and
-- Sufficient data exists to indicate that, although a
development in the specific area is likely to proceed, the carrying
amount of the exploration and evaluation asset is unlikely to be
recovered in full from successful development or by sale.
For the purpose of assessing exploration and evaluation assets
for impairment, such assets are allocated to cash-generating units,
being exploration license areas.
Any impairment loss is recognised as an expense in accordance
with the policy on impairment of tangible assets set out below.
Mining assets
Mining assets are classified as, property, plant and equipment
and are carried at revalued amounts, being the fair value at the
date of the revaluation plus costs since the last revaluation and
less any subsequent accumulated depreciation and subsequent
accumulated impairment losses.
Revaluations are made with sufficient regularity to ensure that
the carrying amount does not differ materially from that which
would be determined using fair value at the end of the reporting
period. If an item of property, plant and equipment is revalued,
the entire class of property, plant and equipment to which that
asset belongs is revalued.
If an asset's carrying amount is increased as a result of a
revaluation, the increase is recognised in other comprehensive
(loss)/income and accumulated in equity within Revaluation surplus.
However, the increase is recognised in profit or loss to the extent
that it reverses a revaluation decrease of the same asset
previously recognised in profit or loss.
If an asset's carrying amount is decreased as a result of a
revaluation, the decrease is recognised in the consolidated
statement of operations. However, the decrease is recognised in
other comprehensive (loss)/income to the extent of any credit
balance existing in the revaluation surplus in respect of that
asset. The decrease recognised in other comprehensive (loss)/income
reduces the amount accumulated in equity within Revaluation
surplus.
The revaluation surplus included in equity in respect of an item
of property, plant and equipment is transferred directly to
retained earnings when the asset is retired or disposed of.
Mining assets are amortised on a straight-line basis over the
estimated useful life of individual assets or the life of mines of
23 years (which is based upon the mine development plans and
supported by proven and probable ore reserves), whichever is
shorter. Amortisation is charged from the date on which a mine
reaches commercial production quantities and is included in the
cost of production.
Non-mining assets
Non-mining assets such as buildings, structures, plant and
equipment, trucks and vehicles and other non-mining assets are
carried at revalued amounts on a similar basis as described in
section Mining assets above, less subsequent accumulated
depreciation. Land is not depreciated. Depreciation for all
non-mining assets is provided on a straight-line basis over the
economic useful lives of such assets:
-- buildings, structures, plant and equipment 5-13 years;
-- trucks and vehicles 3 years;
-- other assets 3-7 years.
Capital construction-in-progress
Capital construction-in-progress comprises costs directly
related to mine development, construction of buildings,
infrastructure, processing plant, machinery and equipment.
Amortisation or depreciation of these assets commences when the
assets are placed into commercial production.
Impairment of property, plant and equipment, other than
exploration and evaluation assets
An impairment review of property, plant and equipment is carried
out when there is an indication that those assets have suffered an
impairment loss. If any such indication exists, the carrying amount
of the asset is compared to the estimated recoverable amount of the
asset in order to determine the extent of the impairment loss (if
any).Where it is not possible to estimate the recoverable amount of
an individual asset, the Group estimates the recoverable amount of
the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to
sell and value-in-use. If the recoverable amount of an asset (or
cash-generating unit) is estimated to be less than its carrying
amount, the carrying amount of the asset (or cash-generating unit)
is reduced to its recoverable amount. The impairment loss is
recognised in the statement immediately, unless the relevant asset
is carried at revalued amount, in which case the impairment loss is
treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying
amount of the asset (or cash-generating unit) is increased to the
revised estimate of its recoverable amount, but only to the extent
that the increased carrying amount does not exceed the original
carrying amount that would have been determined had no impairment
loss been recognised in prior periods.
A reversal of an impairment loss is recognised in the statement
of operations immediately, unless the relevant asset is carried at
a revalued amount, in which case the reversal of the impairment
loss is treated as a revaluation increase.
Inventories
Finished goods
Gold-bearing products, which represent finished goods, are
measured at the lower of net production cost and net realisable
value. The net cost of production per unit of gold-bearing products
is determined by dividing production cost, by the saleable mine
output of gold-bearing products.
Production costs include consumables and spares, labour, tax on
mining, utilities, sundry costs, amortisation and depreciation of
operating assets, adjustments for deferred stripping costs
capitalised, change in provision for land restoration and change in
gold-in-process and finished goods.
Gold-in-process and stockpiles
Costs that are incurred in or benefit the production process are
accumulated as stockpiles and gold in process. Net realisable value
tests are performed at least annually and represent the estimated
future sales price of the product, based on prevailing spot metal
prices, less estimated costs to complete production and bring the
product to sale.
Gold-in-process is valued at the weighted average cost.
Stockpiles are recorded at cost, and volumes measured by
estimating the number of tonnes added and removed from the
stockpile, the number of contained gold ounces based on assay data,
and the estimated recovery percentage based on the expected
processing method. Stockpile volumes are verified by periodic
surveys.
Stores and materials
Stores and materials consist of consumable stores and are valued
at the weighted average cost less provision for obsolete and
slow-moving items.
Financial assets
Financial assets are recognised on trade date where the purchase
or sale of a financial asset is under a contract whose terms
require delivery of the financial asset within the timeframe
established by the market concerned, and are initially measured at
fair value, plus transaction costs, except for financial assets
classified as at fair value through profit or loss, which are
initially measured at fair value.
The Group's financial assets represent trade and other
receivables and are measured at amortised cost using the effective
interest method less any impairment.
Impairment of financial assets
When a trade or other receivable is uncollectible, it is written
off against the allowance account. Subsequent recoveries of amounts
previously written off are credited against the allowance account.
Changes in the carrying amount of the allowance account are
recognised in the consolidated statement of operations.
Derecognition of financial assets
The Group derecognises a financial asset only when the
contractual rights to the cash flows from the asset expire; or it
transfers the financial asset and substantially all the risks and
rewards of ownership of the asset to another entity. If the Group
neither transfers nor retains substantially all the risks and
rewards of ownership and continues to control the transferred
asset, the Group recognises its retained interest in the asset and
an associated liability for amounts it may have to pay. If the
Group retains substantially all the risks and rewards of ownership
of a transferred financial asset, the Group continues to recognise
the financial asset and also recognises a collateralised borrowing
for the proceeds received.
Financial liabilities
Financial liabilities, including borrowings, are initially
measured at fair value, net of transaction costs, and subsequently
measured at amortised cost using the effective interest method,
with interest expense recognised on an effective yield basis.
Effective interest method
The effective interest method is a method of calculating the
amortised cost of a financial liability and of allocating interest
expense over the relevant period. The effective interest rate is
the rate that exactly discounts estimated future cash outflows
through the expected life of the financial liability, or, where
appropriate, a shorter period.
Expense is recognised on an effective interest rate basis for
debt instruments.
Compound instruments
The component parts of compound instruments such as convertible
loans issued by the Group are classified separately as financial
liabilities and equity in accordance with the substance of the
contractual arrangement. At the date of issue, the fair value of
the liability component is estimated using the prevailing market
interest rate for a similar non-convertible instrument. This amount
is recorded as a liability on an amortised cost basis using the
effective interest method until extinguished upon conversion or at
the instrument's maturity date. The equity component is determined
by deducting the amount of the liability component from the fair
value of the compound instrument as a whole. This is recognised and
included in option premium on convertible debt within the statement
of changes in equity, net of income tax effects, and is not
subsequently remeasured.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only
when, the Group's obligations are discharged, cancelled or they
expire.
Finance costs
Finance costs directly attributable to the acquisition,
construction or production of qualifying assets, which are assets
that necessarily take a substantial period of time to get ready for
their intended use or sale, are added to the cost of those assets,
until such time as the assets are substantially ready for their
intended use or sale.
Investment income earned on the temporary investment of specific
borrowings pending their expenditure on qualifying assets is
deducted from the finance costs eligible for capitalisation.
All other finance costs are recognised in the consolidated
statement of operations in the period in which they are
incurred.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances, cash deposits
and highly liquid investments with original maturities of three
months or less, which are readily convertible to known amounts of
cash and are subject to an insignificant risk of changes in value.
Restricted cash is recorded as Other long-term assets.
Provisions
Provisions are recognised when the Group has a present
obligation (legal or constructive) as a result of a past event, it
is probable that the Group will be required to settle the
obligation, and a reliable estimate can be made of the amount of
the obligation.
The amount recognised as a provision is the best estimate of the
consideration required to settle the present obligation at the
reporting date, taking into account the risks and uncertainties
surrounding the obligation. Where a provision is measured using the
cash flows estimated to settle the present obligation, its carrying
amount is the present value of those cash flows.
Employee benefit obligations
Remuneration to employees in respect of services rendered during
a reporting period is recognised as an expense in that reporting
period.
The Group's entities in Kazakhstan contribute to the state
pension funds on behalf of all its current employees in accordance
with the Law of the Republic of Kazakhstan "On pension provisioning
in the Republic of Kazakhstan" effective from 1 January 1 1998. The
plan is a defined contribution plan.
These contributions are recognised in the statement of
operations when employees have rendered services entitling them to
the contribution.
Income tax
Income tax expense represents the sum of the tax currently
payable and deferred tax. Income taxes are computed in accordance
with the laws of countries where the Group operates.
Current tax
The tax currently payable is based on taxable profit for the
year. Taxable profit differs from profit as reported in the
consolidated statement of operations because it excludes items of
income or expense that are taxable or deductible in other years and
it further excludes items that are never taxable or deductible. The
Group's liability for current tax is calculated using tax rates
that have been enacted or substantively enacted by the reporting
date.
Deferred tax
Deferred tax is recognised on differences between the carrying
amounts of assets and liabilities in the financial statements and
the corresponding tax bases used in the computation of taxable
profit, and are accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognised for all
taxable temporary differences, and deferred tax assets are
generally recognised for all deductible temporary differences to
the extent that it is probable that taxable profits will be
available against which those deductible temporary differences can
be utilised. Such assets and liabilities are not recognised if the
temporary difference arises from goodwill or from the initial
recognition (other than in a business combination) of other assets
and liabilities in a transaction that affects neither the taxable
profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary
differences associated with investments in subsidiaries and
associates except where the Group is able to control the reversal
of the temporary difference and it is probable that the temporary
difference will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary
differences associated with such investments are only recognised to
the extent that it is probable that there will be sufficient
taxable profits against which to utilise the benefits of the
temporary differences and they are expected to reverse in the
foreseeable future.
The carrying amount of deferred tax assets is reviewed at each
reporting date and reduced to the extent that it is no longer
probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax
rates that are expected to apply in the period in which the
liability is settled or the asset realised, based on tax rates (and
tax laws) that have been enacted or substantively enacted by the
reporting date. The measurement of deferred tax liabilities and
assets reflects the tax consequences that would follow from the
manner in which the Group expects, at the reporting date, to
recover or settle the carrying amount of its assets and
liabilities.
Deferred tax assets and liabilities are offset when there is a
legally enforceable right to set off current tax assets against
current tax liabilities and when they relate to income taxes levied
by the same taxation authority and the Group intends to settle its
current tax assets and liabilities on a net basis.
Current and deferred tax for the period
Current and deferred tax are recognised as an expense or income
in the consolidated statement of operations, except when they
relate to items credited or debited directly to equity, in which
case the tax is also recognised directly in equity, or where they
arise from the initial accounting for a business combination. In
the case of a business combination, the tax effect is taken into
account in calculating goodwill or determining the excess of the
acquirer's interest in the net fair value of the acquiree's
identifiable assets, liabilities and contingent liabilities over
cost.
Revenue recognition
Gold sales revenue
Revenue from the sale of cathodic gold, free gold and other
gold-bearing products is recognised when the risks and rewards of
ownership are transferred to the buyer. Gold sales revenue
represents the invoiced value of gold shipped to customers, net of
value-added tax. Revenues from sale of by-products are netted
against production costs.
Other revenue
Other revenue consists of sales of goods, other than
gold-bearing products, and services the Group provides as necessary
in the locations where it operates. Revenue from sale of goods is
recognised when significant risks and rewards of ownership are
transferred to the buyer in accordance with the shipping terms
specified in the sales agreements. Revenue from services is
recognised when the services are rendered.
Operating leases
The lease of assets under which all the risks and benefits of
ownership are retained by the lessor are classified as operating
leases. Costs for operating leases are recognised on a straight
line basis over the lease term unless another systematic basis is
more representative of the time pattern of the user's benefit.
Environmental obligations
Environmental obligations include decommissioning and land
restoration costs.
Future decommissioning and land restoration costs, discounted to
net present value, are added to respective assets and corresponding
obligations raised as soon as the constructive obligation to incur
such costs arises and the future cost can be reliably estimated.
Additional assets are amortised on a straight-line basis over the
corresponding asset. The unwinding of the obligation is included in
the consolidated statement of operations as finance costs.
Obligations are periodically reviewed in light of current laws and
regulations, and adjustments made as necessary to the corresponding
item of property, plant and equipment.
Ongoing restoration costs are expensed when incurred.
4. CRITICAL ACCOUNTING ESTIMATES AND JudgementS
Preparation of the consolidated financial statements in
accordance with IFRS requires the Group's management to make
estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. The determination of estimates requires judgments which are
based on historical experience, current and expected economic
conditions, and all other available information. Actual results
could differ from those estimates.
Critical judgements in applying accounting policies
The following are the critical judgments, apart from those
involving estimations (see below), that the management has made in
the process of applying the Group's accounting policies and that
have the most significant effect on the amounts recognised in the
consolidated financial statements.
Revaluation of property, plant and equipment
The Group applies a revaluation model to measurement of
property, plant and equipment. Revaluations are made with
sufficient regularity to determine whether the carrying amount of
these assets differs materially from fair value. The Group carries
out such reviews based on the depreciated replacement cost approach
as the main approach to valuation of property, plant and equipment.
For each item of property plant and equipment the replacement cost
are estimated as the current cost to replace the assets with a
functionally equivalent asset. The replacement cost is then
adjusted for accrued depreciation, including physical depreciation
and functional and economic obsolescence. In 2010, the Group
concluded that the depreciated replacement cost did not differ
materially from fair value and as such did not revalue its
property, plant and equipment.
Contingencies
By their nature, contingencies will only be resolved when one or
more future events occur or fail to occur. The assessment of such
contingencies inherently involves the exercise of significant
judgments and estimates of the outcome of future events.
Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and
other key sources of estimation uncertainty at the end of the
reporting period that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within
the next financial year.
The most significant areas requiring the use of management
estimates and assumptions relate to:
-- Useful economic lives of property, plant and equipment;
-- Impairment of assets;
-- Calculation of allowance for doubtful debts;
-- Environmental obligations; and
-- Income taxes.
Useful economic lives of property, plant and equipment
The Group's mining assets, classified within property, plant and
equipment, are amortised on a straight-line basis over estimated
useful life of individual assets or the life of mines of 23 years
(which is based on estimated proven and probable ore reserves),
whichever is shorter. When determining life of mine, assumptions
that were valid at the time of estimation, may change when new
information becomes available.
The factors that could affect estimation of life of mine include
the following:
-- Change of estimates of proven and probable ore reserves;
-- The grade of mineral reserves varying significantly from time
to time;
-- Differences between actual commodity prices and commodity
price assumptions used in the estimation of ore reserves;
-- Unforeseen operational issues at mine sites; and
-- Changes in capital, operating mining, processing and
reclamation costs, discount rates and foreign exchange rates
possibly adversely affecting the economic viability of ore
reserves.
Any of these changes could affect prospective amortisation of
mining assets and their carrying value.
Non-mining property, plant and equipment are depreciated on a
straight-line basis over their useful economic lives. Management
periodically reviews the appropriateness of assets' useful economic
lives. The review is based on the current condition of the assets
and the estimated period during which they will continue to bring
economic benefit to the Group.
Allowance for doubtful debts
The Group creates allowances for doubtful debts to account for
estimated losses resulting from the inability of counterparties to
make required payments. When evaluating the adequacy of an
allowance for doubtful debts, management bases its estimates on the
current overall economic conditions, the aging of accounts
receivable balances, historical write-off experience, customer
creditworthiness and changes in payment terms. Changes in the
economy, industry or specific customer conditions may require
adjustments to the allowance for doubtful debts recorded in the
consolidated financial statements.
Impairment of tangible and intangible assets
The Group reviews the carrying amounts of its tangible and
intangible assets to determine whether there is any indication that
those assets are impaired. In making the assessment for impairment,
assets that do not generate independent cash flows are allocated to
an appropriate CGU.
Management necessarily applies its judgment in allocating assets
that do not generate independent cash flows to appropriate cash
generating units, and also in estimating the timing and value of
underlying cash flows within the value in use calculation. In
determining the value in use calculation, future cash flows are
estimated based on cash flows projection utilising the latest
budget information available.
In line with ongoing operational changes, the Group is
continually reassessing their property, plant and equipment
requirements, and plans for their future use. During the year ended
31 December 2010, the Group identified assets for which the book
value exceeded the anticipated recoverable value, and accordingly
an impairment was recorded in the amount of USD 26,544
thousand.
Due to its subjective nature, these estimates may differ from
actual results of operations and cash flows, and may therefore
result in further asset impairments in the future.
Environmental obligations
The Group's mining and exploration activities are subject to
various environmental laws and regulations. The Group estimates
environmental obligations based on the management's understanding
of the current legal requirements in the various jurisdictions,
terms of the license agreements and internally generated
engineering estimates. Provision is made, based on net present
values, for decommissioning and land restoration costs as soon as
the obligation arises. Actual costs incurred in future periods
could differ materially from the amounts provided. Additionally,
future changes to environmental laws and regulations, life of mine
estimates and discount rates could affect the carrying amount of
this provision.
Income taxes
The Group is subject to income taxes in numerous jurisdictions.
Significant judgment is required in determining the worldwide
provision for income taxes due to the complexity of legislation.
There are many transactions and calculations for which the ultimate
tax determination is uncertain. The Group recognises liabilities
for anticipated tax audit issues based on estimates of whether
additional taxes will be due. Where the final tax outcome of these
matters is different from the amounts that were initially recorded,
such differences will impact the income tax and deferred tax
provisions in the period in which such determination is made.
The Group is subject to income taxes in the Republic of
Kazakhstan. The taxation system in Kazakhstan is relatively new and
is characterized by frequent changes in legislation, official
pronouncements and court decisions, which are often unclear,
contradictory and subject to varying interpretation by different
tax authorities. Taxes are subject to review and investigation by
various levels of authorities, which have the authority to impose
severe fines, penalties and interest charges. These circumstances
may create tax risks in Kazakhstan that are more significant than
in other countries. The Group recognises liabilities for
anticipated additional tax based its interpretations of the current
tax laws and the amount it believes that is probable to be paid
upon any inspection by the tax authorities.
Management believes that it has provided adequately for tax
liabilities based on its interpretations of applicable tax
legislation, official pronouncements and court decisions. However,
the interpretations of the relevant authorities could differ and
the effect on these consolidated financial statements, if the
authorities were successful in enforcing their interpretations,
could be significant. Where the final tax outcome of these matters
is different from the amounts that were initially recorded, such
differences will impact the income tax provisions in the period in
which such determinations are made.
Deferred tax assets are reviewed at the end of each reporting
period and are reduced to the extent that it is not probable that
sufficient taxable profit will be available to allow all or part of
the deferred tax assets to be utilised. Various factors are
considered in assessing the probability of the future utilisation
of deferred tax assets, including past operating results,
operational plans, expiration of tax losses carried forward, and
tax planning strategies. If actual results differ from these
estimates or if these estimates must be adjusted in future periods,
the financial position, results of operations and cash flows may be
negatively affected. As a result of changes in estimates, the Group
has recognised income tax benefits in the years presented for
assets created, but not recognised, in prior years.
1.
5. Employee benefit expense
2010 2009
------ ------
Wages and salaries 28,415 25,535
Direct social taxes 2,650 2,156
Other employee benefits 40 630
Total 31,105 28,321
====== ======
Employee benefit expenses in the amount of USD 22,669 thousand
(2009: USD 18,823 thousand), USD 567 thousand (2009: USD 360
thousand) and USD 7,869 thousand (2009: USD 9,138 thousand) were
recognised as part of cost of gold sales, cost of other sales and
selling, general and administrative expenses, respectively.
6. OTHER expenses, NET
2010 2009
------ ------
Bank guarantee provision (refer to Note
19) - 11,650
Loss on revaluation of property, plant
and equipment - 11,079
Non-recoverable value added tax on construction,
repair,
maintenance and exploration works 8,600 5,219
Bad debt (release)/expense (65) 3,594
Impairment of property, plant and equipment 26,544 -
Loss on disposal of property, plant and
equipment 574 1,859
Other (423) (780)
------ ------
Total 35,230 32,621
====== ======
7. FINANCE COSTS
2010 2009
------ ------
Interest on borrowings 26,951 26,309
Unwinding of discount on decommissioning
obligations 1,555 1,392
Unwiding of discount on borrowings 2,692 3,657
Interest on bank guarantee 1,190 -
Unwiding of discount on historical cost 541 483
Total 32,929 31,841
====== ======
8. income tax
2010 2009
------- -----
Current tax expense (1,329) -
Deferred tax benefit - 6,161
------- -----
Total income tax (expense)/benefit (1,329) 6,161
======= =====
The corporate income tax rates in the countries where the Group
has a taxable presence vary from 0% to 28%. A reconciliation of
statutory income tax at the rate effective in the Republic of
Kazakhstan, the location of the Group's production entities and
substantially all operations, to the amount of actual income tax
expense recorded in the consolidated income statement is as
follows:
2010 2009
-------- ---------
Loss before income tax (55,942) (149,900)
Income tax at statutory rate of 20% (2009:
20%) 11,188 29,980
Tax effect of expenses not deductible
for tax purposes (1,524) (11,374)
Unrecognised tax losses and deferred tax
asset not recognised (10,993) (12,445)
-------- ---------
Income tax (expense)/benefit at effective
rate of 2.4% (2009: 4.1%) (1,329) 6,161
======== =========
At 31 December 2010, the Group has not recognised deferred tax
assets in the amount of USD 21,963 thousand (2009: USD 10,970
thousand) in respect of tax losses carried forward due to
uncertainty of available future taxable profit. These unrecognised
tax lossesare available for offset against future taxable profit of
the Group for a period of up to ten years.
The tax rate used for the 2010 reconciliations above is the
income tax rate of 20% (2009: 20%) payable by Kazakhaltyn, the
Group's main operating subsidiary in the Republic of Kazakhstan, on
taxable profits.
Deferred taxation is attributable to the temporary differences
that exist between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for tax
purposes. The tax effects of temporary differences that give rise
to deferred taxation are presented below:
Effect of
Recognised translation
31 December in statement to presentation 31 December
2009 of operations currency 2010
----------- -------------- ---------------- -----------
Property, plant
and equipment 5,441 2,220 (1) 7,660
Environmental
obligations (1,379) (2,774) 1 (4,152)
Historical cost
liability (677) (423) - (1,100)
Inventory
write-downs and
bad debt
expense (766) 533 - (233)
Other (789) 394 - (395)
Tax losses (1,830) 50 - (1,780)
----------- --------------
Total - - - -
=========== ============== ================ ===========
Recognised Recognised Effect of
in in equity translation
31 statement on to 31
December of revaluation presentation December
2008 operations surplus currency 2009
---------- ---------- ----------- ------------ ----------
Property,
plant and
equipment 5,081 931 1,598 (2,169) 5,441
Environmental
obligations - (1,371) - (8) (1,379)
Historical
cost
liability - (673) - (4) (677)
Inventory
write-down
and bad debt
expense - (762) - (4) (766)
Other 1,691 (2,466) - (14) (789)
Tax losses - (1,820) - (10) (1,830)
---------- ---------- ----------- ------------
Total 6,772 (6,161) 1,598 (2,209) -
========== ========== =========== ============ ==========
The Group did not recognise a deferred tax asset for temporary
differences associated with investments in subsidiaries of USD
18,521 thousand (2009: USD 16,535 thousand), because management
believes that it is able to control the timing of reversal of such
differences and has no intention to reverse them in the foreseeable
future.
9. loss per share
The following reflects the income and share data used in the
calculation of basic and diluted loss per share:
2010 2009
---------- ----------
Loss for the year attributable to shareholders
of the parent company 56,265 142,899
Weighted average number of ordinary shares
in issue during the year 85,453,082 52,941,666
Basic and diluted loss per share (US Dollars) 0.66 2.70
========== ==========
In 2010 and 2009, the convertible loans were antidilutive:
59,547,167 contingently issuable shares on conversion of the loans
were therefore excluded from the weighted average number of
ordinary shares for the purposes of diluted loss per share.
10. PROPERTY, PLANT AND EQUIPMENT
Exploration
and
evaluation Mining Non-mining Capital
assets assets assets construction-in-progress Total
----------- -------- ---------- ------------------------ ---------
Cost
Balance at 1
January 2009 927 197,731 1,452 57,475 257,585
Additions 3,464 1,380 616 4,244 9,704
Transfers - 631 1,354 (1,985) -
Change in
estimate of
decommissioning
costs - (3,934) - - (3,934)
Disposals (652) (931) (157) (340) (2,080)
Effect of
translation to
presentation
currency 133 (34,184) (281) (9,842) (44,174)
Balance at 31
December 2009 3,872 160,693 2,984 49,552 217,101
Additions 8,656 6,844 - 20,514 36,014
Transfers - 9,131 - (9,131) -
Change in
estimate of
decommissioning
costs - 5,779 - - 5,779
Disposals - (727) - (3) (730)
Impairment loss - (19,835) - (6,709) (26,544)
Effect of
translation to
presentation
currency 13 (729) (78) (1,556) (2,350)
----------- -------- ---------- ------------------------ ---------
Balance at 31
December 2010 12,541 161,156 2,906 52,667 229,270
=========== ======== ========== ======================== =========
Accumulated
amortisation,
depreciation and
impairment
Balance at 1
January 2009 - - - - -
Charge for the
year - (19,734) (365) - (20,099)
Disposals - 64 157 - 221
Effect of
translation to
presentation
currency - (173) 1 - (172)
Balance at 31
December 2009 - (19,843) (207) - (20,050)
Charge for the
year - (19,355) (85) - (19,440)
Disposals - 156 - - 156
Effect of
translation to
presentation
currency - 258 (43) - 215
----------- -------- ---------- ------------------------ ---------
Balance at 31
December 2010 - (38,784) (335) - (39,119)
=========== ======== ========== ======================== =========
Net book value
31 December 2009 3,872 140,850 2,777 49,552 197,051
=========== ======== ========== ======================== =========
31 December 2010 12,541 122,372 2,571 52,667 190,151
=========== ======== ========== ======================== =========
As at 31 December 2010 property, plan and equipment with a
carrying value of USD 3,620 thousand have been pledged to secure
bank guarantee liability (see Notes 19, 20). As at 31 December 2009
property, plan and equipment with a carrying value of USD 20,510
thousand have been pledged to secure borrowings and bank guarantee
liability (see Notes 17, 19, 20).
The Group, as a result of its previous experience with fires,
missing assets, and excessive wear and tear, combined with ongoing
operational changes and revisions of plans, has been actively
reassessing its property, plant and equipment requirements, and
plans for their future use. During the year ended 31 December 2010,
the Group identified assets for which the book value exceeded the
anticipated recoverable value and also reassessed expected useful
life of certain assets, and accordingly an impairment was recorded
in the amount of USD 26,544 thousand.
11. other non-current assets
Other non-current assets include:
-- Bank accounts in the amount of USD 862 thousand that were
frozen by the Kazakhstan authorities as security in legal
proceedings initiated by the Government (see Note 1). Management
believes that this cash is recoverable and will be available when
legal proceedings are finalised;
-- Input value added tax borne from import purchases in the
amount of USD 721 thousand, which expected to be refunded in
2012.
12. INVENTORIES
2010 2009
------ -------
Inventories expected to be recovered after
twelve months
Ore stockpiles 2,245 2,867
Total 2,245 2,867
====== =======
Inventories expected to be recovered in
the next twelve months
Gold-in-process 9,288 5,462
Finished goods 7,901 4,926
------ -------
Total 17,189 10,388
Stores and materials 11,206 4,954
Less: Allowance for obsolescence (504) (1,077)
------ -------
27,891 14,265
------ -------
Total 30,136 17,132
====== =======
The Group consumed USD 20,820 thousand of stores and materials
during the year ended 31 December 2010, which has been recognised
in Cost of gold sales (2009: USD 13,518 thousand).
13. TRADE AND OTHER RECEIVABLES
2010 2009
------- -------
Trade receivables for gold sales 1,004 1,359
Other receivables 7,575 9,404
8,579 10,763
Less: Allowance for doubtful debts (6,767) (8,639)
------- -------
Total 1,812 2,124
======= =======
The average credit period on gold sales was 4 days in 2010 (7
days in 2009). No interest is charged on trade receivables for the
first 5 days from the date of invoice. Thereafter, interest is
charged at 0.045% per annum on the outstanding balance.
The Group has fully provided for all receivables over 365 days
because historical experience is such that receivables that are
past due beyond 365 days are generally not recoverable.
At 31 December 2010, the Group's two major customers
individually exceeding 5% of the total balance represented 63% of
the outstanding balance of trade and other receivables.
At 31 December 2010, there were no trade receivables which were
past due but not impaired (at 31 December 2009: USD 1,359
thousand).
The movement in the allowance for doubtful debts is as
follows:
2010 2009
------- -------
Balance at beginning of the year 8,639 6,364
Receivable balances written off (1,929) -
Increase in allowance - 3,594
Effect of translation to presentation
currency 57 (1,319)
------- -------
Balance at end of the year 6,767 8,639
======= =======
Included in the allowance for doubtful debts were individually
impaired other receivables amounting to USD 6,767 thousand (31
December 2009: USD 8,639 thousand) relating to counterparties which
have been placed under liquidation. The Group does not hold any
collateral over these balances.
14. ADVANCES paid TO SUPPLIERS
At 31 December 2010, advances paid to suppliers in the amount of
USD 2,560 thousand (31 December 2009: USD 1,905 thousand) were
presented net of impairment losses of USD 805 thousand (31 December
2009: USD 990 thousand).
15. CASH AND CASH EQUIVALENTS
2010 2009
----- -----
Current bank accounts - KZT 6,188 942
Current bank accounts - foreign currencies 1,842 2,320
Other cash and cash equivalents 132 269
Total 8,162 3,531
===== =====
16. SHARE CAPITAL
At 31 December 2010, the authorised share capital of the Company
was comprised of 200,000,000 ordinary shares at par value of GBP of
0.0001 and the issued and fully paid share capital of the Company
comprised of 119,608,333 ordinary shares.
At 31 December 2009, authorised share capital of the Company
comprised of 100,000,000 ordinary shares at par value of GBP 0.0001
and issued and fully paid share capital of the Company comprised of
52,941,666 ordinary shares.
On 1 July 2010, the Company issued 66,666,667 new ordinary
shares at a price of USD 1.5 per share for a total consideration of
USD 98,747 thousand, net of expenses of USD 1,253 thousand. The
amount raised was used to provide additional working capital for
the Group and repay the USD 50 million Jenington loan obtained in
February 2010 (Note 17).
17. Borrowings
2010 2009
-------------------- --------------------
Outstanding Outstanding
Currency Rate,% balance Rate,% balance
--------- ------- ----------- ------- -----------
Guaranteed
senior notes (i) USD 9.375 200,000 9.375 200,000
Convertible
loan received
from
Jenington (ii) USD LIBOR+6 49,310 LIBOR+6 47,892
Convertible
loans
received from
Gold Lion
Holdings
Limited (iii) USD 10 24,155 10.0 19,783
Secured bank
loan (iv) KZT - 16.0 1,854
Secured bank
loan (iv) USD - 13.75 4,751
Unsecured bank
loan (v) USD - 11.0 4,348
Total 273,465 278,628
Less: Current portion
due within twelve months (249,310) (257,816)
----------- -----------
Long-term borrowings 24,155 20,812
=========== ===========
Summary of borrowing agreements
(i) Guaranteed senior notes (the "Notes")
In November 2006, the Company issued the Notes at par with
interest payable semi-annually in arrears on 6 May and 6 November
of each year, and with principal due on 6 November 2013. The Notes
are unconditionally and irrevocably guaranteed by Kazakhaltyn, a
wholly owned subsidiary of the Company, and its subsidiaries.
Following the acquisition of the Company by Jenington, Polyus
Gold became an additional limited liability guarantor of the
Notes.
The Group is obliged to comply with a number of restrictive
covenants under the agreement relating to the Notes, including
limitations on obtaining additional indebtedness, and financial
reporting timelines. At 31 December 2010 and 2009, the Group was
not in compliance with certain of these covenants related to
reporting obligations. As a result, the USD 200 million Notes
balance has been classified as a current liability.
As at the date of issuance of consolidated financial statements,
the Group has not received any enforcement notice from the
bondholders regarding early redemption.
(ii) Loan received from Jenington
On 14 August 2009, the Company signed a USD 50,000 thousand
unsecured loan agreement with Jenington. The loan agreement has a
floating rate of LIBOR+6% per annum. The loan is used for general
corporate purposes, including working capital requirements.
The principal amount together with accrued interest are payable
when the Company completes a capital raising of USD 100,000
thousand, which management estimates will occur in 2011;
consequently, the loan has been classified as current. The
principal amount of the loan together with accrued interest can be
converted by Jenington into the Company's ordinary shares at a rate
of USD 1.5 per one share at any point during the term of the loan,
subject to several restrictions, including regulatory approval from
the Government of Kazakhstan. The net proceeds received under the
convertible loan agreement were split between a liability element
and an equity component, representing the residual equity
attributable to the option, as follows:
Fair value of the convertible
instrument 49,310
Fair value of liability component
at date of issue (47,083)
Residual equity component 2,227
========
On 4 February 2010, the Company obtained an additional USD
49,960 thousand unsecured loan from Jenington. This loan yielded an
annual interest rate of 9.27%. On 6 July 2010, the Company repaid
this loan together with accrued interest, from the proceeds from a
USD 100 million share issue (Note 16).
(iii) Loans received from Gold Lion
On 11 June 2009, the Company signed two loan agreements with
Gold Lion, an entity that was, at that time, a related party. The
loan agreements have a 10% interest rate per annum. Principal
amounts of USD 21,650 thousand and USD 9,375 thousand together with
accrued interest are payable on 6 November 2014. Until their
maturity date, these loans are convertible wholly or in part into
the Company's ordinary shares at a rate of USD 1.5 per one share.
Conversion is subject to several restrictions, including Republic
of Kazakhstan regulatory approval and approval from the Company. In
June 2009, Gold Lion Holdings Limited granted a call option to
Jenington, or any other direct of indirect subsidiary of Polyus
Gold, to acquire all rights and interests under these loan
agreements, including the conversion right.
The net proceeds received under the convertible loan agreements
have been split between a liability element and an equity
component, representing the residual equity attributable to the
instrument, as follows:
Fair value of the convertible
instrument 31,025
Fair value of liability component
at date of issue (17,654)
Residual equity component 13,371
========
The borrowing is discounted at an effective interest rate of
22.1%.
18. ENVIRONMENTAL OBLIGATIONS
2010 2009
------ -------
Balance at beginning of the year 13,356 20,106
Change in estimate 5,779 (5,021)
Unwinding of discount on decommissioning
obligations 1,555 1,392
Effect of translation to presentation
currency 68 (3,121)
------ -------
Balance at end of the year 20,758 13,356
====== =======
The principal assumptions used for the estimation of
environmental obligations were as follows:
2010 2009
---- ----
Discount rates, % 10.0 12.0
Expected mine closure dates 2032 2032
19. other non-current liabilities
2010 2009
----- ------
Bank guarantee liability 300 11,014
Historical costs liability 4,158 4,512
Total 4,458 15,526
===== ======
Bank guarantee liability
In April 2006, the Group entered into a contractual arrangement
to guarantee a credit facility of USD 15,000 thousand provided by
"Kazkommertsbank" ("KKB") to "Akir Group" LLP, a former related
party to the Group. That credit facility has a maturity date of 4
April 2013. Funds received from the credit facility were used by
the "Akir Group" to acquire mining and other equipment which was
subsequently leased to the Group under finance lease agreements
concluded during 2006-2007.
In 2009, the "Akir Group" LLP defaulted on its loan agreement
with KKB. The Group fully provided for probable losses related to
this guarantee liability at 31 December 2009.
Liability in the amount of USD 5,996 due in 2011 was
reclassified to other payables (Note 20).
Historical costs liability
The Group has a financial liability to reimburse the Government
of Kazakhstan an amount of USD 8,991 thousand incurred for the
historical cost of geological studies performed in respect to the
Group's subsoil use contracts. The historical cost of geologic
studies is expected to be repaid in 10 equal annual instalments,
commencing from 2011 subject to approval from the appropriate
governmental authority. The effective interest rate on the
liability is 12% per annum.
2010 2009
----- -----
Balance at beginning of the year 4,512 4,029
Reclassified to current liabilities (895) -
Unwinding of discount on historical cost 541 483
Balance at end of the year 4,158 4,512
===== =====
20. Trade, Other payables and accrued expenses
2010 2009
------ ------
Trade payables to third parties 1,778 1,771
Accrued expenses 1,977 3,046
Wages and salaries 2,473 3,519
Interest on loans 6,805 3,469
Bank guarantee liability - current 5,996 2,235
Historical cost - current 895 -
Other payables 7,583 6,628
Total 27,507 20,668
====== ======
In 2010, the credit period for trade and other payables was 38
days (2009: 44 days). There is no interest charged on the
outstanding payables balance during the credit period.
21. RELATED PARTIES
Related parties include shareholders, entities under common
ownership and control with the Group, companies presumed by
management to be under control of members of the Company's Board of
Directors and key management personnel.
As a result of changes in the shareholders of the Company,
Polyus Gold and its subsidiaries became related parties to the
Group from 30 July 2009.
As at 31 December 2010 and 2009, the Group had the following
outstanding balances with shareholders of the Group:
2010 2009
------ ------
Jenington
Borrowings 49,310 47,892
Interest payable 3,928 644
UK Polyus Geologorazvedka
Trade payables 129 -
Gold Lion
Borrowings - 19,783
------ ------
Total 53,367 68,319
====== ======
The amounts outstanding are unsecured and are expected to be
settled in cash.
During the years ended 31 December 2010 and 2009, the Group
entered into the following transactions with shareholders of the
Group:
2010 2009
-------- ------
Jenington
Proceeds from borrowings 49,960 49,310
Repayments of borrowings (49,960) -
Interest accrued 1,333 -
Interest paid (1,333) -
UK Polyus Geologorazvedka
Purchase of goods and services 207
Gold Lion
Loans received - 31,025
Compensation of key management personnel
2010 2009
----- -----
Short-term employee benefits 1,698 2,546
Total 1,698 2,546
===== =====
22. CONTINGENCIES
Operating environment
Emerging markets such as Kazakhstan are subject to different
risks than more developed markets, including economic, political
and social, and legal and legislative risks. As has happened in the
past, actual or perceived financial problems or an increase in the
perceived risks associated with investing in emerging economies
could adversely affect the investment climate in the country and
the country's economy in general.
Laws and regulations affecting businesses in Kazakhstan continue
to change rapidly. Tax, currency and customs legislation within the
country are subject to varying interpretations, and other legal and
fiscal impediments contribute to the challenges faced by entities
currently operating in Kazakhstan. The future economic direction of
the country is largely dependent upon economic, fiscal and monetary
measures undertaken by the government, together with legal,
regulatory, and political developments.
The global financial turmoil that negatively affected Kazakhstan
financial and capital markets in 2008 and 2009 has receded and
Kazakhstan's economy returned to growth in 2010. However,
significant economic uncertainties remain. Adverse changes arising
from systemic risks in global financial systems, including any
tightening of the credit environment could slow or disrupt
Kazakhstan's economy, adversely affect the Group's access to
capital and cost of capital for the Group and, more generally, its
business, results of operations, financial condition and
prospects.
Kazakhstan is facing a relatively high level of inflation
(according to the government's statistical data consumer price
inflation for the years ended 31 December 2010 and 2009 was 5% and
7%, respectively). Because Kazakhstan produces and exports large
volumes of mineral resources, the country's economy is particularly
sensitive to the price of mineral resources on the world market
that fluctuated significantly during 2010 and 2009.
The Group continues to be exposed to the risk that the impacts
of the global financial turmoil may have a direct and indirect
impact on its business in the future. Specifically, the Group's
cost of borrowings could increase if further borrowings were needed
by the Group due to the fact there is less overall liquidity in the
market. In addition, the Group may be impacted if the price of gold
decreases as a result of decreased global demand. Further economic
turmoil could prevent or postpone purchases of gold from the Group
and delays in the building of new power plants by the Group's
customers would decrease the future demand for gold.
The consolidated financial statements reflect management's
assessment of the impact of the Kazakhstan business and political
environment on the Group's performance and financial position. The
actual business environment may differ from the management's
assessment
Capital commitments
The Group's budgeted capital expenditures for the year ended 31
December 2011 amount to USD 21,592 thousand, including USD 17,392
thousand of contractual capital commitments (2010: USD 62,068
thousand and 2,372 thousand respectively).
Contractual obligations in the Republic of Kazakhstan
The Group's subsoil use rights are not granted in perpetuity,
and any renewal must be approved before the expiration of the
relevant subsoil use contract or license. These rights may be
terminated by the Government if the Group does not fulfil its
contractual obligations. Management believes it fulfilled all
required contractual obligations during the year ended 31 December
2010.
Pursuant to the subsurface use contracts ("SSU") the Group has
committed to the following contractual obligations:
( ) Minimum working program
The Group approved a minimum working program for exploration
("MWP") which can be updated on a periodic basis to take account of
the economic and operating conditions of the fields. Each year the
Group agrees the annual working program ("AWP") with the Ministry
of Industry and New Technologies of the Republic of Kazakhstan.
According to the AWP, the agreed mining expenditures for 2010 were
set at USD 4,821 thousand, while the actual mining expenditures
incurred under AWP amounted to USD 14,284 thousand.
(b) Training of local staff
The Group is obliged to finance on an annual basis professional
training of its Kazakhstan personnel. Actual obligations
materialise over the passage of time and, as such, the Group
recognises such expenses in the consolidated statement of
operations as they are incurred.
(c) Social programs
The Group is obliged to participate in social development
programs in the territory in which the Group entities operate and
to transfer funds agreed with local authorities for development of
social programs in the Eastern Kazakhstan and Akmola regions.
Actual obligations materialise over the passage of time and, as
such, the Group recognises such expenses in the consolidated
statement of operations as they are incurred.
(d) Environmental matters
The Group is subject to various environmental laws and
regulations of the Republic of Kazakhstan. While management
believes that substantial compliance with such laws and regulations
has been achieved, there can be no assurance that contingent
liabilities do not exist.
According to the Group's subsurface use contracts #2526 and
#2527 (relating to mines in exploration stage), the Group is
obliged to finance environmental works related to projects. Group
management believes that its mining and production technologies are
in compliance with the existing environmental legislation in the
countries in which it operates. However, environmental laws and
regulations continue to evolve. The Group is unable to predict the
timing or extent to which those laws and regulations may change.
Such change, if it occurs, may require that the Group modernise
technology to meet more stringent standards. As these subsurface
use contracts are still in the exploration stage, the Group is not
yet liable for financing environmental works and has not recognised
a provision for these contracts as at 31 December 2010.
Litigation
At the date of issuance of these consolidated financial
statements the Group was party to a number of significant claims
and litigation outstanding:
-- Prior to 2010, the Group received a claim by Ministry of
Natural Resources of Kyrgyzstan for lack of geological
documentation against Talas Gold Mining Company, a subsidiary of
the Group. The Group's renewal costs for the completion of the
geological documentation would not exceed USD 3 million. As this is
not a claim for penalties, but rather a request for required
documentation, the Group will not record a provision until the
service is received from an external party for the geological
documentation;
-- General Prosecutor's office of Kyrgyzstan launched a lawsuit
to liquidate Talas Gold Mining Company. The amount of assets held
in the subsidiary is equivalent to USD 36,172 thousand;
-- A claim in the amount of USD 2,344 thousand against the Group
by a former executive of the Group for compensation of losses;
-- Oxus mining has submitted a claim against the Group for the
restitution of drilling machines in the amount of USD 850 thousand;
and
-- A claim in the amount of USD 8,700 thousand was obtained from
the Maed Group, a former supplier of the Group. The claim is in
relation to Maed Group's claimed compensation of losses.
Management believes that none of these claims, individually or
in aggregate, will have a material adverse impact on the Group.
Compliance with licenses
The business of the Group depends on the continuing validity of
its licenses, particularly subsoil licenses for the Group's
exploration and mining operations, the issuance of new licences and
the Group's compliance with the terms of its licenses. Kazakhstan
regulatory authorities exercise considerable discretion in the
timing of license issuance and renewal and the monitoring of a
licensee's compliance with the terms of a license. Requirements
imposed by these authorities, including requirements to comply with
numerous industrial standards, recruit qualified personnel and
subcontractors, maintain necessary equipment and quality control
systems, monitor the operations of the Group, maintain appropriate
filings and, upon request, submit appropriate information to the
licensing authorities, may be costly and time-consuming and may
result in delays in the commencement or continuation of exploration
or production operations. Accordingly, licenses that may be needed
for the operations of the Group may be invalidated or may not be
issued or renewed, or if issued or renewed, may not be issued or
renewed in a timely fashion.
The legal and regulatory basis for the licensing requirements is
subject to frequent change, which increases the risk that the Group
may be found in non-compliance. In the event that licensing
authorities discover a material violation by the Group, the Group
may be required to suspend its operations or incur substantial
costs in eliminating or remediating the violation, which could have
a material adverse effect on the Group's business and financial
condition.
The Subsoil Use Law of the Republic of Kazakhstan stipulates
that assignments, transfers and amendments of subsoil use rights
may be made only with the prior consent of the Ministry of Energy
and Mineral Resources of the Republic of Kazakhstan (except when
such assignment or transfer is to a subsidiary of the subsoil user
in question or is as a result of a reorganisation of the subsoil
user whereby its legal successor assumes all its rights and
obligations). The Government has a pre-emptive right in respect of
a transfer of any part of the subsoil use rights and of a
participation share (shares) in the legal entity holding such
subsoil use rights for assets in the Republic of Kazakhstan,
provided that the terms and conditions (upon which such pre-emption
right may be exercised) are not less favourable than those on which
the proposed transferee is prepared to assume such subsoil use
rights.
Insurance
The insurance industry in the Republic of Kazakhstan is in a
developing state and many forms of insurance protection common in
other parts of the world are not yet generally available. The Group
has the following insurance coverage:
-- insurance of the Group's plant facilities, in respect of
natural disasters, fire, flood and theft;
-- coverage for the Group's plant facilities and third party
liability in respect of property or environmental damage arising
from accidents on Group's property or relating to Group's
operations;
-- civil liability of owners of vehicles; and
-- employer's legal liability for all employees of the
Group.
The Group has not yet obtained coverage for business
interruption.
Taxation contingencies in the Republic of Kazakhstan
The tax system of Kazakhstan is quite new and characterised by a
large number of taxes (corporate income tax, value added tax, and
personal income tax being material to the Company's operations) and
frequent changes in legislation, official regulation and court
rulings. Taxes are subject to review by a number of bodies which
are entitled to charge fines, interest and penalties. Tax years
remain open to reviews by tax authorities during 5 calendar years
subsequent to year-end; however in certain circumstances the tax
year can remain open longer. Various Kazakh legislative acts and
normative are not always clearly set forth and their interpretation
depends on the opinion of local tax inspectors and the Ministry of
Finance of the Republic of Kazakhstan, for example, the definition
of taxable turnover for VAT purposes, the deductibility of certain
expenses for CIT purposes, questions of application of the new tax
code effective from 2009, the determination of the timing of
revenue recognition, and other issues. The opinions of the local,
regional, and republican tax officials often differ. The existing
regime of charging penalties and fines in case of declared and
discovered violations of laws, decrees and standards of Kazakhstan
are very strict. Tax authorities are very aggressive in the
inspection of subsurface users. The sanctions include confiscation
of disputable amounts (for violation of rules of exchange
operations), and penalties of 2.5 times the official refinancing
rate set by the National Bank of the Republic of Kazakhstan for
each day of the violation. The rate of the penalty comprises 50% of
the additional charge of the tax. As a result, penalties and fines
can result in amounts many times greater than the incorrectly
calculated taxes.
Such conditions can create more serious tax, penalty, and
interest risks in Kazakhstan than in other countries. Management
believes that it has appropriately provided for all tax liabilities
based on existing interpretations of applicable tax laws,
regulations and court rulings. Nonetheless, the opinions of the
respective authorities can differ, which can significantly impact
the financial statements if the authorities manage to prove the
legality of their own interpretations.
Starting from 1 July 2010 the tax code set a restriction for
refund of the excess of an input value added tax ("VAT") from the
state budget. Thus, VAT input borne from purchase of fixed assets
as well as import VAT shall not be refundable. The above said
amendments are rather ambiguous and provide no clarity on whether
the newly introduced restriction applies to taxpayers having 0% VAT
turnovers. At that, any VAT which is not subject to refund may be
offset against future VAT liability.
During 2010, JSC MMC Kazakhaltyn (the Company), a subsidiary of
the Group, was the subject of a tax audit for the 2007 - 2008
years. As the result of this tax audit, the Company was exposed to
tax and penalties of approximately USD 16 thousand. The Company
accepted these assessments and did not submit an appeal. However,
the tax authorities are now in the process of re-auditing these
periods, simultaneously auditing 2009 and the first six months of
2010.
During 2010, JSC MMC KazakhAltyn became subject to a VAT audit
for 2010. As the result of audit for 3 quarters of 2010, a VAT
refund of approximately USD 1,090 thousand was not confirmed by the
tax authorities (including import VAT in the amount of USD 721
thousand). The Company is in the process of appeal of the tax audit
results and intends to defend its position with respect to all
amounts not confirmed for refund. The VAT audit for the 4th quarter
of 2010 is currently in process.
Stability of applicable tax regime
Subsoil use contracts in Kazakhstan have traditionally always
contained tax terms that reflected the tax law in effect when the
contract was signed, and these tax terms were "stabilised," meaning
that they were to remain in effect for the life of the contract,
regardless of how tax law changed over time. All subsoil use
contracts of the Group have been stabilised.
In 2008, Kazakhstan enacted a new tax law which came into effect
on 1 January 2009. Only production sharing agreements and
concessionary agreements with a tax regime approved by a
legislative act of the Kazakhstan Parliament retained their tax
stability. The Group's subsoil use contracts do not fall within
either of these two categories and the tax regime applicable to
these subsoil use contracts may therefore change.
Environmental matters
The Group is subject to extensive federal, local environmental
controls and regulations in the regions in which it operates. The
Group's operations involve the discharge of materials and
contaminants into the environment, disturbance of land that could
potentially impact on flora and fauna, and give rise to other
environmental concerns.
The Group's management believes that its mining and production
technologies are in compliance with the existing environmental
legislation in the countries in which it operates. However,
environmental laws and regulations continue to evolve. The Group is
unable to predict the timing or extent to which those laws and
regulations may change. Such change, if it occurs, may require that
the Group modernise technology to meet more stringent
standards.
The Group is obliged in terms of various laws, mining licenses
and 'use of mineral rights' agreements to decommission mine
facilities on cessation of its mining operations and to restore and
rehabilitate the environment. Management of the Group regularly
reassesses environmental obligations for its operations.
Estimations are based on management's understanding of the current
legal requirements and the terms of the license agreements. Should
the requirements of applicable environmental legislation change or
be clarified, the Group may incur additional environmental
obligations. Provision for site restoration and decommissioning are
presented in Note 18.
Republic of Kazakhstan risk
Although in recent years there has been a general improvement in
economic conditions in the Republic of Kazakhstan, the country
continues to display certain characteristics of an emerging market.
These include, but are not limited to, currency controls and
convertibility restrictions, relatively high level of inflation and
continuing efforts by the Government to implement structural
reforms.
As a result, laws and regulations affecting businesses in the
Republic of Kazakhstan continue to change rapidly. Tax, currency
and customs legislation within the Republic of Kazakhstan is
subject to varying interpretations, and other legal and fiscal
impediments contribute to the challenges faced by entities
currently operating in the Republic of Kazakhstan. The future
economic direction of the Republic of Kazakhstan is largely
dependent upon the effectiveness of economic, fiscal and monetary
measures undertaken by the Government, together with legal,
regulatory, and political developments.
23. RISK MANAGEMENT ACTIVITIES
Capital risk management
The Group manages its capital through financing from parent
company to ensure that entities of the Group will be able to
continue as a going concern. The capital structure of the Group
consists of net debt (borrowings as described in Note 17 offset by
cash and cash equivalents (disclosed in Note 15) and equity
attributable to the parent (comprising issued share capital,
reserves and accumulated losses).
Major categories of financial instruments
The Group's principal financial liabilities comprise borrowings,
trade and other payables and other non-current liabilities. The
main purpose of these financial instruments is to raise finance for
the Group's operations. The Group financial assets represent mainly
trade and other receivables, and cash and cash equivalents.
2010 2009
------- -------
Financial assets
Cash and cash equivalents 8,162 3,531
Trade and other receivables 1,812 2,124
Other non-current assets 862 -
Total financial assets 10,836 5,655
======= =======
Financial liabilities
Guaranteed senior notes 200,000 200,000
Other borrowings 73,465 78,628
Trade payables 1,778 1,771
Other payables 23,752 15,851
Other non-current liabilities 4,458 15,526
Total financial liabilities 303,453 311,776
======= =======
The main risks arising from the Group's financial instruments
are interest rate, foreign currency, credit and liquidity
risks.
Fair value of financial instruments
Management believes that the carrying values of trade and other
receivables, borrowings, trade payables, other payables and other
non-current liabilities recorded at amortised cost in the
consolidated financial statements approximate their fair values due
to their short-term nature, variable interest rates, or recently
negotiated terms except for the Company's Notes the fair value
which, at the reporting date, was USD 197,174 thousand (2009: USD
201,000 thousand) based on the mid market price as quoted on the
Luxembourg Stock Exchange.
Interest rate risk
Interest rate risk is the risk that changes in interest rates
will adversely impact the financial results of the Group. The
Group's interest rate risk arises from borrowings at floating
rates.
If interest rates had been 50 basis points higher/lower and all
other variables were held constant, the Group's loss for the year
ended 31 December 2010 would decrease/increase by USD 250 thousand
(2009: decrease/increase by USD 85 thousand). The change of 50
basis points would have the same impact on equity.
Foreign currency risk
Foreign currency risk is the risk that the financial results of
the Group will be adversely affected by changes in exchange rates
to which the Group is exposed. The Group undertakes certain
transactions denominated in foreign currencies. All revenues are
denominated in USD, whereas the majority of the Group's
expenditures are denominated in KZT. Accordingly, operating profits
are adversely impacted by appreciation of KZT against USD.
The carrying amounts of monetary assets and liabilities
denominated in foreign currencies other than functional currencies
of the individual Group entities at 31 December 2010 and 2009 were
as follows:
Assets Liabilities
------------ ----------------
2010 2009 2010 2009
----- ------- -------
USD 3,834 4,274 287,693 281,286
Total 3,834 4,274 287,693 281,286
===== ===== ======= =======
Currency risk is monitored by performing sensitivity analysis in
order to verify that the potential loss is at an acceptable
level.
The table below details the Group's sensitivity to changes of
exchange rates of the KZT to USD by 10% which is the sensitivity
rate used by the Group for internal reporting purposes. The
analysis was applied to monetary items at the reporting dates
denominated in respective currencies.
2010 2009
------ ------
Profit or loss (KZT to USD) 28,386 27,701
Equity would be impacted by the same amount as shown for profit
or loss above.
Credit risk
Credit risk is the risk that a counterparty may default or not
meet its obligations to the Group on a timely basis, leading to
financial losses to the Group. Credit risk arises from cash and
cash equivalents, trade and other receivables and advances paid to
suppliers.
Prior to dealing with a new counterparty, management assesses
the credit worthiness and liquidity of the counterparty.
Although the Group sells substantially all the gold produced to
two major customers, the Group is not economically dependant on
these customers because of the high level of liquidity in the gold
commodity market. Buyers of gold are required to make advance
payments, therefore credit risk related to trade receivables is
minimal. At 31 December 2010 the Group had USD 1,004 thousand of
outstanding trade receivables from gold sales (31 December 2009:
USD 1,359 thousand). Gold sales to the Group's two major customers,
exceeding 90% of the Group's gold sales, amounted to USD 105,928
thousand and comprise (2009: USD 57,402 thousand).
The procedures of accepting a new customer include check by a
security department and responsible on-site management for a
business reputation, licenses and certification, credit worthiness
and liquidity.
Management of the Group believes that there is no other
significant concentration of credit risk.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to
settle all liabilities as they are due. The Group's liquidity
position is carefully monitored and managed by treasury department.
The Group manages liquidity risk by maintaining detailed budgeting,
cash forecasting process and matching the maturity profiles of
financial assets and liabilities to help ensure that it has
adequate cash available to meet its payment obligations.
The maturity profile of the Group's financial liabilities at 31
December 2010 and 2009 based on contractual payments is presented
below:
Due Due Due
Due from from Due in in Due in Due in
within three six to the the the the
three to six twelve second third fourth fifth Due in
Total months months months year year year year thereafter
---------- ------- ------ ------ ------ ----- ------ ------ ----------
2010
Borrowings, including:
Principal 280,335 249,310 - - - - 31,025 - -
Interest 27,785 3,940 2,865 - - - 20,980 - -
Other non-current liabilities, including:
Principal 8,392 - - - 1,199 899 899 899 4,496
Trade and other payables, including:
Principal 18,725 11,834 - 6,891 - - - -
---------- ------- ------ ------ ------ ----- ------ ------ ----------
Total 335,237 265,084 2,865 6,891 1,199 899 52,904 899 4,496
2009
Borrowings, including:
Principal 289,870 200,206 48,098 9,512 823 206 - 31,025 -
Interest 24,105 1,105 1,105 565 297 53 - 20,980 -
Other non-current liabilities, including:
Principal 20,005 - - - 11,583 1,229 899 899 5,395
Trade and other payables, including:
Principal 17,622 4,316 8,018 5,288 - - - - -
---------- ------- ------ ------ ------ ----- ------ ------ ----------
Total 351,602 205,627 57,221 15,365 12,703 1,488 899 52,904 5,395
========== ======= ====== ====== ====== ===== ====== ====== ==========
24. SUBSEQUENT events
On 8 December 2010, KazakhGold and AltynGroup entered into a
binding agreement (the "Original Principal Agreement") for the sale
of KazakhGold's operating subsidiaries in Kazakhstan, Romania and
Kyrgyzstan and the withdrawal of claims against former
shareholders, and cessation of claims by Kazakh Authorities. The
Original Principal Agreement was terminated by KazakhGold on 14
March 2011.
Following termination of the Original Principal Agreement, the
parties have continued with negotiations regarding the sale of the
operating subsidiaries to AltynGroup, resolution of the Claims and
other disputes between the parties. These continued negotiations
have now resulted in the entry into a Restated and Amended
Principal Agreement (the "RAPA"), and a Settlement Deed in respect
of the Claims which provides for a conditional settlement and
release of the orders, judgments and claims, whether in litigation,
arbitration or otherwise, initiated, inter alia, in the UK, Jersey,
the BVI, or elsewhere, between KazakhGold, Jenington and
Kazakhaltyn, on the one hand, and the Assaubayev family, on the
other hand, and all of their respective subsidiaries and
affiliates, howsoever relating to the matters referred to in those
proceedings or otherwise arising in respect of the original
acquisition of 65 percent of KazakhGold by Jenington, without any
admission of liability on either part (the "Settlement Deed").
Pursuant to the RAPA, AltynGroup will acquire KazakhGold's
operating subsidiaries in Kazakhstan, Romania and Kyrgyzstan in two
tranches. The aggregate transaction price for all the shares is
USD509,000,000, as well as the provision of funds required to be
repay the Jenington Loan.
There can be no assurance that the conditions to the
transactions contemplated by the RAPA and the conditions to the
Settlement Deed will be satisfied, or that the transactions will be
completed.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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