TIDMKZG
RNS Number : 4550F
KazakhGold Group Ltd
26 April 2011
DIRECTORS' RESPONSIBILITY STATEMENT
Mr Evgueni I. Ivanov, Chairman and CEO of KazakhGold Group
Limited confirms on behalf of the Board of Directors that:
(a) the consolidated financial statements for the year ended 31
December 2010 and 2009, prepared in accordance with International
Financial Reporting Standards as issued by the International
Accounting Standards Board, give a true and fair view of the
assets, liabilities, financial position and profit or loss of
KazakhGold Group Limited and its consolidated subsidiaries; and
(b) the management report for the year 2010 includes a fair
review of the development and performance of the business and the
position of KazakhGold Group Limited, together with a description
of the principal risks and uncertainties that it faces.
Neither KazakhGold Group Limited nor the directors accept any
liability to any person in relation to the management report except
to the extent that such liability could arise under English law.
Accordingly, any liability to a person who has demonstrated
reliance on any untrue or misleading statement or omission shall be
determined in accordance with Section 90A of the Financial Services
and Markets Act 2000.
EVGUENI I. IVANOV
Chairman and CEO
26 April 2011
Management report
Management's discussion and analysis of financial condition and
results of operations for the year ended 31 December 2010
This Management report should be read in conjunction with
KazakhGold's consolidated financial statements and the related
notes thereto.
The KazakhGold Group is a leading gold miner in the Republic of
Kazakhstan with a broad gold reserves and resources base. The
KazakhGold Group's operating mines are located in Northern and
Eastern Kazakhstan, and it also has development properties in
Eastern Kazakhstan and Romania, as well as potential development
opportunities in Kyrgyzstan. Global Depositary Receipts
representing the shares of KazakhGold Group Limited are traded on
the main market of the London Stock Exchange under the symbol of
KZG.
On 30 July 2009 as a result of the Partial Offer(1) , Jenington
International, an indirect wholly owned subsidiary of Polyus Gold,
the leading Russian gold producer and one of the largest gold
mining companies globally, acquired 50.15% of KazakhGold Group
Limited. On 1 July 2010, following an equity placing, KazakhGold
issued 66,666,667 its ordinary shares, resulting in gross proceeds
of USD 100 million. Polyus Gold, through its subsidiary Jenington,
subscribed for 51,194,922 of these shares, increasing its ownership
in KazakhGold to 65% of its issued share capital.
This report represents the management's discussion of
KazakhGold's operating and financial results, including:
-- material recent developments;
-- key performance indicators;
-- results of operations for the year ended 31 December 2010 and
31 December 2009;
-- financial position as at 31 December 2010 and 31 December
2009; and
-- the Company's liquidity, solvency and capital resources;
(1) The Partial Offer to acquire 50.1% of the issued and to be issued share capital of KazakhGold Group Limited was made by Jenington International Inc., an indirect wholly-owned subsidiary of OJSC Polyus Gold, to all shareholders of the Group in July 2009. Following the completion of the Partial Offer Jenington became owner of 50.15% of the issued share capital of the Group.
Table of contents
1. Material recent developments
2. KazakhGold Group's operating results
2.1 External market factors affecting the financial results of
the KazakhGold Group
2.2.Discussion of results of operations for the year ended 31
December 2010 and the year ended 31 December 2009
2.3. Gold sales
2.4. Cost of gold sales
2.5. Selling, general and administrative expenses
2.6. Other expenses, net
2.7. Finance costs and foreign exchange gain/(loss)
2.8. Income tax
2.9. Other sales and cost of other sales
3. Non-GAAP financial measures
3.1.EBITDA..............................................................
........................................................................
..... 10
3.2.TCC.................................................................
........................................................................
.......10
4. Review of financial sustainability and solvency
4.1. Analysis of items of statement of financial position
4.2. Cash flow analysis. 14
4.3.Capital
expenditure.............................................................
..............................................................15
5. Description of principal
risks...................................................................
.................................16
6. Main features of the internal control and risk management
systems in relation to the
financial reporting
process.................................................................
.........................................18
7. Corporate governance
report..................................................................
..............................19
1. Material recent developments
Since the appointment following the completion of the Partial
Offer, the new management team undertook a number of steps to
improve the operational and financial condition of KazakhGold,
including seeking additional cash injections and initiating
preparation of a new development strategy. Prior to completion of
the Partial Offer, a lack of working capital and protracted
underinvestment led to serious problems at all production units.
Regular maintenance works had not been performed on either mining
or processing equipment, resulting in an increasing number of
emergency shutdowns and a significant amount of downtime.
Since completion of the Partial Offer by Jenington International
in August 2009, the new controlling shareholder has invested
significant amounts of funds in KazakhGold for the maintenance and
restoration of existing facilities. In August 2009 and February
2010, KazakhGold entered into two USD 50 million loan agreements
with Jenington to provide it with funds for working capital
purposes and to fund the USD 8.4 million consent fee payable to the
bondholders in connection with a consent solicitation carried out
to permit the Partial Offer. On 1 July 2010, KazakhGold also
completed a USD 100 million placing. A total of 51,194,922 Shares
and 15,471,745 GDRs (each representing one Share) were placed at a
price of USD 1.50 per share. Jenington subscribed for 51,194,922
Shares and thereby contributed on additional USD 76.8 million to
KazakhGold, out of which USD 51.3 million was used to repay the
February 2010 loan, together with the accrued interest. In total,
since August 2009 untill end of 2010, USD 140.3 million was
invested into the company. In May 2010, a new long-term strategy to
2020 was approved by the Board.
On 30 June 2010, the Board of KazakhGold announced the Proposed
Combination of KazakhGold and Polyus Gold, which, if completed,
would have resulted in KazakhGold acquiring substantially all of
the issued share capital of Polyus Gold. The Proposed Combination
was to be carried out through series of transactions designed to
create a single holding company which would combine the businesses
of both KazakhGold and Polyus Gold, unifying the shareholder bases
of the companies under a single listing on the London Stock
Exchange.
On 12 July 2010, KazakhGold announced that its subsidiaries in
Kazakhstan had received a letter from the Ministry of Industry and
New Technologies of the Republic of Kazakhstan ("MINT") indicating
that the prior decisions of the competent authorities in Kazakhstan
relating to the waivers of the state's pre-emptive right to acquire
KazakhGold securities had been annulled. The decision appeared to
be based on the waiver obtained by the former directors of
KazakhGold for the partial offer by Jenington, which was completed
in August 2009, but also covered the waiver subsequently obtained
in June 2010 for the proposed business combination between Polyus
Gold and KazakhGold announced on 30 June 2010 and the USD 100
million equity placing completed by KazakhGold on 1 July 2010.
On 27 July 2010, the Proposed Combination was approved by an
extraordinary general meeting of shareholders. The meeting also
extended the deadline for acceptances of the Private Exchange Offer
to 17 September 2010, in order to provide KazakhGold a further
period for consultation with the Kazakh authorities in relation to
issues raised by them in connection with the Proposed Combination,
including the announcement by MINT of the annulment of the waivers
previously granted to KazakhGold with respect to the state's
pre-emptive rights under the Kazakh subsoil laws, with a view to
resolving these issues.
On 28 July 2010, KazakhGold announced that the consent
solicitation of holders of its USD 200,000,000 9.375 per cent.
Senior Notes due 2013 (the "Senior Notes") was successfully
completed, and the resolutions consenting to various actions in
connection with the Proposed Combination and certain other matters
were passed.
On 26 October 2010, KazakhGold Group and OJSC Polyus Gold
announced that the Private Exchange Offer under the terms announced
on 30 June 2010 had been terminated, due to an inability to reach a
resolution of the above mentioned issues by the 29 October
deadline.
On 8 December 2010, KazakhGold entered into a Principal
Agreement ("Agreement") with AltynGroup, a limited liability
partnership controlled by the Assaubayev family, to sell its
operating subsidiaries in Kazakhstan, Romania and Kyrgyzstan.
According to the Agreement, the Assaubayev family agreed to pay USD
509 million in two tranches.
On 14 March 2011, KazakhGold Group Limited announced that it had
terminated the Principal Agreement with Altyn Group, as the first
tranche completion was not achieved by the cut-off date.
On 8 April 2011, KazakhGold and AltynGroup signed a Restated and
Amended Principal Agreement (RAPA) for the sale of KazakhGold's
operating assets, as well as a Settlement Deed in respect of the
claims initiated in relation to the Assaubayev family. Under RAPA,
the sale of KazakhGold's assets shall be implemented in two
tranches. In the first tranche, KazakhGold will transfer to
AltynGroup 51% stakes in operating subsidiaries for a total amount
of USD 259,590,000, part of that consideration to be satisfied by
cancellation of its KazakhGold's loan (plus interest accrued
thereon) to Gold Lion (the entity controlled by Assaubayev family
through which it holds its KazakhGold stakes).
On or prior the First tranche completion, AltynGroup will
provide an irrevocable unconditional guarantee or stand-by letter
of credit in respect of 51% of all sums payable under the Senior
Notes; such guarantee shall be increased proportionally to the
number of shares acquired further by AltynGroup.
In case the first tranche is not implemented by 12 September
2011, the letter of credit proceeds will be applied to the
AltynGroup's acquisition of shares of KazakhGold, the quantity to
be calculated using a formula defined by the agreement. In that
case, in accordance with preliminary estimation, AltynGroup's
ownership of KazakhGold will amount to 15.89%.
Under the second tranche AltynGroup shall either acquire the
remaining 49% stake in the operating subsidiaries, or 100% of the
off-shore companies holding such operating subsidiaries for the
total consideration of USD 249,410,000. Prior to or at First
tranche completion, AltynGroup is required to provide KazakhGold
with guarantees of payment for the Second tranche.
2. KazakhGold Group's operating results
2.1 External market factors affecting the financial results of
the KazakhGold Group
The results of the KazakhGold Group are significantly affected
by the price of commodities, such as gold, oil and steel, as well
as movements in the national currency exchange rates.
The market price of gold is the most significant factor
affecting the profitability and operating cash flow generation of
the Group. The global gold price is subject to volatile movements
over short periods of time. In 2010, gold price volatility remained
high, with the price ranging from the lowest level of USD 1,058 per
troy ounce (London p.m. fixing) in February to the highest of USD
1,421 per ounce in November. In 2010, the average gold p.m. fixing
price in London was USD 1,224.5 per ounce, an increase of 26% over
the 2009 average price of USD 972.4 per ounce. For the whole year,
the global price of gold increased by 25% from USD 1,121.5 per
ounce on 4 January, to USD 1,405.5 per ounce on 30 December, the
first and the last business days in 2010, respectively.
The results of the KazakhGold Group are also affected to a
significant extent by currency exchange rates. The KazakhGold
Group's revenue from gold sales is denominated in USD, whereas most
of the operating expenses of KazakhGold are denominated in the
Kazakh tenge. During 2010, the KZT exchange rate did not change
materially. The average rate for 2010 was KZT 147.35 per USD (2009:
147.50). By the end of the year, the KZT slightly appreciated,
closing at KZT 147.40 per USD (2009: 148.36).
A significant portion of costs included in the cost of gold
sales of the KazakhGold Group are also directly or indirectly
impacted by the prices of oil and steel. Changes in oil prices
impact the prices of heating oil, diesel fuel, gasoline and
lubricants for mining and construction equipment. Steel forms the
basis for the price of all rolled metal products, pipes, machinery
and vehicles. Global prices for commodities increased in 2010,
creating significant cost pressure for the KazakhGold Group. Oil
prices showed a 29% year-on-year increase, with steel prices
growing by 10%. Average rates for key external market factors
are:
Average price/ rate 2010 2009
----------------------------------------------------------- -------- -------
Average London p.m. gold fixing price (USD per troy
ounce)(1) 1,224.5 972.4
Oil (Brent) (USD per barrel)(2)
................................... 80.3 62.4
Steel (hot rolled) (USD per tonne)(3)
....................... 641 582
Average USD/KZT rate(5)
......................................... 147.35 147.51
Period end USD/KZT
rate........................................ 147.40 148.36
1. Source: London Bullion Market Association.
2. Source: Bloomberg.
3. Source: Steel Business Briefing.
4. Source: The Central Bank of Russia.
5. Source: The National Bank of Kazakhstan.
2.2. Discussion of results of operations for the year ended 31
December 2010 and 2009.
The following table sets forth a summary of results of the
operations of the KazakhGold Group for the year ended 31 December
2010 and 2009.
Year ended 31 December Change
(US dollars in thousands, except
for per share amount) 2010 2009 %
---------------------------------------- ----------- ------------ ---------
Gold sales 114,448 58,434 95.9
Other sales 1,246 1,943 (35.9)
Total revenue 115,694 60,377 91.6
Cost of gold sales (76,997) (57,296) 34.4
Cost of other sales (3,306) (2,846) 16.2
Gross profit/(loss) 35,391 235 14,960.0
Gross profit/(loss) on gold sales 37,451 1,138 3,191.0
Gross profit margin 31% 0,4% -
Selling, general and administrative
expenses (24,260) (39,746) (39.0)
Other expenses, net (35,230) (32,621) 8.0
Finance costs (32,929) (31,841) 3.4
Foreign exchange (loss)/gain, net 1,086 (45,927) (102.4)
Loss before income tax (55,942) (149 900) (62.7)
Pre-tax margin (48%) (248%) -
Income tax (expense)/ benefit (1,329) 6,161 (121.6)
Loss for the year (57,271) (143,739) (60.2)
Net loss attributable to minority
interest (1,006) (840) 19.8
Net profit/(loss) attributable
to shareholders of the parent company (56,265) (142,899) (60.6)
Net profit margin (49%) (238%) -
Loss per share - basic and diluted
(USD) (0.66) (2.70) (75.6)
2.3. Gold sales
The following tables show gold sales for the year ended 31
December 2010 and 2009:
year ended 31 December Change
-------------------------------
2010 2009 %
------------------------------- ------------- ---------- -------
Gold sales (USD thousand) 114,448 58,434 95.9
Gold sales (thousand troy
ounces) 103.31 69.34 49.0
Weighted-average gold selling
price (USD per troy ounce) 1,107.8 842.7 31.5
Average p.m. fixing price
in London (USD per troy
ounce)(1) 1,224.5 972.4 25.9
Excess/ (deficit) of average
selling price over/(under)
average evening fixing
price (USD per troy ounce) (117) (130) (10.0)
1) Source: London Bullion Market Association
Gold sales revenue in 2010 almost doubled year-on-year and
amounted to USD 114,448 thousand. The growth was driven by higher
realized gold prices as well as the substantial increase in sales
volumes. In the reporting year, KazakhGold Group sold 103.31
thousand troy ounces of gold in the form of sludge, flotation and
gravitation concentrates and other semi-products, compared to 69.34
thousand ounces in the comparative period, representing almost a
50% year-on-year increase.
In 2010, the Group produced 110.5 thousand ounces of gold in
semi-products, compared to 72.7 thousand ounces produced in the
previous year. The growth in production was a result of the
modernization programme at all the Group's facilities that began
after the completion of the Partial Offer when a new management
team was appointed.
In the reporting year, the gold price rally continued, pushing
the average London fixing to USD 1,224.5 per ounce. KazakhGold
sells its metal in semi-finished products, which are sold at a
discount to the market price. The average weighted gold selling
price in the reporting year amounted to USD 1,107.8 per ounce,
compared to USD 842.7 per ounce in 2009. However, in the reporting
period the weighted average gold selling price showed a 31.46%
year-on-year increase, compared to a 25.93% increase in the London
fixing. The difference resulted from the modernization and
facilities development program being currently implementedand which
was aimed, among other things, at increasing the share of
higher-margin products in the production mix, bringing the selling
price closer to the market price. In particular, the Group's
production facility at Akzhal deposit was launched in the reporting
period, producing dore gold.
The table below shows a breakdown of the KazakhGold Group's gold
revenue by product category.
Year ended 31 December
USD '000 2010 2009 Change, %
--------------- ------------------------- ----------
Product
Cathodic gold 53,653 27,236 99.0
Free gold 12,187 6,109 99.5
Other 38,918 25,089 55.1
Dore gold 9,690
------------- ---------- ----------
Total 114,448 58,434 95.9
------------- ---------- ----------
The table below shows a breakdown of the KazakhGold Group's
revenue by customer.
2010 2009
Type of Location Revenues (USD Revenues (USD
Customer Product of Customer thousand) thousand)
-------------- --------------- ------------- --------------- ---------------
Gravity and
flotation
concentrates,
CJSC quartzite
Karabashmed ore Russia 38,485 22,915
Cathodic, free
Metalor gold and dore
Technologies gold Switzerland 75,530 34,487
Gravity and flotation
concentrates, quartzite
Other(1) ore 433 1,032
--------------- ---------------
Total: 114,448 58,434
--------------- ---------------
1. Includes Alashankou Yaxin Commerce and Trade Company and
Nongjiushi Zhongye Trade Development Company.
The KazakhGold Group currently exports all of its products, with
most of its sales to Switzerland and Russia. The Group sells all of
its cathodic and free gold pursuant to arrangements with Metalor
S.A., a specialist trader in gold and precious metals processing
based in Neuchatel in Switzerland. In the reporting period, dore
gold produced at Akzhal was also sold to Metalor. Under the terms
of these arrangements, Metalor pays the Group for each ounce of
gold contained in the supplied products at a discount calculated
based on the cost of refining, the gold price fixed by LBMA and
other factors. Metalor bears the cost of insurance from the time
the products are transferred for international transportation by
air. On 27 October 2010, the contract with Metalor S.A. was
extended until 31 December 2011. In addition, substantial volumes
of gold, mainly in gravity and flotation concentrates, as well as
quartzite ore is sold to CJSC Karabashmed in Russia. In April 2011,
the contract with Karabashmed was extended until 30 April 2012.
2.4. Cost of gold sales
The below table gives the breakdown of the Group's cost of gold
sales in the reporting period.
Year ended 31 December Change, %
----------
USD'000 2010 2009
-------------------------------- ------------ ----------- ----------
Cash operating costs 66,970 46,559 43.8
Labour 22,669 20,643 9.8
Consumables and spares, out
of which: 20,820 11,683 78.2
Materials and spares 18,419 10,609 73.6
Fuel 2,401 1,074 123.6
Utilities, out of which: 6,880 5,052 36.2
Power 6,551 4,908 33.4
Other 329 144 128.0
Tax on mining 9,223 4,726 95.1
Sundry 7,378 4,456 65.5
------------ ----------- ----------
Amortisation and depreciation
of operating assets 16,121 15,787 2.1
Increase in provision for land
restoration - (925) -
(Increase)/decrease in metal
inventories (6,093) (4,125) 47.7
------------ ----------- ----------
Cost of gold sales 76,997 57,296 34.4
------------ ----------- ----------
The presentation of cash operating costs is more detailed than
that presented in the financial statements. The amounts are derived
from management accounts and agree in total with the amounts
presented in the financial statements.
In the reporting year, the cost of gold sales amounted to USD
76,997 thousand, compared to USD 57,296 thousand in the previous
year. The 34.39% year-on-year increase, compared to the 48.99%
year-on-year increase in ounces sold implies a 9.8% decrease of
costs of sales per ounce, which was the result of measures
undertaken since the completion of the Partial Offer aimed at
raising operating efficiency.
The increase in labour costs for operating personnel resulted
from increased salaries and new employees hired. KazakhGold is the
major employer in the towns where its mines are located and a
significant number of employees work under trade union agreements.
KazakhGold maintains a close relationship with local trade unions,
but believes that its staff levels, relative to current production
volumes, are high. Kazakhgold believes that upon modernisation of
operating facilities and the associated increase in production, the
staff levels will gradually become more commensurate with the
levels of its gold output.
The cost of materials and spares consumed in the reporting year
accounted for 27.5% of the Group's cash operating costs. In 2010,
expenses on materials and spares amounted to USD 18,419 thousand,
compared to USD 10,609 thousand in 2009. The growth mainly comes
from the increased gold production, as well as increases in prices
for most consumables.
The 123.61% year-on-year increase in expenses on fuel was a
result of increased volumes of diesel fuel purchased due to the
growth in production, combined with increased prices for fuel,
which resulted from growth in crude oil prices.
In the reporting period, the volume of drilling-and-blasting
works increased, which led to an increase in the volume of
exposives consumption. The volume of ore mined increased 130%, thus
diesel fuel consumption increased, ore processing grew 93%
year-on-year, increasing purchases of grinding balls by 69%.
The following table sets forth the principal consumables and
spares procured by the Group in 2010 and 2009:
Item 2010 2009
----------------------------------- ------------------- -------------------
Volume, Cost, Volume, Cost,
tonnes USD'000 tonnes USD'000
----------------------------------- -------- --------- -------- ---------
Spare parts for tipper trucks
and digging machines n/a 268 n/a n/a
Grinding balls 1,720 1,509 1,018 796
Pipes for current operations 179 153 n/a n/a
Spare parts for road-building
machines n/a 4 n/a n/a
Rolled metal products for current
operations 286 444 n/a n/a
Summer diesel fuel 1,784 1,035 1,384 946
Winter diesel fuel 1,058 761 849 396
Ai-80 gasoline 361 221 337 172
Ai-92 gasoline 67 47 71 42
Explosives 646 1,010 397 593
Cyanides 725 2,123 610 1,897
The 95.17% increase in tax on mining is proportionate to the
increase in gold sales revenue. Mining tax in the Republic of
Kazakhstan is calculated with reference to the value of the
reserves of commercially useful minerals which are contained in the
mineral raw materials extracted. The value of the reserves of
commercially useful minerals contained in mineral raw materials is
determined on the basis of the average exchange price for such
commercial minerals for the tax period. The average exchange price
is the arithmetic mean of the daily average quotations for each
commercial mineral recorded on the London Metal Exchange. The
mining tax rate for gold from 1 January 2009 is 5%.
The major portion of sundry costs in 2010 comprised of expenses
on security. The latter showed a substantial increase in the
reporting year and amounted to USD 4,169 thousand, compared to USD
1,766 thousand in 2009. Increased spending on security was a result
of the new management's efforts to strengthen control over
operations.
In the reporting year, amortisation included in cost of sales
increased by 2.12% to USD 16,121 thousand. The increase was due to
additions to the property, plant and equipment resulting from the
investments into the production facilities made since the
completion of the Partial Offer.
2.5. Selling, general and administrative expenses
The table bellow gives a breakdown of KazakhGold Group's
selling, general and administrative expenses.
USD '000 Year ended 31 December Change, %
----------------------------- ----------
2010 2009
----------------------------- ------------ ----------- ----------
Salaries 8,157 9,138 (10.7)
Taxes other than mining and
income taxes 3,521 1,613 118.3
Professional services 8,719 12,342 (29.4)
Depreciation 457 414 10.4
Other 3,406 16,239 (79.0)
------------ ----------- ----------
Total 24,260 39,746 (39.0)
------------ ----------- ----------
The presentation of selling, general and administrative expenses
is more detailed than that presented in the financial statements.
The amounts are derived from management accounts and agree in total
with the amounts presented in the financial statements.
Selling, general and administrative expenses in the reporting
year decreased substantially and amounted to USD 24,260 thousand,
compared to USD 39,746 thousand in 2009.
In 2010, salaries included in the selling, general and
administrative expenses decreased significantly and amounted to USD
8,157 thousand, compared to USD 9,138 thousand in the previous
year. The decrease reflected the cost-cutting programme implemented
by the management team of the Group, which was appointed following
the completion of the Partial Offer.
Taxes, other than mining and income taxes, in the reporting
period showed a 118.29% year-on-year increase and amounted to USD
3,521 thousand. The major portion of this item is comprised of
property tax expense, which, in the reporting year, amounted to USD
1,914 thousand. Also, in the reporting period, USD 1,062 thousand
of tax penalties were recorded, mainly relating to VAT
expenses.
One of the largest items of the Group's selling, general and
administrative expenses in the reporting period comprised of
expenses for professional services. This item included expenses for
legal, audit and consulting services, including those relating to
the investigation of activities of the previous management,
preparation for the proceedings against the Assaubaev family, and
the July 2010 USD 100 million equity placement, as well as the
Proposed Combination.
In 2009, expenses on professional services included those
related to the preparation for the Partial Offer.
2.6. Other expenses, net
Change,
Year ended 31 December %
--------
USD '000 2010 2009
---------------------------------- ------------ ----------- --------
Non-recoverable value added
tax on construction, repair,
maintenance and exploration
works 8,600 5,219 64.8
Bank guarantee provision - 11,650 (100.0)
Loss on revaluation of property,
plant & equipment - 11,079 (100.0)
Impairment of property, plant
and equipment 26,544 - 139.6
Other 86 4,673 (98.2)
------------ ----------- --------
Total 35,230 32,621 8.0
------------ ----------- --------
Other expenses in the reporting year primarily related to the
effects of new management's efforts to address many of the issues
identified upon the takeover, relating to the activities of the
former management. Particularly, in the reporting period,
KazakhGold accrued USD 8,600 thousand of VAT, which it believes was
previously illegally refunded out of the state budget by the former
management of the Company during 2007-2009 based on sham
contracts.
The impairment of property, plant and equipment in the reporting
year amounted to USD 26,544 thousand and was a result of the
continued efforts of the new management to streamline control and
management systems of the Company. In particular, further
reassessments of mining assets and capital construction in progress
were made following the introduction of a number of new upgrades in
the Group's management and accounting systems.
2.7. Finance costs and foreign exchange gain/(loss)
Change,
Year ended 31 December %
--------
USD '000 2010 2009
------------------------------ ------------ ----------- --------
Finance costs (32,929) (31,841) 3.4
Foreign exchange (loss)/gain 1,086 (45,927) (102.4)
In the reporting period, finance costs amounted to USD 32,929
thousand. The major portion of that was interest on loans and
borrowings amounting to USD 26,951 thousand. Out of that amount,
interest accrued on the Senior Notes amounted to USD 18,750
thousand. The remaining portion of interest on loans and borrowing
was related to interest payments in respect of the loan from Gold
Lion, amounting to USD 3,103 thousand, and in respect of the loans
from Jenington, amounting to USD 5,098 thousand (see note 17 of the
consolidated financial statements for the year ended 31 December
2010).
In the reporting year, currency exchange gain amounted to USD
1,068 thousand, compared to currency exchange loss of USD 45,927
thousand in 2009. The currency exchange gain was a result of
period-end KZT/USD exchange rate increase, the major portion of
loans and borrowings being USD denominated.
The USD 45,927 thousand foreign exchange loss in the year 2009
was a result of KZT devaluation by the National Bank of Kazakhstan
in February 2009.
2.8. Income tax
In 2010, the Group accrued USD 1,329 thousand of income tax
expense, compared to USD 6,161 thousand of income tax benefit in
the previous year. In 2010, TOO Gornyak, a subsidiary of the Group,
developing Akzhal deposit, started production activities and
received taxable profit, that is why income tax expense was
accrued, in spite of loss before income tax at corporate level.
2.9. Other sales and cost of other sales
In 2010, other sales amounted to USD 1,246 thousand, compared to
USD 1,943 thousand in 2009. The cost of other sales amounted to USD
3,306 thousand compared to USD 2,846 thousand in the previous year.
Other sales included revenues from hotels and ancillary services.
The cost of other sales included non-mining operating expenses,
such as hotel operations, and other ancillary services.
3. Non-GAAP financial measures
In its analysis of the Group's results, KazakhGold uses key
performance indicators which are not measures determined in
accordance with IFRS.
3.1. EBITDA
"EBITDA" is defined by the KazakhGold Group as profit before
finance costs, income tax, depreciation and amortisation of
operating assets and is further adjusted by certain items included
in the table below. In management view, KazakhGold has made these
adjustments in calculating EBITDA to provide a clearer view of the
performance of its underlying business operations and to generate a
metric that it believes will give greater comparability over time
with peers in its industry. KazakhGold believes that EBITDA is a
meaningful indicator of its profitability and performance. This
measure should not be considered as an alternative to profit for
the period and operating cash flows based on IFRS and should not
necessarily be construed as a comprehensive indicator of the
Group's measure of profitability or liquidity.
The following table sets forth the Group's EBITDA for the years
2010 and 2009:
Year ended 31 December
USD'000 2010 2009
---------------------------------- ----------- ------------
Loss for the period (57,271) (143,739)
- Income tax expense/(benefit) 1,329 (6,161)
+ Finance costs 32,929 31,841
+ Depreciation and amortization
for the period 18,116 17,659
- Foreign exchange (gain)/ loss (1,086) 45,927
Loss on PPE disposal 568 1,859
Loss on revaluation of property,
plan and equipment - 11,079
Impairment of property, plant
and equipment 26,544 -
EBITDA 21 129 41 535
The Group's EBITDA for the year 2010 amounted to USD 21
129thousand, compared to negative EBITDA of USD 41 535 thousand in
the previous year. The substantial improvement of EBITDA resulted
from increased sales volumes, improved gold selling prices and
improved cost control.
3.2. Total cash costs
KazakhGold Group presents the financial items "total cash costs"
("TCC") and "total cash costs per troy ounce". The measures are
calculated and presented by management as TCC presentation is a
common industry practice, although its calculations of these items
may differ from those of its industry peers. These items are not
IFRS measures. An investor should not consider these items in
isolation or as alternatives to cost of sales, profit for the
period attributable to shareholders of the parent company, net cash
generated from operating activities or any other measure of
financial performance presented in accordance with IFRS. The
calculation of total cash costs may vary significantly among gold
mining companies, and by themselves do not necessarily provide a
basis for comparison with other gold mining companies.
Total cash costs are defined by the Group as cost of gold sales
reduced by depreciation and amortisation of operating assets and
provision for annual vacation payment. Total cash costs per troy
ounce are the attributable total cash costs divided by the
attributable troy ounce of gold sold.
The following table shows the Group's TCC for the years 2010 and
2009:
Year ended 31 December Change, %
----------
USD'000 2010 2009
----------------------------------- ------------ ----------- ----------
Cost of gold sold 76,997 57,296 34.4
- property, plant and equipment
depreciation (16,121) (15,787) 2.1
- vacation provision (462) (1,215) (62.0)
TCC (USD thousand) 60,414 40,294 49.9
Gold sales (thousand troy ounces) 103 69 49.0
TCC, USD/ounce 585 581 0.6
In 2010, TCC amounted to USD 585 per ounce of gold sold,
compared to USD 581 in the previous year with this insignificant
increase related only to the KZT appreciation against USD. The
Group is continuing to focus on raising the operational efficiency
of its producing enterprises aimed, particularly, at curbing
costs.
4. Review of financial sustainability and solvency
As at 31 December 2010, the Group had a working capital
deficiency of USD 233,169 thousand. The deficit mainly resulted
from the full amount owed on the senior notes in the amount of USD
200,000 thousand with original maturity in 2013 and short-term
borrowing outstanding with Polyus Gold of USD 49 million. The
Senior Notes include various restrictive covenants including
limitations on additional indebtedness, and meeting certain
financial reporting timelines.. At 31 December 2010, the Group was
not in compliance with certain of these covenants, and as a
consequence, the Group classified the Senior Notes Senior Notes as
current liability.
4.1. Analysis of items of statement of financial position
KazakhGold's consolidated statement of financial position as at
31 December 2010, compared to 31 December 2009, was as follows:
Change,
Year ended 31 December %
--------
USD'000 2010 2009
--------------------------------------- ------------ ----------- --------
ASSETS
Non-current assets 193,979 199,918 (3.0)
Property, plant and equipment 190,151 197,051 (3.5)
Inventories 2,245 2,867 (21.7)
Other non-current assets 1,583 - n/a
Current assets 47,747 25,835 84.8
Inventories 27,891 14,265 95.5
Reimbursable value added tax 4,538 - n/a
Trade and other receivables 1,812 2,124 (14.7)
Advances paid to suppliers 2,560 1,905 34.4
Income tax prepaid 1,765 3,057 (42.3)
Cash and cash equivalents 8,162 3,531 131.2
Other current assets 1,019 953 6.9
TOTAL ASSETS 241,726 225,753 7.1
NEGATIVE EQUITY AND LIABILITIES
Share capital and reserves (88,561) (127,170) (30.4)
Share capital 332,392 233,645 42.3
Revaluation surplus 7,787 7,787 -
Option premium on convertible
debt 15,598 15,598 -
Translation reserve 22,533 25,401 (11.3)
Accumulated losses (465,866) (409,601) 13.7
Negative equity attributable
to shareholders of the parent
company (87,556) (127,170) (31.2)
Non-controlling interests (1,005) - n/a
Non-current liabilities 49,371 49,694 (0.7)
Borrowings 24,155 20,812 16.1
Environmental obligations 20,758 13,356 55.4
Other non-current liabilities 4,458 15,526 (71.3)
Current liabilities 280,916 303,229 (7.4)
Borrowings 249,310 257,816 (3.3)
Trade, other payables and accrued
expenses 27,507 20,668 3.1
Income tax payable 1,332 - -
Other taxes payable 2,767 24,745 (88.8)
TOTAL LIABILITIES 330,287 352,923 (6.4)
TOTAL NEGATIVE EQUITY AND LIABILITIES 241,726 225,753 7.1
4.1.1. Assets
Non-current assets
The table below sets forth the components of the KazakhGold
Group's property, plant and equipment as at 31 December 2010 and 31
December 2009:
As at 31 December, Change, %
----------
USD'000 2010 2009
---------------------------------- ---------- --------- ----------
Exploration and evaluation
assets 12,541 3,872 223.9
Mining assets 122,372 140,850 (13.1)
Non-mining assets 2,571 2,777 (7.4)
Capital construction-in-progress 52,667 49,552 6.3
Total property, plant
and equipment 190,151 197,051 (3.5)
KazakhGold's property, plant and equipment as at 31 December
2010 amounted to USD 190,151 thousand, compared to USD 197,051
thousand as at 31 December 2009. The decrease resulted from
impairment of mining assets in the amount of USD 19,835 thousand
and impairment of capital construction in progress in the amount of
USD 6,709, both relating to the reassessment of the fixed assets
made in the reporting year following certain improvements of
management and accounting systems of the Group. This was partly
offset by additions to fixed assets which resulted from investments
made into the modernization and expansion of the Group's production
facilities, as well as to exploration works.
In May 2010, the new long-term strategy to develop the Company's
assets was approved by the Board. The strategy consisted of the
large-scale exploration campaign aimed at substantially increasing
reserves, as well as the modernization and expansion programme to
upgrade the existing facilities and construct new mining and
processing capacities at existing operating sites. Upgrading works
at all sites commenced in August 2009, following completion of the
Partial Offer, and were intensified after the development strategy
was approved. Due to the conflict with the previous owners that
arose during the summer (see Section 1. of this report Material
recent developments), management had to significantly curb its
investment programme. In particular, spending on exploration was
substantially cut. The Group remained focused mainly on the
modernization of the existing facilities during the period.
Capital expenditure in 2010 amounted to USD 33,548 thousand,
compared to USD 7,372 thousand in 2009 (see 4.3 of this
Report).
Current assets
As at 31 December 2010, current assets amounted to USD 47,747
thousand, compared to USD 25,835 thousand as at 31 December 2009.
The increase in current assets resulted from capital injections
into the working capital of the Company that continued in the
reporting period. Inventories showed a 95.5% year-on-year increase,
due to substantial increase of gold-in-process and finished goods
at warehouses. The increase resulted from improved operating
efficiencies of the Group's production facilities resulting from
the modernization program that began after the Partial Offer was
completed in August 2009.
4.1.2. Equity and liabilities
Capital and reserves
As at 31 December 2010, the Group had negative capital and
reserves amounting to USD 88,561 thousand, compared to negative
capital and reserves of USD 127,170 thousand as at 31 December
2009. The decrease in negative capital and reserves resulted from
the share placement for USD 100 million, which was partly offset by
loss for the year ended 31 December 2011.
Non-current liabilities
As at 31 December 2010, the KazakhGold Group's non-current
liabilities amounted to USD 49,371 thousand, compared to USD 49,694
thousand as at 31 December 2009. The most substantial item within
non-current liabilities is long-term borrowings, which is comprised
of a loan obtained from Gold Lion in June 2009, due on 6 November
2014. (See Note 17 of the consolidated financial statements).
Environmental obligations as at 31 December 2010 amounted to USD
20,758 thousand, compared to USD 13,356 thousand as at 31 December
2009. The increase resulted from the change in the applied discount
rate.
Current liabilities
As at 31 December 2010, the KazakhGold Group's current
liabilities amounted to USD 280,916 thousand, compared to USD
303,229 thousand as at 31 December 2009.
The Group's current liabilities as at 31 December 2010 were
comprised of the USD 200,000 thousand Senior Notes and a short-term
loan from Jenington in the amount of USD 49,310 million (see Note
17 of the consolidated financial statements). As at 31 December
2010 the Senior Notes are classified as current, as the Group was
not in compliance with certain of its covenants.
As at 31 December 2009, KazakhGold also had secured and
unsecured USD-denominated loans for the total amount of USD 9,099
thousand, as well as a secured KZT-denominated loan of USD 1,854
thousand. All loans except Jenington and the Senior Notes were
repaid during 2010.
On 14 August 2009 and on 4 February 2010, the Group obtained two
USD 50,000 thousand loans from Jenington International to finance
its working capital and to fund the consent fee payable to holders
of the Senior Notes in connection with the Partial Offer. The
February loan was repaid in July 2010, through proceeds of the USD
100,000 thousand placing of shares, and thus is not reflected in
the consolidated financial statements. The loan obtained in August
2009, as at 31 December 2010, was classified as a short-term
borrowing (see Note 17 on the consolidated financial statements).
Under the RAPA (see section 1 of this report), AltynGroup is
required to provide funds for the repayment of the loan at
completion of the first tranche.
4.2. Cash flow analysis
The following table shows KazakhGold's consolidated statement of
cash flows for the years ended 31 December 2010 and 31 December
2009.
USD'000 12m 2010 12m 2009
--------- ----------
Operating activities
Profit before income tax (55,942) (149,900)
Adjustments for:
Amortisation and depreciation 18,116 17,659
Loss on revaluation of PPE - 11,079
Impairment of PPE 26,544 -
Bank guarantee provision - 11,650
Non-recoverable VAT - 5,219
Finance costs 32,929 31,841
Loss on disposal of property, plant and
equipment 574 1,859
Change in allowance for doubtful debts (65) 3,594
Foreign exchange (gain)/loss, net (1,086) 45,927
Other 1,996 1,881
--------- ----------
Operating profit before working capital
changes 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 payables (536) (10,470)
Other payables and accrued expenses (2,063) 11,177
Other taxes payable (20,401) (1,672)
--------- ----------
Cash flows from operations (17,930) (25,068)
Interest paid (24,546) (22,457)
Income tax paid (1,410) (1,462)
--------- ----------
Net cash inflow from operating activities (43,886) (48,987)
--------- ----------
Investing activities
Purchase of property, plant and equipment (33,548) (7,372)
Net cash inflow/(outflow) from investing
activities (33,548) (7,372)
--------- ----------
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 issuance a company Share
capital 98,747 -
Net cash (outflow)/inflow from financing
activities 82,899 47,642
--------- ----------
Restricted cash (862) -
Effect of translation to presentation currency 28 (1,718)
--------- ----------
Net increase in cash and cash equivalents 5,465 (8,717)
Cash and cash equivalents at beginning
of the year 3,531 13,966
--------- ----------
Cash and cash equivalents at end of the
year 8,162 3,531
========= ==========
Net cash used in operating activities in the reporting year
amounted to USD 43,886 thousand compared to USD 48,987 thousand in
2009. Investing activities substantially increased in the reporting
period. Capital expenditure in 2010 amounted to USD 33,548
thousand, compared to USD 7,372 thousand in 2009.
Cash generated from financing activities amounted to USD 82,899
thousand, compared to USD 47,642 thousand in 2009. The inflow from
financing activities resulted from the new share placements for USD
100 million in July 2010, as well as proceeds from borrowings,
which was partly offset by repayment of borrowings (see Note 17 of
the consolidated financial statements).
4.3 Capital expenditures
The following table shows the KazakhGold Group's capital
expenditures in 2010 and 2009:
Change,
Year ended 31 December %
--------
USD'000 2010 2009
------------------------------- ------------- ---------- --------
+ Purchase of property, plant
and equipment 33,548 7,372 355.1
Net capital expenditures 33,548 7,372 355.1
In May 2010, the Board of KazakhGold approved a development
strategy for the Kazakhstan assets of KazakhGold Group through
2020. The strategy covers the development of the mineral resources
base, the modernization and expansion of the existing operating
capacities and the construction of new production facilities. Under
this strategy, the Group's capital expenditures in 2010 were
planned at the level of USD 56 million - USD 67 million. The
capital expenditure activities were intensified after the strategy
was approved, but, due to the conflict with the previous owners,
since August 2010 financing of those measures was substantially
reduced, and the investment program for 2010 was not fully
implemented.
In 2010, the Company concentrated on modernization of the
existing production units, located in the Stepnogorsk region of the
Akmolinsk area of Kazakhstan: Aksu, Bestobe and Zholymbet.
Exploration works also remained in focus in the reporting period.
The total volume of capital expenditures in 2010 amounted to USD
33,548 thousand.
In 2010, at the Aksu mine a heavy repair of three mills,
including replacement of crushing cylinders, was performed. This
measure allowed an increase in the volume of ore processed at the
plant by 70%. At the same time, works on commissioning of the
additional section of the heap leaching complex continued. As a
result, the volume of ore processed at the heap leaching facility
increased by 127%.
At the Bestobe a new flotation workshop was constructed and
equipped with new mills, flotation equipment, concentration and
slime pumps. The main building of the plant was also equipped with
the new mill. These measures helped to increase volume of ore
processed at the plant by 55%. On the mining side, additional
horizons were brought into operations (zone Dalnaya at the level
160 meters, level of 655 meters of Centralnaya area), increasing
the volume of underground mining by 1.7 times.
At the Zholymbet mine, new mills were launched into operations,
as well as a new jaw crusher and cone-type crusher, which resulted
in a further increase of the ore processed by 23%. Also the capital
repair of the Centralnaya shaft had been performed, including the
replacement of the depreciated armors and commissioning of the
compressor station, which delivers compressed air to the shaft.
In the reporting period, the Company's capital expenditure
program included exploration activities at the following deposits
in Kazakhstan: Aksu, Bestobe, Zholymbet, Akzhal, Southern
Karaultube, the Quartzite Hills and Kaskabulak. Total volume of
exploratory drilling (including core drilling and reverse
circulation drilling) at all the deposits amounted to 31.8 thousand
meters, compared to 8.1 thousand meters in the previous year.
5. Description of principal risks
Going concern risk
Subsequent to the completion of the Partial Offer, 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 operating and financial performance has been
substantially improved. Nevertheless, despite the improvement in
operations, the Group continued to incur losses in the reporting
year, has negative working capital and cash outflows from
operations.
At 31 December 2010 the Group has the following borrowings (see
Note 7 of the consolidated financial statements):
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 December 31, 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. (see Note 1 of the
consolidated financial statements)
To resolve the existing disputes between the shareholders
mentioned above, with regards to misappropriation of funds
identified in 2008-2009 and as a step toward the RTO deal announced
at the middle of the year 2010, in December 2010 KazakhGold Group
Limited entered into a principal agreement for the sale of its
operating subsidiaries and related matters with AltynGroup
Kazakhstan LLP, a limited liability partnership controlled by
members of the Assaubayev family. The deal was later canceled and
then renewed on 8 April 2011 (see section 1 of this report). The
transaction is subject to a number of conditions, including
settlement of all outstanding claims and actions between the
parties, and the receipt of all necessary waivers and consents from
the Kazakhstan Government, receipt of financing by AltynGroup to
complete the transactions and the entry into definitive agreements,
as well as the receipt of all necessary waivers and approvals for a
possible business combination between KazakhGold and Polyus
Gold.
The deal is exposed to a number of uncertainties and risks such
as (i) a material breach by AltynGroup of the terms of the
Agreement; (ii) failure by AltynGroup to obtain the required
waivers and consents in Kazakhstan; or (iii) failure by AltynGroup
to obtain the debt and equity financing required for tranches
closing. Therefore there can be no assurance that the conditions to
the Transaction will be satisfied, or that the Transaction will be
completed.
All the above-mentioned factors may have a material impact on
the Group's future operations and may cast a doubt about the
Group's ability to continue as a going concern. For more details
see Note 1 of the consolidated financial statements.
Other risk factors
In addition to going concern risk, the Group is exposed to a
number of risks relating to doing business in gold mining sector in
countries where the Group's operations or projects are located.
Those risk factors are described below.
Financial risk factors
The Group's multi-national operations expose it to a variety of
financial risks: foreign currency risk, fair value and cash flow
interest rate risk, other price risk, liquidity risk and credit
risk. The policy for managing these risks is set by the Board and
all such risks are managed at a Group level within the
organization.
The Group has a general policy of not hedging against foreign
currency risk. In managing interest rate and currency risks, the
Group aims to reduce the impact of short-term fluctuations on the
Group's earnings. Over the longer-term, however, changes in foreign
exchange rates could have an impact on consolidated earnings.
Market risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate due to changes in interest
rates (interest rate risk), foreign exchange rates (currency risk)
or other market factors (other price risk).
(a) Price risk
The Group is exposed to market price risk from its current
activities.
The gold market is cyclical and sensitive to any economic
changes. The price of gold is subject to substantial fluctuations
and is affected by a number of factors which are beyond the control
of the Group. A substantial continued price reduction may result in
a reduction in profitability of gold exploration and extraction
activities.
The Group manages this risk centrally, with reference to annual
budgets and periodic forecasts including sensitivity analyses of
projected production rates and gold market prices.
(b) Liquidity risk
The liquidity risk of the Group is managed centrally. New
borrowings are taken on where additional funds are required. During
the period under review, all of the Group's new borrowing were from
its parent, Jenington International. Surplus funds not allocated to
future investment and working capital requirements are used to
repay existing loans and bonds. The bulk of the Group's cash
balances are held in USD denominated floating rate deposits as
required to fund its short-term requirements.
(c) Credit risk
The Group is exposed to credit risk arising from credit sales of
its products to customers. It is the Board's policy to assess the
credit risk of all new customers before entering into contracts and
also, where possible, to trade only with established entities.
During 2010, the Group had two principal customers, who together
account for 90% of its sales.
(d) Foreign exchange risk
Foreign exchangerisk arises due to the Group's primary revenues
being in US dollars, which is also the presentation currency whilst
the Group's principal operating costs are denominated in Kazakhstan
Tenge, which is the principal functional currency of the Group's
operating subsidiaries.
The effect of a strengthening of the Kazak Tenge against the US
dollar at the balance sheet date could result in an increase in
post-tax losses for the year and decrease net assets, all other
variables held constant.
Operational risks
The reserves volume and grade of the ore the KazakhGold Group
processes may not conform to current expectations and could be
significantly corrected.
The activity of the Group heavily relies upon existing reserves
and resources. Evaluation of mineral resources of all mining
companies, may, by its nature, be inaccurate and to some extent
depends on the statistical findings on the basis of limited
drilling and other analyses, which could be inconsistent. The gold
price changes may also significantly impact the assessment and
classification of ores. A failure to confirm the quantity and
quality of the mined ore deposits may reduce the efficiency of
production through boosting the cost of mining and increasing the
labor intensity. The KazakhGold Group is subject to mining
risks.
Gold exploration and the development of mines involve a high
degree of risk and uncertainty.
There are increased risks of flooding, pit slope and rim slide,
accidents caused by the use of the mining transport equipment and
preparation and performance of explosion works in the pit,
reduction of gold production due to adverse weather conditions and
problems in the power supply facilities and recovery plants. These
risks could result in suspended ore production and recovery,
increased costs, health, safety and environmental issues and affect
the Group's production activities.
The Group aims to mitigate the risks associated with unplanned
production interruptions through various processes, including
probability analysis and effective risk management. Such risk
management includes identification of probability and consequences
of potential threats and adoption of appropriate risk response
measures to prevent accidents and emergencies.
Regulation and country risks
Emerging markets such as Kazakhstan, Kirgizstan and Romania are
subject to greater risks than more developed markets, including
significant legal, economic and political risks.
-- Taxation contingencies
The Group is subject to uncertainties relating to the
determination of its tax liabilities. The tax system and tax
legislation in Kazakhstan have been in force for only a relatively
short time and are subject to frequent changes and varying
interpretations. Management's interpretations of such legislation
in applying it to business transactions of the Group may be
challenged by the relevant tax authorities and, as a result, the
Group may be assessed on additional tax payments including fines,
penalties and interest charges, which could have a material adverse
effect on the Group's financial position and results of operations.
Such uncertainties may in particular relate to the valuation of the
taxable base for excess profits tax purposes.
-- Insurance
The insurance industry in 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 does not have
third party liability coverage in respect of property or
environmental damage arising from accidents on Group property or
relating to the Group's operations. There is a risk that the loss
or destruction of certain assets could have a material adverse
effect on the Group's operations and financial position.
-- Environmental contingencies
Environmental regulations in Kazakhstan are continually
evolving. The outcome of the environmental regulations under
proposed or future environmental legislation cannot be estimated at
present. As obligations are determined, they will be provided for
in accordance with the Group's accounting policies. The Directors
believe that there are no significant liabilities that can be
identified under current legislation not accrued for in the Group's
consolidated financial statements. A provision has been made for
costs associated with restoration and abandonment of mine sites
upon depletion of deposits.
-- Use of sub-soil rights
In Kazakhstan, all sub-soil reserves belong to the State, with
the Ministry of Energy and Mineral Resources granting exploration
and production rights to third party bodies. Sub-soil rights are
not granted in perpetuity and any renewal must be agreed before the
expiration of the relevant current contract or license. These
rights may be terminated by the Ministry if the Group does not
satisfy its contractual obligations in respect of the individual
contract or license granted. The Group believes that it is in
substantial compliance with the terms of its sub-soil
agreements.
-- Kazakhstan currency control regulations may hinder the
KazakhGold Group's ability to conduct business.
-- Kazakh competition regulations and procedures are subject to
uncertainties.
If transactions that KazakhGold and its subsidiaries have
entered into are challenged for non-compliance with applicable
Kazakh legal requirements, the transactions could be invalidated or
liabilities imposed on the KazakhGold Group.
-- The Kazakh state may be entitled to exercise pre-emptive
rights over assets acquired by the KazakhGold Group, transfers of
shares in KazakhGold's subsidiaries and the issuance of new
depositary receipts over its shares.
Additional risks and uncertainties that KazakhGold is not aware
of or that KazakhGold currently believes are immaterial may also
adversely affect the KazakhGold Group's business, operating results
and financial condition.
6. Main features of the internal control and risk management
systems in relation to the financial reporting process
Group management is responsible for establishing and maintaining
adequate risk management and internal control over financial
reporting for the Group. Internal control over financial reporting
is a process to provide reasonable assurance regarding the
reliability of the Group's financial reporting for external
purposes in accordance with international accounting
principles.
Internal control includes maintaining records that, in
reasonable detail, accurately and fairly reflect the Group's
transactions; providing reasonable assurance that transactions are
recorded as necessary for preparation of the Group's financial
statements; providing reasonable assurance that receipts and
expenditures of Group assets are made in accordance with management
authorization; and providing reasonable assurance that unauthorized
acquisition, use, or disposition of Group assets that could have a
material effect on its financial statements would be prevented or
detected on a timely basis.
One of the instruments of the Group's internal control is the
Audit Committee (see section 7. Corporate governance).
Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance
that a misstatement of the Group's financial statements would be
prevented or detected.
While preparing and improving its internal control and risk
management systems over financial reporting, the Group relies,
among others, on recommendations and integrated framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission.
Based on this evaluation, management concluded that the Group's
internal control over financial reporting as of December 31, 2010
was effective.
7. Corporate governance report
7.1. Board of Directors
Mr. Evgeny I. Ivanov
Mr. Ivanov has been a member of KazakhGold's Board of Directors
and Chairman of KazakhGold since August 2009. Mr. Ivanov has held
the following other posts:
-- From 2005 to 2007 - Member of the Board of Directors of
ROSBANK.
-- Since 2004 - Member of the Board of Directors of CJSC Polyus,
from 2004 to 2007 and from February 2008 to October 2008, President
of CJSC Polyus and, from 28 December 2007 to 10 February 2008 and
from October 2008 to December 2010, General Director of CJSC
Polyus.
-- From 2005 to 2007 since 2008 - Member of the Board of
Directors of OJSC Matrosov Mine.
-- Since 2005 - Member and Chairman of the Board of Directors of
JSC Lenzoloto.
-- From 2005 to 2007 - Member of the Board of Directors of OJSC
Aldanzoloto.
-- From 2005 to 2008 - Chairman of the Board of Directors of
OJSC YMC.
-- From 2005 to 2007 - Member of the Board of Directors of OJSC
SVMC.
-- From 2005 to 2008 - Vice-Chairman of the Board of Directors
of ROSBANK (Switzerland) S.A.
-- Since 2006 - Chairman of the Board of Directors of CJSC ZDK
Lenzoloto.
-- From 2006 to 2007 and from October 2008 to December 2010 -
General Director of Polyus Gold.
-- From February 2008 to October 2008, President of CJSC
Polyus.
-- From 2007 to 2009 - General Director and Member of the Board
of Directors of OJSC Polyus Exploration.
-- Since 2008 - Chairman of the Board of Directors of East
Yakutia Development Corporation.
-- Since 2008 - Member of the Board of Directors of LZRK LLC
and, since April 2010, Chairman of the Board.
-- Mr. Ivanov graduated from the State Finance Academy in
International Economic Relations.
Mr. German R. Pikhoya
Mr. Pikhoya has been a member of KazakhGold's Board of Directors
since August 2009. Mr. Pikhoya has held the following other
posts:
-- From 1994 to 1995 - Project Manager at MOSEXPO company.
-- From 1994 to 1998 - General Director of Eurogold Financial
and Industrial Group Managing Company.
-- From 1995 to 1997 - General Director of Palamos company.
-- From 1998 to 2002 - Deputy Head of representative office in
Russia and New Business Development Manager for Placer Dome
International Ltd.
-- From 2002 to 2004 - Deputy General Director for Corporate
Development of CJSC Polyus.
-- From 2004 to 2007 - Vice-President for Corporate Development
of CJSC Polyus.
-- From 2007 to 2008 - Deputy General Director for Strategy and
Corporate Development of OJSC Polyus Gold.
-- Since January 2009 - Deputy General Director for Strategy and
Corporate Development of CJSC Polyus.
Mr. Pikhoya graduated from the Urals State University with an
honours degree in history. Mr. Pikhoya conducted post-graduate
research at Bowdoin College in the United States. Mr. Pikhoya
graduated from the Russian State Service Academy with a degree in
economics.
Mr. Alexey L. Teksler
Mr. Teksler has been a member of the Board of the KazakhGold
Group Ltd since March 2010. Since August 2009, Mr. Teksler has been
Chief Operating Officer and a member of the Board of Directors of
the KazakhGold Group's main operating subsidiary, Kazakhaltyn. Mr.
Teksler has held the following other posts:
-- From 2001 to 2007 - Chief Accountant, Deputy Director of the
Polar Division of Norilsk Nickel, Head of Multibranch Supporting
Department.
-- From 2007 to 2008 - General Director of Norilsk Supporting
Complex LLC.
-- From 2008 to June 2009 - Head of Norilsk City Authority.
Mr. Teksler graduated from Norilsk Industrial Institute with a
degree in Economy and Administration in Metallurgy.
Mr. Oleg V. Ignatov
Mr. Ignatov has been a member of KazakhGold's Board of Directors
since August 2009. Mr. Ignatov has held the following other
posts:
-- From 1994 to 1998 - Various positions at UNEXIM Bank,
including Senior Specialist, Chief Specialist of Regional
Development, Head of the Department for Federal Programmes for the
Management of Regional Relations, Deputy Head of Regional
Development and Head of Management of Budget and Regional
Programmes.
-- From 1998 to 2003 - Various positions at OJSC AKB Rosbank,
including Head of Regional Relations, Deputy Head for Corporate
Clientele in the Regional Relations Department, Vice-President and
Senior Vice-President.
-- In 2002 - Deputy General Director for Finance of OJSC
Chelyabenergo.
-- From 2003 to 2005 - Deputy Head of Norilsk City of
Krasnoyarsk region.
-- From 2005 to 2008 - Deputy Director for Economy and Finance
of the Zapolyarny unit of Open Joint Stock Company Mining and
Metallurgical Company "Norilsk Nickel".
-- Since 2008 - Member of the Board of Directors of CJSC ZDK
Lenzoloto.
-- Since 2008 - Deputy General Director for Economy and Finance
of CJSC Polyus and member of the Board of Directors.
Mr. Ignatov graduated from Moscow Machine-Tool Institute in 1992
with a degree in electrical engineering. In 1998 Mr. Ignatov
graduated with honours from the Finance Academy of the Government
of the Russian Federation with a degree in finance and credit.
Mr. Adrian Coates
Mr. Coates has been a member of the Board and the Chairman of
the Audit Committee since March 2010. Mr. Coates has held the
following other posts:
-- From 1996 to 1998 - Managing Director, Metals and Mining, at
UBS Investment Bank.
-- From 1998 to 2008 - Global Sector Head, Resources and Energy,
at HSBC.
-- Since 1998 - Director of Regal Petroleum plc.
-- Since 1998 - Director of A&P Coates Management
Limited.
Mr. Coates has a MA degree in Economics from Cambridge
University and a MBA from the London Business School.
7.2. Accounting policies
The Group's consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards as
issued by the International Accounting Standard Board.
7.3. Share capital
Details of the Group's authorized and issued share capital as at
31 December 2010 are disclosed in Note 16 of the consolidated
financial statements.
7.4 Substantial shareholdings
The Group is aware of the following beneficial shareholdings,
representing 10% or more of the issued ordinary share capital of
the Group, as at 31 December 2010.
Number of ordinary % of issued share
shares capital
---------------------------- ------------------- ------------------
Jenington International
Inc. 77,745,417 65.00
---------------------------- ------------------- ------------------
BNY (Nominees) Limited(1) 31,263,377 26.14
---------------------------- ------------------- ------------------
Gold Lion Holdings Limited 10,599,539 8.86
---------------------------- ------------------- ------------------
(1) BNY (Nominees) Limited holds these shares as
depository,against Global Depositary Receipts issued, each
representing one ordinary share with a nominal value of
GBP0.0001.
7.5 Corporate governance
Board
The Board of Directors is composed of five members: the
Executive Chairman (Evgeny Ivanov) and four Non-Executive Directors
(German Pikhoya, Oleg Ignatov, Alexey Teksler and Adrian Coates),
including one independent director (Adrian Coates).
The Board has established the Audit Committee with formally
delegated duties, responsibilities and written terms of reference.
From time to time, separate committees may be set up by the Board
to consider specific issues as and when the need arises.
The Board of Directors met 15 times during 2010 to discuss
matters related to the Company's activity.
Audit Committee
The Audit Committee assists the Board in discharging its
responsibilities with regard to financial reporting, external and
internal audits and controls, including reviewing the Company's
annual financial statements, reviewing and monitoring the extent of
the non-audit work undertaken by external auditors, advising on the
appointment of external auditors and reviewing the effectiveness of
the Company's internal audit activities, internal controls and risk
management systems. The ultimate responsibility for reviewing and
approving the annual report and accounts and the half yearly
reports remains with the Board.
The membership of the Company's Audit Committee is composed of
three members: Adrian Coates, German Pikhoya and Oleg Ignatov.
Adrian Coates, the Committee Chairman, is considered by the Board
to have recent and relevant financial experience. The Company
therefore considers that it complies with the Combined Code
recommendations regarding the composition of the Audit
Committee.
The Audit Committee meets formally at least three times a year
and otherwise as required.
In the reporting year, four meetings of the Audit Committee were
held. The agenda of those meetings were the following: review of FY
2009 consolidated financial statements; review of 1H 2010 interim
condensed consolidated financial statements; and remuneration of
the auditor.
7.6. Directors and officers liability insurance
The Group has in place a Directors and Officers insurance policy
to cover relevant individuals against claims arising from their
work on behalf of the company. The Board intends to keep the level
of cover provided under annual or more frequent review, as
appropriate.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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Kazera Global (LSE:KZG)
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Kazera Global (LSE:KZG)
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から 7 2023 まで 7 2024
