Level: 1 – From: 1 – Thursday, May 13, 2010 – 20:29 – eprint3 – 4221 Important Notice
IMPORTANT NOTICE
IMPORTANT: You must read the following disclaimer before continuing. The following disclaimer applies to the Base Prospectus following this page. You are advised to read this disclaimer carefully before accessing, reading or making any other use of the Base Prospectus. In accessing the Base Prospectus, you agree to be bound by the following terms and conditions, including any modifications to them from time to time, each time you receive any information from us as a result of such access.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER OF SECURITIES FOR SALE IN ANY JURISDICTION WHERE IT IS UNLAWFUL TO DO SO. ANY SECURITIES TO BE ISSUED HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES OR OTHER JURISDICTION AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS. YOU ARE NOT AUTHORISED TO AND YOU MAY NOT FORWARD OR DELIVER THE ATTACHED BASE PROSPECTUS, ELECTRONICALLY OR OTHERWISE, TO ANY OTHER PERSON OR REPRODUCE SUCH BASE PROSPECTUS IN ANY MANNER WHATSOEVER. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS DOCUMENT AND THE ATTACHED BASE PROSPECTUS IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH THIS DIRECTIVE OR ANY OTHER APPLICABLE RULES OR REGULATIONS MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE APPLICABLE LAWS OF OTHER JURISDICTIONS.
CONFIRMATION OF YOUR REPRESENTATION: In order to be able to view the Base Prospectus or make an investment decision with respect to the securities described herein, investors must not be a U.S. Person (as defined in Regulation S under the Securities Act). The Base Prospectus is being sent at your request and by accepting the e-mail and accessing the Base Prospectus, you shall be deemed to have represented to Deutsche Bank AG, London Branch (Deutsche Bank), Morgan Stanley & Co. International plc (Morgan Stanley) and each of the other dealers (together with Deutsche Bank and Morgan Stanley, the Dealers), Eurasian Natural Resources Corporation PLC (the Issuer), Sokolovsko- Sarbaiskoye Mining and Production Association JSC (SSGPO) and Transnational Company Kazchrome JSC (together with SSGPO, the Guarantors) that (1) you and any customers which you represent are not U.S. Persons, the e-mail address that you have given us is not located in the United States of America, its territories, its possessions and other areas subject to its jurisdiction; and its possessions include Puerto Rico, the U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands, and (2) you consent to delivery of the Base Prospectus and any amendments or supplements thereto by electronic transmission.
You are reminded that the Base Prospectus has been delivered to you on the basis that you are a person into whose possession the Base Prospectus may be lawfully delivered in accordance with the laws of the jurisdiction in which you are located and you may not, nor are you authorised to, deliver this document, electronically or otherwise, to any other person. If you receive this document by e-mail, you should not reply by e-mail to this announcement. Any reply e-mail communications, including those you generate by using the “Reply” function on your e-mail software, will be ignored or rejected. If you receive this document by e-mail, your use of this e-mail is at your own risk and it is your responsibility to take precautions to ensure that it is free from viruses and other items of a destructive nature.
The materials relating to the offering do not constitute, and may not be used in connection with, an offer or solicitation in any place where offers or solicitations are not permitted by law. No action has been or will be taken in any jurisdiction by the Issuer, the Guarantors or the Dealers that would, or is intended to, permit a public offering of the securities, or possession or distribution of the Base Prospectus or any other offering or publicity material relating to the securities, in any country or jurisdiction where action for that purpose is required. If a jurisdiction requires that the offering be made by a licensed broker or dealer and a relevant Dealer or any affiliate of such Dealer is a licensed broker or dealer in that jurisdiction, the offering shall be deemed to be made by such Dealer or such affiliate on behalf of the Issuer in such jurisdiction.
The attached Base Prospectus has been sent to you in an electronic format. You are reminded that documents transmitted in an electronic format may be altered or changed during the process of transmission and consequently none of the Issuer, the Guarantors, the Dealers or their respective affiliates, directors, officers, employees, representatives and agents or any other person controlling the Issuer, the Guarantors, the Dealers or any of their respective affiliates accepts any liability or responsibility whatsoever in respect of any discrepancies between the document distributed to you in electronic format and the hard-copy version.
This communication is for informational purposes only. It is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. Any comments or statements made herein do not necessarily reflect those of the Dealers, their subsidiaries and affiliates. Level: 4 – From: 4 – Thursday, May 13, 2010 – 12:51 – eprint6 – 4221 Intro
BASE PROSPECTUS
EURASIAN NATURAL RESOURCES CORPORATION PLC (a public limited company incorporated under the laws of England and Wales)
U.S.$3,000,000,000 Euro Medium Term Note Programme unconditionally and irrevocably guaranteed by SOKOLOVSKO- SARBAISKOYE MINING AND PRODUCTION ASSOCIATION JSC and TRANSNATIONAL COMPANY KAZCHROME JSC (each incorporated as a joint stock company under the laws of Kazakhstan)
Under this U.S.$3,000,000,000 Euro Medium Term Note Programme (the Programme), Eurasian Natural Resources Corporation PLC (the Issuer) may from time to time issue notes (the Notes) denominated in any currency agreed between the Issuer and the relevant Dealer (as defined below).
The payments of all amounts due in respect of the Notes will be unconditionally and irrevocably guaranteed by Sokolovsko- Sarbaiskoye A6.1 Mining and Production Association JSC (SSGPO) and Transnational Company Kazchrome JSC (Kazchrome) (each a Guarantor and A6.2 together, the Guarantors). The terms “Guarantor” and “Guarantors” shall, so far as the context permits, also (i) include any Restricted Subsidiary (as defined in Condition 3.13) which becomes a Guarantor pursuant to the provisions of Condition 3.6 or otherwise and (ii) exclude any Restricted Subsidiary which has been released from its guarantee obligations pursuant to Condition 3.6. References in this Base Prospectus to the Group shall have the meaning set out in “Glossary”. The maximum aggregate nominal amount of all Notes from time to time outstanding under the Programme will not exceed U.S.$3,000,000,000 (or its equivalent in other currencies calculated as described in the Programme Agreement described herein), subject to increase as described herein. The Notes may be issued on a continuing basis to one or more of the Dealers specified under “Overview of the Programme” and any additional Dealer appointed under the Programme from time to time by the Issuer (each a Dealer and together the Dealers), which appointment may be for a specific issue or on an ongoing basis. References in this Base Prospectus to the relevant Dealer shall, in the case of an issue of Notes A9.3.1 being (or intended to be) subscribed by more than one Dealer, be to all Dealers agreeing to subscribe such Notes. A12.2 An investment in Notes issued under the Programme involves certain risks. For a discussion of these risks see “Risk Factors”. A13.2
Application has been made to the Financial Services Authority in its capacity as competent authority under the Financial Services and Markets A12.6.1 Act 2000 (the UK Listing Authority) for Notes issued under the Programme during the period of 12 months from the date of this Base Prospectus to be admitted to the official list of the UK Listing Authority (the Official List) and to the London Stock Exchange plc (the London A13.5.1 Stock Exchange) for such Notes to be admitted to trading on the London Stock Exchange’s regulated market. References in this Base Prospectus to Notes being listed (and all related references) shall mean that such Notes have been admitted to trading on the London Stock Exchange’s regulated market and have been admitted to the Official List. The London Stock Exchange’s regulated market is a regulated market for the purposes of Directive 2004/39/EC (the Markets in Financial Instruments Directive). Notice of the aggregate nominal amount of Notes, interest (if any) payable in respect of Notes, the issue price of Notes and any other terms and conditions not contained herein which are applicable to each Tranche (as defined under “Terms and Conditions of the Notes”) of Notes will be set out in a final terms document (the Final Terms) which, with respect to Notes to be listed on the London Stock Exchange will be delivered to the UK Listing Authority and the London Stock Exchange. The Programme provides that Notes may be listed or admitted to trading, as the case may be, on such other or further stock exchanges or markets as may be agreed between the Issuer and the relevant Dealer. The Issuer may also issue unlisted Notes and/or Notes not admitted to trading on any market. The Issuer may agree with any Dealer and the Trustee (as defined herein) that Notes may be issued in a form not contemplated by the Terms and Conditions of the Notes herein, in which event a supplemental prospectus, if appropriate, will be made available which will describe the effect of the agreement reached in relation to such Notes. Arranger Deutsche Bank
Dealers Crédit Agricole CIB Deutsche Bank Morgan Stanley Natixis Nomura Société Générale Corporate & Investment Banking The Royal Bank of Scotland
The date of this Base Prospectus is 13 May 2010. Level: 4 – From: 4 – Thursday, May 13, 2010 – 12:51 – eprint6 – 4221 Intro
This Base Prospectus comprises a base prospectus for the purposes of Article 5.4 of Directive 2003/71/EC (the Prospectus Directive).
The Issuer and the Guarantors accept responsibility for the information contained in this Base A9.1.1 Prospectus. To the best of the knowledge of the Issuer and the Guarantors (each having taken all A12.1.1 reasonable care to ensure that such is the case) the information contained in this Base Prospectus is in A13.1.1 accordance with the facts and does not omit anything likely to affect the import of such information. A9.1.2 A12.1.2 Subject as provided in the applicable Final Terms, the only persons authorised to use this Base A13.1.2 Prospectus in connection with an offer of Notes are the persons named in the applicable Final Terms as the relevant Dealer or the Managers, as the case may be.
Copies of Final Terms will be available from the registered office of the Issuer and the specified office set out below of each of the Paying Agents (as defined below).
This Base Prospectus is to be read in conjunction with all documents which are deemed to be incorporated herein by reference (see “Documents Incorporated by Reference”). This Base Prospectus shall be read and construed on the basis that such documents are incorporated in and form part of this Base Prospectus.
Save for the Issuer and the Guarantors, no other party has separately verified the information contained herein. Accordingly, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by the Dealers or the Trustee as to the accuracy or completeness of the information contained or incorporated in this Base Prospectus or any other information provided by the Issuer or the Guarantors in connection with the Programme. No Dealer or the Trustee accepts any liability in relation to the information contained or incorporated by reference in this Base Prospectus or any other information provided by the Issuer or the Guarantors in connection with the Programme.
No person is or has been authorised by the Issuer, the Guarantors or the Trustee to give any information or to make any representation not contained in or not consistent with this Base Prospectus or any other information supplied in connection with the Programme or the Notes and, if given or made, such information or representation must not be relied upon as having been authorised by the Issuer, the Guarantors, any of the Dealers or the Trustee.
Neither this Base Prospectus nor any other information supplied in connection with the Programme or any Notes (a) is intended to provide the basis of any credit or other evaluation or (b) should be considered as a recommendation by the Issuer, the Guarantors, any of the Dealers or the Trustee that any recipient of this Base Prospectus or any other information supplied in connection with the Programme or any Notes should purchase any Notes. Each investor contemplating purchasing any Notes should make its own independent investigation of the financial condition and affairs, and its own appraisal of the creditworthiness, of the Issuer and the Guarantors. Neither this Base Prospectus nor any other information supplied in connection with the Programme or the issue of any Notes constitutes an offer or invitation by or on behalf of the Issuer or the Guarantors, any of the Dealers or the Trustee to any person to subscribe for or to purchase any Notes.
Neither the delivery of this Base Prospectus nor the offering, sale or delivery of any Notes shall in any circumstances imply that the information contained herein concerning the Issuer and/or the Guarantors is correct at any time subsequent to the date hereof or that any other information supplied in connection with the Programme is correct as of any time subsequent to the date indicated in the document containing the same. The Dealers and the Trustee expressly do not undertake to review the financial condition or affairs of the Issuer or the Guarantors during the life of the Programme or to advise any investor in the Notes of any information coming to their attention.
The Notes have not been and will not be registered under the United States Securities Act of 1933, as amended, (the Securities Act) and are subject to U.S. tax law requirements. Subject to certain exceptions, Notes may not be offered, sold or delivered within the United States or to, or for the account or benefit of, U.S. persons (see “Subscription and Sale”).
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This Base Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any Notes in any jurisdiction to any person to whom it is unlawful to make the offer or solicitation in such jurisdiction. The distribution of this Base Prospectus and the offer or sale of Notes may be restricted by law in certain jurisdictions. The Issuer, the Guarantors, the Dealers and the Trustee do not represent that this Base Prospectus may be lawfully distributed, or that any Notes may be lawfully offered, in compliance with any applicable registration or other requirements in any such jurisdiction, or pursuant to an exemption available thereunder, or assume any responsibility for facilitating any such distribution or offering. In particular, no action has been taken by the Issuer, the Guarantors, the Dealers or the Trustee which is intended to permit a public offering of any Notes or distribution of this Base Prospectus in any jurisdiction where action for that purpose is required. Accordingly, no Notes may be offered or sold, directly or indirectly, and neither this Base Prospectus nor any advertisement or other offering material may be distributed or published in any jurisdiction, except under circumstances that will result in compliance with any applicable laws and regulations. Persons into whose possession this Base Prospectus or any Notes come must inform themselves about, and observe, any such restrictions on the distribution of this Base Prospectus and the offering and sale of Notes. In particular, there are restrictions on the distribution of this Base Prospectus and the offer or sale of Notes in the United States, the European Economic Area (including the United Kingdom), Japan and Kazakhstan, see “Subscription and Sale”.
This Base Prospectus has been prepared on the basis that any offer of Notes in any Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) will be made pursuant to an exemption under the Prospectus Directive, as implemented in that Relevant Member State, from the requirement to publish a prospectus for offers of Notes. Accordingly any person making or intending to make an offer in that Relevant Member State of Notes which are the subject of an offering contemplated in this Base Prospectus as completed by final terms in relation to the offer of those Notes may only do so in circumstances in which no obligation arises for the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive, in each case, in relation to such offer. Neither the Issuer nor any Dealer has authorised, nor do they authorise, the making of any offer of Notes in circumstances in which an obligation arises for the Issuer or any Dealer to publish or supplement a prospectus for such offer.
All references in this document to U.S. dollars, U.S.$ and $ refer to United States dollars and to Tenge or KZT refer to Kazakhstan Tenge. In addition, all references to Sterling and £ refer to pounds sterling, to Yen, refer to the currency of Japan, and to euro and € refer to the currency introduced at the start of the third stage of European economic and monetary union pursuant to the Treaty on the Functioning of the European Union.
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CONTENTS
Clause Page
Overview of the Programme ...... 5
Risk Factors ...... 10
Forward-Looking Statements...... 32
Enforceability of Liabilities and Service of Process ...... 34
Documents Incorporated by Reference ...... 35
Form of the Notes ...... 38
Applicable Final Terms ...... 40
Terms and Conditions of the Notes ...... 52
Use of Proceeds ...... 109
Selected Historical Consolidated Financial Data ...... 110
Description of the Group ...... 112
Taxation ...... 128
Subscription and Sale...... 131
General Information...... 134
Glossary ...... 136
Index to Consolidated Financial Statements of each Guarantor ...... F-1
______
In connection with the issue of any Tranche of Notes, the Dealer or Dealers (if any) named as the Stabilising Manager(s) (or persons acting on behalf of any Stabilising Manager(s)) in the applicable Final Terms may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager(s) (or persons acting on behalf of a Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the relevant Tranche of Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the relevant Tranche of Notes and 60 days after the date of the allotment of the relevant Tranche of Notes. Any stabilisation action or over-allotment must be conducted by the relevant Stabilising Manager(s) (or persons acting on behalf of any Stabilising Manager(s)) in accordance with all applicable laws and rules.
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OVERVIEW OF THE PROGRAMME
The following overview does not purport to be complete and is taken from, and is qualified in its entirety by, the remainder of this Base Prospectus and, in relation to the terms and conditions of any particular Tranche of Notes, the applicable Final Terms. The Issuer and any relevant Dealer may agree that Notes shall be issued in a form other than that contemplated in the Terms and Conditions, in which event, in the case of listed Notes only and if appropriate, a supplemental prospectus will be published.
This Overview constitutes a general description of the Programme for the purposes of Article 22.5(3) of Commission Regulation (EC) No 809/2004 implementing the Prospectus Directive.
Words and expressions defined in “Form of the Notes“ and “Terms and Conditions of the Notes” shall have the same meanings in this Overview.
Issuer: Eurasian Natural Resources Corporation PLC
Guarantors: Sokolovsko- Sarbaiskoye Mining and Production Association JSC and Transnational Company Kazchrome JSC
Risk Factors: There are certain factors that may affect (i) the Issuer’s ability to fulfil its obligations under Notes issued under the Programme and (ii) a Guarantor’s ability to fulfil its obligations under the Notes Guarantee (as defined below under “Notes Guarantee”). These are set out under “Risk Factors” below and include the risk inherent in a change in government or the political climate in Kazakhstan, Russia, the Democratic Republic of Congo or Zambia risks relating to the Group’s business and industry, risks relating to operating in emerging markets and in particular in Kazakhstan, and certain risks relating to the Group’s structure. In addition, there are certain factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme. These are set out under “Risk Factors“ and include the fact that the Notes may not be a suitable investment for all investors, certain risks relating to the structure of particular Series of Notes and certain market risks.
Description: Euro Medium Term Note Programme
Arranger: Deutsche Bank AG, London Branch
Dealers: Crédit Agricole Corporate and Investment Bank Deutsche Bank AG, London Branch Morgan Stanley & Co. International plc Natixis Nomura International plc Société Générale The Royal Bank of Scotland plc
and any other Dealers appointed in accordance with the Programme Agreement.
Certain Restrictions: Each issue of Notes denominated in a currency in respect of which particular laws, guidelines, regulations, restrictions or reporting requirements apply will only be issued in circumstances which comply with such laws, guidelines,
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regulations, restrictions or reporting requirements applicable from time to time (see “Subscription and Sale”) including the following restrictions applicable at the date of this Base Prospectus.
Notes having a maturity of less than one year
Notes having a maturity of less than one year will constitute deposits for the purposes of the prohibition on accepting deposits contained in section 19 of the Financial Services and Markets Act 2000 unless they are issued to a limited class of professional investors and have a denomination of at least £100,000 or its equivalent, see “Subscription and Sale”.
Issuing and Principal Paying Agent: Deutsche Bank AG, London Branch
Programme Size: Up to U.S.$3,000,000,000 (or its equivalent in other currencies calculated as described in the Programme Agreement) outstanding at any time. The Issuer may increase the amount of the Programme in accordance with the terms of the Programme Agreement.
Distribution: Notes may be distributed by way of private or public placement and in each case on a syndicated or non- syndicated basis.
Currencies: Notes may be denominated in euro, Sterling, U.S. dollars, yen and subject to any applicable legal or regulatory restrictions, any other currency agreed between the Issuer and the relevant Dealer.
Redenomination: The applicable Final Terms may provide that certain Notes may be redenominated in euro.
Maturities: The Notes will have such maturities as may be agreed between the Issuer and the relevant Dealer, subject to such minimum or maximum maturities as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the Issuer or the relevant Specified Currency.
Issue Price: Notes may be issued on a fully-paid or a partly-paid basis and at an issue price which is at par or at a discount to, or premium over, par.
Form of Notes: The Notes will be issued in bearer form as described in “Form of the Notes”.
Fixed Rate Notes: Fixed interest will be payable on such date or dates as may be agreed between the Issuer and the relevant Dealer and on redemption and will be calculated on the basis of such Day Count Fraction as may be agreed between the Issuer and the relevant Dealer.
Floating Rate Notes: Floating Rate Notes will bear interest at a rate determined:
(a) on the same basis as the floating rate under a notional interest rate swap transaction in the relevant Specified Currency governed by an agreement incorporating the
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2006 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc., and as amended and updated as at the Issue Date of the first Tranche of the Notes of the relevant Series); or
(b) on the basis of a reference rate appearing on the agreed screen page of a commercial quotation service; or
(c) on such other basis as may be agreed between the Issuer and the relevant Dealer.
The margin (if any) relating to such floating rate will be agreed between the Issuer and the relevant Dealer for each Series of Floating Rate Notes.
Index Linked Notes: Payments of principal in respect of Index Linked Redemption Notes or of interest in respect of Index Linked Interest Notes will be calculated by reference to such index and/or formula or to changes in the prices of securities or commodities or to such other factors as the Issuer and the relevant Dealer may agree.
Other provisions in relation to Floating Floating Rate Notes and Index Linked Interest Notes may Rate Notes and Index Linked Interest also have a maximum interest rate, a minimum interest rate Notes: or both. Interest on Floating Rate Notes and Index Linked Interest Notes in respect of each Interest Period, as agreed prior to issue by the Issuer and the relevant Dealer, will be payable on such Interest Payment Dates, and will be calculated on the basis of such Day Count Fraction, as may be agreed between the Issuer and the relevant Dealer.
Dual Currency Notes: Payments (whether in respect of principal or interest and whether at maturity or otherwise) in respect of Dual Currency Notes will be made in such currencies, and based on such rates of exchange, as the Issuer and the relevant Dealer may agree.
Zero Coupon Notes: Zero Coupon Notes will be offered and sold at a discount to their nominal amount and will not bear interest.
Redemption: The applicable Final Terms will indicate either that the relevant Notes cannot be redeemed prior to their stated maturity (other than in specified instalments, if applicable, or for taxation reasons or following an Event of Default) or that such Notes will be redeemable at the option of the Issuer and/or the Noteholders upon giving notice to the Noteholders or the Issuer, as the case may be, on a date or dates specified prior to such stated maturity and at a price or prices and on such other terms as may be agreed between the Issuer and the relevant Dealer.
The applicable Final Terms may provide that Notes may be redeemable in two or more instalments of such amounts and on such dates as are indicated in the applicable Final Terms.
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Notes having a maturity of less than one year are subject to restrictions on their denomination and distribution, see “Certain Restrictions - Notes having a maturity of less than one year” above.
Denomination of Notes: The Notes will be issued in such denominations as may be agreed between the Issuer and the relevant Dealer save that the minimum denomination of each Note will be such amount as may be allowed or required from time to time by the relevant central bank (or equivalent body) or any laws or regulations applicable to the relevant Specified Currency, see “Certain Restrictions - Notes having a maturity of less than one year” above and save that the minimum denomination of each Note admitted to trading on a regulated market within the European Economic Area or offered to the public in a Member State of the European Economic Area in circumstances which require the publication of a prospectus under the Prospectus Directive will be €50,000 (or, if the Notes are denominated in a currency other than euro, the equivalent amount in such currency).
Taxation: All payments in respect of the Notes will be made without deduction for or on account of withholding taxes imposed by any Tax Jurisdiction as provided in Condition 7. In the event that any such deduction is made, the Issuer or, as the case may be, the relevant Guarantor will, save in certain limited circumstances provided in Condition 7, be required to pay additional amounts to cover the amounts so deducted.
Covenants: The terms of the Notes will contain certain covenants as further described in Condition 3. The Issuer and the Restricted Subsidiaries will be released from certain of those covenants if, inter alia, the Notes have an Investment Grade Rating from either of the Rating Agencies, all as further described in Condition 3.
Cross Default: The terms of the Notes will contain a cross default provision as further described in Condition 9.
Status of the Notes: The Notes will constitute direct, unconditional and (subject to the provisions of Condition 3) unsecured obligations of the Issuer and (subject as stated above) will rank pari passu, without any preference among themselves, with all other outstanding unsecured and unsubordinated obligations of the Issuer, present and future, but, in the event of insolvency, only to the extent permitted by applicable laws relating to creditors’ rights
Notes Guarantee: The Notes will be unconditionally and irrevocably A6.1 guaranteed on a joint and several basis by the Guarantors (the A6.2 Notes Guarantee). The obligations of the Guarantors under the Notes Guarantee constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Guarantors and (subject as stated above) will rank pari passu with all other outstanding unsecured and unsubordinated obligations of the Guarantors, present and future, but, in the event of insolvency, only to the
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extent permitted by applicable laws relating to creditors’ rights.
Rating: The rating of certain Series of Notes to be issued under the Programme may be specified in the applicable Final Terms.
Listing and admission to trading: Application has been made to the UK Listing Authority for Notes issued under the Programme to be admitted to the Official List and to the London Stock Exchange for such Notes to be admitted to trading on the London Stock Exchange’s regulated market.
Notes may be listed or admitted to trading, as the case may be, on other or further stock exchanges or markets agreed between the Issuer and the relevant Dealer in relation to the Series. Notes which are neither listed nor admitted to trading on any market may also be issued.
The applicable Final Terms will state whether or not the relevant Notes are to be listed and/or admitted to trading and, if so, on which stock exchanges and/or markets.
Governing Law: The Notes and any non-contractual obligations arising out of or in connection with the Notes will be governed by, and shall be construed in accordance with, English law.
Selling Restrictions: There are restrictions on the offer, sale and transfer of the Notes in the United States, the European Economic Area (including the United Kingdom), Japan and Kazakhstan and such other restrictions as may be required in connection with the offering and sale of a particular Tranche of Notes, see “Subscription and Sale”.
United States Selling Restrictions: Regulation S, Category 2. TEFRA C or D/TEFRA not applicable, as specified in the applicable Final Terms.
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RISK FACTORS
Each of the Issuer and each Guarantor believes that the following factors may affect its ability to fulfil its A9.3.1 obligations under Notes issued under the Programme. All of these factors are contingencies which may or A12.2 may not occur and none of the Issuer and the Guarantors is in a position to express a view on the likelihood A13.2 of any such contingency occurring.
In addition, factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme are also described below.
Each of the Issuer and each Guarantor believes that the factors described below represent the principal risks inherent in investing in Notes issued under the Programme, but the inability of the Issuer or a Guarantor to pay interest, principal or other amounts on or in connection with any Notes may occur for other reasons which may not be considered significant risks by the Issuer and the Guarantors based on information currently available to them or which they may not currently be able to anticipate. Prospective investors should also read the detailed information set out elsewhere in this Base Prospectus and reach their own views prior to making any investment decision.
Factors that may affect (i) the Issuer’s ability to fulfil its obligations under Notes issued under the Programme and (ii) a Guarantor’s ability to fulfil its obligations under the Notes Guarantee
Risks relating to the Group’s business and industry
Any reduction in the Group’s production volumes will result in an increase in its unit production costs, and a reduction in revenue, which could reduce its ability to compete and achieve long-term profitability
The Group’s competitiveness and long-term profitability substantially depend upon its ability to maintain a low cost base, including transport and labour costs. The Group’s most significant costs include materials, fuel, transport, rental expenses and labour, which have recently increased significantly, due in part to increased competition for skilled labour. However, any increase in these costs or in the Group’s general cost base could materially and adversely affect the Group’s business, financial condition, results of operations and prospects.
Given the relatively fixed nature of the Group’s cost base in the short term, production volumes can significantly affect the Group’s unit production costs. For example, during the last quarter of 2008 and the first quarter of 2009, the Group significantly reduced the volume of production of its major operations to a level that was consistent with the Group’s expectations of global sales volumes of the relevant commodities in the first half of 2009, which resulted in increases in fixed costs per unit of production of the Group’s products. Although production levels have since increased to more normalized levels, any inability by the Group to maximise its capacity utilisation could impair the Group’s overall cost competitiveness.
Commodity prices are volatile and a continued or extended decline in commodity prices would materially and adversely affect the Group’s business, financial condition, results of operations and prospects
The Group generates most of its revenue from the sale of commodity products, primarily ferrochrome and other ferroalloys, chrome ore, iron ore, alumina and aluminium. As a result of the acquisition of CAMEC and ENYA, the Group will also generate revenue from sales of copper and cobalt. Historically, the prices for these products have been volatile and have fluctuated widely in response to relatively minor changes in supply and demand, market uncertainty, the performance of global or regional economies and cyclicality in the industries that purchase these products. The prices for these products came under significant pressure during the recent economic downturn and despite the recent economic recovery may come under pressure again in the future. For example, the quarterly European benchmark price for ferrochrome declined from U.S.$2.04 per pound in mid 2008 to U.S.$0.69 in the second quarter of 2009, before recovering to U.S.$1.03 per pound during the fourth quarter of 2009. Prices may also be affected by government actions, including the imposition of tariffs and import duties, speculative trades, the development of product substitutes or replacements, recycling practices, an increase in capacity or an oversupply of the Group’s products in its
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main markets. These external factors and the volatility of the commodity markets make it difficult to estimate future prices. The Group generally does not hedge its exposure to the risk of fluctuations in the prices of its commodity products. A continued or extended decline in commodity prices would materially and adversely affect the Group’s business, financial condition, results of operations and prospects.
The Group intends to pursue further growth via acquisitions, but may be unable to identify or complete potential acquisitions or may not be able to acquire such interests on satisfactory terms or at all
The Group intends to continue expanding and developing its existing reserves and asset portfolio in the natural resources sector through strategic acquisitions. These acquisitions could be funded by cash flow from operations, new debt or equity financing, or other means, and have the potential to raise the potential leverage of the business. The Group may face significant competition in acquiring additional mining properties, and many of its competitors may have greater financial resources than the Group. There can be no assurance that the Group will be able to continue to identify suitable acquisitions and strategic investment opportunities, acquire interests on satisfactory terms or obtain the financing necessary to complete and support such acquisitions. It is likely that businesses acquired by the Group in the future will be located in emerging markets, which are generally subject to greater risks, including legal, regulatory, economic and political risks, than more developed markets. The Group may face political and legal obstacles in completing acquisitions outside of Kazakhstan. New legislation limiting foreign ownership of strategic sectors may be adopted, which could present difficulties for the Group in acquiring new assets or restrict the Group’s ability to form strategic partnerships. In addition, acquisitions and investments involve a number of risks, including possible adverse effects on the Group’s operating results, diversion of management’s attention, failure to retain key personnel, risks associated with unanticipated events or liabilities and difficulties in the assimilation and integration of the operations. Any failure to identify and execute future acquisitions successfully could adversely impact the Group’s growth strategy and thus could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group may be unable to acquire or retain the subsurface contracts, mining licences, contracts, permits and other regulatory approvals necessary to extract the Group’s reserves on satisfactory terms or at all
The Group’s exploration and mining activities depend on the grant, renewal or continuance in force of various exploration and production contracts, licences, permits and other regulatory approvals that are valid only for a finite time period and may provide for early termination. In Kazakhstan, the State owns subsoil resources and grants exploration and production rights through subsurface licences, mining licences, contracts, permits and other regulatory approvals. These rights are not granted in perpetuity, and many of the Group’s subsurface use contracts are due to expire within the next decade. The Group may be unable to retain such rights or extend or renew them on acceptable terms or at all. Moreover, entering into new subsurface use contracts or extending existing subsurface use contracts in Kazakhstan is time-consuming and requires the review and approval of several ministries of the Government of the Republic of Kazakhstan. The relevant laws and regulations are often unclear and, at times, are inconsistently applied by the authorities.
The Group’s subsurface use contracts and related working programmes contain a range of obligations. If the Group breaches these obligations, it may suffer adverse consequences, such as penalties and/or suspension or termination of the Group’s subsurface use contracts. The Group’s management is aware that there have been past breaches by the Group of the obligations in its subsurface use contracts. There is a possibility that these breaches may be considered material or to lead to a suspension or withdrawal of the relevant rights or the termination of the relevant subsurface use contract, there can be no assurance of this. In addition, changing circumstances may require the Group to amend its subsurface use contracts or related working programmes, and it is possible that the responsible Kazakhstani regulators may not agree to future amendments of the Group’s obligations. The loss of the Group’s subsurface use contracts would have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Similar risks exist, but to a lesser extent, with regard to the Group’s exploration and mining activities in Russia, the Democratic Republic of Congo, Zambia and all other locations in which the Group has exploration and mining activities.
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To the extent the Group has acquired subsidiaries with existing licences or subsurface use contracts, the acquisition of or entrance into such licences or subsurface use contracts by such subsidiaries was beyond the Group’s control. The Group cannot be certain that such licences or subsurface use contracts were properly obtained or entered into or that the previous beneficiary of such licences or subsurface use contracts did not violate their terms in a manner that could permit the governments of the Republic of Kazakhstan, Russia, the Democratic Republic of Congo and Zambia, or a third party to challenge the validity of such licences or subsurface use contracts.
If the Group fails to integrate recent and future acquisitions successfully, its financial condition could be negatively impacted
The assimilation and integration of acquired businesses requires significant time and effort on the part of the Group’s senior management. Integration of newly acquired businesses, particularly in emerging markets, can be difficult, and potential problems may include, but would not be limited to, differences in the measurement of reserves and resources, integration of management, integration of common financial reporting procedures and accounting policies, the assumption of disclosed and undisclosed liabilities, including in relation to tax and environmental matters relating to the acquired assets or businesses, the possibility that indemnification agreements with the sellers of those assets may be unenforceable or insufficient to cover potential tax or other liabilities and implementation of agreed headcount reductions. Integration of newly acquired businesses can also be complicated by the various regulatory regimes to which Group entities, directors, and employees are subject. As a result of the Group’s acquisition of CAMEC, its operations extend to Zimbabwe, a jurisdiction in which the United States Office of Foreign Asset Control (OFAC) and the United Kingdom’s HM Treasury (HMT) have implemented sanctions. These regulatory regimes could place restrictions on the Group’s ability to manage newly acquired assets, use revenues from the operations of newly acquired assets, and direct Group expenditures toward the operations of newly acquired assets. The Group could experience difficulties in integrating recent and future acquisitions, which could materially and adversely affect its growth strategy and thus could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group depends on the Russian and Chinese markets for a significant portion of its revenue and the economic slowdown in these markets, in particular Russia, may negatively impact the Group’s business, financial condition, results of operations and prospects
The Group’s sales of iron ore, alumina and aluminium products are primarily to customers based in Russia and China. In 2009, customers in Russia and China accounted for 95.5% of its product sales in the Iron Ore Division and 55.6% in the Alumina and Aluminium Division. In 2008, customers in Russia and China accounted for 84.6% of its product sales in the Iron Ore Division and 60.2% in the Alumina and Aluminium Division.
The significant slowdown in the global economy as a whole, and the consequent impact on the growth of the economies of these countries, brought about a decrease in demand for the Group’s products. This reduction in demand created downward pressure on sales prices. Although the global economy now shows some signs of recovery, there can be no assurance that conditions will continue to improve in the near term. If economic conditions do not continue to improve in China, or were to deteriorate further in Russia, it could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Compliance with environmental laws and regulations requires ongoing expenditures, considerable current capital commitments and uncertain capital requirements in the future, which the Group may be unable to adequately fund or complete on schedule
The Group is required to obtain environmental permits to conduct some of its operations. Government authorities and the courts enforce compliance with the terms and conditions of these permits. Violations may result in civil or criminal penalties, the curtailment or cessation of operations, orders to pay compensation, orders to remedy the effects of such violations and/or orders to take preventative steps against possible future violations. In certain situations, the issuing authority may modify, renew or revoke the permits.
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As a condition to its subsurface use contracts and licences in Kazakhstan, the Group must set aside at least 0.1% of annual operating expenses for the eventual rehabilitation of its mines (other than coal mines), and at least 1% of annual sales revenue derived from its coal mines for the rehabilitation of such mines. These amounts may be insufficient, however, to meet the actual rehabilitation expenses for which the Group may be responsible under its subsurface use contracts and licences.
As an industrial business in Kazakhstan, the Group is required to undertake programmes to minimise its impact on the environment and to protect natural resources. The Group must actively monitor specific parameters such as air emissions, wastewater discharge, ambient air quality, quality of nearby surface water, soil and groundwater quality and the generation of solid waste, and submit an annual report to the Kazakhstani environmental authorities, which may then conduct independent tests to verify the Group’s report.
If the Group’s emissions exceed certain levels established in the site permits, the Group could be subject to monetary penalties. Moreover, in the course, or as a result, of an environmental investigation, regulatory authorities in Kazakhstan can issue an order reducing or halting production at a facility that has violated environmental standards. Regulatory authorities can also require the Group to incur some or all of the expense of relocating inhabitants (who number in the thousands) who currently reside within restricted buffer zones surrounding the Group’s operations. If production is reduced or halted at one or more of the Group’s facilities or an enforcement action is brought by the authorities to compel resettlement, the Group’s business, financial condition, results of operations and prospects could be materially and adversely affected.
The environmental impact of the Group’s historical operations has not been fully quantified or appropriately allocated to responsible parties. Under Kazakhstani law and certain privatisation contracts, responsibility for pre-privatisation environmental liabilities lies with the State. It is possible, however, that the law could be changed. If the Group were found liable for the environmental impact of operations during the pre- privatisation period, the Group could be required to incur significant costs for remediation, which could materially and adversely affect its business, financial condition, results of operations and prospects. The Group currently aims to comply with Kazakhstani legal standards for asset retirement obligations, which are less onerous than applicable international legal standards, that also include, for example, the demolition and rehabilitation of plant areas. If the Group chooses, or becomes required, to meet such international standards, the Group would incur additional costs, which may be significant and could materially and adversely affect its business, financial condition, results of operations and prospects.
The Republic of Kazakhstan is a signatory to the United Nations Framework Convention on Climate Change (the Kyoto Protocol), which took effect in February 2005. The Kyoto Protocol’s objective is to limit or capture emissions of greenhouse gases such as carbon dioxide and methane. Having ratified the Protocol on 19 June 2009, the Government of the Republic of Kazakhstan may enact new environmental requirements to address carbon emissions, which could oblige the Group to incur significant capital expenditures and pay emission fees, levies, etc. Currently, the Ministry of Environment Protection of the Republic of Kazakhstan is defining policy that may have a significant impact on the Group’s business in both the short and the long term. In particular, the Republic of Kazakhstan’s target of reducing emissions under the Kyoto Protocol of 15% by 2015 and 20% by 2050, each as compared with 1992 levels, was announced in November 2009. In this context, category 1 companies, including ENRC, must submit their own greenhouse gases (GHG) inventories and emissions reduction targets, and any failure to do so could result in the imposition of strict financial penalties, as well as potential stakeholder reaction.
The 2007 Kazakhstani Environmental Code requires companies operating in Kazakhstan to use Best Available Techniques (BAT), as determined by the Ministry of Environmental Protection of the Republic of Kazakhstan. Under Article 16 of the Code, the list of BAT are to be authorised by the Government of the Republic of Kazakhstan, which will issue a special regulatory act. The applicable BAT for coal power generators and the natural resources industry were issued in 2008 and 2009. The BAT requirements could require the Group to incur significant capital expenditures.
The Group may not be able satisfy any of its remediation, rehabilitation and other obligations under environmental laws and regulations which could result in financial or other penalties and or the suspension or loss of the Group’s subsurface use contracts. To the extent that these fines are material, the Group’s cash
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flows may be insufficient to meet the Group’s obligations. In addition, the Group may fail to complete on schedule programmes and projects intended to meet its environmental obligations and GHG reduction targets. The occurrence of any of these risks could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Taxation represents an area of inherent risk in jurisdictions in which the Group operates
The Group is subject to taxation in jurisdictions in which it operates. There are inherent risks associated with complexities of tax laws and regulations, potential differences in interpretation of the applicable legislation and continuous changes to tax laws and regimes. Cross border transactions also represent inherent risks as a result of being subject to different national tax rules which are not necessarily harmonised. An example of such inherent risk exposure is cross-border inter-company transfer pricing. The Group management is committed to ensuring compliance with the tax requirements in all jurisdictions in which the Group operates and to both minimising and managing risks associated with taxation. The Group is also committed to building and maintaining good and constructive working relationships with the tax authorities in all countries in which the Group is subject to taxation.
The Group may be subject to increased transport costs, rail tariffs and custom duties The Group’s competitiveness and profitability depend in part on low transportation costs. The Group’s transportation costs increased from U.S.$309 million in 2006 to U.S.$342 million in 2008, but decreased to U.S.$302 million in 2009 as sales volumes fell. The reduction in transportation costs due to reduced sales volumes was partially offset by the higher proportion of sales into China, which incur higher transport costs than sales to Russia or within Kazakhstan. In addition, the Government of the Republic of Kazakhstan exercises significant control over its transport system. The Kazakhstani national railway system is a national monopoly, and, currently, the National Monopolies Regulation Agency must approve its rail tariffs, including those stipulated in its contract with the Group, which is renewed annually. The Kazakhstani national railway system is undergoing a fundamental reorganisation, and the long-term effect on rail tariffs and services is uncertain. The Group may also become subject to customs duties in Russia and China. Increases in the Group’s transportation costs, including rail and road tariffs and customs duties, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Mining, smelting and metals refining are inherently dangerous and subject to conditions or events beyond the Group’s control, which could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects Mining, smelting and refining metals involve operational risks and hazards that are generally outside of the Group’s control. These risks include industrial accidents (such as mine collapses, fires and explosions), equipment failure, unusual or unexpected geological conditions, environmental hazards, labour disputes and extreme weather conditions and other natural phenomena. Any of the above risks may result in destruction of, or damage to, the Group’s properties or production facilities, mine or plant shutdowns or periods of reduced production. Any disruption of the Group’s production or its ability to supply its customers could have a material adverse effect on the Group’s profitability and cash flows, and, if production equipment is damaged, may require the Group to make large capital expenditures. Long-term disruptions could result in a loss of customers and have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Operational risks could also result in human exposure to pollution, personal injury or death, environmental and natural resource damage, delays in mining, monetary losses and possible legal liability, any of which could materially and adversely affect the Group’s business, financial condition, results of operations and prospects.
A violation of health and safety requirements and the occurrence of accidents could disrupt the Group’s operations and increase operating costs A violation of health and safety laws, or failure to comply with the instructions of the relevant health and safety authorities, could lead to, among other things, a temporary shut down of all, or a portion of, the
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Group’s mines and processing facilities and the imposition of costly compliance procedures, which could materially and adversely affect the Group’s business, financial condition, results of operations and prospects.
The nature of the Group’s operations creates a risk of accidents and fatalities among its workforce, and the Group may be required to pay compensation or suspend operations as a result of past or future accidents or fatalities, which could have a material adverse effect on the business, financial condition, results of operations and prospects of the Group.
Fluctuations in exchange rates and appreciation in the rate of inflation may materially and adversely affect the Group’s business, financial condition, results of operations and prospects
The Group produces commodities that typically are priced by reference to prices expressed in U.S. dollars and, accordingly, payments to the Group are typically made in U.S. dollars. In February 2009, the National Bank of Kazakhstan (the NBK) decided to support the tenge against the U.S. dollar, among other currencies, and devalued the tenge against the U.S. dollar by 25%. This had the effect of decreasing the Group’s expenses in U.S. dollar terms. However, on 31 December 2009 the NBK announced that, going forward, it would seek to maintain a wider currency range. Any future appreciation of the tenge against the U.S. dollar would increase the Group’s costs relative to its revenue, which could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Only an underdeveloped forward market in the tenge exists. The Group entered into a limited number of hedging arrangements in 2007 that expired at the end of 2009. The Group is not currently entering into new contracts to actively hedge its exposure to exchange rate fluctuations, but the Group regularly reviews its hedging strategy. Any foreign exchange hedging activity in which the Group does engage may not adequately protect the Group from future changes in exchange rates and could increase the Group’s costs relative to its revenue, thus reducing the Group’s profit.
The Group depends on certain key personnel, including its senior management. The failure to attract and retain qualified personnel could materially and adversely affect its business, financial condition, results of operations and prospects
The Group’s growth and future success depend significantly upon its continued ability to attract, retain and motivate key senior management. The loss of the services of one or more of the Group’s key personnel could have a material adverse effect on its business, financial condition, results of operations and prospects. The Group does not currently maintain “key man” insurance with respect to any members of its senior management. The Group’s growth and future success also depends on its ability to implement adequate succession planning for the senior management team.
The preparation of the Group’s IFRS financial information and its control over financial reporting are difficult tasks requiring IFRS-experienced accounting personnel at each of the Group’s principal subsidiaries and at its corporate offices. However, there is a shortage of accounting personnel with IFRS expertise in Kazakhstan and other emerging markets in which the Group operates. Moreover, there is an increasing demand for such personnel as more Kazakhstani companies begin to prepare financial statements on the basis of IFRS or other international standards. Competition for accounting personnel with IFRS expertise, combined with the remote locations of the Group’s facilities, which such personnel may find less attractive than the locations offered by other employment opportunities, makes it difficult for the Group to hire and retain such personnel. Any inability to hire or retain qualified accounting staff could disrupt the Group’s capacity to timely and accurately report IFRS financial information and its control over financial reporting.
The Group relies significantly on its skilled and unskilled workforce. In particular, the Group relies on skilled in-house personnel to perform a majority of the Group’s complex repairs due in part to a lack of qualified external service providers. There exists an increasing demand for skilled personnel and contractors across a range of disciplines. An inability of the Group to attract and retain such personnel may adversely impact the Group’s ability to adequately resource development projects and fill roles and vacancies in existing operations. The Group faces significant competition from other companies in and outside of Kazakhstan and the other emerging markets in which the Group operates (particularly, natural resource companies) for its skilled and unskilled labour force. Such competition partly contributed to the increase in Group employee,
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payroll and benefit expenses from U.S.$394 million in 2006 to U.S.$582 million in 2008. Although the Group’s payroll expenses declined overall in 2009 to U.S.$526 million, payroll expenses have begun to increase again alongside the increase in production. Ongoing competition for personnel and the Group’s mining licence obligations in Kazakhstan to hire employees from certain of the regions in which it operates could result in additional increases in labour costs or an inability to recruit or retain necessary personnel, each of which could materially and adversely affect the Group’s business, financial condition, results of operations and prospects. In several towns where it operates, the Group is the only significant employer, which may limit the Group’s ability to release or restructure its workforce.
The Group’s business may be affected by slowdowns, stoppages and other disruptions due to labour-related developments
Nearly all of the Group’s employees in Kazakhstan are members of labour unions, which are primarily organised around the Group’s operating facilities and its workforce. It is possible that a work slowdown, work stoppage or strike could occur prior to or upon the expiration of the Group’s current labour agreements. Work slowdowns, stoppages and other labour-related developments could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group is upgrading the financial and administration IT systems used by its operating entities and there is no guarantee that this upgrade will be successful
ENRC relies on IT systems for financial reporting and administration purposes. The financial IT systems used by ENRC’s operating divisions in Kazakhstan are based on operating systems that are no longer supported, and the Group has initiated an upgrade of these systems.
Implementing the new IT system across the Group’s operating divisions is a significant project that is likely to take at least four years to complete. This implementation may cause considerable disruption to the Group’s business and operations, and there can be no guarantee that the new IT system will be implemented on schedule. The costs of implementing this new system are expected to be significant and the project costs may exceed budget. Furthermore, it is possible that this upgrade will not be successful in delivering the increased efficiencies and reliability sought by the Group.
Title to the Group’s mineral properties or production facilities may be challenged, which may prevent or severely curtail the Group’s use of the affected properties
Some of the Group’s properties may be subject to prior claims or unregistered agreements, and title may be affected by undetected defects. Title to some of the Group’s properties may be challenged or impugned, which may prevent or severely curtail the Group’s use of the affected properties.
The Group’s growth projects require substantial capital expenditures, and the Group may be unable to adequately fund such expansion plans or complete the relevant projects on schedule and within budget
The Group’s mining operations are capital intensive. The development and exploitation of mineral reserves and the acquisition of machinery and equipment require substantial capital expenditures. The Group estimated that, as at 31 December 2009, the total cost of its “in progress” and “under review” capital expenditure plans amounted to U.S.$5.8 billion. International credit markets have experienced, and may continue to experience, high volatility and severe liquidity disruptions stemming from the follow-on effects of the economic slowdown. These and other related events have had a significant impact on the global capital markets, and the reduced liquidity in the global capital markets could limit the Group’s ability to obtain adequate funding. The Group may be unable to satisfactorily fund the in-progress or deferred investments from its operations or external financing sources. In the event that the Group is unable to fund the in-progress or deferred investments from its operations or external financing sources, the Group may not be able to complete its growth projects without reducing its investment in ongoing operations.
In addition, the Group’s growth projects may require greater investment than currently expected or the Group may fail to complete the projects on time, which could cause cost over-runs. Any delay, interruption or cost
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overruns in implementing the Group’s planned capital investments, as the result of a lack of available funding or otherwise, could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group’s operations are highly dependent on transport services and sources of power that may be disrupted or interrupted
The Group operates separate facilities in central, eastern and north-eastern Kazakhstan, Russia, China, the Democratic Republic of Congo, South Africa, Zambia and in other emerging market countries that are difficult to access. Accordingly, raw materials must be transported over long distances from mines to processing facilities, and the Group’s products must be transported over long distances to reach customers. In Kazakhstan the Group depends on the Kazakhstani national railway system and the Logistics Division’s railway systems for these purposes. It is possible that the Group’s current access to adequate transport networks and sufficient rolling stock capacity and maintenance capabilities for these purposes, may be disrupted.
The Group depends on the transportation infrastructure of Kazakhstan, Russia, China, the Democratic Republic of Congo, South Africa, Zambia and Brazil for the delivery of a significant portion of the Group’s international sales. In some cases, Kazakhstan’s, the Democratic Republic of Congo’s, Zambia’s and, to a lesser extent, Russia’s, South Africa’s, Brazil’s and China’s state-owned physical infrastructure suffers from a lack of funding and maintenance. The deterioration of the transport infrastructure in these countries could disrupt the transportation of goods and supplies and interrupt the Group’s operations. The failure to maintain adequate transport services and networks or a disruption in transport services could cause transportation delays for the Group’s products and impair the Group’s ability to supply its customers, which could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group is also dependent on intra-Group sources for its power supply. Any disruption in the supply of electricity or coal could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Group depends on certain key customers for a significant portion of its revenue. The loss of any one of these customers or Group of customers could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects
The Group generates a significant portion of its revenue from certain key customers. In particular, UC RUSAL accounted for 55.6% of the revenue of the Alumina and Aluminium Division and 8.2% of the Group’s consolidated revenue in 2009. In addition, MMK accounted for 52.6% of the revenue of the Iron Ore Division and 15.0% of the Group’s consolidated revenue in 2009. It is possible that the Group’s long- term contracts with UC RUSAL, maturing 2016, and MMK, maturing 2017, may not be fulfilled by the counterparties to such contracts in accordance with their contractual obligations. In the fourth quarter of 2008, the Group agreed, in light of the economic downturn and its impact on MMK, to temporarily waive the minimum contractual sales volume required of MMK. Contractual sales volumes will continue to be reviewed on a regular basis, taking into account developing market conditions. If any of the Group’s key customers, including UC RUSAL and MMK, fails to meet its contractual obligations, encounters further financial difficulty during the economic downturn or otherwise discontinues or further reduces the level of its purchases from the Group, the Group’s business, financial condition, results of operations and prospects could be materially and adversely affected.
The Group’s insurance coverage may be insufficient to cover losses arising from unexpected natural and operational catastrophes
The Group’s operational processes and locations may be subject to operational accidents. Our operations may be also subject to unexpected natural catastrophes such as earthquakes and flooding. Existing insurance arrangements may not provide cover for all of the costs that may arise from such events. The impact of these events can lead to disruptions in production and loss of facilities adversely affecting our financial results.
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In March 2010 the Group implemented a new insurance programme based on significantly enhanced asset values, coverage and terms. Whilst this insurance programme may not provide cover for all possible losses, it is intended to provide comprehensive property damage and business interruption cover for the Group’s operations in Kazakhstan and Russia. The Group’s operations in other jurisdictions including China, the Democratic Republic of Congo and Zambia are not covered by the new insurance programme but are instead covered by separate insurance contracts which were set up prior to the acquisition of the relevant companies by the Group. These insurance contracts may not provide adequate cover in the event of property damage or business interruption claims, and also may not provide cover for all other possible losses.
The actual volume and grade of the Group’s ore reserves and its rate of production may not conform to current expectations
The Group’s ore reserves and mineral resources in Kazakhstan are estimates based on the rules contained in the Code for Reporting of Mineral Resources and Ore Reserves (the JORC Code). There is a possibility that the estimated quantities or grades of minerals will not be available to extract, or that any particular level of recovery of minerals may not be realised. Reserves and resources estimates are imprecise and depend on assumptions about operating costs and commodity prices and geological analysis based partly on statistical inferences drawn from drilling and sample analysis, which may prove unreliable. Valid estimates may change significantly when new information becomes available. Therefore, the actual deposits and the grade of mineralisation encountered may differ materially from the estimates disclosed in this Base Prospectus.
There can be no guarantee that an identified reserve or resource will continue to qualify as a commercially mine-able deposit that can be economically exploited over the medium to long term. Production of mineral resources can be affected by such factors as permitting regulations and requirements, weather, environmental factors, unforeseen technical difficulties, unusual or unexpected geological formations and work interruptions. The estimated ore reserves and mineral resources disclosed in this document should not be interpreted as an assurance of the commercial viability, potential or profitability of any future operations. The Group’s historical production levels may not be representative of its future production levels.
Risks relating to operating in emerging markets
The Group is exposed to the general risks associated with operating in emerging markets
Emerging markets, such as Kazakhstan, Russia, China and Africa, are generally subject to greater risks, including legal, regulatory, economic and political risks, than more developed markets.
Emerging economies are generally subject to rapid change, and the information set out in this Base Prospectus may quickly become outdated. Accordingly, investors should exercise particular care in evaluating the risks involved and should consider whether, in light of these risks, investing in the notes of a company whose assets and operations are based in an emerging market is appropriate. Investment in a company whose assets and operations are located in an emerging market is generally suitable only for sophisticated investors who fully appreciate the significance of the risks involved. Investors are urged to consult with their own legal and financial advisors before making an investment in the Notes.
The availability of credit to entities operating within emerging markets is significantly influenced by levels of investor confidence in these markets, and, as such, any factors that impact market confidence, for example, a decrease in credit ratings or state or central bank intervention, in one market could affect the price or availability of funding for entities within any of these markets. The disruptions recently experienced in the international capital markets have led to reduced liquidity and increased credit risk for certain market participants generally and have resulted in a reduction of available financing. Companies with significant assets and operations in countries in emerging markets may be particularly susceptible to these disruptions and reductions in the availability of credit or increased financing costs, which could result in financial difficulties.
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The Group could face enhanced risk and uncertainty upon a change in government or a change in the political climate in Kazakhstan and the other emerging market countries in which it operates
The Group and its Founders have had, and continue to have, close links with the Government of the Republic of Kazakhstan, including the President. The Group could face enhanced risk and uncertainty upon a change in government or a change in the political climate. For example, a new government with whom the Group may not have as close links may be more likely to seek to re-nationalise the Group’s assets, terminate the Group’s subsurface contracts and attempt to re-open or challenge the tax, legal or other arrangements affecting the Group’s operations, which could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
These risks are most relevant in relation to the Republic of Kazakhstan, in which the Group’s principal operations are conducted, but are also relevant to a lesser extent in Russia, China, the Democratic Republic of Congo, South Africa, Zambia and the other emerging market countries in which the Group operates.
Taxation systems in emerging and developing markets are generally at an early stage of development. The interpretation and application of tax laws and regulations are often evolving, which significantly increases the risks with respect to the Group’s operations and investment in emerging and developing markets
Historically the majority of the Group’s operations and assets have been located in the emerging market of Kazakhstan. As the Group diversifies, its operations now include operating and marketing subsidiaries in Russia, and joint ventures in Brazil and China.
In 2009, the Group completed its acquisition of CAMEC and its subsidiaries operating in various jurisdictions in Africa. The Group is in the process of integrating the acquisition which, amongst other measures, includes a detailed review of tax compliance as well as additional tax accounting, systems and compliance support. The Group’s management believes that, with the exception of the corporate income tax returns for Camec PLC and Camec Finance Limited for the year ended 31 March 2009, originally due by 31 March 2010, where the Group needs more time to prepare complete and correct returns, all necessary tax returns have been duly filed with the appropriate taxing authorities and all material liabilities for taxation due to the relevant tax authorities have been brought to account, and are not aware of any material penalties to the Group.
The Group and its Founders may incur additional liabilities as a result of certain historic trading arrangements in Russia
Between 2004 and 2006, certain sales were made by Kazakhstani operating companies that are now part of the Group to customers in Russia through a chain of agency agreements (the Russian Trading System or RTS). Although the Group and the Directors believe that the RTS was neither owned nor legally controlled by the Group, because the RTS received only a fixed commission of approximately 3% of sales and the residual profits of the structure totalling U.S.$111 million over the period were received by the Founders, the results of trading through the RTS were combined into the financial results of the Group for the three years ended 31 December 2006. The results of trading through the RTS were approximately 11.5%, 13.1% and 5.5% of the Group’s aggregate revenues in 2004, 2005 and 2006 respectively.
The Group and the Group’s management understand that the commission deducted by the RTS included an amount for the payment of taxes, and believe that no additional taxes are payable. However, the Group and the Group’s management cannot verify whether this is the case and there is a possibility that the Russian or Kazakhstani tax authorities might seek to recover additional taxes, regardless of whether the Group has a legal obligation to pay any such taxes or penalties.
The imposition of significant tax adjustments, fines or penalties could materially and adversely affect the Group’s business, financial condition, results of operations and prospects. In November 2007 the Group settled in Kazakhstan an additional tax liability of U.S.$20 million in respect of transfer pricing adjustments on coal sales to the RTS. However, the Group does not hold any additional provisions in respect of the RTS arrangements. The Founders have agreed to indemnify the Group for certain liabilities that may be incurred by it as a result of the use of the RTS by the Founders.
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The RTS arrangements were voluntarily terminated by the Group in the second half of 2006. The Group now makes its sales to customers in Russia via its marketing company ENRC Marketing LLC, which is resident in Russia.
The Group operates in jurisdictions in which rules regulating corruption are difficult to enforce
The Group’s operations are geographically diverse and include assets in jurisdictions in which rules regulating corruption are difficult to enforce. Following the integration of its most recent acquisitions, the Group’s operations will extend to jurisdictions including Brazil, China, the Democratic Republic of Congo, Mali, Mozambique, Russia, South Africa, Zambia and Zimbabwe, some of which are jurisdictions where independent analysts have rated corruption levels to be high. In addition, it is expected that the UK Bribery Act 2010 will come into force in late 2010, and if so, the Group will be subject to the UK Bribery Act 2010 which will establish criminal offences of bribing another person, being bribed, bribery of foreign officials, and the failure of a commercial organisation to prevent bribery. In particular, the Group has adopted internal guidelines relating to procurement and the use of intermediaries and agents, implemented by the Group in order to prevent involvement of entities and individuals associated with the Group in unlawful activities, and prior to the UK Bribery Act 2010 coming into force, the Group will update its internal guidelines in conformity with the obligation under the UK Bribery Act 2010 to prevent bribery. It is possible that measures taken by the Group to prevent these activities may prove to be ineffective. If the Group is unable to successfully safeguard against entities or individuals associated with the Group becoming involved in unlawful activity, then its reputation and business would be adversely affected. In addition, such involvement by entities or individuals associated with the Group in unlawful activity could result in criminal penalties, regulatory sanctions and monetary fines, any of which could have a material adverse effect on the Group‘s business, financial condition, results of operations and prospects.
Risks relating to operating in Kazakhstan
Most of the Group’s operations are conducted, and a substantial part of its assets are located, in Kazakhstan; therefore, the Group is highly dependent on the economic and political conditions prevailing in Kazakhstan
The majority of the Group’s mining operations are conducted in Kazakhstan. Accordingly, the Group is substantially dependent on the economic and political conditions prevailing in Kazakhstan.
Kazakhstan’s existence as an independent state resulted from the dissolution of the Soviet Union. As such, it has a relatively short history as an independent nation and has the potential for social, political, economic, legal and fiscal instability. Nursultan Nazarbayev has been President of the Republic of Kazakhstan since independence in 1991. His current term expires in 2012. Under President Nazarbayev’s leadership, the foundations of a market economy have taken hold, and the country has been largely free from political violence, fostering stable conditions that have benefited the Group’s operations, however, it is possible these stable conditions will not continue. Since the break-up of the Soviet Union, a number of former Soviet republics have experienced periods of political instability, civil unrest, military action or incidents of violence. Future political instability, civil unrest or continued violence in the region could affect the political or economic stability of Kazakhstan and could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Some of the Group’s assets were acquired through privatisation. Privatisations in certain other former Soviet republics have been subject to political controversy and legal challenge. If privatisations in Kazakhstan were to be successfully challenged, or if the Government of the Republic of Kazakhstan sought to re-nationalise any privatised assets, the Group could lose its ownership interest in its mineral properties or production facilities.
Kazakhstan is moving from a command to a market-driven economy. While this change is establishing a more developed business environment, substantial differences persist between Kazakhstan and western market economies. Specific risks include, among other things, local currency instability, civil disturbances, changes in exchange controls, lack of availability of hard currency, changes in energy price tariffs, taxes, royalty rates (including withholding taxes on distributions to foreign investors), anti-monopoly legislation, expropriation of property, and interruptions or blockages of exports, including minerals, hydrocarbons and
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other strategic materials. The occurrence of any of these events could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Kazakhstani economy is highly dependent on the export of oil, gas, and other commodities. As such, the economy is adversely affected by volatility, or a sustained drop, in oil, gas and other commodity prices, as has been witnessed during the economic downturn. In addition, fluctuations in the value of the U.S. dollar relative to other currencies cause volatility on earnings from U.S. dollar-denominated oil, gas and commodity exports. The significant slowdown in the global economy that commenced in 2008 has led to a substantial decrease in global commodity prices, and caused substantial volatility in oil prices. A continued decline in commodity prices or sustained volatility in oil prices could have a material adverse effect on the Kazakhstani economy, which could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Factors outside Kazakhstan have also had an impact on Kazakhstan’s economy, specifically the finance and banking sector. For example, in February 2009, S&P downgraded the credit ratings of five of Kazakhstan’s largest commercial banks, while Moody’s downgraded the bank financial strength ratings of six banks. The rating agencies have stated that these downgrades are the consequence of the increasingly negative impact of the global economic crisis on the Kazakhstani economy and its financial institutions and its mounting asset quality and liquidity problems and the inability of Kazakhstani banks to refinance their large foreign wholesale debt, in large part because of the recent devaluation of the tenge in February 2009. Several commercial banks in Kazakhstan have experienced difficulty in refinancing maturing international debt and, as a result, have sought short term funding from the NBK and substantially limited issuance of new loans. Pursuant to the terms of financial stability legislation adopted by the Government of the Republic of Kazakhstan in February 2009, two of Kazakhstan’s largest banks, BTA Bank and Alliance Bank, were effectively nationalised by the Government of the Republic of Kazakhstan in the wake of the new fiscal stability legislation. It is not clear what impact this will have on the prospects of Kazakhstan’s banks and their customers. The housing and construction industries and small and medium sized enterprises have been particularly affected while larger companies, subsoil use companies and state-owned companies have continued to have access to offshore funding albeit on a more limited basis and on less favourable terms. A downgrade of Kazakhstan’s sovereign credit rating and liquidity problems in Kazakhstan’s economy could adversely affect its economic development, which could in turn materially and adversely affect the Group’s prospects, business, financial condition and results of operations.
According to figures compiled by the IMF, Kazakhstan’s real GDP continued to grow following the adoption of a floating exchange rate policy in April 1999 but growth slowed in 2008 as a result of the global economic crisis and is expected to continue to be adversely affected by current global economic conditions in the near term. It is possible that Kazakhstan’s GDP will not continue to grow, and any decrease in GDP or in the rate of GDP growth could adversely affect Kazakhstan’s economic development, which could, in turn, have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Kazakhstan has experienced relatively high levels of inflation in recent years, but inflation has decelerated since late 2008 and reduced inflation is expected to continue through 2010, owing to much weaker global commodity prices and slower credit growth. The increased inflation between 2006 and 2008 was primarily attributable to increases in food and oil prices in Russia and Ukraine (from which Kazakhstan imports a substantial part of its food products), imported inflation through the rise of prices generally and substantial increases in nominal wages and social payments. The Government of the Republic of Kazakhstan and the NBK may not be able to control inflationary pressures and the upward trend in inflation witnessed between 2006 and 2008 may resume in the future. Changes in the rate of inflation could materially adversely affect the Group’s business, financial condition and results of operations.
Financial problems or an increase in the perceived risks associated with investing in emerging economies generally could reduce foreign investment in Kazakhstan and adversely affect Kazakhstan’s economy. Accordingly, even if the Kazakhstani economy remains relatively stable, financial turmoil in any emerging market, especially countries in the Commonwealth of Independent States (CIS) or the Caspian Sea or Central Asian regions, which recently have experienced significant political instability, including terrorism and internal conflicts, could negatively affect the Kazakhstani economy.
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The exact scope of Article 71 of the Kazakhstani Subsurface Law, which provides the Republic of Kazakhstan with a pre-emption right in relation to the transfer of the Group’s subsurface use rights, is uncertain and no precedent exists to indicate how it may be applied
Article 71 of the Kazakhstani Subsurface Law, as amended on 1 December 2004 and 14 October 2005, entitles the Government of the Republic of Kazakhstan to a pre-emptive right to purchase certain subsurface rights or direct or indirect interests in companies having subsurface rights for sale. This pre-emptive right permits the Government of the Republic of Kazakhstan to purchase any such subsurface use rights or equity interests being sold on terms no less favourable than those offered by other purchasers. The relevant government authority may terminate a subsurface use contract if a transaction takes place in violation of this law. These provisions apply to Kazakhstani and overseas entities. The exact scope of the law is uncertain and no precedent exists to indicate how it may be applied. There can be no guarantee that the Group’s interpretation of this law in the context of past transfers will be upheld. It is unclear whether the right of pre- emption can be exercised on transfers that have occurred without notice to the relevant authority and whether such prior transactions can be unwound.
The pre-emptive right has not been waived and therefore any future issuance or sale of ordinary shares in the Issuer or the sale of, or granting of security over, the Group’s assets will require a pre-emptive waiver from the Government of the Republic of Kazakhstan. Such a waiver may not be granted in a timely manner or at all. This requirement could adversely affect the ability of the Group to raise future capital through equity fundraisings. It may also hinder the Group’s ability to dispose of its assets or raise secured debt finance.
The laws and regulations of Kazakhstan relating to foreign investment, subsurface use, licensing, companies, tax, customs, currency, banking and competition are still developing, and uncertainties or changes in the law could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects
The laws and regulations of Kazakhstan relating to foreign investment, subsurface use, licensing, companies, tax, customs, currency, capital markets, pensions, insurance, banking and competition are still developing. Many laws provide regulators and officials with substantial discretion in their application, interpretation and enforcement. New legislation adopted in November 2007 grants the Government of the Republic of Kazakhstan the right to require amendments to or termination of subsurface use contracts of strategic importance if it is determined that the operations thereof have a material impact on the economic position of Kazakhstan. In addition, because the statutes on subsurface use do not restrict the course of action available to the Government of the Republic of Kazakhstan by reference to the gravity of the violation, a minor violation could conceivably lead to harsh consequences, such as suspension or termination of the subsurface use rights. The subsurface use legislation is relatively new and little precedent exists to predict the consequences of a violation. As a condition of certain of its subsurface use licences and contracts, the Group is obliged to maintain certain social programmes for the benefit of local communities and to invest in training the local workforce. These obligations may increase or become more burdensome in the future, upon a change in the government or political climate or otherwise, which may have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
The Government of the Republic of Kazakhstan has stated that it believes in continued reform of the corporate governance processes and will promote discipline and transparency in the corporate sector, though this policy may be reversed at any time. Given Kazakhstan’s relatively short independent legislative, judicial and administrative history, the effect of current and future legislation on the Group’s business is unpredictable. The ongoing rights of the Group under its subsurface use contracts, licences and other agreements may be susceptible to revision or cancellation, and legal redress may be unavailable.
The Group’s operations are subject to extensive government regulation and legislation, as well as political pressure, that may materially and adversely affect the Group’s business, financial condition, results of operations and prospects
Mining operations in Kazakhstan are subject to significant laws and regulations concerning, among other things, the issuance and renewal of contracts and licences. Kazakhstani regulatory authorities exercise
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considerable discretion in the interpretation and enforcement of local laws and regulations. At times, authorities may use this discretion to enforce rights in a manner that is inconsistent with the relevant legislation, particularly with respect to licence issuance, renewal and compliance. Requirements imposed by regulatory authorities may be costly and time-consuming and may result in delays in the commencement or continuation of production operations.
The licensing process is also influenced by outside commentary and political pressure. A competing applicant for a subsurface use contract or licence may bring a direct claim against the issuing authority if the applicant believes that the contract or licence was issued in violation of applicable law or regulation. If successful, such proceedings and claims may result in the revocation or invalidation of the contract or licence, the refusal to issue or renew a contract or licence or the issuance or renewal of a contract or licence in an untimely fashion or with conditions that impair the Group’s ability to conduct its operations profitably.
Regulatory authorities may impose more onerous requirements and obligations than those currently in effect. Although the Group is unable to predict the costs to comply with such amended laws, regulations and permits, the costs could be substantial and could materially and adversely affect the Group’s business, financial condition, results of operations and prospects.
The Republic of Kazakhstan is an emerging market where the tax legislation is still subject to frequent changes and various interpretations. One such area which is subject to rapid development and change is transfer pricing. Changes to tax legislation and differences in the interpretation of such legislation may materially and adversely affect the Group’s business, financial condition, results of operation and prospects
With effect from 1 January 2009, the Republic of Kazakhstan introduced the new Tax Code and transfer pricing legislation. The new transfer pricing legislation, amongst other measures, provided for the abolition of the 10% “safe harbour” rule.
Under Kazakhstani tax law, the tax authorities have the right to audit the tax affairs of any company which is subject to tax in Kazakhstan for five years from the end of the accounting period.
At the end of 2009, the Kazakhstani tax authorities issued a transfer pricing assessment of U.S.$126 million on SSGPO in respect of the year ended 31 December 2004. The Group’s management is confident that SSGPO was fully compliant with the transfer pricing legislation prevailing at the time, have appealed against the assessment, and will be defending the adopted filing position. No provision against additional tax is considered to be necessary.
The Kazakhstani judiciary’s lack of experience and perceived lack of independence, the difficulty of enforcing court decisions and governmental discretion in enforcing claims could prevent the Group or holders of the Notes from obtaining effective redress in a court proceeding
The independence of the judicial system and its immunity from economic, political and nationalistic influences in Kazakhstan cannot be guaranteed. The judicial system is often understaffed and under-funded. Judges are generally inexperienced in business and corporate law. Not all Kazakhstani legislation and court decisions are readily available to the public or organised in a manner that facilitates understanding. The Kazakhstani judicial system can be slow and court orders are not always enforced or followed by law enforcement agencies. All of these shortcomings may affect the ability of the Group or holders of the Notes to obtain effective legal redress in Kazakhstani courts. In addition, the press has reported that court claims and government prosecutions are often used to further political aims that the courts support. The Group may be subject to such political claims and may not receive a fair hearing. These uncertainties make judicial decisions in Kazakhstan difficult to predict and effective redress uncertain and could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects and the price of the Notes.
The Group provides social programmes for the benefit of local communities, the costs of which may increase
As a condition of certain of its subsurface use licences and contracts and pursuant to certain agreements with governmental authorities, the Group is obliged to maintain certain social programmes. These obligations
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include funding the construction and maintenance of medical, cultural, recuperation and rehabilitation facilities, community centres, athletic facilities, housing and infrastructure in the areas in which the Group operates. Furthermore, the Group is obliged under its subsurface use licences and contracts to invest in training the local workforce, upgrading the qualifications of its employees and providing educational grants.
In addition, at its own initiative and at the request of governmental authorities, the Group has provided and continues to provide social support in the areas where it operates and in other areas of Kazakhstan.
These obligations, as well as additional social projects, may increase or become more burdensome in the future and could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects.
Risks relating to the Group’s structure
The Group has significant deposits with financial institutions, including Eurasian Bank, and the Group may be unable to withdraw these deposits on a timely basis or at all
The Group has historically used Eurasian Bank (which is beneficially owned by the Founders) for all its day- to-day banking transactions in Kazakhstan. As at 31 December 2009, the net liability of Eurasian Bank to the Group shown in the Group’s accounts was U.S.$269 million. The Group’s management considers this amount to be material in the context of Eurasian Bank’s financial position and operations. The Group’s management believes that Eurasian Bank may be reliant on the Group’s deposits and that this could restrict the ability of the Group to withdraw cash at short notice or at all. Although the Group’s arrangements with Eurasian Bank, including those governing term deposits, entitle the Group to withdraw its deposits on notice, it is possible that Eurasian Bank may not honour these arrangements. Any default by Eurasian Bank on its contractual arrangements could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects. Although the Group is currently seeking to diversify its banking providers in Kazakhstan, it may be unable to do so on acceptable terms or at all, and the Group’s exposure to Eurasian Bank may therefore continue to be significant.
The Group also has significant surplus funds which it invests primarily in the United Kingdom and in Kazakhstan. At 31 December 2009, the amounts invested with financial institutions were U.S.$1,021 million, including U.S.$735 million and U.S.$57 million with financial institutions in Kazakhstan and Russia, respectively. Adverse changes in, or the general deterioration of, global economic conditions, or arising from systemic risks in the financial systems, could affect the recoverability and value of the Group’s assets and could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects or require an increase in the Group’s provisions.
The Kazakhstani banking sector, although one of the fastest growing economic sectors in the country until 2007, was one of the hardest hit by the economic downturn. Despite various forms of support provided by the Government of the Republic of Kazakhstan to financial institutions, continued instability in the Kazakhstani banking sector could have detrimental consequences for the Kazakhstani economy and this could have a material adverse effect on the Group’s business, financial condition, results of operations and prospects (see “Risks relating to operating in Kazakhstan - Most of the Group’s operations are conducted, and a substantial part of its assets are located, in Kazakhstan; therefore, the Group is largely dependent on the economic and political conditions prevailing in Kazakhstan“).
A breach in our governance processes may lead to regulatory penalties and loss of reputation
The Group operates in a global environment straddling multiple jurisdictions and complex regulatory frameworks. The Group’s governance and compliance processes, which include the review of control over financial reporting, may not prevent future potential breaches of law, accounting or governance practice. The Group’s code of business conduct and anti-trust protocols may not prevent instances of fraudulent behaviour and dishonesty nor guarantee compliance with legal or regulatory requirements. This may lead to regulatory fines, litigation, loss of operating licences or loss of reputation.
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The Group has undertaken a significant number of related party transactions and may continue to do so
The Group has engaged and may continue to engage in a significant number of transactions with related parties, primarily with other entities beneficially owned by the Founders. Prior to the listing of the Issuer in 2007, such transactions may not have been on arm’s length terms and may not have complied with applicable procedural or governance requirements. The legitimacy of any such related party transactions may therefore potentially be challenged. In particular, the Group’s management is aware that the necessary approvals were not obtained for certain historic related party transactions, and the validity of such transactions could be subject to challenge under Kazakhstani law. The Founders have a number of other business interests in Kazakhstan and it is likely that the Group will continue to transact with entities affiliated with the Founders. Since the Issuer was listed in 2007, the Group, being aware of its obligations under the Listing Rules with respect to related party transactions, has put procedures in place to ensure that potential related party transactions are properly reported and approved, including by the shareholders where necessary. Despite compliance with the Listing Rules (including, in certain circumstances, the requirement for shareholder approval and confirmation that the relevant related party transaction is fair and reasonable), there can be no guarantee that better terms for these transactions would not have been achieved by the Group in arms’ length transactions with unrelated parties.
The Founders exercise significant influence over the Group
Historically, the Founders have exercised significant control and influence over the Group’s operations and employees. As at 31 March 2010, the Founders collectively owned approximately 43.8% of the issued ordinary shares in the Issuer and, as a result, remain able to exercise significant influence over all matters requiring shareholder approval, including the election of directors and significant non-related party corporate transactions. Although the Group has entered into a relationship agreement with each of the Founders to enable the Group to carry on its business independently, it is possible that the Founders will not continue to exert significant influence over the Group’s operations and employees.
The Founders are involved in an ongoing investigation in Belgium relating to tax evasion
The Founders, together with a number of related individuals, have been named in an ongoing investigation of certain matters in Belgium (unrelated to the Group’s activities) that started in 1996. The Group has been advised by the Founders that the investigation relates to allegations of tax evasion in respect of the 1996 tax year. Any use by the Founders of the monies that should, allegedly, have been paid in tax could constitute money laundering under Belgian law, and as a result, although it is derived from tax issues, the investigation has been categorised as a money laundering investigation. The investigation, which commenced in 1996 and could ultimately lead to criminal sanctions, has attracted widespread publicity. To date no charges have been brought against the Founders. The Group has been advised by the Founders that, having taken legal advice, they are confident that the Belgian investigation will not result in the imposition of criminal sanctions, however criminal proceedings may be commenced at any time and the timing and nature of the outcome of any such proceedings is uncertain. Although any such criminal proceedings would not be against the Group and would not involve the Group’s assets or operations, if criminal proceedings are commenced against the Founders, there can be no assurance that the Group’s reputation will not be materially and adversely affected as a result of its association with the Founders.
Factors which are material for the purpose of assessing the market risks associated with Notes issued under the Programme
The Notes may not be a suitable investment for all investors
Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
(i) have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained or incorporated by reference in this Base Prospectus or any applicable supplement;
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(ii) have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact the Notes will have on its overall investment portfolio;
(iii) have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes, including Notes with principal or interest payable in one or more currencies, or where the currency for principal or interest payments is different from the potential investor’s currency;
(iv) understand thoroughly the terms of the Notes and be familiar with the behaviour of any relevant indices and financial markets; and
(v) be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
Some Notes are complex financial instruments. Sophisticated institutional investors generally do not purchase complex financial instruments as stand-alone investments. They purchase complex financial instruments as a way to reduce risk or enhance yield with an understood, measured, appropriate addition of risk to their overall portfolios. A potential investor should not invest in Notes which are complex financial instruments unless it has the expertise (either alone or with a financial adviser) to evaluate how the Notes will perform under changing conditions, the resulting effects on the value of the Notes and the impact this investment will have on the potential investor’s overall investment portfolio.
Risks related to the structure of a particular issue of Notes
A wide range of Notes may be issued under the Programme. A number of these Notes may have features which contain particular risks for potential investors. Set out below is a description of the most common such features:
Notes subject to optional redemption by the Issuer
An optional redemption feature of Notes is likely to limit their market value. During any period when the Issuer may elect to redeem Notes, the market value of those Notes generally will not rise substantially above the price at which they can be redeemed. This also may be true prior to any redemption period.
The Issuer may be expected to redeem Notes when its cost of borrowing is lower than the interest rate on the Notes. At those times, an investor generally would not be able to reinvest the redemption proceeds at an effective interest rate as high as the interest rate on the Notes being redeemed and may only be able to do so at a significantly lower rate. Potential investors should consider reinvestment risk in light of other investments available at that time.
Index Linked Notes and Dual Currency Notes
The Issuer may issue Notes with principal or interest determined by reference to an index or formula, to changes in the prices of securities or commodities, to movements in currency exchange rates or other factors (each, a Relevant Factor). In addition, the Issuer may issue Notes with principal or interest payable in one or more currencies which may be different from the currency in which the Notes are denominated. Potential investors should be aware that:
(i) the market price of such Notes may be volatile;
(ii) they may receive no interest;
(iii) payment of principal or interest may occur at a different time or in a different currency than expected;
(iv) they may lose all or a substantial portion of their principal;
(v) a Relevant Factor may be subject to significant fluctuations that may not correlate with changes in interest rates, currencies or other indices;
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(vi) if a Relevant Factor is applied to Notes in conjunction with a multiplier greater than one or contains some other leverage factor, the effect of changes in the Relevant Factor on principal or interest payable likely will be magnified; and
(vii) the timing of changes in a Relevant Factor may affect the actual yield to investors, even if the average level is consistent with their expectations. In general, the earlier the change in the Relevant Factor, the greater the effect on yield.
The historical experience of an index should not be viewed as an indication of the future performance of such index during the term of any Index Linked Notes. Accordingly, each potential investor should consult its own financial and legal advisers about the risk entailed by an investment in any Index Linked Notes and the suitability of such Notes in light of its particular circumstances.
Partly-paid Notes
The Issuer may issue Notes where the issue price is payable in more than one instalment. Failure to pay any subsequent instalment could result in an investor losing all of his investment.
Variable rate Notes with a multiplier or other leverage factor
Notes with variable interest rates can be volatile investments. If they are structured to include multipliers or other leverage factors, or caps or floors, or any combination of those features or other similar related features, their market values may be even more volatile than those for securities that do not include those features.
Inverse Floating Rate Notes
Inverse Floating Rate Notes have an interest rate equal to a fixed rate minus a rate based upon a reference rate such as LIBOR. The market values of those Notes typically are more volatile than market values of other conventional floating rate debt securities based on the same reference rate (and with otherwise comparable terms). Inverse Floating Rate Notes are more volatile because an increase in the reference rate not only decreases the interest rate of the Notes, but may also reflect an increase in prevailing interest rates, which further adversely affects the market value of these Notes.
Fixed/Floating Rate Notes
Fixed/Floating Rate Notes may bear interest at a rate that converts from a fixed rate to a floating rate, or from a floating rate to a fixed rate. Where the Issuer has the right to effect such a conversion, this will affect the secondary market and the market value of the Notes since the Issuer may be expected to convert the rate when it is likely to produce a lower overall cost of borrowing. If the Issuer converts from a fixed rate to a floating rate in such circumstances, the spread on the Fixed/Floating Rate Notes may be less favourable than then prevailing spreads on comparable Floating Rate Notes tied to the same reference rate. In addition, the new floating rate at any time may be lower than the rates on other Notes. If the Issuer converts from a floating rate to a fixed rate in such circumstances, the fixed rate may be lower than then prevailing rates on its Notes.
Notes issued at a substantial discount or premium
The market values of securities issued at a substantial discount or premium from their principal amount tend to fluctuate more in relation to general changes in interest rates than do prices for conventional interest- bearing securities. Generally, the longer the remaining term of the securities, the greater the price volatility as compared to conventional interest-bearing securities with comparable maturities.
Risks related to Notes generally
Set out below is a brief description of certain risks relating to the Notes generally:
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The Issuer’s holding company structure may impact the ability of the holders of Notes to receive payment on the Notes
The Issuer is a holding company with no material assets other than the capital stock of its subsidiaries and partnerships. As a result, the Issuer’s ability to repay its indebtedness, including the Notes, is dependent on the generation of cash flow by its subsidiaries and their ability to make such cash available to the Issuer, by dividend, debt repayment or otherwise. The Issuer’s subsidiaries, other than the Guarantors, do not have any obligation to pay amounts due on the Notes or to make funds available for that purpose. In addition, the Issuer’s subsidiaries may not be able to, or be permitted to, make distributions to enable the Issuer to make payments in respect of its indebtedness, including the Notes. Each of the Issuer’s subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions, as well as the financial condition and operating requirements of its subsidiaries, may limit the Issuer’s ability to obtain cash from its subsidiaries. The Issuer’s right to participate in any distribution of its subsidiaries’ assets upon their liquidation, reorganisation or insolvency would generally be subject to the prior claims of the subsidiaries’ creditors, including any trade creditors and preferred shareholders.
The Notes and the Notes Guarantee will be subordinated to secured indebtedness of the Issuer and the Guarantors
The Notes will be unsubordinated and unsecured obligations of the Issuer and will rank pari passu in right of payment with all other existing and future unsubordinated and unsecured indebtedness of the Issuer and senior in right of payment to all subordinated indebtedness of the Issuer, if any. The Notes Guarantee will be an unsubordinated and unsecured obligation of the Guarantors and will rank pari passu in right of payment to all other existing and future unsubordinated and unsecured indebtedness of the Guarantors and senior in right of payment to all subordinated indebtedness of the Guarantors, if any. However, the Notes and the Notes Guarantee will be effectively subordinated to any secured obligations of the Issuer or of any Guarantor, as the case may be, to the extent of the assets serving as security therefor. In bankruptcy, the holder of a security interest with respect to any assets of the Issuer or of any Guarantor would be entitled to have the proceeds of such assets applied to the payment of such holder’s claim before the remaining proceeds, if any, are applied to the claims of the Noteholders. The Issuer and the Guarantors currently have secured obligations and may incur secured obligations in the future.
The Notes and the Notes Guarantee will be structurally subordinated to the indebtedness of the Issuer’s subsidiaries that are not Guarantors of the Notes
Investors will not have any claim as a creditor against subsidiaries of the Issuer that are not Guarantors of the Notes (the Non-guarantor Subsidiaries). As a result, all indebtedness and other liabilities, including trade payables, of the Non-guarantor Subsidiaries, whether secured or unsecured, must be satisfied before any of the assets of the Non-guarantor Subsidiaries would be available for distribution, upon a liquidation or otherwise, to the Issuer in order for the Issuer and the Guarantors to meet their obligations with respect to the Notes. As of 31 December 2009, Non-guarantor Subsidiaries had indebtedness, including trade payables, of approximately U.S.$750 million.
Modification, waivers and substitution
The conditions of the Notes contain provisions for calling meetings of Noteholders to consider matters affecting their interests generally. These provisions permit defined majorities to bind all Noteholders including Noteholders who did not attend and vote at the relevant meeting and Noteholders who voted in a manner contrary to the majority.
The conditions of the Notes also provide that the Trustee may, without the consent of Noteholders, agree to (i) any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of Notes or (ii) determine without the consent of the Noteholders that any Event of Default or potential Event of Default shall not be treated as such or (iii) the substitution of another company as principal debtor under any Notes in place of the Issuer, in the circumstances described in Condition 14.
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EU Savings Directive
Under EU Council Directive 2003/48/EC on the taxation of savings income, Member States are required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual beneficial owner resident in that other Member State or to certain limited types of entities established in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). The current rate of withholding is 20 per cent and it will be increased to 35 per cent with effect from 1 July 2011. A number of non-EU countries and territories including Switzerland and certain British and Dutch dependent or associated territories have adopted similar measures (a withholding system in the case of Switzerland).
A number of amendments to the Directive have been proposed and approved by the European Parliament. If any of the proposed changes to the Directive are implemented, they may amend or broaden the scope of the requirements described above.
If a payment were to be made or collected through a Member State which has opted for a withholding system and an amount of, or in respect of, tax were to be withheld from that payment, neither the Issuer nor any Paying Agent nor any other person would be obliged to pay additional amounts with respect to any Note as a result of the imposition of such withholding tax. The Issuer is required to maintain a Paying Agent in a Member State that is not obliged to withhold or deduct tax pursuant to the Directive.
Taxation in Kazakhstan applicable to payments to holders of the Notes under the Notes Guarantee
As discussed in “Taxation – Kazakhstan Taxation”, any payments to holders of the Notes by a Guarantor could be considered as taxable income from sources in Kazakhstan and subject to withholding tax at a rate of up to 20 per cent, unless reduced by any applicable double tax treaty. Each Guarantor has agreed to pay additional amounts in respect of such withholding (see Condition 7). The enforceability in Kazakhstan of such an agreement has not to date been determined by Kazakhstani courts and there may be some doubt as to whether such courts would enforce such an agreement.
Change of law
The conditions of the Notes are based on English law in effect as at the date of this Base Prospectus. No assurance can be given as to the impact of any possible judicial decision or change to English law or administrative practice after the date of this Base Prospectus.
Notes where denominations involve integral multiples: definitive Notes
In relation to any issue of Notes which have denominations consisting of a minimum Specified Denomination plus one or more higher integral multiples of another smaller amount, it is possible that such Notes may be traded in amounts that are not integral multiples of such minimum Specified Denomination. In such a case a holder who, as a result of trading such amounts, holds an amount which is less than the minimum Specified Denomination in his account with the relevant clearing system at the relevant time may not receive a definitive Note in respect of such holding (should definitive Notes be printed) and would need to purchase a principal amount of Notes such that its holding amounts to a Specified Denomination.
If definitive Notes are issued, holders should be aware that definitive Notes which have a denomination that is not an integral multiple of the minimum Specified Denomination may be illiquid and difficult to trade.
Global notes and clearing systems
Because the Notes will be initially represented by one or more Global Note(s) which will be deposited with a common depositary for Euroclear and Clearstream, Luxembourg (the Common Depositary), investors will have to rely on the procedures of those clearing systems for transfer, payment and communication with
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the Issuer and/or the Guarantors. Definitive Notes will only be issued in limited circumstances, as described in “Form of the Notes”.
Euroclear and Clearstream, Luxembourg will maintain records of the beneficial interests in the relevant Global Note. While the Notes are in global form, investors will be able to trade their beneficial interests only through Euroclear and Clearstream, Luxembourg. While the Notes are in global form, the Issuer or a Guarantor, as the case may be, will discharge its payment obligations under the Notes by making payments to the Common Depositary. A holder of a beneficial interest in a Global Note must rely on the procedures of Euroclear and Clearstream, Luxembourg to receive payments under the Notes. Neither the Issuer nor any Guarantor has any responsibility or liability for the records relating to, or payments made in respect of, beneficial interests in the Global Note(s).
Risks related to the market generally
Set out below is a brief description of the principal market risks, including liquidity risk, exchange rate risk, interest rate risk and credit risk:
The secondary market generally
Notes may have no established trading market when issued, and one may never develop. If a market does develop, it may not be very liquid. Therefore, investors may not be able to sell their Notes easily or at prices that will provide them with a yield comparable to similar investments that have a developed secondary market. This is particularly the case for Notes that are especially sensitive to interest rate, currency or market risks, are designed for specific investment objectives or strategies or have been structured to meet the investment requirements of limited categories of investors. These types of Notes generally would have a more limited secondary market and more price volatility than conventional debt securities. Illiquidity may have a severely adverse effect on the market value of Notes.
Exchange rate risks and exchange controls
The Issuer will pay principal and interest on the Notes and the Guarantors will make any payments under the Notes Guarantee in the Specified Currency. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or currency unit (the Investor’s Currency) other than the Specified Currency. These include the risk that exchange rates may significantly change (including changes due to devaluation of the Specified Currency or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the Specified Currency would decrease (1) the Investor’s Currency-equivalent yield on the Notes, (2) the Investor‘s Currency equivalent value of the principal payable on the Notes and (3) the Investor’s Currency equivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls that could adversely affect an applicable exchange rate. As a result, investors may receive less interest or principal than expected, or no interest or principal.
Interest rate risks
Investment in Fixed Rate Notes involves the risk that subsequent changes in market interest rates may adversely affect the value of the Fixed Rate Notes.
Credit ratings may not reflect all risks
One or more independent credit rating agencies may assign credit ratings to the Notes. The ratings may not reflect the potential impact of all risks related to structure, market, additional factors discussed above, and other factors that may affect the value of the Notes. A credit rating is not a recommendation to buy, sell or hold securities and may be revised or withdrawn by the rating agency at any time.
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The trading prices of emerging market debt are subject to substantial volatility
Historically, the markets for emerging market debt have been subject to disruptions that have caused substantial volatility in the prices of securities similar to the Notes. There can be no assurance that the market for the Notes will not be subject to similar disruptions. Any such disruptions may have an adverse effect on holders of the Notes. Even if Kazakhstan’s economy remains relatively stable, financial turmoil in other emerging markets could materially adversely affect the market price of the Notes.
Legal investment considerations may restrict certain investments
The investment activities of certain investors are subject to legal investment laws and regulations, or review or regulation by certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (1) Notes are legal investments for it, (2) Notes can be used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or pledge of any Notes. Financial institutions should consult their legal advisors or the appropriate regulators to determine the appropriate treatment of Notes under any applicable risk-based capital or similar rules.
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FORWARD-LOOKING STATEMENTS
This Base Prospectus includes statements that are, or may be deemed to be, “forward-looking statements”. These forward-looking statements may be identified by the use of forward-looking terminology, including the terms “believes”, “estimates”, “plans”, “projects”, “anticipates”, “expects”, “intends”, “may”, “will” or “should” or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this Base Prospectus and include, but are not limited to, statements regarding the Group’s intentions, beliefs or current expectations concerning, among other things, the Group business, results of operations, financial position, liquidity, prospects, growth, strategies and the ferroalloys, iron ore, alumina, aluminium, energy, logistics and other non-ferrous industries.
By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the actual results of the Group’s operations, financial position and liquidity, and the development of the markets and the industries in which the Group operates may differ materially from those described in, or suggested by, the forward-looking statements contained in this Base Prospectus. In addition, even if the Group’s results of operations, financial position and liquidity, and the development of the markets and industries in which the Group operates, are consistent with the forward-looking statements contained in this Base Prospectus, those results or developments may not be indicative of results or developments in subsequent periods. A number of risks, uncertainties and other factors could cause results and developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation: • a change in government or the political climate in Kazakhstan. Russia, the Democratic Republic of Congo or Zambia; • the actual volume and grade of the Group’s ore reserves and its rate of production; • the Group’s ability to acquire or retain the subsurface contracts, mining licences and other regulatory approvals necessary to extract the Group’s reserves; • the volatility of commodity prices; • the Group’s ability to adequately fund its growth projects; • the Group’s ability to identify, complete or integrate acquisitions; • the economic slowdown in the Russian and Chinese markets, on which the Group depends for a significant portion of its revenue; • fluctuations in exchange rates and appreciation in the rate of inflation; • the Group’s ability to attract and retain qualified personnel; • the general risks associated with operating in emerging markets; • other factors discussed in “Risk Factors” and “Description of the Group”; and • the Group’s success in accurately identifying future risks to its business and managing the risks of the aforementioned factors.
Forward-looking statements may and often do differ materially from actual results. Any forward-looking statements in this Base Prospectus reflect the Group’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Group’s business, results of operations, financial position, liquidity, prospects, growth, strategies and the ferroalloys, iron ore, alumina, aluminium, energy, logistics and other non-ferrous industries. Investors should specifically consider the factors identified in this Base Prospectus, which could cause actual results to differ, before making an investment decision. Subject to the requirements of the Prospectus Rules, the Disclosure and
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Transparency Rules and the Listing Rules, none of the Issuer and the Guarantors undertakes any obligation publicly to release the result of any revisions to any forward-looking statements in this Base Prospectus that may occur due to any change in the Issuer’s and/or a Guarantor’s expectations or to reflect events or circumstances after the date of this Base Prospectus.
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ENFORCEABILITY OF LIABILITIES AND SERVICE OF PROCESS
The Issuer is a public limited company incorporated in England and Wales. Each of the Guarantors is organised under the laws of the Republic of Kazakhstan. It may not be possible to enforce against the Issuer, the Guarantors or any of their respective directors and officers, in Kazakhstan’s courts, judgments obtained in jurisdictions other than Kazakhstan, including judgments obtained in respect of the Notes or the Trust Deed in the courts of England and Wales.
The Notes and the Trust Deed are governed by the laws of England and Wales. Subject to the right of the Trustee, any Noteholder, any Receiptholder or any Couponholder to require a dispute arising out of or in connection with the Notes and/or the Trust Deed (a Dispute) to be heard in a court of law pursuant to Condition 18.3 of the “Terms and Conditions of the Notes”, any Dispute arising out of or in connection with the Notes and/or the Trust Deed shall be referred to and finally resolved by arbitration in accordance with the Arbitration Rules of The London Court of International Arbitration, all as more fully described in Condition 18 of the “Terms and Conditions of the Notes”.
Each of Kazakhstan and the United Kingdom is a party to the 1958 New York Convention on Recognition and Enforcement of Arbitral Awards (the Convention) and, accordingly, an arbitral award under the Convention should generally be recognised and enforceable in Kazakhstan provided the conditions to enforcement set out in the Convention are met. The Law on International Commercial Arbitration (the Arbitration Law) was adopted by the Parliament of Kazakhstan (the Parliament) on 28 December 2004. The Arbitration Law is intended to resolve uncertainty created by prior decisions of the Constitutional Council of Kazakhstan regarding enforcement of the Convention in Kazakhstan that were effective 15 February 2002 and 12 April 2002 and were cancelled by the Constitutional Council in February 2008. The Arbitration Law provides clear statutory guidelines for the enforcement of arbitral awards under the conditions set forth in the Convention. The Parliament is currently considering draft legislation seeking to provide for certain immunities to the Government of the Republic of Kazakhstan in the context of arbitration and foreign court judgments. It is not clear whether and to what extent companies, such as the Issuer and the Guarantors, which are partially owned by the Government of the Republic of Kazakhstan would be covered by such draft legislation, were it to come into effect
In the event that the Trustee, any Noteholder, any Receiptholder or any Couponholder requires a Dispute to be heard in a court of law pursuant to Condition 18.3 of the “Terms and Conditions of the Notes”, the Issuer and the Guarantors have agreed that the courts of England are to have exclusive jurisdiction to settle any Dispute. Kazakhstan’s courts will not enforce any judgment obtained in a court established in a country other than Kazakhstan unless there is in effect a treaty between such country and Kazakhstan providing for reciprocal enforcement of judgments and then only in accordance with the terms of such treaty. There is no such treaty in effect between Kazakhstan and the United Kingdom.
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DOCUMENTS INCORPORATED BY REFERENCE A9.11.1 A9.11.2 The following information (the Information Incorporated by Reference) shall be incorporated in, and form part of, this Base Prospectus:
(a) the audited consolidated financial statements of the Issuer (together, in each case, with the audit report thereon) as at, and for the financial year ended, 31 December 2008 and 2009 (set out on pages 69 to 116 and pages 57 to 109, respectively, of the 2008 and 2009 annual reports of the Issuer which have been published and filed with the Financial Services Authority) (the Financial Statements);
(b) those sections of the Issuer’s annual report for the financial year ended 31 December 2009 filed with the Financial Services Authority (the Annual Report) set out in the cross-reference table below; and
(c) the Issuer’s May 2010 interim management statement and Q1 2010 production report dated 13 May 2010 (the Interim Management Statement) excluding:
(i) the section headed “Outlook for the Full Year” on page 1;
(ii) the quote from Felix J Vulis (Chief Executive Officer) beginning “We were pleased with our performance…” on pages 1 to 2; and
(iii) the section headed “Outlook” on pages 6 to 7.
Following the publication of this Base Prospectus a supplement may be prepared by the Issuer and approved by the UK Listing Authority in accordance with Article 16 of the Prospectus Directive. Statements contained in any such supplement (or contained in any document or information incorporated by reference therein) shall, to the extent applicable (whether expressly, by implication or otherwise), be deemed to modify or supersede statements contained in this Base Prospectus or in a document which contains Information Incorporated by Reference in this Base Prospectus. Any statement so modified or superseded shall not, except as so modified or superseded, constitute a part of this Base Prospectus.
Cross-reference table
The following table cross-references the pages of the Information Incorporated by Reference with the main heading required under Annex IX of the Prospectus Directive Regulation No. 2004/809/EC implementing the Prospectus Directive.
Item Item contents Reference
5. BUSINESS OVERVIEW
5.1 Principal Activities
5.1.1A brief description of the issuer’s principal See Annual Report, “Business Review – Risk activities stating the main categories of Management—” pages 14 to 19, “Business products sold and/or services performed. Review – Operating Review” pages 20 to 28, “Business Review – Financial Review” pages 29 to 35, “Business Review – Sustainability Review” pages 36 to 40, “Corporate Governance - Directors’ Report” pages 41 to 43, “Reserves – Independent Expert Ore Reserves Report” pages 115 to 121 and “Corporate Governance – Corporate Governance Report” pages 44 to 50.
5.1.2The basis for any statements in the registration See Annual Report, “Business Review – document made by the issuer regarding its Operating Review – Competitive Position” competitive position. pages 21, 23, 24 and 27.
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9. ADMINISTRATIVE, MANAGEMENT, AND SUPERVISORY BODIES
9.1Names, business addresses and functions in the See Annual Report “Group Overview – Board issuer of the following persons, and an of Directors” pages 4 and 5, and “Group indication of the principal activities performed Overview – Senior Management“ pages 10 by them outside the issuer where these are and 11. significant with respect to that issuer:
(a) members of the administrative, management or supervisory bodies;
(b) partners with unlimited liability, in the case of a limited partnership with a share capital. 10. MAJOR SHAREHOLDERS 10.1To the extent known to the issuer, state whether See Annual Report, “Corporate Governance – the issuer is directly or indirectly owned or Directors’ Report – Major Interests in Shares” controlled and by whom, and describe the page 42. nature of such control, and describe the measures in place to ensure that such control is not abused.
11. FINANCIAL INFORMATION CONCERNING THE ISSUER’S ASSETS AND LIABILITIES, FINANCIAL POSITION AND PROFITS AND LOSSES 11.1 Historical Financial Information Audited historical financial information See Financial Statements (included in the covering the latest 2 financial years (or such Issuer’s 2009 and 2008 annual reports on pages shorter period that the issuer has been in 57 to 109, and pages 69 to 116, respectively). operation), and the audit report in respect of For the 2009 balance sheet, income statement each year. Such financial information must be and accounting policies and explanatory notes, prepared according to Regulation (EC) No see pages 58 to 109 of the Financial Statements 1606/2002, or if not applicable to a Member (included in the Issuer’s 2009 annual report). State national accounting standards for issuers from the Community. For third country issuers, For the 2008 balance sheet, income statement such financial information must be prepared and accounting policies and explanatory notes, according to the international accounting see pages 70 to 116 of the Financial Statements standards adopted pursuant to the procedure of (included in the Issuer’s 2008 annual report). Article 3 of Regulation (EC) No 1606/2002 or to a third country’s national accounting standards equivalent to these standards.
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The most recent year’s historical financial information must be presented and prepared in a form consistent with that which will be adopted in the issuer’s next published annual financial statements having regard to accounting standards and policies and legislation applicable to such annual financial statements.
If the audited financial information is prepared according to national accounting standards, the financial information required under this heading must include at least the following: (a) balance sheet; (b) income statement; and (c) accounting policies and explanatory notes.
The historical annual financial information must be independently audited or reported on as to whether or not, for the purposes of the registration document, it gives a true and fair view, in accordance with auditing standards applicable in a Member State or an equivalent standard. 11.2 Financial Statements If the issuer prepares both own and See Financial Statements (included in the consolidated financial statements, include at Issuer’s 2009 and 2008 annual reports on pages least the consolidated financial statements in 57 to 109, and pages 69 to 116, respectively). the registration document.
11.3 Auditing of historical annual financial information
A statement that the historical financial See Financial Statements (included in the information has been audited. If audit reports Issuer’s 2009 and 2008 annual reports on pages on the historical financial information have 57 to 109 and 69 to 116, respectively). been refused by the statutory auditors or if they contain qualifications or disclaimers, such refusal or such qualifications or disclaimers must be reproduced in full and the reasons given. 11.4 Age of latest financial information The last year of audited financial information See Financial Statements (included in the may not be older than 18 months from the date Issuer’s 2009 annual report on pages 57 to 109). of the registration document. Copies of documents containing Information Incorporated by Reference can be obtained from the registered office of the Issuer and from the specified offices of the Paying Agent for the time being in London. The Issuer and the Guarantors will, in the event of any significant new factor, material mistake or inaccuracy relating to information included in this Base Prospectus which is capable of affecting the assessment of any Notes, prepare a supplement to this Base Prospectus or publish a new Base Prospectus for use in connection with any subsequent issue of Notes.
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FORM OF THE NOTES
Each Tranche of Notes will be in bearer form and will be initially issued in the form of a temporary global A12.4.1.4 note (a Temporary Global Note) or, if so specified in the applicable Final Terms, a permanent global note A13.4.4 (a Permanent Global Note and together with Temporary Global Notes, the Global Notes and each a Global Note) which, in either case, will be delivered on or prior to the original issue date of the Tranche to a common depositary (the Common Depositary) for, Euroclear Bank SA/NV (Euroclear) and Clearstream Banking, société anonyme (Clearstream, Luxembourg).
Whilst any Note is represented by a Temporary Global Note, payments of principal, interest (if any) and any other amount payable in respect of the Notes due prior to the Exchange Date (as defined below) will be made against presentation of the Temporary Global Note only to the extent that certification (in a form to be provided) to the effect that the beneficial owners of interests in such Note are not U.S. persons or persons who have purchased for resale to any U.S. person, as required by U.S. Treasury regulations, has been received by Euroclear and/or Clearstream, Luxembourg and Euroclear and/or Clearstream, Luxembourg, as applicable, has given a like certification (based on the certifications it has received) to the Agent.
On and after the date (the Exchange Date) which is 40 days after a Temporary Global Note is issued, interests in such Temporary Global Note will be exchangeable (free of charge) upon a request as described therein either for (a) interests in a Permanent Global Note of the same Series or (b) for definitive Notes of the same Series with, where applicable, receipts, interest coupons and talons attached (as indicated in the applicable Final Terms and subject, in the case of definitive Notes, to such notice period as is specified in the applicable Final Terms), in each case against certification of beneficial ownership as described above unless such certification has already been given. The holder of a Temporary Global Note will not be entitled to collect any payment of interest, principal or other amount due on or after the Exchange Date unless, upon due certification, exchange of the Temporary Global Note for an interest in a Permanent Global Note or for definitive Notes is improperly withheld or refused.
Payments of principal, interest (if any) or any other amounts on a Permanent Global Note will be made through Euroclear and/or Clearstream, Luxembourg against presentation or surrender (as the case may be) of the Permanent Global Note without any requirement for certification.
The applicable Final Terms will specify that a Permanent Global Note will be exchangeable (free of charge), in whole but not in part, for definitive Notes with, where applicable, receipts, interest coupons and talons attached upon either (a) not less than 60 days’ written notice from Euroclear and/or Clearstream, Luxembourg (acting on the instructions of any holder of an interest in such Permanent Global Note) to the Agent as described therein or (b) only upon the occurrence of an Exchange Event. For these purposes, Exchange Event means that (i) an Event of Default (as defined in Condition 9) has occurred and is continuing, (ii) the Issuer has been notified that both Euroclear and Clearstream, Luxembourg have been closed for business for a continuous period of 14 days (other than by reason of holiday, statutory or otherwise) or have announced an intention permanently to cease business or have in fact done so and no successor clearing system satisfactory to the Trustee is available or (iii) the Issuer has or will become subject to adverse tax consequences which would not be suffered were the Notes represented by the Permanent Global Note in definitive form and a certificate to such effect signed by two Directors of the Issuer is given to the Trustee. The Issuer will promptly give notice to Noteholders in accordance with Condition 13 if an Exchange Event occurs. In the event of the occurrence of an Exchange Event, Euroclear and/or Clearstream, Luxembourg (acting on the instructions of any holder of an interest in such Permanent Global Note) or the Trustee may give notice to the Agent requesting exchange and, in the event of the occurrence of an Exchange Event as described in (iii) above, the Issuer may also give notice to the Agent requesting exchange. Any such exchange shall occur not later than 45 days after the date of receipt of the first relevant notice by the Agent.
The following legend will appear on all Notes which have an original maturity of more than 365 days and on all receipts and interest coupons relating to such Notes:
“ANY UNITED STATES PERSON WHO HOLDS THIS OBLIGATION WILL BE SUBJECT TO LIMITATIONS UNDER THE UNITED STATES INCOME TAX LAWS, INCLUDING THE LIMITATIONS PROVIDED IN SECTIONS 165(j) AND 1287(a) OF THE INTERNAL REVENUE CODE.”
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The sections referred to provide that United States holders, with certain exceptions, will not be entitled to deduct any loss on Notes, receipts or interest coupons and will not be entitled to capital gains treatment of any gain on any sale, disposition, redemption or payment of principal in respect of such Notes, receipts or interest coupons.
Notes which are represented by a Global Note will only be transferable in accordance with the rules and procedures for the time being of Euroclear or Clearstream, Luxembourg, as the case may be.
Pursuant to the Agency Agreement (as defined under “Terms and Conditions of the Notes”), the Agent shall arrange that, where a further Tranche of Notes is issued which is intended to form a single Series with an existing Tranche of Notes, the Notes of such further Tranche shall be assigned a common code and ISIN which are different from the common code and ISIN assigned to Notes of any other Tranche of the same Series until at least the expiry of the distribution compliance period (as defined in Regulation S under the Securities Act) applicable to the Notes of such Tranche.
Any reference herein to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be deemed to include a reference to any additional or alternative clearing system specified in the applicable Final Terms or as may otherwise be approved by the Issuer, the Agent and the Trustee.
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APPLICABLE FINAL TERMS
Set out below is the form of Final Terms which will be completed for each Tranche of Notes issued under the Programme.
[Date]
EURASIAN NATURAL RESOURCES CORPORATION PLC
Issue of [Aggregate Nominal Amount of Tranche] [Title of Notes] A12.4.1.1 Guaranteed by A13.4.2
SOKOLOVSKO- SARBAISKOYE MINING AND PRODUCTION ASSOCIATION JSC and TRANSNATIONAL COMPANY KAZCHROME JSC
under the U.S.$3,000,000,000 Euro Medium Term Note Programme
PART A – CONTRACTUAL TERMS
Terms used herein shall be deemed to be defined as such for the purposes of the Conditions set forth in the Base Prospectus dated [date] which constitutes a base prospectus for the purposes of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive). This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive and must be read in conjunction with the Base Prospectus. Full information on the Issuer, the Guarantors and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus. The Base Prospectus is available for viewing [at [website]] [and] during normal business hours at [address] [and copies may be obtained from [address]].
[The following alternative language applies if the first tranche of an issue which is being increased was issued under a Base Prospectus with an earlier date.
Terms used herein shall be deemed to be defined as such for the purposes of the Conditions (the Conditions) set forth in the Base Prospectus dated [original date]. This document constitutes the Final Terms of the Notes described herein for the purposes of Article 5.4 of the Prospectus Directive (Directive 2003/71/EC) (the Prospectus Directive) and must be read in conjunction with the Base Prospectus dated [current date] which constitutes a base prospectus for the purposes of the Prospectus Directive, save in respect of the Conditions which are extracted from the Base Prospectus dated [original date] and are attached hereto. Full information on the Issuer, the Guarantors and the offer of the Notes is only available on the basis of the combination of these Final Terms and the Base Prospectus dated [current date] and [original date]. Copies of such Base Prospectus are available for viewing [at [website]] [and] during normal business hours at [address] [and copies may be obtained from [address]].
[Include whichever of the following apply or specify as “Not Applicable” (N/A). Note that the numbering should remain as set out below, even if “Not Applicable” is indicated for individual paragraphs or subparagraphs. Italics denote directions for completing the Final Terms.]
[When adding any other final terms or information consideration should be given as to whether such terms or information constitute “significant new factors” and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.]
If the Notes have a maturity of less than one year from the date of their issue, the minimum denomination must be £100,000 or its equivalent in any other currency.
1. (a) Issuer: Eurasian Natural Resources Corporation PLC
(b) Guarantors: Sokolovsko- Sarbaiskoye Mining and Production Association JSC and Transnational Kazchrome JSC
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2. (a) Series Number: [ ]
(b) Tranche Number: [ ]
(If fungible with an existing Series, details of that Series, including the date on which the Notes become fungible)
3. Specified Currency or Currencies: [ ] A12.4.1.5 A13.4.5 4. Aggregate Nominal Amount:
(a) Series: [ ] A13.4.1
(b) Tranche: [ ]
5. Issue Price: [ ] per cent. of the Aggregate Nominal Amount [plus accrued A12.5.3 interest from [insert date] (if applicable)]
6. (a) Specified Denominations: [ ]
(Note – where multiple denominations above €50,000 or equivalent are being used the following sample wording should be followed:
“€50,000 and integral multiples of €1,000 in excess thereof up to and including €99,000. No Notes in definitive form will be issued with a denomination above €99,000.”)
(N.B. If an issue of Notes is (i) NOT admitted to trading on an European Economic Area exchange; and (ii) only offered in the European Economic Area in circumstances where a prospectus is not required to be published under the Prospectus Directive the €50,000 minimum denomination is not required although the UK withholding tax position should be considered carefully in these circumstances.)
(b) Calculation Amount: [ ]
(If only one Specified Denomination, insert the Specified Denomination.
If more than one Specified Denomination, insert the highest common factor. Note: There must be a common factor in the case of two or more Specified Denominations.)
7. (a) Issue Date: [ ]
(b) Interest Commencement Date: [specify/Issue Date/Not Applicable]
(N.B. An Interest Commencement Date will not be relevant for certain Notes, for example Zero Coupon Notes.)
8. Maturity Date: [Fixed rate - specify date/ Floating rate - Interest Payment Date falling in or nearest to [specify month]]
9. Interest Basis: [[ ] per cent. Fixed Rate] [[LIBOR/EURIBOR] +/- [ ] per cent. Floating Rate] [Zero Coupon] [Index Linked Interest] [Dual Currency Interest]
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[specify other] (further particulars specified below)
10. Redemption/Payment Basis: [Redemption at par] [Index Linked Redemption] [Dual Currency Redemption] [Partly Paid] [Instalment] [specify other]
(N.B. If the Final Redemption Amount is other than 100 per cent. of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Directive Regulation will apply.)
11.Change of Interest Basis or [Specify details of any provision for change of Notes into Redemption/Payment Basis: another Interest Basis or Redemption/Payment Basis] 12. Put/Call Options: [Investor Put] [Issuer Call] [(further particulars specified below)]
13. (a) Status of the Notes: Senior
(b) Status of the Notes Guarantee: Senior
(c)[Date [Board] approval for [ ] [and [ ], respectively]] A12.4.1.8 issuance of Notes: A13.4.12 (N.B. Only relevant where Board (or similar) authorisation is required for the particular tranche of Notes)
14. Method of distribution: [Syndicated/Non-syndicated]
PROVISIONS RELATING TO INTEREST (IF ANY) PAYABLE A13.4.8
15. Fixed Rate Note Provisions [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
(a) Rate(s) of Interest: [ ] per cent. per annum [payable [annually/semi annually/quarterly/other (specify)] in arrear]
(If payable other than annually, consider amending Condition 4)
(b) Interest Payment Date(s): [[ ] in each year up to and including the Maturity Date]/[specify other]
(N.B. This will need to be amended in the case of long or short coupons)
(c)Fixed Coupon Amount(s): [ ] per Calculation Amount (Applicable to Notes in definitive form.)
(d)Broken Amount(s): [ ] per Calculation Amount, payable on the Interest Payment (Applicable to Notes in Date falling [in/on] [ ] definitive form.)
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(e) Day Count Fraction: [30/360 or Actual/Actual (ICMA) or [specify other]]
(f) [Determination Date(s): [ ] in each year
(Insert regular interest payment dates, ignoring issue date or maturity date in the case of a long or short first or last coupon N.B. This will need to be amended in the case of regular interest payment dates which are not of equal duration N.B. Only relevant where Day Count Fraction is Actual/Actual (ICMA))]
(g)Other terms relating to the [None/Give details] method of calculating interest for Fixed Rate Notes:
16. Floating Rate Note Provisions [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
(a)Specified Period(s)/Specified [ ] Interest Payment Dates: (b) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/Preceding Business Day Convention/[specify other]]
(c) Additional Business Centre(s): [ ]
(d)Manner in which the Rate of [Screen Rate Determination/ISDA Determination/specify Interest and Interest Amount other] is to be determined:
(e)Party responsible for [ ] calculating the Rate of Interest and Interest Amount (if not the Agent): (f) Screen Rate Determination: • Reference Rate: [ ] (Either LIBOR, EURIBOR or other, although additional information is required if other - including fallback provisions in the Agency Agreement) • Interest Determination [ ] Date(s): (Second London business day prior to the start of each Interest Period if LIBOR (other than Sterling or euro LIBOR), first day of each Interest Period if Sterling LIBOR and the second day on which the TARGET2 System is open prior to the start of each Interest Period if EURIBOR or euro LIBOR)
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• Relevant Screen Page: [ ] (In the case of EURIBOR, if not Reuters EURIBOR01 ensure it is a page which shows a composite rate or amend the fallback provisions appropriately)
(g) ISDA Determination: • Floating Rate Option: [ ] • Designated Maturity: [ ] • Reset Date: [ ] (h) Margin(s): [+/-] [ ] per cent. per annum
(i) Minimum Rate of Interest: [ ] per cent. per annum
(j) Maximum Rate of Interest: [ ] per cent. per annum
(k) Day Count Fraction: [Actual/Actual (ISDA) Actual/365 (Fixed) Actual/365 (Sterling) Actual/360 30/360 30E/360 30E/360 (ISDA) Other]
(See Condition 4 for alternatives)
(l)Fallback provisions, [ ] rounding provisions and any other terms relating to the method of calculating interest on Floating Rate Notes, if different from those set out in the Conditions: 17. Zero Coupon Note Provisions [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
(a) Accrual Yield: [ ] per cent. per annum
(b) Reference Price: [ ]
(c)Any other formula/basis of [ ] determining amount payable:
(d)Day Count Fraction in [Conditions 6.5 and 6.10 apply/specify other] relation to Early Redemption (Consider applicable day count fraction if not U.S. dollar Amounts and late payment: denominated)
18. Index Linked Interest Note Provisions [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
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(N.B. If the Final Redemption Amount is other than 100 per cent. of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Directive Regulation will apply.)
(a) Index/Formula: [give or annex details]
(b) Calculation Agent [give name (and, if the Notes are derivative securities to A12.5.4.5 which Annex XII of the Prospectus Directive Regulation applies, address)]
(c)Party responsible for [ ] calculating the Rate of Interest (if not the Calculation Agent) and Interest Amount (if not the Agent):
(d)Provisions for determining [need to include a description of market disruption or A12.4.2.3 Coupon where calculation by settlement disruption events and adjustment provisions] A12.4.2.4 reference to Index and/or Formula is impossible or impracticable:
(e)Specified Period(s)/Specified [ ] Interest Payment Dates: (f) Business Day Convention: [Floating Rate Convention/Following Business Day Convention/Modified Following Business Day Convention/ Preceding Business Day Convention/specify other]
(g) Additional Business Centre(s): [ ]
(h) Minimum Rate of Interest: [ ] per cent. per annum
(i) Maximum Rate of Interest: [ ] per cent. per annum
(j) Day Count Fraction: [ ]
19.Dual Currency Interest Note [Applicable/Not Applicable] Provisions (If not applicable, delete the remaining subparagraphs of this paragraph)
(N.B. If the Final Redemption Amount is other than 100 per cent. of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Directive Regulation will apply.)
(a)Rate of Exchange/method of [give or annex details] calculating Rate of Exchange:
(b)Party, if any, responsible for [ ] calculating the principal and/or interest due (if not the Agent):
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(c)Provisions applicable where [need to include a description of market disruption or A12.4.2.3 calculation by reference to settlement disruption events and adjustment provisions] A12.4.2.4 Rate of Exchange impossible or impracticable:
(d)Person at whose option [ ] Specified Currency(ies) is/are payable:
PROVISIONS RELATING TO REDEMPTION
20. Issuer Call: [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
(a) Optional Redemption Date(s): [ ]
(b)Optional Redemption [[ ] per Calculation Amount/specify other/see Appendix] Amount and method, if any, of calculation of such amount(s): (c) If redeemable in part:
(i)Minimum Redemption [ ] Amount:
(ii)Maximum [ ] Redemption Amount:
(d)Notice period (if other than [ ] as set out in the Conditions): (N.B. If setting notice periods which are different to those provided in the Conditions, the Issuer is advised to consider the practicalities of distribution of information through intermediaries, for example, clearing systems and custodians, as well as any other notice requirements which may apply, for example, as between the Issuer and the Agent or Trustee)
21. Investor Put: [Applicable/Not Applicable]
(If not applicable, delete the remaining subparagraphs of this paragraph)
(a) Optional Redemption Date(s): [ ]
(b)Optional Redemption [[ ] per Calculation Amount/specify other/see Appendix] Amount and method, if any, of calculation of such amount(s):
(c)Notice period (if other than [ ] as set out in the Conditions): (N.B. If setting notice periods which are different to those provided in the Conditions, the Issuer is advised to consider the practicalities of distribution of information through intermediaries, for example, clearing systems and
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custodians, as well as any other notice requirements which may apply, for example, as between the Issuer and the Agent or Trustee)
22. Final Redemption Amount: [[ ] per Calculation Amount/specify other/see Appendix]
(N.B. If the Final Redemption Amount is other than 100 per cent. of the nominal value the Notes will be derivative securities for the purposes of the Prospectus Directive and the requirements of Annex XII to the Prospectus Directive Regulation will apply.)
23.Early Redemption Amount payable [[ ] per Calculation Amount/specify other/see Appendix] on redemption for taxation reasons or on event of default and/or the method of calculating the same (if required or if different from that set out in Condition 6.5(a)):
GENERAL PROVISIONS APPLICABLE TO THE NOTES
24. Form of Notes: A12.4.1.4 A13.4.4 (a) [Temporary Global Note exchangeable for a Permanent Global Note which is exchangeable for Definitive Notes [on 60 days’ notice given at any time/only upon an Exchange Event]]
[Temporary Global Note exchangeable for Definitive Notes on and after the Exchange Date]
[Permanent Global Note exchangeable for Definitive Notes [on 60 days’ notice given at any time/only upon an Exchange Event]
(Ensure that this is consistent with the wording in the “Form of the Notes” section in the Base Prospectus and the Notes themselves. N.B. The exchange upon notice/at any time options should not be expressed to be applicable if the Specified Denomination of the Notes in paragraph 6 includes language substantially to the following effect: “€50,000 and integral multiples of €1,000 in excess thereof up to and including €99,000.” Furthermore, such Specified Denomination construction is not permitted in relation to any issue of Notes which is to be represented on issue by a Temporary Global Note exchangeable for Definitive Notes.)
25.Additional Financial Centre(s) or [Not Applicable/give details] other special provisions relating to (Note that this paragraph relates to the place of payment and Payment Days: not Interest Period end dates to which sub-paragraphs 16(c) and 18(g) relate)
26.Talons for future Coupons or [Yes/No. If yes, give details] Receipts to be attached to Definitive Notes (and dates on which such Talons mature):
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27.Details relating to Partly Paid [Not Applicable/give details. N.B. a new form of Temporary Notes: amount of each payment Global Note and/or Permanent Global Note may be required comprising the Issue Price and date for Partly Paid issues] on which each payment is to be made and consequences of failure to pay, including any right of the Issuer to forfeit the Notes and interest due on late payment: 28. Details relating to Instalment Notes:
(a) Instalment Amount(s): [Not Applicable/give details]
(b) Instalment Date(s): [Not Applicable/give details]
29. Redenomination applicable: Redenomination [not] applicable
(if Redenomination is applicable, specify the terms of the redenomination in an Annex to the Final Terms)
30. Other final terms: [Not Applicable/give details]
[(When adding any other final terms consideration should be given as to whether such terms constitute “significant new factors” and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.)]
(Consider including a term providing for tax certification if required to enable interest to be paid gross by issuers.)
DISTRIBUTION
31. (a)If syndicated, names of [Not Applicable/give names] A12.5.4.1 Managers: A12.5.4.3 (If the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies, include names of entities agreeing to underwrite the issue on a firm commitment basis and names of the entities agreeing to place the issue without a firm commitment or on a “best efforts” basis if such entities are not the same as the Managers.)
(b)Date of Subscription [ ] A12.5.4.4 Agreement: (The above is only relevant if the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies).
(c) Stabilising Manager(s) (if any): [Not Applicable/give name]
32.If non-syndicated, name of relevant [Not Applicable/give name] Dealer: 33. U.S. Selling Restrictions: [Reg. S Compliance Category; TEFRA D/TEFRA C/TEFRA not applicable]
34. Additional selling restrictions: [Not Applicable/give details]
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PURPOSE OF FINAL TERMS
These Final Terms comprise the final terms required for issue and admission to trading on [specify relevant regulated market (for example the Bourse de Luxembourg, the London Stock Exchange’s regulated market or the Regulated Market of the Irish Stock Exchange) and, if relevant listing on an official list (for example, the Official List of the UK Listing Authority)] of the Notes described herein pursuant to the U.S.$3,000,000,000 Euro Medium Term Note Programme of Eurasian Natural Resources Corporation PLC.
RESPONSIBILITY
The Issuer and the Guarantors accept responsibility for the information contained in these Final Terms. A12.1.1 [[Relevant third party information, for example in compliance with Annex XII to the Prospectus Directive A12.1.2 Regulation in relation to an index or its components] has been extracted from [specify source]. The Issuer A13.1.1 and the Guarantors confirm that such information has been accurately reproduced and that, so far as each of A12.7.4 them is aware and is able to ascertain from information published by [specify source], no facts have been A13.1.2 omitted which would render the reproduced information inaccurate or misleading.] A13.7.4
Signed on behalf of Eurasian Natural Resources Signed on behalf of Sokolovsko- Sarbaiskoye Corporation PLC: Mining and Production Association JSC and Transnational Kazchrome JSC:
By: ...... By: ...... Duly authorised Duly authorised
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PART B – OTHER INFORMATION
1. LISTING AND ADMISSION TO TRADING
(i)Listing and Admission to Application has been made by the Issuer (or on its behalf) for A12.6.1 trading the Notes to be admitted to trading on [specify relevant A13.5.1 regulated market (for example the Bourse de Luxembourg, the London Stock Exchange’s regulated market or the Regulated Market of the Irish Stock Exchange) and, if relevant, listing on an official list (for example, the Official List of the UK Listing Authority)] with effect from [ ].] [Not Applicable.]
(ii)Estimate of total expenses [ ] A13.6.1 related to admission to trading:
2. RATINGS
Ratings: The Notes to be issued have been rated: A13.7.5
[S & P: [ ]] [Moody’s: [ ]] [Fitch: [ ]] [[Other]: [ ]]
(The above disclosure should reflect the rating allocated to Notes of the type being issued under the Programme generally or, where the issue has been specifically rated, that rating.)
3. INTERESTS OF NATURAL AND LEGAL PERSONS INVOLVED IN THE ISSUE A12.3.1 A13.3 [Save for any fees payable to the [Managers/Dealers], so far as the Issuer is aware, no person involved in the issue of the Notes has an interest material to the offer. - Amend as appropriate if there are other interests]
[(When adding any other description, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.)]
4. REASONS FOR THE OFFER, ESTIMATED NET PROCEEDS AND TOTAL EXPENSES A12.3.2
[(i) Reasons for the offer [ ]
[(ii)] Estimated net proceeds: [ ]
[(iii)] Estimated total expenses: [ ]]
(N.B.: Delete unless the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies, in which case (i) above is required where the reasons for the offer are different from making profit and/or hedging certain risks and, where such reasons are inserted in (i), disclosure of net proceeds and total expenses at (ii) and (iii) above are also required.)]
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5. YIELD (Fixed Rate Notes only) A13.4.10 Indication of yield: [ ]
The yield is calculated at the Issue Date on the basis of the Issue Price. It is not an indication of future yield.
6. PERFORMANCE OF INDEX/FORMULA, EXPLANATION OF EFFECT ON VALUE OF A12.4.1.2 INVESTMENT AND ASSOCIATED RISKS AND OTHER INFORMATION CONCERNING A12.4.2.1 THE UNDERLYING (Index-linked Notes only)
[Need to include details of where past and future performance and volatility of the index/formula can A12.4.2.2 be obtained.] [Where the underlying is an index need to include the name of the index and a description if composed by the Issuer and if the index is not composed by the Issuer need to include details of where the information about the index can be obtained.] [Include other information concerning the underlying required by paragraph 4.2 of Annex XII of the Prospectus Directive Regulation.] [(When completing the above paragraphs, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.)] The Issuer [intends to provide post-issuance information [specify what information will be reported and where it can be obtained]] [does not intend to provide post-issuance information]. (N.B. This paragraph 6 only applies if the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies.)
7. PERFORMANCE OF RATE[S] OF EXCHANGE (Dual Currency Notes only) A12.4.1.2 A12.4.2.1 [Need to include details of where past and future performance and volatility of the relevant rates can A12.4.2.2 be obtained.] [(When completing this paragraph, consideration should be given as to whether such matters described constitute “significant new factors” and consequently trigger the need for a supplement to the Base Prospectus under Article 16 of the Prospectus Directive.)] (N.B. This paragraph 7 only applies if the Notes are derivative securities to which Annex XII of the Prospectus Directive Regulation applies.)
8. OPERATIONAL INFORMATION
(i) ISIN Code: [ ] A12.4.1.1 A13.4.2 (ii) Common Code: [ ]
(iii)Any clearing system(s) other [Not Applicable/give name(s) and number(s)] than Euroclear Bank SA/NV and Clearstream Banking, société anonyme and the relevant identification number(s):
(iv) Delivery: Delivery [against/free of] payment A12.5.4.2 A13.5.2 (v)Names and addresses of [ ] additional Paying Agent(s) (if any):
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TERMS AND CONDITIONS OF THE NOTES
The following are the Terms and Conditions of the Notes which will be incorporated by reference into each A12.4.1.7 Global Note (as defined below) and each definitive Note, in the latter case only if permitted by the relevant A13.4.7 stock exchange or other relevant authority (if any) and agreed by the Issuer and the relevant Dealer at the time of issue but, if not so permitted and agreed, such definitive Note will have endorsed thereon or attached thereto such Terms and Conditions. The applicable Final Terms in relation to any Tranche of Notes may specify other terms and conditions which shall, to the extent so specified or to the extent inconsistent with the following Terms and Conditions, replace or modify the following Terms and Conditions for the purpose of such Notes. The applicable Final Terms (or the relevant provisions thereof) will be endorsed upon, or attached to, each Global Note and definitive Note. Reference should be made to “Form of the Notes” for a description of the content of Final Terms which will specify which of such terms are to apply in relation to the relevant Notes.
This Note is one of a Series (as defined below) of Notes issued by Eurasian Natural Resources Corporation PLC (the Issuer) constituted by a Trust Deed (such Trust Deed as modified and/or supplemented and/or restated from time to time, the Trust Deed) dated 13 May 2010 made between the Issuer, Sokolovsko- Sarbaiskoye Mining and Production Association JSC and Transnational Company Kazchrome JSC as guarantors (each a Guarantor and together, the Guarantors and Deutsche Trustee Company Limited (the Trustee, which expression shall include any successor as Trustee). The terms “Guarantor” and “Guarantors” shall also (i) include any Restricted Subsidiary (as defined in Condition 3.13) which becomes a Guarantor pursuant to the provisions of Condition 3.6 or otherwise and (ii) exclude any Restricted Subsidiary (as defined in Condition 3.13) which has been released from its guarantee obligations pursuant to Condition 3.6.
References herein to the Notes shall be references to the Notes of this Series and shall mean:
(a) in relation to any Notes represented by a global Note (a Global Note), units of each Specified Denomination in the Specified Currency;
(b) any Global Note; and
(c) any definitive Notes issued in exchange for a Global Note.
The Notes, the Receipts (as defined below) and the Coupons (as defined below) have the benefit of an Agency Agreement (such Agency Agreement as amended and/or supplemented and/or restated from time to time, the Agency Agreement) dated 13 May 2010 and made between the Issuer, the Guarantors, the Trustee, Deutsche Bank AG, London Branch as issuing and principal paying agent and agent bank (the Agent, which expression shall include any successor agent) and the other paying agents named therein (together with the Agent, the Paying Agents, which expression shall include any additional or successor paying agents).
Interest bearing definitive Notes have interest coupons (Coupons) and, if indicated in the applicable Final Terms, talons for further Coupons (Talons) attached on issue. Any reference herein to Coupons or coupons shall, unless the context otherwise requires, be deemed to include a reference to Talons or talons. Definitive Notes repayable in instalments have receipts (Receipts) for the payment of the instalments of principal (other than the final instalment) attached on issue. Global Notes do not have Receipts, Coupons or Talons attached on issue.
The final terms for this Note (or the relevant provisions thereof) are set out in Part A of the Final Terms attached to or endorsed on this Note which supplement these Terms and Conditions (the Conditions) and may specify other terms and conditions which shall, to the extent so specified or to the extent inconsistent with the Conditions, replace or modify the Conditions for the purposes of this Note. References to the applicable Final Terms are to Part A of the Final Terms (or the relevant provisions thereof) attached to or endorsed on this Note.
The Trustee acts for the benefit of the holders for the time being of the Notes (the Noteholders, which A13.4.11 expression shall, in relation to any Notes represented by a Global Note, be construed as provided below), the holders of the Receipts (the Receiptholders) and the holders of the Coupons (the Couponholders, which
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expression shall, unless the context otherwise requires, include the holders of the Talons), in accordance with the provisions of the Trust Deed.
As used herein, Tranche means Notes which are identical in all respects (including as to listing and admission to trading) and Series means a Tranche of Notes together with any further Tranche or Tranches of Notes which are (a) expressed to be consolidated and form a single series and (b) identical in all respects (including as to listing and admission to trading) except for their respective Issue Dates, Interest Commencement Dates and/or Issue Prices.
Copies of the Trust Deed and the Agency Agreement are available for inspection during normal business hours at the registered office for the time being of the Trustee being at 13 May 2010 at Winchester House, 1 Great Winchester Street, London EC2N 2DB and at the specified office of each of the Paying Agents. Copies of the applicable Final Terms are available for viewing at the registered office of the Issuer and of the Agent and copies may be obtained from those offices save that, if this Note is neither admitted to trading on a regulated market in the European Economic Area nor offered in the European Economic Area in circumstances where a prospectus is required to be published under the Prospectus Directive, the applicable Final Terms will only be obtainable by a Noteholder holding one or more Notes and such Noteholder must produce evidence satisfactory to the Issuer, the Trustee and the relevant Paying Agent as to its holding of such Notes and identity. The Noteholders, the Receiptholders and the Couponholders are deemed to have notice of, and are entitled to the benefit of, all the provisions of the Trust Deed, the Agency Agreement and the applicable Final Terms which are applicable to them. The statements in the Conditions include summaries of, and are subject to, the detailed provisions of the Trust Deed and the Agency Agreement.
Words and expressions defined in the Trust Deed, the Agency Agreement or used in the applicable Final Terms shall have the same meanings where used in the Conditions unless the context otherwise requires or unless otherwise stated and provided that, in the event of inconsistency between the Trust Deed and the Agency Agreement, the Trust Deed will prevail and, in the event of inconsistency between the Trust Deed or the Agency Agreement and the applicable Final Terms, the applicable Final Terms will prevail.
1. FORM, DENOMINATION AND TITLE
The Notes are in bearer form and, in the case of definitive Notes, serially numbered, in the Specified A12.4.1.4 Currency and the Specified Denomination(s). Notes of one Specified Denomination may not be A13.4.4 exchanged for Notes of another Specified Denomination.
This Note may be a Fixed Rate Note, a Floating Rate Note, a Zero Coupon Note, an Index Linked Interest Note, a Dual Currency Interest Note or a combination of any of the foregoing, depending upon the Interest Basis shown in the applicable Final Terms.
This Note may be an Index Linked Redemption Note, an Instalment Note, a Dual Currency Redemption Note, a Partly Paid Note or a combination of any of the foregoing, depending upon the Redemption/Payment Basis shown in the applicable Final Terms.
Definitive Notes are issued with Coupons attached, unless they are Zero Coupon Notes in which case references to Coupons and Couponholders in the Conditions are not applicable.
Subject as set out below, title to the Notes, Receipts and Coupons will pass by delivery. The Issuer, the Guarantors, the Paying Agents and the Trustee will (except as otherwise required by law) deem and treat the bearer of any Note, Receipt or Coupon as the absolute owner thereof (whether or not overdue and notwithstanding any notice of ownership or writing thereon or notice of any previous loss or theft thereof) for all purposes but, in the case of any Global Note, without prejudice to the provisions set out in the next succeeding paragraph.
For so long as any of the Notes is represented by a Global Note held on behalf of Euroclear Bank SA/NV (Euroclear) and/or Clearstream Banking, société anonyme (Clearstream, Luxembourg), each person (other than Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear or of Clearstream, Luxembourg as the holder of a particular nominal amount of such Notes (in which regard any certificate or other document issued by Euroclear or Clearstream,
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Luxembourg as to the nominal amount of such Notes standing to the account of any person shall be conclusive and binding for all purposes save in the case of manifest error) shall be treated by the Issuer, the Guarantors, the Paying Agents and the Trustee as the holder of such nominal amount of such Notes for all purposes other than with respect to the payment of principal or interest on such nominal amount of such Notes, for which purpose the bearer of the relevant Global Note shall be treated by the Issuer, the Guarantors, any Paying Agent and the Trustee as the holder of such nominal amount of such Notes in accordance with and subject to the terms of the relevant Global Note and the expressions Noteholder and holder of Notes and related expressions shall be construed accordingly. In determining whether a particular person is entitled to a particular nominal amount of notes as aforesaid, the Trustee may rely on such evidence and/or information and/or certification as it shall, in its absolute discretion, think fit and, if it does so rely, such evidence and/or information and/or certification shall, in the absence of manifest error, be conclusive and binding on all concerned.
Notes which are represented by a Global Note will be transferable only in accordance with the rules A12.4.1.10 and procedures for the time being of Euroclear and Clearstream, Luxembourg, as the case may be. A13.4.14 References to Euroclear and/or Clearstream, Luxembourg shall, whenever the context so permits, be deemed to include a reference to any additional or alternative clearing system specified in the applicable Final Terms or as may otherwise be approved by the Issuer, the Agent and the Trustee.
2. STATUS OF THE NOTES, NOTES GUARANTEE AND STATUS OF THE NOTES A6.2 GUARANTEE A12.4.1.6 A13.4.6 2.1 Status of the Notes
The Notes and any relative Receipts and Coupons are direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Issuer and (subject as stated above) rank and will rank pari passu, without any preference among themselves, with all other outstanding unsecured and unsubordinated obligations of the Issuer, present and future, but, in the event of insolvency, only to the extent permitted by applicable laws relating to creditors’ rights.
2.2 Notes Guarantee and status of the Notes Guarantee
The payment of the principal and interest in respect of the Notes and all other moneys payable by the Issuer under or pursuant to the Trust Deed has been unconditionally and irrevocably guaranteed on a joint and several basis (save to the extent set out in paragraphs (b) and/or (c) of Condition 3.6) by the Guarantors (the Notes Guarantee) in the Trust Deed. The obligations of the Guarantors under the Notes Guarantee constitute direct, unconditional, unsubordinated and (subject to the provisions of Condition 3) unsecured obligations of the Guarantors and (subject as stated above) rank and will rank pari passu with all other outstanding unsecured and unsubordinated obligations of the Guarantors, present and future, but, in the event of insolvency, only to the extent permitted by applicable laws relating to creditors’ rights.
3. COVENANTS
3.1 Limitation on Indebtedness
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness; provided, however, that the Issuer or any Restricted Subsidiary that is a Guarantor may Incur Indebtedness if on the date of such Incurrence and after giving effect thereto, in accordance with the provisions set out in the definition of Consolidated Leverage Ratio, the Consolidated Leverage Ratio would be no greater than 3.5 to 1.0.
(b) The foregoing paragraph (a) of this Condition 3.1 will not prohibit the Incurrence of any of the following items of Indebtedness:
(i) Indebtedness of the Issuer or a Restricted Subsidiary Incurred pursuant to Credit Facilities (other than the Structured Trade Finance Facility and any Permitted
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Receivables Financing) in an aggregate amount at any one time outstanding not to exceed U.S.$500,000,000;
(ii) Indebtedness of the Issuer owed to and held by any Restricted Subsidiary or Indebtedness of a Restricted Subsidiary owed to and held by the Issuer or any other Restricted Subsidiary; provided, however, that (A) any subsequent issuance or transfer of any Capital Stock (or any other event) that results in any such Restricted Subsidiary ceasing to be a Restricted Subsidiary or any subsequent transfer of any such Indebtedness (except to the Issuer or a Restricted Subsidiary) shall be deemed, in each case, to constitute the Incurrence of such Indebtedness by the issuer thereof, (B) if the Issuer is the obligor on such Indebtedness and the lender with respect to such Indebtedness is not a Guarantor, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations with respect to the Notes and (C) if a Guarantor is the obligor on such Indebtedness and the lender with respect to such Indebtedness is not the Issuer, such Indebtedness is expressly subordinated to the prior payment in full in cash of all obligations of such Guarantor with respect to its Notes Guarantee, provided that such Indebtedness, in the case of subclauses (B) and (C), will only be required to be so subordinated to the extent that such subordination would not be prohibited by applicable law or regulation or order or decision of any central bank;
(iii) Indebtedness (A) represented by the Initial Notes and any Notes Guarantee with respect to such Initial Notes, (B) outstanding or Incurred pursuant to agreements entered into, and in the form existing, on the Programme Date (other than the Indebtedness described in clauses (i) and (ii) above and (x) below), (C) consisting of Refinancing Indebtedness Incurred in respect of any Indebtedness described in this clause (iii) (including Indebtedness that is Refinancing Indebtedness), clause (xi) of this paragraph (b) or the foregoing paragraph (a) and (D) consisting of Guarantees of or Liens securing any Indebtedness permitted by this Condition 3.1;
(iv) Indebtedness (A) in respect of performance bonds, bankers’ acceptances, letters of credit, completion guarantees and surety, environmental, reclamation, judgment, bid, completion or appeal bonds provided by the Issuer or a Restricted Subsidiary in the ordinary course of its business, and (B) under Interest Rate Agreements, Currency Agreements, Commodity Price Protection Agreements and any other Hedging Obligation entered into for bona fide hedging purposes (not for speculation) of the Issuer or any Restricted Subsidiary in the ordinary course of its business;
(v) Purchase Money Indebtedness and Capitalized Lease Obligations of the Issuer and the Restricted Subsidiaries in an aggregate amount not in excess of U.S.$300,000,000 or, if greater, 4.0 per cent. of Total Assets at any time outstanding;
(vi) Indebtedness (other than Indebtedness permitted to be Incurred pursuant to the foregoing paragraph (a) or any other clause of this paragraph (b)) of the Issuer and the Restricted Subsidiaries that are Guarantors in an aggregate amount on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause (vi) and then outstanding, will not exceed U.S.$250,000,000;
(vii) Indebtedness (other than Indebtedness permitted to be Incurred pursuant to any other clause of this paragraph (b)) of Restricted Subsidiaries that are not Guarantors in an aggregate amount on the date of Incurrence that, when added to all other Indebtedness Incurred pursuant to this clause (vii) and then outstanding, will not exceed U.S.$100,000,000;
(viii) Indebtedness arising from agreements of the Issuer or a Restricted Subsidiary providing for indemnification, adjustment of purchase price or similar obligations, in each case, Incurred in connection with the disposition of any business, assets or a Subsidiary of the Issuer or such Restricted Subsidiary, other than Guarantees of Indebtedness Incurred by
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any Person acquiring all or any portion of such business, assets or Subsidiary for the purpose of financing such acquisition; provided, however, that (A) such Indebtedness is not reflected on the balance sheet of the Issuer or any Restricted Subsidiary (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet will not be deemed to be reflected on such balance sheet for purposes of this subclause (A)) and (B) the maximum assumable liability in respect of all such Indebtedness shall at no time exceed the gross proceeds including non-cash proceeds (the Fair Market Value of such non-cash proceeds being measured at the time received and without giving effect to any subsequent changes in value) actually received by (or held in escrow for later release to) the Issuer and such Restricted Subsidiary in connection with such disposition;
(ix) Indebtedness of the Issuer or a Restricted Subsidiary arising from the honouring by a bank or other financial institution of a cheque, draft or similar instrument drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five Covenant Business Days of its Incurrence;
(x) Indebtedness Incurred pursuant to the Structured Trade Finance Facility or any Permitted Receivables Financing in an aggregate amount at any one time outstanding not to exceed U.S.$1,500,000,000;
(xi) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or prior to the date on which such Restricted Subsidiary was acquired by the Issuer or any other Restricted Subsidiary (other than Indebtedness Incurred in contemplation of, in connection with, as consideration in, or to provide all or any portion of the funds or credit support utilized to consummate, the transaction or series of related transactions pursuant to which such Restricted Subsidiary became a Subsidiary of, or was otherwise acquired by, the Issuer or any other Restricted Subsidiary); provided, however, that on the date that such Restricted Subsidiary is acquired by the Issuer or any other Restricted Subsidiary, either (A) the Issuer would have been able to Incur U.S.$1.00 of additional Indebtedness pursuant to paragraph (a) above or (B) the Consolidated Leverage Ratio would be equal to or greater than the Consolidated Leverage Ratio immediately prior to giving pro forma effect to such acquisition;
(xii) Indebtedness of the Issuer or a Restricted Subsidiary represented by letters of credit in order to provide security for workers’ compensation claims, claims arising under similar legislation, payment obligations in connection with self-insurance or similar requirements and loans and advances to employees in connection with their relocation, in each case in the ordinary course of business; and
(xiii) the Guarantee by the Issuer or any Restricted Subsidiary of Indebtedness of a Qualified Joint Venture in respect of performance, bid, completion or surety bonds issued by or on behalf of any Qualified Joint Venture in the ordinary course of business.
(c) Notwithstanding the foregoing, neither the Issuer nor any Guarantor may Incur any Indebtedness pursuant to paragraph (b) above if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations of the Issuer or any Guarantor unless such Indebtedness will be subordinated to the Notes or such Guarantor’s obligations under the Notes Guarantee on substantially the same terms, taken as a whole, as such Subordinated Obligations.
(d) For purposes of determining compliance with this Condition 3.1:
(i) the outstanding principal amount of any particular Indebtedness shall be counted only once and any obligations arising under any guarantee, Lien, letter of credit or similar instrument supporting such Indebtedness shall not be double counted;
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(ii) Indebtedness permitted by this Condition 3.1 need not be permitted solely by reference to one provision permitting such Indebtedness but may be permitted in part by one such provision and in part by one or more other provisions of this Condition 3.1 permitting such Indebtedness; and
(iii) in the event that any item of Indebtedness meets the criteria of more than one of the types of Indebtedness described in this Condition 3.1, the Issuer will be permitted, in its sole discretion, to divide, classify or reclassify all or a portion of such item of Indebtedness and only be required to include the amount of such Indebtedness in one of such clauses; provided, that all Indebtedness outstanding or available pursuant to the Credit Facilities on the Programme Date will be treated as Incurred as of the Programme Date under clause (i) of paragraph (b) above and, provided further, that all Indebtedness Incurred or available pursuant to the Structured Trade Finance Facility prior to or on the Programme Date shall be treated as Incurred pursuant to clause (x) of paragraph (b) above.
(e) For purposes of determining compliance with any U.S. dollar denominated restriction on the Incurrence of Indebtedness where the Indebtedness Incurred is denominated in a different currency, the amount of such Indebtedness will be the U.S. Dollar Equivalent determined on the date of the Incurrence of such Indebtedness; provided, however, that if any such Indebtedness denominated in a different currency is subject to a Currency Agreement with respect to U.S. dollars covering all principal, premium, if any, and interest payable on such Indebtedness, the amount of such Indebtedness expressed in U.S. dollars will be as provided in such Currency Agreement. The principal amount of any Refinancing Indebtedness Incurred in the same currency as the Indebtedness being Refinanced will be the U.S. Dollar Equivalent of the Indebtedness Refinanced, except to the extent that (1) such U.S. Dollar Equivalent was determined based on a Currency Agreement, in which case the Refinancing Indebtedness will be determined in accordance with the preceding sentence, and (2) the principal amount of the Refinancing Indebtedness exceeds the principal amount of the Indebtedness being Refinanced, in which case the U.S. Dollar Equivalent of such excess, as appropriate, will be determined on the date such Refinancing Indebtedness is Incurred. Notwithstanding any other provision of this Condition 3.1, the maximum amount of Indebtedness that the Issuer or any Restricted Subsidiary may Incur pursuant to this Condition 3.1 shall not be deemed to be exceeded solely as a result of fluctuations in exchange rates, commodity prices or currency values.
3.2 Investments in Unrestricted Subsidiaries
The Issuer will not, and will not permit any Restricted Subsidiary to make, directly or indirectly, any Investment in an Unrestricted Subsidiary other than Investments having a Fair Market Value (measured on the date each such Investment was made and without giving effect to subsequent changes in value), when taken together with all other Investments made pursuant to this Condition 3.2 since the Programme Date that are outstanding, not to exceed U.S.$100,000,000.
3.3 Limitation on sales of assets and subsidiary stock
(a) The Issuer will not, and will not permit any Restricted Subsidiary to, make any Asset Disposition unless:
(i) the Issuer or such Restricted Subsidiary receives consideration (including by way of relief from, or by any other Person assuming sole responsibility for, any liabilities, contingent or otherwise) at the time of such Asset Disposition at least equal to the Fair Market Value of the shares and assets subject to such Asset Disposition;
(ii) except in the case of a Permitted Asset Swap, at least 75 per cent. of the consideration thereof received by the Issuer or such Restricted Subsidiary is in the form of cash or Cash Equivalents; provided, that, for purposes of this provision, each of the following will be deemed to be cash: (i) any liabilities, as shown on the Issuer’s or such Restricted Subsidiary’s most recent internal balance sheet (other than contingent liabilities,
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liabilities that are by their terms subordinated to the Notes and liabilities to the extent owned by the Issuer or any Restricted Subsidiary), that are assumed by the transferee of any such assets (or a third party on behalf of the transferee) and for which the Issuer or such Restricted Subsidiary has been released by all creditors and (ii) any securities, notes or other obligations or assets received by the Issuer or any such Restricted Subsidiary from such transferee that are converted by the Issuer or such Restricted Subsidiary into cash or Cash Equivalents, to the extent of the cash or Cash Equivalents received in that conversion, within 120 days following the closing of the Asset Disposition; and
(iii) an amount equal to 100 per cent. of the Net Available Cash from such Asset Disposition is applied by the Issuer (or such Restricted Subsidiary, as the case may be):
(A) to the extent the Issuer elects (or is required by the terms of any Indebtedness), to prepay, repay, purchase, repurchase, redeem, retire, defease or otherwise acquire for value Senior Indebtedness of the Issuer or any Guarantor or Indebtedness (other than obligations in respect of Preferred Stock) of a Restricted Subsidiary that is not a Guarantor (in each case, other than Indebtedness owed to the Issuer or an Affiliate of the Issuer and other than obligations in respect of Disqualified Stock) within 365 days after the date of such Asset Disposition or, if later, the receipt of such Net Available Cash;
(B) to the extent the Issuer or such Restricted Subsidiary elects, to reinvest in Additional Assets (including by means of an Investment in Additional Assets by a Restricted Subsidiary with Net Available Cash received by the Issuer or another Restricted Subsidiary) within 365 days from such Asset Disposition or, if later, the receipt of such Net Available Cash (provided that any Net Available Cash that the Issuer or any Restricted Subsidiary has committed to invest within such 365- day period may be invested in Additional Assets within one year of the end of such period);
(C) to the extent of the balance of such Net Available Cash after application in accordance with clauses (A) and (B), to make an Asset Disposition Offer (as defined in paragraph (b) of this Condition 3.3) to purchase Notes and to make, on a rateable basis, a Programme Notes Asset Disposition Offer (as defined in paragraph (b) of this Condition 3.3) to purchase notes of any other Series issued under the Programme which remain outstanding at such time (each such Series of notes being Programme Notes), in each case pursuant to and subject to the conditions set forth in paragraphs (b) and (c) of this Condition 3.3; provided, however, that if the Issuer elects (or is required by the terms of any other Senior Indebtedness), it may or (if so required) will make an offer (a Senior Indebtedness Offer) on equivalent terms to such Asset Disposition Offer and any such Programme Notes Asset Disposition Offer to prepay, repay or purchase (as the case may be) such Senior Indebtedness of the Issuer or a Guarantor on a rateable basis with such Notes and any such Programme Notes; and
(D) to the extent of the balance of such Net Available Cash after application in accordance with clauses (A), (B) and (C), for any general corporate purpose;
provided, however, that in connection with any prepayment, repayment, purchase, repurchase, redemption, retirement, defeasance or other acquisition for value of Indebtedness pursuant to subclause (A) or (C) above, the Issuer or such Restricted Subsidiary will retire such Indebtedness and will cause the related loan commitment (if any) to be permanently reduced in an amount equal to the principal amount so prepaid, repaid, purchased, repurchased, redeemed, retired, defeased or otherwise acquired for value.
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Pending application of Net Available Cash pursuant to this Condition 3.3, such Net Available Cash shall be invested in Cash Equivalents or applied to reduce temporarily revolving credit indebtedness of the Issuer or any Restricted Subsidiary.
(b) In the event of an Asset Disposition that requires the purchase of Notes (and, if applicable, on a rateable basis, any such Programme Notes and any such other Senior Indebtedness of the Issuer or a Guarantor) pursuant to subclause (a)(iii)(C) of this Condition 3.3, the Issuer will be required:
(i) to purchase the Notes tendered pursuant to an offer by the Issuer for such Notes (the Asset Disposition Offer) at a purchase price of 100 per cent. of their nominal amount together (if appropriate) with interest accrued to (but excluding) the date of purchase (or if this Note is a Zero Coupon Note, 100 per cent. of the Condition 3 Amortised Face Amount with respect to each Note);
(ii) if applicable, to purchase the Programme Notes which have been tendered pursuant to an offer by the Issuer for such Programme Notes (such offer with respect to such Programme Notes being a Programme Notes Asset Disposition Offer) at a purchase price of 100 per cent. of their nominal amount together (if appropriate) with interest accrued to (but excluding) the date of purchase (or if each Programme Note of such Series is a Zero Coupon Note, 100 per cent. of the Condition 3 Amortised Face Amount with respect to such Programme Note); and
(iii) if applicable, to prepay, repay or purchase (as the case may be) other Senior Indebtedness of the Issuer or a Guarantor on the terms and to the extent contemplated thereby (provided, that in no event shall the Issuer offer to prepay, repay or purchase (as the case may be) such other Senior Indebtedness of the Issuer or a Guarantor at a purchase price in excess of 100 per cent. of its principal amount (or to the extent that such other Senior Indebtedness was issued with significant original issue discount, 100 per cent. of the accreted value thereof)), together with unpaid interest accrued thereon,
in any such case in accordance with the procedures set forth under paragraph (c) below and the provisions of this Condition 3.3.
(c) Each:
(i) Asset Disposition Offer shall be made to all Noteholders;
(ii) related Programme Notes Asset Disposition Offer shall be made to all holders of the relevant Programme Notes; and
(iii) related Senior Indebtedness Offer shall be made to all holders (or lenders) of the relevant other Senior Indebtedness.
Each Asset Disposition Offer, related Programme Notes Asset Disposition Offer and Senior Indebtedness Offer will remain open for a period of at least 20 Business Days following its commencement and not more than 30 Business Days, except to the extent that a longer period is required by applicable law (the Offer Period). No later than five Business Days after the termination of the Offer Period (the Asset Disposition Purchase Date), the Issuer will apply all Net Available Cash to prepay, repay or purchase (as the case may be) the Notes and, if applicable, such Programme Notes and such Senior Indebtedness.
If the aggregate purchase price of (A) the Notes tendered by Noteholders pursuant to the Asset Disposition Offer, (B) the Programme Notes tendered by holders thereof pursuant to each Programme Notes Asset Disposition Offer and (C) such Senior Indebtedness exceeds the Net Available Cash allotted to the purchase of such Notes (and such other Programme Notes and such Senior Indebtedness), the Net Available Cash shall be applied rateably to the Notes (and such Programme Notes and such Senior Indebtedness) and, in the case of the Notes, the Issuer will select the Notes to be purchased pursuant to the Asset Disposition Offer in accordance with
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the following procedures. In such circumstances, the Notes to be purchased (the Purchased Notes) will be selected individually by lot, in the case of Purchased Notes represented by definitive Notes and held outside of Euroclear and Clearstream, Luxembourg, and in accordance with the rules of Euroclear and/or Clearstream, Luxembourg, in the case of Purchased Notes represented by a Global Note or in the case of Purchased Notes represented by definitive Notes held through Euroclear or Clearstream, Luxembourg, not more than 30 days prior to the date fixed for purchase (such date of selection being hereinafter called the Purchase Selection Date). In the case of Purchased Notes represented by definitive Notes, a list of the serial numbers of such Purchased Notes will be published in accordance with Condition 13 not less than 15 days prior to the date fixed for purchase. No exchange of the relevant Global Note will be permitted during the period from (and including) the Purchase Selection Date to (and including) the date fixed for purchase pursuant to this Condition 3.3 and notice to that effect shall be given by the Issuer to the Noteholders in accordance with Condition 13 at least five days prior to the Purchase Selection Date.
If the aggregate purchase price of (x) the Notes tendered by Noteholders pursuant to the Asset Disposition Offer, (y) the Programme Notes tendered by holders thereof pursuant to each Programme Notes Asset Disposition Offer and (z) such Senior Indebtedness is less than the Net Available Cash allotted to the prepayment, repayment or purchase (as the case may be) of such Notes (and such other Programme Notes and such Senior Indebtedness), the Issuer will apply the remaining Net Available Cash in accordance with subclause (a)(iii)(D) of this Condition 3.3.
The Issuer will not be required to make an Asset Disposition Offer to purchase Notes pursuant to this Condition 3.3 if the Net Available Cash available therefor, for any Programme Notes Asset Disposition Offer and for any Senior Indebtedness Offer (after application of the proceeds as provided in clauses (a)(iii)(A) and (B)) is less than U.S.$50,000,000 for any particular Asset Disposition (which lesser amount will be carried forward for purposes of determining whether an Asset Disposition Offer (and, if applicable, Programme Notes Asset Disposition Offer and Senior Indebtedness Offer) is required with respect to the Net Available Cash from any subsequent Asset Disposition).
(d) The Issuer will comply, to the extent applicable, with the requirements of any securities laws or regulations in connection with the repurchase of Notes pursuant to this Condition 3.3. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Condition 3.3, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Condition 3.3 by virtue thereof.
3.4 Limitation on liens
The Issuer will not, and will not permit any Restricted Subsidiary, to create, Incur or otherwise permit to exist any Lien of any kind securing Indebtedness (other than Permitted Liens) with respect to any of their property or assets, now owned or hereafter acquired, unless, in any such case, the Issuer and/or the relevant Restricted Subsidiary, as the case may be, shall simultaneously with, or prior to, the creation or Incurrence of such Lien promptly take any and all action necessary to procure that all payments due under the Trust Deed and the Notes are secured by a Lien (the Initial Lien) to the satisfaction of the Trustee on such property or assets on an equal and rateable basis with the obligations so secured (or, in the case of Indebtedness subordinated to the Notes and any relative Receipts and Coupons or the Notes Guarantee, senior in priority thereto, with the same relative priority as the Notes and any relative Receipt and Coupons will have with respect to such subordinated Indebtedness) until such time as such obligations are no longer secured by a Lien.
Any Lien created for the benefit of the Trustee and the holders of the Notes pursuant to the preceding sentence shall provide by its terms that such Lien shall be automatically and unconditionally released and discharged upon (i) the release and discharge of the Initial Lien, (ii) the sale or other disposition of the assets subject to such Initial Lien (or the sale or other disposition of the Person that owns such
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assets) in compliance with the Conditions, (iii) the designation of a Restricted Subsidiary whose property or assets secure such Initial Lien as an Unrestricted Subsidiary in accordance with the terms of the Trust Deed, or (iv) the full and final payment of all amounts payable by the Issuer and the Guarantors under the Notes, the Trust Deed and the Notes Guarantee (as applicable).
3.5 Transactions with affiliates
The Issuer will not, and will not permit any Restricted Subsidiary to, directly or indirectly, make any payment to, or sell, lease, transfer, exchange or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make or amend any transaction or series of transactions, contract, agreement, understanding, loan, advance or Guarantee with, or for the benefit of, any Affiliate, officer or director of the Issuer or a Restricted Subsidiary (each an Affiliate Transaction) unless:
(a) such Affiliate Transaction is on terms that are not materially less favourable to the Issuer or such Restricted Subsidiary than those that would have been obtained in a comparable arm’s length transaction by the Issuer or such Restricted Subsidiary with an unrelated Person; and
(b) the Issuer delivers to the Trustee:
(i) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of U.S.$10,000,000, a resolution of the Board of Directors set forth in an Officers’ Certificate certifying that such Affiliate Transaction or series of related Affiliate Transactions complies with this Condition 3.5 and that such Affiliate Transaction or series of related Affiliate Transactions has been approved by a majority of the disinterested members of the Board of Directors (or, in the event that there is only one disinterested member of the Board of Directors, by the resolution of such disinterested member); and
(ii) with respect to any Affiliate Transaction or series of related Affiliate Transactions involving aggregate consideration in excess of U.S.$25,000,000, an opinion issued by an independent accounting, appraisal or investment banking firm of international standing stating that the transaction or series of transactions is fair to the Issuer or such Restricted Subsidiary from a financial point of view or is not materially less favourable to the Issuer and the Restricted Subsidiaries than could reasonably be expected to be obtained at the time in an arm’s length transaction with an unrelated Person;
provided, however, that the Issuer will not be required to comply with this paragraph (b) with respect to any transaction that complies with, or is exempt from, the requirements contained in Chapter 11 of the Listing Rules of the UK Financial Services Authority (the Listing Rules) or any successor rules thereto for so long as the Issuer has a “primary listing” for any class of its “equity securities” (as such terms are defined in the Listing Rules).
(c) The following items shall be deemed not to be Affiliate Transactions and, therefore, will not be subject to the provisions of the paragraphs (a) and (b) above:
(i) any employment agreement entered into by the Issuer or any Restricted Subsidiary in the ordinary course of business of the Issuer or such Restricted Subsidiary and payment of any employee salaries, bonuses, consulting fees and employee benefits;
(ii) transactions between or among the Issuer and/or one or more of the Restricted Subsidiaries;
(iii) transactions with a Person that is an Affiliate of the Issuer solely because the Issuer owns Capital Stock in such Person; provided, that such transactions are on terms that are not materially less favourable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable arm’s length transaction by the Issuer or such Restricted Subsidiary with an unrelated Person;
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(iv) payment of reasonable directors’ fees and directors’ and officers’ insurance premiums and indemnification and similar arrangements in the ordinary course of business;
(v) sales of Capital Stock of the Issuer, other than Disqualified Stock;
(vi) loans and advances or Guarantees (but not any forgiveness of such loans or advances) to the Issuer’s or the relevant Restricted Subsidiary’s officers, directors and employees in the ordinary course of business;
(vii) the issuance of securities or other payments, award or grants in cash, securities or similar transfers pursuant to, or for the purpose of funding, employment arrangements and deferred compensation, retirement, savings, stock options, stock ownership and insurance plans, as long as the terms thereof are or have been previously approved by the Board of Directors;
(viii) any payments or other transactions pursuant to a tax-sharing agreement or arrangement among the Issuer and any of its Subsidiaries or other Persons with whom the Issuer or any of its Subsidiaries files a consolidated tax return or with which the Issuer or any of its Subsidiaries is or could be part of a group for tax purposes or any tax advantageous group contribution made pursuant to applicable legislation; provided, however, that any such tax-sharing agreement or arrangement and any payment pursuant thereto does not permit or require payments in excess of the amounts of tax that would be payable by the Issuer and the Restricted Subsidiaries on a stand-alone basis;
(ix) transactions with customers, suppliers contractors, joint venture partners or purchasers or sellers of goods and services, in each case entered into in the ordinary course of business and otherwise in compliance with the Conditions, and which are fair to the Issuer and the Restricted Subsidiaries in the reasonable determination of the Board of Directors or senior management of the Issuer or are on terms not materially less favourable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Restricted Subsidiary with an unrelated Person;
(x) any transaction effected in connection with a Permitted Receivables Financing;
(xi) transactions with Affiliates solely in their capacity as holders of Indebtedness or Capital Stock of the Issuer or any Restricted Subsidiary where such Affiliates are treated not materially more favourably than holders of Indebtedness or Capital Stock of the Issuer or any Restricted Subsidiary that are not Affiliates;
(xii) transactions with Qualified Joint Ventures entered into in the ordinary course of business and otherwise in compliance with the Conditions, and which are fair to the Issuer and the Restricted Subsidiaries in the reasonable determination of the Board of Directors or senior management of the Issuer or are on terms not materially less favourable to the Issuer or the relevant Restricted Subsidiary than those that would have been obtained in a comparable transaction by the Issuer or such Restricted Subsidiary with an unrelated Person;
(xiii) any agreement as in effect on the Programme Date, including pursuant to any amendment, modification, supplement, extension, renewal or refinancing thereto, in any replacement agreement or arrangement thereto so long as any such amendment, modification, supplement, extension, renewal, refinancing or replacement agreement or arrangement is not more disadvantageous to the Issuer and/or the Restricted Subsidiaries, as the case may be, in any material respect than the original agreement as in effect on the Programme Date; and
(xiv) any consolidation, merger, conveyance, transfer or lease permitted pursuant to Condition 3.7.
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3.6 Limitation on issuances of Guarantees of Indebtedness
(a) The Issuer will not cause or permit any Restricted Subsidiary that is not a Guarantor, directly or indirectly, to Guarantee, assume, or in any manner become liable with respect to, any other Indebtedness of the Issuer or a Guarantor unless, prior thereto, such Restricted Subsidiary becomes a Note Guarantor by executing and delivering a supplemental trust deed to the Trustee, such supplemental trust deed to be in a form and with substance satisfactory to the Trustee, and accompanied by such Opinion(s) of Counsel as the Trustee shall require, and pursuant to which such Restricted Subsidiary shall Guarantee the obligations of the Issuer in respect of the Notes and the Trust Deed, subject, in any case, as set out in paragraphs (b) and (c) below, on terms mutatis mutandis as the Notes Guarantee including, but not limited to, such guarantee being joint and several. The Issuer shall also ensure that such Guarantee ranks senior to, or pari passu with, such Restricted Subsidiary’s Guarantee of such other Indebtedness.
(b) Each additional Guarantee will be limited as necessary to recognise certain defences generally available to guarantors (including those that relate to fraudulent conveyance or transfer, voidable preference, financial assistance, corporate purpose, capital maintenance or similar laws, regulations or defenses affecting the rights of creditors generally) or other considerations under applicable law.
(c) Notwithstanding the foregoing, the Issuer shall not be obligated to cause such Restricted Subsidiary to Guarantee the Notes to the extent that such Guarantee by such Restricted Subsidiary would reasonably be expected to give rise to, or result in, a violation of applicable law which, in any case, cannot be prevented or otherwise avoided through measures reasonably available to the Issuer or such Restricted Subsidiary or any liability for the officers, directors or shareholders of such Restricted Subsidiary.
(d) The Issuer may, by delivering an Officers’ Certificate to the Trustee, request that an additional Guarantor cease to be a Guarantor if such Guarantor is no longer providing a Guarantee in respect of any Indebtedness of the Issuer or a Guarantor. Upon the Trustee’s receipt of such Officer’s Certificate, such Guarantor shall automatically and irrevocably be released and relieved of any obligation under the Notes Guarantee. Such Officer’s Certificate must also contain the following certifications:
(i) no Event of Default is continuing or will result from the release of such Guarantor; and
(ii) such Guarantor is not (or will cease to be simultaneously with such release) providing a Guarantee in respect of any other Indebtedness of the Issuer or a Guarantor.
For the avoidance of doubt, if a Restricted Subsidiary which has ceased to be a Guarantor pursuant to the provisions of this paragraph (d) subsequently provides a Guarantee in respect of any other Indebtedness of the Issuer or a Guarantor at any time subsequent to the date on which it is released from the Notes Guarantee as described above, such Restricted Subsidiary will be required to become a Note Guarantor as described in paragraph (a) above.
3.7 Merger and consolidation
(a) The Issuer will not amalgamate, consolidate or enter into a statutory plan of arrangement with or merge with or into, or convey, directly or indirectly transfer or lease all or substantially all its assets to, any Person, unless:
(i) either (A) the Issuer will be the surviving corporation or (B) the Successor Person to the Issuer (the Successor Issuer) will be a corporation organized and existing under the laws of the United Kingdom, another member of the European Union, Switzerland, the British Virgin Islands, Jersey, Guernsey or Kazakhstan and the Successor Issuer (if not the Issuer) expressly assumes, by a supplemental trust deed, executed and delivered to the Trustee, in form and with substance satisfactory to the Trustee, all the obligations of the Issuer under the Notes and the Trust Deed;
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(ii) immediately after giving effect to such transaction (and treating any Indebtedness which becomes an obligation of the Successor Issuer or any Restricted Subsidiary as a result of such transaction as having been Incurred by the Successor Issuer or such Restricted Subsidiary at the time of such transaction), no Default shall have occurred and be continuing;
(iii) either (A) immediately after giving effect to such transaction, the Issuer or the Successor Issuer would be able to Incur an additional U.S.$1.00 of Indebtedness under paragraph (a) of Condition 3.1 or (B) the Consolidated Leverage Ratio would be equal to or greater than the Consolidated Leverage Ratio immediately prior to giving pro forma effect to such transaction;
(iv) each Guarantor, unless such Guarantor is the Person with which the Issuer has entered into a transaction under this Condition 3.7, will have in the supplemental trust deed confirmed that its obligations under the Notes Guarantee will apply to the obligations of the Issuer or the Successor Issuer in accordance with the Notes and the Trust Deed; and
(v) the Issuer shall have delivered to the Trustee an Officers’ Certificate stating that such consolidation, amalgamation, statutory plan of arrangement, merger or transfer and such supplemental trust deed (if any) comply with the provisions hereof, and such Opinion(s) of Counsel as the Trustee shall require.
For purposes of this Condition 3.7, the sale, lease, conveyance, assignment, transfer or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Issuer, which properties and assets, if held by the Issuer instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Issuer on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Issuer.
The Successor Issuer will succeed to, and be substituted for, and may exercise every right and power of, the Issuer under the Trust Deed, but the predecessor Issuer in the case of a conveyance, transfer or lease of all or substantially all its assets will not be released from the obligation to pay the principal of and interest on the Notes.
(b) The Issuer will not permit any Guarantor (or any holding company of such Guarantor) to amalgamate, consolidate or enter into a statutory plan of arrangement with or merge with or into, or directly or indirectly convey, transfer or lease, in one transaction or a series of transactions, all or substantially all of its assets to, any Person unless:
(i) except in the case of a Guarantor (or any holding company of such Guarantor other than the Issuer or a parent company of the Issuer) (x) that has been disposed of in its entirety to another Person (other than to the Issuer or an Affiliate of the Issuer), whether through a merger, amalgamation, consolidation, statutory plan of arrangement or sale of Capital Stock or assets or (y) that, as a result of the disposition of all or a portion of its Capital Stock, ceases to be a Subsidiary, in both cases, if in connection therewith the Issuer provides an Officers’ Certificate to the Trustee to the effect that the Issuer will comply with its obligations under Condition 3.3 in respect of such disposition, the Successor Person (if not such Subsidiary) shall be a Person organized and existing under the laws of the jurisdiction under which such Subsidiary was organized or under the laws of the United Kingdom, another member of the European Union, Switzerland, the British Virgin Islands, Jersey, Guernsey or Kazakhstan, and such Person shall expressly assume by executing and delivering a supplemental trust deed to the Trustee, such supplemental trust deed to be in a form and with substance satisfactory to the Trustee, all the obligations of such Subsidiary, if any, under its Notes Guarantee;
(ii) immediately after giving effect to such transaction or transactions (and treating any Indebtedness which becomes an obligation of the Successor Person formed or
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continuing as a result of such transaction as having been issued by such Successor Person at the time of such transaction), no Default shall have occurred and be continuing;
(iii) each Guarantor will have in the supplemental trust deed confirmed that its obligations under the Notes Guarantee will continue to apply to the obligations of the Issuer or any Successor Issuer in accordance with the Notes and the Trust Deed; and
(iv) the Issuer shall have delivered to the Trustee an Officers’ Certificate stating that such consolidation, amalgamation, statutory plan of arrangement, merger or transfer and such supplemental trust deed comply with the provisions hereof, and such Opinion(s) of Counsel as the Trustee shall require.
Notwithstanding the foregoing:
I. any Restricted Subsidiary may amalgamate, consolidate or enter into a statutory plan of arrangement with, merge with or into or directly or indirectly transfer all or part of its properties and assets to the Issuer or a Guarantor; and
II. the Issuer may amalgamate, consolidate or enter into a statutory plan of arrangement with or merge with or into an Affiliate incorporated under the laws of Kazakhstan, Switzerland, the British Virgin Islands, Jersey, Guernsey or a member state of the European Union solely for the purpose of reincorporating the Issuer in another jurisdiction to realize tax or other benefits, provided, that:
(A) the Successor Issuer expressly assumes, by a supplemental trust deed, executed and delivered to the Trustee, in a form and with substance satisfactory to the Trustee, all of the obligations of the Issuer under the Notes and the Trust Deed;
(B) as a result of such amalgamation, consolidation, statutory plan of arrangement or merger the Issuer or Successor Issuer would not become required to make any deductions or withholding on account of taxes as described below under Condition 7 that the Issuer would not have been required to make had the amalgamation, consolidation, statutory plan of arrangement or merger not occurred;
(C) each Guarantor will have in the supplemental trust deed confirmed that its obligations under the Notes Guarantee will continue to apply to the obligations of the Successor Issuer in accordance with the Notes and the Trust Deed; and
(D) the Issuer delivers to the Trustee an Officers’ Certificate stating that such consolidation, amalgamation, statutory plan of arrangement, merger or transfer and such supplemental trust deed comply with the provisions hereof, and such Opinion(s) of Counsel as the Trustee shall require.
In connection with any proposed amalgamation, consolidation, merger, conveyance, transfer or lease to be effected in accordance with this Condition 3.7 (a Substitution Event), upon satisfaction of all conditions precedent thereto as set out in this Condition 3.7, the Trustee shall (at the expense of the Issuer) enter into the necessary supplemental trust deed referred to in Condition 3.7(a)(i), Condition 3.7(b)(i) or paragraph II above, as the case may be, provided that the Trustee shall not be obliged to do so if, in the opinion of the Trustee, the same would expose it to liabilities or reduce its protections or impose additional obligations upon the Trustee. The Trustee shall have no responsibility for or incur any liabilities in respect of any Substitution Event and shall have no responsibility for the effectiveness of the same, the creditworthiness of any Successor Issuer or Successor Person or for the effect of any Successor Event on the interests of the Noteholders, Receiptholders or Couponholders.
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3.8 Reports
(a) Subject to compliance with applicable law, so long as any of the Notes remains outstanding, the Issuer will provide to the Trustee and the Noteholders:
(i) within 180 days after the end of the Issuer’s fiscal year, annual reports containing the following information: (a) audited consolidated balance sheet of the Issuer as of the end of the two most recent fiscal years and audited consolidated income statements and statements of cash flow of the Issuer for the two most recent fiscal years, including complete footnotes to such financial statements of the most recent fiscal year and the report of the independent auditors on the financial statements; (b) the annual report of the Issuer, if any, and, to the extent contained therein, an operating and financial review of the audited financial statements, including a discussion of the results of operations, financial condition and liquidity of capital resources, and a discussion of material commitments and contingencies and critical accounting policies and; (c) risk factors and material recent developments (but only to the extent not contained in the annual report of the Issuer and the Issuer is required to provide such disclosure to its shareholders);
(ii) within 120 days following the end of the second fiscal quarter in each fiscal year of the Issuer, semi-annual reports containing the following information: (a) an unaudited consolidated balance sheet as of the end of such semi-annual period and unaudited condensed statements of income and cash flow for the semi-annual and year-to-date periods ending on the unaudited condensed balance sheet date, and the comparable prior year periods, together with condensed footnote disclosure; and (b) to the extent the Issuer is required to provide such disclosure to its shareholders, (i) material developments in the business of the Issuer and its Subsidiaries, (ii) financial developments and trends in the business in which the Issuer and its Subsidiaries are engaged; and (iii) material recent developments and any material changes to the risk factors disclosed in the most recent annual report delivered pursuant to clause (a)(i) above; and
(iii) promptly after the occurrence of a material acquisition, disposition, restructuring or change in the accountants or any change in the Issuer’s senior management or any other material event that, in each case, the Issuer announces publicly, a report containing a description of such event;
provided, however, that the reports set forth in clauses (i), (ii) and (iii) above will not be required to include separate financial statements for any Guarantors or non-guarantor Subsidiaries of the Issuer. The Trustee shall not be required to review any of such reports or be deemed to have knowledge of any matter disclosed therein and shall not be required to check that such reports conform to the provisions of this Condition 3.8.
(b) At the same time as providing any such document to the Trustee, the Issuer will also make available copies of the above information required by clauses (a)(i) through (iii) above on the website of the Issuer.
3.9 Compliance Certificate
Pursuant to the Trust Deed:
(a) the Issuer shall deliver to the Trustee, within 180 days after the end of each fiscal year, an Officers’ Certificate stating that (i) a review of the activities of the Issuer and its Subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Issuer and the Guarantors have kept, observed, performed and fulfilled their obligations under the Trust Deed, and (ii) as to each such Officer signing such certificate, that to the best of his or her knowledge the Issuer and the Guarantors have kept, observed, performed and fulfilled each and every covenant contained in the Trust
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Deed and is not in default in the performance or observance of any of the terms, provisions and conditions of the Trust Deed (or, if a Default or Event of Default has occurred, describing all such Defaults or Events of Default of which he or she may have knowledge and what action the Issuer and the Guarantors are taking or proposes to take with respect thereto) and to the best of his or her knowledge no event has occurred and remains in existence by reason of which payments on account of the principal of or interest, if any, on the Notes is prohibited or if such event has occurred, a description of the event and what action the Issuer and the Issuer are taking or proposes to take with respect thereto; and
(b) the Issuer and the Guarantors will deliver to the Trustee, forthwith upon any Officer having actual knowledge of any Default or Event of Default, an Officers’ Certificate specifying such Default or Event of Default and what action the Issuer and the Guarantors are taking or proposes to take with respect thereto.
The Trust Deed provides that any Officers’ Certificate delivered to the Trustee pursuant to this Condition 3 may, in the absence of manifest error, be relied upon by the Trustee and, if so relied upon, shall be conclusive and binding on the Issuer, the Guarantors, the Noteholders, the Receiptholders and the Couponholders.
3.10 Maintenance of Listing
So long as any of the Notes remains outstanding, the Issuer will use all reasonable endeavours to list and to maintain the listing of the Notes on the London Stock Exchange; provided that if at any time the Issuer determines that it will not maintain such listing, it will obtain, prior to the delisting of the Notes from the London Stock Exchange, and thereafter use all reasonable endeavours to obtain and maintain, a listing of the Notes on such other “recognised stock exchange” as defined in section 1005 of the Income Tax Act 2007 of the United Kingdom.
3.11 Change of control
(a) Upon the occurrence of a Change of Control and, in any case, subject to paragraph (e) below, the holder of any Note will have the right to require the Issuer to purchase such Note at a purchase price in cash equal to 101 per cent. of the nominal amount thereof together with (if appropriate) interest accrued to (but excluding) the date of purchase (or if this Note is a Zero Coupon Note, 101 per cent. of the Condition 3 Amortised Face Amount with respect to such Note).
(b) Subject to paragraph (e) below, within 45 days following the occurrence of a Change of Control (such 45th day being the Cut-off Date), the Issuer shall give notice to the Noteholders in accordance with Condition 13 (the Change of Control Offer Notice) specifying:
(i) that a Change of Control has occurred and that each Noteholder has the right to require the Issuer to purchase all or only some of the Notes of such Noteholder at a purchase price in cash equal to 101 per cent. of the nominal amount thereof together with (if appropriate) interest accrued to (but excluding) the date of purchase (or if this Note is a Zero Coupon Note, 101 per cent. of the Condition 3 Amortised Face Amount with respect to each Note);
(ii) the circumstances and relevant facts regarding such Change of Control; and
(iii) the procedures that the holder of a Note must follow in order to have such Note purchased, which procedures shall be consistent with paragraphs (c) and (d) below.
(c) To exercise the right to require the purchase of Notes under this Condition 3.11, the holder of the Note, must, if such Note is in definitive form and held outside of Euroclear and Clearstream, Luxembourg, deliver at the specified office of any Paying Agent, at any time during normal business hours of such Paying Agent falling within the period (the Change of Control Put Period) of 45 days after a Change of Control Offer Notice is given, a duly
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completed and signed notice of exercise in the form obtainable from the specified office of any Paying Agent (the Change of Control Put Notice).
If this Note is represented by a Global Note or is in definitive form and held through Euroclear or Clearstream, Luxembourg, to exercise the right to require the purchase of such Note pursuant to this Condition 3.11 the holder of such Note, must, within the Change of Control Put Period, give notice to the Agent of such exercise in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg (which may include notice being given on his instruction by Euroclear, Clearstream, Luxembourg or any depositary for them to the Agent in a form acceptable to Euroclear and Clearstream, Luxembourg from time to time) and, if this Note is represented by a Global Note, at the same time present or procure the presentation of the relevant Global Note to the Agent for notation accordingly.
If this Note is in definitive form, the Change of Control Put Notice must be accompanied by such Note and all Coupons appertaining thereto maturing after the date which is 15 days after the expiration of the Change of Control Put Period (the Put Date), failing which the relevant Paying Agent will require payment of an amount equal to the face value of any such missing Coupon (or any replacement therefor issued pursuant to Condition 10) at any time after such payment, but before the expiry of the period of five years from the Relevant Date (as defined in Condition 7) in respect of such Coupon, but not thereafter.
The Paying Agent to which any Note in definitive form held outside Euroclear and Clearstream, Luxembourg and any Change of Control Put Notice are delivered will issue to the holder of the Note concerned a non-transferable receipt in respect of the Note so delivered.
(d) Payment in respect of any Note so exercised will be made either (i) on the Put Date by transfer to the bank account (if any) specified in the relevant Change of Control Put Notice; or (ii) if no such bank account is so specified, on or after the Put Date against presentation and surrender of such receipt at the specified office of any Paying Agent. A Change of Control Put Notice, once given, shall be irrevocable. For the purposes of the Conditions, pending purchase of the relevant Note non-transferable receipts issued pursuant to this Condition 3.11(d) shall be treated as if they were Notes.
(e) Notwithstanding the foregoing, the Issuer will not be required to deliver a Change of Control Offer Notice upon the occurrence of a Change of Control and the Noteholders of any Note will not have the right to require the Issuer to purchase Notes pursuant to paragraph (a) above if:
(i) prior to the occurrence of the Change of Control or at any time up to (and including) the Cut-off Date, a third party (the Third Party) delivers a notice (the Third Party Notice) to Noteholders specifying (A) that a Change of Control has occurred or is expected to occur (as the case may be), (B) that it is making an offer (the Third Party Offer) to purchase all of the Notes at a purchase price equal to 101 per cent. of the nominal amount thereof together with (if appropriate) interest accrued to (but excluding) the date of purchase (or if this Note is a Zero Coupon Note, 101 per cent. of the Condition 3 Amortised Face Amount with respect to each Note), (C) the circumstances and relevant facts regarding such Change of Control and (D) the procedures that the holder of a Note must follow in order to have such Note purchased by the Third Party; and
(ii) the Third Party purchases within 60 days of the date of such Third Party Notice all Notes validly tendered by Noteholders pursuant to the Third Party Offer and not withdrawn pursuant to the terms thereof (it being understood that, if the relevant Change of Control has not occurred at the time the Third Party Offer is made, the Third Party may give a Third Party Notice that provides that, if a definitive agreement is in place with respect to such Change of Control, the Third Party Offer is conditional upon the occurrence of such Change of Control).
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(f) The Issuer will comply, to the extent applicable, with the requirements of any securities laws or regulations in connection with the repurchase of Notes pursuant to this Condition 3.11. To the extent that the provisions of any securities laws or regulations conflict with provisions of this Condition 3.11, the Issuer will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under this Condition 3.11 by virtue thereof.
3.12 Covenant suspension
Following the first day (the Suspension Date) that:
(i) the Notes have an Investment Grade Rating from either of the Rating Agencies;
(ii) no Default or Event of Default has occurred and is continuing,
(together, the Suspension Conditions) and such conditions are certified to the Trustee in an Officers’ Certificate, (A) the Issuer and the Restricted Subsidiaries will not be subject to: • Condition 3.1; • Condition 3.2; • Condition 3.3; • Condition 3.5; • Condition 3.6; and • clause (iii) of paragraph (a) of Condition 3.7 (collectively, the Suspended Covenants); and (B) paragraphs (a) and (h) of the definition of “Permitted Liens” under Condition 3.13 shall be amended to read as follows (and, for the avoidance of doubt, the remainder of the definition of “Permitted Liens” shall remain in effect without any amendment thereto):
“(a) Liens that secure Indebtedness Incurred pursuant to Credit Facilities, the Structured Trade Finance Facility and any Permitted Receivables Financing (including, in each case, any Refinancing thereof in whole or in part);” and
“(h) Liens to secure Purchase Money Indebtedness and Capitalized Lease Obligations”.
In the event that the Issuer and the Restricted Subsidiaries are not subject to the Suspended Covenants for any period of time as a result of the preceding sentence and, on any subsequent date (the Reversion Date), (a) a Default or Event of Default with respect to the Notes (other than as a result of any breach of the Suspended Covenants) occurs, is not cured within any applicable grace or cure period and is continuing or (b) both of the Rating Agencies withdraw their ratings or downgrade their ratings assigned to the Notes below the required Investment Grade Rating, then the Issuer and the Restricted Subsidiaries will thereafter again be subject to the Suspended Covenants (and the Issuer shall immediately confirm the same to the Trustee in an Officers’ Certificate) until the Suspension Conditions are again satisfied. The period of time between the Suspension Date and the Reversion Date is referred to in this description as the Suspension Period. Notwithstanding that the Suspended Covenants may be reinstated, no Default or Event of Default will be deemed to have occurred as a result of a failure to comply with the Suspended Covenants during the Suspension Period. During any Suspension Period, the Issuer may not designate any Subsidiary as an Unrestricted Subsidiary unless the Issuer would have been permitted to designate such Subsidiary as an Unrestricted Subsidiary if a Suspension Period had not been in effect for any period.
On the Reversion Date, all Indebtedness Incurred during the Suspension Period will be classified to have been Incurred pursuant to paragraph (a) of Condition 3.1 or one of the clauses set forth in paragraph (b) of Condition 3.1 (to the extent such Indebtedness would be permitted to be Incurred thereunder as of the Reversion Date and after giving effect to Indebtedness Incurred prior to the
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Suspension Period and outstanding on the Reversion Date). To the extent such Indebtedness would not be so permitted to be Incurred pursuant to paragraph (a) or (b) of Condition 3.1, such Indebtedness will be deemed to have been outstanding on the Programme Date, so that it is classified as permitted under clause (iii) of paragraph (b) of Condition 3.1. For purposes of determining compliance with paragraph (a) of Condition 3.3, the amount of Net Available Cash from all Asset Dispositions not applied in accordance with the Condition 3.3 will be deemed to be reset to zero.
3.13 Definitions
In the Conditions:
Additional Assets means:
(a) any property or assets (other than current assets, Indebtedness and Capital Stock) used or to be used by the Issuer or a Restricted Subsidiary in a Permitted Business;
(b) the Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by the Issuer or another Restricted Subsidiary;
(c) Capital Stock constituting a minority interest in any Person that at such time is a Restricted Subsidiary; or
(d) capital expenditures relating to an asset used or useful in a Permitted Business provided, however, that any such Restricted Subsidiary described in clauses (b) or (c) above is primarily engaged in a Permitted Business;
Additional Notes means:
(a) the Notes other than the Initial Notes; and
(b) with respect to the Initial Notes, any subsequent Tranche of such Notes which is consolidated and which forms a single Series with the Initial Notes;
Affiliate of any specified Person means any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing;
Asset Disposition means any sale, lease, transfer or other disposition (or series of related sales, leases, transfers or dispositions) by the Issuer or any Restricted Subsidiary, including any disposition by means of an amalgamation, merger, statutory plan of arrangement, consolidation, or similar transaction (each referred to for the purposes of this definition as a disposition), of:
(a) any shares of Capital Stock of a Restricted Subsidiary (other than directors’ qualifying shares or shares required by applicable law to be held by a Person other than the Issuer or a Restricted Subsidiary);
(b) all or substantially all the assets of any division or line of business of the Issuer or any Restricted Subsidiary; or
(c) any other assets of the Issuer or any Restricted Subsidiary outside of the ordinary course of business of the Issuer or such Restricted Subsidiary;
other than, in the case of (a), (b) and (c) above:
(i) a disposition by a Restricted Subsidiary to the Issuer or by the Issuer or a Restricted Subsidiary to a Restricted Subsidiary;
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(ii) a disposition effected in compliance with clause (a) of Condition 3.7;
(iii) a disposition of assets with a Fair Market Value of less than U.S.$25,000,000;
(iv) a disposition of cash or Cash Equivalents;
(v) the creation of a Lien (but not the sale or other disposition of the property subject to such Lien);
(vi) a disposition of (i) any equipment that has become damaged, worn out or obsolete or (ii) no longer used or useful material or equipment which are not material in the aggregate;
(vii) the lease, assignment or sublease of any real or personal property in the ordinary course of business;
(viii) the issuance of Capital Stock by a Restricted Subsidiary to the Issuer or to another Restricted Subsidiary;
(ix) sales or other dispositions of assets or property received by the Issuer or any Restricted Subsidiary upon the foreclosure on a Lien granted in favour of the Issuer or any Restricted Subsidiary or any other transfer of title with respect to any ordinary course secured investment in default;
(x) any disposition of accounts receivable and related assets in a Permitted Receivables Financing;
(xi) licences granted to third parties in the ordinary course of business; and
(xii) a disposition of accounts receivable in connection with the compromise, settlement or collection thereof;
Attributable Debt in respect of a Sale and Leaseback Transaction means, as at the time of determination, the present value calculated using a discount rate equal to the rate of interest implicit in such transaction, determined in accordance with IFRS of the total obligations of the lessee for net rental payments during the remaining term of the lease included in such Sale and Leaseback Transaction (including any period for which such lease has been extended), after excluding from such rental amount all amounts required to be paid on account of maintenance and repairs, insurance, taxes, assessments, water, utilities and similar charges; provided, however, that if such Sale and Leaseback Transaction results in a Capitalized Lease Obligation, the amount of Indebtedness represented thereby will be determined in accordance with the definition of Capitalized Lease Obligations;
Average Life means, as of the date of determination, with respect to any Indebtedness or Preferred Stock, the quotient obtained by dividing:
(a) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of such Indebtedness or scheduled redemption or similar payment with respect to such Preferred Stock, multiplied by the amount of such payment by
(b) the sum of all such payments;
Board of Directors means the Board of Directors of the Issuer or any committee thereof duly authorized to act on behalf of the Board of Directors of the Issuer;
Capital Stock of any Person means any and all shares, interests (including partnership interests), rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any Preferred Stock, but excluding any debt securities convertible into such equity;
Capitalized Lease Obligations means an obligation that is required to be classified and accounted for as a capitalized lease for financial reporting purposes in accordance with IFRS, and the amount (at
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the time any determination is to be made) of Indebtedness represented by such obligation shall be the capitalized amount of such obligation determined in accordance with IFRS; and the Stated Maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty;
Cash Equivalents means any of the following:
(a) direct obligations of the United States of America, or any agency thereof, or a member of the European Union, or any agency thereof, or obligations Guaranteed by the United States of America, or any agency thereof, or a member of the European Union or any agency thereof;
(b) investments in time deposit accounts, certificates of deposit and bankers’ acceptances maturing within one year of the date of acquisition thereof, and money market deposits issued by either (i) a bank or trust company having capital, surplus and undivided profits aggregating in excess of U.S.$250,000,000 (or the foreign currency equivalent thereof) and whose long-term debt is rated at least “A-” or the equivalent thereof by S&P and at least “A3” or the equivalent thereof by Moody’s or (ii) Eurasian Bank JSC; provided, however, in the case of clause (ii) that such instruments in the aggregate do not exceed U.S.$250,000,000at any time outstanding;
(c) repurchase obligations with a term of not more than 30 days for underlying securities of the types described in clauses (a) and (b) above entered into with a financial institution meeting the qualifications described in clause (b) above;
(d) investments in commercial paper, maturing not more than one year after the date of acquisition, issued by a corporation (other than an Affiliate of the Issuer) with a rating at the time as of which any investment therein is made of “P-1” (or higher) according to Moody’s or “A-1” (or higher) according to S&P;
(e) investments in securities with maturities of one year or less from the date of acquisition issued or fully Guaranteed by any political subdivision or taxing authority, of a member of the European Union, and rated at least “A” by S&P or “A” by Moody’s; or
(f) investment funds investing substantially all of their assets in cash and securities of the types described in clauses (a) through (e) above;
Change of Control means the occurrence of any of the following:
(a) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger, amalgamation or statutory plan of arrangement or consolidation), in one or a series of related transactions, of all or substantially all of the assets of the Issuer and its Subsidiaries taken as a whole to any Person or “group” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than to the Issuer, one of its Subsidiaries or one or more Permitted Holders; or
(b) the consummation of any transaction (including, without limitation, any merger, amalgamation or statutory plan of arrangement or consolidation) the result of which is that any Person other than a Permitted Holder or a “group” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) other than a “group” that includes one or more Permitted Holder becomes beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than 50 per cent. of the combined voting power of the Issuer’s Voting Stock or other Voting Stock into which the Issuer’s Voting Stock is reclassified, consolidated, exchanged or changed, measured by voting power rather than number of shares;
Commodity Price Protection Agreement means any forward contract, commodity swap, commodity option or other similar agreement or arrangement which is designed to protect such Person against fluctuations in commodity prices (other than any commodity supply contract);
Condition 3 Amortised Face Amount means an amount with respect to each Note calculated in accordance with the following formula:
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Condition 3 Amortised Face Amount = RP x (1+AY)y
where:
RP means the Reference Price;
AY means the Accrual Yield expressed as a decimal; and
y is a fraction the numerator of which is equal to the number of days (calculated on the basis of a 360-day year consisting of 12 months of 30 days each) from (and including) the Issue Date of the first Tranche of the Notes to (but excluding) the date fixed for purchase and the denominator of which is 360,
or on such other calculation basis as may be specified in the applicable Final Terms;
Consolidated Interest Expense means, for any period, without duplication and in each case determined on a consolidated basis in accordance with IFRS, the total interest expense of the Issuer and its Consolidated Restricted Subsidiaries, plus, to the extent Incurred by the Issuer and its Consolidated Restricted Subsidiaries in such period but not included in such interest expense:
(a) interest expense attributable to Capitalized Lease Obligations and the interest expense attributable to leases constituting part of a Sale and Leaseback Transaction;
(b) amortization of debt discount and debt issuance costs and interest paid in the form of additional Indebtedness;
(c) capitalized interest relating to any deferred payment obligation or any Indebtedness;
(d) non-cash interest expense;
(e) commissions, discounts and other fees and charges attributable to letters of credit and bankers’ acceptance financing;
(f) interest accruing on any Indebtedness of any other Person to the extent such Indebtedness is Guaranteed by (or secured by the assets of) the Issuer or any Restricted Subsidiary;
(g) net payments pursuant to Interest Rate Agreements (including amortization of fees and discounts);
(h) net payments with respect to Currency Agreements and Commodity Price Protection Agreements (including amortization of fees and discounts);
(i) dividends in respect of all Disqualified Stock of the Issuer and all Preferred Stock of any of the Subsidiaries of the Issuer, to the extent held by Persons other than the Issuer or a Restricted Subsidiary; and
(j) the cash contributions to any employee stock ownership plan or similar trust to the extent such contributions are used by such plan or trust to pay interest or fees to any Person (other than the Issuer) in connection with Indebtedness Incurred by such plan or trust;
Consolidated Leverage Ratio means, as of the date of calculation (the Calculation Date), the ratio of (1) the aggregate outstanding Net Indebtedness on the Calculation Date to (2) the EBITDA of the Issuer and the Restricted Subsidiaries for the most recently ended four fiscal quarters for which internal financial statements are available, immediately preceding the Calculation Date. The amount in clause (1) shall include the Indebtedness, Disqualified Stock or Preferred Stock giving rise to the need to make such calculation, but shall exclude any cash or Cash Equivalents received by the Issuer or the Restricted Subsidiaries as proceeds of such Indebtedness, Disqualified Stock or Preferred Stock. Such cash or Cash Equivalents received in connection with a particular Indebtedness, Disqualified Stock or Preferred Stock giving rise to the need to make a calculation, shall be included in the amount in clause (1) in respect of any subsequent Incurrence of Indebtedness, Disqualified Stock or Preferred Stock that gives rise to the need to make a subsequent calculation.
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Provided, however, that:
(i) if the Issuer or any Restricted Subsidiary has Incurred any Indebtedness (other than ordinary working capital borrowings) since the beginning of such period that remains outstanding on such date of determination or if the transaction giving rise to the need to calculate the Consolidated Leverage Ratio is an Incurrence of Indebtedness, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving effect on a pro forma basis to such Indebtedness as if such Indebtedness had been Incurred on the first day of such period and the discharge of any other Indebtedness repaid, repurchased, defeased or otherwise discharged with the proceeds of such new Indebtedness as if such discharge had occurred on the first day of such period;
(ii) if the Issuer or any Restricted Subsidiary has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the beginning of such period or if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness Incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Consolidated Leverage Ratio, EBITDA and Consolidated Interest Expense for such period shall be calculated on a pro forma basis as if such discharge had occurred on the first day of such period and as if the Issuer or such Restricted Subsidiary has not earned the interest income actually earned during such period in respect of cash or Cash Equivalents used to repay, repurchase, defease or otherwise discharge such Indebtedness;
(iii) if since the beginning of such period the Issuer or any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for such period shall be reduced by an amount equal to the EBITDA (if positive) directly attributable to the assets that are the subject of such Asset Disposition for such period, or increased by an amount equal to the EBITDA (if negative) directly attributable thereto for such period, and Consolidated Interest Expense for such period shall be reduced by an amount equal to the Consolidated Interest Expense directly attributable to any Indebtedness of the Issuer or any Restricted Subsidiary repaid, repurchased, defeased or otherwise discharged with respect to the Issuer and its continuing Restricted Subsidiaries in connection with such Asset Disposition for such period (or, if the Capital Stock of any Restricted Subsidiary is sold, the Consolidated Interest Expense for such period directly attributable to the Indebtedness of such Restricted Subsidiary to the extent the Issuer and its continuing Restricted Subsidiaries are no longer liable for such Indebtedness after such sale);
(iv) if since the beginning of such period the Issuer or any Restricted Subsidiary (by amalgamation, merger, statutory plan of arrangement or otherwise) shall have made an Investment in any Person that becomes a Restricted Subsidiary or an acquisition of assets, including any acquisition of assets occurring in connection with a transaction causing a calculation to be made hereunder, which constitutes all or substantially all of an operating unit of a business, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto (including the Incurrence of any Indebtedness) as if such Investment or acquisition occurred on the first day of such period; and
(v) if since the beginning of such period any Person (that subsequently became a Restricted Subsidiary or was merged with or into the Issuer or any Restricted Subsidiary since the beginning of such period) shall have made any Asset Disposition or any Investment or acquisition of assets that would have required an adjustment pursuant to clause (iii) or (iv) above if made by the Issuer or a Restricted Subsidiary during such period, EBITDA and Consolidated Interest Expense for such period shall be calculated after giving pro forma effect thereto as if such Asset Disposition, Investment or acquisition of assets occurred on the first day of such period.
For purposes of this definition, whenever pro forma effect is to be given to an acquisition of assets or other Investment, the amount of income or earnings relating thereto and the amount of Consolidated Interest Expense associated with any Indebtedness Incurred in connection therewith, the pro forma
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calculations shall be determined in good faith by a responsible financial or accounting Officer of the Issuer. Such Officer may in calculating the Consolidated Leverage Ratio or any element thereof for any period give pro forma effect to any realized or expected synergies, cost efficiencies and cost savings relating to, or directly or indirectly resulting from, or associated with any Asset Disposition, Investment, acquisition, reorganization, restructuring or operational improvement initiative that has occurred during the period included in the calculation or any prior period as if such synergies, cost efficiencies or cost savings had been effective throughout the period included in the calculation. Interest on a Capitalized Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by a responsible financial or accounting officer of the Issuer to be the rate of interest implicit in such Capitalized Lease Obligation in accordance with IFRS.
If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest expense on such Indebtedness shall be calculated as if the rate in effect on the date of determination had been the applicable rate for the entire period (taking into account any Interest Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement has a remaining term as at the date of determination in excess of 12 months). If any Indebtedness is Incurred under a revolving credit facility and is being given pro forma effect, the interest on such Indebtedness shall be calculated based on the average daily balance of such Indebtedness for the four fiscal quarters subject to the pro forma calculation to the extent that such Indebtedness was Incurred solely for working capital purposes;
Consolidated Net Income means, for any period, the profit for the year of the Issuer and its Consolidated Subsidiaries for such period as determined in accordance with IFRS; provided, however, that there shall not be included in such Consolidated Net Income:
(a) any net income (or loss) of any Person (other than the Issuer) if such Person is not a Restricted Subsidiary, except that:
(i) the Issuer’s equity in the net income of any such person for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such period to the Issuer or a Restricted Subsidiary as a dividend or other similar distribution (subject, in the case of a dividend or other similar distribution made to a Restricted Subsidiary, to the limitations contained in clause (c) below); and
(ii) the Issuer’s equity in a net loss of any such Person for such period shall be included in determining such Consolidated Net Income but only to the extent that such loss has been funded with cash from the Issuer or a Restricted Subsidiary;
(b) any net income (or loss) of any Person acquired by the Issuer or a Subsidiary of the Issuer for any period prior to the date of such acquisition;
(c) any net income (or loss) of any Restricted Subsidiary if such Restricted Subsidiary to the extent that at the date of determination the payment of dividends or the making of distributions of that net income is not permitted without any prior approval (that has not been obtained), pursuant to the terms of its charter and all agreement, instrument, judgments, decrees, orders, statutes, rules or governmental regulation applicable to such Restricted Subsidiary (unless such restriction with respect to the payment of dividends or the making of distributions has been waived) except that:
(i) subject to the limitations contained in clause (d) below, the Issuer’s equity in the net income of any such Restricted Subsidiary for such period shall be included in such Consolidated Net Income up to the aggregate amount of cash capable of being distributed by such Restricted Subsidiary during such period to the Issuer or another Restricted Subsidiary as a dividend or other similar distribution (subject, in the case of a dividend or other similar distribution made to another Restricted Subsidiary, to the limitation contained in this clause); and
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(ii) the Issuer’s equity in a net loss of any such Restricted Subsidiary for such period shall be included in determining such Consolidated Net Income but only to the extent that such loss has been funded with cash from the Issuer or a Restricted Subsidiary;
(d) any net after-tax gain (or loss) realized upon any Asset Disposition;
(e) any net after-tax gains or losses classified as extraordinary under IFRS;
(f) the cumulative effect of a change in accounting principles after the Programme Date;
(g) any non-cash gain or loss attributable to any Commodity Price Protection Agreement until such time as it is settled, at which time the net gain or loss shall be included;
(h) any non-cash impairment charges resulting from the write-down of goodwill or other long- lived assets and any amortization of intangible assets in each case in accordance with IFRS; and
(i) any non-cash compensation expense realized from grants of stock appreciation or similar rights, stock options, restricted stock, restricted stock units or other rights to officers, directors and employees of such Person or any Restricted Subsidiary,
in each case, for such period;
Consolidation means the consolidation of the accounts of each of the Restricted Subsidiaries, with those of the Issuer in accordance with IFRS consistently applied; provided, however, that Consolidation will not include consolidation of the accounts of any Unrestricted Subsidiary, but the interest of the Issuer or any Restricted Subsidiary in an Unrestricted Subsidiary will be accounted for as an investment. The term Consolidated has a correlative meaning;
Control means, with respect to any Person, the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. Controlling and Controlled have meanings correlative thereto;
Covenant Business Day means each day which is not a Legal Holiday;
Credit Facilities means one or more debt facilities or commercial paper facilities, in each case with banks or other lenders providing for revolving credit loans, term loans, receivables financing or letters of credit, or other forms of Guarantees and assurances or other credit facilities or extensions of credit, including overdrafts, as amended, restated, modified, renewed, refunded, replaced or refinanced in whole or in part from time to time;
Currency Agreement means, with respect to any Person, any foreign exchange contract, currency swap agreements, currency option agreements or other similar agreement or arrangement to which such Person is a party or of which it is a beneficiary;
Default means any event which is, or after notice, certification or passage of time would be, an Event of Default;
Disqualified Stock means, with respect to any Person, any Capital Stock which by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable or exercisable) or upon the happening of any event:
(a) matures or is mandatorily redeemable pursuant to a sinking fund obligation or otherwise;
(b) is convertible or exchangeable for Indebtedness or Disqualified Stock (excluding Capital Stock convertible or exchangeable solely at the option of the Issuer or a Restricted Subsidiary; provided, however, that any such conversion or exchange shall be deemed an Incurrence of Indebtedness or Disqualified Stock, as applicable); or
(c) redeemable at the option of the holder thereof, in whole or in part,
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in the case of each of clauses (a), (b) and (c), on or prior to the first anniversary of the Stated Maturity of the Notes of a series; provided, however, that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an “asset sale” or “change of control“ occurring prior to the first anniversary of the Stated Maturity of the Notes of such series shall not constitute Disqualified Stock if the “asset sale” or “change of control” provisions applicable to such Capital Stock are not more favorable to the holders of such Capital Stock than the provisions of Condition 3.11 and Condition 3.3;
EBITDA for any period means the Consolidated Net Income for such period, plus, without duplication, the following to the extent deducted in calculating such Consolidated Net Income:
(a) provision for taxes based on income, profits or capital of the Issuer and the Consolidated Restricted Subsidiaries;
(b) Consolidated Interest Expense;
(c) depreciation of the Issuer and the Consolidated Restricted Subsidiaries;
(d) amortization expense or other non-cash charge of the Issuer and the Consolidated Restricted Subsidiaries (excluding amortization expense or other non-cash charges attributable to a prepaid cash item that was paid in a prior period);
(e) any unusual or non-recurring charges, write-downs or losses (and minus any such gains); and
(f) all other non-cash charges of the Issuer and the Consolidated Restricted Subsidiaries (excluding any such non-cash charge to the extent it represents an accrual of or reserve for cash expenditures in any future period) less all non-cash items of income (other than accrual of revenue in the ordinary course of business) of the Issuer and the Restricted Subsidiaries,
in each case, for such period. Notwithstanding the foregoing, the provision for taxes based on the income or profits of, and the depreciation and amortization and non-cash charges of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute EBITDA only to the extent (and in the same proportion) that the net income of such Restricted Subsidiary was included in calculating Consolidated Net Income;
Exchange Act means the U.S. Securities Exchange Act of 1934, as amended;
Fair Market Value means, with respect to any asset or property, the price which could be negotiated in an arm’s-length, free market transaction, for cash, between a willing seller and a willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined in good faith by the Board of Directors;
Guarantee means any obligation, contingent or otherwise, of any Person directly or indirectly guaranteeing any Indebtedness or other obligation of any other Person and any obligation, direct or indirect, contingent or otherwise, of such Person:
(a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation of such other Person (whether arising by virtue of partnership arrangements, or by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, or to maintain financial statement conditions or otherwise); or
(b) entered into for the primary purpose of assuring in any other manner the obligee of such Indebtedness or other obligation of the payment thereof or to protect such obligee against loss in respect thereof (in whole or in part),
provided, however, that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning. The term “guarantor” shall mean any Person Guaranteeing any obligation;
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Hedging Obligations means, with respect to any specified Person, the obligations of such Person under:
(a) any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement or other similar agreement or arrangement;
(b) any forward contract, commodity swap agreement, commodity option agreement or other similar agreement or arrangement; or
(c) any foreign exchange contract, currency swap agreement or other similar agreement or arrangement.
IFRS means the International Financial Reporting Standards adopted by the International Accounting Standards Board and its predecessors, consistently applied, in effect as of t the Programme Date. All ratios and computations contained in this Condition 3 will be computed in conformity with IFRS;
Incur means issue, assume, Guarantee, incur or otherwise become liable for; provided, however, that any Indebtedness or Capital Stock of a Person existing at the time such Person becomes a Restricted Subsidiary (whether by amalgamation, merger, statutory plan of arrangement, consolidation, acquisition or otherwise) shall be deemed to be Incurred by such Person at the time it becomes a Restricted Subsidiary. The term Incurrence when used as a noun shall have a correlative meaning. Solely for purposes of determining compliance with Condition 3.1:
(a) amortization of debt discount or the accretion of principal with respect to a non-interest bearing or other discount security;
(b) the payment of regularly scheduled interest in the form of additional Indebtedness of the same instrument or the payment of regularly scheduled dividends on Capital Stock in the form of additional Capital Stock of the same class and with the same terms;
(c) the obligation to pay a premium in respect of Indebtedness arising in connection with the issuance of a notice of redemption or the making of a mandatory offer to purchase such Indebtedness; and
(d) a change in IFRS that results in an obligation of such Person that exists at such time, and is not theretofore classified as Indebtedness, becoming Indebtedness,
will be deemed not to be the Incurrence of Indebtedness;
Indebtedness means, with respect to any Person on any date of determination, without duplication:
(a) the principal of indebtedness of such Person for borrowed money;
(b) the principal of obligations of such Person evidenced by bonds, debentures, notes or other similar instruments;
(c) all obligations of such Person in respect of letters of credit (including reimbursement obligations with respect thereto);
(d) all obligations of such Person to pay the deferred and unpaid purchase price of property or services (except Trade Payables), which purchase price is due more than six months after acquiring such property or the completion of such services;
(e) all Capitalized Lease Obligations and all Attributable Debt in respect of a Sale and Leaseback Transaction of such Person;
(f) the amount of all obligations of such Person with respect to the redemption, repayment or other repurchase of any Disqualified Stock or, with respect to any Subsidiary of such Person, any Preferred Stock (but excluding, in each case, any accrued dividends);
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(g) all obligations of the type referred to in clauses (a) through (f) above of other Persons secured by a Lien on any asset of such Person, whether or not such indebtedness is assumed by such Person; provided, however, that the amount of Indebtedness of such Person shall be the lesser of:
(i) the Fair Market Value of such asset at such date of determination; and
(ii) the amount of such secured obligations referred to in other clauses of this definition of Indebtedness of such other Persons;
(h) to the extent not otherwise included in this definition, Hedging Obligations of such Person; and
(i) all obligations of the type referred to in clauses (a) through (h) of other Persons and all dividends of other Persons for the payment of which, in either case, such Person is responsible or liable, directly or indirectly, as obligor, guarantor or otherwise, including by means of any Guarantee,
in each case, to the extent any of the preceding items (other than letters of credit, Attributable Debt and Hedging Obligations) would appear as a liability upon a balance sheet of the specified Person prepared in accordance with IFRS.
Notwithstanding the foregoing, in connection with the purchase by the Issuer or any Restricted Subsidiary of any business, the term “Indebtedness” will exclude post-closing payment adjustments to which the seller may become entitled to the extent such payment is determined by a final closing balance sheet or such payment depends on the performance of such business after the closing; provided, however, that at the time of closing, the amount of any such payment is not determinable and, to the extent such payment thereafter becomes fixed and determined, the amount is paid within 90 days thereafter.
The amount of Indebtedness of any Person at any date shall be the outstanding balance at such date of all unconditional obligations as described above and the maximum liability, upon the occurrence of the contingency giving rise to the obligation, of any contingent obligations at such date. The amount of any Indebtedness described in clauses (a) and (b) will be:
(A) the accreted value thereof, in the case of any Indebtedness issued with original issue discount; and
(B) the principal amount thereof, in the case of any other Indebtedness.
Notwithstanding the foregoing, Indebtedness shall not include (a) expenses and royalties arising in the ordinary course of business; (b) asset retirement obligations and obligations in respect of reclamation, mine rehabilitation and workers’ compensation (including superannuation, pensions and retiree medical care); (c) anything accounted for as an operating lease in accordance with IFRS; and (d) liabilities or obligations in respect of customer deposits and advance payments received from customers in the ordinary course of business;
Initial Notes means the first Tranche of the first Series of Notes issued under the Programme, such Tranche to be in an aggregate amount which will not exceed U.S.$1,000,000,000;
Interest Rate Agreement means with respect to any Person any interest rate protection agreement, interest rate future agreement, interest rate option agreement, interest rate swap agreement, interest rate cap agreement, interest rate collar agreement, interest rate hedge agreement or other similar agreement or arrangement to which such Person is party or of which it is a beneficiary;
Investment in any Person means any direct or indirect advance, loan (other than advances to customers and accounts receivable in the ordinary course of business) or other extension of credit (including by way of Guarantee or similar arrangement) or capital contribution to (by means of any transfer of cash or other property to others or any payment for property or services for the account or use of others), or any purchase or acquisition of Capital Stock, Indebtedness or other similar
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instruments issued by such Person. The acquisition by the Issuer or any Restricted Subsidiary of a Person that holds an Investment in a third Person will be deemed to be an Investment by the Issuer or such Restricted Subsidiary in such third Person in an amount equal to the Fair Market Value of the Investments held by the acquired Person in such third person as of the date of such acquisition. Except as otherwise provided for herein, the amount of an Investment shall be its Fair Market Value at the time the Investment is made and without giving effect to subsequent changes in value;
For purposes of the definition of Unrestricted Subsidiary:
(a) Investment shall include the portion (proportionate to the Issuer’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of any Subsidiary of the Issuer at the time that such Subsidiary is designated an Unrestricted Subsidiary; provided, however, that upon a redesignation of such Subsidiary as a Restricted Subsidiary, the Issuer shall be deemed to continue to have a permanent “Investment” in an Unrestricted Subsidiary in an amount (if positive) equal to:
(i) the Issuer’s “Investment” in such Subsidiary at the time of such redesignation, less
(ii) the portion (proportionate to the Issuer’s equity interest in such Subsidiary) of the Fair Market Value of the net assets of such Subsidiary at the time of such redesignation; and
(b) any property transferred to or from an Unrestricted Subsidiary shall be valued at its Fair Market Value at the time of such transfer;
Investment Grade Rating means a rating equal to or higher than Baa3 (or the equivalent) by Moody’s and BBB- (or the equivalent) by S&P;
Legal Holiday means a Saturday, Sunday or other day on which banking institutions are not required by law or regulation to be open in London, United Kingdom or Düsseldorf, Germany;
Lien means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law, including any conditional sale or other title retention agreement, any lease in the nature thereof, any option or other agreement to sell or give a security interest in and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction;
Moody’s means Moody’s Investors Services, Inc. or any successor to the rating agency business thereof;
Net Available Cash from an Asset Disposition means cash payments received (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or otherwise and proceeds from the sale or other disposition of any securities received as consideration, but only as and when received, but excluding any other consideration received in the form of assumption by the acquiring Person of Indebtedness or other obligations relating to the properties or assets that are the subject of such Asset Disposition or received in any other non-cash form) therefrom, in each case net of:
(a) all legal, title and recording tax expenses, commissions and other fees and expenses Incurred, and all federal, state, provincial, foreign and local taxes paid or required to be paid or accrued as a liability under IFRS, as a consequence of such Asset Disposition or any distribution of the proceeds thereof by a Restricted Subsidiary to the Issuer or another Restricted Subsidiary;
(b) all payments made on any Indebtedness which is secured by any assets subject to such Asset Disposition, in accordance with the terms of any Lien upon or other security agreement of any kind with respect to such assets, or which must by its terms, or in order to obtain a necessary consent to such Asset Disposition, or by applicable law be repaid out of the proceeds from such Asset Disposition;
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(c) all distributions and other payments required to be made to minority interest holders in Subsidiaries or joint ventures as a result of such Asset Disposition;
(d) appropriate amounts to be provided by the seller as a reserve, in accordance with IFRS, against any liabilities associated with the property or other assets disposed of in such Asset Disposition and retained by the Issuer or any Restricted Subsidiary after such Asset Disposition; and
(e) any portion of the purchase price from an Asset Disposition placed in escrow, whether as a reserve for adjustment of the purchase price, for satisfaction of indemnities in respect of such Asset Disposition or otherwise in connection with that Asset Disposition; provided, however, that upon the termination of that escrow, Net Available Cash will be increased by any portion of funds in the escrow that are released to the Issuer or any Restricted Subsidiary;
Net Cash Proceeds means, with respect to any issuance or sale of Capital Stock, the cash proceeds of such issuance or sale net of attorneys’ fees, accountants’ fees, underwriters’ or placement agents’ fees, discounts or commissions and brokerage, consultant and other fees actually Incurred in connection with such issuance or sale and net of taxes paid or payable as a result thereof;
Net Indebtedness means the amount of (i) Indebtedness of the Issuer and the Restricted Subsidiaries minus (ii) cash and Cash Equivalents of the Issuer and the Restricted Subsidiaries that are not subject to the restrictions on payment to the Issuer or any other Restricted Subsidiaries described in (and not excluded from) clause (c) of the definition of Consolidated Net Income (and in the case of cash and Cash Equivalents of the Issuer, that are not classified as “restricted cash” under IFRS on the Issuer’s balance sheet), each reflected on the consolidated balance sheet of the Issuer and calculated in accordance with IFRS;
Non-Recourse Indebtedness of any Person means any Indebtedness of such Person with respect to which recourse for payment is limited solely to specific assets encumbered by a Lien securing such Indebtedness (or, in the case of a single purpose entity, is limited to such entity); provided, however, that personal recourse of a holder of Indebtedness against any obligor with respect thereto for fraud, misrepresentation, misapplication of cash, waste and other circumstances customarily excluded from non-recourse provisions in non-recourse financing shall not, by itself, prevent any Indebtedness from being characterized as Non-Recourse Indebtedness, provided further, that if a recourse claim is made in connection therewith, such claim shall no longer constitute Non-Recourse Indebtedness for the purposes of this Condition 3;.
Officer means the Chairman of the Board, the Chief Executive Officer, the Chief Financial Officer, the President, any Vice President, the Treasurer or the Secretary of the Issuer;
Officers’ Certificate means a certificate in a form acceptable to the Trustee, addressed to the Trustee and signed by two Officers;
Opinion of Counsel means a written opinion from legal counsel who is acceptable to the Trustee. The counsel may be an employee of or counsel to the Issuer;
Permitted Asset Swap means the concurrent purchase and sale or exchange of Related Business Assets or a combination of Related Business Assets and cash between the Issuer or any Restricted Subsidiary and another Person; provided, that any cash received must be applied in accordance with Condition 3.3;
Permitted Business means any business engaged in by the Issuer or any Restricted Subsidiary on the Programme Date and any Related Business;
Permitted Holders means any of (a) Mr. Chodiev, Mr. Machkevitch and Mr. Ibragimov; (b) any lineal descendent of any Person listed in clause (a) (treating for this purpose, any legally adopted descendant as a lineal descendant); (c) the spouse of any Person listed in clause (a); (d) any trust or corporate entity through which any Person listed is clauses (a), (b) or (c) beneficially owns its interest in the Issuer; (e) the estate trustee or administrator of any Person listed in clauses (a), (b) and (c); (f) any trust (whether testamentary or inter vivos) primarily for the lineal descendants of the persons listed in
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clause (a) or spouses of such lineal descendants; and (g) the State Property and Privatisation Committee of the Ministry of Finance of the Republic of Kazakhstan (and any successor entity thereto);
Permitted Liens means:
(a) Liens that secure Indebtedness permitted to be Incurred under clauses (b)(i) and (b)(x) of Condition 3.1 and Liens to secure the Notes (including any Additional Notes) and the Notes Guarantee;
(b) Liens in favour of the Issuer or any Restricted Subsidiary;
(c) Liens on property of a Person existing at the time such Person enters into a statutory plan of arrangement with, is merged with or into or consolidated or amalgamated with, the Issuer or any Restricted Subsidiary; provided, that such Liens were in existence prior to the contemplation of such statutory plan of arrangement, amalgamation, merger or consolidation and do not extend to any assets other than those of the Person that enters into a statutory plan of arrangement with, merged with or into or consolidated or amalgamated with, the Issuer or such Restricted Subsidiary;
(d) Liens on property (including Capital Stock) existing at the time of acquisition thereof by the Issuer or any Restricted Subsidiary of the Issuer, provided, that such Liens were in existence prior such acquisition, were not Incurred in contemplation of such acquisition and do not extend to any property other than the property so acquired by the Issuer or such Restricted Subsidiary;
(e) Liens Incurred pursuant to agreements existing on the Programme Date (other than any Liens securing Indebtedness described under clause (a) hereof);
(f) Liens securing Refinancing Indebtedness; provided, that such Liens do not extend to any property or assets other than the property or assets that secure the Indebtedness being refinanced (plus improvements and accessions to, such property or proceeds or distributions thereof);
(g) Liens that secure obligations that do not exceed U.S.$100,000,000 or, if greater, 1.0 per cent. of Total Assets at any one time outstanding;
(h) Liens to secure Indebtedness (including Capitalized Lease Obligations) permitted by clause (b)(v) of Condition 3.1; provided, that any such Lien covers only the assets acquired, constructed or improved with such Indebtedness;
(i) Liens securing Hedging Obligations of the Issuer or any Restricted Subsidiary so long as such Hedging Obligations are permitted to be Incurred under the Trust Deed ;
(j) Liens Incurred or deposits made in the ordinary course of business in connection with workers’ compensation, unemployment insurance, old-age pensions or other social security obligations;
(k) Liens, deposits or pledges to secure the performance of bids, tenders, contracts (including, without limitation, joint venture, shareholder agreements and partnership agreements but other than contracts for the payment of Indebtedness), leases, or other similar obligations arising in the ordinary course of business;
(l) survey exceptions, encumbrances, title defects, easements or reservations (including severances, leases or reservations of oil, gas, coal, minerals or water rights) of, or rights of other for, rights of way, sewers, electric lines, telegraph and telephone lines, zoning or other restrictions as to the use of properties, and defects in title which in the aggregate do not materially adversely affect the value of such properties or materially impair the use for the purposes of which such properties are held by the Issuer or any Restricted Subsidiary;
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(m) judgment and attachment Liens not giving rise to an Event of Default and notices of lis pendens and associated rights related to litigation being contested in good faith by appropriate proceedings and for which adequate reserves or other appropriate provision have been made;
(n) Liens, deposits or pledges to secure public or statutory obligations, surety, stay, appeal, indemnity, performance or other similar bonds or obligations; and Liens, deposits or pledges in lieu of such bonds or obligations, or to secure such bonds or obligations, or to secure letters of credit in lieu of or supporting the payment of such bonds or obligations;
(o) Liens in favor of collecting or pay or banks having a right of setoff, revocation, refund or chargeback with respect to money or instruments of the Issuer or any Subsidiary thereof on deposit with or in possession of such bank;
(p) any interest or title of a lessor, licensor or sublicensor in the property subject to any lease, license or sublicense (other than any property that is the subject of a Sale and Leaseback Transaction);
(q) Liens for taxes, assessments and governmental charges not yet delinquent or being contested in good faith and for which adequate reserves or other appropriate provisions have been established to the extent required by IFRS;
(r) Liens in favour of customs or revenue authorities to secure payment of customs duties in connection with the importation of goods in the ordinary course of business;
(s) Liens resulting from escrow arrangements entered into in connection with the disposition of assets;
(t) any right of refusal, right of first offer, option or other agreement to sell or otherwise dispose of an asset of the Issuer or any Restricted Subsidiary;
(u) Liens on Capital Stock or other securities (including, without limitation, put and call arrangements) of an Unrestricted Subsidiary or joint venture;
(v) Liens arising from precautionary UCC financing statements (or the equivalent in other jurisdictions outside of the United States) regarding operating leases or consignments;
(w) statutory Liens or landlords and carriers’, warehouseman’s, mechanics’, suppliers’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business;
(x) Liens securing Indebtedness Incurred pursuant to clause (b)(vii) of Condition 3.1;
(y) Liens securing reimbursement obligations with respect to commercial letters of credit which encumber documents and other assets relating to such letters of credit and products and proceeds thereof;
(z) contract mining agreements granted to others that do not materially interfere with the ordinary conduct of business of the Issuer or any Restricted Subsidiary;
(aa) licenses of intellectual property in the ordinary course of business;
(bb) Liens to secure a defeasance trust;
(cc) Liens securing insurance premium financing arrangements, provided that such Lien is limited to the applicable insurance contracts;
(dd) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods entered into by the issuer or any Restricted Subsidiary in the ordinary course of business in accordance with the Issuer’s or such Restricted Subsidiary’s past practices prior to the Programme Date;
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(ee) covenants restricting or prohibiting access to or from real property abutting on controlled access highways, which covenants do not adversely impair in any material respect the use of the real property concerned in the operation of the business conducted on such real property;
(ff) any option, contract or other agreement to sell an asset; provided such sale is not otherwise prohibited under the Trust Deed; and
(gg) any extension, renewal or replacement, in whole or in part, of any Lien described in the foregoing clauses; provided that any such extension, renewal or replacement shall be no more restrictive in any material respect than the Lien so replaced and shall not extend in any material respect to any additional property or assets and that to the extent such Lien secures Indebtedness, the principal amount of Indebtedness so secured is not increased.
Permitted Receivables Financing means any financing pursuant to which the Issuer or any Restricted Subsidiary may sell, convey or otherwise transfer to any other Person or grant a security interest in, any accounts receivable (and related assets) in an aggregate principal amount equivalent to the Fair Market Value of such accounts receivable (and related assets) of the Issuer or any Restricted Subsidiary; provided that (a) the covenants, events of default and other provisions applicable to such financing shall be customary for such transactions and shall be on market terms (as determined in good faith by the Issuer’s Board of Directors) at the time such financing is entered into, (b) the interest rate applicable to such financing shall be a market interest rate (as determined in good faith by the Issuer’s Board of Directors) at the time such financing is entered into and (c) such financing shall be non-recourse to the Issuer or any Restricted Subsidiary except to a limited extent customary for such transactions;
Person means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity;
Preferred Stock, as applied to the Capital Stock of any Person, means Capital Stock of any class or classes (however designated) that is preferred as to the payment of dividends, or as to the distribution of assets upon any voluntary or involuntary liquidation or dissolution of such Person, over shares of Capital Stock of any other class of such Person;
Programme means the U.S.$3,000,000,000 Euro Medium Term Note Programme of the Issuer;
Programme Date means 13 May 2010;
Purchase Money Indebtedness means Indebtedness:
(a) consisting of the deferred purchase price of an asset, conditional sale obligations, obligations under any title retention agreement and other purchase money obligations, in each case where the maturity of such Indebtedness does not exceed the anticipated useful life of the asset being financed, and
(b) Incurred to finance the design, construction, exploration, installation, development, acquisition or lease of, or repairs, improvement or addition to, any asset by the Issuer or a Restricted Subsidiary, including the Capital Stock of a Person that becomes a Restricted Subsidiary,
provided, however, that such Indebtedness is Incurred within 180 days after the acquisition by the Issuer or such Restricted Subsidiary of such asset;
Qualified Joint Venture means a joint venture that is not a Subsidiary of the Issuer or any Restricted Subsidiary in which the Issuer or any Restricted Subsidiary has a direct or indirect ownership interest and that is engaged in a Permitted Business;
Rating Agencies means Moody’s and S&P or, if S&P or Moody’s or both shall not provide a publicly available rating on the Notes, a nationally recognized statistical rating agency or agencies, as the case may be, selected by the Issuer with the prior written approval of the Trustee, which shall be substituted
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for S&P or Moody’s or both, as the case may be, with respect to the Notes (and the Trustee may (and shall if so required by the Issuer, subject to its being indemnified and/or secured and/or prefunded to its satisfaction) consult promptly and may rely absolutely on advice from a reputable financial adviser in this regard and shall not be liable to the Noteholders, Reciptholders, Couponholders or any other person for such reliance);
Refinance means, in respect of any Indebtedness, to refinance, extend, renew, refund, replace, repay, prepay, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. Refinanced and Refinancing shall have correlative meanings;
Refinancing Indebtedness means Indebtedness that is Incurred to Refinance (including pursuant to any defeasance or discharge mechanism) any Indebtedness of the Issuer or any Restricted Subsidiary existing on the Programme Date or Incurred in compliance with Condition 3.1 (including Indebtedness of the Issuer or any Restricted Subsidiary that Refinances Refinancing Indebtedness); provided, however, that:
(a) the Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced;
(b) the Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is Incurred that is equal to or greater than the Average Life of the Indebtedness being refinanced;
(c) such Refinancing Indebtedness is Incurred in an aggregate principal amount (or if issued with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if issued with original issue discount, the aggregate accreted value) then outstanding, or, if greater, the committed amount, of the Indebtedness being Refinanced, plus an amount necessary to pay any fees and expenses, including premiums, related to such Refinancing; and
(d) if the Indebtedness being Refinanced is subordinated in right of payment to the Notes or the Notes Guarantee, such Refinancing Indebtedness is subordinated in right of payment to the Notes or the Notes Guarantee on substantially the same terms, taken as a whole, as the Indebtedness being Refinanced;
provided further, however, that Refinancing Indebtedness shall not include:
(a) Indebtedness of a Restricted Subsidiary that Refinances Indebtedness of the Issuer or a Guarantor; or
(b) Indebtedness of the Issuer or a Restricted Subsidiary that Refinances Indebtedness of an Unrestricted Subsidiary;
Related Business means any business related, ancillary or complementary to the businesses of the Issuer and the Restricted Subsidiaries on the Programme Date;
Related Business Asset means assets (other than cash) used or useful in a Permitted Business or a Related Business, provided, that any assets received by the Issuer or a Restricted Subsidiary in exchange for assets transferred by the Issuer or a Restricted Subsidiary shall not be deemed to be Related Business Assets if the assets consist of securities of a Person, unless upon receipt of the securities of such Person, such Person would become a Restricted Subsidiary;
Restricted Subsidiary means any Subsidiary of the Issuer other than an Unrestricted Subsidiary.
S&P means Standard & Poor’s Rating Services, a division of The McGraw-Hill Companies, Inc. or any successor to the rating agency business thereof;
Sale and Leaseback Transaction means, with respect to any Person, any transaction involving any of the assets or properties of such Person whether now owned or hereafter acquired, whereby such Person sells or otherwise transfers such assets or properties and then or thereafter leases such assets
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or properties or any part thereof or any other assets or properties which such Person intends to use for substantially the same purpose or purposes as the assets or properties sold or transferred;
Senior Indebtedness of any Person means the principal of, premium (if any) and accrued and unpaid interest on (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization of such Person, regardless of whether or not a claim for post-filing interest is allowed in such proceedings), and fees and other amounts owing in respect of, Indebtedness of such Person whether outstanding on the Programme Date or thereafter Incurred, unless in the instrument creating or evidencing the same or pursuant to which the same is outstanding it is provided, that such obligations are subordinated in right of payment to the Notes or the Notes Guarantee; provided, however, that Senior Indebtedness of such Person shall not include:
(a) any obligation of such Person to the Issuer or any Subsidiary of the Issuer;
(b) any liability for federal, state, provincial, territorial, local or other taxes owed or owing by such Person;
(c) any accounts payable or other liability to trade creditors arising in the ordinary course of business (including Guarantees thereof or instruments evidencing such liabilities);
(d) any Indebtedness or obligation of such Person (and any accrued and unpaid interest in respect thereof) that by its terms is subordinate or junior in any respect to any other Indebtedness or obligation of such Person, including any Subordinated Obligations of such Person;
(e) any obligations with respect to any Capital Stock; or
(f) any Indebtedness Incurred in violation of the Trust Deed;
Stated Maturity means, with respect to any security, the date specified in such security as the fixed date on which the final payment of principal of such security is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase of such security at the option of the holder thereof upon the happening of any contingency beyond the control of the issuer unless such contingency has occurred);
Structured Trade Finance Facility means the facility agreement dated as of 16 December 2006 among ENRC Marketing AG, Guaranteed by Transnational Company Kazchrome JSC, the lenders from time to time parties thereto, and Deutsche Bank AG, Amsterdam Branch, as administrative agent, which provides for the terms and conditions relating to the structured trade finance facility, as the same may be amended, restated, supplemented, modified or replaced from time to time;
Subordinated Obligation means any Indebtedness of a Person (whether outstanding on the Programme Date or thereafter Incurred) that is subordinate or junior in right of payment to the Notes or the Notes Guarantee, as the case may be, pursuant to a written agreement;
Subsidiary means a subsidiary within the meaning of section 1159 of the Companies Act 2006 as amended;
Successor Person means, with respect to any Person, the resulting Person formed by or continuing from such consolidation or amalgamation or into which such Person is merged or with which such Person enters into a statutory plan of arrangement or the acquiring Person that acquires or leases all or substantially all of such Person’s properties and assets;
Total Assets means the total assets of the Issuer on a consolidated basis, as shown on the most recent balance sheet of the Issuer (determined on a pro forma basis to give effect to any acquisition or disposition of assets made after such balance sheet date and on or prior to the date of determination);
Trade Payables means, with respect to any Person, any accounts payable or any indebtedness or monetary obligation to trade creditors created, assumed or Guaranteed by such Person arising in the ordinary course of business in connection with the acquisition of goods or services;
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Unrestricted Subsidiary means:
(a) any Subsidiary of the Issuer that at the time of determination shall be designated an Unrestricted Subsidiary by the Board of Directors in the manner provided below; and
(b) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors may designate any Subsidiary of the Issuer (including any newly acquired or newly formed Subsidiary of the Issuer) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of, or owns or holds any Lien on any property of, the Issuer or any other Subsidiary of the Issuer that is not a Subsidiary of the Subsidiary to be so designated.
The Board of Directors may designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided, however, that, unless such designated Unrestricted Subsidiary shall not have any Indebtedness outstanding (other than Indebtedness that would constitute Permitted Indebtedness) immediately after giving effect to such designation:
(a) the Issuer could Incur U.S.$1.00 of additional Indebtedness under paragraph (a) of Condition 3.1 on a pro forma basis taking into account such designation; and
(b) no Default shall have occurred and be continuing.
Any such designation of a Subsidiary as a Restricted Subsidiary or Unrestricted Subsidiary by the Board of Directors shall be evidenced to the Trustee by promptly filing with the Trustee a copy of the resolution of the Board of Directors giving effect to such designation and an Officers’ Certificate certifying that such designation complied with the foregoing provisions;
U.S. Dollar Equivalent means, with respect to any monetary amount in a currency other than U.S. dollars, at any time for determination thereof, the amount of U.S. dollars obtained by converting such foreign currency involved in such computation into U.S. dollars at the spot rate for the purchase of U.S. dollars with the applicable foreign currency, as published in The Wall Street Journal in the “Exchange Rate” column under the heading “Currency Trading” on the date two Business Days prior to such determination.
Except as described under Condition 3.1, whenever it is necessary to determine whether the Issuer has complied with any covenant in the Trust Deed or a Default has occurred and an amount is expressed in a currency other than U.S. dollars, such amount will be treated as the U.S. Dollar Equivalent determined as of the date such amount is initially determined in such currency; and
Voting Stock of a Person means all classes of Capital Stock or other interests (including partnership interests) of such Person then outstanding and normally entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof.
4. INTEREST A13.4.8
4.1 Interest on Fixed Rate Notes
Each Fixed Rate Note bears interest from (and including) the Interest Commencement Date at the rate(s) per annum equal to the Rate(s) of Interest. Interest will be payable in arrear on the Interest Payment Date(s) in each year up to (and including) the Maturity Date.
If the Notes are in definitive form, except as provided in the applicable Final Terms, the amount of interest payable on each Interest Payment Date in respect of the Fixed Interest Period ending on (but excluding) such date will amount to the Fixed Coupon Amount. Payments of interest on any Interest Payment Date will, if so specified in the applicable Final Terms, amount to the Broken Amount so specified.
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As used in the Conditions, Fixed Interest Period means the period from (and including) an Interest Payment Date (or the Interest Commencement Date) to (but excluding) the next (or first) Interest Payment Date.
Except in the case of Notes in definitive form where an applicable Fixed Coupon Amount or Broken Amount is specified in the applicable Final Terms, interest shall be calculated in respect of any period by applying the Rate of Interest to:
(A) in the case of Fixed Rate Notes which are represented by a Global Note, the aggregate outstanding nominal amount of the Fixed Rate Notes represented by such Global Note (or, if they are Partly Paid Notes, the aggregate amount paid up); or
(B) in the case of Fixed Rate Notes in definitive form, the Calculation Amount;
and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub-unit being rounded upwards or otherwise in accordance with applicable market convention. Where the Specified Denomination of a Fixed Rate Note in definitive form is a multiple of the Calculation Amount, the amount of interest payable in respect of such Fixed Rate Note shall be the product of the amount (determined in the manner provided above) for the Calculation Amount and the amount by which the Calculation Amount is multiplied to reach the Specified Denomination, without any further rounding.
Day Count Fraction means, in respect of the calculation of an amount of interest in accordance with this Condition 4.1:
(a) if “Actual/Actual (ICMA)” is specified in the applicable Final Terms:
(i) in the case of Notes where the number of days in the relevant period from (and including) the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to (but excluding) the relevant payment date (the Accrual Period) is equal to or shorter than the Determination Period during which the Accrual Period ends, the number of days in such Accrual Period divided by the product of (I) the number of days in such Determination Period and (II) the number of Determination Dates (as specified in the applicable Final Terms) that would occur in one calendar year; or
(ii) in the case of Notes where the Accrual Period is longer than the Determination Period during which the Accrual Period ends, the sum of:
(A) the number of days in such Accrual Period falling in the Determination Period in which the Accrual Period begins divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Dates that would occur in one calendar year; and
(B) the number of days in such Accrual Period falling in the next Determination Period divided by the product of (x) the number of days in such Determination Period and (y) the number of Determination Dates that would occur in one calendar year; and
(b) if “30/360” is specified in the applicable Final Terms, the number of days in the period from (and including) the most recent Interest Payment Date (or, if none, the Interest Commencement Date) to (but excluding) the relevant payment date (such number of days being calculated on the basis of a year of 360 days with 12 30-day months) divided by 360.
In the Conditions:
Determination Period means each period from (and including) a Determination Date to (but excluding) the next Determination Date (including, where either the Interest Commencement
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Date or the final Interest Payment Date is not a Determination Date, the period commencing on the first Determination Date prior to, and ending on the first Determination Date falling after, such date); and
sub unit means, with respect to any currency other than euro, the lowest amount of such currency that is available as legal tender in the country of such currency and, with respect to euro, one cent.
4.2 Interest on Floating Rate Notes and Index Linked Interest Notes
(a) Interest Payment Dates
Each Floating Rate Note and Index Linked Interest Note bears interest from (and including) the Interest Commencement Date and such interest will be payable in arrear on either:
(i) the Specified Interest Payment Date(s) in each year specified in the applicable Final Terms; or
(ii) if no Specified Interest Payment Date(s) is/are specified in the applicable Final Terms, each date (each such date, together with each Specified Interest Payment Date, an Interest Payment Date) which falls the number of months or other period specified as the Specified Period in the applicable Final Terms after the preceding Interest Payment Date or, in the case of the first Interest Payment Date, after the Interest Commencement Date.
Such interest will be payable in respect of each Interest Period (which expression shall, in the Conditions, mean the period from (and including) an Interest Payment Date (or the Interest Commencement Date) to (but excluding) the next (or first) Interest Payment Date).
If a Business Day Convention is specified in the applicable Final Terms and (x) if there is no numerically corresponding day in the calendar month in which an Interest Payment Date should occur or (y) if any Interest Payment Date would otherwise fall on a day which is not a Business Day, then, if the Business Day Convention specified is:
(A) in any case where Specified Periods are specified in accordance with Condition 4.2 - (a)(ii) above, the Floating Rate Convention, such Interest Payment Date (a) in the case of (x) above, shall be the last day that is a Business Day in the relevant month and the provisions of (ii) below shall apply mutatis mutandis or (b) in the case of (y) above, shall be postponed to the next day which is a Business Day unless it would thereby fall into the next calendar month, in which event (i) such Interest Payment Date shall be brought forward to the immediately preceding Business Day and (ii) each subsequent Interest Payment Date shall be the last Business Day in the month which falls the Specified Period after the preceding applicable Interest Payment Date occurred; or (B) the Following Business Day Convention, such Interest Payment Date shall be postponed to the next day which is a Business Day; or (C) the Modified Following Business Day Convention, such Interest Payment Date shall be postponed to the next day which is a Business Day unless it would thereby fall into the next calendar month, in which event such Interest Payment Date shall be brought forward to the immediately preceding Business Day; or (D) the Preceding Business Day Convention, such Interest Payment Date shall be brought forward to the immediately preceding Business Day. In the Conditions, Business Day means a day which is both: (a) a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in London and each Additional Business Centre specified in the applicable Final Terms; and
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(b) either (i) in relation to any sum payable in a Specified Currency other than euro, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in the principal financial centre of the country of the relevant Specified Currency (if other than London and any Additional Business Centre and which if the Specified Currency is Australian dollars or New Zealand dollars shall be Sydney and Auckland, respectively) or (ii) in relation to any sum payable in euro, a day on which the Trans-European Automated Real-Time Gross Settlement Express Transfer (TARGET2) System (the TARGET2 System) is open.
(b) Rate of Interest
The Rate of Interest payable from time to time in respect of Floating Rate Notes and Index Linked Interest Notes will be determined in the manner specified in the applicable Final Terms.
(i) ISDA Determination for Floating Rate Notes
Where ISDA Determination is specified in the applicable Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Period will be the relevant ISDA Rate plus or minus (as indicated in the applicable Final Terms) the Margin (if any). For the purposes of this subparagraph (i), ISDA Rate for an Interest Period means a rate equal to the Floating Rate that would be determined by the Agent under an interest rate swap transaction if the Agent were acting as Calculation Agent for that swap transaction under the terms of an agreement incorporating the 2006 ISDA Definitions, as published by the International Swaps and Derivatives Association, Inc. and as amended and updated as at the Issue Date of the first Tranche of the Notes (the ISDA Definitions) and under which:
(A) the Floating Rate Option is as specified in the applicable Final Terms;
(B) the Designated Maturity is a period specified in the applicable Final Terms; and
(C) the relevant Reset Date is either (a) if the applicable Floating Rate Option is based on the London interbank offered rate (LIBOR) or on the Euro-zone interbank offered rate (EURIBOR), the first day of that Interest Period or (b) in any other case, as specified in the applicable Final Terms.
For the purposes of this subparagraph (i), Floating Rate, Calculation Agent, Floating Rate Option, Designated Maturity and Reset Date have the meanings given to those terms in the ISDA Definitions.
Unless otherwise stated in the applicable Final Terms the Minimum Rate of Interest shall be deemed to be zero.
(ii) Screen Rate Determination for Floating Rate Notes
Where Screen Rate Determination is specified in the applicable Final Terms as the manner in which the Rate of Interest is to be determined, the Rate of Interest for each Interest Period will, subject as provided below, be either:
(A) the offered quotation; or
(B) the arithmetic mean (rounded if necessary to the fifth decimal place, with 0.000005 being rounded upwards) of the offered quotations,
(expressed as a percentage rate per annum) for the Reference Rate which appears or appear, as the case may be, on the Relevant Screen Page as at 11.00 a.m. (London time, in the case of LIBOR, or Brussels time, in the case of EURIBOR) on the Interest Determination Date in question plus or minus (as indicated in the applicable Final Terms) the Margin (if any), all as determined by the Agent. If five or more of such offered quotations are available on the Relevant Screen Page, the highest (or, if there is more than one such highest quotation, one only
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of such quotations) and the lowest (or, if there is more than one such lowest quotation, one only of such quotations) shall be disregarded by the Agent for the purpose of determining the arithmetic mean (rounded as provided above) of such offered quotations.
The Agency Agreement contains provisions for determining the Rate of Interest in the event that the Relevant Screen Page is not available or if, in the case of (A) above, no such offered quotation appears or, in the case of (B) above, fewer than three such offered quotations appear, in each case as at the time specified in the preceding paragraph.
If the Reference Rate from time to time in respect of Floating Rate Notes is specified in the applicable Final Terms as being other than LIBOR or EURIBOR, the Rate of Interest in respect of such Notes will be determined as provided in the applicable Final Terms.
(c) Minimum Rate of Interest and/or Maximum Rate of Interest
If the applicable Final Terms specifies a Minimum Rate of Interest for any Interest Period, then, in the event that the Rate of Interest in respect of such Interest Period determined in accordance with the provisions of paragraph (b) above is less than such Minimum Rate of Interest, the Rate of Interest for such Interest Period shall be such Minimum Rate of Interest.
If the applicable Final Terms specifies a Maximum Rate of Interest for any Interest Period, then, in the event that the Rate of Interest in respect of such Interest Period determined in accordance with the provisions of paragraph (b) above is greater than such Maximum Rate of Interest, the Rate of Interest for such Interest Period shall be such Maximum Rate of Interest.
(d) Determination of Rate of Interest and calculation of Interest Amounts
The Agent, in the case of Floating Rate Notes, and the Calculation Agent, in the case of Index Linked Interest Notes, will at or as soon as practicable after each time at which the Rate of Interest is to be determined, determine the Rate of Interest for the relevant Interest Period. In the case of Index Linked Interest Notes, the Calculation Agent will notify the Agent of the Rate of Interest for the relevant Interest Period as soon as practicable after calculating the same.
The Agent will calculate the amount of interest (the Interest Amount) payable on the Floating Rate Notes or Index Linked Interest Notes for the relevant Interest Period by applying the Rate of Interest to:
(A) in the case of Floating Rate Notes or Index Linked Interest Notes which are represented by a Global Note, the aggregate outstanding nominal amount of the Notes represented by such Global Note (or, if they are Partly Paid Notes, the aggregate amount paid up); or
(B) in the case of Floating Rate Notes or Index Linked Interest Notes in definitive form, the Calculation Amount;
and, in each case, multiplying such sum by the applicable Day Count Fraction, and rounding the resultant figure to the nearest sub-unit of the relevant Specified Currency, half of any such sub-unit being rounded upwards or otherwise in accordance with applicable market convention. Where the Specified Denomination of a Floating Rate Note or an Index Linked Interest Note in definitive form is a multiple of the Calculation Amount, the Interest Amount payable in respect of such Note shall be the product of the amount (determined in the manner provided above) for the Calculation Amount and the amount by which the Calculation Amount is multiplied to reach the Specified Denomination, without any further rounding.
Day Count Fraction means, in respect of the calculation of an amount of interest in accordance with this Condition 4.2:
(i) if “Actual/Actual (ISDA)” or “Actual/Actual” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365 (or, if any portion of that Interest
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Period falls in a leap year, the sum of (I) the actual number of days in that portion of the Interest Period falling in a leap year divided by 366 and (II) the actual number of days in that portion of the Interest Period falling in a non-leap year divided by 365);
(ii) if “Actual/365 (Fixed)” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365;
(iii) if “Actual/365 (Sterling)” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 365 or, in the case of an Interest Payment Date falling in a leap year, 366;
(iv) if “Actual/360” is specified in the applicable Final Terms, the actual number of days in the Interest Period divided by 360;
(v) if “30/360”, “360/360” or “Bond Basis” is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360 x (Y – Y )]+[30 x (M – M )]+(D – D ) –––––––––––––––––––––––––––––––––––––––2 1 2 1 2 1 360 where:
“Y1” is the year, expressed as a number, in which the first day of the Interest Period falls;
“Y2” is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“M1” is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
“M2” is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“D1” is the first calendar day, expressed as a number, of the Interest Period, unless such number is 31, in which case D1 will be 30; and
“D2” is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless such number would be 31 and D1 is greater than 29, in which case D2 will be 30; (vi) if “30E/360” or “Eurobond Basis” is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360 x (Y – Y )]+[30 x (M – M )]+(D – D ) –––––––––––––––––––––––––––––––––––––––2 1 2 1 2 1 360 where:
“Y1” is the year, expressed as a number, in which the first day of the Interest Period falls;
“Y2” is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“M1” is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
“M2” is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“D1” is the first calendar day, expressed as a number, of the Interest Period, unless such number would be 31, in which case D1 will be 30; and
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“D2” is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless such number would be 31, in which case D2 will be 30; (vii) if “30E/360 (ISDA)” is specified in the applicable Final Terms, the number of days in the Interest Period divided by 360, calculated on a formula basis as follows:
Day Count Fraction = [360 x (Y – Y )]+[30 x (M – M )]+(D – D ) –––––––––––––––––––––––––––––––––––––––2 1 2 1 2 1 360 where:
“Y1” is the year, expressed as a number, in which the first day of the Interest Period falls;
“Y2” is the year, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“M1” is the calendar month, expressed as a number, in which the first day of the Interest Period falls;
“M2” is the calendar month, expressed as a number, in which the day immediately following the last day of the Interest Period falls;
“D1” is the first calendar day, expressed as a number, of the Interest Period, unless (i) that day is the last day of February or (ii) such number would be 31, in which case D1 will be 30; and “D2” is the calendar day, expressed as a number, immediately following the last day included in the Interest Period, unless (i) that day is the last day of February but not the Maturity Date or (ii) such number would be 31, in which case D2 will be 30.
(e) Notification of Rate of Interest and Interest Amounts
The Agent will cause the Rate of Interest and each Interest Amount for each Interest Period and the relevant Interest Payment Date to be notified to the Issuer, the Trustee and any stock exchange on which the relevant Floating Rate Notes or Index Linked Interest Notes are for the time being listed and notice thereof to be published in accordance with Condition 13 as soon as possible after their determination but in no event later than the fourth London Business Day thereafter. Each Interest Amount and Interest Payment Date so notified may subsequently be amended (or appropriate alternative arrangements made by way of adjustment) without prior notice in the event of an extension or shortening of the Interest Period. Any such amendment will be promptly notified to each stock exchange on which the relevant Floating Rate Notes or Index Linked Interest Notes are for the time being listed and to the Noteholders in accordance with Condition 13. For the purposes of this paragraph, the expression London Business Day means a day (other than a Saturday or a Sunday) on which banks and foreign exchange markets are open for general business in London.
(f) Determination or Calculation by Trustee
If for any reason at any relevant time the Agent or, as the case may be, the Calculation Agent defaults in its obligation to determine the Rate of Interest or the Agent defaults in its obligation to calculate any Interest Amount in accordance with subparagraph (b)(i) or subparagraph (b)(ii) above or as otherwise specified in the applicable Final Terms, as the case may be, and in each case in accordance with paragraph (d) above, the Trustee (or an agent appointed by the Trustee at the expense of the Issuer) shall determine the Rate of Interest at such rate as, in its absolute discretion (having such regard as it shall think fit to the foregoing provisions of this Condition, but subject always to any Minimum Rate of Interest or Maximum Rate of Interest specified in the applicable Final Terms), it shall deem fair and reasonable in all the circumstances or, as the case may be, the Trustee shall calculate the Interest Amount(s) in such manner as it shall deem fair and reasonable in all the circumstances and each such determination or calculation shall be deemed to have been made by the Agent or the Calculation Agent, as applicable.
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(g) Certificates to be final
All certificates, communications, opinions, determinations, calculations, quotations and decisions given, expressed, made or obtained for the purposes of the provisions of this Condition 4.2, whether by the Agent or, if applicable, the Calculation Agent, shall (in the absence of wilful default, bad faith, manifest error or proven error) be binding on the Issuer, the Guarantors, the Agent, the Calculation Agent (if applicable), the other Paying Agents and all Noteholders, Receiptholders and Couponholders and (in the absence of wilful default or bad faith) no liability to the Issuer, the Guarantors, the Noteholders, the Receiptholders or the Couponholders shall attach to the Agent or, if applicable, the Calculation Agent or the Trustee in connection with the exercise or non-exercise by it of its powers, duties and discretions pursuant to such provisions.
4.3 Interest on Dual Currency Interest Notes
The rate or amount of interest payable in respect of Dual Currency Interest Notes shall be determined in the manner specified in the applicable Final Terms.
4.4 Interest on Partly Paid Notes
In the case of Partly Paid Notes (other than Partly Paid Notes which are Zero Coupon Notes), interest will accrue as aforesaid on the paid-up nominal amount of such Notes and otherwise as specified in the applicable Final Terms.
4.5 Accrual of interest
Each Note (or in the case of the redemption of part only of a Note, that part only of such Note) will cease to bear interest (if any) from the date for its redemption unless, upon due presentation thereof, payment of principal is improperly withheld or refused. In such event, interest will continue to accrue until whichever is the earlier of:
(a) the date on which all amounts due in respect of such Note have been paid; and
(b) five days after the date on which the full amount of the moneys payable in respect of such Note has been received by the Agent and notice to that effect has been given to the Noteholders in accordance with Condition 13.
5. PAYMENTS
5.1 Method of payment
Subject as provided below:
(a) payments in a Specified Currency other than euro will be made by credit or transfer to an account in the relevant Specified Currency maintained by the payee with, or, at the option of the payee, by a cheque in such Specified Currency drawn on, a bank in the principal financial centre of the country of such Specified Currency (which, if the Specified Currency is Australian dollars or New Zealand dollars, shall be Sydney and Auckland, respectively); and
(b) payments in euro will be made by credit or transfer to a euro account (or any other account to which euro may be credited or transferred) specified by the payee or, at the option of the payee, by a euro cheque.
Payments will be subject in all cases to any fiscal or other laws and regulations applicable thereto in the place of payment, but without prejudice to the provisions of Condition 7.
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5.2 Presentation of definitive Notes, Receipts and Coupons
Payments of principal in respect of definitive Notes will (subject as provided below) be made in the manner provided in Condition 5.1 above only against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of definitive Notes, and payments of interest in respect of definitive Notes will (subject as provided below) be made as aforesaid only against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of Coupons, in each case at the specified office of any Paying Agent outside the United States (which expression, as used herein, means the United States of America (including the States and the District of Columbia, its territories, its possessions and other areas subject to its jurisdiction)).
Payments of instalments of principal (if any) in respect of definitive Notes, other than the final instalment, will (subject as provided below) be made in the manner provided in Condition 5.1 above only against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of the relevant Receipt in accordance with the preceding paragraph. Payment of the final instalment will be made in the manner provided in Condition 5.1 above only against presentation and surrender (or, in the case of part payment of any sum due, endorsement) of the relevant Note in accordance with the preceding paragraph. Each Receipt must be presented for payment of the relevant instalment together with the definitive Note to which it appertains. Receipts presented without the definitive Note to which they appertain do not constitute valid obligations of the Issuer. Upon the date on which any definitive Note becomes due and repayable, unmatured Receipts (if any) relating thereto (whether or not attached) shall become void and no payment shall be made in respect thereof.
Fixed Rate Notes in definitive form (other than Dual Currency Notes, Index Linked Notes or Long Maturity Notes (as defined below)) should be presented for payment together with all unmatured Coupons appertaining thereto (which expression shall for this purpose include Coupons falling to be issued on exchange of matured Talons), failing which the amount of any missing unmatured Coupon (or, in the case of payment not being made in full, the same proportion of the amount of such missing unmatured Coupon as the sum so paid bears to the sum due) will be deducted from the sum due for payment. Each amount of principal so deducted will be paid in the manner mentioned above against surrender of the relative missing Coupon at any time before the expiry of 10 years after the Relevant Date (as defined in Condition 7) in respect of such principal (whether or not such Coupon would otherwise have become void under Condition 8) or, if later, five years from the date on which such Coupon would otherwise have become due, but in no event thereafter.
Upon any Fixed Rate Note in definitive form becoming due and repayable prior to its Maturity Date, all unmatured Talons (if any) appertaining thereto will become void and no further Coupons will be issued in respect thereof.
Upon the date on which any Floating Rate Note, Dual Currency Note, Index Linked Note or Long Maturity Note in definitive form becomes due and repayable, unmatured Coupons and Talons (if any) relating thereto (whether or not attached) shall become void and no payment or, as the case may be, exchange for further Coupons shall be made in respect thereof. A Long Maturity Note is a Fixed Rate Note (other than a Fixed Rate Note which on issue had a Talon attached) whose nominal amount on issue is less than the aggregate interest payable thereon provided that such Note shall cease to be a Long Maturity Note on the Interest Payment Date on which the aggregate amount of interest remaining to be paid after that date is less than the nominal amount of such Note.
If the due date for redemption of any definitive Note is not an Interest Payment Date, interest (if any) accrued in respect of such Note from (and including) the preceding Interest Payment Date or, as the case may be, the Interest Commencement Date shall be payable only against surrender of the relevant definitive Note.
5.3 Payments in respect of Global Notes
Payments of principal and interest (if any) in respect of Notes represented by any Global Note will (subject as provided below) be made in the manner specified above in relation to definitive Notes and
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otherwise in the manner specified in the relevant Global Note against presentation or surrender, as the case may be, of such Global Note at the specified office of any Paying Agent outside the United States. A record of each payment made against presentation or surrender of any Global Note, distinguishing between any payment of principal and any payment of interest, will be made on such Global Note by the Paying Agent to which it was presented and such record shall be prima facie evidence that the payment in question has been made.
5.4 General provisions applicable to payments
The holder of a Global Note shall be the only person entitled to receive payments in respect of Notes represented by such Global Note and the Issuer or, as the case may be, the Guarantors will be discharged by payment to, or to the order of, the holder of such Global Note in respect of each amount so paid. Each of the persons shown in the records of Euroclear or Clearstream, Luxembourg as the beneficial holder of a particular nominal amount of Notes represented by such Global Note must look solely to Euroclear or Clearstream, Luxembourg, as the case may be, for his share of each payment so made by the Issuer or, as the case may be, a Guarantor to, or to the order of, the holder of such Global Note.
Notwithstanding the foregoing provisions of this Condition, if any amount of principal and/or interest in respect of Notes is payable in U.S. dollars, such U.S. dollar payments of principal and/or interest in respect of such Notes will be made at the specified office of a Paying Agent in the United States if:
(a) the Issuer has appointed Paying Agents with specified offices outside the United States with the reasonable expectation that such Paying Agents would be able to make payment in U.S. dollars at such specified offices outside the United States of the full amount of principal and interest on the Notes in the manner provided above when due;
(b) payment of the full amount of such principal and interest at all such specified offices outside the United States is illegal or effectively precluded by exchange controls or other similar restrictions on the full payment or receipt of principal and interest in U.S. dollars; and
(c) such payment is then permitted under United States law without involving, in the opinion of the Issuer, adverse tax consequences to the Issuer.
5.5 Payment Day
If the date for payment of any amount in respect of any Note, Receipt or Coupon is not a Payment Day, the holder thereof shall not be entitled to payment until the next following Payment Day in the relevant place and shall not be entitled to further interest or other payment in respect of such delay. For these purposes, Payment Day means any day which (subject to Condition 8) is:
(a) a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in:
(i) the relevant place of presentation;
(ii) London; and
(iii) each Additional Financial Centre specified in the applicable Final Terms; and
(b) either (A) in relation to any sum payable in a Specified Currency other than euro, a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealing in foreign exchange and foreign currency deposits) in the principal financial centre of the country of the relevant Specified Currency (if other than the place of presentation, London and any Additional Financial Centre and which if the Specified Currency is Australian dollars or New Zealand dollars shall be Sydney and Auckland, respectively) or (B) in relation to any sum payable in euro, a day on which the TARGET2 System is open.
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5.6 Interpretation of principal and interest
Any reference in the Conditions to principal in respect of the Notes shall be deemed to include, as applicable:
(a) any additional amounts which may be payable with respect to principal under Condition 7 or under any undertaking or covenant given in addition thereto, or in substitution therefor, pursuant to the Trust Deed;
(b) the Final Redemption Amount of the Notes;
(c) the Early Redemption Amount of the Notes;
(d) the Optional Redemption Amount(s) (if any) of the Notes;
(e) in relation to Notes redeemable in instalments, the Instalment Amounts;
(f) in relation to Zero Coupon Notes, the Amortised Face Amount (as defined in Condition 6.5);
(g) any purchase price which may be payable by the Issuer pursuant to Condition 3; and
(h) any premium and any other amounts (other than interest) which may be payable by the Issuer under or in respect of the Notes.
Any reference in the Conditions to interest in respect of the Notes shall be deemed to include, as applicable, any additional amounts which may be payable with respect to interest under Condition 7 or under any undertaking or covenant given in addition thereto, or in substitution therefor, pursuant to the Trust Deed.
6. REDEMPTION AND PURCHASE A12.4.1.12 A12.4.1.13 6.1 Redemption at maturity
Unless previously redeemed or purchased and cancelled as specified below, each Note (including each Index Linked Redemption Note and Dual Currency Redemption Note) will be redeemed by the Issuer at its Final Redemption Amount specified in, or determined in the manner specified in, the applicable Final Terms in the relevant Specified Currency on the Maturity Date.
6.2 Redemption for tax reasons
The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time (if this Note is neither a Floating Rate Note, an Index Linked Interest Note nor a Dual Currency Interest Note) or on any Interest Payment Date (if this Note is either a Floating Rate Note, an Index Linked Interest Note or a Dual Currency Interest Note), on giving not less than 30 nor more than 60 days’ notice to the Trustee and the Agent and, in accordance with Condition 13, the Noteholders (which notice shall be irrevocable), if the Issuer satisfies the Trustee immediately before the giving of such notice that:
(a) on the occasion of the next payment due under the Notes, the Issuer has or will become obliged to pay additional amounts as provided or referred to in Condition 7 or any Guarantor would be unable for reasons outside its control to procure payment by the Issuer and/or another Guarantor and in making payment itself would be required to pay such additional amounts, in each case as a result of any change in, or amendment to, the laws or regulations of a Tax Jurisdiction (as defined in Condition 7) or any change in the application or official interpretation of such laws or regulations, which change or amendment becomes effective on or after the date on which agreement is reached to issue the first Tranche of the Notes; and
(b) such obligation cannot be avoided by the Issuer or, as the case may be, the Guarantors taking reasonable measures available to it or them, as the case may be,
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provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer or, as the case may be, the relevant Guarantor would be obliged to pay such additional amounts were a payment in respect of the Notes (or the Notes Guarantee, as the case may be) then due.
Prior to the publication of any notice of redemption pursuant to this Condition 6.2, the Issuer shall deliver to the Trustee a certificate signed by two Directors of the Issuer or, as the case may be, two Directors of the relevant Guarantor stating that the Issuer is entitled to effect such redemption and setting forth a statement of facts showing that the conditions precedent to the right of the Issuer so to redeem have occurred, and an opinion of independent legal advisers of recognised standing to the effect that the Issuer or, as the case may be, the relevant Guarantor has or will become obliged to pay such additional amounts as a result of such change or amendment and the Trustee shall be entitled to accept the certificate as sufficient evidence of the satisfaction of the conditions precedent set out above, in which event it shall be conclusive and binding on the Noteholders, the Receiptholders and the Couponholders.
Notes redeemed pursuant to this Condition 6.2 will be redeemed at their Early Redemption Amount referred to in Condition 6.5 below together (if appropriate) with interest accrued to (but excluding) the date of redemption.
6.3 Redemption at the option of the Issuer (Issuer Call)
If Issuer Call is specified in the applicable Final Terms, the Issuer may, having given:
(a) not less than 15 nor more than 30 days’ notice to the Noteholders in accordance with Condition 13; and
(b) not less than 15 days before the giving of the notice referred to in (a) above, notice to the Trustee and to the Agent,
(which notices shall be irrevocable and shall specify the date fixed for redemption), redeem all or some only of the Notes then outstanding on any Optional Redemption Date and at the Optional Redemption Amount(s) specified in, or determined in the manner specified in, the applicable Final Terms together, if appropriate, with interest accrued to (but excluding) the relevant Optional Redemption Date. Any such redemption must be of a nominal amount not less than the Minimum Redemption Amount and not more than the Maximum Redemption Amount, in each case as may be specified in the applicable Final Terms. In the case of a partial redemption of Notes, the Notes to be redeemed (Redeemed Notes) will be selected individually by lot, in the case of Redeemed Notes represented by definitive Notes, and in accordance with the rules of Euroclear and/or Clearstream, Luxembourg, in the case of Redeemed Notes represented by a Global Note, not more than 30 days prior to the date fixed for redemption (such date of selection being hereinafter called the Selection Date). In the case of Redeemed Notes represented by definitive Notes, a list of the serial numbers of such Redeemed Notes will be published in accordance with Condition 13 not less than 15 days prior to the date fixed for redemption. No exchange of the relevant Global Note will be permitted during the period from (and including) the Selection Date to (and including) the date fixed for redemption pursuant to this Condition 6.3 and notice to that effect shall be given by the Issuer to the Noteholders in accordance with Condition 13 at least five days prior to the Selection Date.
6.4 Redemption at the option of the Noteholders (Investor Put)
If Investor Put is specified in the applicable Final Terms, upon the holder of any Note giving to the Issuer in accordance with Condition 13 not less than 15 nor more than 30 days’ notice the Issuer will, upon the expiry of such notice, redeem, subject to, and in accordance with, the terms specified in the applicable Final Terms, such Note on the Optional Redemption Date and at the Optional Redemption Amount together, if appropriate, with interest accrued to (but excluding) the Optional Redemption Date. It may be that before an Investor Put can be exercised, certain conditions and/or circumstances will need to be satisfied. Where relevant, the provisions will be set out in the applicable Final Terms.
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To exercise the right to require redemption of this Note the holder of this Note must, if this Note is in definitive form and held outside Euroclear and Clearstream, Luxembourg, deliver, at the specified office of any Paying Agent at any time during normal business hours of such Paying Agent falling within the notice period, a duly completed and signed notice of exercise in the form (for the time being current) obtainable from any specified office of any Paying Agent (a Put Notice) and in which the holder must specify a bank account (or, if payment is required to be made by cheque, an address) to which payment is to be made under this Condition accompanied by this Note or evidence satisfactory to the Paying Agent concerned that this Note will, following delivery of the Put Notice, be held to its order or under its control. If this Note is represented by a Global Note or is in definitive form and held through Euroclear or Clearstream, Luxembourg, to exercise the right to require redemption of this Note the holder of this Note must, within the notice period, give notice to the Agent of such exercise in accordance with the standard procedures of Euroclear and Clearstream, Luxembourg (which may include notice being given on his instruction by Euroclear or Clearstream, Luxembourg or any common depositary for them to the Agent by electronic means) in a form acceptable to Euroclear and Clearstream, Luxembourg from time to time and, if this Note is represented by a Global Note, at the same time present or procure the presentation of the relevant Global Note to the Agent for notation accordingly.
6.5 Early Redemption Amounts
For the purpose of Condition 6.2 above and Condition 9, each Note will be redeemed at its Early Redemption Amount calculated as follows:
(a) in the case of a Note with a Final Redemption Amount equal to the Issue Price, at the Final Redemption Amount thereof;
(b) in the case of a Note (other than a Zero Coupon Note but including an Instalment Note and a Partly Paid Note) with a Final Redemption Amount which is or may be less or greater than the Issue Price or which is payable in a Specified Currency other than that in which the Note is denominated, at the amount specified in, or determined in the manner specified in, the applicable Final Terms or, if no such amount or manner is so specified in the applicable Final Terms, at its nominal amount; or
(c) in the case of a Zero Coupon Note, at an amount (the Amortised Face Amount) calculated in accordance with the following formula:
Early Redemption Amount = RP x (1 + AY)y
where:
RP means the Reference Price;
AY means the Accrual Yield expressed as a decimal; and
y is a fraction the numerator of which is equal to the number of days (calculated on the basis of a 360-day year consisting of 12 months of 30 days each) from (and including) the Issue Date of the first Tranche of the Notes to (but excluding) the date fixed for redemption or (as the case may be) the date upon which such Note becomes due and repayable and the denominator of which is 360,
or on such other calculation basis as may be specified in the applicable Final Terms.
6.6 Instalments
Instalment Notes will be redeemed in the Instalment Amounts and on the Instalment Dates. In the case of early redemption, the Early Redemption Amount will be determined pursuant to Condition 6.5.
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6.7 Partly Paid Notes
Partly Paid Notes will be redeemed, whether at maturity, early redemption or otherwise, in accordance with the provisions of this Condition and the applicable Final Terms.
6.8 Purchases
The Issuer, any Guarantor or any other Subsidiary of the Issuer may at any time purchase Notes (provided that, in the case of definitive Notes, all unmatured Receipts, Coupons and Talons appertaining thereto are purchased therewith) at any price in the open market or otherwise. All Notes so purchased will be surrendered to a Paying Agent for cancellation.
6.9 Cancellation
All Notes which are redeemed will forthwith be cancelled (together with all unmatured Receipts, Coupons and Talons attached thereto or surrendered therewith at the time of redemption). All Notes so cancelled and any Notes purchased and cancelled pursuant to Condition 6.8 above (together with all unmatured Receipts, Coupons and Talons cancelled therewith) shall be forwarded to the Agent and cannot be reissued or resold.
6.10 Late payment on Zero Coupon Notes
If the amount payable in respect of any Zero Coupon Note upon redemption of such Zero Coupon Note pursuant to Condition 6.1, 6.2, 6.3 or 6.4 above or upon its becoming due and repayable as provided in Condition 9 is improperly withheld or refused, the amount due and repayable in respect of such Zero Coupon Note shall be the amount calculated as provided in Condition 6.5(c) above as though the references therein to the date fixed for the redemption or the date upon which such Zero Coupon Note becomes due and payable were replaced by references to the date which is the earlier of:
(a) the date on which all amounts due in respect of such Zero Coupon Note have been paid; and
(b) five days after the date on which the full amount of the moneys payable in respect of such Zero Coupon Notes has been received by the Agent or the Trustee and notice to that effect has been given to the Noteholders in accordance with Condition 13.
7. TAXATION
All payments in respect of the Notes, Receipts and Coupons by the Issuer or any Guarantor will be made without withholding or deduction for, or on account of, any present or future taxes or duties of whatever nature imposed or levied by or on behalf of any Tax Jurisdiction unless such withholding or deduction is required by law. In such event, the Issuer or, as the case may be, the relevant Guarantor will pay such additional amounts as shall be necessary in order that the net amounts received by the holders of the Notes, Receipts or Coupons after such withholding or deduction shall equal the respective amounts of principal and interest which would otherwise have been receivable in respect of the Notes, Receipts or Coupons, as the case may be, in the absence of such withholding or deduction; except that no such additional amounts shall be payable with respect to any Note, Receipt or Coupon:
(a) presented for payment by or on behalf of a holder who is liable for such taxes or duties in respect of such Note, Receipt or Coupon by reason of his having some connection (whether present or former) with a Tax Jurisdiction other than the mere holding of such Note, Receipt or Coupon; or
(b) presented for payment in the United Kingdom or Kazakhstan; or
(c) where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to European Council Directive 2003/48/EC on the taxation of savings
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income or any law implementing or complying with, or introduced in order to conform to, such Directive; or
(d) presented for payment by or on behalf of a holder who would have been able to avoid such withholding or deduction by presenting the relevant Note, Receipt or Coupon to another Paying Agent in a Member State of the European Union; or
(e) presented for payment more than 30 days after the Relevant Date (as defined below) except to the extent that the holder thereof would have been entitled to an additional amount on presenting the same for payment on such thirtieth day assuming that day to have been a Payment Day (as defined in Condition 5.5); or
(f) any combination of the above items.
As used herein:
(i) the Relevant Date means the date on which such payment first becomes due, except that, if the full amount of the moneys payable has not been duly received by the Trustee or the Agent on or prior to such due date, it means the date on which, the full amount of such moneys having been so received, notice to that effect is duly given to the Noteholders in accordance with Condition 13; and
(ii) Tax Jurisdiction means the United Kingdom or any political subdivision or any authority thereof or therein having power to tax (in the case of payments by the Issuer) or Kazakhstan or any political subdivision or any authority thereof or therein having power to tax (in the case of payments by any Guarantor) or, in either case, any other jurisdiction or any political subdivision or any authority thereof or therein having power to tax to which the Issuer or any Guarantor, as the case may be, becomes subject in respect of payments made by it of principal and/or interest on the Notes.
8. PRESCRIPTION
The Notes, Receipts and Coupons will become void unless presented for payment within a period of A13.4.8 10 years (in the case of principal) and five years (in the case of interest) after the Relevant Date (as defined in Condition 7) therefor.
There shall not be included in any Coupon sheet issued on exchange of a Talon any Coupon the claim for payment in respect of which would be void pursuant to this Condition or Condition 5.2 or any Talon which would be void pursuant to Condition 5.2.
9. EVENTS OF DEFAULT AND ENFORCEMENT
9.1 Events of Default
The Trustee at its discretion may, and if so requested in writing by the holders of at least one-quarter in nominal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution shall (subject in each case to being indemnified and/or secured and/or prefunded to its satisfaction), (but in the case of the happening of any of the events described in subparagraphs (d) to (f) (other than the winding up or dissolution of the Issuer or any Guarantor) and (g) to (h) inclusive below, only if the Trustee shall have certified in writing to the Issuer that such event is, in its opinion, materially prejudicial to the interests of the Noteholders), give notice in writing to the Issuer that each Note is, and each Note shall thereupon immediately become, due and repayable at its Early Redemption Amount together with accrued interest as provided in the Trust Deed if any of the following events (each an Event of Default) shall occur:
(a) if default is made in the payment of any principal or interest due in respect of the Notes or any of them and the default continues for a period of 7 days, in the case of principal, or 14 days, in the case of interest; or
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(b) if the Issuer or any Guarantor fails to perform or observe its obligations under Condition 3.7; or
(c) if the Issuer or any Guarantor fails to perform or observe its obligations under Condition 3 (other than that set out in Condition 3.7) and (except in any case where, in the opinion of the Trustee, the failure is incapable of remedy, when no such continuation or notice as is hereinafter mentioned will be required) the failure continues for the period of 30 days next following the service by the Trustee on the Issuer or the relevant Guarantor (as the case may be) of notice requiring the same to be remedied;
(d) if the Issuer or any Guarantor fails to perform or observe any of its other obligations (other than, for the avoidance of doubt, those set out in Condition 3) under the Conditions or the Trust Deed and (except in any case where, in the opinion of the Trustee, the failure is incapable of remedy, when no such continuation or notice as is hereinafter mentioned will be required) the failure continues for the period of 30 days next following the service by the Trustee on the Issuer or the relevant Guarantor (as the case may be) of notice requiring the same to be remedied; or
(e) if (i) any Indebtedness of the Issuer, any Guarantor or any Restricted Subsidiary becomes due and payable prior to the due date for payment thereof by reason of the occurrence of an event of default (however described) in relation to the Issuer, such Guarantor or such Restricted Subsidiary; (ii) the Issuer, any Guarantor or any Restricted Subsidiary fails to make any payment in respect of any Indebtedness on the due date for payment as extended by any applicable grace period; (iii) any security given by the Issuer, any Guarantor or any Restricted Subsidiary for any Indebtedness becomes enforceable and steps are taken to enforce the same; or (iv) default is made by the Issuer, any Guarantor or any Restricted Subsidiary in making any payment due under any guarantee and/or indemnity given by it in relation to any Indebtedness of any other person; provided that no event described in this subparagraph (e) shall constitute an Event of Default unless the relevant amount of Indebtedness or other relative liability due and unpaid, either alone or when aggregated (without duplication) with other amounts of Indebtedness and/or other liabilities due and unpaid relative to all (if any) other events specified in (i) to (iv) above which have occurred and are continuing, amounts to at least U.S.$50,000,000 (or its equivalent in any other currency); or
(f) if any order is made by any competent court or resolution passed for the winding up or dissolution of the Issuer, any Guarantor or any Restricted Subsidiary, save for the purposes of reorganisation on terms previously approved in writing by the Trustee or by an Extraordinary Resolution; or
(g) if the Issuer, any Guarantor or any Restricted Subsidiary ceases or threatens to cease to carry on the whole or a substantial part of its business, save for the purposes of a reorganisation on terms previously approved in writing by the Trustee or by an Extraordinary Resolution, or the Issuer, any Guarantor or any Restricted Subsidiary stops or threatens to stop payment of, or is unable to, or admits inability to, pay, its debts (or any class of its debts) as they fall due, or is deemed unable to pay its debts pursuant to or for the purposes of any applicable law, or is adjudicated or found bankrupt or insolvent; or
(h) if (A) proceedings are initiated against the Issuer, any Guarantor or any Restricted Subsidiary under any applicable liquidation, insolvency, composition, reorganisation or other similar laws, or an application is made (or documents filed with a court) for the appointment of an administrative or other receiver, manager, administrator, liquidator or other similar official, or an administrative or other receiver, manager, administrator, liquidator or other similar official is appointed, in relation to the Issuer, any Guarantor or any Restricted Subsidiary or, as the case may be, in relation to the whole or a substantial part of the undertaking or assets of any of them, or an encumbrancer takes possession of the whole or a substantial part of the undertaking or assets of any of them, or a distress, execution, attachment, sequestration or other process is levied, enforced upon, sued out or put in force against the whole or a substantial part of the
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undertaking or assets of any of them and (B) in any such case (other than the appointment of an administrator or an administrative receiver appointed following the presentation of a petition for an administration order), is not discharged within 14 days, save, in any such case, for the purposes of a reorganisation on terms approved in writing by the Trustee or by an Extraordinary Resolution; or
(i) if the Issuer, any Guarantor or any Restricted Subsidiary initiates or consents to judicial proceedings relating to itself under any applicable liquidation, insolvency, composition, reorganisation or other similar laws (including the obtaining of a moratorium) or makes a conveyance or assignment for the benefit of, or enters into any composition or other arrangement with, its creditors generally (or any class of its creditors) or any meeting is convened to consider a proposal for an arrangement or composition with its creditors generally (or any class of its creditors), save, in any such case, for the purposes of a reorganisation on terms approved in writing by the Trustee or by an Extraordinary Resolution; or
(j) if any Guarantor ceases to be a Subsidiary wholly owned and controlled, directly or indirectly, by the Issuer (except in compliance with Condition 3.7); or
(k) if the Notes Guarantee ceases to be in full force and effect (other than in accordance with the terms of the Notes Guarantee or pursuant to the terms of the Trust Deed) or any Guarantor denies or disaffirms its obligations under the Notes Guarantee (except in compliance with Condition 3.6); or
(l) if any event occurs which, under the laws of any Tax Jurisdiction, has or may have, in the Trustee’s opinion, an analogous effect to any of the events referred to in paragraphs (f) to (k) above.
9.2 Enforcement
The Trustee may at any time, at its discretion and without notice, take such proceedings and/or other actions (including lodging an appeal in any proceedings) against (or in relation to) the Issuer and/or any Guarantor as it may think fit to enforce the provisions of the Trust Deed, the Notes, the Receipts and the Coupons or otherwise, but it shall not be bound to take any such proceedings or other steps or action unless (i) it shall have been so directed by an Extraordinary Resolution or so requested in writing by the holders of at least one-quarter in nominal amount of the Notes then outstanding and (ii) it shall have been indemnified and/or secured and/or prefunded to its satisfaction.
9.3 Limitation on Trustee actions
The Trustee may refrain from taking any action in any jurisdiction if the taking of such action in that jurisdiction would, in its opinion based upon legal advice in the relevant jurisdiction, be contrary to any law of that jurisdiction. Furthermore, the Trustee may also refrain from taking such action if it would otherwise render it liable to any person in that jurisdiction or if, in its opinion based upon such legal advice, it would not have the power to do the relevant thing in that jurisdiction by virtue of any applicable law in that jurisdiction or if it is determined by any court or other competent authority in that jurisdiction that it does not have such power.
9.4 Enforcement by the Noteholders
No Noteholder, Receiptholder or Couponholder shall be entitled to (i) take any steps or action against the Issuer and/or any Guarantor to enforce the performance of any of the provisions of the Trust Deed, the Notes or the Coupons or (ii) take any other proceedings (including lodging an appeal in any proceedings) in respect of or concerning the Issuer or any Guarantor, in each case unless the Trustee, having become bound so to take any such action, steps or proceedings, fails so to do within 60 days of having become so bound and the failure shall be continuing.
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10. REPLACEMENT OF NOTES, RECEIPTS, COUPONS AND TALONS
Should any Note, Receipt, Coupon or Talon be lost, stolen, mutilated, defaced or destroyed, it may be replaced at the specified office of the Agent upon payment by the claimant of such costs and expenses as may be incurred in connection therewith and on such terms as to evidence and indemnity as the Issuer may reasonably require. Mutilated or defaced Notes, Receipts, Coupons or Talons must be surrendered before replacements will be issued.
11. PAYING AGENTS
The names of the initial Paying Agents and their initial specified offices are set out below.
The Issuer is entitled, with the prior written approval of the Trustee, to vary or terminate the appointment of any Paying Agent and/or appoint additional or other Paying Agents and/or approve any change in the specified office through which any Paying Agent acts, provided that:
(a) there will at all times be an Agent;
(b) so long as the Notes are listed on any stock exchange or admitted to listing by any other relevant authority, there will at all times be a Paying Agent with a specified office in such place as may be required by the rules and regulations of the relevant stock exchange or other relevant authority;
(c) there will at all times be a Paying Agent in a Member State of the European Union that will not be obliged to withhold or deduct tax pursuant to European Council Directive 2003/48/EC or any law implementing or complying with, or introduced in order to conform to, such Directive; and
(d) there will at all times be a Paying Agent in a jurisdiction within continental Europe, other than the jurisdiction in which the Issuer or any Guarantor is incorporated.
In addition, the Issuer shall forthwith appoint a Paying Agent having a specified office in New York City in the circumstances described in Condition 5.4. Any variation, termination, appointment or change shall only take effect (other than in the case of insolvency, when it shall be of immediate effect) after not less than 30 nor more than 45 days’ prior notice thereof shall have been given to the Noteholders in accordance with Condition 13.
In acting under the Agency Agreement, the Paying Agents act solely as agents of the Issuer and the Guarantors and, in certain circumstances specified therein, of the Trustee and do not assume any obligation to, or relationship of agency or trust with, any Noteholders, Receiptholders or Couponholders. The Agency Agreement contains provisions permitting any entity into which any Paying Agent is merged or converted or with which it is consolidated or to which it transfers all or substantially all of its assets to become the successor paying agent.
12. EXCHANGE OF TALONS
On and after the Interest Payment Date on which the final Coupon comprised in any Coupon sheet matures, the Talon (if any) forming part of such Coupon sheet may be surrendered at the specified office of the Agent or any other Paying Agent in exchange for a further Coupon sheet including (if such further Coupon sheet does not include Coupons to (and including) the final date for the payment of interest due in respect of the Note to which it appertains) a further Talon, subject to the provisions of Condition 8.
13. NOTICES
All notices regarding the Notes will be deemed to be validly given if published in a leading English language daily newspaper of general circulation in London which is expected to be the Financial Times. The Issuer shall also ensure that notices are duly published in a manner which complies with
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the rules of any stock exchange or other relevant authority on which the Notes are for the time being listed or by which they have been admitted to trading. Any such notice will be deemed to have been given on the date of the first publication or, where required to be published in more than one newspaper, on the date of the first publication in all required newspapers. If publication as provided above is not practicable, a notice will be given in such other manner, and will be deemed to have been given on such date, as the Trustee shall approve.
Until such time as any definitive Notes are issued, there may, so long as any Global Notes representing the Notes are held in their entirety on behalf of Euroclear and/or Clearstream, Luxembourg, be substituted for such publication in such newspaper(s) the delivery of the relevant notice to Euroclear and/or Clearstream, Luxembourg for communication by them to the holders of the Notes and, in addition, for so long as any Notes are listed on a stock exchange or are admitted to trading by another relevant authority and the rules of that stock exchange or relevant authority so require, such notice will be published in a daily newspaper of general circulation in the place or places required by those rules. Any such notice shall be deemed to have been given to the holders of the Notes on the seventh day after the day on which the said notice was given to Euroclear and/or Clearstream, Luxembourg.
Notices to be given by any Noteholder shall be in writing and given by lodging the same, together (in the case of any Note in definitive form) with the relative Note or Notes, with the Agent. Whilst any of the Notes are represented by a Global Note, such notice may be given by any holder of a Note to the Agent through Euroclear and/or Clearstream, Luxembourg, as the case may be, in such manner as the Agent and Euroclear and/or Clearstream, Luxembourg, as the case may be, may approve for this purpose.
14. MEETINGS OF NOTEHOLDERS MODIFICATION, WAIVER AND SUBSTITUTION
The Trust Deed contains provisions for convening meetings of the Noteholders to consider any matter affecting their interests, including the sanctioning by Extraordinary Resolution of a modification of the Notes, the Receipts, the Coupons or any of the provisions of the Trust Deed. Such a meeting may be convened by the Issuer, or the Trustee and shall be convened by the Issuer if required in writing by Noteholders holding not less than five per cent. in nominal amount of the Notes for the time being remaining outstanding. The quorum at any such meeting for passing an Extraordinary Resolution is one or more persons holding or representing more than 50 per cent. in nominal amount of the Notes for the time being outstanding, or at any adjourned meeting one or more persons being or representing Noteholders whatever the nominal amount of the Notes so held or represented, except that at any meeting the business of which includes the modification of certain provisions of the Notes, the Receipts or the Coupons or the Trust Deed (including modifying the date of maturity of the Notes or any date for payment of interest thereon, reducing or cancelling the amount of principal or the rate of interest payable in respect of the Notes or altering the currency of payment of the Notes, the Receipts or the Coupons), the quorum shall be one or more persons holding or representing not less than two- thirds in nominal amount of the Notes for the time being outstanding, or at any adjourned such meeting one or more persons holding or representing not less than one-third in nominal amount of the Notes for the time being outstanding. An Extraordinary Resolution passed at any meeting of the Noteholders shall be binding on all the Noteholders, whether or not they are present at the meeting, and on all Receiptholders and Couponholders.
The Trustee may agree, without the consent of the Noteholders, Receiptholders or Couponholders, to any modification of, or to the waiver or authorisation of any breach or proposed breach of, any of the provisions of the Notes or the Trust Deed, or determine, without any such consent as aforesaid, that any Event of Default or potential Event of Default shall not be treated as such, where, in any such case, it is not, in the opinion of the Trustee, materially prejudicial to the interests of the Noteholders so to do or may agree, without any such consent as aforesaid, to any modification which is of a formal, minor or technical nature or to correct a manifest error or an error which, in the opinion of the Trustee, is proven. Any such modification shall be binding on the Noteholders, the Receiptholders and the Couponholders and any such modification shall be notified to the Noteholders in accordance with Condition 13 as soon as practicable thereafter.
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In connection with the exercise by it of any of its trusts, powers, authorities and discretions (including, without limitation, any modification, waiver, authorisation or determination), the Trustee shall have regard to the general interests of the Noteholders as a class (but shall not have regard to any interests arising from circumstances particular to individual Noteholders, Receiptholders or Couponholders whatever their number) and, in particular but without limitation, shall not have regard to the consequences of any such exercise for individual Noteholders, Receiptholders or Couponholders (whatever their number) resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory or any political sub- division thereof and the Trustee shall not be entitled to require, nor shall any Noteholder, Receiptholder or Couponholder be entitled to claim, from the Issuer, any Guarantor, the Trustee or any other person any indemnification or payment in respect of any tax consequences of any such exercise upon individual Noteholders, Receiptholders or Couponholders except to the extent already provided for in Condition 7 and/or any undertaking or covenant given in addition to, or in substitution for, Condition 7 pursuant to the Trust Deed.
The Trustee may, without the consent of the Noteholders, agree with the Issuer to the substitution in place of the Issuer (or of any previous substitute under this Condition) as the principal debtor under the Notes, the Receipts, the Coupons and the Trust Deed of another company, being a Subsidiary of the Issuer, subject to (a) the Trustee being satisfied that the interests of the Noteholders will not be materially prejudiced by the substitution and (b) certain other conditions set out in the Trust Deed being complied with.
15. INDEMNIFICATION OF THE TRUSTEE AND TRUSTEE CONTRACTING WITH THE ISSUER AND/OR ANY GUARANTOR
The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility, including provisions relieving it from taking action unless indemnified and/or secured and/or prefunded to its satisfaction.
The Trust Deed also contains provisions pursuant to which the Trustee is entitled, inter alia, (a) to enter into business transactions with the Issuer, any Guarantor and/or any of the Issuer’s other Subsidiaries and to act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the Issuer, any Guarantor and/or any of the Issuer’s other Subsidiaries, (b) to exercise and enforce its rights, comply with its obligations and perform its duties under or in relation to any such transactions or, as the case may be, any such trusteeship without regard to the interests of, or consequences for, the Noteholders, Receiptholders or Couponholders and (c) to retain and not be liable to account for any profit made or any other amount or benefit received thereby or in connection therewith.
16. FURTHER ISSUES
To the extent permitted by Condition 3, the Issuer shall be at liberty from time to time without the consent of the Noteholders, the Receiptholders or the Couponholders to create and issue further notes having terms and conditions the same as the Notes or the same in all respects save for the amount and date of the first payment of interest thereon and so that the same shall be consolidated and form a single Series with the outstanding Notes.
17. CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
No person shall have any right to enforce any term or condition of this Note under the Contracts (Rights of Third Parties) Act 1999, but this does not affect any right or remedy of any person which exists or is available apart from that Act.
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18. GOVERNING LAW AND SUBMISSION TO JURISDICTION
18.1 Governing law A12.4.1.3 A13.4.3 The Trust Deed (including the Notes Guarantee), the Agency Agreement, the Notes, the Receipts, the Coupons and any non-contractual obligations arising out of or in connection with the Trust Deed (including the Notes Guarantee), the Agency Agreement, the Notes, the Receipts and the Coupons are governed by, and shall be construed in accordance with, English law.
18.2 Arbitration
Subject to Condition 18.3, any dispute arising out of or in connection with the Trust Deed, the Notes, the Receipts and/or the Coupons (including a dispute regarding their existence, validity or termination or a dispute relating to any non-contractual obligations arising out of or in connection therewith) (a Dispute) shall be referred to and finally resolved by arbitration in accordance with the Arbitration Rules of The London Court of International Arbitration (LCIA) (the Rules), which Rules (as amended from time to time) are incorporated by reference into this Condition 18.2. For these purposes:
(a) the place of arbitration shall be London;
(b) there shall be three independent arbitrators; and
(c) the language of the arbitration shall be English.
18.3 Exercise of litigation option
Notwithstanding Condition 18.2 above, the Trustee, any Noteholder, any Receiptholder or any Couponholder (as applicable) may, in the alternative, and at its sole discretion, by notice in writing to the Issuer and the Guarantors:
(a) within 28 days of service of a Request for Arbitration (as defined in the Rules); or
(b) in the event no arbitration is commenced,
require that a Dispute be heard by a court of law. If the Trustee, relevant Noteholder, relevant Receiptholder or relevant Couponholder (as applicable) gives such notice, the Dispute to which such notice refers shall be determined in accordance with Condition 18.4 and, subject as provided below, any arbitration commenced under Condition 18.2 in respect of that Dispute will be terminated. Each of the parties to the terminated arbitration will bear its own costs in relation thereto.
If any notice to terminate is given after service of any Request for Arbitration in respect of any Dispute, the Trustee, relevant Noteholder, relevant Receiptholder or relevant Couponholder (as applicable) must also promptly give notice to the LCIA Court and to any Tribunal (each as defined in the Rules) already appointed in relation to the Dispute that such Dispute will be settled by the courts. Upon receipt of such notice by the LCIA Court, the arbitration and any appointment of any arbitrator in relation to such Dispute will immediately terminate. Any such arbitrator will be deemed to be functus officio. The termination is without prejudice to:
(a) the validity of any act done or order made by that arbitrator or by the court in support of that arbitration before his appointment is terminated;
(b) his entitlement to be paid his proper fees and disbursements; and
(c) the date when any claim or defence was raised for the purpose of applying any limitation bar or any similar rule or provision.
18.4 Submission to jurisdiction
In the event that a notice pursuant to Condition 18.3 is issued, the following provisions shall apply:
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(a) subject to paragraph (c) below, the courts of England shall have exclusive jurisdiction to settle any Dispute and the Issuer and each Guarantor submit to the exclusive jurisdiction of such courts;
(b) each of the Issuer and each Guarantor agrees that the courts of England are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it will not argue to the contrary; and
(c) this Condition 18.4 is for the benefit of the Trustee, the Noteholders, the Receiptholders and the Couponholders only. As a result, and notwithstanding paragraph (a) above, the Trustee, any Noteholder, any Receiptholder or any Couponholder (as applicable) may take proceedings relating to a Dispute (Proceedings) in any other courts with jurisdiction. To the extent allowed by law, the Trustee, any Noteholder, any Receiptholder or any Couponholder (as applicable) may take concurrent Proceedings in any number of jurisdictions.
18.5 Appointment of Process Agent
Each Guarantor has, in the Trust Deed, irrevocably and unconditionally appointed ENRC Management (UK) Limited at Second Floor, 16 St James’s Street, London SW1A 1ER as its agent for service of process in England in respect of any Disputes or Proceedings and has undertaken that in the event of such agent ceasing so to act it will appoint such other person as the Trustee may approve as its agent for that purpose.
18.6 Waiver of immunity
To the extent that the Issuer or any Guarantor may in any jurisdiction claim for itself or its assets or revenues immunity from suit, execution, attachment (whether in aid or execution, before judgment or otherwise) or other legal process and to the extent that such immunity (whether or not claimed) may be attributed in any such jurisdiction to the Issuer or any Guarantor or its assets or revenues, the Issuer and each Guarantor agree not to claim and irrevocably waive such immunity to the full extent permitted by the laws of such jurisdiction.
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USE OF PROCEEDS A12.3.2
The net proceeds from each issue of Notes will be applied by the Issuer for capital expenditures, including potential future acquisitions, and general corporate purposes.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following is a summary of the Group’s financial information for the years 2009 and 2008. The data has been extracted without material adjustment from, and is qualified in its entirety by reference to, the financial information in the Consolidated Financial Statements. The summary should be read in conjunction with the information in that section and with the “Operating and Financial Review” in the Annual Report. Investors are advised to read the whole of this Prospectus and documents incorporated by reference and not to rely on just the summarised information. Year ended 31 December ––––––––––––––––––– In U.S.$ millions (unless stated otherwise) 2009 2008 ––––––––– ––––––––– Consolidated Income Statement data: Revenue ...... 3,831 6,823 Cost of sales ...... (1,947) (2,088) ––––––––– ––––––––– Gross profit ...... 1,884 4,735 Distribution costs ...... (366) (431) Selling, general and administrative expenses...... (359) (422) Net other operating income/(expense) ...... 215 (32) ––––––––– ––––––––– Operating profit ...... 1,374 3,850 Finance income...... 191 132 Finance costs ...... (157) (143) Share of profit /(loss) of joint ventures and associates ...... 31 (12) ––––––––– ––––––––– Profit before income tax...... 1,439 3,827 Income tax expense ...... (377) (1,143) ––––––––– ––––––––– Profit for the period ...... 1,062 2,684 Fair value gains/(losses) on available-for-sale financial assets, net of tax ...... 6 (8) Cash flow hedges, net of tax ...... 21 (4) Currency translation differences...... (1,241) (23) ––––––––– ––––––––– Total comprehensive (expense)/income for the year ...... (152) 2,649 ––––––––– ––––––––– Total comprehensive (expense)/income attributable to: Equity shareholders of the Group ...... (147) 2,610 Minority interests ...... (5) 39 ––––––––– –––––––––
At at 31 December ––––––––––––––––––– In U.S.$ EPS—basic and diluted ...... 0.81 2.05 ––––––––– ––––––––– Consolidated Balance Sheet data: Total non-current assets...... 7,148 5,621 Current assets less current liabilities (excluding borrowings)...... 1,899 3,698 Borrowings – non-current ...... 68 372 – current...... 360 355 Total other non-current liabilities...... 615 294 Total equity ...... 8,004 8,298 ––––––––– –––––––––
Consolidated Cash Flow data: Net cash generated from operating activities ...... 1,209 2,766 Net cash used for investing activities ...... (2,105) (1,919) Net cash used for financing activities ...... (644) (854) Net changes in cash and cash equivalents ...... (1,540) (7) Foreign exchange loss on cash and cash equivalent ...... (123) (48) ––––––––– –––––––––
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Year ended 31 December ––––––––––––––––––– In U.S.$ millions (unless stated otherwise) 2009 2008 ––––––––– ––––––––– Other financial and operating data: Underlying EBITDA(2) ...... 1,462 4,161 Underlying EBITDA Margin ...... 38.2% 61.0% Ferroalloys sold, ‘000 tonnes ...... 1,306 1,231 Chrome ore sold, ‘000 tonnes ...... 591 702 Manganese sold, ‘000 tonnes ...... 572 753 Iron-manganese sold, ‘000 tonnes ...... 72 529 Iron ore – concentrate, ‘000 tonnes ...... 8,857 7,464 – pellets, ‘000 tonnes ...... 6,203 6,797 Alumina sold, ‘000 tonnes ...... 1,359 1,393 Aluminium sold, ‘000 tonnes...... 125 104 Coal, ‘000 tonnes sold ...... 7,280 8,044 Electricity, GWh sold ...... 4,309 2,825 Logistics, ‘000 tonnes transported ...... 58,181 58,489 Copper cathode sold, tonnes (for Nov – Dec 2009 only) ...... 2,778 n/a Cobalt concentrate sold, tonnes (for Nov – Dec 2009 only) ...... 1,169 n/a Capital expenditure...... 1,147 1,294 Average exchange rate (KZT/U.S.$) ...... 147.50 120.30 Period end exchange rate (KZT/U.S.$) ...... 148.46 120.77 Reconciliation of Non-GAAP measures: Underlying EBIT, EBITDA and EBITDA margin Profit for the year ...... 1,062 2,684 Add: Finance cost ...... 157 143 Income tax expense ...... 377 1,143 Less: Share of (profit)/loss of joint venture and associates1 ...... (31) 12 Finance income ...... (191) (132) Foreign exchange gain resulting from devaluation of Kazakhstani tenge ...... (210) – ––––––––– ––––––––– Underlying EBIT ...... 1,164 3,850 ––––––––– ––––––––– Add back: Depreciation, amortisation and impairment...... 298 311 ––––––––– ––––––––– Underlying EBITDA2 ...... 1,462 4,161 ––––––––– ––––––––– Divide by: Revenue ...... 3,831 6,823 ––––––––– ––––––––– Underlying EBITDA margin ...... 38.2% 61.0% ––––––––– –––––––––
1 Includes BML (joint venture) from 19 May 2008, Shurbakol (associate) from 16 February 2009 and SMKK (associate) from 9 November 2009. 2 Underlying EBITDA represents profit before finance income, finance costs, income tax expense, depreciation, amortisation and impairment, net gains and losses on derivatives not qualifying for hedge accounting, share of profit or loss of joint venture and associates and the impact of the devaluation of the Kazakhstani tenge.
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DESCRIPTION OF THE GROUP
The Issuer
General
The Issuer was incorporated and registered in England and Wales on 8 December 2006 as a public company A9.4.1.2 limited by shares under registered number 06023510. The name of the Issuer on incorporation was “Eurasian A9.4.1.3 Natural Resources Company PLC” and, on 11 December 2006, the name of the Issuer was changed to A9.4.1.4 “Eurasian Natural Resources Corporation PLC”. The Issuer’s registered office and principal place of business is at Second Floor, 16 St. James’s Street, London SW1A 1ER. The telephone number of the Issuer’s A9.4.1.1 principal place of business is +44 (0) 20 7389 1440. The principal legislation under which the Issuer operates is the Companies Act 2006.
Group Overview and Business Divisions
ENRC is a leading diversified natural resources group, performing integrated mining, processing, energy, A9.5.1.1 logistics and marketing operations. The operations of the Group comprise: the mining and processing of chrome, manganese and iron ore; the smelting of ferroalloys; the production of iron ore pellets; the mining and processing of bauxite for the extraction of alumina and the production of aluminium; coal extraction and electricity generation; the transportation and sales of the Group’s products; and, the production of copper and cobalt. The Group’s production assets are largely located in the Republic of Kazakhstan; other assets, notably the Other Non-ferrous Division, are mainly located in the Democratic Republic of Congo. In 2009, the Group accounted for approximately 3% of Kazakhstan’s GDP. The Group currently sells the majority of its products to Russia, China, Japan, Western Europe and the United States. During 2009, the Group’s entities employed approximately 70,300 people. For the year ended 31 December 2009, the Group had revenue of U.S.$3,831 million and profit attributable to equity holders of U.S.$1,045 million. For the year ended 31 December 2008, the Group had revenue of U.S.$6,823 million and profit attributable to equity holders of U.S.$2,642 million. The Group has six key divisions as follows:
The Ferroalloys Division: The Ferroalloys Division primarily produces and sells ferrochrome, as well as other ferroalloys, for use as alloying products in the production of stainless steel and various other types of steel, and sells manganese and chrome ore to third-party producers of ferroalloys as well as the chemical and refractory industry and other Group Divisions. The Group’s management believes that the Ferroalloys Division is the largest ferrochrome producer in the world measured by chrome content and the lowest cost producer of high carbon ferrochrome. In the year ended 31 December 2009, the Ferroalloys Division produced: 3,398 kilotonnes of saleable chrome ore, 904 kilotonnes of saleable manganese ore concentrate and 1,446 kilotonnes of ferroalloys, including 1,073 kilotonnes of its primary product, high-carbon ferrochrome. For the year ended 31 December 2009, the Ferroalloys Division had third-party revenue of U.S.$1,871 million, which represented 48.8% of the Group’s consolidated revenue. For the year ended 31 December 2008, the Ferroalloys Division had third-party revenue of U.S.$4,151 million, which represented 60.8% of the Group’s consolidated revenue.
The Iron Ore Division: The Iron Ore Division operates an iron ore mining and processing enterprise in Kazakhstan and produces and sells iron ore concentrate and pellets primarily to steel producers. The Iron Ore Division’s operations include iron ore mines, crushing, beneficiation and pelletising plants and a thermal power station. In the year ended 31 December 2009, the Iron Ore Division produced 15,197 kilotonnes of primary iron ore concentrate, of which 8,541 kilotonnes were sold and the balance used to produce 6,182 kilotonnes of iron ore pellet. For the year ended 31 December 2009, the Iron Ore Division had third-party revenue of U.S.$1,093 million, which represented 28.5% of the Group’s consolidated revenue. For the year ended 31 December 2008, the Iron Ore Division had third-party revenue of U.S.$1,498 million, which represented 22.0% of the Group’s consolidated revenue.
The Alumina and Aluminium Division: The Alumina and Aluminium Division produces and sells alumina to aluminium producers and also produces and sells its own aluminium. The Alumina and Aluminium Division’s vertically integrated operations include bauxite mines, a limestone mine, an alumina refinery, an
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aluminium smelter and a power station. The Group’s aluminium smelter — the Kazakhstan Aluminium Smelter — which commenced production in 2007, allows the Alumina and Aluminium Division to process some of its own alumina into aluminium. The Kazakhstan Aluminium Smelter attained its Phase 1 run-rate capacity of 125 kilotonnes per annum in the second quarter of 2008. The Group has completed construction of the second phase of the Kazakhstan Aluminium Smelter, which will increase the production capacity of aluminium to 250 kilotonnes per annum, no later than the second quarter of 2010. In the year ended 31 December 2009, the Alumina and Aluminium Division mined 5,130 kilotonnes of bauxite and produced 1,608 kilotonnes of alumina and 127 kilotonnes of aluminium. For the year ended 31 December 2009, the Alumina and Aluminium Division had third-party revenue of U.S.$563 million, representing 14.7% of the Group’s consolidated revenue. For the year ended 31 December 2008, the Alumina and Aluminium Division had third-party revenue of U.S.$864 million, representing 12.7% of the Group’s consolidated revenue.
The Energy Division: The Energy Division is one of the largest electricity providers in Kazakhstan, accounting for approximately 17.2% of the country’s recorded electricity production in 2009. The Energy Division provides a cost-effective energy supply to the Group’s principal Kazakhstani operating divisions as well as producing a surplus for sales to third parties in Kazakhstan. In the year ended 31 December 2009, the Energy Division produced 13,478 GWh of electricity of which 60.8% was used internally within the Group. Coal extraction for the year ended 31 December 2009 amounted to 20,059 kilotonnes. For the year ended 31 December 2009, the Energy Division had revenue of U.S.$402 million, of which U.S.$196 million was derived from third-party sales, representing 5.1% of the Group’s consolidated revenue. For the year ended 31 December 2008, the Energy Division had revenue of U.S.$436 million, of which U.S.$203 million was derived from third-party sales, representing 3.0% of the Group’s consolidated revenue.
The Logistics Division: The Logistics Division provides transportation and logistics services to the Group’s principal Kazakhstani operating divisions and to third parties. The Logistics Division’s operations include freight forwarding, wagon repair services and railway construction and repair services. The availability of these services within the Group mitigates many of the risks associated with the supply of raw materials and delivery of products to customers. In addition, the Logistics Division operates a railway transfer and reloading terminal on the Kazakhstan-China border, facilitating the Group’s access to the Chinese market. For the year ended 31 December 2009, the Logistics Division had revenue of U.S.$157 million of which U.S.$53 million derived from third-party sales, representing 1.5% of the Group’s consolidated revenue. For the year ended 31 December 2008, the Logistics Division had revenue of U.S.$229 million of which U.S.$107 million derived from third-party sales, representing 1.5% of the Group’s consolidated revenue.
The Other Non-ferrous Division: The Other Non-Ferrous Division operates principally in the Democratic Republic of Congo where it mines copper and cobalt, and processes ore at Luita in a joint venture (see “Group History and Background – History of Business Divisions” for further information). The Group is in the process of developing the large copper reserves and investment is planned that will increase copper cathode production to 75 kilotonnes per annum within approximately three years. The Group believes that the Other Non-ferrous Division is the world’s largest independent cobalt concentrate producer, producing approximately 10% of global demand. The Other Non-ferrous Division’s copper and cobalt operations include open cast mines, crushing, beneficiation, concentrator plants and an electro-winning facility. The Group’s management expects a cobalt solvent extraction plant, for the production of cobalt metal, to be commissioned in the second half of 2010. In addition, the Other Non-ferrous Division includes a road logistics business operating in Central and Southern Africa and a number of development prospects: coal in Mozambique; bauxite in Mali; fluorspar in South Africa; and platinum in Zimbabwe (no development of the latter opportunity will take place whilst Zimbabwe is subject to sanctions imposed by the European Union and United States of America).
In addition to its principal operating divisions, the Group has a centralised sales and marketing function that A9.5.1.2 coordinates the operating divisions’ monitoring of markets, production strategy and external sales. This offers the Group several competitive advantages including the identification and exploitation of market synergies and improved operational efficiencies.
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With its internal supply of key raw materials, processing capability, energy sources, logistics services and centralised sales and marketing function, the Group benefits from a fully integrated business model in Kazakhstan.
The following table sets out the consolidated financial information for the years ended 31 December 2008 and 2009. The information has been extracted without material adjustment from the Combined and Consolidated Financial Statements. Underlying EBITDA and Underlying EBITDA Margin are not measures of financial performance under IFRS. For a reconciliation of profit to Underlying EBITDA for the relevant periods, see “Documents Incorporated by Reference – Financial Statements (page 105 in the Issuer’s 2009 annual report)“.
Alumina In millions of U.S.$ Iron and Other Non- Intra (unless stated Ferroalloys Ore Aluminum Energy Logistics Ferrous Group otherwise) Division Division Division Division Division Division Corporate Elimination Total –––––––––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Segment Revenue 2008 ...... 4,156 1,499 867 436 229 N/A – (364) 6,823 2009 ...... 1,874 1,093 565 402 157 55 – (315) 3,831 Underlying EBITDA 2008 ...... 2,789 919 295 177 50 N/A (69) – 4,161 2009 ...... 707 485 78 213 39 6 (66) – 1,462 Underlying EBITDA Margin 2008 ...... 67.1% 61.3% 34.0% 40.6% 21.8% N/A – – 61.0% 2009 ...... 37.7% 44.4% 13.8% 53.0% 24.8% 10.9% – – 38.2%
Group History and Background A9.6.1
The majority of the Group’s assets were acquired through the participation of the Founders (i.e., Messrs. Patokh Chodiev, Alijan Ibragimov and Alexander Machkevitch) in the privatization process in Kazakhstan between 1994 and 1996. The Issuer is a holding company incorporated in England and Wales and was formed as part of a reorganisation in December 2006 to simplify the ownership structure of the Group’s assets and to consolidate them in a single group of companies.
History of Business Divisions
The Ferroalloys Division was established in 1995 when Transnational Company Kazchrome JSC A9.5.1.1 (Kazchrome) was formed as a joint stock company in accordance with a decree of the Government of the Republic of Kazakhstan and was acquired by the Founders. Its mining operations initially comprised Kazchrome’s Donskoy GOK (the Donskoy Unit) and Kazchrome’s Kazmarganets GOK (the Kazmarganets Unit). In 2004, to add to its manganese mining operations, the Group acquired Zhairemsky GOK (the Zhairem Unit). The Ferroalloys Division also includes the Aktobe and Aksu ferroalloy plants and the Akturbo gas power station.
The Iron Ore Division was established in 1996 through the acquisition by the Founders of Sokolovsko A9.5.1.1 Sarbaiskoye Mining and Production Association JSC (SSGPO) and includes primary mining operations that produce iron ore, ancillary mining operations that produce limestone, dolomite and bentonite-clay, an iron ore processing plant and a power plant.
The Alumina and Aluminium Division was established in 1996 through the merger of several mining and A9.5.1.1 energy-producing enterprises and an alumina refinery. The Alumina and Aluminium Division’s assets include two bauxite mining units, a limestone mine, an alumina refinery and a power station. The Group commenced production at the Kazakhstan Aluminium Smelter in Pavlodar in late 2007, allowing the Group to process a portion of its alumina into aluminium.
The Energy Division was established in 1996 through the acquisitions of the Eurasian Energy Corporation A9.5.1.1 JSC (EEC) power station, the Division’s open pit coal mine and the maintenance business.
The Logistics Division was first established in 1999.
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The Other Non-ferrous Division was formed by the acquisition of CAMEC in November 2009 (see “Reorganisation and subsequent expansion” below for further information) and includes copper and cobalt mines and an ore processing plant at Luita in a joint venture with the State-owned Gecamines as a minority (30%) partner. In April 2010 the Group acquired a 90% interest in Chambishi Metals (see “Reorganisation and subsequent expansion“ below for further information), which operates copper and cobalt processing facilities in Zambia.
Reorganisation and subsequent expansion
Although the Group’s principal assets were acquired by the Founders in the mid-1990s, they did not comprise a single group of companies until December 2006, when the Issuer was incorporated. Prior to this date, the operating units were standalone entities, some of which had securities listed on the Kazakhstan Stock Exchange, with their own management structures and minority shareholders (including the Government of the Republic of Kazakhstan, which held an interest directly in each of the principal operating subsidiaries at December 2006). These operating entities were ultimately controlled by the Founders, and were informally managed on a collective basis with a number of other non-Group businesses owned or controlled by the Founders. Prior to December 2006, the operations now comprising the Group (with the exception of the Other Non-ferrous Division) focused on developing the businesses within Kazakhstan, and International Mineral Resources B.V. and its subsidiaries (the IMR Company) focused on acquiring and operating natural resources businesses outside of Kazakhstan.
As a result of a reorganisation of the Group, which concluded in December 2006, the Issuer became the holding company of the Group and the ownership structure was simplified so that, among other things, the interests held by the Government of the Republic of Kazakhstan in the Group’s operating subsidiaries were exchanged for a shareholding in the Issuer. Following the reorganisation, a number of executives, including Dr. Johannes Sittard and Mr. Jim Cochrane, who had previously worked for both the IMR Company and Group entities, ceased to have an executive function with the IMR Company.
Following the reorganisation, in addition to continuing to grow and develop its Kazakhstani operations, the Group decided to pursue a strategy of regional expansion and, in April 2008, the Group announced the completion of the acquisition of a controlling interest in the Serov Ferroalloy Plant JSC and related entities (Serov) for an aggregate consideration of U.S.$210 million and the assumption of certain liabilities. Serov owns a chrome ore mining facility and a ferrochrome smelter in eastern Russia. The smelter produces low- and medium-carbon ferrochrome, and has an annual capacity of 300,000 tonnes.
In May 2008, the Group announced the acquisition of a 50% interest in Bahia Minerals BV (BML) for U.S.$306 million. BML, which is not yet operational, is focused on the development of an iron ore deposit in the Bahia State of Brazil. The Group accounts for BML as a joint venture.
In October 2008, the Group announced the completion of the acquisition of a 50% stake in Tuoli, one of China’s largest ferrochrome plants with an annual capacity of 90,000 tonnes of high-carbon ferrochrome. The Group consolidates Tuoli, reflecting the control it exercises over the operations. In February 2009, the Group completed the acquisition of a 25% interest in Shubarkol Komir JSC (Shubarkol), a major semi coking and thermal coal producer based in Kazakhstan, for a cash consideration of U.S.$200 million less 25% of net debt. The Group accounts for Tuoli as an equity investment/associate.
On 9 November 2009, the Group declared unconditional in all respects a recommended U.S.$931 million (£584 million) cash offer for CAMEC, an AIM listed Africa-focused emerging mining company, with operations centred on copper and cobalt, trucking and haulage businesses, and a portfolio of potential development projects in coal, bauxite, fluorspar, and platinum. Work is ongoing to intergrate CAMEC into the Group’s corporate structure as the Other Non-ferrous Division.
A 50% interest in Société Minière de Kabolela et Kipese Sprl (SMKK) was acquired on 9 November 2009 as part of the CAMEC acquisition. At 31 December 2009, the provisional carrying value of the Group’s investment in SMKK was U.S.$75 million. In Q4 2009 ENRC acquired an option, for a cash consideration of U.S.$25 million, to purchase the outstanding 50% of the issued share capital of SMKK from Emerald Star Enterprises Limited. ENRC has now served notice to exercise this option. The total cash consideration in
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respect of the outstanding SMKK shares, inclusive of the U.S.$25 million option already paid, amounts to U.S.$75 million. SMKK is the title holder of some exploration permit assets contiguous to the Group’s existing operations in the Democratic Republic of the Congo. It is expected that this transaction will be completed by Q3 2010.
In April 2010, the Group acquired ENYA Holdings B.V. which holds a 90% interest in Chambishi Metals PLC, a Zambian copper and cobalt producer, together with Comit Resources FZE, a Dubai-based marketing and sales company. The Group plans to combine these operations with the existing Other Non-ferrous Division facilities.
On 26 April 2010, the Group announced the purchase of a 12.2% interest in Northam Platinum Limited, a major platinum producer in South Africa, from Mvelaphanda Resources Limited, for a cash consideration of ZAR 50 per share, equating to a total consideration of ZAR 2.2 billion (approximately U.S.$296 million).
An overview of the current Group structure and its key operating subsidiaries is as follows:
ENRC Eurasian Natural Africa Limited Resources (UK, 100%) Corporation PLC
ENRC ENRC Finance Africa 1 Limited Limited (UK, 100%) (UK, 100%)
CAMEC Plc ENRC NV (UK, 96.88%) (NL, 100%)
TNC Kazchrome SSGPO JSC Non Guarantor JSC (KZ, 100%) Subsidiaries (KZ, 98.3843%)
Business – Key strengths A9.5.1.2
Management believes that the key strengths of the Group are as follows:
The Group’s diversified operations and reserves enable it to sell a wide range of commodity products, reducing its vulnerability to the price volatility of individual commodities.
The Group sells a diversified portfolio of commodity products including, high-, medium- and low-carbon ferrochrome, other ferroalloys, chrome ore, manganese ore, iron ore pellet and concentrate, alumina and aluminium, coal and electricity, copper cathode and cobalt concentrate, and therefore does not rely on a single commodity or product. The Group’s diversification reduces its vulnerability to the price volatility of individual commodities and its reliance on individual customers, regions or operating entities.
The Group has substantial high quality assets and low costs of production.
The Group believes that it benefits from higher quality chrome ore reserves than those of other large-scale producers, which allow the Group to produce a broader range of ferrochrome products than its competitors. Its integrated mining and processing operations combine mines with long reserve lives and large established production facilities. The Group’s principal operations also benefit from Kazakhstan’s competitive labour and power costs, it has low unit costs of production. ENRC believes that its unit costs of production for the year ended 31 December 2009 are the lowest in the world for ferrochrome (on a chrome content basis) and in the lowest quartile for alumina, aluminium and iron ore pellets (on a metric tonne basis). In addition, the Group believes that its copper assets in the Democratic Republic of Congo contain readily exploitable oxide
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and sulphide ores that will enable the production of high-grade copper cathode at significantly higher levels of production going forward.
The Group is geographically well positioned to benefit from potential attractive growth markets.
The Group’s Eurasian locations give it excellent access to the neighbouring potentially high growth markets A9.5.1.2 of China and Russia. The Ferroalloy Division’s primary operating facilities, in Aktobe in North-western Kazakhstan and Aksu in North-eastern Kazakhstan, are close to the border of Russia and, through the Group’s rail transfer station located on the Kazakhstan–China border, also benefit from relatively easy access to China. The operations of the Iron Ore Division and Alumina and Aluminium Division are located close to the Group’s relevant key customers, MMK and UC RUSAL, respectively. ENRC’s proximity to current and prospective customers in these regions provides a significant competitive advantage in terms of customer service and lower transportation costs, and ENRC’s strategic location leaves it well positioned to take advantage of opportunities to acquire complementary businesses within the Eurasian region. In addition, the Group’s iron ore investment in Brazil, when developed, will provide it with access to the Americas and to seaborne trade, whilst the Group’s businesses in the Democratic Republic of Congo and Zambia have good access to local markets.
The Group has vertically integrated operations from mine-to-market that ensure it has control over the supply of its raw materials and access to other required services.
In Kazakhstan, with its internal supply of raw materials, processing capabilities, energy sources, logistics support and centralised sales and marketing function, the Group is fully integrated, which supports the Group’s competitive cost position. The key raw materials used in the Group’s primary products in Kazakhstan and the Democratic Republic of Congo are sourced from the Group’s mines. The Group’s operations are believed to include some of the largest and most diversified production facilities in the world, which add significant value to the Group’s reserves and raw materials. Through its Energy and Logistics Divisions, the Group, within Kazakhstan, has secure access to low cost energy and reliable transport services. In addition, the Group’s highly skilled and internationally experienced sales and marketing function coordinates all of the Group’s external sales, facilitating operational efficiencies.
The Group has a proven track record of successfully implementing and managing a continuing programme of significant capital investment.
The Group has extensive experience in implementing and managing its significant ongoing capital investment programme to expand its operations, modernise and renew its equipment and increase its capacity. The most significant recent capital investment is the construction of the Kazakhstan Aluminium Smelter (see “The Alumina and Aluminium Division”, above, for further information). The total construction cost of the smelter was estimated to be approximately U.S.$900 million.
The Group’s experienced management team has a proven track record of generating growth.
The Group benefits from the significant experience of its senior and operational management teams. With an average of 20 years of metals and mining experience, the Group’s senior management has a compelling track record of generating growth, both organically and through strategic acquisitions. Members of the Group’s management also have a detailed knowledge of the business and political environment in Kazakhstan and other emerging markets.
Business - Strategy
The Group’s strategy is to achieve growth as a leading natural resources company and to fully utilise and also broaden the Group’s capabilities.
The five strategic goals of the Group are: • To maintain and improve on its low-cost operations; • To continue expansion and development of its existing reserves and capacity;
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• To add value and customer diversity by expanding its product portfolio; • To expand its asset portfolio and footprint in the natural resources sector, both within the existing regions in which it operates and worldwide; and • To commit to high standards of corporate responsibility, with particular emphasis on health and safety. The Group’s management believes that its strategy is a balanced and flexible combination of enhancing existing assets, organic expansion and acquisitions. The strategy aims to bridge the Group’s current position as a leading, diversified natural resource group largely based in Kazakhstan with its aspiration to become a more international mining group.
The proceeds of the Group’s IPO in December 2007 and its subsequent strong cash flow has enabled the Group to plan major capital expenditure and to make acquisitions. The Group continues to enjoy a strong balance sheet, although its plans have been tempered by market conditions, which, while impacting cash flow, have provided opportunities to make well-priced acquisitions. The Group also continues to press hard to achieve cost efficiencies in its business to maintain its competitive edge and to offset the relatively higher levels of inflation experienced in Kazakhstan.
For further information on the Business of ENRC, please refer to “Documents Incorporated by Reference“.
Directors and Senior Management
Each of the Directors and Senior Managers can be contacted at the Issuer’s registered address at Second A9.9.1 Floor, 16 St. James’s Street, London SW1A 1ER.
None of the Directors or Senior Managers performs any principal activities outside of the Issuer or Group that are significant with respect to the Issuer.
There are no current or potential actual conflicts of interest between the private interests and/or other duties A9.9.2 of any Director or Senior Manager and the duties of the Directors or Senior Managers to the Issuer.
For further information on the directors and senior management of the Issuer, please refer to “Documents Incorporated by Reference“.
Principal Shareholders
For information on the principal shareholders of the Issuer, please refer to “Documents Incorporated by Reference“ and also see “Material Contracts – Relationship Agreements” below.
Material Contracts
The following contracts are all the material contracts entered into by any member of the Group (other than A9.12 contracts entered into in the ordinary course of the Group’s business) that could result in any member of the Group being under an obligation or having an entitlement that is material to the Issuer’s ability to meet its obligation to holders of the Notes in respect of the Notes:
Relationship Agreements
On 7 December 2007, each of the Founders entered into a relationship agreement (each, a Relationship A9.10.1 Agreement), regulating the ongoing relationship between the relevant Founder and the Group, with a view A13.3 to ensuring that the Group is capable of carrying on its business independently of the Founders, and to ensure that transactions and relationships between the Group and the Founders are at arm’s length and on a normal commercial basis. Each Founder and his respective associates and affiliates are referred to in this Prospectus as a “Shareholder Group”.
Each Relationship Agreement entered into by a Founder shall continue for so long as (a) the relevant Founder and his relevant Shareholder Group collectively control 10% or more of the voting rights exercisable at general meetings of the Issuer or (b) the relevant Founder and his relevant Shareholder Group collectively
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control between 5% and 10% of the voting rights exercisable at general meetings of the Issuer, and the Founders collectively control 20% or more of the voting rights exercisable at general meetings of the Issuer.
Under the terms of each Relationship Agreement, each Founder and the Issuer agreed, inter alia, that each Founder:
(a) so long as his Shareholder Group controls 10% or more of the voting rights at general meetings of the Issuer, shall have the right to appoint one Director to the Board, provided, however, that in no event may the Founders collectively appoint more than three members of the Board (to date only Mr Ibragimov has exercised this right);
(b) shall exercise his voting rights so as to: • ensure that the Issuer has its own dedicated management; • use reasonable endeavours (in so far as he is able) to ensure that there is a majority of independent Non-executive Directors on the Board; • ensure that the Group is capable at all times of carrying on its business independently of the relevant Shareholder Group; and • ensure that the Issuer operates and makes decisions for the benefit of shareholders as a whole, and independently of the relevant Shareholder Group at all times;
(c) shall not, and shall procure that his Shareholder Group shall not, vote on any shareholder or board resolution that is required pursuant to applicable law or regulation to alter the Issuer’s articles or memorandum of association, which would be contrary to the maintenance of the Issuer’s ability to carry on its business independently of the relevant Founder and his Shareholder Group, unless such resolution is supported by a vote of the Directors independent of the relevant Shareholder Group;
(d) in respect of his own Shareholder Group, shall: • use reasonable efforts to ensure that any Directors appointed by the Shareholder Group will vote so that the Committees of the Board are in line with the requirements of the Combined Code from time to time; and • ensure that any Director appointed by such Founder does not vote at Board meetings in respect of related party transactions concerning any of the three Shareholder Groups;
(e) agrees that no member of its Shareholder Group will enter into any material agreement with any member of the Group unless it has been approved by a vote of the Directors independent of the Shareholder Groups;
(f) agrees that all transactions and relationships between any member of his Shareholder Group and any member of the Group will be on arm’s length terms and on a normal commercial basis;
(g) agrees that, except as disclosed in this Base Prospectus, all existing transactions, agreements and arrangements between the Issuer and his Shareholder Group are on an arm’s length and normal commercial basis and are fair and reasonable having regard to the interests of the Issuer and the Group as a whole;
(h) if presented with an Investment Opportunity (as defined below), will, within seven days of becoming aware of the substantive details of any such Investment Opportunity, first offer to the Issuer the chance to take up such Investment Opportunity, subject always to any confidentiality obligations he may have. For these purposes an “Investment Opportunity” is any opportunity to acquire or develop a business concerned with the extraction, production or marketing of natural resources, other than oil, gas and water, in Kazakhstan, Russia, China, Mongolia, Uzbekistan, Turkmenistan, Kyrgyzstan and/or Tajikistan, excluding from this restriction the existing holdings of any Shareholder Group;
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(i) shall not, and shall procure that his Shareholder Group shall not, for the duration of the relevant Relationship Agreement, recruit, solicit or entice any senior employee of any member of the Group; and
(k) agrees that any decisions of the Board regarding the enforcement of a Relationship Agreement shall be taken by a majority of the Directors who are independent of his Shareholder Group.
Deed of Indemnity
On 7 December 2007, the Issuer entered into a deed of indemnity (the Indemnity) with the Founders, pursuant to which each Founder agreed to severally indemnify the Issuer and each other member of the Group against any liability of a member of the Group (including in respect of interest, penalties or fines) arising directly as a result of the use of the RTS, and that is claimed (a) by any authority (governmental, local, state, federal, fiscal, revenue or other), body, agency or official whatsoever of any jurisdiction or (b) by a person who was a shareholder of the Issuer or any predecessor company or other member of the Group at the time of the relevant act or omission giving rise to the relevant liability. The Indemnity will extend to all reasonable costs and expenses properly incurred by the Group in either making a successful claim or satisfying or settling any liability in respect of a successful claim made under the Indemnity. However, in addition to certain other limitations (including a U.S.$2 million deduction), the Founders will not be liable in respect of any claim under the Indemnity unless notice of any claim under the Indemnity is given in writing to the Founders within four years of the date of the Indemnity. The aggregate maximum liability of the Founders under the Indemnity is U.S.$94 million, being the amount of the distributions retained by the Founders in respect of RTS profits in 2004, 2005 and 2006.
Structured Trade Finance Facility
On 15 December 2006, ENRC Marketing AG entered into a U.S.$1,000 million Structured Trade Finance Facility (the Structured Trade Finance Facility). By a Supplemental Agreement dated 12 April 2007, the Structured Trade Finance Facility was increased to U.S.$1,480 million.
The loan is secured by grants of security over certain of the Ferroalloys Division’s accounts and sales contracts backed by a guarantee given by Kazchrome, the Ferroalloys Division’s principal operating company. The associated accounts receivable balance at 31 December 2009 was U.S.$214 million and at 31 December 2008 was U.S.$178 million. All monies payable by the end purchasers under the sales contracts are required to be paid into bank accounts which are also used to secure the Structured Trade Finance Facility. Withdrawals from these bank accounts are subject to restrictions imposed under the terms of the Structured Trade Finance Facility Agreement. The Group agreed to certain restrictive covenants in respect of Kazchrome, as guarantor of the loan, which prohibit Kazchrome from lending more than U.S.$100 million and from having total debt of greater than U.S.$1,500 million outstanding at any time during the duration of the facility. In addition, the guarantee provides that Kazchrome may pay dividends only if the amount of a dividend in any financial year does not exceed Kazchrome’s net income for the financial year. Kazchrome may still declare a dividend in excess of net income if immediately after payment of such dividend the ratio of Kazchrome’s total equity to total debt would be equal to or greater than 0.4:1. The guarantee places certain restrictions on Kazchrome’s activities including, inter alia, to make loans, give guarantees or indemnities, create security interests, or change its business, and requires Kazchrome to, inter alia, maintain all authorisations applicable to it, comply with all laws applicable to it, maintain certain insurance coverage and maintain full ownership of the ferroalloy production facilities.
During 2008, the Group made accelerated repayments of the Structured Trade Finance Facility for a total amount of U.S.$353 million. As at 31 December 2009, U.S.$342 million of the loan principal was outstanding. Repayment of the balance occurs in equal and consecutive monthly instalments, with final payment scheduled for December 2010.
The Structured Trade Finance Facility is denominated in U.S. Dollars and bears interest at a rate of one- month LIBOR plus 1.35% per annum.
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Export Credit Facility Agreements
On 30 November 2007, Eurasian Energy Corporation entered into an unsecured €32.5 million export credit facility. The facility bears an annual interest rate of EURIBOR plus a margin of 0.5%. This facility matures on 20 February 2020. The purpose of this facility is to finance an export contract with Tekraf GmbH. As at 31 December 2009, U.S.$44.0 million of the facility was drawn down.
On 16 February 2010, the Group entered into an export credit facility agreement for the amount of €47.6 million. The facility is a 10 year draw-down facility and bears an interest rate of six-month EURIBOR plus a margin of 1.5%. Euler Hermes Kreditversicherungs AG has provided credit insurance to support the facility. The facility will finance some of the Group’s capital expenditure.
Development Bank of Kazakhstan Loan Agreement
On 15 April 2010, the Group announced that it had entered into a loan agreement for the amount of U.S.$400 million with the Development Bank of Kazakhstan. The facility is provided by the Development Bank of Kazakhstan using financing from state-run Export-Import Bank of China for a 15 year period. The facility is secured by a guarantee from Eurasian Natural Resources Corporation PLC and a share pledge over 51 per cent of the shares in Kazakhstan Aluminium Smelter JSC. The facility will finance costs incurred in the first and part of the second stage of the Group’s electrolysis plant.
Legal and Arbitration Proceedings
Save as disclosed below, no member of the Group is engaged in or, so far as the Issuer is aware, has pending or threatened against it, any governmental, legal or arbitration proceedings that may have, or have had during the recent past, a significant effect on the Issuer’s and/or Group’s financial position or profitability.
On 6 December 2007, the European Council imposed an anti-dumping duty of 6.5 per cent on EU imports of silico-manganese originating in Kazakhstan. On the same date, the European Commission suspended the anti-dumping duty for a period of nine months. The European Council subsequently extended the suspension until 6 September 2009. On 29 March 2008, the European Council imposed an anti-dumping duty of 33.9% on EU imports of ferro-silicon originating in Kazakhstan. These measures are expected to remain in place for a period of five years from their imposition. ENRC Marketing AG and Kazchrome filed an action for annulment of the regulatory instruments imposing these anti-dumping duties before the General Court of the European Union. They also filed an action for damages against the European institutions with the same court concerning the decision to impose duties on silico-manganese. The General Court of the European Union is expected to rule on these actions in 2011. Furthermore, on 3 July 2009, the Issuer, ENRC Marketing AG, and Kazchrome appealed a judgment of the Brussels Court of First Instance dismissing a damages claim against the companies that supported the complaints that led to the initiation of the investigations into the alleged dumping of silico-manganese and ferro-silicon. The defendants have filed certain counter claims. The Brussels Court of Appeal is expected to make a ruling in this case in 2011. Having taken legal advice, the Group’s management does not believe that the above matters will have a material adverse effect on the Group’s financial position or profitability.
HMT and OFAC Sanctions
As a result of the Group’s acquisition of CAMEC, its operations extend to Zimbabwe, a jurisdiction currently subject to sanctions implemented by HMT and OFAC. During the acquisition process for CAMEC, the Group received independent legal advice and communicated with HMT and OFAC to ensure compliance with all HMT and OFAC sanctions. The Group has adopted internal guidelines to ensure that no development of the Zimbabwe assets will take place that is not in compliance with such sanctions.
Related Party Transactions
The following is a summary of the Group’s most significant transactions with related parties (other than other members of the Group) for the years ended 31 December 2008 and 2009. For further details about these transactions, see Note 5 to the consolidated financial statements for the year ended 31 December 2009.
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During the two years ended 31 December 2008 and 2009 (the Trading Period), members of the Group entered into a number of transactions with entities owned or controlled by the Founders. Set out below is a summary of the material related party transactions entered into during the Trading Period.
For the purposes of this Base Prospectus, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
The nature of the related party relationships for those related parties with whom the Group entered into significant transactions or had significant balances outstanding during the Trading Period are detailed below.
The Founders
For the years ended 31 December 2008 and 2009, the Group undertook significant related party transactions with entities controlled by the Founders. In both years, all transactions with related parties over U.S.$1 million had to be and were approved by the Board.
Contracts Entered Into in the Ordinary Course of Business on Normal Commercial Terms
The table below summarises the related party transactions that the Group entered into in the ordinary course of business with entities under common control of the Founders for the years ended 31 December 2008 and 2009: U.S.$ millions 2009 2008 ––––––––– ––––––––– Revenue from sale of goods Ferroalloys(1) ...... 1 37 Iron Ore ...... 1 2 Other non- ferrous ...... 3 - Other income Insurance, commission and other income ...... 1 13 Expenses Purchases of raw materials(2)...... (25) (115) Insurance...... (18) (27) Services...... (21) (16) Other...... (12) (11) Rental Expenses ...... (7) (10) Sponsorship and donations...... (4) – Bank charges ...... (3) (7) Finance income ...... 8 11 Finance costs ...... (2) (3) Purchase of property, plant and equipment ...... 4 –
(1) Mainly to Serov pre-acquisition. (2) Purchase of raw material largely comprises of purchases of coal and coke with related parties.
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The table below summarises the outstanding balances with related parties at 31 December 2008 and 2009: U.S.$ millions 2009 2008 ––––––––– ––––––––– Non-current assets Loans receivable...... 63 51 Other non-current assets...... 12 29 Current assets Trade and other receivables ...... 159 32 Loans receivable net of provisions for impairment ...... 2 2 Cash and cash equivalents ...... 135 319 Current liabilities Borrowings ...... 1 – Trade and other payables ...... 14 13
The table below summarises the outstanding balances with Eurasian Bank, a company controlled by the Founders, as at 31 December 2008 and 2009: U.S.$ millions 2009 2008 ––––––––– ––––––––– Non-current assets Loans receivable...... – – Other financial assets ...... 4 3 Other non-current assets...... 8 23 Current assets Trade and other receivables ...... 123 8 Loans receivable ...... – – Cash and cash equivalents ...... 135 319 Current liabilities Borrowings ...... 1 –
Acquisitions Involving the Founders
The Group acquired a controlling interest in Serov on 3 April 2008 for a purchase price of U.S.$210 million from companies controlled by the Founders. During the first half of 2009, the Group completed a buy out of a minority interest in Serov for cash consideration of U.S.$10 million. In connection with this transaction, pre-acquisition dividends of U.S.$57 million were paid to the Founders, and U.S.$4 million was paid to an associated company (which was related to coal profits that were not included in the acquisition).
The Group paid a “finders fee” of U.S.$9 million in respect of the acquisition of the stake in Bahia Minerals B.V. (BML). In the period since acquisition, several loan facilities have been granted to BML and Ardila Investments NV to finance certain capital and operating expenditure.
The Group also paid U.S.$1 million consideration for the acquisition of Metallurg LLP to a company controlled by the Founders.
On 30 June 2009, the Group acquired a 100% interest in ASEK Reinsurance AG, an insurance company, for cash consideration of U.S.$12 million from CIM Global Investments NV, a company wholly owned by the Founders. The transaction was agreed on an arm’s length basis, and the consideration paid by the Group was equal to the fair value of the net assets acquired.
On 16 February 2009, the Group acquired a 25% interest in Shubarkol, a major semi-coke and thermal coal producer in Kazakhstan, for a cash consideration of U.S.$200 million less 25% of net debt. Shubarkol is majority-owned by EFIC, a private company wholly-owned by the Founders. The acquisition constituted a “smaller related party transaction” for the purposes of the Listing Rules.
In connection with the acquisition, the Group entered into an off-take agreement with Shubarkol, secured a seat on Shubarkol’s board and entered into a shareholders’ agreement with EFIC. Furthermore, the Group has a right of first refusal, combined with a call option, over all or part of the remaining shares in Shubarkol
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that are held by EFIC. The call option is exercisable (at the Group’s discretion) at any time until 31 January 2011, and is expected to be subject to the approval of the Group’s shareholders with any required regulatory approvals having been obtained. The price payable on any exercise of the call option is the aggregate value of the shares to be transferred, assuming Shubarkol has a total value of U.S.$800 million on a fully diluted basis, less any net debt at the time of the transfer. The Issuer’s management believes that the transaction, which was agreed on an arm’s length basis, creates value for all of the Issuer’s shareholders.
On 8 January 2009, the Group acquired a 100% interest in ENRC PMZ, an unlisted company based in Kazakhstan, for cash consideration of U.S.$20 million. ENRC PMZ owns a 100% interest in Pavlodar Machinery Plant JSC, a producer of overhead factory cranes. ENRC PMZ was acquired from the Founders.
On 8 January 2009, the Group purchased an option, for cash consideration of U.S.$10 million, from a company owned by Mr. Abdraman Yedilbayev, one of ENRC’s Non-executive Directors, to acquire a 70% interest in Masalskoe GOK LLP. Masalskoe GOK LLP is a company with the rights for the exploration and production of iron ore of the Masalskoe deposit in Kazakhstan.
On 24 February 2010, the Group acquired land and buildings in Petropavlovsk, the Republic of Kazakhstan from Eurasian Finance – Industrial Company JSC, a company controlled by the Founders, for a cash consideration of U.S.$4 million.
On 6 April 2010, the Group acquired ENYA Holdings BV which holds a 90% interest in Chambishi Metals PLC, a Zambian copper and cobalt producer, together with Comit Resources FZE, a Dubai-based marketing and sales company for a cash consideration of U.S.$300 million less net debt from the IMR Group, which is controlled by the Founders.
The Republic of Kazakhstan
In addition to conducting transactions with entities controlled by the Founders, the Group conducted transactions with entities controlled by the Government of the Republic of Kazakhstan, one of the Group’s shareholders. The principal such activities were as follows:
(a) provision of railway repair services through Company Zhol Zhondeushi LLP;
(b) supply of electricity through the Eurasian Energy Corporation LLC; and
(c) incurrence of operating costs, including appropriate taxes.
All revenue-generating transactions between the Group and Government departments and agencies are considered to be related party transactions. Costs of transactions between the Group and Government departments and agencies are also considered to be related party transactions, unless they meet all of the following criteria:
(a) they are done in the normal course of the Government departments’ and agencies’ dealings;
(b) there is no choice of suppliers; and
(c) they have terms and conditions (including prices, privileges, credit terms, regulations, etc.) that are consistently applied to all entities, public or private.
The table below summarises the related party transactions between the Group and departments and agencies of the Government of the Republic of Kazakhstan for the years ended 31 December 2008 and 2009: U.S.$ millions 2009 2008 ––––––––– ––––––––– Revenue from the provision of services...... – 89 Revenue from the sale of goods...... 3 5
The Group did not have any non-standard or privileged transactions with entities controlled by the Government of the Republic of Kazakhstan.
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The Guarantors
SSGPO A9.9.2
General
SSGPO’s full legal name is Sokolovsko Sarbaiskoye Mining and Production Association JSC, and its A9.4.1.1 abbreviated legal name is JSC SSGPO. SSGPO was originally organised as a closed joint stock company A9.4.1.2 under the laws of Kazakhstan on 24 February 1992. SSGPO is registered under registration certificate A9.4.1.3 number 544-1937-19-AO. SSGPO’s business address is at 459120, Republic of Kazakhstan, Kostanai region, A9.4.1.4 Rudniy, 26 Lenin Str, and the telephone number of SSGPO’s principal place of business is +7(71431) 20100. The principal legislation under which SSGPO operates is the Law of the Republic of Kazakhstan “On Joint Stock Companies” dated 13 May 2003 (the JSC Law).
SSGPO is an indirect subsidiary of the Issuer. The issued share capital of SSGPO is 6,500,000 shares, A9.10.1 divided into 5,850,000 common shares and 650,000 preference shares. The Issuer indirectly holds 5,850,000 common shares and 529,538 preference shares in SSGPO.
Business
As set out in Article III of SSGPO’s charter, SSGPO was incorporated for the purposes of deriving revenue A5.1.1 from the production and realisation of iron-ore pellets, concentrate of shattered ore, dolomite, road metal, consumer goods and using such revenue in the interests of SSGPO’s shareholders.
There are no and have been no governmental, legal or arbitration proceedings against SSGPO (including any A9.11.5 such proceedings which are pending or threatened of which SSGPO is aware) during the 12 months preceding the date of this Prospectus, which may have, or have had in the recent past, significant effects on SSGPO’s and/or the Group’s financial position or profitability.
Management
SSGPO is managed by: (i) its board of directors, which is appointed by the general meeting of shareholders; A9.9.1 and (ii) its management board, which is appointed by the board of directors. The current members of the board of directors of SSGPO are as follows:
Name Business Role Business Address –––––––––––––––––– ––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––– Mr. Mukhamejan Board member 111500, Republic of Kazakhstan, Kostanai region, Turdakhunov Rudniy, 26 Lenin Str. Mr. Felix Vulis Chairman of the Board 111500, Republic of Kazakhstan, Kostanai region, Rudniy, 26 Lenin Str. Mr. Daulet AhmedovBoard member 111500, Republic of Kazakhstan, Kostanai region, (Independent Director) Rudniy, 26 Lenin Str.
The current members of the management board of SSGPO are as follows:
Name Business Role Business Address –––––––––––––––––– ––––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––– Mr. Mukhamejan President and Chairman of 111500, Republic of Kazakhstan, Kostanai region, Turdakhunov Executive Board Rudniy, 26 Lenin Str. Mr. Anatolyi Bazhenov Vice-president, Executive 111500, Republic of Kazakhstan, Kostanai region, and Board member Rudniy, 26 Lenin Str. Ms. Lidiya Polyanina Head of financial 111500, Republic of Kazakhstan, Kostanai region, management and Rudniy, 26 Lenin Str. Executive board member None of the directors or members of the management board of SSGPO performs any principal activities outside of SSGPO that are significant to SSGPO, with the exception of Mr. Felix Vulis who is Chief
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Executive Officer of the Issuer (see “Documents Incorporated by Reference” for further information on Mr. Felix Vulis as a member of the Board).
There are no current or potential conflicts of interest between the private interests and/or other duties of the A9.9.2 directors or members of the management board of SSGPO and the duties of those directors or members of the management board to SSGPO, with the exception of Mr. Felix Vulis’ role as Chief Executive Officer of the Issuer which may potentially conflict with his role on the board of directors of SSGPO (see “Documents Incorporated by Reference” for further information on Mr. Felix Vulis as a member of the Board).
Kazchrome
General
Kazchrome’s full legal name is Transnational Company Kazchrome JSC, and its abbreviated legal name is A9.4.1.1 TNC Kazchrome JSC. Kazchrome was originally organised as a closed joint stock company under the laws A9.4.1.2 of Kazakhstan on 20 October 1995, under registration certificate number 549-1910-AO. Kazchrome was re- A9.4.1.3 registered as a joint stock company on 31 October 2003 under registration No. 8618-AO (IU). Kazchrome’s A9.4.1.4 business address is at 463015, Republic of Kazakhstan, Aktobe, Industrial Zone, 312 Strelkovaya Diviziya Ave., and the telephone number of Kazchrome’s principal place of business is +7(7132) 505381. The principal legislation under which Kazchrome operates is the JSC Law.
Kazchrome is an indirect subsidiary of the Issuer. The issued share capital of Kazchrome is 7,903,485 shares, A9.10.1 divided into 7,147,485 common shares and 756,000 preference shares. The Issuer indirectly holds 7,115,776 common shares and 654,085 preference shares in Kazchrome.
Business
As set out in Article 3.1 of Kazchrome’s charter, Kazchrome was incorporated for the purpose of generation A9.5.1.1 of income from production and sale of chromite and manganese ores, various types of ferroalloys and consumer goods.
There are no and have been no governmental, legal or arbitration proceedings against Kazchrome (including A9.11.5 any such proceedings which are pending or threatened of which Kazchrome is aware) during the 12 months preceding the date of this Prospectus, which may have, or have had in the recent past, significant effects on Kazchrome’s and/or the Group’s financial position or profitability.
Management
Kazchrome is managed by: (i) its board of directors, which is appointed by the general meeting of A9.9.1 shareholders; and (ii) its management board, which is appointed by the board of directors. The current directors of Kazchrome are as follows:
Name Business Role Business Address ––––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––– Mr. Felix Vulis Chairman of the Board 030015, Republic of Kazakhstan, Aktobe, Industrial Zone, 312 Strelkovaya Diviziya Ave. Ms. Zaure Zaurbekova Board member 030015, Republic of Kazakhstan, Aktobe, Industrial Zone, 312 Strelkovaya Diviziya Ave. Mr. Kamaliden Tuyakbaev Board member 030015, Republic of Kazakhstan, Aktobe, (Independent Director) Industrial Zone, 312 Strelkovaya Diviziya Ave.
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The current members Kazchrome’s management board are as follows:
Name Business Role Business Address –––––––––––––––––––– –––––––––––––––––––– –––––––––––––––––––––––––––––––––––––––– Mr. Victor TilPresident and Chairman 030015, Republic of Kazakhstan, Aktobe, of Executive Board Industrial Zone, 312 Strelkovaya Diviziya Ave. Mr. Murat Mukashev Director of branch Aksu 030015, Republic of Kazakhstan, Aktobe, Ferroalloy Plant and Industrial Zone, 312 Strelkovaya Diviziya Ave. Executive Board member Mr. Nikolay LoginovDirector of branch 030015, Republic of Kazakhstan, Aktobe, Donskoy GOK and Industrial Zone, 312 Strelkovaya Diviziya Ave. Executive Board member Mr. Arman Yesenzhunov Director of branch Aksu 030015, Republic of Kazakhstan, Aktobe, Ferroalloy Plant and Industrial Zone, 312 Strelkovaya Diviziya Ave. Executive Board member Mr. Oleg PrivalovVice-president on 030015, Republic of Kazakhstan, Aktobe, technical issues and Industrial Zone, 312 Strelkovaya Diviziya Ave. Executive Board member None of the directors or members of the management board of Kazchrome performs any principal activities outside of Kazchrome that are significant with respect to Kazchrome, with the exception of Mr Felix Vulis and Ms. Zaure Zaurbekova who are Chief Executive Officer of the Issuer and Chief Financial Officer respectively (see “Documents Incorporated by Reference” for further information on Mr. Felix Vulis and Ms. Zaure Zaurbekova as members of the Board).
There are no current or potential conflicts of interest between the private interests and/or other duties of the A9.9.2 directors or members of the management board of Kazchrome and the duties of those directors or members of the management board to Kazchrome, with the exception of Mr. Felix Vulis’ role as Chief Executive Officer of the Issuer and Ms. Zaure Zaurbekova’s role as Chief Financial Officer which may potentially conflict with their roles on the board of directors of Kazchrome (see “Documents Incorporated by Reference” for further information on Mr. Felix Vulis and Ms. Zaure Zaurbekova as members of the Board).
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TAXATION A12.4.1.14
UK Taxation
The following applies only to persons who are the beneficial owners of Notes and is a summary of the Issuer’s understanding of current law and published practice in the United Kingdom relating only to United Kingdom withholding tax treatment of payments of interest in respect of Notes. It does not deal with any other United Kingdom taxation implications of acquiring, holding or disposing of Notes. The United Kingdom tax treatment of prospective Noteholders depends on their individual circumstances and may be subject to change in the future. Prospective Noteholders who may be subject to tax in a jurisdiction other than the United Kingdom or who may be unsure as to their tax position should seek their own professional advice.
Interest on the Notes
The Notes issued will constitute “quoted Eurobonds” provided that they are and continue to be listed on a “recognised stock exchange” within the meaning of section 1005 of the Income Tax Act 2007. The London Stock Exchange is a recognised stock exchange. Securities will be treated as listed on the London Stock Exchange if they are included in the Official List (within the meaning of and in accordance with the provisions of Part 6 of the Financial Services and Markets Act 2000) and admitted to trading on the London Stock Exchange. Provided, therefore, that the Notes are and continue to be quoted Eurobonds, interest on the Notes will be payable by the Issuer without withholding or deduction on account of United Kingdom tax.
Interest on the Notes may also be paid without withholding or deduction on account of United Kingdom tax where interest on the Notes is paid by the Issuer and, at the time the payment is made, the Issuer reasonably believes (and any person by or through whom interest on the Notes is paid reasonably believes) that the beneficial owner is within the charge to United Kingdom corporation tax as regards the payment of interest; provided that HM Revenue and Customs (HMRC) has not given a direction (in circumstances where it has reasonable grounds to believe that the above exemption is not available in respect of such payment of interest at the time the payment is made) that the interest should be paid under deduction of tax.
Interest on the Notes may also be paid by the Issuer without withholding or deduction on account of United Kingdom tax where the maturity of the Notes is less than 365 days and those Notes do not form part of a scheme or arrangement of borrowing intended to be capable of remaining outstanding for more than 364 days.
In other cases, an amount must generally be withheld from payments of interest on the Notes by the Issuer on account of United Kingdom income tax at the basic rate (currently 20%). However, where an applicable double tax treaty provides for a lower rate of withholding tax (or for no tax to be withheld) in relation to a Noteholder, HMRC can issue a notice to the Issuer to pay interest to the Noteholder without deduction of tax (or for interest to be paid with tax deducted at the rate provided for in the relevant double tax treaty).
Provision of information
Noteholders may wish to note that, in certain circumstances, HMRC has power to obtain information (including the name and address of the beneficial owner of the interest) from any person in the United Kingdom who either pays or credits interest to or receives interest for the benefit of a Noteholder. HMRC also has power, in certain circumstances, to obtain information from any person in the United Kingdom who pays amounts payable on the redemption of Notes which are deeply discounted securities for the purposes of the Income Tax (Trading and Other Income) Act 2005 to or receives such amounts for the benefit of another person. Such information may include the name and address of the beneficial owner of the amount payable on redemption. HMRC published practice indicates that HMRC will not exercise the power referred to above to require this information in respect of amounts payable on the redemption of deeply discounted securities where such amounts are paid on or before 5 April 2011. Any information obtained may, in certain
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circumstances, be exchanged by HMRC with the tax authorities of the jurisdiction in which the Noteholder is resident for tax purposes.
Payments by a Guarantor
If a Guarantor makes any payments in respect of interest on the Notes (or in respect of other payments due on the Notes other than the repayment of amounts subscribed for the Notes), it is possible that such payments may be subject to withholding on account of UK tax, subject to any domestic law exemption or any claim which could be made under an applicable double tax treaty. Such payments by a Guarantor may not be eligible for the quoted Eurobond exemption described above.
Kazakhstan Taxation
The following is a broad summary of the Kazakhstan tax provisions applicable to beneficial owners of Notes, and is based on the Issuer’s understanding of current tax law and practice in Kazakhstan. Given that the tax treatment of the prospective Noteholders depends on both their individual circumstances and applicable laws which may be subject to change in the future, Noteholders are encouraged to seek their own professional advice and use the below summary as broad guidance only.
Payment of principal, interest, commissions and fees by the Issuer to an individual who is a non-resident of Kazakhstan, or to a non-resident legal entity which is neither established under the Kazakhstan legislation, nor has an actual governing body, nor carries on activities through a permanent establishment, in Kazakhstan (non-residents of Kazakhstan) will not be subject to taxation in Kazakhstan and no taxes should be withheld on these payments.
Payment of interest, commissions and fees by the Issuer to a legal entity which is established under the Kazakhstan legislation, or to a non-resident legal entity which has an actual governing body, or carries on activities through a permanent establishment, in Kazakhstan (residents of Kazakhstan) is subject to income tax in the hands of the recipient. Legal entities pay corporate income tax at a rate of 20 per cent decreasing to 17.5 per cent from 1 January 2013 and to 15 per cent from 1 January 2014. Net income of a permanent establishment of a non-resident legal entity in Kazakhstan is also subject to additional income tax at a rate of 15 per cent which may be reduced under provisions of applicable tax treaties. Income of an individual who is a resident of Kazakhstan is subject to personal income tax at a rate of 10 per cent. However, income of an individual who is a resident of Kazakhstan in the form of interest, commissions and fees received under debt securities, including the Notes, is exempt from personal income tax.
Payment of principal, interest, commissions and fees on the Notes under the Guarantee could be considered as taxable income in Kazakhstan and subject to withholding tax at a rate of up to 20 per cent decreasing to 17.5 per cent from 1 January 2013 and to 15 per cent from 1 January 2014. The withholding tax rate may be reduced under provisions of applicable tax treaties (subject to limitations, conditions and documentary requirements).
If payment of interest, commissions and fees to residents of Kazakhstan is subject to withholding taxes at source, such withholding taxes may be available as a tax credit against Kazakhstan income tax liabilities of residents of Kazakhstan (subject to certain limitations, conditions, and documentation requirements).
Gains received by non-residents of Kazakhstan on disposal of the Notes will not be subject to taxation in Kazakhstan.
Gains received by a legal entity registered under the law of Kazakhstan or a non-resident legal entity which has an actual governing body, or carries on activities through a permanent establishment, in Kazakhstan on disposal of the Notes are subject to corporate income tax at a rate of 20 per cent decreasing to 17.5 per cent from 1 January 2013 and to 15 per cent from 1 January 2014. Net income of a permanent establishment of a non-resident legal entity in Kazakhstan is also subject to additional income tax at a rate of 15 per cent which may be reduced under provisions of applicable tax treaties. Individuals who are residents of Kazakhstan pay personal income tax at a rate of 10 per cent on capital gains realised on disposal of the Notes.
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Subject to certain conditions and limitations, capital gains on debt securities listed on a recognised stock exchange and realised by an open trade may be exempt from tax in Kazakhstan under the applicable domestic tax provisions.
EU Savings Directive
Under EU Council Directive 2003/48/EC on the taxation of savings income, Member States are required to provide to the tax authorities of another Member State details of payments of interest (or similar income) paid by a person within its jurisdiction to an individual beneficial owner resident in that other Member State or to certain limited types of entities established in that other Member State. However, for a transitional period, Luxembourg and Austria are instead required (unless during that period they elect otherwise) to operate a withholding system in relation to such payments (the ending of such transitional period being dependent upon the conclusion of certain other agreements relating to information exchange with certain other countries). The current rate of withholding is 20 per cent and it will be increased to 35 per cent with effect from 1 July 2011. A number of non-EU countries and territories including Switzerland and certain British and Dutch dependent or associated territories have adopted similar measures (a withholding system in the case of Switzerland).
A number of amendments to the Directive have been proposed and approved by the European Parliament. If any of the proposed changes to the Directive are implemented, they may amend or broaden the scope of the requirements described above.
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SUBSCRIPTION AND SALE A12.4.1.10 A13.4.14 The Dealers have, in a programme agreement (the Programme Agreement) dated 13 May 2010, agreed with the Issuer and the Guarantors a basis upon which they or any of them may from time to time agree to purchase Notes. Any such agreement will extend to those matters stated under “Form of the Notes“ and “Terms and Conditions of the Notes“. In the Programme Agreement, the Issuer has (failing which, the Guarantors have) agreed to reimburse the Dealers for certain of their expenses in connection with the establishment and any future update of the Programme and the issue of Notes under the Programme and to indemnify the Dealers against certain liabilities incurred by them in connection therewith.
United States
The Notes have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in certain transactions exempt from the registration requirements of the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.
The Notes are subject to U.S. tax law requirements and may not be offered, sold or delivered within the United States or its possessions or to a United States person, except in certain transactions permitted by U.S. tax regulations. Terms used in this paragraph have the meanings given to them by the U.S. Internal Revenue Code of 1986 and regulations thereunder.
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that it will not offer, sell or deliver Notes (a) as part of their distribution at any time or (b) otherwise until 40 days after the completion of the distribution, as determined and certified by the relevant Dealer or, in the case of an issue of Notes on a syndicated basis, the relevant lead manager, of all Notes of the Tranche of which such Notes are a part, within the United States or to, or for the account or benefit of, U.S. persons. Each Dealer has further agreed, and each further Dealer appointed under the Programme will be required to agree, that it will send to each dealer to which it sells any Notes during the distribution compliance period a confirmation or other notice setting forth the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.
Until 40 days after the commencement of the offering of any Series of Notes, an offer or sale of such Notes within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with an available exemption from registration under the Securities Act.
Each issuance of Index Linked Notes or Dual Currency Notes shall be subject to such additional U.S. selling restrictions as the Issuer and the relevant Dealer may agree as a term of the issuance and purchase of such Notes, which additional selling restrictions shall be set out in the applicable Final Terms.
Public Offer Selling Restriction under the Prospectus Directive
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State), each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the Relevant Implementation Date) it has not made and will not make an offer of Notes which are the subject of the offering contemplated by this Base Prospectus as completed by the final terms in relation thereto to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of such Notes to the public in that Relevant Member State:
(a) at any time to legal entities which are authorised or regulated to operate in the financial markets or, if not so authorised or regulated, whose corporate purpose is solely to invest in securities;
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(b) at any time to any legal entity which has two or more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000; and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts;
(c) at any time to fewer than 100 natural or legal persons (other than qualified investors as defined in the Prospectus Directive) subject to obtaining the prior consent of the relevant Dealer or Dealers nominated by the Issuer for any such offer; or
(d) at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of Notes referred to in (a) to (d) above shall require the Issuer or any Dealer to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of Notes to the public in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression Prospectus Directive means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
United Kingdom
Each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that:
(a) in relation to any Notes which have a maturity of less than one year, (i) it is a person whose ordinary activities involve it in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of its business and (ii) it has not offered or sold and will not offer or sell any Notes other than to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or as agent) for the purposes of their businesses or who it is reasonable to expect will acquire, hold, manage or dispose of investments (as principal or agent) for the purposes of their businesses where the issue of the Notes would otherwise constitute a contravention of Section 19 of the FSMA by the Issuer;
(b) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer or any Guarantor; and
(c) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to any Notes in, from or otherwise involving the United Kingdom.
Japan
The Notes have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Law No.25 of 1948, as amended; the FIEA) and each Dealer has represented and agreed, and each further Dealer appointed under the Programme will be required to represent and agree, that it will not offer or sell any Notes, directly or indirectly, in Japan or to, or for the benefit of, any resident of Japan (as defined under Item 5, Paragraph 1, Article 6 of the Foreign Exchange and Foreign Trade Control Law (Law No. 228 of 1949, as amended)), or to others for re-offering or resale, directly or indirectly, in Japan or to, or for the benefit of, a resident of Japan, except pursuant to an exemption from the registration requirements of, and otherwise in compliance with, the FIEA and any other applicable laws, regulations and ministerial guidelines of Japan.
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Kazakhstan
Each Dealer has agreed, and each further Dealer appointed under the Programme will be required to agree, that it will not, directly or indirectly, offer for subscription or purchase or issue invitations to subscribe for or buy or sell the Notes or distribute any draft or definitive document in relation to any such offer, invitation or sale in the Republic of Kazakhstan, except in compliance with the applicable securities laws of the Republic of Kazakhstan.
General
Each Dealer has agreed, and each further Dealer appointed under the Programme will be required to agree, that it will (to the best of its knowledge and belief) comply with all applicable securities laws and regulations in force in any jurisdiction in which it purchases, offers, sells or delivers Notes or possesses or distributes this Base Prospectus and will obtain any consent, approval or permission required by it for the purchase, offer, sale or delivery by it of Notes under the laws and regulations in force in any jurisdiction to which it is subject or in which it makes such purchases, offers, sales or deliveries and the none of the Guarantors, the Trustee and any of the other Dealers shall have any responsibility therefor.
None of the Issuer, the Guarantors, the Trustee and the Dealers represents that Notes may at any time lawfully be sold in compliance with any applicable registration or other requirements in any jurisdiction, or pursuant to any exemption available thereunder, or assumes any responsibility for facilitating such sale.
With regard to each Tranche, the relevant Dealer will be required to comply with such other restrictions as the Issuer and the relevant Dealer shall agree and as shall be set out in the applicable Final Terms.
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GENERAL INFORMATION
Authorisation
The establishment of the Programme has been duly authorised by a resolution of the Board of Directors of A12.4.1 the Issuer dated 11 May 2010 and a Sub-Committee of the Board of Directors of the Issuer dated 13 May A13.4.12 2010. The giving of the Notes Guarantee has been duly authorised by a resolution of the Board of Directors of SSGPO dated 12 May 2010 and a resolution of the Board of Directors of Kazchrome dated 12 May 2010.
Listing of Notes
It is expected that each Tranche of Notes which is to be admitted to the Official List and to trading on the London Stock Exchange’s regulated market will be admitted separately as and when issued, subject only to the issue of a Global Note or Notes initially representing the Notes of such Tranche. Application has been made to the UK Listing Authority for Notes issued under the Programme to be admitted to the Official List and to the London Stock Exchange for such Notes to be admitted to trading on the London Stock Exchange’s regulated market. The listing of the Programme in respect of Notes is expected to be granted on or before 18 May 2010.
Documents Available A6.4.1 A9.14 For the period of 12 months following the date of this Base Prospectus, copies of the following documents will, when published, be available for inspection from the registered office of the Issuer and from the specified office of the Paying Agent for the time being in London:
(a) the Memorandum and Articles of Association of the Issuer and the Memorandum and Articles of Association (with an English translation thereof) of each Guarantor;
(b) the Financial Statements, the Annual Reports and the Interim Management Statement;
(c) the most recently published audited annual financial statements of the Issuer and of each Guarantor and the most recently published unaudited interim financial statements of the Issuer, in each case together with any audit or review reports prepared in connection therewith. The Issuer currently prepares unaudited consolidated interim accounts on a semi-annual basis;
(d) the Programme Agreement, the Trust Deed, the Agency Agreement, and the forms of the Global Notes, the Notes in definitive form, the Receipts, the Coupons and the Talons;
(e) a copy of this Base Prospectus;
(f) any future offering circulars, prospectuses, information memoranda and supplements including Final Terms (save that a Final Terms relating to a Note which is neither admitted to trading on a regulated market in the European Economic Area nor offered in the European Economic Area in circumstances where a prospectus is required to be published under the Prospectus Directive will only be available for inspection by a holder of such Note and such holder must produce evidence satisfactory to the Issuer and the Paying Agent as to its holding of Notes and identity) to this Base Prospectus and any other documents incorporated herein or therein by reference; and
(g) in the case of each issue of Notes admitted to trading on the London Stock Exchange’s regulated market subscribed pursuant to a subscription agreement, the subscription agreement (or equivalent document).
Clearing Systems
The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg (which are the A12.4.1.4 entities in charge of keeping the records). The appropriate Common Code and ISIN for each Tranche of A13.4.4 Notes allocated by Euroclear and Clearstream, Luxembourg will be specified in the applicable Final Terms.
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If the Notes are to clear through an additional or alternative clearing system the appropriate information will be specified in the applicable Final Terms.
The address of Euroclear is Euroclear Bank SA/NV, 1 Boulevard du Roi Albert II, B-1210 Brussels and the address of Clearstream, Luxembourg is Clearstream Banking, 42 Avenue JF Kennedy, L-1855 Luxembourg.
Conditions for determining price
The price and amount of Notes to be issued under the Programme will be determined by the Issuer and each relevant Dealer at the time of issue in accordance with prevailing market conditions.
Significant or Material Change
Save as disclosed on pages 4, 5 and 6 of the Interim Management Statement incorporated by reference into A9.7.1 this Base Prospectus, there has been no significant change in the financial or trading position of the Issuer, A9.11.6 any Guarantor or the Group since 31 December 2009. There has been no material adverse change in the prospects of the Issuer, any Guarantor or the Group since 31 December 2009.
Auditors
The auditors of the Issuer are PricewaterhouseCoopers LLP, a member of the Institute of Chartered A9.2.1 Accountants in England and Wales, who have audited the Issuer’s accounts, without qualification, in A9.11.3.1 accordance with IFRS for each of the two financial years ended on 31 December 2009. The auditors of each A12.7.2 Guarantor are PricewaterhouseCoopers LLP Kazakhstan, a member of the Chamber of Auditors in the Republic of Kazakhstan, who have audited each Guarantor’s accounts, without qualification, in accordance with IFRS for each of the two financial years ended on 31 December 2009.
Post-issuance information
Save as set out in the Final Terms, the Issuer does not intend to provide any post-issuance information in A12.7.5 relation to any issues of Note.
Dealers transacting with the Issuer and the Guarantors
Certain of the Dealers and their affiliates have engaged, and may in the future engage, in investment banking and/or commercial banking transactions with, and may perform services to the Issuer, any Guarantor and their affiliates in the ordinary course of business.
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GLOSSARY
The following is a glossary of terms frequently used in this Base Prospectus:
BML Bahia Minerals BV.
Board the board of Directors of the Issuer.
CAMEC Central African Mining & Exploration Company PLC.
CIS Commonwealth of Independent States.
Comit Resources Comit Resources FZE.
Donskoy Unit Donskoy GOK.
EEC Eurasian Energy Corporation JSC.
EFIC Eurasian Finance-Industrial Company JSC.
EIC Eurasian Insurance Corporation.
ENRC the Issuer and its consolidated subsidiaries (including the Guarantors).
ENYA ENYA Holdings B.V.
Eurasia Insurance Eurasia Insurance Company JSC.
Eurasian Bank Eurasian Bank JSC.
Financial Statements the Group’s audited consolidated financial statements for the years ended 31 December 2008 and 2009, prepared in accordance with IFRS, together with the applicable audit reports from PricewaterhouseCoopers LLP.
Founders Mr. Patokh Chodiev, Mr. Alijan Ibragimov and Mr. Alexander Machkevitch.
Guarantors Kazchrome and SSGPO.
Group the Issuer and its consolidated subsidiaries (including the Guarantors).
Guarantors’ Financial Statements each Guarantor’s audited financial statements for the years ended 31 December 2008 and 2009, prepared in accordance with IFRS, together with the applicable audit reports from PricewaterhouseCoopers LLP, attached to this Base Prospectus.
HMRC Her Majesty’s Revenue and Customs.
IFRS International Financial Reporting Standards, as adopted by the European Union.
IMR Company International Mineral Resources B.V. and its subsidiaries.
Indemnity the deed of indemnity entered into on 7 December 2007 between ENRC and the Founders.
IPO initial public offering.
JORC Code Code for Reporting of Mineral Resources and Ore Reserves.
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Kazakhstan Aluminium Smelter Kazakhstan Aluminium Smelter JSC.
Kazchrome Transnational Company Kazchrome JSC.
Kazmarganets Unit Kazmarganets GOK.
Kyoto Protocol The United Nations Framework Convention on Climate Changes.
MET Mineral Extraction Tax.
Ministry of Justice The Ministry of Justice of the Republic of Kazakhstan.
NBK National Bank of Kazakhstan.
Parliament The Parliament of the Republic of Kazakhstan.
Principal Shareholders The Founders, Kazakhmys Eurasia B.V. and the Government of the Republic of Kazakhstan, represented by the State Property and Privatisation Committee of the Ministry of Finance.
Relationship Agreements the relationship agreements entered into between the Issuer and each of the Founders on 7 December 2007.
RTS Russian Trading System.
Serov Serov Ferroalloy Plant JSC and related entities.
Shareholder Group each Founder and his respective associates and affiliates.
Shubarkol Shubarkol Komir JSC.
SMKK Société Minière de Kabolela et Kipese Sprl.
SSGPO Sokolovsko- Sarbaiskoye Mining and Production Association JSC.
Structured Trade Finance Facility The U.S.$1.48 billion structured trade finance facility agreement between the ENRC Marketing AG and ABN AMRO Bank N.V., Barclays Capital and Deutsche Bank AG, Amsterdam branch.
Tuoli Xinjiang Tuoli Taihang Ferro-Alloy Co. LTD.
Zhairem Unit Zhairemsky GOK JSC.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF EACH GUARANTOR
Consolidated financial statements of SSGPO for the period ended 31 December 2008 Page
Auditor’s report on the consolidated financial statements...... F4-F5 A9.11.1 Consolidated balance sheet ...... F-6 A9.11.2 Consolidated income statement ...... F-7 Consolidated statement of changes in equity ...... F-8 Consolidated cash flow statement ...... F-9 Notes to the consolidated financial statements ...... F-10-F-65
Consolidated financial statements of SSGPO for the period ended 31 December 2009 Page
Auditor’s report on the consolidated financial statements...... F-68-F-69 A9.11.1 Consolidated statement of financial position...... F-70 A9.11.2 Consolidated income statement ...... F-71 Consolidated statement of comprehensive income ...... F-72 Consolidated statement of changes in equity ...... F-73 Consolidated statement of cash flow ...... F-74 Notes to consolidated financial statements ...... F-75-F-124
Consolidated financial statements of Kazchrome for the period ended 31 December 2008 Page
Auditor’s report on the consolidated financial statements...... F-127-F-128 A9.11.1 Consolidated balance sheet ...... F-129 A9.11.2 Consolidated income statement ...... F-130 Consolidated statement of changes in equity ...... F-131 Consolidated statement of cash flow ...... F-132 Notes to the consolidated financial statements ...... F-133-F-185
Consolidated financial statements of Kazchrome for the period ended 31 December 2009 Page
Auditor’s report on the consolidated financial statements...... F-188-F-189 A9.11.1 Consolidated statement of financial position...... F-190 A9.11.2 Consolidated statement of comprehensive income ...... F-191 Consolidated statement of changes in equity ...... F-192 Consolidated statement of cash flows ...... F-193 Notes to the consolidated financial statements ...... F-194-F-244
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Sokolovsko-Sarbaisky Mining and Production Association JSC
International Financial Reporting Standards Consolidated Financial Statements and Auditor’s Report
31 December 2008
(Translated from the Russian original)
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Content
Auditors’ report...... 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheet ...... 2 Consolidated income statement...... 3 Consolidated statement of changes in equity ...... 4 Consolidated cash flow statement ...... 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 The Company and its Operations ...... 6 2 Basis of Preparation and Significant Accounting Policies...... 8 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies ...... 17 4 New Accounting Pronouncements...... 19 5 Employee Information...... 24 6 Balances and Transactions with Related Parties...... 25 7 Property, Plant and Equipment...... 30 8 Other Non-Current Assets ...... 31 9 Other Current Assets...... 32 10 Loans Receivable ...... 33 11 Inventories ...... 34 12 Trade and Other Receivables...... 35 13 Cash and Cash Equivalents ...... 36 14 Long-term assets held for sale ...... 36 15 Share Capital...... 36 16 Long-term Share-based Employee Benefit Plan...... 38 17 Borrowings...... 38 18 Derivative financial instruments ...... 40 19 Other Taxes Payable...... 41 20 Provision for Mining Assets and Waste Polygons Retirement Obligations ...... 41 21 Employee Benefits...... 43 22 Trade and Other Payables...... 44 23 Revenue ...... 44 24 Cost of Sales ...... 44 25 Other Operating Income ...... 45 26 Distribution Costs...... 45 27 General and Administrative Expenses...... 46 28 Other Operating Expenses ...... 46 29 Finance Income and Costs ...... 47 30 Income Taxes ...... 48 31 Contingencies, Commitments and Operating Risks...... 51 32 Financial Risk Management ...... 55 33 Financial Instruments by Category ...... 60 34 Credit Quality of Financial Assets...... 61
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated balance sheet
In thousands of Kazakhstani Tenge Note 31 December 2008 31 December 2007
ASSETS Non-current assets Property, plant and equipment 7 113,783,932 90,943,273 Loans receivable 10 - 36,434,483 Other non-current assets 8 17,328,614 3,059,440
Total non-current assets 131,112,546 130,437,196 Current assets Inventories 11 12,407,453 7,380,414 Trade and other receivables 12 26,663,093 25,484,778 Loans receivable 10 - 14,984,838 Current income tax prepaid 453,326 723,478 Other current assets 9 5,879,526 10,049,896 Cash and cash equivalents 13 13,865,774 4,819,709 59,269,172 63,443,113 Long-term assets held for sale 14 119,970 - Total current assets 59,389,142 63,443,113 TOTAL ASSETS 190,501,688 193,880,309 EQUITY Share capital 15 8,785,200 8,785,200 Hedging reserve 18 (1,505,635) (1,246,647) Retained earnings 160,805,723 108,243,198 Equity attributable to the Company’s shareholders 168,085,288 115,781,751 Minority interest - 2,713,148 TOTAL EQUITY 168,085,288 118,494,899 LIABILITIES Non-current liabilities Borrowings 17 - 36,157,822 Derivative financial instruments 18 - 3,783,812 Provision for mining assets and waste polygons retirement obligations 20 1,802,093 3,720,170 Preference shares 242,900 243,071 Deferred tax liabilities 30 5,141,202 10,318,467 Employee benefits 21 1,072,007 1,113,549 Financial guarantees 46,413 77,507
Total non-current liabilities 8,304,615 55,414,398 Current liabilities Borrowings 17 - 12,062,609 Derivative financial instruments 18 3,999,928 1,469,778 Trade and other payables 22 7,496,561 5,987,119 Income tax payable 2,304,272 - Other taxes payable 19 311,024 451,506 Total current liabilities 14,111,785 19,971,012 TOTAL LIABILITIES 22,416,400 75,385,410 TOTAL LIABILITIES AND EQUITY 190,501,688 193,880,309
Approved for issue and signed on behalf of the Board of Directors on ______2009. ______M.M. Turdakhunov T.A. Agafonova President Chief Accountant
The accompanying notes on pages 6 to 61 are an integral part of these consolidated financial statements Translated from the Russian original 2
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated income statement
In thousands of Kazakhstani Tenge Note 2008 2007
Revenues 23 165,091,697 111,585,204 Cost of sales 24 (55,046,225) (50,924,477) Gross profit 110,045,472 60,660,727 Other operating income 25 3,709,734 4,537,357 Distribution costs 26 (12,816,873) (11,312,163) General and administrative expenses 27 (7,989,176) (9,522,414) Other operating expenses 28 (3,664,838) (8,997,986) Operating profit 89,284,319 35,365,521 Finance income 29 606,259 696,610 Finance costs 29 (932,018) (799,374) Finance costs, net 29 (325,759) (102,764) Profit before income tax 88,958,560 35,262,757 Income tax expense 30 (22,022,447) (12,672,370)
Profit for the year 66,936,113 22,590,387
Participation in profit: Profit attributable to the parent Company’s shareholders 66,975,300 22,833,293 Minority interest (39,187) (242,906) Profit for the year 66,936,113 22,590,387
The accompanying notes on pages 6 to 61 are an integral part of these consolidated financial statements Translated from the Russian original 3
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated statement of changes in equity
Attributable to the Company’s shareholders
Share Hedging Retained Minority Total Note capital reserve earnings Total interest Equity In thousands of Kazakhstani Tenge Balance at 1 January 2007 8,785,200 - 92,631,405 101,416,605 2,956,054 104,372,659
Hedging reserves, net - (1,246,647) - (1,246,647) - (1,246,647)
Profit/(loss) recognized directly in equity - (1,246,647) - (1,246,647) - (1,246,647) Profit for the year - - 22,833,293 22,833,293 (242,906) 22,590,387
Total income and expense for the year - (1,246,647) 22,833,293 21,586,646 (242,906) 21,343,740
Dividends declared 15 - - (7,221,500) (7,221,500) - (7,221,500) Balance at 31 December 2007 8,785,200 (1,246,647) 108,243,198 115,781,751 2,713,148 118,494,899
Hedging reserves - (644,095) - (644,095) - (644,095) Deferred tax on hedging reserves - 385,107 - 385,107 - 385,107 Disposal of subsidiary - - - - (2,673,961) (2,673,961)
Profit/(loss) recognized directly in equity - (258,988) - (258,988) (2,673,961) (2,932,949) Profit for the year - - 66,975,300 66,975,300 (39,187) 66,936,113
Total income and expense for the year - (258,988) 66,975,300 66,716,312 (2,713,148) 64,003,164
Dividends declared 15 - - (14,425,125) (14,425,125) - (14,425,125) Compensation expense 16 - - 12,350 12,350 - 12,350 Balance at 31 December 2008 8,785,200 (1,505,635) 160,805,723 168,085,288 - 168,085,288
The accompanying notes on pages 6 to 61 are an integral part of these consolidated financial statements Translated from the Russian original 4
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated cash flow statement
In thousands of Kazakhstani Tenge Note 2008 2007
Cash flows from operating activities: Profit before income tax 88,958,560 35,262,757
Adjustments for:
Depreciation of property, plant and equipment 7 10,312,714 9,512,775 Impairment of property, plant and equipment 7, 27 (63,512) 1,404,641 Losses less gains on disposal of property, plant and equipment 28 96,526 47,851 Impairment of loans receivable 29 - 136,914 Provision for obsolete and slow-moving inventories 27 20,337 5,605 Net profit from disposal of investments 25 (1,077,695) - Interest expense 28, 29 1,493,670 1,134,104 Interest income 25, 29 (2,341,698) (2,870,176) Employee benefits 21 (52,930) 10,393 Provision for asset retirement obligations 20 270,738 207,081 Unrealized foreign currency exchange (8,511) 178,769 Financial guarantees 25, 28 (27,158) (142,743) Unwinding of present value discount 25, 29 (409,480) (1,364,373) Loss on origination of financial assets and liabilities 28 1,122,891 2,918,000 Fair value revaluation of hedge derivative instruments 24 (1,354,781) 3,472,665 Compensation expense 16 12,350 - Operating cash flows before working capital changes 96,952,021 49,914,263 Increase in trade and other receivables (2,748,235) (3,422,793) Decrease/(increase) in interest receivable 14,333 (2,911) Increase in inventories (5,026,940) (83,000) Increase in trade and other payables 414,921 663,412 Decrease in other taxes 19 (140,482) (183,508) Cash generated from operations 89,465,618 46,885,463 Income tax paid (24,700,834) (12,027,240) Interest paid (773,204) (887,881) Employee benefits paid 21 (89,551) (60,151) Net cash from operating activities 63,902,029 33,910,191
Cash flows from investing activities Purchase of property, plant and equipment (39,009,391) (25,053,368) Proceeds from disposal of property, plant and equipment 490,041 62,442 Term deposits placed (10,668,015) (20,051,364) Term deposits withdrawn 16,367,254 12,924,198 Interest income received 1,947,280 2,324,634 Proceeds from disposal of investments available for sale 3,090 65,672 Loans to related parties 10 (14,060,000) (45,292,392) Repayment of loans to related parties 10 3,918,903 8,177,705 Cash outflow from disposal of subsidiary (1,321,194)
Net cash used in investing activities (42,332,032) (66,842,473) Cash flows from financing activities Proceeds from borrowings from related parties 18,538,625 48,407,630 Repayment of borrowings from related parties 17 (16,702,439) (800,000) Dividends paid to the Company’s shareholders 15 (14,360,118) (12,329,093)
Net cash used in financing activities (12,523,932) 35,278,537
Net increase in cash and cash equivalents 9,046,065 2,346,255 Cash and cash equivalents at the beginning of the year 13 4,819,709 2,473,454
Cash and cash equivalents at the end of the year 13 13,865,774 4,819,709
The accompanying notes on pages 6 to 61 are an integral part of these consolidated financial statements Translated from the Russian original 5
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
1 The Company and its Operations
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2008 for Sokolovsko-Sarbaisky Mining and Production Association JSC and its subsidiaries (further the “Company” or “SSGPO”).
Principal activity The principal activity of the Company comprises the extraction and processing of iron ore, limestone, and dolomite and production of fluxed iron ore pellets, iron-ore concentrate, commercial dolomite and crushed stone. The Company is one of the largest entities in the Republic of Kazakhstan with a production chain from extraction of minerals to production of finished goods. The Company’s head office is located at 26, Lenin Avenue, Rudny town, Kostanai Oblast, 111500, the Republic of Kazakhstan.
The Company is controlled by Eurasian Natural Resources Corporation Plc (the “Group” or “ENRC Plc”), global natural resources group with fully integrated mining, processing, energy and transport operations with the principal assets located in the Republic of Kazakhstan.
Subsurface use contracts The Company operates under contracts for subsurface use signed with the Government of the Republic of Kazakhstan for the extraction of: iron ore No. 98 dated 6 February 1997 for 20 years; dolomite No. 100 dated 7 February 1997 for 20 years; limestone No. 03K dated 5 January 1998 for 20 years. Each contract has a renewal clause. The Company’s activities depend on iron ore reserves and the demand on the iron-ore products market.
Principal operating divisions The Company has twenty structural divisions, including Sarbaiskoye and Kacharskoye open pits, Kurzhunkulsky mine and Sokolovskoye underground mine, extracting iron ore; ore processing and pelletizing mill which processes iron ore to produce fluxed iron ore pellets and iron ore concentrate; Alexeyevsky dolomite open pit; Kzyl-Zharsky limestone open pit; and auxiliary subdivisions, engaged in electric power generation, logistics, blasting, and transportation services.
In 2007 the Company opened its representation office in Moscow.
Company’s shareholders During 2008 and 2007 the immediate shareholders of the Company were:
In percent 31 December 2008 31 December 2007 ENRC N.V. 98.14 98.14 Individuals 1.86 1.86
ENRC N.V. is owned by ENRC Plc. The shareholders of ENRC Plc are:
ENRC Kazakhstan Holding B.V. 69.77% Public shareholders (including employees and directors) 18.58% State Property and Privatisation Committee of Ministry of Finance of the Republic of Kazakhstan 11.65%
The shareholders of ENRC Kazakhstan Holding B.V. are Mr. P.K. Chodiev, Mr. A.R. Ibragimov and Mr. A.A. Mashkevich, each holding 14.59 percent of ENRC Plc., and Kazakhmys Eurasia B.V holding 26 percent of ENRC Plc.
At 31 December 2008 and 2007, 5,850,000 of common shares and 529,471 of preference shares of the Company owned by ENRC N.V. were held by ENRC Management KZ LLP under trust management.
Translated from the Russian original 6
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
1 The Company and its Operations (Continued)
Subsidiaries
Below are the subsidiaries included into the Company’s consolidated financial statements:
Country of 2008 2007 Name of subsidiary incorporation Activity % of % of ownership ownership Rassvet Recreation and Health Republic of Health and recreation 100.00 100.00 Centre LLP Kazakhstan
Servis LLP Republic of Catering 100.00 100.00 Kazakhstan Gornyak Cultural and Entertainment Republic of Entertainment 100.00 100.00 Centre LLP Kazakhstan
Rudnenskaya Heating System LLP Republic of Heating services 100.00 100.00 Kazakhstan Credit Partnership “ENRC Credit” Republic of Financing 11.01 76.11 LLP (former Eurasian Credit Kazakhstan Partnership LLP)
TransRudnyAuto LLP Republic of Transportation services 100.00 100.00 Kazakhstan Fortis LLP Republic of Design and exploration activities, 100.00 - Kazakhstan construction and assembly works, production of construction materials, units and structures
From 1 July 2008 the Construction and Assembly Department, the structural subdivision of the Company was de-merged into independent legal entity, Fortis LLP, to optimise the Company’s business. The principal activity of Fortis LLP is to provide the services to the Company on capital construction, major and minor repair, maintenance of buildings and constructions, as well as production of construction related products.
Eurasian Credit Partnership LLP was created in 2004 by a group of companies under common control to finance the construction of an aluminium smelter for production of primary aluminium (Kazakhstan Aluminium Smelter JSC, related party), as well as financing of other Group entities. SSGPO contributed the major part of charter capital and obtained control since year 2005.
In May 2007 Eurasian Credit Partnership LLP was re-registered under a new name – Credit Partnership “ENRC Credit” LLP (the “Partnership”). On 4 April 2008 in accordance with the Meeting of the General Shareholders of the Partnership, the decision was made to increase its charter capital by Tenge 15 billion. TNC Kazchrome JSC contributed the said amount, whereby SSGPO’s interest in the Partnership decreased from 76.11 to 35.47 percent. As a result, the control over the Partnership operations was lost, and investments previously classified as investments into subsidiaries were reclassified as investments in associates.
On 20 September 2008 the General Shareholders Meeting of the Partnership made a decision to increase the share capital of the Partnership by Tenge 18 billion and to change the Partnership’s shareholders structure. TNC Kazchrome JSC contributed the said amount, whereby SSGPO’s interest in the Partnership decreased from 35.47 to 21.62 percent.
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F-11 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
1 The Company and its Operations (Continued)
Based on the decision of the Partnership’s General Shareholders Meeting dated 29 October 2008 TNC Kazchrome JSC contributed additionally Tenge 44.4 billion. Accordingly, SSGPO’s interest in the Partnership decreased from 21.62 to 11.01 percent. As a result of this, starting from October 29, 2008, investments into the Partnership were reclassified by the Company as investments available for sale (Note 8). The loss from the Partnership’s operations for the first 3 months of 2008 was Tenge 164,029 thousand. The accumulated deficit from inception date was Tenge 1,897,435 thousand; including the loss attributable to the Company was Tenge 1,444,161 thousand. The Partnership’s net assets at 31 March 2008 were Tenge 11,192,805 thousand. As a result of the loss of control over the Partnership, the Company recognized income in the amount of Tenge 1,077,695 thousand (Note 25). The fair value of the Company’s investments into the Partnership determined at the reporting date was Tenge 9,596,539 thousand.
2 Basis of Preparation and Significant Accounting Policies
Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified in connection with certain financial instruments. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below.
Presentation currency. All amounts in these financial statements are presented in thousands of Kazakhstani Tenge ("Tenge"), unless otherwise stated. The functional currency of the Company is Tenge.
Accounting for the effects of hyperinflation. The Republic of Kazakhstan has previously experienced relatively high levels of inflation, and was considered to be a hyperinflationary economy as defined by IAS 29 Financial Reporting in Hyperinflationary Economies (“IAS 29”). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. As the characteristics of the economic environment of the Republic of Kazakhstan indicate that hyperinflation has ceased, effective from 1 January 1999 the Company no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 1998 are treated as the basis for the carrying amounts in these financial statements.
Foreign currency transactions. Monetary assets and liabilities, which are held by the Company and denominated in foreign currencies at 31 December 2008, are translated into Kazakhstani Tenge at the official exchange rate of the Kazakhstani Stock Exchange (“KASE”) at that date. Foreign currency transactions are accounted for at the exchange rate of the KASE prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognized in the income statement.
At 31 December 2008, the official rate of exchange used for translating foreign currency balances was US dollar (USD) 1= Tenge 120.77 (31 December 2007: USD 1= Tenge 120.3 ). Exchange restrictions and currency controls exist relating to converting Tenge into other currencies. Tenge is not freely convertible in most countries outside of the Republic of Kazakhstan.
Consolidated financial statements. Subsidiaries are all companies (including special purpose entities) in which the Company, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Company controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Company (acquisition date), and are de-consolidated from the date that control ceases.
Intercompany transactions, balances and unrealised gains on transactions between subsidiaries are eliminated; unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. The Company and all of its subsidiaries use uniform accounting policies consistent with the Company’s policies.
Minority interest is that part of the net results and the net assets of a subsidiary, including the fair value adjustments for consolidation purposes, which is attributable to interests which are not owned, directly or indirectly, by the Company. Minority interest forms a separate component of the Company’s equity.
Transactions with minorities. The Company applies a policy of treating transactions with minority interests as transactions with parties external to the Company. Disposals to minority interests result in gains and losses for the Company that are recorded in the income statement. Purchases from minority interests result in goodwill, being the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary.
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F-12 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Investments in associates. Investments in associated undertakings are accounted for by the equity method of accounting. These are undertakings over which the Company generally has between 20 and 50 percent of the voting rights, or otherwise the Company has significant influence, but which it does not control.
Unrealised gains on transactions between the Company and its associated undertakings are eliminated to the extent of the Company's interest in the associated undertakings; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.
Equity accounting is discontinued when the carrying amount of the investment in an associated undertaking reaches zero, unless the Company has incurred obligations or guaranteed obligations in respect of the associated undertaking.
Property, plant and equipment. Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment provisions. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of property, plant and equipment at 1 January 2004, the date of the Company’s transition to IFRS, was determined by reference to its depreciated replacement cost at that date (“deemed cost”).
The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the given asset as a whole are depreciated individually, applying depreciation rates reflecting their anticipated useful lives. The cost of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired. Any gain or loss arising is recognized in the income statement when the asset is retired.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred.
Recognized as an item of property, plant and equipment are specialised spare parts and servicing equipment with a significant initial value and a useful life of more than one year. Other spare parts and servicing-related equipment are recognized as inventories and accounted for in the income statement at the moment they are used.
Gains and losses on disposals of property, plant and equipment determined by comparing proceeds with carrying amount are recognized in the income statement.
Expenditure, including evaluation costs, incurred to establish or expand productive capacity, costs to conduct mining- construction and mining-capital works, as well as costs arising from mining preparation works during the development or mine reconstruction phase, are capitalised to mining assets as part of buildings and constructions. Mining assets are recorded at cost less accumulated amortisation and less impairment provisions.
Mining assets are amortised using the units-of-production method based on the estimated economically recoverable reserves to which they relate or the straight line method if the estimated useful life of the individual asset is less than the respective life of mine.
Depreciation. Land is not depreciated. The deemed cost of each item of property, plant and equipment is depreciated over its useful life to residual value. Each item's estimated useful life has due regard to both its own physical life limitations and/or the present assessment of economically recoverable reserves of the mine property at which the item is located.
Depreciation is charged to the income statement on a straight line basis over the estimated useful life of the individual asset or on a unit of production basis depending on the type of asset. Changes in estimates, which affect unit of production calculations, are accounted for prospectively. The expected useful lives are as follows:
Useful life (years) Buildings and constructions 10 to 50 Machinery and equipment 5 to 40 Other equipment and motor vehicles 5 to 20 Mining assets Unit of production basis
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F-13 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
The residual value of an asset is the estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Company expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Stripping costs. Stripping (i.e. overburden and other waste removal) costs incurred in the development of mines and open pits before production commences are capitalised as part of the cost of constructing the mines and open pits and subsequently amortised using unit of production method over the lives of the mines or open pits. The stripping costs incurred subsequently, during the production stage of its operations are included within the cost of inventory.
Impairment. The carrying amount of property, plant and equipment all other non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not be recoverable.
When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ”value in use” (being the net present value of expected future cash flows of the relevant cash generating unit) and ”fair value less costs to sell” (the amount obtainable from the sale of an asset or cash generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal). Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Company could receive for the cash generating unit in an arm’s length transaction. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The estimates used for impairment reviews are based on detailed mine plans and operating budgets, modified as appropriate to meet the requirements of IAS 36 Impairment of Assets. Future cash flows are based on:
– estimates of the quantities of the reserves for which there is a high degree of confidence of economic extraction; – future production levels; – future commodity prices (assuming the current market prices will revert to the Company’s assessment of the long term average price, generally over a period of three to five years); and – future cash costs of production, capital expenditure, close down, restoration and environmental clean up.
If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the income statement so as to reduce the carrying amount in the balance sheet to its recoverable amount. A previously recognized impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognized in the income statement and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized in prior years.
Non-current assets classified as held for sale. Non-current assets are classified in the balance sheet as ‘non- current assets held for sale’ if their carrying amount will be recovered principally through a sale transaction within twelve months after the balance sheet date. Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Group’s management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for a sale at a reasonable price; (d) the sale is expected within one year; and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Non-current assets classified as held for sale in the current period’s balance sheet are not reclassified or re-presented in the comparative balance sheet to reflect the classification at the end of the current period.
Non-current assets are assets that include amounts expected to be recovered or collected more than twelve months after the balance sheet date. If reclassification is required, both the current and non-current portions of an asset are reclassified.
Held for sale property, plant and equipment, or disposal groups as a whole are measured at the lower of their carrying amount and fair value less costs to sell. Held for sale property, plant and equipment, are not depreciated or amortised.
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F-14 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Financial assets. The Company classifies its financial assets in the following categories: loans and receivables, held-to-maturity investments and available-for-sale investments. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, except for those the Company intends to sell in the nearest future.
Loans receivable are recognized initially at cost which is the fair value of the proceeds contributed/received. In subsequent periods, loans receivable are stated at amortised cost using the effective yield method.
Where a loan is provided at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss.
The origination gain or loss is recorded in the income statement within other operating income/expense (or finance income/costs when related to loans not given by Credit Partnership “ENRC Credit” LLP), unless it qualifies for recognition as an asset, liability or a charge to equity in accordance with the substance of the arrangement. Subsequently, the carrying amount of the loans is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded in other operating income/expense (or finance income/costs when related to loans not given by Credit Partnership “ENRC Credit” LLP) using the effective interest method.
Loans and receivables are included in current assets in the balance sheet, except for maturities greater than 12 months after the balance sheet date. These are classified as non-current assets. At 31 December 2008 the Company did not have any loans receivable and the Company’s accounts receivable consist of trade and other receivables, cash and cash equivalents in the balance sheet.
A provision for impairment is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the receivable is impaired. The amount of the provision is the difference between asset’s carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the income statement.
b) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets that are intended by management to be kept until they mature. They are included in current assets as they mature within twelve months after the balance sheet date. The Company does not have any held-to-maturity investments.
c) Available-for-sale investments Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. Investments are initially carried at fair value plus transaction costs and subsequently carried at fair value. Interest income on available for sale debt securities is calculated using the effective interest method and recognised in profit or loss. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Company’s right to receive payment is established. All other elements of changes in the fair value are deferred in equity until the investment is derecognised or impaired at which time the cumulative gain or loss is removed from equity to profit or loss. Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through current period’s profit or loss. When it is not possible to obtain current market value for available for sale investments due to the nature of the local financial market and management cannot estimate fair value of those investments with adequate reliability investments available for sale are recognised in the balance sheet at actual purchase cost.
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F-15 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Available-for-sale investments are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date (Note 8). Regular purchases and sales of financial instruments are recognised on the settlement date, which is the date that an asset is delivered to or by the Company, with the change in value between the trade date and settlement date not recognised for assets carried at cost or amortised cost and recognised in equity for assets classified as available for sale. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. The Company derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the Company has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Company has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale
Derivative financial instruments and hedging activities. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either:
a) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); b) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or c) hedges of a net investment in a foreign operation (net investment hedge).
The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes and movements on the hedging reserve in shareholders’ equity are disclosed in Note 18. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than twelve months, and as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Trading derivatives are classified as a current asset or liability.
During the reporting period and as of 31 December 2008 the Company held only one derivative financial instrument designated as cash flow hedge.
a) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement within ‘other operating gains/(losses)’. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within other operating gains/(losses) – net.
b) Derivatives at fair value through profit or loss and accounted for at fair value through profit or loss
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any these derivative instruments are recognized immediately in the income statement within 'other operating gains/(losses) – net'.
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F-16 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Operating leases. Where the Company is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Company, the total lease payments, including those on expected termination, are charged to the income statement on a straight-line basis over the period of the lease.
When assets are leased out under an operating lease, the lease payments receivable are recognized as rental income on a straight-line basis over the lease term.
Income taxes. Income taxes have been provided for in the financial statements in accordance with Kazakhstani legislation enacted by the balance sheet date. The income tax charge comprises current tax (corporate income tax and excess profit tax) and deferred tax and is recognized in the income statement, except for where it is recognized directly in equity because it relates to transactions that are also recognized, in the same or a different period, directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable income or losses are based on estimates where the financial statements are authorised prior to the filling of the relevant tax return. Taxes, other than on income, are recorded within operating expenses.
Deferred income tax is provided using the balance sheet liability method for tax loss carry-forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. The deferred tax assets and liabilities are settled within each separate subsidiary included in the consolidated financial statements of the Company. Deferred tax balances are measured at corporate income and excess profit tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred excess profit tax is calculated with respect to temporary differences in respect of assets and liabilities allocated to contracts for subsurface use at the expected rate of excess profits tax to be paid under the contract. Deferred tax assets for deductible temporary differences and tax loss carry-forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. In accordance with Tax legislation, effective as of 31 December 2008 excess profit tax was payable under subsurface use contracts where the cumulative internal rate of return during the current year exceeded of 20 percent. The taxable base for excess profit tax (EPT) is taxable income used for the calculation of the corporate income tax less the corporate income tax itself. Whereas the EPT rate is based on the cumulative internal rate of return in respect of the each of subsurface use contracts. Starting from 1 January 2009 the new Tax Code became effective which changed the method for assessment of excess profit tax (Note 30). Liabilities for excess profit tax are recorded in accordance with the Company's accounting policies for current and deferred tax and based on management's understanding of the provisions of the subsurface use contracts and tax regulations. Inventories. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on a weighted average basis. Iron ore is recognized as raw materials when extracted, and is valued at the average cost of extraction. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses. Trade and other receivables. Trade and other receivables are recognized initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in the income statement within general and administrative expenditures. When a trade receivable is uncollectible, it is written off against the allowance account for trade receivables. Subsequent recoveries of amounts previously written off are credited against general and administrative expenditures in the income statement.
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F-17 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Cash and cash equivalents. Cash and cash equivalents include cash on hand, deposits held at call with banks, and other short-term highly liquid investments with original maturities of three months or less. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date are included in other non-current assets, while balances restricted for more than three months but less than twelve months after the balance sheet date are included in other current assets.
Term deposits. Term deposits include deposits with the maturity of more than three months. These deposits are classified as other current assets since management of the Company has an intention to hold the deposits for more than three months. Term deposits are carried at amortized cost using the effective interest method.
Share capital. Ordinary shares are classified as equity. Preference shares are compound financial instruments that contain both a liability and an equity component.
The liability is initially recognized at its fair value by applying the relevant effective interest rate to the amount of mandatory annual dividends using a net present value formula for the period of the life of the mines. The life of mines is used rather than a perpetuity since the Company will not generate cash flows or profits beyond the life of the mines. Subsequently, the liability is measured at amortised cost. Effects of changes in cash flow estimates on carrying amounts are recognized in the income statement. At initial recognition, the equity component is the residual, i.e. it is the proceeds received from the issuance of the preference shares less the fair value of the liability. The equity component is not subsequently re-measured.
Dividends. Dividends, except for the mandatory annual dividends on preference shares, are recognized as a liability and deducted from equity at the balance sheet date only if they are declared before or on the balance sheet date. Mandatory annual dividends on preference shares are recognized as finance costs in the income statement. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the financial statements are authorised for issue.
Value added tax (“VAT”). Value-added tax related to sales is payable to the tax authorities when goods are shipped or services are rendered. Input VAT can be offset against output VAT upon the receipt of a tax invoice from a supplier. Tax legislation allows the settlement of VAT on a net basis. Accordingly, VAT related to sales and purchases unsettled at the balance sheet date is stated in the balance sheet on a net basis.
Borrowings. Borrowings are initially recorded at fair value including transaction costs and subsequently measured at amortised cost using the effective interest method.
Where a loan is obtained at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss. The origination gain or loss is recorded in the income statement within finance income/costs unless it qualifies for recognition as an asset, liability or a charge to equity in accordance with the substance of the arrangement. Subsequently, the carrying amount of the borrowings is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded as finance income/costs using the effective interest method.
Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed.
Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.
Trade and other payables. Trade and other payables are accrued when the counterparty performed its obligations under the contract. The Company recognizes trade payables at fair value. Subsequently trade payables are carried at amortised cost using the effective interest method.
Provision for mining assets and waste polygons retirement obligations. Mining assets and waste polygons retirement obligations are recognized when there is a high certainty of incurring the costs and those costs can be measured reliably.
Mining assets retirement costs include the landfill site restoration and closure (dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas).
Waste polygons retirement costs include the landfill site restoration and closure of waste polygons (dismantling and demolition of polygon infrastructure, the removal of residual materials and discharge monitoring).
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F-18 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Estimated landfill site restoration and remediation costs are provided for and incurred in the cost of property, plant and equipment in the accounting period when the obligation arising from the related disturbance occurs during the mine development phase or when the related damage occurs, based on the net present value of estimated future costs.
Provisions for mining assets and waste polygons retirement obligations do not include any additional obligations which are expected to arise from future disturbance. The costs are estimated on the basis of a closure and restoration plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, e.g. updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals.
Although the ultimate cost to be incurred is uncertain, the Company estimates their costs based on feasibility and engineering studies using current restoration standards and techniques for conducting restoration and remediation works.
The amortisation or ”unwinding” of the discount applied in establishing the net present value of provisions is charged to the income statement in each accounting period. The amortisation of the discount is shown as a financing cost, rather than as an operating cost.
Other movements in the provisions for mining assets and waste polygons retirement obligations, resulting from new disturbance as a result of mine development, updated cost estimates, changes to the estimated lives of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the lives of the assets to which they relate using the depreciation methods applied to those assets. Movements in the provisions for asset retirement obligations that relate to disturbance caused by the production phase are charged in the income statement.
Where remediation works are conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the estimated outstanding continuous remediation work at each balance sheet date and the cost is charged to the income statement.
Financial guarantees. Financial guarantees are contracts that requires the Company to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognized at their fair value, which is normally evidenced by the amount of fees received. Financial guarantees are recognized when premium is paid or in the case of premium-free guarantees (intra group guarantees) when the borrower receives the money from the financing entity. When the Company issues a premium-free guarantee or a guarantee at a premium different from market premium, fair value is determined using valuation techniques (e.g. market prices of similar instruments, interest rate differentials, etc). Losses at initial recognition of financial guarantee liability are recognized in the income statements within other operating expenses. Financial guarantee liabilities are amortised on a straight line basis over the life of the guaranties with respective income presented within other operating income. At each balance sheet date, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the obligation at the balance sheet date.
Transactions with state owned entities. Transactions with state owned entities are not disclosed when they are done in the ordinary course of business with terms consistently applied to all public and private entities and where there is no choice of supplier such as electricity transmission services, telecommunications etc.
Exploration costs. Exploration costs are expensed as incurred up to the point when the evaluation demonstrates that there are commercially viable reserves present and there are probable future economic benefits from the continued development and production of the resource. All subsequent costs are capitalised up to the point when commercial production commences.
Revenue recognition. Revenues from sales of goods are recognized at the point of transfer of the risks and rewards of ownership of the goods, normally when the goods are shipped. If the Company agrees to transport goods to a specified location, revenue is recognized when the goods are passed to the customer at the destination point.
The revenue from sales of many products is subject to adjustment based on an inspection of the product by the customer. In such cases, revenue is initially recognized on a provisional basis using the Company's best estimate of contained iron. Any subsequent adjustments to the initial estimate of iron content are recorded in revenue once they have been determined.
Sales of services are recognized in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts.
Translated from the Russian original 15
F-19 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Interest income is recognized on a time-proportion basis using the effective interest method. When a receivable is impaired, the Company reduces the carrying amount to its recoverable amount, being the estimated future cash flow discounted at original effective interest rate of the instrument, and continues unwinding the discount as interest income. Interest income on impaired loans receivable is recognized using the original effective interest rate.
Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or service given up.
Employee benefits. The Company provides long term employee benefits to employees before, on and after retirement, in accordance with a Collective Labour Agreement. The agreement provides for one-off retirement payments, financial aid for employees’ disability, significant anniversaries and funeral aid to the Company’s employees. The entitlement to some benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period.
The expected costs of the benefits associated with one-off retirement payments are accrued over the period of employment using the same accounting methodology as used for defined benefit post-employment plans. Actuarial gains and losses arising in the year are taken to the income statement. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred. Other movements in the net surplus or deficit are recognized in the income statement, including current service cost, any past service cost and the effect of any curtailments or settlements.
The most significant assumptions used in accounting for defined benefit obligations are the discount rate and the mortality assumptions. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the income statement as interest cost. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities.
Employee benefits other than one-off retirement payments are considered as other long-term employee benefits. The entitlement to these benefits is usually conditional on the completion of a minimum service period. The expected cost of these benefits is accrued over the period of employment using the same accounting methodology as used for the defined benefit plan.
These obligations are valued annually by independent qualified actuaries.
Share-based compensation. The Group issues equity settled share-based payments to certain employees which must be measured at fair value and recognized as an expense in the income statement, with a corresponding increase in equity in the case of equity-settled payments, and liabilities in the case of cash-settled awards. The fair values of equity-settled payments are measured at the dates of grant using Monte-Carlo evaluation model. The fair value is recognized over the period during which employees become unconditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to the employees leaving the Group prior to vesting or due to performance Target not being made. The total amount recognized in the income statement as an expense is adjusted to reflect the actual number of awards that vest.
Payroll expense and related contributions. Wages, salaries, contributions to pension and social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued and expensed in the year in which the associated services are rendered by the employees of the Company. On behalf of its employees, the Company pays those statutory pension and post-employment benefit amounts prescribed by the legal requirements of the Republic of Kazakhstan. These payments are expensed as incurred. Upon achievement of the retirement age by the employee, the financial obligations of the Company cease and all subsequent payments to retired employees are administered by the state and private cumulative pension funds.
Finance income and costs. Finance income and costs comprise interest expense on borrowings and loans payable, deposits, foreign exchange gains/losses on borrowings, loans to own employees, interest income/expense from unwinding of discount on provision for asset retirement obligations and other financial assets and liabilities. Interest income/interest expense is recognized using the effective yield on the asset/liability.
Translated from the Russian original 16
F-20 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also make certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial period include: Contracts on subsurface use. The major contracts of the Company for subsurface use for the extraction of iron ore, dolomite and limestone expire in 2017. Management of the Company expects that these contracts will be extended at nominal cost until the end of the mine life which is expected to be in 2040. In these financial statements the depreciation charge and the carrying amounts of property, plant and equipment and asset retirement obligation have been recorded on the assumption that the subsurface use contracts will be extended until the end of the mine life. The Company believes that it is entitled to prolong the contracts under the current contractual terms and the subsurface use legislation, and in 2006 the Government of the Republic of Kazakhstan confirmed this by issuance of the explanatory letter addressed to the Group. The assumption that the Company will be able to prolong the contracts is also supported by the facts that historically the Company was in compliance with the terms of all its subsoil use contracts, including timely completion of minimum working programs. If the contracts are not renewed in 2017, the carrying amount of property, plant and equipment that would have to be derecognized at the expiry date of the subsurface use contract will be Tenge 39,835,764 thousand (2007: Tenge 31,419,078 thousand). Useful life of mining assets and mineral reserves estimates. The mining assets, classified within property, plant and equipment, are depreciated over the respective life of the mine using the unit of production (UOP) method based on proved and probable mineral reserves over the respective life of mine or the straight line method if the estimated useful life of the individual asset is less than the respective life of mine. When determining mineral reserves, assumptions that were valid at the time of estimation may change when new information becomes available. Any changes could affect prospective depreciation rates and asset carrying values. The calculation of the UOP rate of depreciation could be impacted to the extent that actual production in the future is different from current forecast production based on proved and probable mineral reserves, which would generally arise as a result of significant changes in any of the factors or assumptions used in estimating mineral reserves. These factors could include: • changes to proved and probable mineral 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 mineral 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 mineral reserves.
The majority of other property, plant and equipment are depreciated on a straight line basis over their useful economic lives. Management reviews the appropriateness of assets useful economic lives at least annually; any changes could affect prospective depreciation rates and asset carrying values. Provision for mining assets and waste polygons retirement obligations. In accordance with the environmental legislation and the contracts on subsurface use the Company has a legal obligation to remediate damage caused to the environment from its operations and to decommission its mining assets and waste polygons and restore a landfill site after its closure. Provision is made, based on net present values, for site restoration and rehabilitation costs as soon as the obligation arises from past mining activities. The provision for mining assets and waste polygons retirement obligation is estimated based on the Company’s interpretation of current environmental legislation in the Republic of Kazakhstan and the Company’s related program for liquidation of subsurface use consequences on the contracted territory and other operations supported by the feasibility study and engineering researches in accordance with the existing rehabilitation standards and techniques. Provisions for retirement obligations are subject to potential changes in environmental regulatory requirements and the interpretation of the legislation. Provisions for mining assets and waste polygons retirement obligations are recognized when there is a certainty of incurring those and when it is possible to measure the amounts reliably. As at 31 December 2008 the carrying amount of the provision for mining assets retirement obligations was Tenge 1,617,868 thousand (2007: Tenge 3,720,170 thousand). As at 31 December 2008 the carrying amount of waste polygons retirement obligations was Tenge 184,225 thousand (2007: zero).
Translated from the Russian original 17
F-21 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Impairment. In accordance with IAS 36 “Impairment of assets”, the Company reviews the carrying amounts of its long- term tangible assets (principally property, plant and equipment) to determine whether there is any indication that these assets are impaired.
The global economic downturn and falling demand for commodities was considered by management as impairment indicators for long-term tangible assets. Accordingly, as of 31 December 2008 a review of the carrying values and estimated recoverable amounts of the Company’s property, plant and equipment was performed.
The Company’s strategic planning models were used to calculate the discounted future cash flows (using the “value-in- use” method as defined under IAS 36) and thus assess the recoverability of the carrying value of property, plant and equipment. The models were prepared on a life of mines basis as this period properly reflects the long term nature of the Company’s assets.
The expected future cash flows of a cash generating unit reflect long term mine plans which are based on detailed research, analysis and iterative modelling to optimise the level of return from the investment, the output and the sequence of extraction. The plan takes into account all relevant characteristics of the ore body, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used in the production of iron-ore products. The mine plan is therefore the basis for forecasting production output in each future year and the related production costs.
Cost levels incorporated in the cash flow forecasts are based on the current production plan for each cash generating unit. For impairment reviews, recent cost levels are considered, together with expected changes in costs that are compatible with the current condition of the business and which meet the requirements of IAS 36. IAS 36 includes a number of restrictions on future cash flows that can be recognized in respect of future restructurings and improvement related capital expenditure.
The pre-tax discount rate applied is based upon the Company’s weighted average cost of capital with appropriate adjustment for the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows.
The key assumptions which formed the basis of forecasting future cash flows in the models are:
• commodity prices, which are based on internal forecasts by the management of the Group’s sales and marketing business. These internal forecasts are consistent with the forecasts of industry market researchers.
• that long-term costs will be in line with current operational performance, as adjusted for future inflation rates in Kazakhstan and, where applicable, the expected movements in key input costs.
• the successful extraction, processing and sale of the reserves in accordance with the quantities described in the report on ore reserves and mineral resources.
• that the long-term Kazakhstani inflation rate will average 6 percent per annum, in line with external forecasts
• that the long-term US inflation rate will average 2.5 percent per annum, in line with external forecasts.
In calculating the discount rate to be applied to the future cash flows the Group consulted with external advisors. The rate which was used, applied to pre tax cash flows, was the equivalent of a post tax rate of 14.1% which is the advisor’s opinion on the Weighted Average Cost of Capital for the Group.
The recoverability of the value of current assets is addressed through the Company’s usual procedures, for example the assessment of counterparty default risk, both customer and financial counterparties, and is not part of this impairment review.
The impairment review concluded that no impairment provisions are required for long term tangible assets.
The application of IAS 36 requires extensive judgment on the part of management regarding the assumptions and estimates related to future cash flows and the discount rate. Given the nature of the current global economic environment such assumptions and estimates ultimately have a high degree of uncertainty associated with them. Consequently, other assumptions of equal validity could give rise to materially different results.
Translated from the Russian original 18
F-22 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Land usage rights. The Company has a right to use land plots where all its divisions and mines are located under the long-term rent agreement with the Rudnensk Town Branch of Kostanai Region Land Resources Management Committee until 1 January 2015. These agreements have been renewed at a nominal cost in the past, and the Company’s management believes that the rent agreements will be prolonged until the end of the mine life which is expected to be in 2040.
Related party transactions. In the normal course of business the Company enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties (Note 6).
Tax and transfer pricing legislation. Kazakh tax and transfer pricing legislation is subject to varying interpretations (Note 30).
Fair value of financial guarantees. The fair values of premium-free financial guarantees issued by the Company are determined by using valuation techniques. The Company uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at each balance sheet date and determine fair value of financial guarantees issued by applying market prices of similar instruments (e.g. financial guarantees issued by commercial banks).
Fair value of hedging instruments. The fair value of financial instruments that are not traded in an active market (for example, dollar-for-Tenge foreign exchange forward contracts) is determined based on data provided by the counterparty. The Company uses its judgement to select a variety of methods and verify assumptions that are mainly based on market conditions existing at each balance sheet date, as well as obtains fair value measurements from other parties. In June 2007 the Company entered into a foreign forward exchange contract to sell US Dollars for Tenge for the next two and a half years (Note 18) which qualified as a cash flow hedge as of 31 December 2007 and 31 December 2008. During the year and as of the reporting date, management made its estimates in respect of its position under the contract based on the market Tenge/US Dollar forward exchange rates available at each valuation date. The fair value of the financial liability of the derivative that is designated and qualify as cash flow hedge would be an estimated Tenge 258,525 thousand higher or Tenge 373,799 thousand lower were the discount rate used in the discount cash flow analysis to differ by 10 percent from current estimates.
4 New Accounting Pronouncements
(a) Standards, amendments and interpretations effective in 2008:
IFRIC 11, 'IFRS 2 – Group and treasury share transactions’ (effective for annual periods beginning on or after 1 March 2007) provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. New disclosures are presented in these consolidated financial statements.
(b) Standards, amendments and interpretations effective in 2008, but not relevant.
IFRIC 14, 'IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction' provides guidance on assessing the limit in IAS 19 Employees benefits on the amount of the surplus that can be recognised as an asset. IFRIC 14 also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Company does not have any defined benefit plan, therefore this Interpretation does not have any effect on the Company’s financial statements
IFRIC 12, Service Concession Arrangements. IFRIC 12 addresses how service concession operators should apply existing IFRS to account for the obligations they undertake and rights they receive in service concession arrangements. It does not address accounting for the government side of service concession arrangements. As the Company does not have concession arrangements, IFRIC 12 is not relevant to the Company’s operations.
IFRIC 13, Customer Loyalty Programmes. IFRIC 13 addresses accounting by entities that grant loyalty award credits (such as ‘points’ or travel miles) to customers who buy other goods or services. Specifically, it explains how such entities should account for their obligations to provide free or discounted goods or services (‘awards’) to customers who redeem award credits. As the Company does not have customer loyalty programmes, IFRIC 13 is not relevant to the Company’s operations.
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F-23 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
(c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Company:
IAS 23 (Amendment), Borrowing Costs (effective from 1 January 2009). The standard removes the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. This revision will not impact the Company’s financial statements as the current Company’s policy is to capitalise interest costs on borrowings to finance the construction of property, plant and equipment during the period of time that is required to complete and prepare the asset for its intended use.
IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 replaces IAS 14 and brings the reporting segments into line with the requirements of SFAS USA 131 Disclosure of Entity Segment and Related Information. The new standard requires to apply “the management approach”, whereby the segment information is presented on the basis applied for internal reporting. The Company will apply IFRS 8 from 1 January 2009. The Company does not expect any significant effect of adoption of this Standard.
IAS 1, Presentation of Financial Statements (revised in September 2008; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Company expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances.
IFRS 2 (Amendment), Share-based Payment - Vesting Conditions and Cancellations (effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Company does not anticipate any significant impact from application of this standard. The Company will start to apply IFRS 2 from 1 January 2009.
IFRS 3 (Revised in 2007), Business Combinations (effective for annual periods beginning on or after 1 July 2009). The revised IFRS 3 continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through income. Goodwill may be calculated based on the parent’s share of net assets or it may include goodwill related to the minority interest. All transaction costs will be expensed. The Company will apply the revised IFRS 3 from 1 January 2010.
IAS 27 (Revised), Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non- controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Company does not expect the amended standard to have a material effect on its financial statements.
IAS 32 (Amendment), Financial instruments: Presentation and IAS 1, Presentation of financial statements – Puttable financial instruments and obligations arising on liquidation (effective for annual periods beginning on or after 1 January 2009). The amendment requires entities to classify the following types of financial instruments as equity, provided they have particular features and meet specific conditions: 1) Puttable financial instruments (for example, some shares issued by co-operative entities and some partnership interests); 2) Instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation (for example, some shares issued by limited life entities). The Company will apply amendments to IAS 32 from 1 January 2009, and does not expect any significant impact on its financial statements.
Translated from the Russian original 20
F-24 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IFRS 5 (Amendment), Non-current assets held for sale and discontinued operations (effective for annual periods beginning from 1 July 2009). The amendment clarifies that all of a subsidiary's assets and liabilities are classified as held for sale, if a partial disposal sale plan results in loss of control, and relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. The Company will apply the revised IFRS 5 presumably to all partial sales of subsidiaries from 1 January 2010.
IAS 23 (Amendment), Borrowing costs (effective for annual periods beginning from 1 January 2009). The definition of borrowing costs has been amended so that interest expense is calculated using the effective interest method defined in IAS 39 'Financial instruments: Recognition and measurement’. This eliminates the inconsistency of terms between IAS 39 and IAS 23. The Company will apply the IAS 23 (Amendment) to qualifying assets from 1 January 2009.
IAS 28 (Amendment), Investments in associates and consequential amendments to IAS 32, Financial Instruments: Disclosures and Presentation and IFRS 7, Financial instruments: Disclosures (effective for annual periods beginning from 1 January 2009). Amendment explains that cost of investment is tested for impairment under IAS 36 Impairment of Assets as a single asset. Recognised impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Accordingly, reversals of impairment loss are recognised under IAS 36 as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. Where an investment in associate is accounted for in accordance with IAS 39 ‘Financial instruments: recognition and measurement’ only certain, rather than all disclosure requirements in IAS 28 need to be made in addition to disclosures required by IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7 ‘Financial Instruments: Disclosures’. The Company will apply the IAS 28 (Amendment) to impairment tests related to investment in subsidiaries and any related impairment losses from 1 January 2009.
IAS 36 (Amendment), Impairment of assets (effective from 1 January 2009). The amendment is part of the IASB’s annual improvements project published in May 2008. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Company will apply the IAS 36 (Amendment) and provide the required disclosure where applicable for impairment tests from 1 January 2009.
IAS 38 (Amendment), Intangible assets, (effective for annual periods beginning from 1 January 2009). The amendment explains that a prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The amendment deletes the wording that states that there is 'rarely, if ever' support for use of an amortisation method for intangible assets with definite useful lives that results in a lower rate of amortisation than the straight line method. The Company will apply the revised IAS 38 from 1 January 2009.
IAS 19 (Amendment), Employee benefits (effective for annual periods beginning from 1 January 2009). The amended standard relates to the following:
- The amendment clarifies the differences between the curtailment and the negative cost of the past services. If a plan amendment results in decrease of employee benefits, effect of decreased benefits on future services is a curtailment. Effect of any decreases of past services is a negative past service cost; - The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation; - The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered.
The Company will apply amendments to IAS 19 from 1 January 2009, and does not expect any significant effect on its financial statements.
Translated from the Russian original 21
F-25 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IAS 39 (Amendment), Financial instruments: Recognition and measurement (effective for annual periods beginning from 1 January 2009). These amendments relate to the following: - It is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge; - The definition of financial asset or financial liability at fair value through profit or loss is also amended; - This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit-taking is included in such a portfolio on initial recognition; - The current guidance on designating and documenting hedges states that a hedging instrument needs to involve a party external to the reporting entity and cites a segment as an example of a reporting entity. The amendment removes the references to definitions of hedging instruments on the segment level; - When remeasuring the carrying amount of a debt instrument on cessation of fair value hedge accounting, the amendment clarifies that a revised effective interest rate (calculated at the date fair value hedge accounting ceases) are used. The Company will apply the IAS 39 (amendment) from 1 January 2009. It is not expected to have a significant impact on the Company’s financial statements. IAS 1 (Amendment), Presentation of financial statements (revised in September 2007; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that financial assets and liabilities classified as held for trading in accordance with IAS 39, 'Financial instruments: Recognition and measurement’ should be recognised as current assets and liabilities regardless of their maturities. The Company will apply the IAS 39 (Amendment) from 1 January 2009. It is not expected to have an impact on the Company’s financial statements. IAS 16 (Amendment), Property, plant and equipment and consequential amendment to IAS 7, Statement of cash flows) (effective for annual periods beginning from 1 January 2009). Entities whose ordinary activities comprise renting, and subsequently selling assets should transfer the carrying amount of the asset to inventories when the asset becomes held for sale. Cash payments to manufacturer or owner of such asset held for renting or sale are classified as cash flows from operating activities. Cash flows arising from rental and subsequent sales of those assets are classified as cash flows from operating activities. The Company will apply IAS 16 (Amendment) from 1 January 2009. IFRIC 18, ‘Transfers of Assets from Customers’ (effective from 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. The Company is currently assessing the impact of the new interpretation on its financial statements. (d) Standards, amendments and interpretations to existing standards, published and obligatory to the reporting periods of the Company, beginning on or after 1 January 2009 or later periods but not relevant to the Company’s operations: IFRS 1 (Amendment) First time adoption of IFRS and IAS 27 Consolidated and separate financial statements (effective for annual periods beginning from 1 January 2009). The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removes the definition of the cost method from IAS 27 and replaces it with a requirement to present dividends as income in the separate financial statements of the investor. These amendments will not have any effect on the Company’s financial statements, since the Company completed the transition to the IFRS. IAS 29 (Amendment), Financial reporting in hyperinflationary economies (effective for annual periods beginning from 1 January 2009). The guidance has been amended to reflect the fact that a number of assets and liabilities are measured at fair value rather than historical cost. The amendment will not have an impact on the Company’s operations, as the Company does not operate in hyperinflationary economies. IAS 31 (Amendment), Interests in joint ventures (effective for annual periods beginning from 1 January 2009). Where an investment in joint venture is accounted for in accordance with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32, ‘Financial instruments: Presentation’ and IFRS 7 ‘Financial instruments: Disclosures’. The Company will apply the IAS 31 (Amendment) from 1 January 2009. It is not expected to have an impact on the Company’s financial statements. IAS 40 (Amendment), Investment property (effective for annual periods beginning from 1 January 2009). Where the fair value model is applied, such property is, therefore, measured at fair value. However, where fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably measurable. The amendment will not have an impact on the Company’s operations, as there are no investment properties are held by the Company.
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F-26 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IAS 41 (Amendment), Agriculture (effective for annual periods beginning from 1 January 2009). It requires the use of a market-based discount rate where fair value calculations are based on discounted cash flows and the removal of the prohibition on taking into account biological transformation when calculating fair value. The amendment will not have an impact on the Company’s operations as no agricultural activities are undertaken.
IAS 20 (Amendment), Accounting for government grants and disclosure of government assistance (effective for annual periods beginning from 1 January 2009). The benefit of a below-market rate government loan is measured in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. Income from government loans is measured as at loan origination as difference between the proceeds and the cost stated in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. The amendment will not have an impact on the Company’s operations as there are no loans received or other grants from the government.
IFRIC 15, Agreements for construction of real estates (effective from 1 January 2009). The interpretation clarifies whether IAS 18, ‘Revenue’, or IAS 11,’Construction contracts’ should be applied to particular transactions. It is likely to result in IAS 18 being applied to a wider range of transactions. IFRIC 15 is not relevant to the Company’s operations as all revenue transactions are accounted for under IAS 18 and not IAS 11.
IFRIC 16, Hedges of a net investment in a foreign operation (effective from 1 October 2008). IFRIC 16 clarifies the accounting treatment in respect of net investment hedging. When hedging net investment into a foreign operation, exchange rate risk is subject to hedging. The requirements of IAS 21, ‘The effects of changes in foreign exchange rates’, do apply to the hedged item. This amendment will not have any impact on the Company’s operations, since the Company does not hedge net investments.
IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2008). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. This interpretation will not have any effect on the Company’s operations, since to date the Company does not distribute non-cash assets to its owners.
(e) There is a range of minor amendments to IAS 7, Financial instruments: Disclosures, IAS 8, Accounting Policy, Changes in Estimates and Errors, IAS 10, Subsequent Events, IAS 18 Revenue and IAS 34 Interim Financial Statements, which are part of the IASB’s annual improvements project published in May 2008 and represent solely the amendments to terminology and editor amendments which under IASB opinion do not have any impact on the accounting or have minor impact.
Translated from the Russian original 23
F-27 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
5 Employee Information
The average number of employees (including executive directors) employed by the Company during the year was:
2008 2007
Mining 5,123 5,111 Transport 5,154 5,354 Processing of iron ore 3,118 3,111 Repair and maintenance 2,708 2,518 Administration, social sphere and other 1,295 1,745 Heat and power generation 821 849 Construction 759 748
Total 18,978 19,436
Total staff costs (including executive directors) for the Company were:
In thousands of Kazakhstani Tenge 2008 2007
Wages and salaries 12,030,835 11,255,446 Post-employment and other long-term benefits 48,009 66,447 Compensation expense 12,350 -
Total staff costs 12,091,194 11,321,893
Key management compensation:
In thousands of Kazakhstani Tenge 2008 2007
Salaries and short-term employee benefits 415,932 702,808 Post-employment benefits 5,063 4,824 Compensation expense 12,350 -
Total key management compensation 433,345 707,632
Translated from the Russian original 24
F-28 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
6 Balances and Transactions with Related Parties
For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Company’s ultimate shareholders are disclosed in Note 1.
Transactions with related parties do not disclose transaction with state owned entities which took place in the ordinary course of business with terms consistently applied to all public and private entities and where there is no choice of supplier such as electricity transmission services, telecommunications etc.
The nature of the related party relationships for those related parties with whom the Company entered into significant transactions or had significant balances outstanding at 31 December 2008 and 2007 are detailed below.
At 31 December 2008, the outstanding balances with related parties were as follows: Companies Shareholders Key under management common personnel In thousands of Kazakhstani Tenge Note control Assets Trade accounts receivable 12 16,945,662 - - Prepayments for inventories 12 1,508 - - Prepayments for services 12 13,435 - - Prepaid insurance 12 515,254 - - Accrued interest receivable 12 1,351 - - Other 12 8,443 143,215 - Long-term receivables 8 304,789 - - Provision for long-term receivables impairment 8 (304,789) - - Investments available for sale 8 9,596,539 - - Letters of credit 9 290,126 - - Restricted cash 8 3,349 - - Restricted cash for less than 12 months 9 1,306,967 - - Prepayment - Pestroye lake 383,125 - -
Liabilities Dividends payable 22 - 237,685 - Financial guarantees issued 31 104,045 - - Trade accounts payable 149,727 - - Promissory notes issued 239,235 - - Advances received 403 - - Equipment purchased on instalment: (contractual interest rate 0 % p.a.; effective interest rate: 14.2-15.1% p.a.) 22 29,847 - - Retirement and other long-term benefits obligation - - 5,063 Payables to key management personnel - - 216,114
Translated from the Russian original 25
F-29 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
At 31 December 2007, the outstanding balances with related parties were as follows:
Companies Shareholders Key under management common personnel In thousands of Kazakhstani Tenge Note control Assets Trade accounts receivable 12 18,927,351 - - Prepayments for inventories 12 49,988 - - Prepayments for services 12 76,293 - - Prepaid insurance 12 286,129 - - Accrued interest receivable 12 57,271 - - Other 12 81 143,215 - Loans to related parties 10 51,419,321 - - Long-term receivables 8 356,534 - - Provision for long-term receivables 8 (356,534) - - Term deposits (contractual interest rate 6-8.8 % p.a.; effective interest rate: 9.1% p.a.) 9 7,266,655 - - Letters of credit 9 43,292 - -
Liabilities Borrowings 17 48,210,595 - - Dividends payable 22 - 140,178 - Financial guarantees issued 31 131,205 - - Trade accounts payable 22 173,465 - - Promissory notes issued 22 162,819 - - Advances received 22 994 - - Interest payable 22 241,739 - - Equipment purchased on instalment: (contractual interest rate 0 % p.a.; effective interest rate: 14.2-15.1% p.a.) 22 29,731 - - Retirement and other long-term benefits obligation - - 10,651 Payables to key management personnel - - 220,400
Translated from the Russian original 26
F-30 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
The income and expense items with related parties for the year ended 31 December 2008 were as follows:
Companies Shareholders Associated Key under common companies management In thousands of Kazakhstani Tenge: Note control personnel
Revenue from sales of: - Iron ore products 23 152,648,692 - -- - Dolomite 23 43,040 - -- - Other 23 186,495 - --
Sales of services 31,987 - -- Income from unwinding of present value discount 25 407,820 - -- Interest income on bank deposits 29 249,498 - -- Interest income on loans issued 25 1,732,162 - -- Income from decrease in interest 25 1,077,695 - -- Other operating income 25 1,098,804 - -- Income on financial guarantees 27,158
Purchase of raw materials 2,177,761 - -- Purchase of electricity 3,104,553 - -- Repair and maintenance services 24 399,560 - -- Agency agreement fee 27 126,822 - -- Management fees 27 1,489,128 - -- Transportation expenses 26 4,827,666 - -- Insurance expenses 24,26 1,036,606 - -- Rent expenses 27 26,514 - -- Sponsorship 27 561,255 - -- Interest expenses 749,119 - -- Unwinding of present value discount on preference shares 29 - 32,329 -- Loss from initial recognition of loans at non-market rates 28 1,122,891 - -- Dividends declared on ordinary shares 15 - 13,033,800 - - Dividends declared on preference shares 15 - 1,391,325 - - Ʉey management compensation 5 - - - 420,995 Bank charges 27 266,681 - - - Other operating expenses 28 1,439,007 - - -
Translated from the Russian original 27
F-31 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
The income and expense items with related parties for the year ended 31 December 2007 were as follows:
Entities under Shareholders Associated Key common control companies management In thousands of Kazakhstani Tenge Note personnel
Revenue from sales of: - Iron ore products 23 99,504,344 - -- - Dolomite 23 29,085 - -- - Other 23 232,633 143,215 -- -- Sales of services 59,853 - -- Income from unwinding of present value discount 25,29 1,363,439 - -- Interest income on bank deposits 29 334,785 - -- Interest income on loans issued 25 2,547,835 - -- Insurance income 25 277,486 - -- Other operating income 25 2,198,124 - --
Purchase of raw materials 3,402,732 - -- Repair and maintenance services 24 216,759 - -- Information, consulting and other professional services 27 253,256 - -- Managements fees 27 934,800 - -- Membership fees 27 520,000 - -- Transportation expenses 26 3,664,743 - -- Insurance expenses 24,26 1,346,604 - -- Rent expenses 27 124,074 - -- Sponsorship 27 810,131 - -- Interest expenses 1,041,916 - -- Financial guarantees income 25 142,743 - -- Unwinding of present value discount on preference shares 29 - 32,349 -- Loss from unwinding of present value discounting on loans issued 134,699 - -- Loss from initial recognition of loans at non-market rates 28 2,918,000 - -- Dividends declared on ordinary shares 15 - 6,528,600 - - Dividends declared on preference shares 15 - 692,900 - - Ʉey management compensation 5 - - - 707,632 Bank charges 27 320,396 - - - Other operating expenses 28 3,025,754 - - -
Translated from the Russian original 28
F-32 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
In 2008 and 2007, the Company sold iron ore products primarily to ENRC Marketing AG (former ENR Iron A.G., Switzerland), Eurasian Financial Industrial Company JSC (Kazakhstan), and a number of Russian distributors who acted for and on behalf of the controlling shareholders on the basis of contracts for the supply of iron ore products. Prices for iron ore products are linked to world market prices.
The Company is a member of Eurasian Natural Resources Corporation Plc and is involved in extensive related party transactions. As referred to above, the major part of sales is made to the Company’s trading companies. Transportation services are purchased from Transsystem LLP and Transcom LLP, which are also the Group’s members. Almost all treasury operations and some credit facilities are obtained from a related party, Eurasian Bank. All insurance services are rendered by another related party, Eurasia Insurance Company.
In 2007 and 2008 the Company has made certain prepayments for the construction of a resort complex near Pestroye lake (Petropavlovsk). The total amount of prepayments on construction works comprised Tenge 383,125 thousand and Tenge 315,686 thousand as at 31 December 2008 and 31 December 2007, respectively.
During 2006, all significant purchases were conducted via Vostok Impex, who acted as SSGPO procurement agent. During 2007, Vostok Impex was restructured into ENRC Management KZ, which now acts as SSGPO agent for major contracts only. All other purchases and payments are currently made directly with contractors.
At 31 December 2008 and 31 December 2007 guarantees issued by the Company were as follows:
In thousands of Kazakhstani Tenge Note 2008 2007
Entities under common control 31 104,045 131,205
Translated from the Russian original 29
F-33 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
7 Property, Plant and Equipment
Movements in the carrying amount of property, plant and equipment were as follows:
Land Buildings and Machinery Vehicles Other Construction in Total In thousands of constructions and progress Kazakhstani Tenge equipment
Carrying amount at 31 December 2006 455,486 34,055,355 23,346,862 12,579,119 284,258 5,686,310 76,407,390
Additions 1,907 1,507,482 1,821,886 2,673,541 38,273 19,937,964 25,981,053 Transfers - 1,211,471 6,330,708 3,671,451 2,579 (11,216,209) - Depreciation - (2,003,190) (4,341,127) (3,092,652) (75,806) - (9,512,775) Disposals (455,486) (14,548) (41,175) (16,200) (345) - (527,754) Impairment - - - - - (1,404,641) (1,404,641)
Cost at 31 December 2007 1,907 44,159,320 44,880,023 28,858,547 428,904 15,538,820 133,867,521 Accumulated depreciation and impairment - (9,402,750) (17,762,869) (13,043,288) (179,945) (2,535,396) (42,924,248)
Carrying amount at 31 December 2007 1,907 34,756,570 27,117,154 15,815,259 248,959 13,003,424 90,943,273
Additions - (2,126,420) 1,724,856 4,254,041 112,322 29,932,375 33,897,174 Transfers - 4,619,701 11,573,191 3,152,419 (115) (19,345,196) - Depreciation - (1,708,286) (5,091,157) (3,489,812) (23,459) - (10,312,714) Disposals - (54,721) (39,703) (36,240) (76,688) (536,449) (743,801)
Cost at 31 December 2008 1,907 46,469,072 57,435,991 35,841,297 454,823 23,054,154 163,257,244 Accumulated depreciation and impairment - (10,982,228) (22,151,650) (16,145,630) (193,804) - (49,473,312)
Carrying amount at 31 December 2008 1,907 35,486,844 35,284,341 19,695,667 261,019 23,054,154 113,783,932
Mining assets are included within buildings and constructions. As at 31 December 2008 the carrying amount of mining assets was Tenge 18,958,440 thousand (2007: Tenge 19,441,113 thousand).
Machinery and equipment includes assets acquired on deferred payment terms with the residual value of Tenge 290,500 thousand (2007: Tenge 419,951 thousand).
In October 2004, the Company acquired from Eurasian Energy Corporation JSC, its related party, an asset under construction - horse racing complex in Astana. This asset is being constructed not only for profit making purposes but also to fulfil the Company’s social responsibilities in the Republic of Kazakhstan. By the end of 2007 the management did not expect to generate cash inflows from the use of the asset, and hence a 100 per cent provision was recorded with respect to the costs incurred to 31 December 2007 in the amount of Tenge 2,535,396 thousand.
During 2008 the Company completed construction of the horse racing complex and decided to sell this asset. Accordingly the asset was classified as long-term asset held for sale (Note 14).
In 2008 the Group revised the discount rate in relation to the assessment of assets retirement obligation to 11.35% (31 December 2007: 7.24%) , which resulted in the decrease of the asset retirement obligation as at 31 December 2008 and accordingly in a decrease in the respective asset in the amount of Tenge 2,528,571 thousand (see Note 20). This decrease was reflected as a reduction in the additions line in the movement above.
Translated from the Russian original 30
F-34 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
7 Property, Plant and Equipment (Continued)
Depreciation In thousands of Kazakhstani Tenge 2008 2007
Cost of sales 9,980,560 9,359,201 Capitalised depreciation 171,027 42,203 General and administrative expenses 119,141 103,012 Distribution costs 10,340 8,359 Other operating expenses 31,646 -
Total depreciation 10,312,714 9,512,775
8 Other Non-Current Assets
In thousands of Kazakhstani Tenge 2008 2007
Investments available for sale 9,597,680 6,180 Prepayments for property, plant and equipment 7,727,472 3,049,975 Long-term receivables 304,789 371,934 Investments in associates - 3,090 Restricted cash 3,462 195 Less: impairment provision (304,789) (371,934)
Total other non-current assets 17,328,614 3,059,440
Prepayments for property, plant and equipment represent advance payments made to various suppliers for purchase of mining equipment and other items of property, plant and equipment under the investment program.
Long-term receivables include long-term portion of interest free mortgage loans given to the Group’s employees in 2005 in the total amount of Tenge 262,330 thousand. In accordance with the terms of the mortgage agreements, if individual labour contracts with the Group’s employees (the "ILC") are not terminated within the next five years starting from 2005 and other terms of financing are complied with, the Group’s employees are exempt from repayment of the loan. In case of termination of the ILC within this period of five years, the borrower should repay an amount in proportion to the time remaining from the five years period.
Management of the Group has determined that all Group’s employees will adhere to the mortgage loan agreements terms, and therefore provision for impairment was established for the full amount of long-term receivable at 31 December 2008 and 2007. The initial amount of the receivable is gradually written off against impairment reserve on annual basis. In addition, long-term receivables include long-term advance in amount of Tenge 156,470 thousand (2007: Tenge 156,470 thousand) provided for construction services. The Company estimates that this advance is non- recoverable due to the financial and operations difficulties of the supplier and recorded 100 per cent provision against it as of 31 December 2008 and 31 December 2007.
Presented below is information on the Company’s equity share and investments into associates as at 31 December 2008 and 31 December 2007:
2008 2007 Thousands Owner- Thousands Owner- Country of of Tenge ship of Tenge ship Name of company registration Nature of activity % % Production and major - - 3,090 27.9 JSC Turantransmash Kazakhstan repair of dump truck
In thousands of Kazakhstani Tenge 2008 2007 Total Total Total Net Total Total Total Net Name of company assets liabilities revenues loss assets liabilities revenues loss
JSC Turantransmash - - - - 14,711 2,245 4,855 (8,281)
Translated from the Russian original 31
F-35 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
8 Other Non-Current Assets (Continued)
In May 2008 the Company sold its share in Turantransmash LLP for the amount of Tenge 3,090 thousand (27.9 percent of share capital) to Dumpcar LLP. Cash settlement of sale was transferred to the Company's settlement account during 2008.
Available-for-sale investments include equity securities and shares in the companies, which are not publicly traded. Due to the nature of the local financial market, it was not possible to obtain current market value for these investments.
Presented below is information on the Company’s equity share and investments available for sale as at 31 December 2008 and 31 December 2007:
2008 2007 Country of Nature of Thousands of Owner- Thousands of Owner- Name of company registration activity Tenge ship% Tenge ship% Credit Partnership ENRC Credit LLP Kazakhstan Lending 9,596,539 11.01 9,963,005 76.11 International Academy of Business LLP Kazakhstan Education 1,141 2.5 1,141 2.5
Bank TuranAlem Kazakhstan Bank - - 5,039 -
In connection with the decrease of share in the equity of ”ENRC Credit” Credit Partnership” LLP to 11.01 % and subsequent loss of control (Note 1), investments in ”ENRC Credit” Credit Partnership” LLP were reclassified to investments available for sale. Consequently, investments of ”ENRC Credit” Credit Partnership” LLP in the amount of Tenge 5,039 thousand in the shares of “Bank TuranAlem” JSC, disclosed in the financial statements as at 31 December 2007, are not included in the financial statements of the Company as at 31 December 2008 due to cessation of consolidation of ”ENRC Credit” Credit Partnership” LLP.
Available-for-sale financial assets are all denominated in Tenge. Investments in ”ENRC Credit” Credit Partnership” LLP are recorded at acquisition cost. Management believes that acquisition cost does not significantly differ from the market value of this investment due to the fact that ”ENRC Credit” Credit Partnership” LLP is a financial organization, and the carrying value of the net assets of this company approximates their market value.
Management cannot estimate the fair value of the investment into International Academy of Business LLP with adequate reliability as it is not listed on a stock exchange, and it is impracticable to define the up-to-date information on its current value from public sources. Accordingly, the investment in this company is recognized in the balance sheet at actual purchase cost.
The maximum exposure to credit risk at the reporting date is the carrying value of the available-for-sale financial asset.
9 Other Current Assets
In thousands of Kazakhstani Tenge 2008 2007 Term deposits (contractual interest rate: 7.5-10.2.% p. a., effective interest rate 7.64-10.2% p.a.) 4,282,433 10,006,604 Cash restricted in use for less than 12 months 1,306,967 - Letters of credit 290,126 43,292
Total other current assets 5,879,526 10,049,896
The term deposits represent deposits placed at JSC Bank Center Credit with maturity of less than 3 months.
Cash restricted in use for less than 12 months represent a letter of credit opened in JSC Eurasian Bank initially intended to finance the construction of a cement production line according to the contract with Tianjin Cement Industry Design & Research Institute Co. Ltd (TCDRI). In 2008, according to the Group’s instructions, the Company transferred the cement plant, recorded within construction in progress, for the amount of Tenge 141,274 thousand, and its contractual obligations on completion of this plant construction, to Rudnenskiy Cement Plant LLP. In connection with the transfer by the Company of all the rights and obligations under this contract to “Rudnenskiy Cement Plant” LLP, management believes that restrictions to use cash imposed by the letter of credit, to secure financing of the plant construction for Tenge 1,306,967 thousand, will cease during 2009.
Letters of credit represent cash placed in banks to be transferred to the suppliers after the latter fulfil their contractual obligations to supply goods.
Translated from the Russian original 32
F-36 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
10 Loans Receivable
In thousands of Kazakhstani Tenge 2008 2007
Short-term portion of loans receivable - 14,984,838 Long-term portion of loans receivable - 36,434,483
Total loans receivable - 51,419,321
The Company’s loans receivable mature as follows:
In thousands of Kazakhstani Tenge 2008 2007
Loans due: - within 1 year - 14,984,838 - between 1 and 2 years - 12,973,758 - between 2 and 5 years - 22,103,428 - after 5 years - 1,357,297
Total loans receivable - 51,419,321
The loans receivable as of 31 December 2007 represent loans provided by "ENRC Credit" Credit Partnership LLP to various Group entities and related parties of the Group. As described in Note 1, as result of additional contributions to the share capital of “ENRC Credit” Credit Partnership LLP by TNC Kazchrome JSC the Company’s interest in the Partnership has decreased to 11.01% and accordingly the control over the Partnership was lost. In connection with this, the Company ceased the consolidation of “ENRC Credit” Credit Partnership LLP in 2008 and accordingly loans, issued by “ENRC Credit” Credit Partnership LLP, are not included in the consolidated financial statements of the Company as at 31 December 2008. Presented below is information on terms and effective interest rates as of 31 December 2007 in respect of the loans provide by "ENRC Credit" Credit Partnership LLP:
In percent per annum Origination date Maturity Effective interest, %
Loan to Kazakhstan Aluminium Smelter JSC 27.04.2005 31.12.2016 14.8 – 15.2 Loan to Eurasian Energy Corporation JSC 20.04.2005 01.12.2011 11.5 – 14.8 Loan to Transcom LLP 15.06.2005 15.06.2012 13.3 – 15.1 Loan to Zhol Zhondeushi LLP 26.04.2007 01.12.2011 13.3 Loan to Aluminium of Kazakhstan JSC 26.10.2007 01.12.2011 14.4 Loan to Transsystema LLP 15.06.2005 15.06.2012 12.0 – 14.8 Loan to Sary-Arka SpetsKoks LLP 11.08.2005 11.08.2010 12.0 Loan to Zhairemsky GOK JSC 20.12.2005 20.12.2010 13.0 – 13.7 Loan to Mugotecs CJSC 31.03.2006 31.03.2011 12.0 Loan to Eurasian Financial Industrial Company JSC 08.09.2005 08.12.2020 12.0 Loan to Universal Service LLP 26.04.2007 01.12.2011 13.3 Loan to Transremvagon LLP 26.04.2007 01.12.2011 13.3
Below is the analysis of carrying value and fair value of loans receivable: 2008 2007 Carrying Fair Carrying Fair In thousands of Kazakhstani Tenge amount value amount value
Loan to Kazakhstan Aluminium Smelter JSC - - 20,980,748 20,997,896 Loan to Eurasian Energy Corporation JSC - - 9,204,513 8,728,982 Loan to Transcom LLP - - 5,890,446 5,315,273 Loan to Zhol Zhondeushi LLP - - 4,655,964 4,169,955 Loan to Aluminium of Kazakhstan JSC - - 3,775,141 3,715,657 Loan to Transsystema LLP - - 3,620,053 3,282,931 Loan to Sary-Arka SpetsKoks LLP - - 1,495,099 1,495,099 Loan to Zhairemsky GOK JSC - - 937,164 925,736 Loan to Mugotecs CJSC - - 324,422 262,225 Loan to Eurasian Financial Industrial Company JSC - - 309,460 281,867 Loan to Universal Service LLP - - 197,551 175,529 Loan to Transremvagon LLP - - 28,760 25,554
Total loans receivable - - 51,419,321 49,376,704
Translated from the Russian original 33
F-37 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
10 Loans Receivable (Continued)
Presented below are additional measurement details on loans receivable during year ended 31 December 2007:
Carrying Nominal Loss on Gain from Impair- Repayment Carrying amount at value at origination unwinding ment amount at 31 origination of discount 31 In thousands of December December Kazakhstani Tenge 2006 2007
Loans provided by Credit Partnership ENRC Credit LLP 13,037,020 44,857,765 (2,918,000) 3,549,373 - (7,106,837) 51,419,321
2,521,459 - - 162,221 - (2,683,680) -
Total loans receivable 15,558,479 44,857,765 (2,918,000) 3,711,594 - (9,790,517) 51,419,321
There was no impairment provisions on loans receivable recorded in 2007.
11 Inventories
In thousands of Kazakhstani Tenge 2008 2007
Raw materials, purchased 7,130,005 5,778,888 Finished products 3,547,896 520,371 Work in progress 809,496 382,564 Raw materials, produced 764,432 592,725 Goods for resale 334,760 295,606 Less: provisions for obsolete and slow-moving inventories (179,136) (189,740)
Total inventories 12,407,453 7,380,414
No inventories have been pledged as collateral.
Translated from the Russian original 34
F-38 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
12 Trade and Other Receivables
In thousands of Kazakhstani Tenge 2008 2007
Trade receivables 18,325,610 19,902,918 VAT recoverable 6,278,231 2,960,975 Prepayments 1,478,618 2,059,314 Prepaid insurance 515,320 286,129 Other receivables 168,449 330,100 Less: impairment provisions (103,135) (54,658)
Total trade and other receivables 26,663,093 25,484,778
The total receivables outstanding from related parties at 31 December 2008 amounted to Tenge 16,945,662 thousand (2007: Tenge 18,927,351 thousand). The carrying amounts of the Company’s financial assets within trade and other receivables are denominated in the following currencies: In thousands of Kazakhstani Tenge 2008 2007 US dollar 17,025,417 18,969,117 Tenge 1,422,168 1,222,751 Russian Rouble 744 915 Euro 19 -
Total trade and other receivables 18,448,348 20,192,783
The carrying values of financial assets within trade and other receivables approximate their fair values because of the short maturities of these instruments:
In thousands of Kazakhstani Tenge 2008 2007 Trade receivables 18,280,210 19,862,773 Other receivables 168,138 330,010
Total trade and other receivables 18,448,348 20,192,783
As of 31 December 2008, trade and other receivables in the amount of Tenge 158,788 thousand (2007: Tenge 525,106 thousand) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The aging analysis of these trade and other receivables, which were past due, is as follows:
In thousands of Kazakhstani Tenge 2008 2007 6 months – 1 year 5,481 377,494 Over 1 year 153,307 147,612
Total trade and other accounts receivable past due but not impaired 158,788 525,106
As of 31 December 2008, trade and other receivables in the amount of Tenge 45,711 thousand (2007: Tenge 40,235 thousand) were impaired and provided for. The individually impaired receivables mainly relate to customers, which are in unexpectedly difficult economic situations. All those receivables have been outstanding for more than 1 year.
Movements on the provision for impairment of trade and other receivables are as follows:
In thousands of Kazakhstani Tenge 2008 2007 Provision for impairment of trade and other receivables at 1 January 40,235 37,999 Provision for receivables impairment 9,006 3,284 Receivables written off during the year as uncollectible (Ɂ,530) (1,048)
Provision for impairment of trade and other receivables at 31 December 45,711 40,235
Translated from the Russian original 35
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
12 Trade and Other Receivables (Continued)
The creation and release of the provisions for impaired trade and other receivables have been included in the general and administrative expenses (Note 27). Amounts charged to the allowance account are generally written off when there is no expectation of recovering additional cash.
The maximum exposure to credit risk at the reporting date is the carrying value of each class of trade and other receivables above. The Company does not hold any collateral as security.
Movements on the Company total provision for impairment of accounts and other receivables are as follows:
In thousands of Kazakhstani Tenge 2008 2007 Provision for impairment of accounts receivable and other current assets at 1 January 54,658 76,305 Provision for receivables impairment 52,007 4,750 Receivables written off during the year as uncollectible (3,530) (26,397)
Provision for impairment of accounts and other receivables at 31 December 103,135 54,658
13 Cash and Cash Equivalents
In thousands of Kazakhstani Tenge 2008 2007
Cash at bank ,USD 13,254,322 3,186,806 Cash at bank, Tenge 584,247 1,606,199 Cash at hand 16,174 16,099 Cash at bank, Russian Roubles 10,973 10,505 Cash at bank, Euro 58 - Cash in transit - 100
Total cash and cash equivalents 13,865,774 4,819,709
14 Long-term Assets Held for Sale
In thousands of Kazakhstani Tenge 2008 2007
Long-term assets held for sale 119,970 -
Total long-term assets held for sale 119,970 -
After completion of the construction of a horse racing located in Astana, in August 2008, the Company carried out an active search for a potential purchasers for this asset. It was decided on the meeting of the Board of Directors dated 26 January 2009 to conclude a sales contract with “Eurasian Financial and Industrial Company” JSC (related party) at the price of Tenge 119,970 thousand. Based on this decision, as of 31 December 2008, the Company classified this asset as a long-term asset held for sale and recognizes it at its expected sales price of Tenge 119,970 thousand.
15 Share Capital
31 December 2008 31 December 2007 In thousands of Kazakhstani Tenge Number Amount Number Amount
Ordinary shares 5,850,000 5,850,000 5,850,000 5,850,000 Preference shares 650,000 406,422 650,000 406,422
Total nominal share capital 6,500,000 6,256,422 6,500,000 6,256,422 Share capital indexation for hyperinflation - 2,528,778 - 2,528,778
Total share capital - 8,785,200 - 8,785,200
Translated from the Russian original 36
F-40 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
15 Share Capital (Continued)
There was no change in the number and value of ordinary and preference shares in 2008 and 2007.
The total authorised number of ordinary shares is 5,850,000 shares (2007: 5,850,000 shares) with a par value of Tenge 1,000 per share (2007: Tenge 1,000 per share). All issued ordinary shares are fully paid. Each ordinary share carries one vote.
The total authorised number of preference shares is 650,000 shares (2007: 650,000 shares) with a par value of Tenge 1,000 per share (2007: Tenge 1,000 per share). All issued preference shares are fully paid.
The preference shares are not redeemable and rank ahead of the ordinary shares in the event of the Company’s liquidation. The preference shares give their holders the right to participate in general shareholders’ meetings without voting rights except for instances where decisions are made in relation to re-organisation and liquidation of the Company, when considering the issue specifying restriction of rights of preference shareholders. Preference shares get voting rights at the moment when dividends on preference shares are not paid in full three months from the date of expiry of the period set for payment of such dividends until the dividends are actually paid. Dividends on preference shares are set at five percent of their par value and rank above ordinary shares. Preference share dividends should not be declared for the amount less than that declared to ordinary shareholders. Preference share dividends are set at Tenge 50 (2007: Tenge 50) and rank above ordinary dividends.
Dividends declared and paid during the year were as follows:
2008 2007
Ordinary Preference Ordinary Preference shares shares shares Shares
In thousands of Kazakhstani Tenge Equity Liability Equity Liability (except for dividends per share)
Dividends payable at 1 January - 107,678 32,500 5,063,110 119,661 32,500 Dividends declared during the year 13,033,800 1,391,325 32,500 6,528,600 692,900 32,500 Dividends paid during the year (13,033,800) (1,269,443) (56,875) (11,591,710) (704,883) (32,500)
Dividends payable at 31 December - 229,560 8,125 - 107,678 32,500 Dividends per share declared during the year (expressed in Tenge per share) 2,228 2,141 50 1,116 1,066 50
All the dividends are declared and paid in Kazakhstani Tenge. During the years ended 31 December 2008 and 31 December 2007 dividends on preference shares at a guaranteed fixed amount of Tenge 50 per share were accrued as part of non-current preference shares liabilities for the amount of Tenge 32,500 thousand.
On 7 December 2007, the Company’s ultimate parent, ENRC Plc, placed 252,500,000 ordinary shares at 540 pence per share at the London Stock Exchange’s main market (total offer size is £1,364 million). In addition, ENRC Plc granted the Sole Global Coordinator an over-allotment option over a further 25.3 million, which was exercised before 31 December 2007.
On 15 December 2008 the Board of Directors Meeting declared and partially paid the dividends for the first half-year and III quarter of year 2008. The remaining part of declared and paid dividends relates to 2007 profit.
Translated from the Russian original 37
F-41 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
16 Long-term Share-based Employee Benefit Plan
In May 2008 the Group presented the long-term share-based key employee benefit plan (“LTEBP”). LTEBP bonuses recorded at 31 December 2008 are effective only upon achievement of an established target. The established objective means achievement of the overall shareholder income by ENRC Group companies to be compared with the total shareholder income of the comparative group for the comparative period. Total shareholder income of the comparative group includes 22 international mining companies. In case of normal course of operations, benefits will be awarded upon expiration of the third year from the benefit provision date.
The estimated fair value of each awarded share is Tenge 2 thousand. Estimates are based on the Monte-Carlo model. The following information was used in the model for calculation purposes: share price as at the date of equity right awarding is Tenge 2,8 thousand and expected volatility is 42%, expected rate of dividend income is 1.01% on the basis of the previous rate of dividend income or on the basis of dividend income rate of the comparative group if information on dividend payments is unavailable, and the risk-free interest rate is 2.55%.
The number of shares issued under the LTEBP was as follows:
2008 2007 At the beginning of the period - - Provided for the period 28,969 - Cancelled during the period - - At the end of the period 28,969 -
Below are the costs related to the share-based payments to the Company's employees in accordance with the ENRC long-term employee benefit plan:
In thousands of Kazakhstani Tenge 2008 2007 Compensation expense 12,350 -
Total costs 12,350 -
17 Borrowings
In thousands of Kazakhstani Tenge 2008 2007 Current portion of borrowings - 12,062,609 Non-current portion of borrowings - 36,157,822
Total borrowings - 48,220,431
The Company’s borrowings mature as follows:
In thousands of Kazakhstani Tenge 2008 2007 Borrowings due: - within 1 year - 12,062,609 - between 1 and 2 years - 12,052,609 - between 2 and 5 years - 24,105,213
Total borrowings - 48,220,431
The carrying amounts of the Company’s borrowings are denominated in the following currencies:
2008 2007 US dollar - 48,210,431 Tenge - 10,000
Total borrowings - 48,220,431
Translated from the Russian original 38
F-42 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
17 Borrowings (Continued)
The effective interest rates at the balance sheet date were as follows:
In percent per annum 31 December 2008 31 December 2007
Borrowings from ENRC Limited - 6.91 Borrowings from Bank Center Credit JSC - 11.3-16.1
Credit Partnership ENRC Credit LLP
Loans recorded in the consolidated financial statements as at 31 December 2007 in the amount of Tenge 48,210,431 thousand represent loan between “ENRC Credit” Credit Partnership" LLP and ”ENRC Limited”, being related party with ENRC Plc owning 100% of the share capital of the latter. In accordance with the loan agreements as at 31 December 2007, the amount of USD 400.7 million was received from the total amount of USD 679.3 million, stipulated in the loan agreements. Interest rate on all three loans is LIBOR plus 2.31 basis points, subject to repayment on monthly basis. All three loans are repayable on 5 December 2011.
As described in Note 1, as a result of additional contributions to the share capital of “ENRC Credit” Credit Partnership LLP by TNC Kazchrome JSC, the Company’s share in the Partnership has decreased to 11.01% and control over the partnership was lost. In connection with this the Company ceased consolidation of “ENRC Credit” Credit Partnership LLP in 2008 and accordingly loans, received by “ENRC Credit” Credit Partnership LLP, are not recorded in the consolidated financial statements of the Company as at 31 December 2008.
In 2008 in accordance with two loan agreements, Credit Partnership ENRC Credit LLP provided the Company with loans in the amount of Tenge 7,423,700 thousand. Interest rate for each loan agreement initially was 10 percent per annum. From 1 July 2008 the interest rate was decreased for all loans to 8 percent per annum, subject to repayment on a monthly basis. In December 2008 the Company fully repaid the loans to the Partnership including borrowings for 2007.
JSC Bank CenterCredit
Borrowings in the amount of Tenge 10,000 thousand from JSC Bank CenterCredit outstanding as at 31 December 2007 was fully repaid in 2008.
The carrying amounts and fair values of borrowings are as follows:
Carrying amount Fair value In thousands of Kazakhstani Tenge 2008 2007 2008 2007 Borrowings from ENRC Limited - 48,210,431 - 48,210,431 Borrowings from Bank Center Credit JSC - 10,000 - 10,000
Total borrowings - 48,220,431 - 48,220,431
Translated from the Russian original 39
F-43 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
18 Derivative financial instruments
In thousands of Kazakhstani Tenge 2008 2007
Forward foreign exchange contracts – cash flow hedges – non-current portion - 3,783,812 Forward foreign exchange contracts – cash flow hedges – current portion 3,999,928 1,469,778
Total derivative financial liabilities 3,999,928 5,253,590
On 27 June 2007 the Company signed a two-and-a-half year forward foreign currency exchange contract (“Contract”) with Deutsche Bank committing the Company to thirty monthly sales transactions, starting from July 2007, of 25 million US Dollars each in exchange for Tenge at specified forward rates for the purpose of hedging foreign exchange risk. The reason the Company entered into this agreement was to hedge against unfavourable foreign currency exchange movements because most sales contracts’ pricing, and hence the cash revenue collected by the Company, are denominated in US Dollars, while most expenditures the Company incurs during its production activity are paid in Tenge. The last monthly transaction under the contract is scheduled to happen in December 2009. As of the end of each month the Company makes an assessment of its position under the contract that is based on market Tenge-to-US Dollar forward exchange rates applicable to each of the future transactions. For the nominal amounts of cash inflow and cash outflow under the Contract please refer to Note 32.
The Company treated the forward foreign exchange contract as a derivative financial liability through profit and loss and has applied respective accounting since its origination in June 2007 until September 2007. Starting from 18 September 2007, the Company qualified for hedge accounting and started to treat the forward exchange contracts with the corresponding charge to equity. As of the transition date, the total charge to profit and loss related to fair value revaluation of the derivative amounted to Tenge 3,472,665 thousand (Note 28). For the effective portion of fair value measurements under hedge accounting, all subsequent movements in fair value, which is calculated on a monthly basis, were charged to equity.
Please see the movement in equity hedge reserve for 2008 and 2007 below:
In thousands of Kazakhstani Tenge 2008 2007. Hedge reserves at 1 January 1,246,647 - Fair value income / (loss) in year (1,504,716) 1,946,925 Tax on fair value loss 451,415 (584,078) Transfer to cost of sales (Note 24) (51,500) (166,000) Tax on transfers to cost of sales 15,450 49,800 Recycling (Note 24) 1,354,781 - Tax on recycling (406,434) - Effect of change in rates 399,992 -
Hedge reserve in equity as of 31 December 2008 1,505,635 1,246,647
Hedging derivatives are classified as a current asset or liability. The fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months and, as a current asset or liability, if the maturity of the hedged item is less than 12 months. The hedged highly probable forecast transactions denominated in foreign currency are expected to occur at various dates during the next 12 months (Note 32). Gains and losses recognized in the hedging reserve in equity on forward foreign exchange contracts as of 31 December 2008 are recognized in the income statement in the period or periods during which the hedged forecast transaction affects the income statement and are classified within cost of sales (Note 24).
As it is described in Note 32, a devaluation of the national currency occurred in February 2009. As a result of the Tenge devaluation the Company may incur losses during 2009 from exchange difference in relation to liabilities under forward currency foreign exchange contract in the amount of Tenge 7,500,000 thousand, if the exchange rate from the devaluation date will continue to be 150 Tenge for 1 US Dollar during the year.
Translated from the Russian original 40
F-44 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
19 Other Taxes Payable
In thousands of Kazakhstani Tenge 2008 2007
Environmental payments 213,285 177,897 Royalties 17,511 88,711 Individual income tax 6,031 106,405 Property tax 313 - Withholding tax 48 30,115 Other 73,836 48,378
Total other taxes payable 311,024 451,506
20 Provision for Mining Assets and Waste Polygons Retirement Obligations
In thousands of Kazakhstani Tenge December 31, 2008 December 31, 2007 Mining assets 1,617,868 3,720,170 Waste polygons 184,225 -
Total provisions for mining assets and waste polygons retirement obligations 1,802,093 3,720,170
The Company has a legal obligation to landfill and restore its mining sites and decommission its mining property and waste polygons after their expected closure in 2049 and 2050.
The amount of the provision for asset retirement obligations is determined using the nominal prices effective at the reporting dates by applying the forecasted rate of inflation for the expected period of the life of the mines and waste polygons and discount rate at the reporting dates.
Principal assumptions made in calculations of asset retirement obligations are presented below:
2008 2007
Discount rate at 31 December 11,35% 7,4% Inflation rate at 31 December 7,8%-8,6% 8,3%
Mining assets retirement obligations should be settled at the end of the useful life of each mine between 2016 to 2040.
Waste polygons retirement obligations should be settled at the end of the useful life of each polygon up to its closure to 2050.
Uncertainties in such costs estimates include potential changes in regulatory requirements, alternatives to closure and reclamation of disturbed lands and discount and inflation rates.
Translated from the Russian original 41
F-45 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
20 Provision for Mining Assets and Waste Polygons Retirement Obligations (Continued)
Movements in the provisions for mining assets retirement obligations are as follows:
Mining assets Landfill Total decommissioning site In thousands of Kazakhstani Tenge restoration
Carrying amount at 1 January 2007 854,907 1,136,666 1,991,573
Capitalized to property, plant and equipment 545,340 734,009 1,279,349 Increase in property, plant and equipment due to change in discount rate 144,512 97,655 242,167 Unwinding of the present value discount 91,536 115,545 207,081
Carrying amount at 31 December 2007 1,636,295 2,083,875 3,720,170
Capitalized to property, plant and equipment 51,259 (175,073) (123,814) Decrease in property, plant and equipment due to change in discount rate (1,040,284) (1,196,648) (2,236,932) Unwinding of the present value discount 118,973 139,471 258,444
Carrying amount at 31 December 2008 766,243 851,625 1,617,868
Movements in provisions for waste polygons retirement obligations are as follows:
Waste polygons Landfill Total decommissioning site In thousands of Kazakhstani Tenge restoration
Carrying amount at 1 January 2007 - - - Capitalized to property, plant and equipment - - - Decrease in property, plant and equipment due to change in discount rate - - - Unwinding of the present value discount - - -
Carrying amount at 31 December 2007 - - -
Capitalized to property, plant and equipment 14,394 449,176 463,570 Decrease in property, plant and equipment due to change in discount rate (8,621) (283,018) (291,639) Unwinding of the present value discount 299 11,995 12,294
Carrying amount at 31 December 2008 6,072 178,153 184,225
Translated from the Russian original 42
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
21 Employee Benefits
Changes in the defined benefit obligations are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Present value of defined benefit obligations at the beginning of year 1,113,549 1,107,253 Unwinding of present value discount 100,939 56,054 Benefits paid (89,551) (60,151) Current service expense 103,812 18,842 Actuarial losses/(gains) (156,742) (8,449)
Present value of defined benefit obligations at the end of year 1,072,007 1,113,549
Amounts recognized in the balance sheet and income statement are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Present value of defined benefit obligation at end of year 1,072,007 1,113,549
Net liability 1,072,007 1,113,549
Unwinding of present value discount 100,939 56,054 Current service expense 103,812 18,842 Actuarial losses/(gains) (156,742) (8,449)
Expense recognized in profit and loss 48,009 66,447
Unwinding of present value discount was included in the finance costs (Note 29).
Actuarial losses, current and past service expenses were included in the income statement as part of cost of sales in the amount of loss of Tenge 158,895 thousand (2007: gain of Tenge 39,191 thousand), part of general and administrative expense in the amount of gain of Tenge 97,030 thousand (2007: loss of Tenge 48,097 thousand), part of selling expenses in the amount of loss of Tenge 1,589 thousand (2007: loss of Tenge 1,199 thousand), and part of capitalised costs in the amount of gain of Tenge 11,911 thousand (2007: loss of Tenge 288 thousand).
In thousands of Kazakhstani Tenge 2008 2007
Cumulative amount of actuarial gains and losses recognized in the income statement 94,162 250,904
In thousands of Kazakhstani Tenge 2008 2007
Experience adjustment: loss on defined benefit obligation 33,820 13,137
Principal actuarial assumptions at the balance sheet date are as follows:
2008 2007
Discount rate at 31 December 11.35% 8% Future salary increases 10% 10% Average labour turnover rate 13.36% 14.6%
The mortality rates used in calculating the defined benefit obligation as of the end of 2008 and 2007 (ranging between 0.1 percent at the age of sixteen and 0.46 percent at the age of sixty-three in both 2008 and 2007) were based on official Kazakhstani statistical data published by the Statistic Agency.
Translated from the Russian original 43
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
22 Trade and Other Payables
In thousands of Kazakhstani Tenge 2008 2007
Trade payables 4,021,212 2,692,945 Annual vacation payable 1,692,458 1,300,310 Salaries payable 367,151 745,471 Interest payable - 241,739 Promissory notes issued 344,282 235,673 Dividends payable 237,685 140,178 Advances received 107,783 115,643 Pension fund payable 86,581 99,872 Financial guarantees 57,632 53,698 Equipment purchased on instalment 29,847 29,731 Other payables 551,930 331,859
Total trade and other payables 7,496,561 5,987,119
23 Revenue
In thousands of Kazakhstani Tenge 2008 2007
Iron ore products 160,900,042 107,467,847 Heat power 1,548,143 1,444,860 Crushed stone 232,719 373,304 Dolomite 829,955 862,817 Other 1,580,838 1,436,376
Total revenue 165,091,697 111,585,204
During 2008 the revenues from sale of iron ore products have increased significantly mainly due to the increase in commodity prices.
24 Cost of Sales
In thousands of Kazakhstani Tenge 2008 2007
Materials and parts 14,850,781 13,304,550 Payroll and related expenses 12,083,214 11,059,595 Depreciation 9,980,560 9,359,201 Spare parts 5,271,563 4,988,358 Fuel 5,136,001 3,383,801 Electric power 3,494,557 2,287,847 Repair and maintenance services 2,856,706 1,754,115 Royalties 1,528,748 968,524 Environmental fund 1,145,116 602,358 Insurance costs 1,018,391 1,009,529 Transportation of freights 738,464 563,740 Rent 39,885 214,917 Realized foreign exchange difference on cash flow hedge 51,500 166,000 Recycling (1,354,781) - Changes in finished goods and work in progress (3,454,524) 170,479 Other 1,660,044 1,091,463
Total cost of sales 55,046,225 50,924,477
Translated from the Russian original 44
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
25 Other Operating Income
In thousands of Kazakhstani Tenge Note 2008 2007
Interest income on loans receivable 1,745,226 2,471,421 Gain from decrease in interest of subsidiary 1 1,077,695 - Unwinding of present value discount 407,820 1,066,518 Net gain from disposal of materials - 284,983 Insurance income - 277,486 Income on financial guarantees 168,755 142,743 Income from recovery of impairment provision 134,388 51,930 Income on railway transportation services 11,279 75,277 Penalties for unfulfilled contractual obligations 15,682 54,833 Other 148,889 112,166
Total other operating income 3,709,734 4,537,357
26 Distribution Costs
In thousands of Kazakhstani Tenge 2008 2007
Shipping, transportation and storage services 11,603,817 9,920,497 Payroll and related expense 421,303 410,390 Insurance of products - 310,547 Fuel 213,923 190,363 Materials 90,002 80,218 Promotion and marketing costs 83,750 75,190 Depreciation 10,340 8,358 Other 393,738 316,600
Total distribution costs 12,816,873 11,312,163
Translated from the Russian original 45
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
27 General and Administrative Expenses
In thousands of Kazakhstani Tenge 2008 2007
Management fees 1,489,128 934,900 Payroll and related expense 1,421,110 1,613,460 Sponsorship and other financial aid 636,409 1,240,370 Taxes other than income tax 950,022 896,976 Repair and maintenance 526,563 548,142 Land rent 387,023 368,711 Information, consulting and other professional services 343,912 256,335 Bank charges 269,512 325,334 Payments under collective labour agreement 262,188 128,252 Security services 245,546 199,834 Personnel training expenses 238,734 82,116 Agency agreement fee 126,822 - Depreciation 119,141 103,012 Business trip and representative expenses 108,695 139,853 Communication expenses 78,441 77,885 Provision for trade and other receivables impairment 54,262 88,475 Impairment loss on horse riding complex 39,426 1,404,641 Fines and penalties 31,894 56,397 Inventory provision 20,337 5,605 Rent 14,331 141,227 Membership fees - 520,000 Other 625,680 390,889
Total general and administrative expenses 7,989,176 9,522,414
The membership fee expenses relates to various legal, accounting, finance and other consulting services provided by the Group to the Company. Starting from May 2007, according to the new contract signed with the Group, the Company was paying management fees. The increase in management fees in 2008 is attributable to higher amount of consulting services rendered by the Group to the Company.
28 Other Operating Expenses
In thousands of Kazakhstani Tenge 2008 2007
Loss on origination of loans receivable at non-market rate 1,122,891 2,918,000 Interest expense 832,390 1,041,916 Net foreign exchange loss 648,708 1,258,054 Loss from disposal of materials 525,644 - Financial guarantees 141,597 - Loss from penalties on contractual terms breach 113,820 - Net loss from disposal of property, plant and equipment 96,526 47,851 Fair value revaluation of hedge derivative instruments - 3,472,665 Other 183,262 259,500
Total other operating expenses 3,664,838 8,997,986
Translated from the Russian original 46
F-50 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
29 Finance Income and Costs
In thousands of Kazakhstani Tenge 2008 2007 Interest income on bank deposits 596,472 398,755 Net foreign exchange gain 8,127 - Unwinding of present value discount 1,660 297,855 Total financial income 606,259 696,610 Interest expense on borrowings received (495,578) (3,785) Provision for assets retirement obligation: amortisation of present value discount (270,738) (207,081) Unwinding of present value discount (133,373) (56,054) Preference shares (32,329) (32,349) Impairment of loans receivable - (136,914) Net foreign exchange loss - (363,191) Total finance costs (932,018) (799,374)
Net finance costs (325,759) (102,764)
Translated from the Russian original 47
F-51 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
30 Income Taxes
Income tax expense comprises the following:
In thousands of Kazakhstani Tenge 2008 2007
Current income tax expense – corporate income tax 25,585,860 12,592,074 Current income tax expense – excess profit tax 2,304,192 - Current income tax expense/(benefit) – prior periods (305,233) 8,940 Deferred income tax expense/(benefit) – excess profit tax (1,052,266) 231,305 Deferred income tax expense/(benefit) – corporate income tax (4,510,106) (159,949)
Income tax expense for the year 22,022,447 12,672,370
Reconciliation between expected and actual taxation charge is provided below.
In thousands of Kazakhstani Tenge 2008 2007
IFRS profit before tax 88,958,560 35,262,757
Theoretical tax charge at standard statutory rate of 30 percent (2007: 30 percent) 26,687,567 10,578,827
Tax effect of items which are not deductible or assessable for taxation purposes: - Representative office expenses 57,121 27,927 - Non-deductible employee benefits 50,289 101,306 - Non-deductible general and administrative expenses 25,691 8,499 - Amortization of non-production assets 21,064 9,234 - Non-deductible taxes 19,541 10,888 - Provision on impairment of receivables 16,279 26,542 - Impairment provision for horse racing complex 11,828 421,392 - Penalties and fines 6,848 16,898 - Inventory write-offs 6,101 1,682 - Charity expenses 1,458 16,051 - Membership fees 976 151,111 - Loss on origination of financial assets and liabilities - 875,400 - Income from the bonds sale - (10,830) - Unwinding of present value discount (498) (376,456) - Financial guarantees (2,825) - - Income /(loss) on sale of non-production assets (136,646) 153,608 - Other non-deductible expenses (196,586) 428,986 - Excess profit tax for the current year1 2,304,192 - - Deferred income tax – excess profit tax2 (1,052,266) 231,305 - Effect of change in tax rates² (5,797,687) -
Total income tax (benefit)/expense for the year 22,022,447 12,672,370
1 As a result of significant increase in the selling prices during the first half of 2008 gross IRR (Note 2) exceeded 20% and accordingly as of 31 December 2008 the Company has accrued excess profit tax (further “EPT”).
2 Starting from January 1 2009, the New Tax Code is adopted in Kazakhstan. Changes in corporate income tax rate and EPT calculation methodology (Note 31) impacted the reported amounts of deferred income tax liabilities.
Translated from the Russian original 48
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
30 Income Taxes (Continued)
Differences between IFRS and Kazakhstani statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the applicable tax rate.
1 January Charged/ Charged/ 31 December 2008 (credited) to (credited) to 2008 In thousands of Kazakhstani Tenge profit or loss equity
Tax effect of deductible temporary differences Provision for asset retirement obligations (1,116,051) 845,737 - (270,314) Annual leave payable (383,674) 76,911 - (306,763) Employee benefits (206,465) 110,534 - (95,931) Accounts receivable (141,684) 140,216 - (1,468) Taxes accrued not paid (26,613) 19,077 - (7,536) Derivative financial instrument liabilities (1,576,077) 390,985 385,107 (799,985) Gross deferred tax asset (3,450,564) 1,583,460 385,107 (1,481,997)
Tax effect of taxable temporary differences Property, plant and equipment 12,515,385 (5,968,302) - 6,547,083 Inventory 51,150 (50,540) - 610 Other 150,230 (74,724) - 75,506
Gross deferred tax liability 12,716,765 (6,093,566) 6,623,199 Less offsetting with deferred tax assets (3,450,564) 1,583,460 385,107 (1,481,997) Net deferred tax liability at standard statutory rate of 30% 9,266,201 (4,510,106) 385,107 5,141,202
Excess profits tax - property, plant and equipment 1,187,147 (1,187,147) - - Excess profits tax – employee benefits (30,716) 30,716 - - Excess profits tax – provision for asset retirement obligations (104,165) 104,165 - -
Recognized deferred tax liability 10,318,467 (5,562,372) 385,107 5,141,202
Translated from the Russian original 49
F-53 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
30 Income Taxes (Continued)
1 January Charged/ Charged/ 31 December 2007 (credited) to (credited) to 2007 In thousands of Kazakhstani Tenge profit or loss equity
Tax effect of deductible temporary differences Provision for asset retirement obligations (597,472) (518,579) - (1,116,051) Annual leave payable (309,190) (74,484) - (383,674) Employee benefits (286,843) 80,378 - (206,465) Accounts receivable (81,799) (59,885) - (141,684) Property tax (13,899) 13,899 - - Taxes accrued not paid (11,193) (15,420) - (26,613) Derivative financial instrument liabilities - (1,041,799) (534,278) (1,576,077) Other (22,943) 22,943 - -
Gross deferred tax asset (1,323,339) (1,592,947) (534,278) (3,450,564)
Tax effect of taxable temporary differences Property, plant and equipment 11,249,885 1,265,500 - 12,515,385 Inventory 33,882 17,268 - 51,150 Other - 150,230 - 150,230
Gross deferred tax liability 11,283,767 1,432,998 - 12,716,765 Less offsetting with deferred tax assets (1,323,339) (1,592,947) (534,278) (3,450,564) Net deferred tax liability at standard statutory rate of 30% 9,960,428 (159,949) (534,278) 9,266,201
Excess profits tax - property, plant and equipment 876,252 310,895 - 1,187,147 Excess profits tax – provision for asset retirement obligations (24,288) (79,877) - (104,165) Excess profits tax – employee benefits (31,003) 287 - (30,716)
Recognized deferred tax liability 10,781,389 71,356 (534,278) 10,318,467
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows: 2008 2007
Deferred income tax assets: - Deferred income tax asset to be recovered after more than 12 months (494,784) (2,269,745) - Deferred income tax asset to be recovered within 12 months (1,118,782) (1,631,505)
(1,613,566) (3,901,250)
Deferred income tax liabilities: - Deferred income tax liability to be recovered after more than 12 months 6,678,652 12,831,190 - Deferred income tax liability to be recovered within 12 months 76,116 1,388,527
6,754,768 14,219,717 Deferred income tax liabilities (net) 5,141,202 10,318,467
Translated from the Russian original 50
F-54 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
31 Contingencies, Commitments and Operating Risks
Political and economic situation in Kazakhstan. In general, the economy of Kazakhstan continues to display the characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country and a low level of liquidity of debt and equity securities in the markets.
The mining sector in Kazakhstan is still impacted by political, legislative, fiscal and regulatory developments in Kazakhstan. The prospects for future economic stability in Kazakhstan are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory and political developments, which are beyond the Company’s control.
The financial condition and future operations of the Company may be adversely affected by continued economic difficulties related mainly to the current situation in the global financial markets. Management is unable to predict the extent and duration of the economic difficulties, nor quantify the impact, if any, on these financial statements.
Impact of global financial crisis. The slowdown in the growth rates of leading developed world economies - the USA, Japan, European Union, was very dramatic in autumn 2008 and caused the slowdown of development of the world economy and reduction of the world consumption. The oil and metal prices went down and such products are the main export products of Kazakhstan. Further, the effects of the crisis flowed from the financial sector into the real sector.
The volume of financing has significantly reduced from August 2008 for the economy as a whole. Such circumstances may affect the ability of the Company to obtain new borrowings and re-finance its existing borrowings at terms and conditions similar to those applied to earlier transactions.
Debtors of the Company may be affected by the lower liquidity situation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for debtors may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management have properly reflected revised estimates of expected future cash flows in their impairment assessments.
Due to the reduction of production and consumption levels around the world as well as the fall of prices for main export products of Kazakhstan, the Government has developed a stabilization plan envisaging the increase of the governmental expenses for support and resumption of business activities. The anti-crisis program aims to prevent the work places cut-off and mass dismissals in the real sector. In this environment, the influence and presence of the Government of the Republic of Kazakhstan in the economy increased.
One of the features of the program was the introduction of a new Tax Code which removed the term "stability" of tax regime from the subsurface use contracts and introduced the mineral resources production tax (“MRPT”). For the first time in state practice, oil and oil products export customs duty is introduced, and the same measures are planned in terms of export of products of mining and smelting industry.
In response to the financial crisis and for the purposes of costs reduction, the Company revised its social guarantees and compensations in the current collective agreement.
In the fourth quarter of 2008 Magnitogorsk Metallurgic Plant (MMK), one of the Company’s major customers, decreased purchases of iron ore products due to reduction in its production.
Management believes it is taking all the necessary measures to support the sustainability and development of the Company’s business in the current circumstances.
Risk of limited market. Most of the Company's products are sold to related parties (Note 6). The related parties sell those products in international commodity markets. The geographical position of the Company's production facilities, location of ultimate consumers and the existing transportation routes restricts to some extent the ability of the related parties to distribute the Company’s products. These restrictions sometimes affect the Company. From time to time the Company has to reduce its production due to disputes between the related parties and their customers. Such a dispute occurred in 2005 and the Company operated at 30 percent of its capacity from May until August. In order to safeguard its sales to major customers, in March 2007 the Company signed a ten-year contract with ENRC Marketing AG, related party, on shipment of iron ore products in the amount of approximately twelve million tones per annum. The contract came into force on 1 April 2007 and stays valid until 31 March 2017. In the fourth quarter of 2008 the sales to ENRC Marketing AG under this contract reduced in connection with global economic downturn and accordingly decrease of demand for Company’s products, whereby the shipment of products for 2008 under this contract was 10.4 million tones.
The Company continues active seeking to diversify the customer portfolio by attracting other customers across Russian and Chinese markets.
Translated from the Russian original 51
F-55 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
31 Contingencies, Commitments and Operating Risks (Continued)
Tax and transfer pricing legislation. Kazakh tax legislation and practice is in a state of continuous development and therefore is subject to varying interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax and transfer pricing legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, tax authorities may challenge transactions and the Company may be assessed additional taxes, penalties and fines. Tax periods remain open to retrospective review by the Kazakh tax authorities for five years.
Whilst there is a risk that the Kazakh tax authorities may challenge the policies applied, including those relating to transfer pricing legislation and excess profits tax, the management believe that they would be successful in defending any such challenge. Accordingly, at 31 December 2008 no provision for potential tax liabilities had been recorded (2007: no provision recorded).
Prior to the date of these financial statements preparation, the Kazakhstani tax authorities had finished a complex tax audit of the Company, started in 2008, covering the years ended 31 December 2004, 2005, except for the compliance with legislation of transfer pricing. No significant violations were revealed upon the result of this tax audit.
Management expects that during 2009 the Kazakhstani tax authorities will complete inspections of the Company’s transfer pricing accounting policies for the years ended 31 December 2004, 2005.
Changes in tax legislation. On 10 December 2008 the President of the Republic of Kazakhstan singed the New Tax Code, which comes into effect from 1 January 2009 and legislative acts, envisaged by this Code. Major changes include: corporate income tax rate decreased from 30% to 20% in the financial year 2009, and to 15% in the year 2011; VAT rates are changed from 13% to 12%, the fixed social tax rate of 11% is introduced, the property tax rate is increased from 1% to 2% only in relation to real estate tax base, and other changes are introduced.
Capital expenditure commitments. At 31 December 2008 the Company has contractual capital expenditure commitments in respect of purchases totalling Tenge 8,971,661 thousand (2007: Tenge 7,201,258 thousand).
The Company’s management believes that future net income and funding will be sufficient to cover this and any similar commitments.
Legal proceedings. From time to time and in the normal course of business, claims against the Company are received. On the basis of its own estimates and both internal and external professional advice management of the Company is of the opinion that no material losses will be incurred in respect of claims.
Guarantees. Guarantees are the Company’s irrevocable obligations on payments in the event that another party cannot meet its obligations. The Company has guaranteed the following obligations:
In thousands of Kazakhstani Tenge 2008 2007 Nominal value of Fair value of Nominal value Fair value of loans guarantees of loans guarantees guaranteed guaranteed
Entities under common control 2,275,643 104,045 3,086,702 131,205
Total guarantees 2,275,643 104,045 3,086,702 131,205
Insurance policies. The Company holds insurance policies in relation to the following risks:
• Insurance of property; • Insurance of civil responsibility of an employer for causing damage to the life and health of an employee during his/her duties; • Insurance of civil responsibility of owners of vehicles; • Insurance of civil responsibility for causing damage to the environment; • Insurance of civil responsibility of owners of properties, operations of which can cause damage to third parties.
Translated from the Russian original 52
F-56 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
31 Contingencies, Commitments and Operating Risks (Continued)
Environmental matters. The enforcement of environmental regulation in the Republic of Kazakhstan is evolving and the enforcement posture of government authorities is continually being reconsidered. The Company periodically evaluates its obligations under environmental regulations. Thus, due to adoption of the Ecology Code of the Republic of Kazakhstan, during 2008 the Company created the decommissioning fund to arrange the measures for decommissioning of waste polygons and environmental monitoring upon closure. In addition to decommisioning fund, representing the special account for accumulation of funds, the Company accrued the provisions for waste polygons retirement. The amount of accrued provision for waste polygons retirement was based on the management's best estimates of future costs, which will be incurred by the Company for repayment of its current liabilities (Note 20). In the current enforcement climate under existing legislation, the Company’s management believes that there are no significant liabilities for environmental damage.
In 2004 the Company passed the certification procedure of quality management of the certification body “TUV CERT”. The Company received the certificate on compliance with the requirements of quality standard ISO 9001. The Company has also developed and established the Company Ecology Management Policy, the main purpose of which is prevention of environmental pollution. Based on the results of the audit conducted in 2005, “TUV CERT” (Germany) concluded that the Company’s current system of quality management was in accordance with the requirements of ISO 14001 and issued the certificate of compliance.
In December 2005 TÜV SUED auditors conducted an audit for the compliance of the Company with the quality management system on ISO 9001:2000 and on ISO 14001:2004, these certificates were received on 17 January 2006. During September 2006 TÜV SUED auditors reviewed the Company’s compliance with ISO 14001:2004 requirements. In October 2007 TÜV SUED auditors conducted recertified audit for the compliance of the Company with the quality management system on ISO 9001:2000 and environment protection system on ISO 14001.
In September 2008 TÜV SUED auditors conducted audit for the compliance of the Company with the quality management system on ISO 9001 and recertified audit of environment protection system on ISO 14001.
Provision for asset retirement obligations. The estimate of the outstanding provision for asset retirement obligations was based on management’s estimates from an analysis of contractual obligations in respect of site restoration and rehabilitation (Note 3). This estimate might change upon completion of further environmental study works and reassessment of existing liabilities.
Pledged assets. At 31 December 2008 the Company does not have any pledged assets. Loans provided as at 31 December 2007 as collateral under credit line agreement from Eurasian Bank JSC (Note 10) in the amount of Tenge 5,860,300 thousand were issued by a subsidiary, Credit Partnership ENRC Credit LLP, over which in 2008 the company lost control (Note 1).
2008 2007 In thousands of Kazakhstani Tenge Note Pledged assets Pledged assets
Loan receivable from Eurasian Energy Corporation JSC 10 - 3,292,300 Loan receivable from Kazakhstan Aluminium Smelter JSC 10 - 2,568,000
Total assets pledged as a collateral - 5,860,300
Translated from the Russian original 53
F-57 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
31 Contingencies, Commitments and Operating Risks (Continued)
Open credit lines. Presented below are the credit lines provided by “ENRC Credit” Credit Partnership LLP to other parties as of 31 December 2007, over which the Company lost control in 2008 (Note 1).
Company Name Credit Line Amount Utilized as of Credit Line Amount Amount Utilized as Amount 31 December 2008 (at nominal) as of of 31 December 2007 (at nominal) as (at nominal) 31 December 2007 (at nominal) of 31 December 2008
Kazakhstan Aluminium Smelter - - 31,513,260 25,918,600 Eurasian Energy Corporation JSC - - 10,625,100 9,662,558 Zholzhondeushy JSC - - 5,382,162 5,382,162 Aluminium of Kazakhstan JSC - - 5,040,331 4,761,136 Eurasian Financial Industrial Company JSC - - 3,917,247 1,200,154 Transcom JSC - - 1,775,000 1,340,000 Sary-Arka SpetsKoks JSC - - 1,300,000 1,300,000 Transsystema JSC - - 1,108,080 1,076,502 Zhairemsky GOK JSC - - 923,700 923,700 Mugotecs CJSC - - 490,000 490,000 Universal Service LLP - - 204,650 204,650 Transremvagon LLP - - 29,794 29,794 Remput JSC - - - -
Total - - 62,309,324 52,289,256
Land operating lease obligations. Presented below is the summary of the minimum future operating lease payments for the use of land. Repayment Period Due in 1 year Due between Due after Total In thousands of Kazakhstani Tenge 2 and 5 years 5 years
Minimum lease payments at 31 December 2008 386,550 1,523,056 429,753 2,339,359 Minimum lease payments at 31 December 2007 386,832 1,531,436 1,185,959 3,104,227
Translated from the Russian original 54
F-58 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
32 Financial Risk Management
Financial Risk Factors
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. Risk management is carried out by finance, accounting and treasury departments under policies set by the Group. The Group provides principles for risk management, covering specific areas, such as credit risk, and liquidity risk. (a) Market Risk Foreign exchange risk. The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the Euro. The Company has the significant cash and cash equivalents, as well as term deposits denominated in foreign currencies, and is thus exposed to foreign exchange risk. The Company uses derivative financial instruments that are designated and qualify as cash flow hedges for the purpose of mitigating its exposure towards foreign exchange risk resulting from the fact that most Company revenues are denominated in US Dollars and most operating expenditures are denominated in Kazakhstani Tenge (Notes 18, 32). Foreign exchange risk arises when future foreign currency inflows or recognized assets and liabilities are denominated in currency other than the Company’s functional currency. The table below shows the total amount of foreign currency denominated assets and liabilities that give rise to foreign exchange exposure. US dollar Russian Euro Total Rouble In thousands of Kazakhstani Tenge At 31 December 2008 Assets 34,795,771 11,177 1,307,044 36,113,992 Liabilities 4,163,822 415,327 299,410 4,878,559
At 31 December 2007 Assets 32,065,229 12,578 - 32,077,807 Liabilities 54,041,653 349,124 63,454 54,454,231
On 4 February 2009 the National Bank of the Republic of Kazakhstan ceased to maintain the exchange rate of Tenge to other foreign currencies. The exchange rate of Tenge to USD subsequently weakened for 25% and at the closing exchange rate at the Kazakhstan Stock Exchange on that day was 150.03 Tenge for 1 USD (31 December 2008: 120.77 Tenge for 1 USD). At 31 December 2008, if the Tenge had weakened by 25 percent against the US dollar, with all other variables held constant, post-tax profit would have been Tenge 5,360,147 thousand higher (2007: weakened by 5 percent post-tax profit would have been by Tenge 769,175 thousand lower), mainly as a result of foreign exchange gains/losses on translation of US dollar denominated cash, trade receivables and payables. Since USD to Tenge exchange rate decrease is not expected, the sensitivity analysis for Tenge strengthening was not made. At 31 December 2008, if the Tenge had weakened/strengthened by 6 percent against the Russian Roubles, with all other variables held constant, post-tax profit for the year would have decreased/increased by Tenge 17,208 thousand (2007: weakened/strengthened by 5 percent, post-tax profit would have decreased/increased by Tenge 11,779 thousand), mainly as a result of foreign exchange gain/loss on translation of Russian Roubles denominated cash and cash equivalents and payables. At 31 December 2008, if the Tenge had weakened/strengthened by 10 percent against the Euro, with all other variables held constant, post-tax profit for the year would have increased/decreased by Tenge 70,539 thousand (2007: weakened/strengthened by 5 percent, post-tax profit would have decreased/increased by Tenge 2,221 thousand), mainly as a result of foreign exchange gain/loss on translation of Euro denominated accounts payable. Price risk. The Company is exposed to equity securities price risk over investments held by the Company and classified on the consolidated balance sheet as available-for-sale. However the Company believes that this risk is not high, since it is mitigated by the same that these investments are investments in ”ENRC Credit” Credit Partnership” LLP, which is the subsidiary of ENRC Plc.
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F-59 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
32 Financial Risk Management (Continued)
The Company is not exposed to equity securities price risk over investments classified on the consolidated balance sheet at fair value through profit or loss because no such investments are held by the Company at the reporting date.
The Company is exposed to commodity price risk as the sales price for iron ore is affected by world market price movements which are dependant upon general and specific market movements. The Company has not entered into any hedging arrangements in respect of its commodity price exposures as the management projects that the trend of historically higher prices for iron ore in the period prior to the credit crisis in 2008, will resume. However, as sales contracts are denominated in US Dollars, the Company hedges foreign exchange risk with forward contracts (Notes 18, 32).
Cash flow and fair value interest rate risk. Sensitivity analysis shows the effect of changes in market interest rates on interest payments, interest income and expenses, and if applicable, on equity.
The analysis of sensitivity to interest rate risk is based on the following assumptions:
Changes in market interest rate effects interest income and interest expenses on financial instruments with floating interest rate, therefore, should be included into calculation for the purposes of sensitivity analysis.
Financial instruments with fixed interest rate recognized at amortized costs are not exposed to interest rate risk, therefore, are not included into calculations for the purposes of sensitivity analysis.
Changes in market interest rate on financial liabilities and financial assets with fixed interest rate affect income and losses given they are recognized at fair value through profit or loss.
As at 31 December 2008 and 31 December 2007 the Company was not exposed to interest rate risk since the Company does not have any financial assets and liabilities with floating interest rate, nor financial instruments with fixed interest rate recognized at fair value through profit or loss.
Translated from the Russian original 56
F-60 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
32 Financial Risk Management (Continued)
(b) Credit Risk
Credit risk mainly arises from cash and cash equivalents, term deposits with banks, loans receivable as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only highly rated institutions operating on local market are accepted. The Company has policies in place to ensure that sales of products and services are made to customers with good financial position and credit history. The majority sales of iron ore products are made to related parties. The carrying amount of cash and cash equivalents, short-term bank deposits with maturity of more than 3 months, and accounts receivable (including receivables from related parties), net of provision for their impairment represents the maximum amount exposed to credit risk. The Company has been granting loans to related parties only (Note 10), and hence management considers the risk of credit default on loans receivable as minimal. The Company does not have policies in place to assign internal ratings and set credit limits to its counterparties. The table below shows credit ratings (where available) and balances of five major counterparties with aggregated outstanding amounts above Tenge 80,000 thousand at the balance sheet date:
In thousands of Kazakhstani Tenge Rating 2008 2007 Cash and cash equivalents Eurasian Bank B (Standard&Poor’s) 13,835,965 4,243,868 Bank of Moscow Baɚ1 (Moody's) 5,395 14,986 Bank Center Credit BB- (Fitch) 3,352 303 HSBC* AA (Standard&Poor’s) 2,701 10,862 Kazkommertsbank BB- (Standard&Poor’s) 1,642 34 Halyk Bank BB (Standard&Poor’s) 315 2,902 RBS Kazakhstan (ABN AMRO Bank)* Ⱥ (Standard&Poor’s) 211 509,500 Bank TuranAlem B (Standard&Poor’s) 19 21,154
Total cash and cash equivalents 13,849,600 4,803,609
In thousands of Kazakhstani Tenge Rating 2008 2007 Term deposits Bank CenterCredit BB - (Fitch) 4,282,433 53,419 recalled by ATF Bank (Standard&Poor’s) 2,646,530 Bank TuranAlem BB (Standard&Poor’s) 40,000 Eurasian Bank B (Standard&Poor’s) 7,266,655
Total term deposits 4,282,433 10,006,604
In thousands of Kazakhstani Tenge Rating 2008 2007
Trade and other receivables ENRC Marketing AG Not available 16,944,199 18,879,168 Mittal Steel Temirtau JSC Not available 631,595 391,388 Kostanai Transstroy 2003 LLP Not available 233,919 - Receivables from Rudny customers of power station services Not available 152,670 113,114 Ibragimov A.R., ultimate shareholder Not available 143,215 143,215 Medet – Nedvizhimost JSC Not available - 387,575
Total trade and other receivables 18,105,598 19,914,460
Loans receivable Loans receivable Not available - 51,419,321
Total loans receivable - 51,419,321 * Rating is provided on international bank. Rating on Kazakhstani bank is not available.
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F-61 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
32 Financial Risk Management (Continued)
Trade accounts receivable listed above are short-term assets due from counterparties with outstanding period from one to three months. Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Company beyond the provisions already recorded.
(c) Liquidity Risk
Prudent liquidity risk management implies maintaining sufficient cash and marketable securities, availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company maintains flexibility in funding by maintaining availability under committed credit lines.
The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (except for financial guarantees, preference shares and derivative financial instruments, for which maturity was presented based on present value figures). Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
Carrying Cash flows Less than 1 Between 1 Between 2 Over 5 In thousands of Kazakhstani Value under year and 2 years and 5 years years Tenge Agreement
At 31 December 2008 Borrowings ------Trade and other payables 3,980,226 3,980,226 3,980,226 - - - Amounts due to related parties 418,809 418,809 418,809 - - - Financial guarantees 104,045 - - - - - Preference shares 242,900 1,072,500 32,500 32,500 97,500 910,000 Derivative financial instruments 3,999,928 4,934,632 4,934,632 - - -
Total financial liabilities 8,745,908 10,406,167 9,366,167 32,500 97,500 910,000
At 31 December 2007 Borrowings 48,220,431 54,780,514 14,770,823 14,169,399 25,840,292 - Trade and other payables 2,595,115 2,595,115 2,595,115 - - - Amounts due to related parties 607,777 607,777 607,777 - - - Financial guarantees 131,205 - - - - - Preference shares 243,071 1,105,000 32,500 32,500 97,500 942,500 Derivative financial instruments 5,253,590 6,133,080 1,592,836 4,540,244 - -
Total financial liabilities 57,051,189 65,221,486 19,599,051 18,742,143 25,973,792 942,500
The table below analyses the Company’s derivative financial liabilities as of 31 December 2008 and 2007 which will be settled on a gross basis into relevant maturity groupings based on the remaining period at the balance sheet to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, according to rates forecasted by Deutsche Bank:
Less than Between 1 and 2 Between 2 and 5 Over years years In thousands of Kazakhstani Tenge 1 year 5 Years
At 31 December 2008 Forward foreign exchange contracts – cash flow hedges Outflow 41,114,132 - - Inflow 36,179,500 - -
At 31 December 2007 Forward foreign exchange contracts – cash flow hedges Outflow 37,633,836 40,719,744 - - Inflow 36,041,000 36,179,500 - -
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
32 Financial Risk Management (Continued)
Capital risk management
Decisions in relation to Company’s activity on funding (through own or borrowed funds) are made at the level of Group’s management. The Group’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or sell assets to reduce debt.
Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio.
Fair value estimation
Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price.
The estimated fair values of financial instruments have been determined by the Company using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Republic of Kazakhstan continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.
The Company has available-for-sale investments which are not publicly traded. Due to the nature of the local financial market, it is not possible to obtain current market value for these investments as they are not listed on a stock exchange. Accordingly, such investments are recognized in the balance sheet at actual purchase cost.
Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on the credit risk of the counterparty. Refer to Note 10 for the estimated fair values of loans receivable. Due to the short-term nature of trade receivables, their carrying amounts approximate fair values.
Liabilities carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Refer to Note 17 for the estimated fair values of borrowings.
Derivative financial instruments. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Refer to Note 18.
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F-63 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:44 – Mac6 – 4221 Section 09a
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
33 Financial Instruments by Category
The accounting policies for financial instruments have been applied to line items below:
In thousands of Kazakhstani Tenge Note 2008 2007
Available for sale financial assets
Other non-current assets 8 9,717,650 1,141 Other current assets 9 - 5,039
Loans and receivables
Loans receivable 10 - 51,419,321 Cash and cash equivalents 13 13,865,774 4,819,709 Short-term letters of credit 1,597,093 43,292 Other current assets 9 4,282,433 10,006,604 Trade and other receivables, net 12 1,434,170 1,047,695 Amounts due from related parties, net 12 16,955,456 19,127,918
Total financial assets, net 47,852,576 86,470,719
In thousands of Kazakhstani Tenge Note 2008 2007
Financial liabilities Borrowings 17 - 48,220,431 Derivative financial instruments 18 3,999,928 5,253,590 Trade and other payables 22 3,980,226 2,595,115 Amounts due to related parties 22 418,809 607,777 Financial guarantees 104,045 131,205 Preference shares 242,900 243,071
Total financial liabilities 8,745,908 57,051,189
Translated from the Russian original 60
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2008
34 Credit Quality of Financial Assets
In thousands of Kazakhstani Tenge 2008 2007
Other current assets
Counterparties with external credit rating: Recalled by (Standard and Poor’s) - 2,646,530 BB (Standard and Poor’s) - 40,000 Bȼ- (Fitch) 4,282,433 53,419 ȼ (Standard and Poor’s) - 7,266,655
Total other current assets 4,282,433 10,006,604
Cash and cash equivalents *
Counterparties with external credit rating: ȺȺ (Standard and Poor’s)** 2,701 10,862 Ⱥ (Standard and Poor’s)** 211 509,500 BB (Standard and Poor’s) 315 2,902 BB- (Standard and Poor’s) 1,642 34 ȼ (Standard and Poor’s) 13,835,984 4,265,022 Bȼ- (Fitch) 3,352 303 Baɚ1(Moody’s) 5,395 14,986
Total cash and cash equivalents 13,849,600 4,803,609
Trade and other receivables
Counterparties without external credit rating: Existing customers (less than 6 months) 1,267,477 520,017 Existing customers (more than 6 months) 158,788 520,102
Total trade and other receivables 1,426,265 1,040,119
Amounts due from related parties
Counterparties without external credit rating: Existing customers (less than 6 months) 16,955,456 19,127,918
Total amounts due from related parties 16,955,456 19,127,918
Other long-term accounts receivable
Counterparties without external credit rating 7,905 7,576
Total other long-term accounts receivable 7,905 7,576
*The rest of the balance sheet item ‘cash and cash equivalents’ is cash at hand ** Rating is provided on international bank. Rating on Kazakhstani bank is not available.
Translated from the Russian original 61
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Sokolovsko-Sarbaisky Mining and Production Association JSC
International Financial Reporting Standards Consolidated Financial Statements and Auditor’s Report
31 December 2009
(Translated from the Russian original)
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Content
Independent auditors’ report ...... 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated statement of financial position ...... 2 Consolidated income statement...... 3 Consolidated statement of comprehensive income ...... 4 Consolidated statement of changes in equity ...... 5 Consolidated statement of cash flow ...... 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 The Company and its Operations...... 7 2 Basis of Preparation and Significant Accounting Policies...... 8 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies ...... 17 4 New Accounting Pronouncements...... 20 5 Employee Information...... 24 6 Balances and Transactions with Related Parties...... 25 7 Property, Plant and Equipment...... 30 8 Other Non-Current Assets ...... 31 9 Other Current Assets ...... 32 10 Inventories...... 32 11 Trade and Other Receivables...... 33 12 Cash and Cash Equivalents ...... 34 13 Non-Current Assets Held for Sale...... 34 14 Share Capital...... 35 15 Long-term Share-based Employee Benefit Plan...... 36 16 Derivative Financial Instruments...... 36 17 Other Taxes Payable ...... 37 18 Provision for Mining Assets and Waste Polygons Retirement Obligations ...... 37 19 Employee Benefits...... 39 20 Trade and Other Payables...... 40 21 Revenue ...... 40 22 Cost of Sales ...... 41 23 Other Operating Income ...... 41 24 Distribution Costs...... 41 25 General and Administrative Expenses...... 41 26 Other Operating Expenses ...... 42 27 Finance Income and Costs...... 43 28 Income Taxes ...... 43 29 Contingencies, Commitments and Operating Risks...... 47 30 Financial Risk Management ...... 50 31 Financial Instruments by Category ...... 55 32 Credit Quality of Financial Assets...... 56 33 Subsequent events...... 56
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated income statement
In thousands of Kazakhstani Tenge Note 2009 2008
Revenues 21 132,951,392 165,091,697 Cost of sales 22 (72,690,792) (55,046,225) Gross profit 60,260,600 110,045,472 Other operating income 23 7,215,839 3,709,734 Distribution costs 24 (1,220,466) (12,816,873) General and administrative expenses 25 (6,882,420) (7,989,176) Other operating expenses 26 (438,858) (3,664,838) Operating profit 58,934,695 89,284,319 Finance income 27 1,910,816 606,259 Finance costs 27 (301,013) (932,018) Net finance income/(costs) 27 1,609,803 (325,759) Profit before income tax 60,544,498 88,958,560 Income tax expense 28 (16,419,344) (22,022,447)
Profit for the year 44,125,154 66,936,113
Participation in profit: Profit attributable to the Company’s shareholders 44,125,154 66,975,300 Minority interest - (39,187) Profit for the year 44,125,154 66,936,113
The accompanying notes on pages 7 to 56 are an integral part of these consolidated financial statements Translated from the Russian original
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated statement of comprehensive income
In thousands of Kazakhstani Tenge 2009 2008 Profit for the year 44,125,154 66,936,113 Other comprehensive income: Cash flow hedging instruments profit/(loss), net 1,882,044 (644,095) Income tax related to other comprehensive income (376,409) 385,107 Other comprehensive income for the year, net of tax 1,505,635 (258,988) Total comprehensive income for the year 45,630,789 66,677,125
Total comprehensive income is attributable to: Owners of the Company 45,630,789 66,716,312 Minority interest - (39,187) Total comprehensive income for the year 45,630,789 66,677,125
The accompanying notes on pages 7 to 56 are an integral part of these consolidated financial statements Translated from the Russian original
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated statement of changes in equity
Attributable to the Company’s shareholders Hedging In thousands of Share Retained Minority Total Kazakhstani Tenge capital reserve earnings Total interest equity Balance at 1 January 2008 8,785,200 (1,246,647) 108,243,198 115,781,751 2,713,148 118,494,899 Changes in equity for the year 2008 Dividends - - (14,425,125) (14,425,125) - (14,425,125) Disposal of subsidiary - - - - (2,673,961) (2,673,961) Total comprehensive income - (258,988) 66,975,300 66,716,312 (39,187) 66,677,125 Share-based payment - - 12,350 12,350 - 12,350 Balance at 31 December 2008 8,785,200 (1,505,635) 160,805,723 168,085,288 - 168,085,288 Changes in equity for the year 2009 Dividends - - (20,986,875) (20,986,875) - (20,986,875) Total comprehensive income - 1,505,635 44,125,154 45,630,789 - 45,630,789 Share-based payment - - 39,284 39,284 - 39,284
Balance at 31 December 2009 8,785,200 - 183,983,286 192,768,486 - 192,768,486
The accompanying notes on pages 7 to 56 are an integral part of these consolidated financial statements Translated from the Russian original
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Sokolovsko-Sarbaisky Mining and Production Association JSC Consolidated statement of cash flow
In thousands of Kazakhstani Tenge Note 2009 2008
Cash flows from operating activities: Profit before income tax 60,544,498 88,958,560
Adjustments for:
Depreciation of property, plant and equipment 7 12,007,134 10,312,714 Impairment of property, plant and equipment - (63,512) Losses less gains on disposal of property, plant and equipment 26 68,546 96,526 Provision for obsolete and slow-moving inventories 25 199,621 20,337 Net profit from disposal of investments 23 - (1,077,695) Interest expense 26, 27 32,328 1,360,297 Interest income 23, 27 (1,040,496) (2,341,698) Employee benefits 19 (570,820) (52,930) Provision for asset retirement obligations 18 246,970 270,738 Foreign currency exchange (gain)/loss on cash and cash equivalents (2,725,230) 163,293 Unrealized foreign currency exchange 27 (712,985) (8,511) Financial guarantees 23, 26 (57,632) (27,158) Unwinding of present value discount 23, 27 21,060 (276,107) Reversal of accumulated amortisation of discounting as result of revision of terms of the Collective agreement 19 (156,680) - Loss on origination of financial assets and liabilities 26 - 1,122,891 Fair value revaluation of hedge derivative instruments 22 (2,117,884) (1,354,781) Share-based compensation expense 15 39,284 12,350 Operating cash flows before working capital changes 65,777,714 97,115,314 Increase in trade and other receivables (8,900,776) (2,748,235) Decrease in interest receivable - 14,333 Decrease/(increase) in inventories 1,807,919 (5,026,940) Increase in trade and other payables 2,550,146 414,921 Decrease in other taxes 17 (77,447) (140,482) Cash generated from operations 61,157,556 89,628,911 Income tax paid (13,712,924) (24,700,834) Interest paid - (773,204) Employee benefits paid 19 (41,885) (89,551) Net cash from operating activities 47,402,747 64,065,322
Cash flows from investing activities Purchase of property, plant and equipment (26,329,364) (39,009,391) Proceeds from disposal of property, plant and equipment 187,108 490,041 Term deposits placed (11,526,388) (10,668,015) Term deposits withdrawn 5,399,430 16,367,254 Interest income received 555,853 1,947,280 Proceeds from disposal of investments available for sale - 3,090 Purchase of investments available for sale (140,000) - Loans to related parties - (14,060,000) Repayment of loans to related parties - 3,918,903 Cash outflow from disposal of subsidiary - (1,321,194)
Net cash used in investing activities (31,853,361) (42,332,032) Cash flows from financing activities Proceeds from borrowings from related parties - 18,538,625 Repayment of borrowings from related parties - (16,702,439) Dividends paid to the Company’s shareholders 14 (10,907,541) (14,360,118)
Net cash used in financing activities (10,907,541) (12,523,932)
Effect of exchange rate changes on cash and cash equivalents 2,725,230 (163,293)
Net increase in cash and cash equivalents 7,367,075 9,046,065 Cash and cash equivalents at the beginning of the year 12 13,865,774 4,819,709
Cash and cash equivalents at the end of the year 12 21,232,849 13,865,774
The accompanying notes on pages 7 to 56 are an integral part of these consolidated financial statements Translated from the Russian original
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
1 TheCompanyanditsOperations
These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2009 for Sokolovsko-Sarbaisky Mining and Production Association JSC and its subsidiaries (further the “Company” or “SSGPO”).
Principal activity The principal activity of the Company comprises the extraction and processing of iron ore, limestone, and dolomite and production of fluxed iron ore pellets, iron-ore concentrate, commercial dolomite and crushed stone. The Company is one of the largest entities in the Republic of Kazakhstan with a production chain from extraction of minerals to production of finished goods. The Company’s head office is located at 26, Lenin Avenue, Rudny town, Kostanai Oblast, 111500, the Republic of Kazakhstan.
The Company is controlled by Eurasian Natural Resources Corporation Plc (the “Group” or “ENRC Plc”), global natural resources group with fully integrated mining, processing, energy and transport operations with the principal assets located in the Republic of Kazakhstan.
Subsurface use contracts The Company operates under contracts for subsurface use signed with the Government of the Republic of Kazakhstan for the extraction of: iron ore No. 98 dated 6 February 1997 for 20 years; dolomite No. 100 dated 7 February 1997 for 20 years; limestone No. 03K dated 5 January 1998 for 20 years. Each contract has a renewal clause. The Company’s activities depend on iron ore reserves and the demand on the iron-ore products market.
Principal operating divisions The Company has twenty structural divisions, including Sarbaiskoye and Kacharskoye open pits, Kurzhunkulsky mine and Sokolovskoye underground mine, extracting iron ore; ore processing and pelletizing mill which processes iron ore to produce fluxed iron ore pellets and iron ore concentrate; Alexeyevsky dolomite open pit; Kzyl-Zharsky limestone open pit; and auxiliary subdivisions, engaged in electric power generation, logistics, blasting, and transportation services.
In 2009 the Company closed its representation office in Moscow.
Company’s shareholders During 2009 and 2008 the Company’s immediate shareholders were:
In percent 31 December 2009 31 December 2008 ENRC N.V. 98.15 98.14 Individuals 1.85 1.86
ENRC N.V. is owned by ENRC Plc. ENRC Plc.’s shareholders are:
In percent 31 December 2009 31 December 2008 Kazakhmys PLC together with Kazakhmys Eurasia B.V. 26% 26% Mr. P.K. Chodiev 14,59% 14,59% Mr. A.R. Ibragimov 14,59% 14,59% Mr. A.A. Mashkevich 14,59% 14,59% Public shareholders (including employees and directors) 18.58% 18.58% State Property and Privatisation Committee of Ministry of Finance of the Republic of Kazakhstan 11.65% 11.65%
At 31 December 2009 and 2008, the Company’s 5,850,000 common shares and 529,471 preference shares owned by ENRC N.V. were held by ENRC Management KZ LLP under the trust management.
Translated from the Russian original 7
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
1 TheCompanyanditsOperations(Continued)
Subsidiaries
Below are the subsidiaries included into the Company’s consolidated financial statements:
Country of 2009 2008 Name of subsidiary incorporation Activity %of %of ownership ownership Rassvet Recreation and Health Republic of Health and recreation services 100.00 100.00 Centre LLP Kazakhstan Servis LLP Republic of Catering 100.00 100.00 Kazakhstan Gornyak Cultural and Entertainment Republic of Entertainment 100.00 100.00 Centre LLP Kazakhstan Rudnenskaya Heating System LLP Republic of Heating services 100.00 100.00 Kazakhstan TransRudnyAuto LLP Republic of Transportation services 100.00 100.00 Kazakhstan Fortis LLP Republic of Design and exploration activities, 100.00 100.00 Kazakhstan construction and assembly works.
2 Basis of Preparation and Significant Accounting Policies
Basis of preparation. The accounting policies used in preparing these consolidated financial statements are described below and are based on International Financial Reporting Standards (‘IFRS’). These standards are subject to interpretations issued from time to time by the International Financial Reporting Interpretation Committee (‘IFRIC’). These consolidated financial statements have also been prepared under the historical cost convention as modified for the revaluation of certain financial instruments.
The preparation of the financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also necessitates management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3.
The financial statements have been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year ended 31 December 2008 except where new policies have been applied. New accounting policies and pronouncements and the effects of these policies have been outlined in Note 4.
Functional currency and presentation currency. All amounts in these financial statements are presented in thousands of Kazakhstani Tenge ("Tenge"), unless otherwise stated. The functional currency of the Company is Tenge.
Foreign currency transactions. Monetary assets and liabilities held by the Company and denominated in foreign currencies at 31 December 2009, are translated into Kazakhstani Tenge at the official exchange rate of the Kazakhstani Stock Exchange (“KASE”) at that date. Foreign currency transactions are accounted for at the exchange rate of the KASE prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognized in the income statement.
At 31 December 2009, the official rate of exchange used for translating foreign currency balances was US dollar (USD) 1= Tenge 148.46 (31 December 2008: USD 1= Tenge 120.77). Exchange restrictions and currency controls exist relating to converting Tenge into other currencies. Tenge is not freely convertible in most countries outside of the Republic of Kazakhstan.
Accounting for the effects of hyperinflation. The Republic of Kazakhstan has previously experienced relatively high levels of inflation, and was considered to be a hyperinflationary economy as defined by IAS 29 Financial Reporting in Hyperinflationary Economies (“IAS 29”). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date. As the characteristics of the economic environment of the Republic of Kazakhstan indicate that hyperinflation has ceased, effective from 1 January 1999 the Company no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 1998 are treated as the basis for the carrying amounts in these financial statements.
Translated from the Russian original 8
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Consolidated financial statements. Subsidiaries are all companies (including special purpose entities) in which the Company, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Company controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Company (acquisition date), and are de-consolidated from the date that control ceases.
Intercompany transactions, balances and unrealised gains on transactions between subsidiaries are eliminated. Unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. The Company and all of its subsidiaries use uniform accounting policies consistent with the Company’s policies.
Minority interest is that part of the net results and the net assets of a subsidiary, including the fair value adjustments for consolidation purposes, which is attributable to interests which are not owned, directly or indirectly, by the Company. Minority interest forms a separate component of the Company’s equity.
Transactions with minorities. The Company applies a policy of treating transactions with minority interests as transactions with parties external to the Company. Disposals to minority interests result in gains and losses for the Company that are recorded in the income statement. Acquisitions of minority shares result in goodwill, being the difference between consideration paid and fair value of acquired part of the subsidiary's net assets.
Property, plant and equipment. Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment provisions. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of property, plant and equipment at 1 January 2004, the date of the Company’s transition to IFRS, was determined by reference to its depreciated replacement cost at that date (“deemed cost”).
The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the given asset as a whole are depreciated individually, applying depreciation rates reflecting their anticipated useful lives. The cost of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired. Any gain or loss arising is recognized in the income statement when the asset is retired.
Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance costs are charged to the income statement during the financial period in which they are incurred.
Recognized as an item of property, plant and equipment are specialised spare parts and servicing equipment with a significant initial value and a useful life of more than one year. Other spare parts and servicing-related equipment are recognized as inventories and accounted for in the income statement at the moment they are used.
Gains and losses on disposals of property, plant and equipment determined by comparing proceeds with carrying amount are recognized in the income statement.
Mining assets are recorded at cost less accumulated amortisation and less impairment provisions. Expenditure, including evaluation costs, incurred to establish or expand productive capacity, costs to conduct mining-construction and mining-capital works, as well as costs arising from mining preparation works during the development or mine reconstruction phase, are capitalised to mining assets as part of buildings and constructions.
Mining assets are amortised using the units-of-production method based on the estimated economically recoverable reserves to which they relate or the straight line method if the estimated useful life of the individual asset is less than the respective life of mine.
Depreciation. Land is not depreciated. The deemed cost of each item of property, plant and equipment is depreciated over its useful life to residual value. Each item's estimated useful life has due regard to both its own physical life limitations and/or the present assessment of economically recoverable reserves of the mine property at which the item is located.
Translated from the Russian original 9
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Depreciation is charged to the income statement on a straight line basis over the estimated useful life of the individual asset or on a unit of production basis depending on the type of asset. Changes in estimates, which affect unit of production calculations, are accounted for prospectively.
The expected useful lives are as follows:
Useful life (years) Buildings and constructions 10 to 50 Machinery and equipment 5to40 Other equipment and motor vehicles 5 to 20 Mining assets Unit of production basis
The residual value of an asset is the estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Company expects to use the asset until the end of its physical life The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date.
Stripping costs. Stripping (i.e. overburden and other waste removal) costs incurred in the development of mines and open pits before production commences are capitalised as part of the cost of constructing the mines and open pits and subsequently amortised using unit of production method over the lives of the mines or open pits. The stripping costs incurred subsequently, during the production stage of its operations are included within the cost of inventory.
Impairment. The carrying amount of property, plant and equipment and all other non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not be recoverable.
When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ”value in use” (being the net present value of expected future cash flows of the relevant cash generating unit) and ”fair value less costs to sell” (the amount obtainable from the sale of an asset or cash generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal). Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Company could receive for the cash generating unit in an arm’s length transaction. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The estimates used for impairment reviews are based on detailed mine plans and operating budgets, modified as appropriate to meet the requirements of IAS 36 Impairment of Assets. Future cash flows are based on:
– estimates of the quantities of the reserves for which there is a high degree of confidence of economic extraction; – future production levels; – future commodity prices (assuming the current market prices will revert to the Company’s assessment of the long term average price, generally over a period of three to five years); and – future cash costs of production, capital expenditure, close down, restoration and environmental clean up.
If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the income statement so as to reduce the carrying amount in the statement of financial position to its recoverable amount. A previously recognized impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognized in the income statement and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized in prior years.
Non-current assets classified as held for sale. Non-current assets are classified in the consolidated statement of financial position as ‘non-current assets held for sale’ if their carrying amount will be recovered principally through a sale transaction within twelve months after the reporting date. Assets are reclassified when all of the following conditions are met: (a) the assets are available for immediate sale in their present condition; (b) the Company’s management approved and initiated an active programme to locate a buyer; (c) the assets are actively marketed for a sale at a reasonable price; (d) the sale is expected within one year; and (e) it is unlikely that significant changes to the plan to sell will be made or that the plan will be withdrawn. Non-current assets classified as held for sale in the current period’s consolidated statement of financial position are not reclassified or re-presented in the comparative consolidated statement of financial position to reflect the classification at the end of the current period.
Translated from the Russian original 10
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Non-current assets are assets that include amounts that are not expected to be recovered or collected within twelve months after the reporting date. If reclassification is required, both the current and non-current portions of an asset are reclassified.
Non-current assets held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Non-current assets held for sale are not depreciated.
Classification of financial assets. The Company classifies its financial assets in the following categories: loans and receivables, held-to-maturity investments and available-for-sale investments. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
a) Loans and receivables
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, except for those the Company intends to sell in the nearest future.
Loans receivable are recognized initially at cost which is the fair value of the proceeds contributed/received. In subsequent periods, loans and receivable are stated at amortised cost using the effective yield method.
Where a loan is provided at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss.
The origination gain or loss is recorded in the income statement within finance income/costs except for loans to the Company’s employees. Subsequently, the carrying amount of the loans is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded in finance income/costs using the effective interest method.
When the loans are issued to the Company's employees, the difference between the fair value of the loan issued and net proceeds at origination is recognized as prepayment of employee benefits. Subsequently, the prepayment is amortized through profit/loss during the loan period. Amortization charge on prepayment is recognized at the relevant expense accounts depending on the employee’s employment place.
Loans and receivables are included in current assets, except for maturities greater than 12 months after the reporting date. These are classified as non-current assets.
An impairment provision is established when there is an objective evidence that the Company will not be able to collect all amounts due according to the original terms (see accounting policy for Trade and Other Receivables). The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the original effective interest rate. The amount of the provision is recognised in the income statement.
b) Held-to-maturity investments
Held-to-maturity investments are non-derivative financial assets that are intended by management to be kept until they mature. They are included in current assets as they mature within twelve months after the reporting date. The Company does not have any held-to-maturity investments.
c) Available-for-sale investments Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. Available-for-sale investments are initially carried at fair value plus transaction costs and subsequently carried at fair value. Interest income on available for sale debt securities is calculated using the effective interest method and recognised in profit or loss. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Company’s right to receive payment is established. All other elements of changes in the fair value are deferred in other comprehensive income until the investment is derecognised or impaired at which time the cumulative gain or loss is removed from equity to profit or loss.
Translated from the Russian original 11
F-79 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is removed from other comprehensive income and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through current period’s profit or loss. When it is not possible to obtain current market value for available for sale investments due to the nature of the local financial market and management cannot estimate fair value of those investments with adequate reliability investments available for sale are recognised in the statement of financial position at actual purchase cost. Available-for-sale investments are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date (Note 8). Regular purchases and sales of financial instruments are recognised on the settlement date, which is the date that an asset is delivered to or by the Company, with the change in value between the trade date and settlement date not recognised for assets carried at cost or amortised cost and recognised in other comprehensive income for assets classified as available for sale. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. The Company derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the Company has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Company has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.
Derivative financial instruments and hedging activities. Derivatives are initially recognized at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognizing the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either: a) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); b) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or c) hedges of a net investment in a foreign operation (net investment hedge). The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The fair values of various derivative instruments used for hedging purposes and movements on the hedging reserve in other comprehensive income are disclosed in Note 16.
The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than twelve months and as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Trading derivatives are classified as current asset or liability.
During the reporting period, the Company held only one derivative financial instrument designated as cash flow hedge which at 31 December 2009 was closed due to expiration of hedging instrument.
a) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income. The gain or loss relating to the ineffective portion is recognized immediately in the income statement within “other operating gains/(losses)”. Amounts accumulated in other comprehensive income are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place).
When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in other comprehensive income at that time remains in other comprehensive income and is recognized when the forecast transaction is ultimately recognized in the income statement. Translated from the Russian original 12
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
b) Derivatives measure and accounted for at fair value through profit or loss
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any these derivative instruments are recognized immediately in the income statement within 'other operating gains/(losses) – net'.
Inventories. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on a weighted average basis. Iron ore is recognized as raw materials when extracted, and is valued at the average cost of extraction. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.
Trade and other receivables. Trade and other receivables are initially recognised at fair value. Trade and other receivables are subsequently carried at amortised cost using the effective interest method less impairment provision. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables.
Presented below are the indicators of the trade receivables impairment: - any portion of the receivable is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Company obtains; - the counterparty considers bankruptcy or other financial reorganisation; - there is an adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; - the value of collateral, if any, significantly decreases as a result of deteriorating market conditions.
The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Carrying amount of an asset is decreased against the provisions account and the loss amount is recognised in the income statement within general and administrative expenses. Uncollectible trade receivables are written off against the trade receivables provisions. The amount of recovered loss is recognised in the income statement within other income.
Prepayments. Prepayment is recognised in the financial statements at cost less provision for impairment. Prepayments paid to suppliers for future supplies of property, plant and equipment are recognised within other non- current assets. Prepayments for future supplies of inventories are recognised within other current assets. Foreign currency denominated prepayments for goods and services represent the nonmonetary items, and accordingly, are stated at the exchange rate at the prepayment date, and are not subject to restatement at the reporting date. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly, and a corresponding impairment loss is recognised in the statement of comprehensive income.
Cash and cash equivalents. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments. Cash equivalents are carried at amortised cost using the effective interest method. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets, while balances restricted for more than three months but less than twelve months after the reporting date are included in other current assets. Restricted balances are excluded from cash and cash equivalents for the purpose of cash flow statement.
Term deposits. Term deposits include deposits with the maturity of more than three months. These deposits are classified as other current assets since management of the Company has an intention to hold the deposits for more than three months and does not intend to use the for short term cash needs. Term deposits are carried at amortized cost using the effective interest method.
Share capital. Ordinary shares are classified as equity. Preference shares are compound financial instruments that contain both a liability and an equity component.
The liability is initially recognized at its fair value by applying the relevant effective interest rate to the amount of mandatory annual dividends using a net present value formula for the period of the life of the mines. The life of mines is used rather than perpetuity since the Company will not generate cash flows or profits beyond the life of the mines. Subsequently, the liability is measured at amortised cost. Effects of changes in cash flow estimates on carrying amounts are recognized in the income statement. At initial recognition, the equity component is the residual, i.e. it is the proceeds received from the issuance of the preference shares less the fair value of the liability. The equity component is not subsequently re-measured.
Translated from the Russian original 13
F-81 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Dividends. Dividends, except for the mandatory annual dividends on preference shares, are recognized as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Mandatory annual dividends on preference shares are recognized as finance costs in the income statement. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the financial statements are authorised for issue.
Provision for mining assets and waste polygons retirement obligations. Mining assets and waste polygons retirement obligations are recognized when it is probable to incur the costs and those costs can be measured reliably.
Mining assets retirement costs include the landfill site restoration and closure (dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas).
Waste polygons retirement costs include the landfill site restoration and closure of waste polygons (dismantling and demolition of polygon infrastructure, the removal of residual materials and discharge monitoring).
Estimated landfill site restoration and remediation costs are provided for and incurred in the cost of property, plant and equipment in the accounting period when the obligation arising from the related disturbance occurs during the mine development phase or when the related damage occurs, based on the net present value of estimated future costs.
Provisions for mining assets and waste polygons retirement obligations do not include any additional obligations which are expected to arise from future disturbance. The costs are estimated on the basis of a closure and restoration plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, e.g. updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals.
Although the ultimate cost to be incurred is uncertain, the Company estimates their costs based on feasibility and engineering studies using current restoration standards and techniques for conducting restoration and remediation works.
The amortisation or ”unwinding” of the discount applied in establishing the net present value of provisions is charged to the income statement in each accounting period. The amortisation of the discount is shown as a financing cost, rather than as an operating cost.
Other movements in the provisions for mining assets and waste polygons retirement obligations, resulting from new disturbance as a result of mine development, updated cost estimates, changes to the estimated lives of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the lives of the assets to which they relate using the depreciation methods applied to those assets. Movements in the provisions for asset retirement obligations that relate to disturbance caused by the production phase are charged in the income statement.
Where remediation works are conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the estimated outstanding continuous remediation work at each reporting date and the cost is charged to the income statement.
Operating leases. Where the Company is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Company, the total lease payments, including those on expected termination, are charged to the income statement on a straight-line basis over the period of the lease.
When assets are leased out under an operating lease, the lease payments receivable are recognized as rental income on a straight-line basis over the lease term.
Borrowings. Borrowings are initially recorded at fair value including transaction costs and subsequently measured at amortised cost using the effective interest method.
Where a loan is obtained at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans.
The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss. The origination gain or loss is recorded in the income statement within finance income/costs. Subsequently, the carrying amount of the borrowings is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded as borrowing costs using the effective interest method.
Translated from the Russian original 14
F-82 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Borrowing costs that are directly attributable to the construction of an asset that necessarily takes a substantial period of time to get ready for its intended use form part of the cost of that asset. Exchange differences on foreign currency denominated borrowings to finance the construction of qualifying assets are capitalised at the extent they compensate the decrease of interest expenses. All other borrowing costs are expensed.
Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date.
Financial guarantees. Financial guarantees are contracts that require the Company to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognized at their fair value, which is normally evidenced by the amount of fees received. Financial guarantees are recognized when premium is paid or in the case of premium-free guarantees (intra group guarantees) when the debtor receives the money from the financing entity. When the Company issues a premium-free guarantee or a guarantee at a premium different from market premium, fair value is determined using valuation techniques (e.g. market prices of similar instruments, interest rate differentials, etc). Losses at initial recognition of financial guarantee liability are recognized in the income statement within other operating expenses. Financial guarantee liabilities are amortised on a straight line basis over the life of the guaranties with respective income presented within other operating income. At each reporting date, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the obligation at the reporting date.
Trade and other payables. Trade and other payables are accrued when the counterparty performed its obligations under the contract. The Company recognizes trade payables at fair value. Subsequently trade payables are carried at amortised cost using the effective interest method.
Value added tax (“VAT”). Value-added tax related to sales is payable to the tax authorities when goods are shipped or services are rendered. Input VAT can be offset against output VAT upon the receipt of a tax invoice from a supplier. Tax legislation allows the settlement of VAT on a net basis. Accordingly, VAT related to sales and purchases unsettled at the reporting date is recognised in the statement of financial position on a net basis.
Income taxes. Income taxes have been provided for in the financial statements in accordance with Kazakhstani legislation enacted by the reporting date. The income tax charge comprises current tax (corporate income tax and excess profit tax) and deferred tax, and is recognised in the statement of comprehensive income, except for where it relates to transactions that are also recognised, in the same or a different period directly in equity or other comprehensive income Current tax is the amount expected to be paid to or recovered from the state budget in respect of taxable profits or losses for the current and prior periods. Taxable income or losses are based on estimates where the financial statements are authorised prior to the filling of the relevant tax return. Taxes, other than on income, are recorded within operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry-forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. In accordance with the initial recognition exemption, the deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. The deferred tax assets and liabilities are settled within each separate subsidiary included in the Company’s consolidated financial statements. Deferred tax balances are measured at corporate income and excess profit tax rates enacted or substantively enacted at the reporting date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred excess profit tax is calculated with respect to temporary differences in respect of assets and liabilities allocated to contracts for subsurface use at the expected rate of excess profits tax to be paid under the contract. Deferred tax assets for deductible temporary differences and tax loss carry-forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.
Excess profit tax. In accordance with tax legislation effective up to 31 December 2008, excess profit tax was payable under subsurface use contracts where the cumulative internal rate of return during the current year exceeded 20 percent. The taxable base for excess profit tax (EPT) is taxable income used for the calculation of the corporate income tax less the corporate income tax itself. Whereas, the EPT rate depends on the cumulative internal rate of return in respect to each subsurface use contract.
Translated from the Russian original 15
F-83 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
In accordance with the new Tax Code effective from 1 January 2009, the excess profit tax calculation method has changed. Internal rate of return indicator is replaced by the ratio of the annual income and the annual allowed deductions under a contract. The allowed deductions can include the capital expenditures. Contractual income is determined based on the rules of separate accounting established by the Tax Accounting Policies of the Company. Taxable basis for the excess profit tax is the taxable income determined for the corporate income tax purposes reduced by the amount of corporate income tax as well as amount of 25 percent of allowed deductions including the capital expenditures. Excess profit tax should be paid in the years when the ratio of the annual income and the annual deductions exceeds 1.25. Liabilities for excess profit tax are recorded in accordance with the Company's accounting policies for current and deferred tax and based on management's understanding of the provisions of the subsurface use contracts and tax regulations.
Revenue recognition. Revenues from sales of goods are recognized at the point of transfer of the risks and rewards of ownership of the goods, normally when the goods are shipped. If the Company agrees to transport goods to a specified location, revenue is recognized when the goods are passed to the customer at the destination point.
The revenue from sales of products is subject to adjustment based on an inspection of the product by the customer. In such cases, revenue is initially recognized on a provisional basis using the Company's best estimate of quality and quantity of the product. Any subsequent adjustments to the initial estimate of the Company in respect of quality and quantity of the product are recorded in revenue once they have been determined. Sales of services are recognized in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts.
Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or service given up.
Exploration costs. Exploration costs are expensed as incurred up to the point when the evaluation demonstrates that there are commercially viable reserves present and there are probable future economic benefits from the continued development and production of the resource. All subsequent costs are capitalised up to the point when commercial production commences.
Payroll expense and related contributions. Wages, salaries, social tax, contributions to social insurance fund, paid annual vacations and sick leaves, bonuses, and non-monetary benefits are accrued as the associated works are executed by the Company’s employees.
Employee benefits. The Company provides the long term employee benefits to employees before, on and after retirement, in accordance with a Collective Labour Agreement. The agreement provides for one-off retirement payments, financial aid for employees’ disability, significant anniversaries and funeral aid to the Company’s employees. The entitlement to some benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. Such benefits are valued consistent with an unfunded defined benefit plan in accordance with IAS 19 Employee Benefits.
The expected costs of the benefits associated with one-off retirement payments are accrued over the period of employment using the same accounting methodology as used for defined benefit post-employment plans. For defined benefit post-employment plans, the difference between the fair value of the plan assets (if any) and the present value of the defined liabilities obligations is recognised as an asset or liability on the statement of financial position. Actuarial gains and losses arising in the year are taken to the income statement. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred. Other movements in the net surplus or deficit are recognized in the income statement, including current service cost, any past service cost and the effect of any curtailments or settlements.
The most significant assumptions used in accounting for given long-term benefits are the discount rate and the mortality assumptions. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the income statement as interest cost. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities.
Employee benefits other than one-off retirement payments are considered as other long-term employee benefits. The entitlement to these benefits is usually conditional on the completion of a minimum service period. The expected cost of these benefits is accrued over the period of employment using the same accounting methodology as used for the defined benefit plan.
These obligations are valued annually by the independent qualified actuaries. Translated from the Russian original 16
F-84 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Pension payments except for described above in employee benefits. The Company does not incur any expenses in relation to pension payments for its employees. In accordance with the legal requirements of the Republic of Kazakhstan, the Company withholds pension contributions from employees’ salary and transfers them into the employee’s designated pension fund. Upon retirement of employees, all pension payments are administered by such pension funds.
Share-based compensation. The Group issues the equity settled share-based payments to the certain employees measured at fair value and recognized as an expense in the income statement, with a corresponding increase in equity in the case of equity-settled payments, and liabilities in the case of cash-settled awards. The fair values of equity-settled payments are measured at the dates of grant using Monte-Carlo evaluation model. The fair value is recognized over the period during which employees become unconditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to the employees leaving the Group prior to vesting or due to performance target not being made. The total amount recognized in the income statement as an expense is adjusted to reflect the actual number of awards that vest. If the Group cancels the vesting of the share instruments or makes the calculations for them during the period of vesting, the Group considers it as the acceleration of a vesting process and immediately recognises the amount which in other cases would be considered as the services received during the remaining vesting period. Any payments made to the employees in case of cancellation of share-based payments or calculation of them are stated as reverse purchase of share in the equity unless such payment exceeds the fair value of share based payments evaluated at the date of reserve purchase. Anysuchexcessisstatedasexpense.
Finance income and costs. Finance income and costs comprise interest expense on borrowings and loans payable, deposits, loans given to employees by the Company, foreign exchange gains/losses on borrowings, interest income/expense from unwinding of discount on provision for asset retirement obligations and other financial assets and liabilities. Interest income/interest expense is recognized using the effective yield on the asset/liability.
Transactions with state controlled entities. Transactions with state controlled entities do not include those undertaken in the ordinary course of business with terms consistently applied to all public and private entities and where there is no choice of supplier such as electricity, telecommunications, taxes, etc.
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also make certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognized in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial period include:
Contracts on subsurface use. The major contracts of the Company for subsurface use for the extraction of iron ore, dolomite and limestone expire in 2017. The Company’s management expects that these contracts will be extended at nominal cost until the end of the mine life which is expected to be in 2040. In these financial statements the depreciation charge and the carrying amounts of property, plant and equipment and asset retirement obligation have been recorded on the assumption that the subsurface use contracts will be extended until the end of the mine life. The Company believes that it is entitled to prolong the contracts under the current contractual terms and the subsurface use legislation, and in 2006 the Government of the Republic of Kazakhstan confirmed this by issuance of the explanatory letter addressed to the Group. The assumption that the Company will be able to prolong the contracts is also supported by the facts that historically the Company was in compliance with the terms of all its subsoil use contracts, including timely completion of minimum working programs. If the contracts are not renewed in 2017, the carrying amount of property, plant and equipment that would have to be derecognized at the expiry date of the subsurface use contract will be Tenge 39,740,830 thousand (2008: Tenge 39,835,764 thousand).
Useful life of mining assets and mineral reserves estimates. The mining assets, classified within property, plant and equipment, are depreciated over the respective life of the mine using the unit of production (UOP) method based on proved and probable mineral reserves over the respective life of mine or the straight line method if the estimated useful life of the individual asset is less than the respective life of mine. When determining mineral reserves, assumptions that were valid at the time of estimation may change when new information becomes available. Any changes could affect prospective depreciation rates and asset carrying values.
The calculation of the UOP rate of depreciation could be impacted to the extent that actual production in future is different from current forecast production based on proved and probable mineral reserves, which would generally arise as a result of significant changes in any of the factors or assumptions used in estimating mineral reserves.
Translated from the Russian original 17
F-85 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
These factors could include: changes to proved and probable mineral 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 mineral 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 mineral reserves.
The majority of other property, plant and equipment are depreciated on a straight line basis over their useful economic lives. Management reviews the appropriateness of assets useful economic lives at least annually; any changes could affect prospective depreciation rates and asset carrying values. At 31 December 2009 the carrying amount of mining assets included within buildings and constructions was Tenge 18,916,178 thousand (2008: Tenge 18,958,440 thousand).
Provision for mining assets and waste polygons retirement obligations. In accordance with the environmental legislation and the contracts on subsurface use, the Company has a legal obligation to remediate damage caused to the environment from its operations and to decommission its mining assets and waste polygons and restore a landfill site after its closure. Provision is made, based on net present values, for site restoration and rehabilitation costs as soon as the obligation arises from past mining activities. The provision for mining assets and waste polygons retirement obligation is estimated based on the Company’s interpretation of current environmental legislation in the Republic of Kazakhstan and the Company’s related program for liquidation of subsurface use consequences on the contracted territory and other operations supported by the feasibility study and engineering researches in accordance with the existing rehabilitation standards and techniques. Provisions for retirement obligations are subject to potential changes in environmental regulatory requirements and the interpretation of the legislation. Provisions for mining assets and waste polygons retirement obligations are recognized when there is a certainty of incurring those and when it is possible to measure the amounts reliably. As at 31 December 2009 the carrying amount of the provision for mining assets retirement obligations was Tenge 2,971,376 thousand (2008: Tenge 1,617,868 thousand). As at 31 December 2009 the carrying amount of waste polygons retirement obligations was Tenge 472,942 thousand (2008: Tenge 184,225 thousand).
Impairment of assets. The Company reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that these assets are impaired. Based on the analysis of the internal and external factors, the Company’s management did not identify impairment indicators at the reporting date.
Land usage rights. The Company has a right to use land plots where all its divisions and mines are located under the long-term rent agreement with the Rudnensk Town Branch of Kostanai Region Land Resources Management Committee until 1 January 2015. These agreements have been renewed at a nominal cost in the past, and the Company’s management believes that the rent agreements will be prolonged until the end of the mine life which is expectedtobein2040.
Tax and transfer pricing legislation. Kazakh tax and transfer pricing legislation is subject to varying interpretations (Note 29).
Related party transactions. In the normal course of business the Company enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties (Note 6).
Fair value of financial guarantees. The fair values of premium-free financial guarantees issued by the Company are determined by using valuation techniques. The Company uses its judgement to select a variety of methods and make assumptions that are mainly based on market conditions existing at reporting date and determine fair value of financial guarantees issued by applying market prices of similar instruments (e.g. financial guarantees issued by commercial banks).
Fair value of hedging instruments. The fair value of financial instruments that are not traded in an active market (for example, dollar-for-Tenge foreign exchange forward contracts) is determined based on data provided by the counterparty. The Company uses its judgement to select a variety of methods and verify assumptions that are mainly based on market conditions existing at each reporting date, as well as obtains fair value measurements from other parties. In June 2007 the Company entered into a foreign forward exchange contract to sell US Dollars for Tenge for the next two and a half years (Note 16) which qualified as a cash flow hedge. During the year, the management made its estimates in respect of its position under the contract based on the market Tenge/US Dollar forward exchange rates available at each valuation date. Hedging instruments expired in December 2009.
Translated from the Russian original 18
F-86 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Investments carried at cost. Management could not reliably estimate fair value of its available-for-sale investments in shares of ENRC Business and Technology Services LLP, ENRC Credit and International Academy of Business LLP. The investments are carried at cost (Note 8). The investees have not published recent financial information about its operations, its shares are not quoted and recent trade prices are not publicly accessible. Management estimates that fair value of these investments approximates its cost.
Estimate of deferred income tax. Estimate of deferred income tax for the reporting date depends on the effective rate of income tax applicable for the periods when deductible/taxable temporary differences are reversed/settled. Since the officially established corporate income tax rate will change in the subsequent periods, and the excess profit tax rate which will be applied in future depends on rate of return on subsurface use operations, the assessment of effective rate of deferred income tax for the reporting date requires the judgment on: estimation of future taxable income and related deductions on subsurface use operations; expected mechanism for amortization of capital expenditures; expected useful life of property, plant and equipment and other assumptions which affect the estimations of amounts and periods when deductible/taxable temporary differences existing at the reporting date are reversed/settled.
During 2009 the Company incurred the loss on hedging transactions. According to the Company's management, such losses can be carried for deductions against the income from non-contractual activities during the next 10 years in accordance with the provisions of the current tax legislation. Management believes that based on the experience and estimations of future non-contractual activities, the Company will receive sufficient income to cover the loss incurred on hedging transactions for the purposes of reduction of future income tax. Accordingly, the Company’s management believes that the Company has reasonable basis for recognition of deferred income tax asset at 31 December 2009 in the amount of Tenge 1,128,225 thousand related to foreign currency hedge lossess.
Translated from the Russian original 19
F-87 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
4 New Accounting Pronouncements
(a) Standards, amendments and interpretations effective from 1 January 2009:
IFRS 7 (Amendment) ‘Financial Instruments: Disclosures’. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity is required to disclose an analysis of financial instruments using fair value measurement hierarchy. These changes in the accounting policies lead only to the additional disclosures, and do not affect the financial results.
IFRS 8, Operating Segments (new). IFRS 8 replaces IAS 14 and brings the reporting segments into line with the requirements of SFAS USA 131 Disclosure of Entity Segment and Related Information. The new standard requires to apply “the management approach”, whereby the segment information is presented on the basis applied for internal reporting. The new IFRS will not lead to the additional disclosures for the Company, since the Company does not place its debt or equity instruments at the open market.
IAS 1, Presentation of Financial Statements (revised). The revised standard prohibits to present the items of income and expenses (i.e. non-owner changes in equity) in the statement of changes in equity and requires to present such items of income and expenses separately from changes in equity in the statement of comprehensive income. As a result, the Company presents all changes in owners’ equity in the statement of changes in equity whereas the non-owner changes in equity are presented in the statement of comprehensive income. For comparison purposes, the information for the prior periods was presented in accordance with the requirements of revised standard. Since this change in the accounting policies affect the presentation aspects, it does not affect the financial results.
IFRS 2 (Amendment), Share-based Payment - Vesting Conditions and Cancellations. The revised standard relates to vesting conditions and cancellations. The amendment clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features should be included into calculations of fair value at the share-based payment agreement date related to the transactions with the employees and other entities providing the same services; such features should not affect the number of share-based payments for which vesting is expected, and on evaluation after share-based payment agreement date. All cancellations made whether by the entity or by other parties, should receive the same accounting treatment. The Company adopted the amended IFRS 2 from 1 January 2009. This amendment does not have the significant effect on the Company’s financial statements.
IAS 23 (Amendment), Borrowing Costs. This amendment requires that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time to get ready for its intended use or sale form part of the cost of that asset. The option of immediately recognising as an expense borrowing costs is removed from this standard. This amendment will not impact the Company’s financial statements as the current Company’s policy is to capitalise interest costs on borrowings to finance the construction of property, plant and equipment during the period of time that is required to complete and prepare the asset for its intended use.
Puttable Financial Instruments and Obligations Arising on Liquidation—IAS 32 and IAS 1 Presentation of Financial Statements (Amendment). The amendment requires classification as equity of puttable financial instruments and instruments binding the company with the obligation to present to the other party the proportional share in the net assets of company only upon liquidation given that such financial instruments meet the certain features and the certain terms. This amendment does not have the significant impact on the Company’s financial statements.
IAS 23 (Amendment), 'Borrowing costs. The amendment is part of the IASB’s annual improvements project published in May 2008. The definition of borrowing costs has been amended so that interest expense is calculated using the effective interest method defined in IAS 39 'Financial instruments: Recognition and measurement’. This eliminates the inconsistency of terms between IAS 39 and IAS 23. This amendment does not have the significant impact on the Company’s financial statements.
IAS 28 (Amendment), 'Investments in associates' (and consequential amendments to IAS 32, 'Financial Instruments: Presentation') and IFRS 7, 'Financial instruments: Disclosures'. The amendment is part of the IASB’s annual improvements project published in May 2008. An investment in associate is treated as a single asset for the purposes of impairment testing and any impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. This new accounting pronouncement does not have the impact on the Company’s financial statements.
Translated from the Russian original 20
F-88 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
4 New Accounting Pronouncements (Continued)
IAS 36 (Amendment), 'Impairment of assets'. The amendment is part of the IASB’s annual improvements project published in May 2008. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Company applies the IAS 36 (amendment) and provides the required disclosure where applicable for impairment tests.
IAS 38 (Amendment), 'Intangible assets'. The amendment is part of the IASB’s annual improvements project published in May 2008. An amendment clarifies that prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. This amendment does not have the significant impact on the Company’s financial statements.
IAS 19 (Amendment), Employee benefits. The amendment is part of the IASB’s annual improvements project published in May 2008. - The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. - The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. - The distinction between short-term and long-term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. - IAS 37, 'Provisions, contingent liabilities and contingent assets', requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent.
These amendments do not have the significant impact on the Company’s financial statements.
IAS 39 (Amendment), 'Financial instruments: Recognition and measurement'. The amendment is part of the IASB’s annual improvements project published in May 2008. - This amendment clarifies that it is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge. - The definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading is also amended. This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit-taking is included in such a portfolio on initial recognition. - The current guidance on designating and documenting hedges states that a hedging instrument needs to involve a party external to the reporting entity and cites a segment as an example of a reporting entity. This means that in order for hedge accounting to be applied at segment level, the requirements for hedge accounting are currently required to be met by the applicable segment. The amendment removes the segment example so that the guidance is consistent with IFRS 8, ‘Operating segments’ which requires disclosure for segments to be based on information reported to the chief operating decision maker. - When remeasuring the carrying amount of a debt instrument on cessation of fair value hedge accounting, the amendment clarifies that a revised effective interest rate (calculated at the date fair value hedge accounting ceases) are used.
These amendments do not have the significant impact on the Company’s financial statements.
IAS 1 (Amendment), 'Presentation of financial statements'. The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that some rather than all financial assets and liabilities classified as held for trading in accordance with IAS 39, 'Financial instruments: Recognition and measurement’ are examples of current assets and liabilities respectively. This amendment does not have the impact on the Company’s financial statements.
IFRIC 15, Agreements for the Construction of Real Estate. The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. This amendment does not have the impact on the Company’s financial statements.
Translated from the Russian original 21
F-89 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
4 New Accounting Pronouncements (Continued)
There are a number of minor amendments to IFRS 7, 'Financial instruments: Disclosures', IAS 8, 'Accounting policies, changes in accounting estimates and errors', IAS 10, 'Events after the reporting period', IAS 18, 'Revenue' and IAS 34, 'Interim financial reporting', which are part of the IASB’s annual improvements project published in May 2008 These amendments are unlikely to have an impact on the group’s accounts and have therefore not been analysed in detail.
(b) Standards, amendments and interpretations effective in 2009, but not relevant:
IFRS 1 (Amendment) First time adoption of IFRS and IAS 27 Consolidated and Separate Financial Statements. The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removes the definition of the cost method from IAS 27 and replaces it with a requirement to present dividends as income in the separate financial statements of the investor. These amendments will not have any effect on the Company’s financial statements, since the Company completed the transition to the IFRS in 2005.
IAS 29 (Amendment), Financial reporting in hyperinflationary economies. The guidance has been amended to reflect the fact that a number of assets and liabilities are measured at fair value rather than historical cost. The amendment will not have an impact on the Company’s operations, as the Company does not operate in hyperinflationary economies.
IAS 31 (Amendment), Interests in joint ventures (effective for annul periods beginning on 1 January 2009). Where an investment in joint venture is accounted for in accordance with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32, ‘Financial instruments: Presentation’ and IFRS 7 ‘Financial instruments: Disclosures’. The amendment will not have an impact on the Company’s operations as there are no interests held in joint ventures.
IAS 40 (Amendment), Investment property. Where the fair value model is applied, such property is, therefore, measured at fair value. However, where fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably measurable.
The amendment will not have an impact on the Company’s operations, as there is no investment property held by the Company.
IAS 41 (Amendment), Agriculture. It requires the use of a market-based discount rate where fair value calculations are based on discounted cash flows and the removal of the prohibition on taking into account biological transformation when calculating fair value. The amendment will not have an impact on the Company’s operations as no agricultural activities are undertaken.
IAS 20 (Amendment), Accounting for government grants and disclosure of government assistance. The benefit of a below-market rate government loan is measured in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. Income from government loans is measured as at loan origination as difference between the proceeds and the cost stated in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. The amendment will not have an impact on the Company’s operations as there are no loans received or other grants from the government.
(c) Standards, amendments and interpretations to existing standards effective from and after 1 January 2010 and have not been early adopted by the Company:
IAS 27 (Revised), Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in profit or loss. The Group/Company will apply the revised IAS 27 from 1 January 2010.
IFRS 3 (Revised), Business Combinations (effective for annual periods beginning on 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the income statement. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Company will apply IFRS 3 (Revised) from 1 January 2010. It is expected that amendment will not have the significant impact on the financial statements.
Translated from the Russian original 22
F-90 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
4 New Accounting Pronouncements (Continued)
IAS 38 (Amendment), 'Intangible assets'. The amendment is part of the IASB’s annual improvements project published in April 2009. The amendment represents the explanation and guidance on measurement of market value of intangible asset acquired as a result of business combination and allows to group the intangible assets into one asset, if all assets have the same useful lives. The Company will apply these amendments from adoption of amendments to IFRS 3. The amendment does not have the significant impact on the Company’s financial statements.
IFRS 5 (Amendment), 'Non-current assets held for sale and discontinued operations' (effective for the annual periods beginning on 1 July 2009). The amendment represents the explanation that IFRS 5 establishes the disclosures required on non-current assets (or held for sale groups) classified as held for sale or discontinued operations. Additionally, it explains that general requirement of IAS 1 will continue to apply. The Company will apply these amendments from 1 January 2010. It is expected that amendment will not have the significant impact on the financial statements.
IFRS 5 (Amendment), Non-current assets held for sale and discontinued operations (and the subsequent amendments to IAS 1 First Adoption of IFRS (effective from 1 July 2009). This amendment is developed as a part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that all of a subsidiary's assets and liabilities are classified as held for sale, if a partial disposal sale plan results in loss of control, and relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. The Company will apply the revised IFRS 5 prospectively to all sales of subsidiaries from 1 January 2010.
IAS 1 (Amendment) ‘Presentation of financial statements. The amendment represents the explanation that the potential settlement of a liability through issue of shares does not relate to its classification as long-term or current. The amendment allows to classify the liability as long-term (given that a legal entity has unconditional right to defer the settlement of liability through transfer of cash or other assets for the period at least 12 months after the end of the reporting period), regardless that a legal entity's counterparty can demand at any time the share-based settlement. The Company will apply the amendments to IFRS 1 from 1 January 2010. It is expected that the amendment will not have any significant impact on the Company’s financial statements.
IFRS 2 (Amendments) ‘Share based payments’. The amendments to the standard were developed to explain how a subsidiary with the group should maintain the accounting for some share-based payments in its financial statements. Additionally, the amendments include the provisions envisaged in IFRIC 8 ‘Scope of IFRS 2’ and IFRIC 11 ‘Group and treasury share transactions’. For this reason, the above IFRICs are cancelled.
IFRS 9 ‘Financial instruments’ (new standard). The new standard proposes the easier approach to the accounting for the financial instruments thereby improving the investors and other users’ understating of the financial statements. The standard envisages the only approach to the determination whether the financial asset is measured at fair value or amortized cost unlike the several rules envisaged by IFRS 39. The new standard also envisages the only approach to accounting for impairment unlike the several methods envisaged in the previous version of this standard. This standard will come into effect from 1 January 2013. The Company is at the stage of assessment of the new standard effect on its financial statements.
(d) Standards, amendments and interpretations to existing standards, published and obligatory to the reporting periods of the Company, beginning on or after 1 January 2010 or later periods but not relevant to the Company’s operations:
IFRIC 18, ‘Transfers of Assets from Customers’ (effective from 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. This interpretation will not have any impact on the Company’s operations since to date the Company has not been engaged in such transactions.
IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. This interpretation will not have any effect on the Company’s operations, since to date the Company does not distribute non-cash assets to its owners.
Translated from the Russian original 23
F-91 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
5EmployeeInformation
The average number of employees (including executive directors) employed by the Company during the year was:
2009 2008
Mining 5,045 5,123 Transport 4,003 5,154 Processing of iron ore 3,052 3,118 Repair and maintenance 2,979 2,708 Administration, social sphere and other 979 1,295 Heat and power generation 847 821 Construction 746 759
Total 17,651 18,978
Total staff costs (including executive directors) for the Company were:
In thousands of Kazakhstani Tenge 2009 2008
Wages and salaries 12,963,959 12,030,835 Post-employment and other long-term benefits (Note 19) (705,785) 48,009 Share-based compensation expense 39,284 12,350
Total staff costs 12,297,458 12,091,194
Presented below is the key management compensation for the year:
In thousands of Kazakhstani Tenge 2009 2008
Salaries and short-term employee benefits 696,307 415,932 Post-employment benefits - 5,063 Share-based compensation expense 39,284 12,350
Total key management compensation 735,591 433,345
Translated from the Russian original 24
F-92 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
6 Balances and Transactions with Related Parties
For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Company’s ultimate shareholders are disclosed in Note 1. Transactions with related parties do not disclose transactions with state owned entities which took place in the ordinary course of business with terms consistently applied to all public and private entities and where there is no choice of supplier such as electricity transmission services, telecommunications etc.
The nature of the related party relationships for those related parties with whom the Company entered into significant transactions or had significant balances outstanding at 31 December 2009 and 2008 are detailed below.
At 31 December 2009, the outstanding balances with related parties were as follows: Companies Shareholders Key under management common personnel In thousands of Kazakhstani Tenge Note control Assets Trade receivables 11 26,675,056 - - Prepayments for inventories 11 8,985 - - Prepaid insurance expenses 11 203,469 - - Accrued interest receivable 11 3,752 - - Other 11 10,262 - Long-term receivables 8 253,549 - - Long-term receivables impairment provision 8 (253,549) - - Available for sale investments 8 13,749,539 - - Restricted cash 8 1,639,858 - -
Liabilities Dividends payable 20 - 10,349,519 - Financial guarantee issued 29 46,413 - - Trade payables 433,920 - - Promissory notes issued 165,329 - - Advances received 21,476 - - Other payables 20 4,014,000 - - Equipment purchased on instalment: (contractual interest rate: 0 % p.a.; effective interest rate: 14.2-15.1% p.a.) 20 36,690 - - Payables to key management personnel 5 - - 226,468
Translated from the Russian original 25
F-93 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
At 31 December 2008, the outstanding balances with related parties were as follows:
Companies Shareholders Key under management common personnel In thousands of Kazakhstani Tenge Note control Assets Trade accounts receivable 11 16,945,662 - - Prepayments for inventories 11 1,508 - - Prepayments for services 11 13,435 - - Prepaid insurance expenses 11 515,254 - - Accrued interest receivable 11 1,351 - - Other 11 8,443 143,215 - Long-term receivables 8 304,789 - - Provision for long-term receivables impairment 8 (304,789) - - Available for sale investments 8 9,596,539 - - Letters of credit 9 290,126 - - Restricted cash 8 1,310,316 - - Prepayment - Pestroye lake 383,125 - -
Liabilities Dividends payable 20 - 237,685 - Financial guarantees issued 29 104,045 - - Trade payables 149,727 - - Promissory notes issued 239,235 - - Advances received 403 - - Equipment purchased on instalment: (contractual interest rate 0 % p.a.; effective interest rate: 14.2-15.1% p.a.) 20 29,847 - - Retirement and other long-term benefits obligation - - 5,063 Payables to key management personnel 5 - - 216,114
Translated from the Russian original 26
F-94 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
The income and expense items with related parties for the year ended 31 December 2009 were as follows:
Companies Shareholders Key under management common personnel In thousands of Kazakhstani Tenge: Note control
Revenue from sales of:
- Iron ore products 21 128,176,521 - - - Dolomite 21 60,078 - - - Other 21 184,661 - -
Sales of services 33,710 - - Interest income on bank deposits 27 659,729 - - Other operating income 23 4,240,940 -- Income on financial guarantees 57,632 Purchase of raw materials 2,365,612 - - Purchase of electricity 3,206,489 - - Repair and maintenance services 22 210,064 - - Agency agreement fee 25 111,252 - - Informational and other professional services 139,286 Management fees 25 1,253,114 - - Transportation expenses 24 43,301 - - Insurance expenses 22,24 845,902 - - Rent expenses 25 14,029 - - Sponsorship 25 537,650 - - Interest expenses 9 - - Unwinding of present value discount on preference shares 27 - 32,306 - Dividends declared on ordinary shares 14 - 18,895,500 - Dividends declared on ordinary shares 14 - 2,091,375 - Share-based compensation 5 - - 39,284 ey management compensation 5 - - 696,307 Bank charges 25 138,223 -- Other operating expenses 26 1,008,601 --
Translated from the Russian original 27
F-95 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
The income and expense items with related parties for the year ended 31 December 2008 were as follows:
Companies Shareholders Key management under personnel common In thousands of Kazakhstani Tenge: Note control
Revenue from sales of: - Iron ore products 21 152,648,692 - - - Dolomite 21 43,040 - - - Other 21 186,495 - -
Sales of services 31,987 - - Income from unwinding of present value discount 23 407,820 - - Interest income on bank deposits 27 249,498 - - Interest income on loans issued 23 1,732,162 - - Income from decrease in interest 23 1,077,695 - - Other operating income 23 1,098,804 - - Income on financial guarantees 27,158
Purchase of raw materials 2,177,761 - - Purchase of electricity 3,104,553 - - Repair and maintenance services 22 399,560 - - Agency agreement fee 25 126,822 - - Management fees 25 1,489,128 - - Transportation expenses 24 4,827,666 - - Insurance expenses 22,24 1,036,606 - - Rent expenses 25 26,514 - - Sponsorship 25 561,255 - - Interest expenses 749,119 - - Unwinding of present value discount on preference shares 27 - 32,329 - Loss from initial recognition of loans at non-market rates 26 1,122,891 - - Dividends declared on ordinary shares 14 - 13,033,800 - Dividends declared on preference shares 14 - 1,391,325 - Share-based compensation 5 12,350 ey management compensation 5 - - 420,995 Bank charges 25 266,681 - - Other operating expenses 26 1,439,007 - -
Translated from the Russian original 28
F-96 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
In 2009 and 2008, the Company sold iron ore products primarily to ENRC Marketing AG (Switzerland) and a number of Russian distributors who acted for and on behalf of the controlling shareholders on the basis of contracts for the supply of iron ore products. Prices for iron ore products are linked to the world market prices.
The Company is a member of ENRC Plc, and is involved in extensive related party transactions. As referred to above, the major part of sales is made to the SSGPO trading companies. Transportation services are purchased from Transsystem LLP and Transcom LLP, which are also the Group’s members. Almost all treasury operations are carried out through Eurasian Bank, the related party. All insurance services are rendered by other related party, Eurasia Insurance Company.
Duirng 2008 and 2007 the Company made certain prepayments for the construction of the resort complex near Pestroye Lake (Petropavlovsk). In June 2009 the Company completed capital construction works on such a complex for the amount of Tenge 380,790 thousand and transferred the costs of these works to JSC Eurasian Industrial Company (the successor of JSC Eurasian Financial and Industrial Company). In the same period, the complex with the land plot was sold to SSGPO for the total amount of Tenge 627,900 thousand. At 31 December 2009 this asset is stated within property, plant and equipment and used for the purposes of recreation and health recovery services to the Company’s employees as additional employee benefits.
All the significant purchases were made through ENRC Management KZ LLP which is currently acts as SSGPO agent only for the major contracts. All other purchases and payments are currently made directly with the contractors.
Presented below are the guarantees issued by the Company at 31 December 2009 and 31 December 2008:
In thousands of Kazakhstani Tenge Note 2009 2008
Companies under common control 29 46,413 104,045
Translated from the Russian original 29
F-97 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
7 Property, Plant and Equipment
Movements in the carrying amount of property, plant and equipment were as follows:
Land Buildings Machinery Vehicles Other Construction Total In thousands of and and in progress Kazakhstani Tenge constructions equipment Carrying amount at 31 December 2007 1,907 34,756,570 27,117,154 15,815,259 248,959 13,003,424 90,943,273
Additions - (2,126,420) 1,724,856 4,254,041 112,322 29,932,375 33,897,174 Transfers - 4,619,701 11,573,191 3,152,419 (115) (19,345,196) - Depreciation - (1,708,286) (5,091,157) (3,489,812) (23,459) - (10,312,714) Disposals - (54,721) (39,703) (36,240) (76,688) (536,449) (743,801)
Carrying amount at 31 December 2008 1,907 46,469,072 57,435,991 35,841,297 454,823 23,054,154 163,257,244 Accumulated depreciation and impairment - (10,982,228) (22,151,650) (16,145,630) (193,804) - (49,473,312)
Carrying amount at 31 December 2008 1,907 35,486,844 35,284,341 19,695,667 261,019 23,054,154 113,783,932
Additions 85,000 1,951,947 1,402,187 192,417 74,437 29,438,499 33,144,487 Transfers 3,365,252 9,878,421 4,742,121 80 (17,985,874) - Depreciatikon - (2,012,569) (5,976,365) (3,934,564) (83,636) - (12,007,134) Disposals - (25,320) (3,399) (81,634) - (618,257) (728,610)
Carrying amount at 31 December 2009 86,907 51,725,978 67,937,297 40,333,824 529,160 33,888,522 194,501,688 Accumulated depreciation and impairment - (12,959,824) (27,352,112) (19,719,817) (277,260) - (60,309,013)
Carrying amount at 31 December 2009 86,907 38,766,154 40,585,185 20,614,007 251,900 33,888,522 134,192,675
Machinery and equipment includes assets acquired on deferred payment terms with the residual value of Tenge 177,195 thousand (2008: Tenge 290,500 thousand).
In October 2004, the Company acquired from Eurasian Energy Corporation JSC, its related party, an asset under construction - horse racing complex in Astana. This asset is being constructed not only for profit making purposes but also to fulfil the Group’s social responsibilities in the Republic of Kazakhstan. By the end of 2007 the management did not expect to generate cash inflows from the use of the asset, and hence a 100 per cent provision was recorded with respect to the costs incurred to 31 December 2007 in the amount of Tenge 2,535,396 thousand.
During 2008 the Company completed construction of the horse racing complex and decided to sell this asset. Due to the intention to sell the horse racing complex, it is reclassified from the construction in process to non-current assets held for sale (Note 13).
In 2009 the Group revised the discount rate in relation to the assessment of assets retirement obligation to 5,964% (31 December 2008: 11.35%), which resulted in the increase in the asset retirement obligation at 31 December 2009, and accordingly in the increase in the respective asset in the amount of Tenge 1,548,768 thousand (Note 18). This increase is included into the additions line in the movement above.
Depreciation
In thousands of Kazakhstani Tenge 2009 2008
Cost of sales 11,264,373 9,980,560 Capitalised depreciation 339,207 171,027 General and administrative expenses 203,387 119,141 Distribution costs 11,013 10,340 Other operating expenses 189,154 31,646
Total depreciation charge 12,007,134 10,312,714
Translated from the Russian original 30
F-98 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
8 Other Non-Current Assets
In thousands of Kazakhstani Tenge 2009 2008
Investments available for sale 13,750,680 9,597,680 Prepayments for property, plant and equipment 3,547,270 7,727,472 Restricted cash 1,639,858 3,462 Long-term receivables 253,549 304,789 Long-term deposits (contractual interest rate: 8,8-11,0%, effective interest rate: 9,16-11,6%) 44,126 - Less: non-current assets impairment provision (253,549) (304,789)
Total other non-current assets 18,981,934 17,328,614
Prepayments for property, plant and equipment represent advance payments made to various suppliers for purchase of mining equipment and other items of property, plant and equipment under the investment program.
Long-term receivables include long-term portion of interest free mortgage loans given to the Group’s employees in 2005 in the total amount of Tenge 262,330 thousand. In accordance with the terms of the mortgage agreements, if individual labour contracts with the Group’s employees (the "ILC") are not terminated within the next five years starting from 2005 and other terms of financing are complied with, the Group’s employees are exempt from repayment of the loan. In case of termination of the ILC within this period of five years, the borrower should repay an amount in proportion to the time remaining from the five years period. The Group’s management has determined that all Group’s employees will adhere to the mortgage loan agreements terms, and therefore provision for impairment was established for the full amount of long-term receivable at 31 December 2009 and 2008. The initial amount of the receivable is gradually written off against impairment reserve on annual basis.
In addition, long-term receivables include long-term advance in amount of Tenge 156,470 thousand (2008: Tenge 156,470 thousand) provided for construction services. The Company estimates that this advance is non-recoverable due to the financial and operations difficulties of the supplier and recorded 100 percent provision against it at 31 December 2009 and 31 December 2008.
Restricted cash includes the letter of credit opened with JSC Eurasian Bank initially intended for financing of the construction of cement production line in accordance with the construction contract with Tianjin Cement Industry Design & Research Institute Co. Ltd (TCDRI). During 2008 in accordance with the Group instructions, the Company transferred the cement plant stated within the construction in progress in the amount of Tenge 141,274 thousand as well as the contractual obligations on completion of this plant construction to Rudnenskiy Cement Plant LLP. Due to the transfer of the Company’s rights and liabilities under this contract to Rudhenskiy Cement Plant as at 31 December 2008 management expected that the restrictions on cash set by the letter of credit will be cancelled during 2009. However, regardless of the Company's expectations, at 31 December 2009 restrictions on cash set by the letter of credit in the amount of Tenge 1,636,290 thousand were not cancelled. Additionally, in accordance with the information received from the Group, the restrictions will be cancelled not earlier than in 2012. Accordingly, at 31 December 2009 the restricted cash was reclassified into other non-current assets. Available for sale investments include the equity securities and shares in the companies not traded at the open market. Due to the specifics of the local market, it is impossible to receive the information on the current market price of these investments. Presented below is the information on the Company’s interest and available for sale investments as at 31 December 2009 and 2008:
2009 2008 Thousands of Owner- Thousands of Owner- Country of Tenge ship Tenge ship Name of company incorporation Activity % % Credit Partnership ENRC Credit LLP Kazakhstan Lending 12,595,539 10.88 9,596,539 11.01 International Business Academy LLP Kazakhstan Training 1,141 2.5 1,141 2.5
Kazakhstan Implementation ENRC Business & 1,154,000 28 - - Technology Services LLP and support of ERP-systems
Translated from the Russian original 31
F-99 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
8 Other Non-Current Assets (Continued)
In 2008 due to the decrease of interest in ENRC Credit - Credit Partnership LLP (the “ENRC Credit’) to 11.01 percent and subsequent loss of control, investments in ENRC Credit were reclassified to investments available for sale.
In November 2009 the ENRC Credit General Participants Meeting made the decision to increase the share capital of ENRC Credit. In accordance with this decision, the Company’s investment amount increased by Tenge 3,000,000 thousand and the Company's interest became 10.88 percent. As of the reporting date the amount of the unpaid portion of the investment in ENRC Credit amounted to Tenge 3,000,000 thousand, which is included within other payables (Note 20). ENRC Business & Technology Services LLP («ENRC BTS») was set up in July 2009 by the Group companies to implement the Project Arrow through implementation of ERP integrated system. SSGPO’s interest in ENRC BTS is 28 percent. Considering that the Company does not exercise the significant influence on ENRC BTS or participate in making the financial or operational decisions, the contribution into ENRC BTS share capital is classified as available for sale investment. As of the reporting date the amount of the unpaid portion of the investment in ENRC BTS amounted to Tenge 1,014,000 thousand, which is included within other payables Available-for-sale financial assets are all denominated in Tenge. Investments in ENRC Credit are recorded at purchase price. Management believes that purchase price does not significantly differ from the market value of this investment due to the fact that ENRC Credit is a financial organization, and the carrying value of the net assets of this company approximates their market value.
Management cannot estimate the fair value of the investment into International Academy of Business LLP and ENRC BTS with adequate reliability as these companies not listed on a stock exchange, and it is impracticable to define the reliable information on its current value from public sources. Accordingly, the investment in these companies is recognized in the statement of financial position at actual purchase price. The maximum exposure to credit risk at the reporting date is the carrying value of the available-for-sale financial assets.
9 Other Current Assets
In thousands of Kazakhstani Tenge 2009 2008 Term deposits (contractual interest rate: 3.56-11.0% p. a., effective interest rate: 3.56-11.6% p.a.) 11,058,886 4,282,433 Restricted cash for 12 months - 1,306,967 Letters of credit -290,126
Total other current assets 11,058,886 5,879,526
The term deposits represent deposits with maturity of more than three and less than twelve months.
At 31 December 2008 restricted cash represents a letter of credit opened in JSC Eurasian Bank initially intended to finance the construction of a cement production line according to the contract with Tianjin Cement Industry Design & Research Institute Co. Ltd (TCDRI). At 31 December 2009 according to the management estimates, this restricted cash is classified as other non-current assets (Note 8).
10 Inventories
In thousands of Kazakhstani Tenge 2009 2008
Raw materials, purchased 8,050,523 7,130,005 Finished products 1,346,338 3,547,896 Raw materials, produced 602,865 764,432 Production in progress 490,837 809,496 Goods for resale 395,746 334,760 Less: provisions for obsolete and slow-moving inventories (355,408) (179,136)
Total inventories 10,530,901 12,407,453
No inventories have been pledged as collateral.
Translated from the Russian original 32
F-100 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
11 Trade and Other Receivables
In thousands of Kazakhstani Tenge 2009 2008
Trade receivables 27,609,097 18,325,610 VAT recoverable 4,956,939 6,278,231 Prepayments 1,931,533 1,478,618 Prepaid insurance 204,115 515,320 Other receivables 500,772 168,449 Less: impairment provisions (127,096) (103,135)
Total trade and other receivables 35,075,360 26,663,093
The total receivables outstanding from related parties at 31 December 2009 amounted to Tenge 26,675,056 thousand (2008: Tenge 16,945,662 thousand). The carrying amounts of the Company’s financial assets within trade and other receivables are denominated in the following currencies: In thousands of Kazakhstani Tenge 2009 2008 US dollar 26,716,249 17,025,417 Tenge 1,305,793 1,422,168 Russian Rouble 661 744 Euro 646 19
Total trade and other receivables 28,023,349 18,448,348
The carrying values of financial assets within trade and other receivables approximate their fair values due to short maturities of these instruments:
In thousands of Kazakhstani Tenge 2009 2008 Trade receivables 27,523,045 18,280,210 Other receivables 500,304 168,138
Total trade and other receivables 28,023,349 18,448,348
At 31 December 2009, trade and other receivables in the amount of Tenge 61,734 thousand (2008: Tenge 158,788 thousand) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default.
The aging analysis of these trade and other receivables, which were past due, is as follows:
In thousands of Kazakhstani Tenge 2009 2008 6 months – 1 year 57,961 5,481 Over 1 year 3,773 153,307
Total trade and other accounts receivable past due but not impaired 61,734 158,788
At 31 December 2009, trade and other receivables in the amount of Tenge 86,520 thousand (2008: Tenge 45,711 thousand) were impaired and provided for. The individually impaired receivables mainly relate to customers, which are in unexpectedly difficult economic situations. All those receivables have been outstanding for more than 1 year.
Movements on the provision for impairment of trade and other receivables are as follows:
In thousands of Kazakhstani Tenge 2009 2008 Provision for impairment of trade and other receivables at 1 January 45,711 40,235 Provision for receivables impairment 71,103 9,006 Receivables written off during the year as uncollectible (30,294) (3,530)
Provision for impairment of trade and other receivables at 31 December 86,520 45,711
Translated from the Russian original 33
F-101 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
11 Trade and Other Receivables (Continued)
The creation and release of the provisions for impaired trade and other receivables have been included in the general and administrative expenses (Note 25). Amounts charged to the allowance account are generally written off if the additional cash recovery is not expected.
The maximum exposure to credit risk at the reporting date is the fair value of each class of trade and other receivables above. The Company does not hold any collateral as security.
Movements on the Company total provision for impairment of trade and other receivables are as follows:
In thousands of Kazakhstani Tenge 2009 2008 Provision for impairment of accounts receivable and other current assets at 1 January 103,135 54,658 Provision for receivables impairment 71,103 52,007 Receivables written off during the year as uncollectible (47,142) (3,530)
Provision for impairment of trade and other receivables at 31 December 127,096 103,135
12 Cash and Cash Equivalents
In thousands of Kazakhstani Tenge 2009 2008 Cash at term deposit accounts (up to 3 months) 18,364,255 - Cash at bank ,USD 2,569,197 13,254,322 Cash at bank, Tenge 277,386 584,247 Cash at hand 16,942 16,174 Cash at bank, Russian Roubles 4,997 10,973 Cash at bank, Euro 72 58
Total cash and cash equivalents 21,232,849 13,865,774
Term deposits with maturity of less than 3 months include deposits denominated in US dollars in the amount of Tenge 18,334,010 thousand (contractual interest rate: 1.8-5.0%, effective interest rate: 1.8-5.1%) and deposits denominated in Tenge in the amount of Tenge 30,245 thousand (contractual interest rate: 5.5%, effective interest rate: 5.64%).
13 Non-Current Assets Held for Sale
In thousands of Kazakhstani Tenge 2009 2008
Non-current assets held for sale 119,970 119,970
Total non-current assets held for sale 119,970 119,970
Upon completion of the construction of a horse racing complex located in Astana in August 2008, the Company carried out an active search for the potential buyers of this asset. As a result of the Board of Directors Meeting dated 26 January 2009, the decision was made to conclude the purchase-sale agreement with JSC Eurasian Financial and Industrial Company (the related party) at the price of Tenge 119,970 thousand. It was expected to sell this asset at the beginning of the year 2009; however the documents on land plot where the complex locates were not finalized by the end of the year 2009. The Company expects to sell this asset during the year 2010. Accordingly, at 31 December 2009 the Company classified this asset as non-current asset held for sale, and it is carried at its expected sales price of Tenge 119,970 thousand.
Translated from the Russian original 34
F-102 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
14 Share Capital
31 December 2009 31 December 2008 In thousands of Kazakhstani Tenge Number Amount Number Amount
Ordinary shares 5,850,000 5,850,000 5,850,000 5,850,000 Preference shares 650,000 406,422 650,000 406,422
Total nominal share capital 6,500,000 6,256,422 6,500,000 6,256,422 Share capital indexation for hyperinflation - 2,528,778 - 2,528,778
Total share capital - 8,785,200 - 8,785,200
There was no change in the number and value of ordinary and preference shares in 2009 and 2008.
The total authorised number of ordinary shares is 5,850,000 shares (2008: 5,850,000 shares) with a par value of Tenge 1,000 per share (2008: Tenge 1,000 per share). All issued ordinary shares are fully paid. Each ordinary share carries one vote.
The total authorised number of preference shares is 650,000 shares (2008: 650,000 shares) with a par value of Tenge 1,000 per share (2008: Tenge 1,000 per share). All issued preference shares are fully paid.
The preference shares do not envisage the obligatory redemption by the company (issuer) and participate in the dividends distribution. The preference shares rank ahead of the ordinary shares in the event of the Company’s liquidation. The dividends on the preference shares in excess of the guaranteed amount are controllable but not contractual since such distributions can be avoided if the dividends on ordinary shares are not distributed. Therefore, the preference share represents the compound instrument which consists of equity and liability components.
The preference shares give their holders the right to participate in general shareholders’ meetings without voting rights except for instances where decisions are made in relation to re-organisation and liquidation of the Company, when considering the issue specifying restriction of rights of preference shareholders. Preference shares get voting rights at the moment when dividends on preference shares are not paid in full three months from the date of expiry of the period set for payment of such dividends until the dividends are actually paid. Preference share dividends are set at Tenge 50 (2008: Tenge 50) and rank above ordinary dividends. Preference share dividends should not be declared for the amount less than what is declared to ordinary shareholders.
Dividends declared and paid during the year were as follows:
2009 2008
Ordinary Preference Ordinary Preference shares shares shares Shares
In thousands of Kazakhstani Tenge (except Equity Liability Equity Liability for dividends per share)
Dividends payable at 1 January - 229,560 8,125 - 107,678 32,500 Dividends declared during the year 18,895,500 2,091,375 32,500 13,033,800 1,391,325 32,500 Dividends paid during the year (8,789,594) (2,109,822) (8,125) (13,033,800) (1,269,443) (56,875)
Dividends payable at 31 December 10,105,906 211,113 32,500 - 229,560 8,125 Dividends per share declared during the year (expressed in Tenge per share) 3,230 3,218 50 2,228 2,141 50
All the dividends are declared and paid in Kazakhstani Tenge. During the years ended 31 December 2009 and 31 December 2008 dividends on preference shares at a guaranteed fixed amount of Tenge 50 per share were accrued as part of non-current preference shares liabilities for the amount of Tenge 32,500 thousand.
Translated from the Russian original 35
F-103 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
15 Long-term Share-based Employee Benefit Plan
In May 2008 and in April 2009 the Group presented the long-term share-based key employee benefit plan (“LTEBP”). LTEBP bonuses recorded at 31 December 2009 are effective only upon achievement of an established objective. The established objective means achievement of the overall shareholder income by ENRC Group companies to be compared with the total shareholder income of the comparative group for the comparative period. Total shareholder income of the comparative group includes 22 international mining companies. In case of normal course of operations, benefits will be awarded upon expiration of the third year from the benefit provision date.
Estimates are based on the Monte-Carlo model. The following information was used in the model for calculation purposes: Plan 1 Plan 2 Granting date 7 May 2008 20 April 2009 Fair value of each share granted (in Tenge) 2,004 883 Share price at grant date (in Tenge) 2,842 1,221 Expected volatility 42% 70% Expected rate of dividend income 1.01% 3.82% Risk-free interest rate 2.55% 1.27% Granting period 3 years 3 years The number of shares under LTEBP was as follows:
31 December 2009 31 December 2008 Plan 1 Plan 2 Plan 1 Plan 2
At the beginning of the period 28,968 - - Provided for the period - 95,921 28,968 - Cancelled during the period ----
At the end of the period 28,968 95,921 28,968 -
Below are the costs related to the share-based payments to the Company's employees in accordance with the ENRC Plc. long-term employee benefit plan:
2009 2008 In thousands of Kazakhstani Tenge Plan 1 Plan 2 Plan 1 Plan 2
Share-based benefit expense 19,678 19,606 12,350 - Total expenses 19,678 19,606 12,350 -
16 Derivative Financial Instruments
In thousands of Kazakhstani Tenge 2009 2008
Forward foreign exchange contracts – cash flow hedges – current portion - 3,999,928
Total derivative financial liabilities - 3,999,928
On 27 June 2007 the Company signed a two-and-a-half year forward foreign currency exchange contract (“Contract”) with Deutsche Bank committing the Company to thirty monthly currency sales transactions, starting from July 2007, of 25 million US Dollars each in exchange for Tenge at specified forward rates for the purpose of hedging foreign exchange risk. The last transaction under the contract was made in December 2009.
Translated from the Russian original 36
F-104 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
16 Derivative Financial Instruments (Continued)
The Company treated the forward foreign exchange contract as a derivative financial liability through profit and loss and has applied the respective accounting since its origination in June 2007 until September 2007. Starting from 18 September 2007, the Company applied hedge accounting and started to treat the forward exchange contracts with the corresponding charge to other comprehensive income. The effective portion of fair value measurements under hedge accounting calculated on a monthly basis was charged to other comprehensive income.
Presented below are the movements in equity hedge reserve for 2009 and 2008:
In thousands of Kazakhstani Tenge 2009 2008 Hedge reserves at 1 January 1,505,635 1,246,647 Fair value (income)/loss in year 3,521,572 (1,504,716) Tax on fair value loss (704,314) 451,415 Transfer to cost of sales (Note 22) (7,521,500) (51,500) Tax on transfers to cost of sales 1,504,300 15,450 Recycling (Note 22) 2,117,884 1,354,781 Deferred tax on recycling (423,577) (406,434) Effect of change in rates -399,992
Hedge reserve within equity at 31 December 2009 - 1,505,635
In December 2009 due to expiration of hedging instrument, the related profit or loss recorded in hedge reserve within equity was released to the income statement within the cost of sales.
17 Other Taxes Payable
In thousands of Kazakhstani Tenge 2009 2008 Individual income tax 100,860 6,031 Environmental payments 178 213,285 Royalties - 17,511 Property tax -313 Withholding tax -48 Other 132,539 73,836
Total other taxes payable 233,577 311,024
18 Provision for Mining Assets and Waste Polygons Retirement Obligations
In thousands of Kazakhstani Tenge 2009 2008 Mining assets 2,971,376 1,617,868 Waste polygons 472,942 184,225
Total provisions for mining assets retirement obligations 3,444,318 1,802,093
The Company has a legal obligation to landfill and restore its mining sites and decommission its mining property and waste polygons after their expected closure in 2049 and 2050, respectively.
The amount of the provision for asset retirement obligations is determined using the nominal prices effective at the reporting dates by applying the forecasted rate of inflation for the expected period of the life of the mines and waste polygons and discount rate at the reporting dates.
Principal assumptions made in calculations of asset retirement obligations are presented below:
2009 2008
Discount rate at 31 December 5.964% 11.35% Inflation rate at 31 December 5.6%-6.6% 7.8%-8.6%
The estimate of discount rate is based on risk free-rates on state bonds. The discount rate decreased in 2009 (from 11.35% to 5.964%) and increased in 2008 (from 7.4% to 11.35%) due to respective change in long-term risk free rates on state bonds. Translated from the Russian original 37
F-105 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
18 Provision for Mining Assets and Waste Polygons Retirement Obligations (Continued)
Mining assets retirement obligations should be settled at the end of the useful life of each mine between 2016 and 2040.
Waste polygons retirement obligations should be settled at the end of the useful life of each polygon up to its expected closure time in 2050.
Uncertainties in such costs estimates include potential changes in regulatory requirements, alternatives to closure and reclamation of disturbed lands and discount and inflation rates.
Movements in the provisions for mining assets retirement obligations are as follows:
Mining assets Landfill Total decommissioning site In thousands of Kazakhstani Tenge restoration
Carrying amount at 1 January 2008 1,636,295 2,083,875 3,720,170
Capitalized/ (reversed) to/(from) property, plant and equipment 51,259 (175,073) (123,814) Decrease in property, plant and equipment due to change in discount rate (1,040,284) (1,196,648) (2,236,932) Unwinding of the present value discount 118,973 139,471 258,444
Carrying amount at 31 December 2008 766,243 851,625 1,617,868
Capitalized/ (reversed) to/(from) property, plant and equipment (38,527) (82,668) (121,195) Increase in property, plant and equipment due to change in discount rate 590,595 669,433 1,260,028 Unwinding of the present value discount 101,488 113,187 214,675
Carrying amount at 31 December 2009 1,419,799 1,551,577 2,971,376
Movements in provisions for waste polygons retirement obligations are as follows:
Waste polygons Landfill Total decommissioning site In thousands of Kazakhstani Tenge restoration
Carrying amount at 1 January 2008 - - -
Capitalized to property, plant and equipment 14,394 449,176 463,570 Decrease in property, plant and equipment due to change in discount rate (8,621) (283,018) (291,639) Unwinding of the present value discount 299 11,995 12,294
Carrying amount at 31 December 2008 6,072 178,153 184,225
Capitalized/ (reversed) to/(from) property, plant and equipment (1,087) (31,231) (32,318) Increase in property, plant and equipment due to change in discount rate 9,539 279,201 288,740 Unwinding of the present value discount 1,064 31,231 32,295
Carrying amount at 31 December 2009 15,588 457,354 472,942
Translated from the Russian original 38
F-106 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
19 Employee Benefits
Changes in the defined benefit obligations are as follows:
In thousands of Kazakhstani Tenge 2009 2008 2007 2006 2005
Present value of defined benefit obligations at the beginning of year 1,072,007 1,113,549 1,107,253 861,664 856,585 Unwinding of present value discount 21,715 100,939 56,054 43,083 42,829 Reversal of accumulated amortisation of discounting as result of revision of terms of the Collectiveagreement (156,680)---- Benefits paid (41,885) (89,551) (60,151) (54,276) (49,024) Past service expense (681,143) ---- Current service expense - 103,812 18,842 18,815 22,767 Actuarial losses/(gains) 110,323 (156,742) (8,449) 237,967 (11,493)
Present value of defined benefit obligations at the end of year 324,337 1,072,007 1,113,549 1,107,253 861,664
Amounts recognized in the statement of financial position and income statement are as follows:
In thousands of Kazakhstani Tenge 2009 2008 2007 2006 2005
Present value of defined benefit obligation at end of year 324,337 1,072,007 1,113,549 1,107,253 861,664
Net liability 324,337 1,072,007 1,113,549 1,107,253 861,664
Unwinding of present value discount 21,715 100,939 56,054 43,083 42,829 Reversal of accumulated amortisation of discounting as result of revision of terms of the Collective agreement (156,680) - - - - Past service expense (681,143) - - - - Current service expense - 103,812 18,842 18,815 22,767 Actuarial losses/(gains) 110,323 (156,742) (8,449) 237,967 (11,493)
Expense/(gain) recognized in profit and loss (705,785) 48,009 66,447 299,865 54,103
Unwinding of present value discount was included in the finance costs (Note 27).
During 2009 the Company and labour union revised provisions of Collective Labor Agreement whereby certain payments were cancelled which led to reduction of employee benefits obligation under Collective Labor Agreement. Accordingly a net gain of 705,785 thousand Tenge was recognized in the income statement.
Actuarial losses/gains, current and past service costs are included in the consolidated income statement: as part of cost of sales in the amount of gain of Tenge 102,850 thousand (2008: loss of Tenge 158,895 thousand), part of general and administrative expense in the amount of gain of Tenge 459,548 thousand (2008: gain of Tenge 97,030 thousand), part of selling expenses in the amount of gain of Tenge 3,380 thousand (2008: loss of Tenge 1,589 thousand), and part of other expenses - gain in the amount of Tenge 5,272 thousand (2008: loss of Tenge of 1,387 thousand); and part of capitalised costs in the amount of loss of Tenge 230 thousand (2008: gain of Tenge 11,911 thousand).
In thousands of Kazakhstani Tenge 31 December 2009 31 December 2008
Cumulative amount of actuarial gains and losses recognized in income statement (62,518) 94,162
In thousands of Kazakhstani Tenge 2009 2008
Experience adjustment: (gain)/loss on defined benefit obligation (34,975) 33,820
Translated from the Russian original 39
F-107 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
19 Employee Benefits (Continued)
Principal actuarial assumptions at the reporting date are as follows:
2009 2008
Discount rate at 31 December 5.964% 11.35% Future salary increases 10% 10% Average labour turnover rate 6% 13.36%
The mortality rates used in determination of employee benefits at 31 December 2009 and 2008 are based on the official data of the Kazakhstan Actuary Centre.
20 Trade and Other Payables
In thousands of Kazakhstani Tenge 2009 2008
Dividends payable 10,349,519 237,685 Trade payables 5,962,904 4,021,212 Annual vacation payable 1,786,544 1,692,458 Salaries payable 389,123 367,151 Promissory notes issued 185,090 344,282 Pension fund payable 131,525 86,581 Advances received 127,411 107,783 Financial guarantees 46,413 57,632 Equipment purchased on instalment 36,690 29,847 Other payables 5,076,813 551,930
Total trade and other payables 24,092,032 7,496,561
At 31 December 2009 other payables include contributions outsatnding to the share capital of ENRC Credit in the amount of Tenge 3,000,000 thousand and ENRC BTS in the amount of Tenge 1,014,000 thousand. The carrying values of financial liabilities within trade and other payables approximate their fair values due to short maturities of these instruments.
21 Revenue
In thousands of Kazakhstani Tenge 2009 2008
Iron ore products 129,076,677 160,900,042 Heat power 1,844,039 1,548,143 Dolomite 431,074 829,955 Crushed stone 235,651 232,719 Other 1,363,951 1,580,838
Total revenue 132,951,392 165,091,697
During 2009 the revenues from sale of iron ore products have decreased significantly mainly due to the decrease in commodity prices.
Translated from the Russian original 40
F-108 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
22 Cost of Sales
In thousands of Kazakhstani Tenge 2009 2008
Materials and parts 14,610,263 14,850,781 Payroll and related expenses 11,960,437 12,083,214 Depreciation 11,264,373 9,980,560 Realized foreign exchange difference on cash flow hedge (Note 16) 7,521,500 51,500 Mineral Extraction Tax (Royalty in 2008)* 6,291,414 1,528,748 Spare parts 5,357,620 5,271,563 Electric power 3,537,693 3,494,557 Fuel 3,222,656 5,136,001 Repair and maintenance services 2,589,207 2,856,706 Changes in finished goods and work in progress 2,426,142 (3,454,524) Environmental fund 1,236,556 1,145,116 Insurance costs 816,752 1,018,391 Transportation of freights 567,375 738,464 Rent 2,587 39,885 Hedge accounting recycling (Note 16) (2,117,884) (1,354,781) Other 3,404,101 1,660,044
Total cost of sales 72,690,792 55,046,225
*Mineral Extraction Tax was introduced instead of Royalty from 1 January 2009 (Note 29).
23 Other Operating Income
In thousands of Kazakhstani Tenge 2009 2008 Net foreign exchange gain 6,758,167 - Net gain from disposal of materials 63,778 - Income on financial guarantees 57,632 168,755 Income from recovery of impairment provision 21,309 134,388 Income on penalties for unfulfilled contractual obligations 14,593 15,682 Interest income on loans receivable - 1,745,226 Gain from decrease in interest in subsidiary - 1,077,695 Unwinding of present value discount - 407,820 Income on railway transportation services - 11,279 Other 300,360 148,889
Total other operating income 7,215,839 3,709,734
On 4 February 2009 the National Bank of the Republic of Kazakhstan ceased to maintain the exchange rate of Tenge to other foreign currencies. The exchange rate of Tenge to USD subsequently weakened for 25%. Due to the fact that the export sales of Company's iron-ore products are primarily carried out in US Dollars, the devaluation of Kazakhstani Tenge resulted in realization of the net foreign exchange gain in 2009.
24 Distribution Costs
In thousands of Kazakhstani Tenge 2009 2008
Payroll and related expense 392,463 421,303 Shipping, transportation and storage services 302,992 11,603,817 Fuel 114,713 213,923 Materials 72,106 90,002 Promotion and marketing costs 15,075 83,750 Depreciation 11,013 10,340 Other 312,104 393,738
Total distribution costs 1,220,466 12,816,873
Significant decrease in selling expenses is mainly due to change of INCOTERMS under the contract with ENRC Marketing AG (for China plants) that was changed from DAF station Dostyk – Alashankou to FCA at Zhelezorudnaya station, as a result the Company’s transportation costs have been significantly reduced. Translated from the Russian original 41
F-109 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
25 General and Administrative Expenses
In thousands of Kazakhstani Tenge 2009 2008
Payroll and related expense 1,773,494 1,421,110 Management fees 1,253,114 1,489,128 Taxes other than income tax 906,338 950,022 Sponsorship and other financial aid 738,660 636,409 Land rent 386,939 387,023 Repair and maintenance 379,765 526,563 Depreciation 203,387 119,141 Inventory provision 199,621 20,337 Information, consulting and other professional services 193,218 343,912 Security services 143,579 245,546 Bank charges 139,686 269,512 Agency agreement fee 111,252 126,822 Communication expenses 73,291 78,441 Provision for trade and other receivables impairment 71,167 54,262 Personnel training expenses 70,624 238,734 Business trip and representative expenses 66,916 108,695 Fines and penalties 27,170 31,894 Rent 25,738 14,331 Impairment loss on horse riding complex - 39,426 Payments under collective labour agreement (323,917) 262,188 Other 442,378 625,680
Total general and administrative expenses 6,882,420 7,989,176
According to the contract signed with the Group, the Company pays the management fees.
26 Other Operating Expenses
In thousands of Kazakhstani Tenge 2009 2008
Operating lease expenses 224,567 88,401 Life support expenses in case of production suspension 132,412 19,923 Net loss from disposal of property, plant and equipment 68,546 96,526 Loss from penalties on contractual terms breach 272 113,820 Loss on origination of loans receivable at non-market rate - 1,122,891 Interest expense -832,390 Net foreign exchange loss - 648,708 Loss from disposal of materials -525,644 Financial guarantees -141,597 Other 13,061 74,938
Total other operating expenses 438,858 3,664,838
Translated from the Russian original 42
F-110 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
27 Finance Income and Costs
In thousands of Kazakhstani Tenge 2009 2008
Interest income on bank deposits 1,040,496 596,472 Net foreign exchange gain 712,985 8,127 Reversal of accumulated amortisation of discounting as result of revision of terms of the Collective agreement 156,680 - Unwinding of present value discount 655 1,660 Total financial income 1,910,816 606,259 Provision for assets retirement obligation: amortisation of present value discount (246,970) (270,738) Preference shares (32,306) (32,329) Unwinding of present value discount (21,715) (133,373) Interest expense on borrowings received (22) (495,578) Total finance costs (301,013) (932,018)
Net finance income/(costs) 1,609,803 (325,759)
28 Income Taxes
Income tax expense comprises the following:
In thousands of Kazakhstani Tenge 2009 2008
Current income tax expense – corporate income tax 13,042,094 25,585,860 Current income tax expense – excess profit tax 2,878,635 2,304,192 Current income tax expense/(benefit) – prior periods (53,878) (305,233) Deferred income tax expense – excess profit tax – prior periods 91,643 - Deferred income tax expense/(benefit) – corporate income tax 4,288 (4,510,106) Deferred income tax expense - excess profit tax 456,562 (1,052,266)
Income tax expense for the year 16,419,344 22,022,447
Translated from the Russian original 43
F-111 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
28 Income Taxes (Continued)
Reconciliation between expected and actual taxation charge is provided below.
In thousands of Kazakhstani Tenge 2009 2008
IFRS profit before tax 60,544,498 88,958,560
Theoretical tax charge at standard statutory rate of 20 percent (2008: 30 percent) 12,108,900 26,687,567
Tax effect of items which are not deductible or assessable for taxation purposes: - Non-deductible taxes 43,367 19,541 - Charity expenses 30,919 1,458 - Non-deductible employee benefits 23,936 50,289 - Amortization of non-production assets 15,111 21,064 - Provision on impairment of receivables 14,233 16,279 - Representative office expenses 9,863 57,121 - Penalties and fines 4,405 6,848 - Inventory write-offs 3,701 6,101 - Non-deductible general and administrative expenses 192 25,691 - Impairment provision for horse racing complex - 11,828 - Membership fees - 976 - Income/(loss) on sale of non-production assets - (136,646) - Financial guarantees (11,526) (2,825) - Accruals under additional declarations (53,878) - - Unwinding of present value discount - (498) - Other non-deductible expenses 291,670 (196,586) - Excess profit tax for the current year 2,878,635 2,304,192 - Excess profit tax for the prior year 91,643 - - Deferred income tax – excess profit tax 456,562 (1,052,266) - Effect of change in corporate income tax rates* 311,615 (5,797,687) - Hedging transaction profit/(loss) 199,996 -
Total income tax expense for the year 16,419,344 22,022,447
* Starting from 1 January 2009 New Tax Code is adopted in Kazakhstan. Chan ges in corporate income tax rate and EPT calculation methodology (Note 29) impacted the reported amounts of deferred income tax liabilities.
Translated from the Russian original 44
F-112 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
28 Income Taxes (Continued)
Differences between IFRS and Kazakhstani statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the applicable tax rate.
1 January Charged/ Charged to other 31 December 2009 (credited) to comprehensive 2009 In thousands of Kazakhstani Tenge profit or loss income
Tax effect of deductible temporary differences Provision for asset retirement obligations (270,314) (246,334) - (516,648) Annual leave payable (306,763) (47,892) - (354,655) Employee benefits (95,931) 40,668 - (55,263) Accounts receivable (1,468) 1,468 - - Taxes accrued not paid (7,536) (3,648) - (11,184) Derivative financial instrument liabilities (799,985) 423,576 376,409 - Loss carried forward on hedging instruments - (1,128,225) - (1,128,225) Other - (14,318) - (14,318)
Gross deferred income tax assets (1,481,997) (974,705) 376,409 (2,080,293)
Tax effect of taxable temporary differences Property, plant and equipment 6,547,083 950,492 - 7,497,575 Inventory 610 (610) - - Other 75,506 29,112 - 104,618
Gross deferred tax liability 6,623,199 978,993 - 7,602,193 Less offsetting with deferred tax assets (1,481,997) (974,705) 376,409 (2,080,293)
Net deferred tax liability at rates applicable to liabilities settlement period 5,141,202 4,288 376,409 5,521,900
Deferred excess profit tax* - 562,804 - 562,804 Excess profits tax - property, plant and equipment - 562,804 - 562,804 Excess profits tax – employee benefits - (10,273) - (10,273) Excess profits tax – annual vacation payables - (92,434) - (92,434) Excess profits tax – taxes accrued not paid - (2,635) - (2,635) Excess profits tax – other differences - (900) - (900)
Recognized deferred income tax liability 5,141,202 460,850 376,409 5,978,462
* At 31 December 2008 the Company’s management expected that in future the Company will not have any excess profit tax (“EPT”). Accordingly, at 31 December 2008 deferred excess profit tax (“DEPT”) was zero. In 2009 due to the improvement of the actual production and financial indicators versus the budgeted indicators, the management revised its EPT estimates for the future period which impacted DEPT at 31 December 2009. EPT estimates for future period are exposed to the changes, and are based on the management's judgments (Note 3).
Translated from the Russian original 45
F-113 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
28 Income Taxes (Continued)
1 January Charged/ Charged to other 31 December 2008 (credited) to comprehensive 2008 In thousands of Kazakhstani Tenge profit or loss income
Tax effect of deductible temporary differences
Provision for asset retirement obligations (1,116,051) 845,737 - (270,314) Annual leave payable (383,674) 76,911 - (306,763) Employee benefits (206,465) 110,534 - (95,931) Accounts receivable (141,684) 140,216 - (1,468) Taxes accrued not paid (26,613) 19,077 - (7,536) Derivative financial instrument liabilities (1,576,077) 390,985 385,107 (799,985) Gross deferred tax asset (3,450,564) 1,583,460 385,107 (1,481,997)
Tax effect of taxable temporary differences
Property, plant and equipment 12,515,385 (5,968,302) - 6,547,083 Inventory 51,150 (50,540) - 610 Other 150,230 (74,724) - 75,506
Gross deferred tax liability 12,716,765 (6,093,566) 6,623,199 Less offsetting with deferred tax assets (3,450,564) 1,583,460 385,107 (1,481,997) Net deferred tax liability at rates applicable to liabilities settlement period 9,266,201 (4,510,106) 385,107 5,141,202
Excess profits tax - property, plant and equipment 1,187,147 (1,187,147) - - Excess profits tax – employee benefits (30,716) 30,716 - - Excess profits tax – provision for asset retirement obligations (104,165) 104,165 - -
Recognized deferred tax liability 10,318,467 (5,562,372) 385,107 5,141,202
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows: In thousands of Kazakhstani Tenge 2009 2008
Deferred income tax assets: - Deferred income tax asset to be recovered after more than 12 months (1,802,931) (494,784) - Deferred income tax asset to be recovered within 12 months (382,704) (1,118,782)
(2,185,635) (1,613,566)
Deferred income tax liabilities: - Deferred income tax liability to be recovered after more than 12 months 8,118,038 6,678,652 - Deferred income tax liability to be recovered within 12 months 46,059 76,116
8,164,097 6,754,768 Deferred income tax liabilities (net) 5,978,462 5,141,202
Translated from the Russian original 46
F-114 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
28 Income Taxes (Continued)
Income tax related to the components of other comprehensive income:
In thousands of Kazakhstani Tenge 2009
Pre-tax Tax expense/ Post-tax amount (benefit) amount Cash flow hedging instruments profit/(loss), net 1,882,044 (376,409) 1,505,635
Other comprehensive income 1,882,044 (376,409) 1,505,635
In thousands of Kazakhstani Tenge 2008 Pre-tax Tax expense/ Post-tax amount (benefit) amount Cash flow hedging instruments profit/(loss), net (644,095) 385,107 (258,988)
Other comprehensive income (644,095) 385,107 (258,988)
29 Contingencies, Commitments and Operating Risks
Political and economic situation in the Republic of Kazakhstan. In general, the economy of Kazakhstan continues to display the characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country and a low level of liquidity of debt and equity securities in the markets. The mining sector in Kazakhstan is still impacted by political, legislative, fiscal and regulatory developments in Kazakhstan. The prospects for future economic stability in the Republic of Kazakhstan are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory and political developments, which are beyond the Company’s control. The financial condition and future operations of the Company may be adversely affected by continued economic difficulties related mainly to the current situation in the global financial markets. Management is unable to predict the extent and duration of the economic difficulties, nor quantify the impact, if any, on these financial statements. Impact of global financial crisis. The slowdown in the growth rates of leading developed world economies - the USA, Japan, European Union, was very dramatic in autumn 2008 and caused the slowdown of development of the world economy and reduction of the world consumption. The oil and metal prices went down and such products are the main export products of Kazakhstan. Further, the effects of the crisis flowed from the financial sector into the real sector. Due to the reduction of production and consumption levels around the world as well as the fall of prices for main export products of Kazakhstan, the Government has developed a stabilization plan envisaging the increase of the governmental expenses for support and resumption of business activities. The anti-crisis program aims to prevent the work places cut-off and mass dismissals in the real sector. In this environment, the influence and presence of the Government of the Republic of Kazakhstan in the economy increased. As a result of actions taken the situation in the country has stabilized. In general, the macroeconomic situation in Kazakhstan is still tough but manageable. The Company’s position in the economy surmounting the world financial crisis looks encouraging. The action plan to cope with the world markets recession in the end of the 2008, which resulted in reduction of production levels for the successful business management in the tough environment, proved to be correct and is completely implemented. The Company observes the first indicators of stability and recovery of the economies in the USA, Europe and Russia and hopes that such recovery will be sustainable. However, the Company follows the conservative forecasts for the year 2010. It is still difficult to predict the world economy situation for the year 2010; therefore the Company intends to continue to reduce the cost of production since it is the key factor to maintain the competitiveness. The management of ENRC Plc Group companies follows and will follow the strategy of investments into the Kazakhstan’s mining sector aimed to improve the capacities and to ensure the effective production. Thus, in the beginning of 2009, the Group management declared on its intention to invest 1.2 billion US dollars into the capital expenditure program.
Translated from the Russian original 47
F-115 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
29 Contingencies, Commitments and Operating Risks (Continued)
Risk of limited market. Most of the Company's products are sold to related parties (Note 6). The related parties sell those products in international commodity markets. The geographical position of the Company's production facilities, location of ultimate consumers and the existing transportation routes restricts to some extent the ability of the related parties to distribute the Company’s products. These restrictions sometimes affect the Company. From time to time the Company has to reduce its production due to disputes between the related parties and their customers. Such a dispute occurred in 2005 and the Company operated at 30 percent of its capacity from May until August. In order to safeguard its sales to major customers, in March 2007 the Company signed a ten-year contract with ENRC Marketing AG, related party, on shipment of iron ore products in the amount of approximately twelve million tones per annum. The contract came into force on 1 April 2007 and stays valid until 31 March 2017. In the fourth quarter of 2008 and in the first quarter of 2009 the sales to ENRC Marketing AG under this contract reduced in connection with global economic downturn, and accordingly, decrease of demand for Company’s products. From the second quarter of 2009, the shipment of products under this contract increased and sales volumes were 8.8 million tones.
The Company continues active seeking to diversify the customer portfolio by attracting other customers across Russian and Chinese markets.
Tax and transfer pricing legislation. Kazakh tax legislation and practice is in a state of continuous development and therefore is subject to varying interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax and transfer pricing legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, tax authorities may challenge transactions and the Company may be assessed the additional taxes, penalties and fines. Tax periods remain open to retrospective review by the Kazakh tax authorities for five years.
At these financial statements date, the Company completed the litigations on full-scope tax audit of the Company commenced in 2008 for the years ended 31 December 2004 and 2005 (except for matters related to transfer pricing). These litigations did not result in any significant tax violations by the Company (except for matters related to transfer pricing). During 2009 the Kazakhstan tax authorities completed the tax audit of the Company for compliance with the transfer pricing legislation for the years 2004 and 2005. Based on the results of such tax audits, the tax authorities assessed the additional income tax of Tenge 7,442,309 thousand and penalty and fine of Tenge 11,353,585 thousand and issue the notification. The Company’s management disagreed with the findings of the Tax Committee and filed an appeal to the Ministry of Finance of the Republic of Kazakhstan. At these financial statements date, the appeal on the results of transfer pricing tax audit is still being considered by the Tax Committee of the Ministry of Finance of the Republic of Kazakhstan. Whilst there is a risk that the Kazakh tax authorities may challenge the policies applied, including those relating to transfer pricing legislation and excess profits tax, the management believe that it would be successful in defending any such challenge. Accordingly, at 31 December 2009 no provision for potential tax liabilities had been recorded (2008: no provision recorded).
Changes in tax legislation. On 10 December 2008 the President of Republic of Kazakhstan signed the new Tax Code and other legislative acts following the introduction of the new Tax Code, which came into force starting from 1 January 2009. During 2009 the government continued to introduce amendments to the Tax Code. The key changes made include: replacement of the royalty by the mineral extraction tax with the increase in rates from 1.4% to 16.2% from 2009 till 2012 and up to 16.8% in 2013, up to 17% in 2014; reduction of the corporate income tax rates: from 30% to 20% starting 1 January 2009, form 20% to 17.5% for tax (calendar) year 2013, 15% in 2014; reduction of the VAT from 13% to 12%; introduction of the fixed social tax rate of 11%; increase in the property tax rate from 1% to 1.5% in relation to the taxable base which includes only immovable property and cancellation of the property tax in relation to other property; change in the methodology of excess profit tax calculations; and other changes.
Changes in corporate income tax rates had an impact on calculation of deferred income tax amounts at 31 December 2009 and 31 December 2008 (Note 28).
Capital expenditure commitments. At 31 December 2009 the Company has contractual capital expenditure commitments in respect of purchases totalling Tenge 6,344,998 thousand (2008: Tenge 8,971,661 thousand). The Company’s management believes that future net income and funding will be sufficient to cover this and any similar commitments.
Legal proceedings. From time to time and in the normal course of business, claims against the Company are received. On the basis of its own estimates and both internal and external professional advice management of the Company is of the opinion that no material losses will be incurred in respect of claims.
Translated from the Russian original 48
F-116 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
29 Contingencies, Commitments and Operating Risks (Continued)
Guarantees. Guarantees are the Company’s irrevocable obligations on payments in the event that another party cannot meet its obligations. The Company has guaranteed the following obligations:
In thousands of Kazakhstani Tenge 2009 2008 Nominal value of Fair value of Nominal value Fair value of loans guarantees of loans guarantees guaranteed guaranteed
Entities under common control 2,339,703 46,413 2,275,643 104,045
Total guarantees 2,339,703 46,413 2,275,643 104,045
Insurance policies. The Company holds insurance policies in relation to the following risks:
- Insurance of property; - Insurance of civil responsibility of an employer for causing damage to the life and health of an employee during his/her duties; - Insurance of civil responsibility of owners of vehicles; - Insurance of civil responsibility for causing damage to the environment; - Insurance of civil responsibility of owners of properties, operations of which can cause damage to third parties.
Environmental matters. The enforcement of environmental regulation in the Republic of Kazakhstan is evolving and the enforcement posture of government authorities is continually being reconsidered. The Company periodically evaluates its obligations under environmental regulations. Thus, due to adoption of the Ecology Code of the Republic of Kazakhstan, during 2008 the Company created the decommissioning fund to arrange the measures for decommissioning of waste polygons and environmental monitoring upon closure. In addition to decommisioning fund, representing the special account for accumulation of funds, the Company accrued the provisions for waste polygons retirement. The amount of accrued provision for waste polygons retirement was based on the management's best estimates of future costs, which will be incurred by the Company for repayment of its current liabilities (Note 18). In the current enforcement climate under existing legislation, the Company’s management believes that there are no significant liabilities for environmental damage.
In 2004 the Company passed the certification procedure of quality management of the certification body TUV CERT. The Company received the certificate on compliance with the requirements of quality standard ISO 9001. The Company has also developed and established the Company Ecology Management Policy, the main purpose of which is prevention of environmental pollution. Based on the results of the audit conducted in 2005, TUV CERT (Germany) concluded that the Company’s current system of quality management was in accordance with the requirements of ISO 14001 and issued the certificate of compliance.
From the year 2005 TUV SUED auditors conduct the annual audit for the compliance of the Company with the quality management system on ISO 9001:2000 and on ISO 14001:2004.
In October 2009 the Company’s environment management system was audited for compliance with ISO 14001:2004.
Provision for asset retirement obligations. The estimate of the outstanding provision for asset retirement obligations was based on management’s estimates from an analysis of contractual obligations in respect of site restoration and rehabilitation (Note 3). This estimate might change upon completion of further environmental study works and reassessment of existing liabilities.
Liabilities on land operating lease agreements. Presented below is the summary of future minimum lease payments on land use: Maturity Up to 1 year From 2 to 5 Above Total In thousands of Kazakhstani Tenge years 5 years
Minimum lease payments at 31 December 2009 404,210 1,610,111 325,173 2,339,494 Minimum lease payments at 31 December 2008 386,550 1,523,056 429,753 2,339,359
Translated from the Russian original 49
F-117 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
30 Financial Risk Management
Financial Risk Factors
The Company’s activities expose it to a variety of financial risks: market risk (including currency risk, fair value interest rate risk, cash flow interest rate risk and price risk), credit risk and liquidity risk. The Company’s overall risk management program focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance. The Company uses derivative financial instruments to hedge certain risk exposures. (a) Market Risk
Foreign exchange risk. The Company operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the US dollar and the Euro. The Company has significant cash and cash equivalents, term deposits and accounts receivable denominated in foreign currencies, and is thus exposed to foreign exchange risk. The Group management monitors foreign exchange risk exposure by currency and in total based on the Group consolidated position.
The Company used the derivative financial instruments designated and classified as cash flow hedges for the purpose of mitigating its exposure to foreign exchange risk since the Company’s revenues are denominated in US Dollars and the most operating expenditures are denominated in Kazakhstani Tenge (Notes 16). Foreign currecy hedge contract has expired in December 2009. Foreign exchange risk arises when future foreign currency inflows or recognized assets and liabilities are denominated in currency other than the Company’s functional currency. The table below shows the total amount of foreign currency denominated assets and liabilities that give rise to foreign exchange exposure. US Russian Euro Total In thousands of Kazakhstani Tenge dollar Rouble At 31 December 2009 Assets 58,540,824 5,658 1,637,008 60,183,490 Liabilities 354,237 830,717 374,126 1,559,080
At 31 December 2008 Assets 34,795,771 11,177 1,307,044 36,113,992 Liabilities 4,163,822 415,327 299,410 4,878,559
According to the National Bank of the Republic of Kazakhstan in 2010 the targeted average exchange rate will remain at the level of 150 Tenge for 1 US dollar. Taking into account the situation at the world commodity and currency markets, as well as to create the environment for the flexibility of the exchange rates, the range of Tenge exchange rate will be expanded up to +15 Tenge (or 10%) and -22.5 Tenge (or 15%).
As at 31 December 2009, if the exchange rate of US dollar to Tenge had increased by 10%/decreased by 15%, with all other variables held constant, net profit for the year would have been Tenge 5,824,149 thousand/ Tenge 8,730,341 thousand higher/lower, respectively (2008: increased/decreased by 25%, post-tax profit would have been Tenge 5,360,147 thousand higher/lower) mainly due to the foreign exchange profit/loss on translation of USD denominated cash, trade receivables and payables.
At 31 December 2009, if the exchange rate of the Russian Rouble to Tenge had increased/decreased by 6.3 percent, with all other variables held constant, the Company’s net profit for the year would have increased/decreased by Tenge 51,985 thousand (2008: increased/decreased by 6 percent, post-tax profit would have increased/decreased by Tenge 17,208 thousand), mainly as a result of foreign exchange gain/loss on translation of Russian Roubles denominated cash and cash equivalents and payables. At 31 December 2009, if the exchange rate of Euro to Tenge had increased/decreased by 5.4 percent, with all other variables held constant, net profit for the year would have increased/decreased by Tenge 68,413 thousand (2008: increased/decreased by 10 percent, net profit for the year would have increased/decreased by Tenge 70,539 thousand), mainly as a result of foreign exchange gain/loss on translation of Euro denominated accounts payable. Price risk. The Company is exposed to equity securities price risk over investments held by the Company and classified on the consolidated statement of financial position as available-for-sale. However, the Company believes that this risk is not high, since it is mitigated by the fact that these investments are investments in ENRC Credit and ENRC BTS which are the subsidiaries of ENRC Plc.
Translated from the Russian original 50
F-118 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
30 Financial Risk Management (Continued)
The Company is not exposed to equity securities price risk over investments classified on the consolidated statement of financial position at fair value through profit or loss because no such investments are held by the Company at the reporting date.
The Company is exposed to commodity price risk as the sales price for iron ore is affected by world market price movements which are dependant upon general and specific market movements. The Company has not entered into any hedging arrangements in respect of its commodity price exposures as the management projects that the trend of historically higher prices for iron ore in the period before the credit crisis, will resume. However, as sales contracts are denominated in US Dollars, the Company hedges the foreign exchange risk with forward contracts (Notes 16).
Cash flow and fair value interest rate risk. Sensitivity analysis shows the effect of changes in market interest rates on interest payments, interest income and expenses, and if applicable, on equity.
The analysis of sensitivity to interest rate risk is based on the following assumptions:
Changes in market interest rate effects interest income and interest expenses on financial instruments with floating interest rate, therefore, should be included into calculation for the purposes of sensitivity analysis.
Financial instruments with fixed interest rate recognized at amortized costs are not exposed to interest rate risk, therefore, are not included into calculations for the purposes of sensitivity analysis.
Changes in market interest rate on financial liabilities and financial assets with fixed interest rate affect income and losses only if they are accounted for at fair value through profit or loss.
As at 31 December 2009 and 31 December 2008 the Company was not exposed to interest rate risk since the Company does not have any financial assets and liabilities with floating interest rate, nor financial instruments with fixed interest rate recognized at fair value through profit or loss.
(b) Credit Risk
Credit risk mainly arises from cash and cash equivalents, term deposits with banks as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only highly rated institutions operating on local market are accepted. The Company has policies in place to ensure that sales of products and services are made to customers with good financial position and credit history. The majority sales of iron ore products are made to related parties. The carrying amount of cash and cash equivalents, short-term bank deposits with maturity of more than 3 months, and accounts receivable (including receivables from related parties), net of provision for their impairment represents the maximum amount exposed to credit risk. The Company did not provide any loans; therefore at 31 December 2009 the Company was not exposed to the credit risk in respect of loans given. The Company does not have policies in place to assign internal ratings and set credit limits to its counterparties.
Translated from the Russian original 51
F-119 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
30 Financial Risk Management (Continued)
The table below shows credit ratings (where available) and balances with banks and financial institutions where cash and cash equivalents, term and balances of five major counterparties with aggregated outstanding amounts above Tenge 19,000 thousand at the balance sheet date:
In thousands of Kazakhstani Tenge Rating1 2009 2008 Cash and cash equivalents Eurasian Bank B (Standard&Poor’s) 8,852,617 13,835,965 ATF Bank BBB (Fitch) 6,272,435 - Bank CenterCredit B(Fitch) 6,089,781 3,352 2 RBS Kazakhstan (ABN RO Bank) (Standard&Poor’s) 465 211 Halyk Bank B+(Standard&Poor’s) 318 315 HSBC (Standard&Poor’s) 194 2,701 Kazkommertsbank B (Standard&Poor’s) 97 1,642 Bank Moscow B -(Fitch) -5,395 Bank TuranAlem D (Standard&Poor’s) -19 Total cash and cash equivalents 21,215,907 13,849,600
In thousands of Kazakhstani Tenge Rating1 2009 2008 Term deposits Eurasian Bank B (Standard&Poor’s) 10,884,464 - Bank CenterCredit B(Fitch) 174,422 4,282,433
Total term deposits 11,058,886 4,282,433
In thousands of Kazakhstani Tenge Rating 2009 2008
Trade and other receivables ENRC Marketing AG Not available 26,613,149 16,944,199 Receivables from Rudny customers Not available of power station services 207,331 152,670 Zhol Zhondeushy Company LLP Not available 59,458 - PSF Kostanaiagrogas LLP Not available 94,331 - JSC Mittal Steel Temirtau Not available 19,986 631,595 Kostanai Transstroy 2003 LLP Not available -233,919 Ibragimov A.R., ultimate shareholder Not available -143,215
Total trade and other receivables 26,994,255 18,105,598
1 The ratings are stated as of31 December 2009. 2 The rating is presented for the international bank. The rating for the Kazakhstan bank is unavailable.
Trade accounts receivable listed above are short-term assets due from counterparties with outstanding period from one to three months. Although the collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Company beyond the provisions already recorded.
(c) Liquidity Risk
Prudent liquidity risk management implies maintaining the sufficient cash and marketable securities, availability of funding through an adequate amount of committed credit facilities and the ability to close out market positions. Due to the dynamic nature of the underlying businesses, the Company maintains flexibility in funding by maintaining availability under committed credit lines.
Translated from the Russian original 52
F-120 Level: 1 – From: 0 – Wednesday, May 12, 2010 – 02:45 – Mac6 – 4221 Section 09b
Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
30 Financial Risk Management (Continued)
The table below analyses the Company’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (except for financial guarantees, preference shares and derivative financial instruments, for which maturity was presented based on present value figures). Balances due within 12 months equal their carrying balances as the impact of discounting is not significant.
Carrying Cash flows Less than 1 Between 1 Between 2 Over 5 In thousands of Kazakhstani Value under year and 2 years and 5 years years Tenge Agreement
At 31 December 2009 Trade and other payables 5,548,745 5,548,745 5,548,745 - - - Amounts due to related parties 4,649,939 4,649,939 4,649,939 - - - Financial guarantees 46,413----- Preference shares 242,706 1,040,000 32,500 32,500 97,500 877,500
Total financial liabilities 10,487,803 11,238,684 10,231,184 32,500 97,500 877,500
At 31 December 2008 Trade and other payables 3,980,226 3,980,226 3,980,226 - - - Amounts due to related parties 418,809 418,809 418,809 - - - Financial guarantees 104,045 - - - - - Preference shares 242,900 1,072,500 32,500 32,500 97,500 910,000 Derivative financial instruments 3,999,928 4,934,632 4,934,632 - - -
Total financial liabilities 8,745,908 10,406,167 9,366,167 32,500 97,500 910,000
The table below analyses the Company’s derivative financial liabilities as of 31 December 2008 which were settled in 2009 on a gross basis into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows, according to rates forecasted by Deutsche Bank:
Less thanBetween 1 and 2 Between 2 and 5 Over In thousands of Kazakhstani Tenge 1 year years years 5 years
At 31 December 2009 Forward foreign exchange contracts – cash flow hedges Outflow - - -- Inflow - - --
At 31 December 2008 Forward foreign exchange contracts – cash flow hedges Outflow 41,114,132 --- Inflow 36,179,500 ---
Capital risk management
Decisions in relation to the Company’s activity on funding (through own or borrowed funds) are made at the level of Group’s management. The Group’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or sell assets to reduce debt.
Consistent with others in the industry, the Group monitors capital on the basis of the gearing ratio.
Translated from the Russian original 53
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
30 Financial Risk Management (Continued)
Fair value estimation. Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price.
The estimated fair values of financial instruments have been determined by the Company using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Republic of Kazakhstan continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.
Available-for-sale investments include the equity securities and shares in the companies traded at the open market. Due to the nature of the local financial market, it is impossible to obtain current market value for these investments. Accordingly, such investments are recognized in the statement of financial position at actual purchase cost.
The fair value and carrying amounts of financial assets and financial liabilities as of 31 December 2009 and 31 December 2008 are presented in the table below:
31 December 2009 31 December 2008
Fair Carrying Fair In thousands Kazakhstani Tenge Carrying value value value value
Financial assets Cash and cash equivalents 21,232,849 21,232,849 13,865,774 13,865,774 Trade and other receivables, net 27,752,011 27,752,011 18,389,626 18,389,626 Term deposits 11,058,886 11,356,127 4,282,433 4,296,052 Restricted cash for 12 months - - 1,306,967 1,306,967 Short-term letters of credit - - 290,126 290,126 Long-term deposits 44,126 44,318 - - Long-term letters of credit 1,636,290 1,320,490 Investments available for sale* 13,750,680 Not available 9,597,680 Not available
Financial liabilities Derivative financial instruments - - 3,999,928 3,999,928 Trade and other payables 10,198,684 10,198,684 4,399,035 4,399,035 Financial guarantees 46,413 46,413 104,045 104,045 Preference shares 242,706 242,706 242,900 242,900
*The investments available for sale represent investments into unquoted shares, it is impossible to obtain current market value for these investments. Accordingly, such investments are recognized in the statement of financial position at actual purchase cost .
Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on the credit risk of the counterparty.
Liabilities carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity.
Translated from the Russian original 54
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
31 Financial Instruments by Category
The accounting policies for financial instruments have been applied to line items below:
In thousands of Kazakhstani Tenge Note 2009 2008
Financial assets available for sale Investments available for sale 8 13,750,680 9,597,680 Loans and receivables Long-term letters of credit 8 1,636,290 - Long-term deposits 8 44,126 - Short-term letters of credit 9 - 290,126 Restricted cash for 12 months 9 - 1,306,967 Term deposits 9 11,058,886 4,282,433 Trade and other receivables, net 11 1,062,941 1,434,170 Amounts due from related parties, net 11 26,689,070 16,955,456 Cash and cash equivalents 12 21,232,849 13,865,774
Total financial assets, net 75,474,842 47,732,606
In thousand of Kazakhstani Tenge Note 2009 2008
Financial liabilities Derivative financial instruments 16 - 3,999,928 Trade and other payables 20 5,548,745 3,980,226 Amounts due to related parties 20 4,649,939 418,809 Financial guarantees 46,413 104,045 Preference shares 242,706 242,900
Total financial liabilities 10,487,803 8,745,908
Translated from the Russian original 55
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Sokolovsko-Sarbaisky Mining and Production Association JSC Notes to the consolidated financial statements – 31 December 2009
32 Credit Quality of Financial Assets
In thousands of Kazakhstani Tenge 2009 2008 Other current assets
Counterparties with external credit rating1: B(Fitch) 174,422 4,282,433 (Standard and Poor’s) 10,884,464 -
Total other current assets 11,058,886 4,282,433
2 Cash and cash equivalents 1 Counterparties with external credit rating : (Standard and Poor’s) 659 2,912 B+ (Standard and Poor’s) 318 315 B (Standard and Poor’s) 8,852,714 13,837,607 D (Standard and Poor’s) -19 BBB (Fitch) 6,272,435 - B(Fitch) 6,089,781 3,352 BBB - (Fitch) - 5,395
Total cash and cash equivalents 21,215,907 13,849,600
Trade and other receivables
Counterparties without external credit rating: Existing customers (less than 6 months) 994,532 1,267,477 Existing customers (more than 6 months) 61,734 158,788
Total trade and other receivables 1,056,266 1,426,265
Amounts due from related parties:
Counterparties without external credit rating: Existing customers (less than 6 months) 26,689,070 16,955,456
Total amounts due from related parties 26,689,070 16,955,456
Other long-term receivables
Counterparties without external credit rating: 6,675 7,905 Total other long-term receivables 6,675 7,905
1 The ratings are stated as at 31 December 2009. 2 The rest of the statement of financial position item ‘cash and cash equivalents’ is cash at hand.
33 Subsequent events
On 19 January 2010 the Company paid out dividends payable at the reporting date in the amount of Tenge 10,105,906 thousand.
On 1 February 2010 the Company paid out the part of its obligations to share capital of ENRC Credit at the reporting date in the amount of Tenge 1,000,000 thousand.
On 15 February 2010 the Company signed the agreement on provision of a loan to ENRC Finance Limited wholly owned by ENRC Plc in the amount of US Dollars 50,000 thousand for 180 days.
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TNC Kazchrome JSC
International Financial Reporting Standards Financial Statements and Independent Auditor’s Report 31 December 2008
(Translated from the Russian original)
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Contents
INDEPENDENT AUDITOR’S REPORT ...... 1
FINANCIAL STATEMENTS
Consolidated Balance Sheet...... 2 Consolidated Income Statement...... 3 Consolidated Statement of Changes in Equity...... 4 Consolidated Statement of Cash Flows ...... 5
Notes to the Financial Statements
1 The Company and its Operations ...... 6 2 Basis of Preparation and Significant Accounting Policies...... 7 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies ...... 16 4 New Accounting Pronouncements...... 19 5 Employee Information...... 23 6 Balances and Transactions with Related Parties...... 24 7 Property, Plant and Equipment...... 28 8 Investments in Associates ...... 29 9 Available for Sale Investments ...... 29 10 Other financial assets at fair value through profit and loss ...... 30 11 Investments Held to Maturity ...... 30 12 Other Non-Current Assets ...... 31 13 Inventories ...... 32 14 Trade Receivables and Other Current Assets ...... 32 15 Loans Receivable ...... 33 16 Cash and Cash Equivalents ...... 36 17 Share Capital...... 37 18 Long-term Share-based Employee Benefit Plan...... 38 19 Borrowings...... 38 20 Trade and Other Payables...... 40 21 Provision for Mining Assets and Waste Polygons Retirement Obligations ...... 40 22 Employee Benefits...... 41 23 Other Taxes Payable...... 43 24 Revenue ...... 43 25 Cost of Sales ...... 43 26 Other Operating Income ...... 44 27 Distribution Costs...... 44 28 General and Administrative Expenses...... 45 29 Other Operating Expenses ...... 45 30 Finance Income ...... 45 31 Finance Costs...... 46 32 Income Taxes ...... 46 33 Discontinued Operations ...... 50 34 Contingencies, Commitments and Operating Risks...... 51 35 Financial Risk Management ...... 54 36 Fair Value of Financial Instruments ...... 57 37 Events After the Balance Sheet Date ...... 58
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TNC Kazchrome JSC Consolidated Balance Sheet
In thousands of Kazakhstani Tenge Note 31 December 2008 31 December 2007
ASSETS
Non-current assets Property, plant and equipment 7 122,968,278 100,685,741 Intangible assets 2,267 3,400 Investments in associates 8 - 1,976,165 Loans receivable 15 76,956,399 - Other non-current assets 12 4,526,975 4,503,057 Total non-current assets 204,453,919 107,168,363
Current assets Inventories 13 27,042,787 17,042,795 Trade receivable and other current assets 14 137,881,756 84,366,960 Loans receivable 15 3,594,605 9,162,018 Other financial assets at fair value though profit and loss 10 8,452,837 - Investments held to maturity 11 525,753 - Current income tax prepayments 314,024 55,689 Cash and cash equivalents 16 50,041,629 7,455,487 Total current assets 227,853,391 118,082,949 TOTAL ASSETS 432,307,310 225,251,312
EQUITY
Share capital 17 11,777,952 11,777,952 Other Reserves 18 10,441 - Retained earnings 374,579,907 179,893,015 Equity attributable to the Company’s equity holders 386,368,300 191,670,967 Minority interest 9,593,369 19,540 TOTAL EQUITY 395,961,669 191,690,507
LIAIBILITIES
Non-current liabilities Borrowings 19 4,674,106 5,467,790 Deferred income tax liability 32 5,869,701 9,813,805 Provision for mining assets and waste polygons retirement obligations 21 2,267,673 2,586,703 Employee benefits 22 1,617,016 3,169,756 Preference shares 2 568,421 568,421 Other payables 34 471,034 897,405 Total non-current liabilities 15,467,951 22,503,880
Current liabilities Borrowings 19 1,640,849 1,777,836 Trade and other payables 20 5,040,698 4,551,941 Current income tax payable 12,998,706 3,700,468 Employee benefits 22 132,986 108,936 Provision for mining assets and waste polygons retirement obligations 21 371,457 79,533 Other taxes payable 23 692,994 838,211 Total current liabilities 20,877,690 11,056,925 TOTAL LIABILITIES 36,345,641 33,560,805 TOTAL LIABILITIES AND EQUITY 432,307,310 225,251,312
Approved for issue and signed on behalf of the Board of Directors on 22 April 2009.
______Viktor V. Til Ludmila F. Mulyar President Chief Accountant The accompanying notes on pages 6 to 58 are an integral part of these consolidated financial statements. Translated from the Russian original 2
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TNC Kazchrome JSC Consolidated Income Statement
In thousands of Kazakhstani Tenge Note 2008 2007
Revenue 24 426,189,165 211,469,717 Cost of sales 25 (93,983,790) (75,668,864) Gross profit 332,205,375 135,800,853
Other operating income 26 2,746,830 2,789,203 Distribution costs 27 (16,060,166) (15,940,595) General and administrative expenses 28 (11,903,506) (12,486,882) Other gains - 206,035 Other operating expenses 29 (1,061,437) (4,302,422) Operating profit 305,927,096 106,066,192
Finance income 30 11,549,590 2,169,758 Finance costs 10, 31 (12,648,146) (3,378,924) Share of after tax loss of associates 8 - (862,361) Profit before income tax 304,828,540 103,994,665 Income tax expense 32 (97,612,880) (38,304,012) Profit for the year from continuous operations 207,215,660 65,690,653 Profit for the year from discontinued operations 33 5,061 -
Profit is attributable to: The parent Company’s shareholders 207,682,677 65,688,458 Minority interest (461,956) 2,195 Profit for the year 207,220,721 65,690,653
The accompanying notes on pages 6 to 58 are an integral part of these consolidated financial statements. Translated from the Russian original 3
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TNC Kazchrome JSC Consolidated Statement of Changes in Equity
Attributable to the Company’s shareholders
In thousands of Share Hedging Other Retained Minority Total Kazakhstani Tenge Note capital reserve Reserves earnings Total interest equity
Balance at 31 December 2006 11,777,952 - - 126,640,189 138,418,141 19,061 138,437,202 Cash flow hedges: Fair value gains in year 34, 25 - 648,120 - - 648,120 - 648,120 Tax on fair value gains (194,436) - - (194,436) - (194,436) Transfers to cost of sales 25 - (648,120) - - (648,120) - (648,120) Tax on transfers to income tax expense - 194,436 - - 194,436 - 194,436 Net income recognised directly in equity ------Profit for the year - - - 65,688,458 65,688,458 2,195 65,690,653 Total recognised income for the year - - - 65,688,458 65,688,458 2,195 65,690,653 Dividends declared 17 - - - (12,435,632) (12,435,632) (1,716) (12,437,348)
Balance at 31 December 2007 11,777,952 - - 179,893,015 191,670,967 19,540 191,690,507 Profit for the year - - - 207,682,677 207,682,677 (461,956) 207,220,721 Total recognised income for the year - - - 207,682,677 207,682,677 (461,956) 207,220,721 Dividends declared 17 - - - (12,174,817) (12,174,817) (858) (12,175,675) Compensation expense 18 - - 10,441 - 10,441 - 10,441 Consolidation of ENRC Credit 8 - - - (820,968) (820,968) 10,036,643 9,215,675
Balance at 31 December 2008 11,777,952 - 10,441 374,579,907 386,368,300 9,593,369 395,961,669
The accompanying notes on pages 6 to 58 are an integral part of these consolidated financial statements. Translated from the Russian original 4
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TNC Kazchrome JSC Consolidated Statement of Cash Flows
In thousands of Kazakhstani Tenge Note 2008 2007
Cash flows from operating activities Profit before income tax 304,833,601 103,994,665
Adjustments for: Depreciation of property, plant and equipment 7 9,166,826 8,069,620 Amortisation of intangible assets 786 879 Provision for impairment 7, 28 712,097 1,593,705 Compensation expense 18 10,441 - Employee benefits 22 (1,629,245) 159,888 Amortisation from financial guarantees 26 (315,787) (473,817) Gain on disposal of subsidiary 26 (4,739) - Gain on sales of apartments to employees 26 - (42) (Reversal of provision) / provision for obsolete and slow-moving inventory 13, 28 (45,452) 113,832 (Reversal of provision) / provision on receivables impairment 14, 28 (6,420) 51,454 Share of after tax loss of associates 8 - 862,361 Losses on changes in fair value of other financial assets 10, 31 721,177 (206,035) Commission on sale of investments - 17,900 Loss from initial recognition of financial guarantees 29 (485) - Losses less gains on disposal of property, plant and equipment 29 286,092 263,748 Unwinding of the present value discount from loans receivable 30 (3,167,145) (608,150) Interest income 30 (8,322,509) (1,125,040) Interest expense 31 3,070,087 1,104,593 Unwinding of the present value discount 31 542,940 347,353 Losses less gains on origination of loans at non-market rate 31 8,353,301 1,926,978 Unrealised foreign currency exchange (98,802) (436,568)
Operating cash flows before working capital changes 314,106,764 115,657,324 (Increase) / Decrease in inventories 13 (9,977,232) 55,311 Increase in trade receivables and other current assets 14 (52,487,879) (37,738,321) Decrease in restricted cash 12 190,325 56,636 (Decrease) / Increase in trade and other payables 20 21,762 1,079,076 (Increase) / Decrease in provision for asset retirement obligations 21 (613,246) 153,258 Decrease in other taxes payable 23 (143,672) (436,546)
Cash generated from operations 251,096,822 78,826,738 Income tax paid 32 (92,511,599) (32,633,440) Employee benefits paid 22 (142,069) (130,267)
Net cash from operating activities 158,443,154 46,063,031
Cash flows from investing activities Purchase of property, plant and equipment 7 (32,555,801) (20,581,706) Proceeds from disposal of property, plant and equipment 139,193 49,257 Proceeds from disposal of subsidiary 51,824 - Purchase of investments held to maturity 11 (522,208) - Proceeds from sales of available for sale investments 9 - 2,937,387 Purchase of available for sale investments 9 (9,179,538) - Proceeds from sales of trading investments 10 5,524 - Loans receivable 6, 15 (47,935,516) (12,357,736) Repayment of loans receivable 6, 15 40,937,457 5,422,548 Increase in other non-current assets 12 45,881 17,100 Decrease in other payables (7,007) (10,142) Interest received 7,355,981 1,106,261 Purchase of additional interest in share capital of ENRC Credit LLP 6, 8 - (1,249,520) Dividends received 26 1,593 -
Net cash used in investing activities (41,662,617) (24,666,551)
Cash flows from financing activities Proceeds from borrowings 6, 19 14 30,989 Repayment of borrowings 6, 19 (57,913,708) (25,925) Repayment of finance lease liabilities 6, 19 (963,693) (2,142,973) Interest paid 6, 19 (3,115,783) - Dividends paid to Company’s shareholders 17 (12,201,225) (15,789,803)
Net cash used in financing activities (74,194,395) (17,928,612)
Net change in cash and cash equivalents 42,586,142 3,467,868 Unrestricted cash and cash equivalents at the beginning of the year 16 7,455,487 3,987,619
Unrestricted cash and cash equivalents at the end of the year 16 50,041,629 7,455,487
The accompanying notes on pages 6 to 60 are an integral part of these consolidated financial statements. Translated from the Russian original 5
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
1 The Company and its Operations
These financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2008 for TNC Kazchrome JSC and its subsidiaries (the “Company” or “Kazchrome”).
Principal activity The principal activity of the Company and its subsidiaries comprises the extraction and sale of chrome ore as well as the production of ferroalloys. Kazchrome is considered to be one of the world’s largest chrome ore and ferroalloy producers. The Company is regarded as a natural monopoly in some types of its activity. The Company’s head office is located at 312 Strelkovaya Diviziya Av, Promzone, Aktobe, the Republic of Kazakhstan. The Company is controlled by Eurasian Natural Resources Corporation Plc (the “Group” or “ENRC Plc”), global natural resources group with fully integrated mining, processing, energy and transport operations with the principal assets located in the Republic of Kazakhstan.
Subsurface use contracts The Company is a party to a number of subsurface use contracts granted by the Government of the Republic of Kazakhstan the terms of which are set out below:
Subsurface use contract Location Commencement Expiry*
Extraction of chromium ore Chromtau, Aktobe oblast 1997 2041 Extraction of chromium ore Chromtau, Aktobe oblast 2002 2018 Extraction of chromium ore Chromtau, Aktobe oblast 2001 2012 Exploration of chromium ore Aktobe oblast 2003 2009 Extraction of manganese ore Karaganda oblast 1999 2024 Extraction of manganese ore Karaganda oblast 1998 2018 Extraction of titanium-zirconium Aktobe oblast 2003 2021 * Each contract includes a renewal clause.
Principal operating divisions The Company has four main operating divisions: 9 Aksu Ferroalloys Plant – production of chromium, siliceous and manganese alloys; 9 Aktobe Ferroalloys Plant - production of chromium and siliceous alloys; 9 Donskoy Mining and Metal Enriching Plant (“DGOK”) – extraction, processing and dressing of chrome ore mined from open-cast and underground mines which is both sold directly and used in the production of ferroalloys; 9 Kazmarganets – extraction and processing of manganese ore which is used in the production of ferroalloys.
Company’s shareholders During 2008 and 2007 the shareholders of the Company were:
In percent 31 December 2008 31 December 2007
ENRC N.V. 98.31 98.31 Other legal entities 0.40 0.40 Individuals 1.29 1.29
ENRC N.V. is owned by ENRC Plc. The shareholders of ENRC Plc (the “Group”) are: ENRC Kazakhstan Holding B.V. 69.77% Public (including employees and directors) 18.58% State Property and Privatisation Committee of Ministry of Finance of the Republic of Kazakhstan 11.65% The shareholders of ENRC Kazakhstan Holding B.V. are Mr. P. K. Chodiev, Mr. A. R. Ibragimov and Mr. A.A. Mashkevich, each holding 14.59%, and Kazakhmys Eurasia B.V., the interest of which is 26%. At 31 December 2008 and 2007, 7,115,776 of common shares and 653,416 of preference shares of the Company owned by ENRC N.V. are transferred to ENRC Management KZ LLP for the trust management.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
1 The Company and its Operations (Continued)
Subsidiaries In addition to the four main operating divisions the Company has a number of subsidiaries which provide auxiliary services to the main operating entities:
Country of In percent of ownership incorporation Activity 2008 2007
Molservis AZF JSC Kazakhstan Dairy products production 100.00 100.00 Lotos Aktobe LLP Kazakhstan Bricks production 100.00 100.00 Martuk Sut LLP Kazakhstan Dairy products production - 100.00
Warehousing services and sales of combustive- Donskaya Neftebaza JSC Kazakhstan lubricating materials 77.62 77.62
Credit Partnership ENRC CREDIT LLP Kazakhstan Financial services 88.67 21.68
In September 2008 the Company sold 100% of interest in the share capital of Martuk Sut LLP. During 2008 the Company increased its interest in Credit Partnership ENRC CREDIT LLP from 21.68% to 88.67% (see Note 8).
2 Basis of Preparation and Significant Accounting Policies
Basis of preparation. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention as modified in connection with certain financial instruments. The principal accounting policies applied in the preparation of these financial statements are set out below.
Functional and presentation currency. All amounts in these financial statements are presented in thousands of Kazakhstani Tenge ("Tenge"), unless otherwise stated. Functional currency is the currency of the primary economic environment in which the Company operates. The Company’s functional currency is Tenge.
Accounting for the effects of hyperinflation. The Republic of Kazakhstan has previously experienced relatively high levels of inflation, and was considered to be hyperinflationary as defined by IAS 29 Financial Reporting in Hyperinflationary Economies (“IAS 29”). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the balance sheet date. As the characteristics of the economic environment of the Republic of Kazakhstan indicate that hyperinflation has ceased, effective from 1 January 1999 the Company no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 1998 are treated as the basis for the carrying amounts in these financial statements.
Consolidated financial statements. Subsidiaries are all companies (including special purpose entities) in which the Company, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Company controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Company (acquisition date) and are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between subsidiaries are eliminated; unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. The Company and all of its subsidiaries use uniform accounting policies consistent with the Company’s policies. Minority interest is that part of the net results and of the net assets of a subsidiary, including the fair value adjustments, which is attributable to interests which are not owned, directly or indirectly, by the Company. Minority interest forms a separate component of the Company’s equity.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Purchases of subsidiaries from parties under common control. Purchases of subsidiaries from parties under common control are accounted for using the pooling of interest method. Under this method the financial statements of the combined entity are presented from the date of purchase. The assets and liabilities of the subsidiary transferred under common control are at the predecessor entity’s carrying amounts. Related goodwill inherent in the predecessor entity’s original acquisitions is also recorded in these financial statements. Any difference between the carrying amount of net assets, including the predecessor entity's goodwill, and the consideration paid is accounted for in these consolidated financial statements as an adjustment to equity.
Investments in associates. Investments in associated undertakings are accounted for by the equity method of accounting. These are undertakings over which the Company generally has between 20 and 50% of the voting rights, or otherwise the Company has significant influence, but which it does not control. Unrealised gains on transactions between the Company and its associated undertakings are eliminated to the extent of the Company's interest in the associated undertakings; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies for associates have been changed where necessary to ensure consistency with the policies adopted by the Company. Equity accounting is discontinued when the carrying amount of the investment in an associated undertaking reaches zero, unless the Company has incurred obligations or guaranteed obligations in respect of the associated undertaking.
Foreign currency transactions. Monetary assets and liabilities denominated in foreign currencies at 31 December 2008 are translated into the Tenge at the official exchange rate of the Kazakhstani Stock Exchange (“KASE”) at the balance sheet date. Foreign currency transactions are accounted for at the exchange rate prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognised in the income statement. At 31 December 2008 the principal rate of exchange used for translating foreign currency balances was US dollar (USD) 1 = Tenge 120.77 (31 December 2007: USD 1= Tenge 120.30). Exchange restrictions and currency controls exist relating to converting the Tenge into other currencies. The Tenge is not freely convertible in most countries outside of the Republic of Kazakhstan.
Property, plant and equipment. Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of property, plant and equipment at 1 January 2004, the date of the Company’s transition to IFRS, was determined by reference to its depreciated replacement cost at that date (“deemed cost”). The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the given asset as a whole are depreciated individually, applying depreciation rates reflecting their anticipated useful lives. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the reporting period in which they are incurred. Recognised as an item of property, plant and equipment are specialised spare parts and servicing equipment with a significant initial value and a useful life of more than one year. Other spare parts and servicing-related equipment are recognised as inventories and accounted for in the income statement at the moment they are used. Gains or losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Mining assets are recorded at cost less accumulated amortisation and less any accumulated impairment losses. Expenditure, including evaluation costs, incurred to establish or expand productive capacity, to conduct mining- construction and mining-capital works, mining preparation works in the period of developing project capacities or mine reconstruction, are capitalised to mining assets as part of buildings and constructions. Mining assets are amortised using the units-of-production method based on the estimated economically recoverable reserves to which they relate or the straight line method if the estimated useful life of the individual asset is less than the respective life of mine.
Translated from the Russian original 8 F-135 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Depreciation. Land is not depreciated. The deemed cost of each item of property, plant and equipment is depreciated over its useful life to residual value. Each item's estimated useful life has due regard to both its own physical life limitations and/ or the present assessment of economically recoverable reserves of the mine property at which the item is located. Depreciation is charged to the income statement on a straight line basis over the estimated useful life of the individual asset or on a unit of production basis depending on the type of asset. Changes in estimates, which affect unit of production calculations, are accounted for prospectively. The expected useful lives are as follows:
Useful lives in years
Buildings and constructions 2 to 50 Machinery and equipment 2 to 35 Other equipment and motor vehicles 2 to 20 Mining assets – open pits and mines infrastructure 2 to 23 Mining assets – others Units of production basis
The residual value of an asset is the estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Company expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date.
Stripping costs. Stripping (i.e. overburden and other waste removal) costs incurred in the development of mines and open pits before production commences are capitalised as part of the cost of constructing the mines and open pits and subsequently amortised using unit of production method over the lives of the mines or open pits. The stripping costs incurred subsequently, during the production stage of its operations are included within the cost of inventory.
Impairment. The carrying amount of property, plant and equipment and all other non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not be recoverable. When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ”value in use” (being the net present value of expected future cash flows of the relevant cash generating unit) and ”fair value less costs to sell” (the amount obtainable from the sale of an asset or cash generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal). Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Company could receive for the cash generating unit in an arm’s length transaction. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The Company distinguishes three cash generating units: Aktobe Ferroalloys Plant, Aksu Ferroalloys Plant and Donskoy Mining and Metal Enriching Plant. The estimates used for impairment reviews are based on detailed mine plans and operating budgets, modified as appropriate to meet the requirements of IAS 36 Impairment of Assets. Future cash flows are based on: - estimates of the quantities of the reserves and mineral resources for which there is a high degree of confidence of economic extraction; - future production levels; - future commodity prices (assuming the current market prices will revert to the Company ’s assessment of the long term average price, generally over a period of three to five years); and - future cash costs of production, capital expenditure, close down, restoration and environmental clean up. If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the income statement so as to reduce the carrying amount in the balance sheet to its recoverable amount. A previously recognized impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognized in the income statement and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized in prior years.
Translated from the Russian original 9 F-136 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Operating leases. Where the Company is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Company, the total lease payments, including those on expected termination, are charged to profit or loss on a straight-line basis over the period of the lease. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term.
Finance lease liabilities. Where the Company is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Company, the assets leased are capitalised in property, plant and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in borrowings. The interest cost is charged to the income statement over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Company is not reasonably certain that it will obtain ownership by the end of the lease term.
Intangible assets. All of the Company’s intangible assets have definite useful lives and primarily include patent. Acquired patent is capitalised on the basis of the costs incurred to acquire and bring them to use. Intangible assets are amortised using the straight-line method over their useful lives: twelve years for patent. Long-term assets available for sale. A long-term asset is classified as intended for sale, if its carrying value is to be recovered mainly through its sale, rather than its further utilisation. Assets which meet the criteria of assets intended for sale classification are measured at the lower of their carrying value and their fair value less selling costs, and amortization of such assets is derecognised. Classification of financial assets. The Company classifies its financial assets into the following measurement categories: loans and receivables, held to maturity, available for sale and financial assets at fair value through profit and loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition.
(a) Loans and receivables
Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Company intends to sell in the near term. Loans and receivables are recognised initially at fair value plus transaction costs. Subsequently, loans and receivable are stated at amortised cost using the effective interest method. Where a loan is provided at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss. The origination gain or loss is recorded in the income statement within finance income/costs (except for loans issued to the Company's employees; in this case origination gain or loss is recorded in the income statement within cost, distribution costs and administrative expenses), unless it qualifies for recognition as an asset, liability or a charge to equity in accordance with the substance of the arrangement. Subsequently, the carrying amount of the loans is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded as finance income/costs using the effective interest method. Loans and receivables are included in current assets in the balance sheet, except for those with maturities greater than 12 months after the balance sheet date, which are classified as non-current assets (see Note 15).
(b) Held-to-maturity
The held-to-maturity classification includes quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company has both the intention and ability to hold to maturity. Management determines the classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification at each balance sheet date. If the Company fails to keep these investments to maturity other than for certain specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value rather than amortised cost.
Translated from the Russian original 10 FF-137-137 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued) Held-to-maturity investments are initially recorded at fair value including transactions costs and subsequently carried at amortised cost (net of provision for impairment loss) including any discounts using the effective interest method over the period to maturity. Held-to-maturity investments are included in non-current assets unless for investments with maturities within 12 months of the balance sheet date.
(c) Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category is acquired principally for the purpose of selling in the short term. Assets in this category are classified as current assets.
Financial assets at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement. Subsequently, financial assets at fair value through profit or loss are carried at fair value. Gains or losses arising from changes in the fair value of the “Financial assets at fair value through profit or loss” category are presented in the income statements within finance cost or income, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the income statement as part of other income when the Company’s right to receive payments is established.
All other financial assets are included in the available-for-sale category.
(d) Available for sale investments
Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. Investments are initially carried at fair value plus transaction costs and subsequently carried at fair value. Interest income on available for sale debt securities is calculated using the effective interest method and recognised in profit or loss. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Company’s right to receive payment is established. All other elements of changes in the fair value are deferred in equity until the investment is derecognised or impaired at which time the cumulative gain or loss is removed from equity to profit or loss. Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through current period’s profit or loss. When it is not possible to obtain current market value for available for sale investments due to the nature of the local financial market and management cannot estimate fair value of those investments with adequate reliability investments available for sale are recognised in the balance sheet at actual purchase cost. Available-for-sale investments are included in non-current assets unless management intends to dispose of the investment within 12 months of the balance sheet date (see Note 9). Regular purchases and sales of financial instruments are recognised on the settlement date, which is the date that an asset is delivered to or by the Company, with the change in value between the trade date and settlement date not recognised for assets carried at cost or amortised cost and recognised in equity for assets classified as available for sale. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. The Company derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the Company has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Company has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.
Translated from the Russian original 11 F-138 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Derivative financial instruments and hedging activities. Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Company designates certain derivatives as either: (a) hedges of the fair value of recognised assets or liabilities or a firm commitment (fair value hedge); (b) hedges of a particular risk associated with a recognised asset or liability or a highly probable forecast transaction (cash flow hedge); or (c) hedges of a net investment in a foreign operation (net investment hedge). The Company documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Company also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The full fair value of a hedging derivative is classified as a non-current asset or liability when the remaining hedged item is more than twelve months, and as a current asset or liability when the remaining maturity of the hedged item is less than twelve months. Trading derivatives are classified as a current asset or liability.
During 2008 the Company did not hold any derivative financial instruments. During 2007 the Company held only one derivative financial instrument designated as cash flow hedge.
a) Cash flow hedge
The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognized in equity. The gain or loss relating to the ineffective portion is recognized immediately in the income statement within ‘other gains/(losses) – net’. Amounts accumulated in equity are recycled in the income statement in the periods when the hedged item affects profit or loss (for example, when the forecast sale that is hedged takes place). The gain or loss relating to the ineffective portion is recognized in the income statement within “other gains/(losses) – net”. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognized when the forecast transaction is ultimately recognized in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is immediately transferred to the income statement within “other gains/(losses) – net”.
(b) Derivatives at fair value through profit or loss and accounted for at fair value through profit or loss
Certain derivative instruments do not qualify for hedge accounting. Changes in the fair value of any these derivative instruments are recognized immediately in the income statement within finance cost.
Inventories. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis. Chrome, manganese and other extracted minerals are recognised as raw materials when delivered to the surface and is valued at the average cost of extraction. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.
Trade and other receivables. Trade and other receivables are initially recognised at fair value. Trade and other receivables are subsequently carried at amortised cost using the effective interest method. A provision for impairment of receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments are considered indicators that the trade receivable is impaired. The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognised in the income statement.
Transactions with state owned entities. Transactions with the state owned entities are not disclosed when they are done in the ordinary course of business with terms consistently applied to all public and private entities and where there is no choice of supplier such as electricity transmission services, telecommunications and etc.
Translated from the Russian original 12 F-139 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Cash and cash equivalents. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments. Cash and cash equivalents are carried at amortised cost using the effective interest method. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date are included in other non-current assets, while balances restricted for more than three months but less than twelve months after the balance sheet date are included in other current assets. Restricted balances are excluded from cash and cash equivalents for the purpose of cash flow statement. Term deposits. Term deposits include deposits with the maturity of more than three months. These deposits are classified as other current assets since management of the Company has an intention to hold the deposits for more than three months. Term deposits are carried at amortized cost using the effective interest method.
Share capital. Ordinary shares are classified as equity. Preference shares are compound financial instruments that contain both a liability and an equity component (see earnings per share policy). The liability is initially recognised at its fair value by applying the relevant effective interest rate to the amount of mandatory annual dividends using a net present value formula for the period of the life of the mines. The life of mines is used rather than a perpetuity since the company will not generate cash flows or profits beyond the life of the mines. Subsequently, the liability is measured at amortised cost. Effects of changes in cash flow estimates on carrying amounts are recognised in the income statement. At initial recognition, the equity component is the residual, i.e. it is the proceeds received from the issuance of the preference shares less the fair value of the liability. The equity component is not subsequently re-measured.
Dividends. Dividends, except for the mandatory annual dividends on preference shares, are recognised as a liability and deducted from equity at the balance sheet date only if they are declared before or on the balance sheet date. Mandatory annual dividends on preference shares are recognised as finance costs in the income statement. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the financial statements are authorised for issue.
Value added tax (“VAT”). Value-added tax related to sales is payable to the tax authorities when goods are shipped or services are rendered. Input VAT can be offset against output VAT upon the receipt of a tax invoice from a supplier. Tax legislation allows the settlement of VAT on a net basis. Accordingly, VAT related to sales and purchases unsettled at the balance sheet date is stated in the balance sheet on a net basis.
Borrowings. Borrowings are initially recorded at fair value including transaction costs and subsequently measured at amortised cost using the effective interest method. Where a loan is obtained at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss. The origination gain or loss is recorded in the statement of income within finance income/costs. Subsequently, the carrying amount of the borrowings is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded as interest income/interest expense using the effective interest method. Interest costs on borrowings to finance the construction of property, plant and equipment are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All other borrowing costs are expensed.
Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the balance sheet date.
Trade and other payables. Trade payables are accrued when the counterparty performed its obligations under the contract. The Company recognizes trade payables at fair value. Subsequently trade payables are carried at amortised cost using the effective interest method.
Provisions for liabilities and charges. Provisions for liabilities and charges are recognised when the Company has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Where the Company expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain, i.e. when a counter party has confirmed and is financially solvent to pay reimbursement.
Translated from the Russian original 13 F-140 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Financial guarantees. Financial guarantees are contracts that require the Company to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. Financial guarantees are recognised when a premium is paid or in the case of a premium-free guarantees (intra group guarantees) when the borrower receives the money from the financing entity. When the Company issues a premium-free guarantee or a guarantee at a premium different from market premium, fair value is determined using valuation techniques (e.g. market prices of similar instruments, interest –rate differentials, etc). Losses at initial recognition of a financial guarantee liability are recognised in the income statements within other operating expenses. Financial guarantee liabilities are amortised on a straight line basis over the life of the guarantees with respective income presented within other operating income. At each balance sheet date, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the obligation at the balance sheet date.
Provision for mining assets and waste polygons retirement obligations. Mining assets and waste polygons retirement obligations are recognized when there is a high certainty of incurring the costs and those costs can be measured reliably. Mining assets retirement costs include the landfill site restoration and closure (dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas). Waste polygons retirement costs include the landfill site restoration and closure of waste polygons (dismantling and demolition of polygon infrastructure, the removal of residual materials and discharge monitoring). Estimated landfill site restoration and remediation costs are provided for and incurred in the cost of property, plant and equipment in the accounting period when the obligation arising from the related disturbance occurs during the mine development phase or when the related damage occurs, based on the net present value of estimated future costs. Provisions for mining assets and waste polygons retirement obligations do not include any additional obligations which are expected to arise from future disturbance. The costs are estimated on the basis of a closure and restoration plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, e.g. updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals. Although the ultimate cost to be incurred is uncertain, the Company estimates their costs based on feasibility and engineering studies using current restoration standards and techniques for conducting restoration and remediation works. The amortisation or ”unwinding” of the discount applied in establishing the net present value of provisions is charged to the income statement in each accounting period. The amortisation of the discount is shown as a financing cost, rather than as an operating cost. Other movements in the provisions for mining assets and waste polygons retirement obligations, resulting from new disturbance as a result of mine development, updated cost estimates, changes to the estimated lives of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the lives of the assets to which they relate using the depreciation methods applied to those assets. Movements in the provisions for asset retirement obligations that relate to disturbance caused by the production phase are charged in the income statement. Where restoration and remediation works are conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the estimated outstanding continuous remediation work at each balance sheet date and the cost is charged to the income statement. Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of the risks and rewards of ownership of the goods, normally when the goods are shipped. If the Company agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Sales of services are recognised in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts. Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or service given up. Revenue from sales of ferroalloys is subject to adjustment based on an inspection of the quantity and quality of product by the customer. In such cases, revenue is initially recognised on a provisional basis using the Company's best estimate of ferroalloys delivered and contained metal. Any subsequent adjustments to the initial estimate of the quantity delivered and metal content are recorded in revenue once they have been determined. Mining royalties are included within cost of sales.
Translated from the Russian original 14 F-141 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Exploration costs. Exploration costs are expensed as incurred up to the point when the evaluation demonstrates that there are commercially viable reserves present and there are probable future economic benefits from the continued development and production of the resource. All subsequent costs are capitalised up to the point when commercial production commences.
Employee benefits. The Company provides long term employee benefits to employees before, on and after retirement, in accordance with a Collective Labour Agreement. The agreement provides for one-off retirement payments, financial aid for employees’ disability, significant anniversaries and funeral aid to the Company’s employees. The entitlement to some benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. The expected costs of the benefits associated with one-off retirement payments are accrued over the period of employment using the same accounting methodology as used for defined benefit post-employment plans. For defined benefit post-employment plans, the difference between the fair value of the plan assets (if any) and the present value of the plan liabilities is recognised as an asset or liability on the balance sheet. Actuarial gains and losses arising in the year are taken to the income statement. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred.
Other movements in the net surplus or deficit are recognised in the income statement, including current service cost, any past service cost and the effect of any curtailments or settlements. The most significant assumptions used in accounting for defined benefit obligations are the discount rate and the mortality assumptions. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the income statement as interest cost. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities. Employee benefits other than one-off retirement payments are considered as other long-term employee benefits. The entitlement to these benefits is usually conditional on the completion of a minimum service period. The expected cost of these benefits is accrued over the period of employment using the same accounting methodology as used for the defined benefit plan. These obligations are valued annually by independent qualified actuaries.
Share based compensation. The Group issues equity settled share-based payments to certain employees which must be measured at fair value and recognized as an expense in the income statement, with a corresponding increase in equity in the case of equity-settled payments, and liabilities in the case of cash-settled awards. The fair values of equity-settled payments are measured at the dates of grant using Monte-Carlo evaluation model. The fair value is recognized over the period during which employees become unconditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to the employees leaving the Group prior to vesting or due to performance Target not being made. The total amount recognized in the income statement as an expense is adjusted to reflect the actual number of awards that vest.
Payroll expense and related contributions. Wages, salaries, social tax, contributions to social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Company.
Pension payments, except for described above in employee benefits. The Company does not incur any expenses in relation to pension payments for its employees. In accordance with the legal requirements of the Republic of Kazakhstan, the Company withholds pension contributions from employees’ salary and transfers them into the employee’s designated pension fund. Upon retirement of employees, all pension payments are administered by such pension funds.
Translated from the Russian original 15 F-142 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
2 Basis of Preparation and Significant Accounting Policies (Continued)
Income taxes. Income taxes have been provided for in the financial statements in accordance with Kazakhstani legislation enacted on the balance sheet date. The income tax charge comprises current (corporate and excess profit) tax and deferred tax and is recognised in the income statement, except for where it is recognised directly in equity because it relates to transactions that are also recognised, in the same or a different period, directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable income or losses are based on estimates where the financial statements are authorised prior to the filling of the relevant tax return. Taxes, other than on income, are recorded within operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry-forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. The deferred tax assets and liabilities are settled within each separate subsidiary included in the consolidated financial statements of the Company. Deferred tax balances are measured at corporate income and excess profit tax rates enacted or substantively enacted at the balance sheet date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred excess profit tax is calculated with respect to temporary differences in respect of assets and liabilities allocated to contracts for subsurface use at the expected rate of excess profits tax to be paid under the contract. Deferred tax assets for deductible temporary differences and tax loss carry-forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. In accordance with Tax legislation, effective as of 31 December 2008 excess profit tax was payable under subsurface use contracts where the cumulative internal rate of return during the current year exceeded 20%. The taxable base for excess profit tax (EPT) is the taxable income used for the calculation of the corporate income tax less the corporate income tax itself. Whereas the EPT rate is based on the cumulative internal rate of return in respect of the each of subsurface use contracts. Starting from 1 January 2009 the new Tax Code became effective which changed the method for assessment of excess profit tax (see Note 34). Liabilities for excess profit tax are recorded in accordance with the Company's accounting policies for current and deferred tax and based on management's understanding of the provisions of the subsurface use contracts and tax regulations.
Finance income and costs. Finance income and costs comprise interest expense on borrowings and loans payable, deposits, loans to own employees, interest income/expense from unwinding of discount on provision for asset retirement obligations and other financial assets and liabilities, net foreign exchange gains/(losses) related to respective financial assets and liabilities. Interest income is recognised as it accrues, taking into account the effective interest on the asset.
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial period include:
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Contract on subsurface use. The major contract of the Company on subsurface use for the extraction of chromium ore expires in 2041. The management of the Company expects that this contract will be extended at nominal cost until the end of the mine life which is expected to be in 2074. In these financial statements primarily depreciation charge and carrying amounts of property, plant and equipment were recorded on the assumption that the subsurface use contracts will be extended until the end of the mine life. The Company believes that it has a right to extend the contracts on subsurface use in accordance with the contracts and current subsurface use legislation. If the contracts are not renewed in 2041, the carrying amount of property, plant and equipment to be written off at the day of subsurface use contract expiry will be Tenge 3,306,800 thousand.
Estimated useful life of mining assets and mineral reserves. The mining assets, classified within property, plant and equipment, are depreciated over the respective life of mine using the unit of production (UOP) method based on proved and probable mineral reserves. When determining mineral reserves, assumptions that were valid at the time of estimation may change when new information becomes available. Any changes could affect prospective depreciation rates and asset carrying values. The calculation of the units of production rate of depreciation could be impacted to the extent that actual production in the future is different from current forecast production based on proved and probable mineral reserves, which would generally arise as a result of significant changes in any of the factors or assumptions used in estimating mineral reserves. These factors could include: - changes to proved and probable mineral 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 mineral 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 mineral reserves.
The majority of other property, plant and equipment are depreciated on a straight line basis over their useful economic lives. Management reviews the appropriateness of assets useful economic lives at least annually; any changes could affect prospective depreciation rates and asset carrying values. As at 31 December 2008 the carrying amount of mining assets included within buildings and constructions was Tenge 3,688,329 thousand (2007: Tenge 4,349,376 thousand).
Provision for mining assets and waste polygons retirement obligations. In accordance with the environmental legislation and the contracts on subsurface use the Company has a legal obligation to remediate damage caused to the environment from its operations and to decommission its mining assets and waste polygons and restore a landfill site after its closure. Provision is made, based on net present values, for site restoration and rehabilitation costs as soon as the obligation arises from past mining activities. The provision for mining assets and waste polygons retirement obligation is estimated based on the Company’s interpretation of current environmental legislation in the Republic of Kazakhstan and the Company’s related program for liquidation of subsurface use consequences on the contracted territory and other operations supported by the feasibility study and engineering researches in accordance with the existing rehabilitation standards and techniques. Provisions for retirement obligations are subject to potential changes in environmental regulatory requirements and the interpretation of the legislation. Provisions for mining assets and waste polygons retirement obligations are recognized when there is a certainty of incurring those and when it is possible to measure the amounts reliably. As at 31 December 2008 the carrying amount of the provision for mining assets retirement obligations was Tenge 705,475 thousand (2007: Tenge 1,665,446 thousand). As at 31 December 2008 the carrying amount of waste polygons retirement obligations was Tenge 1,933,656 thousand (2007: Tenge 1,000,790 thousand).
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Impairment. In accordance with IAS 36 “Impairment of assets”, the Company reviews the carrying amounts of its long- term tangible assets (principally property, plant and equipment) to determine whether there is any indication that these assets are impaired. The global economic downturn and falling demand for commodities was considered by management as an impairment indicators for long-term tangible assets. Accordingly, as of 31 December 2008 a review of the carrying values and estimated recoverable amounts of the Company’s property, plant and equipment was performed. The Company’s strategic planning models were used to calculate the discounted future cash flows (using the “value-in- use” method as defined under IAS 36) and thus assess the recoverability of the carrying value of property, plant and equipment. The models were prepared on a life of mines basis as this period properly reflects the long term nature of the Company’s assets. The expected future cash flows of a cash generating unit reflect long term mine plans which are based on detailed research, analysis and iterative modelling to optimise the level of return from the investment, the output and the sequence of extraction. The plan takes into account all relevant characteristics of the ore body, including waste to ore ratios, ore grades, haul distances, chemical and metallurgical properties of the ore impacting on process recoveries and capacities of processing equipment that can be used in the production of chrome-ore products. Therefore, mines plan is the basis for the forecast of future production level for each subsequent year and related costs. Cost levels incorporated in the cash flow forecasts are based on the current production plan for each cash generating unit. For impairment reviews, recent cost levels are considered, together with expected changes in costs that are compatible with the current condition of the business and which meet the requirements of IAS 36. IAS 36 includes a number of restrictions on future cash flows that can be recognized in respect of future restructurings and improvement related capital expenditure. The pre-tax discount rate applied is based upon the Company’s weighted average cost of capital with appropriate adjustment for the risks associated with the relevant cash flows, to the extent that such risks are not reflected in the forecast cash flows. The key assumptions which formed the basis of forecasting future cash flows in the models are: - commodity prices, which are based on internal forecasts by the management of the Group’s sales and marketing business. These internal forecasts are consistent with the forecasts of industry market researchers. - long-term costs will be in line with current operational performance, as adjusted for future inflation rates in Kazakhstan and, where applicable, the expected movements in key input costs. - the successful extraction, processing and sale of the reserves in accordance with the quantities described in the report on ore reserves and mineral resources. - the long-term Kazakhstani inflation rate will average 6% per annum, in line with external forecasts. - the long-term US inflation rate will average 2.5% per annum, in line with external forecasts. In calculating the discount rate to be applied to the future cash flows the Group consulted with external advisors. The rate which was used, applied to pre tax cash flows, was the equivalent of a post tax rate of 14.1% which is the advisor’s opinion on the Weighted Average Cost of Capital for the Group. The recoverability of the value of current assets is addressed through the Company’s usual procedures, for example the assessment of counterparty default risk, both customer and financial counterparties, and is not part of this impairment review. The impairment review concluded that no impairment provisions are required for long term tangible assets. The application of IAS 36 requires extensive judgment on the part of management regarding the assumptions and estimates related to future cash flows and the discount rate. Given the nature of the current global economic environment such assumptions and estimates ultimately have a high degree of uncertainty associated with them. Consequently, other assumptions of equal validity could give rise to materially different results.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Tax and transfer pricing legislation. Kazakh tax and transfer pricing legislation is subject to varying interpretations (see Note 34).
Fair value of financial guarantees. The fair values of premium-free financial guarantees issued by the Company are determined by using valuation techniques. The Company uses its judgement to determine fair value of financial guarantees issued by applying market prices of similar instruments (e.g. financial guarantees issued by commercial banks).
Fair value of financial instruments. The management of the Company uses its judgement to select a variety of methods and verify assumptions that are mainly based on market conditions existing at each balance sheet date in determining the fair value of the Company’s financial instruments.
4 New Accounting Pronouncements
(a) Standards, amendments and interpretations effective in 2008:
IFRIC 11, 'IFRS 2 – Group and treasury share transactions’ (effective for annual periods beginning on or after 1 March 2007) provides guidance on whether share-based transactions involving treasury shares or involving group entities (for example, options over a parent's shares) should be accounted for as equity-settled or cash-settled share-based payment transactions in the stand-alone accounts of the parent and group companies. New disclosures are presented in these consolidated financial statements.
(b) Standards, amendments and interpretations effective in 2008, but not relevant.
IFRIC 14, 'IAS 19 – The limit on a defined benefit asset, minimum funding requirements and their interaction' provides guidance on assessing the limit in IAS 19 Employees benefits on the amount of the surplus that can be recognised as an asset. IFRIC 14 also explains how the pension asset or liability may be affected by a statutory or contractual minimum funding requirement. The Company does not have any defined benefit plan, therefore this Interpretation does not have any effect on the Company’s financial statements.
IFRIC 12, Service Concession Arrangements. IFRIC 12 addresses how service concession operators should apply existing IFRS to account for the obligations they undertake and rights they receive in service concession arrangements. It does not address accounting for the government side of service concession arrangements. As the Company does not have concession arrangements, IFRIC 12 is not relevant to the Company’s operations.
IFRIC 13, Customer Loyalty Programmes. IFRIC 13 addresses accounting by entities that grant loyalty award credits (such as ‘points’ or travel miles) to customers who buy other goods or services. Specifically, it explains how such entities should account for their obligations to provide free or discounted goods or services (‘awards’) to customers who redeem award credits. As the Company does not have customer loyalty programmes, IFRIC 13 is not relevant to the Company’s operations.
(c) Standards, amendments and interpretations to existing standards that are not yet effective and have not been early adopted by the Company:
IAS 23 (Amendment), Borrowing Costs (effective from 1 January 2009). The revised standard removes the option of immediately recognising as an expense borrowing costs that relate to assets that take a substantial period of time to get ready for use or sale. Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset form part of the cost of that asset. This revision will not impact the Company’s financial statements as the current Company’s policy is to capitalise interest costs on borrowings to finance the construction of property, plant and equipment during the period of time that is required to complete and prepare the asset for its intended use.
IFRS 8, Operating Segments (effective for annual periods beginning on or after 1 January 2009). IFRS 8 replaces IAS 14 and brings the reporting segments into line with the requirements of SFAS USA 131 Disclosure of Entity Segment and Related Information. The new standard requires to apply “the management approach”, whereby the segment information is presented on the basis applied for internal reporting. The Company will apply IFRS 8 from 1 January 2009. The Company does not expect any significant effect of adoption of this Standard.
Translated from the Russian original 19 F-146 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IAS 1, Presentation of Financial Statements (revised in September 2007; effective for annual periods beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income statement by a statement of comprehensive income which will also include all non-owner changes in equity, such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1 also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes in accounting policies, or corrections of errors. The Company expects the revised IAS 1 to affect the presentation of its financial statements but to have no impact on the recognition or measurement of specific transactions and balances.
IFRS 2 (Amendment), Share-based Payment - Vesting Conditions and Cancellations (effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or by other parties, should receive the same accounting treatment. The Company does not anticipate any significant impact from application of this standard. The Company will start to apply IFRS 2 from 1 January 2009.
IFRS 3 (Revised in 2007), Business Combinations (effective for annual periods beginning on or after 1 July 2009). The standard IFRS 3 (revised) continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with some contingent payments subsequently remeasured at fair value through income. Goodwill may be calculated based on the parent’s share of net assets or it may include goodwill related to the minority interest. All transaction costs will be expensed. The Company will apply IFRS 3 (Revised) from 1 January 2010.
IAS 27 (Revised), Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority interests”) even if this results in the non- controlling interests having a deficit balance (the current standard requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control must be accounted for as equity transactions. It also specifies how an entity should measure any gain or loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained in the former subsidiary will have to be measured at its fair value. The Company does not expect the amended standard to have a material effect on its financial statements.
IAS 32 (Amendment), Financial instruments: Presentation' and IAS 1, Presentation of financial statements – Puttable financial instruments and obligations arising on liquidation (effective for annual periods beginning on or after 1 January 2009). The amendment requires entities to classify the following types of financial instruments as equity, provided they have particular features and meet specific conditions: 1) Puttable financial instruments (for example, some shares issued by co-operative entities and some partnership interests); 2) Instruments, or components of instruments, that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation (for example, some shares issued by limited life entities). The Company will apply amendments to IAS 32 from 1 January 2009, and does not expect any significant impact on its financial statements.
IFRS 5 (Amendment), Non-current assets held for sale and discontinued operations (effective for annual periods beginning from 1 July 2009). The amendment clarifies that all of a subsidiary's assets and liabilities are classified as held for sale, if a partial disposal sale plan results in loss of control, and relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. The Company will apply the revised IFRS 5 presumably to all partial sales of subsidiaries from 1 January 2010.
IAS 23 (Amendment), Borrowing costs (effective for annual periods beginning from 1 January 2009). The definition of borrowing costs has been amended so that interest expense is calculated using the effective interest method defined in IAS 39 'Financial instruments: Recognition and measurement’. This eliminates the inconsistency of terms between IAS 39 and IAS 23. The Company will apply the IAS 23 (Amendment) to qualifying assets from 1 January 2009.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IAS 28 (Amendment), Investments in associates and consequential amendments to IAS 32, Financial Instruments: Disclosures and Presentation and IFRS 7, Financial instruments: Disclosures (effective for annual periods beginning from 1 January 2009). Amendment explains that that cost of investment is tested for impairment under IAS 36 Impairment of Assets as a single asset. Recognised impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Accordingly, reversals of impairment loss are recognised under IAS 36 as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. Where an investment in associate is accounted for in accordance with IAS 39 ‘Financial instruments: Recognition and measurement’ only certain, rather than all disclosure requirements in IAS 28 need to be made in addition to disclosures required by IAS 32, ‘Financial Instruments: Presentation’ and IFRS 7 ‘Financial Instruments: Disclosures’. The Company will apply the IAS 28 (Amendment) to impairment tests related to investment in subsidiaries and any related impairment losses from 1 January 2009.
IAS 36 (Amendment), Impairment of assets (effective for annual periods beginning from 1 January 2009). This amendment requires where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Company will apply the IAS 36 (Amendment) and provide the required disclosure where applicable from 1 January 2009.
IAS 38 (Amendment), Intangible assets, (effective for annual periods beginning from 1 January 2009). The amendment explains that a prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. The amendment deletes the wording that states that there is 'rarely, if ever' support for use of an amortisation method for intangible assets with definite useful lives that results in a lower rate of amortisation than the straight line method. The Company will apply the revised IAS 38 from 1 January 2009.
IAS 19 (Amendment), Employee benefits (effective for annual periods beginning from 1 January 2009). The amended standard relates to the following: - The amendment clarifies the differences between the curtailment and the negative cost of the past services. If a plan amendment results in decrease of employee benefits, effect of decreased benefits on future services is a curtailment. Effect of any decreases of past services is a negative past service cost; - The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation; - The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. The Company will apply amendments to IAS 19 from 1 January 2009, and does not expect any significant effect on its financial statements.
IAS 39 (Amendment), Financial instruments: Recognition and measurement (effective for annual periods beginning from 1 January 2009). These amendments relate to the following: - It is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge;
- The definition of financial asset or financial liability at fair value through profit or loss is also amended;
- This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit-taking is included in such a portfolio on initial recognition;
- The current guidance on designating and documenting hedges states that a hedging instrument needs to involve a party external to the reporting entity and cites a segment as an example of a reporting entity. The amendment removes the references to definitions of hedging instruments on the segment level;
- When remeasuring the carrying amount of a debt instrument on cessation of fair value hedge accounting, the amendment clarifies that a revised effective interest rate (calculated at the date fair value hedge accounting ceases) are used. The Company will apply the IAS 39 (amendment) from 1 January 2009. It is not expected to have a significant impact on the Company’s financial statements.
Translated from the Russian original 21 F-148 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IAS 1 (Amendment), Presentation of financial statements (revised in September 2007; effective for annul periods beginning on or after 1 January 2009). The amendment clarifies that financial assets and liabilities classified as held for trading in accordance with IAS 39, 'Financial instruments: Recognition and measurement’ should be recognised as current assets and liabilities regardless of their maturities. The Company will apply the IAS 39 (Amendment) from 1 January 2009. It is not expected to have an impact on the Company’s financial statements.
IAS 16 (Amendment), Property, plant and equipment and consequential amendment to IAS 7, Statement of cash flows) (effective for annual periods beginning from 1 January 2009). Entities whose ordinary activities comprise renting, and subsequently selling assets should transfer the carrying amount of the asset to inventories when the asset becomes held for sale. Cash payments to manufacturer or owner of such asset held for renting or sale are classified as cash flows from operating activities. Cash flows arising from rental and subsequent sales of those assets are classified as cash flows from operating activities. The Company will apply IAS 16 (Amendment) from 1 January 2009.
(d) Standards, amendments and interpretations to existing standards, published and obligatory to the reporting periods of the Company, beginning on or after 1 January 2009 or later periods but not relevant to the Company’s operations:
IFRS 1 (Amendment) First time adoption of IFRS and IAS 27 Consolidated and separate financial statements (effective for annual periods beginning from 1 July 2009). The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removes the definition of the cost method from IAS 27 and replaces it with a requirement to present dividends as income in the separate financial statements of the investor. These amendments will not have any effect on the Company’s financial statements, since the Company completed the transition to the IFRS.
IAS 29 (Amendment), Financial reporting in hyperinflationary economies (effective for annual periods beginning from 1 January 2009). The guidance has been amended to reflect the fact that a number of assets and liabilities are measured at fair value rather than historical cost. The amendment will not have an impact on the Company’s operations, as the Company does not operate in hyperinflationary economies.
IAS 31 (Amendment), Interests in joint ventures (effective for annual periods beginning from 1 January 2009). Where an investment in joint venture is accounted for in accordance with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32, ‘Financial instruments: Presentation’ and IFRS 7 ‘Financial instruments: Disclosures’. The amendment will not have an impact on the Company’s operations as there are no interests held in joint ventures.
IAS 40 (Amendment), Investment property (effective for annual periods beginning from 1 January 2009). Where the fair value model is applied, such property is, therefore, measured at fair value. However, where fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably measurable. The amendment will not have an impact on the Company’s operations, as there are no investment properties are held by the Company.
IAS 41 (Amendment), Agriculture (effective for annual periods beginning from 1 January 2009). It requires the use of a market-based discount rate where fair value calculations are based on discounted cash flows and the removal of the prohibition on taking into account biological transformation when calculating fair value. The amendment will not have an impact on the Company’s operations as no agricultural activities are undertaken.
IAS 20 (Amendment), Accounting for government grants and disclosure of government assistance (effective for annual periods beginning from 1 January 2009). The benefit of a below-market rate government loan is measured in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. Income from government loans is measured as at loan origination as difference between the proceeds and the cost stated in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. The amendment will not have an impact on the Company’s operations as there are no loans received or other grants from the government.
IFRIC 15, Agreements for construction of real estates (effective for annual periods beginning from 1 January 2009). The interpretation clarifies whether IAS 18, ‘Revenue’, or IAS 11,’Construction contracts’ should be applied to particular transactions. It is likely to result in IAS 18 being applied to a wider range of transactions. IFRIC 15 is not relevant to the Company’s operations, since all revenue transactions are stated in accordance with IAS 18.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
4 New Accounting Pronouncements (Continued)
IFRIC 16, Hedges of a net investment in a foreign operation (effective from 1 October 2008). IFRIC 16 clarifies the accounting treatment in respect of net investment hedging. When hedging net investment into a foreign operation, exchange rate risk is subject to hedging. The requirements of IAS 21, ‘The effects of changes in foreign exchange rates’, do apply to the hedged item. This amendment will not have any impact on the Company’s operations, since the Company does not hedge net investments.
IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2008). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. This interpretation will not have any effect on the Company’s operations, since to date the Company does not distribute non-cash assets to its owners.
IFRIC 18, ‘Transfers of Assets from Customers’ (effective from 1 July 2009). The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. The Company is currently assessing the impact of the new interpretation on its financial statements.
(e) There is a range of minor amendments to IAS 7, Financial instruments: Disclosures, IAS 8, Accounting Policy, Changes in Estimates and Errors, IAS 10, Subsequent Events, IAS 18 Revenue and IAS 34 Interim Financial Statements, which are part of the IASB’s annual improvements project published in May 2008 and represent solely the amendments to terminology and editor amendments which under IASB opinion do not have any impact on the accounting or have minor impact.
5 Employee Information
The average number of employees (including executive directors) employed by the Company during the year was:
2008 2007
DGOK 7,577 7,386 Aksu Ferroalloys Plant 6,460 6,649 Aktobe Ferroalloys Plant 3,267 3,286 Kazmarganets 843 868 Administration 107 150 Subsidiaries 302 337
Total 18,556 18,676
Total staff costs (including executive directors) for the Company were:
in thousands of Kazakhstani Tenge 2008 2007
Wages, salaries and other bonuses 18,321,633 16,112,365 Compensation expense 10,441 - Post employment and other long-term benefits (see Note 22) (1,386,622) 314,606
Total staff costs 16,945,452 16,426,971
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
5 Employee Information (Continued)
Key management personnel compensation for the Company was:
in thousands of Kazakhstani Tenge 2008 2007
Wages, salaries and other bonuses 262,531 302,760 Compensation expense 10,441 - Post employment and other long-term benefits (1,920) 94
Total key management compensation 271,052 302,854
6 Balances and Transactions with Related Parties
For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Company’s ultimate shareholders are disclosed in Note 1. The nature of the related party relationships for those related parties with whom the Company entered into significant transactions or had significant balances outstanding at 31 December 2008 and 2007 are detailed below. At 31 December 2008, the outstanding balances with related parties were as follows:
Entities under Key management In thousands Kazakhstani Tenge Note Shareholders common control personnel
Restricted cash (contractual interest rates: 0%, 4.5%-7% p.a., effective interest rates: 4.5%-7% p.a) 12 - 155,654 - Long-term receivables 12 - 70,960 1,320 Provision for impairment of other non-current assets 12 - (70,960) (1,320) Trade receivables 14 - 106,327,951 - Prepayments 14 - 1,097,274 - Prepaid insurance 14 - 337,603 - Other receivables 14 - 205,173 1,320 Term deposits (2008: contractual interest rate: 3- - 4,75%, effective interest rate: 3,91-5,3%; 2007: contractual interest rate: 8.5%, effective interest rate: 8.84%) 14 120,260 - Letters of credit, Tenge 14 - 63,042 - Provision for impairment of accounts receivables 14 - (61,900) (1,320) Long-term portion of loans receivable 15 76,020,320 7,051 Short-term portion of loans receivable 15 3,594,605 - Term deposits (contractual interest rate 7%, 8.5% p.a., effective interest rate 7%, 8.5% p.a.) 14, 16 - 14,548,955 - Cash in bank, USD 16 - 177,085 - Cash in bank, Tenge 16 - 1,245,139 - Cash in bank, EUR 16 236,429 - Cash in bank, RR 16 - 61,528 - Dividends payable 17 359,707 - - Finance lease liabilities 19 - 6,314,942 - Present value of defined benefit obligation at end of year 22 - - 1,948 Trade payables 20 - 410,653 - Payables to employees 20 - - 16,926 Provisions for claims 20 - 158,774 - Advances received 20 - 3,347 - Financial guarantees 20, 34 - 709,059 - Other creditors 20 - 103,219 -
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
At 31 December 2007, the outstanding balances with related parties were as follows:
At Entities under common Key management In thousands Kazakhstani Tenge Note Shareholders control personnel
Investments in associates 8 - 1,976,165 - Restricted cash (contractual interest rates: 0%, 4,5%- 7% p.a., effective interest rates: 4,5%-7% p.a) 12 - 345,979 - Long-term receivables 12 - 250,365 2,640 Provision for impairment of other non-current assets 12 - (135,500) (2,640) Trade receivables 14 - 58,784,818 - Prepayments 14 - 2,088,544 - Prepaid insurance 14 - 541,760 - Other receivables 14 - 193,319 1,320 Provision for impairment of accounts receivables 14 - (63,220) (1,320) Long-term portion of loans receivable 15 - 9,162,018 - Term deposits (contractual interest rate 7%, 8.5% p.a., effective interest rate 7%, 8.5% p.a.) 14, 16 - 7,623,305 - Cash in bank, USD 16 - 488,647 - Cash in bank, Tenge 16 - 196,957 - Cash in bank, EUR 16 - 53,930 - Cash in bank, RR 16 - 10,777 - Letters of credit, Tenge 14 - 44,647 - Finance lease liabilities 19 - 7,225,249 - Present value of defined benefit obligation at end of year 22 - - 3,867 Trade payables 20 - 116,776 - Dividends payable 17 309,657 - - Payables to employees 20 - - 15,887 Provisions for claims 20 - 57,439 - Advances received 20 - 5,032 - Promissory notes 20 - 2,323 - Financial guarantees 20,34 - 1,043,460 - Other creditors 20 - 114,232 -
Translated from the Russian original 25 F-152 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
-
6 Balances and Transactions with Related Parties (Continued)
The transactions with related parties for the year 2008 were as follows:
Entities under Key management In thousands of Kazakhstani Tenge Note Shareholders common control personnel
Revenue from sales of goods and services: Ferroalloys 24 - 364,511,077 - Chrome ore 24 - 50,020,188 - Heat and power 24 - 9,059 - Other 24 - 112,236 - Insurance income 26 - 800,703 - Rent Income 26 19,632 Amortisation from financial guarantees 26 - 315,787 - Sales of inventory 26 - 134,025 - Interest income on bank deposits 30 - 547,351 - Unwinding of the present value discount 30 - 3,159,636 - Interest income on loans given 30 4,844,059 161 Raw materials consumables purchases 25 - 9,852,136 - Electricity purchases 25 - 18,707,274 - Other 25 -1,311,058 - Purchases of property, plant and equipment including fixed assets held under finance lease 7 - 171,630 - Insurance costs 25,27,28 - 1,682,906 - Commission fees 25 - 1,144,166 - Transportation services - outbound 27 - 931,190 - Other 27 85,031 Sponsorship and other financial aid 28 - 1,666,281 - Payroll and related expense 5, 28 - - 262,531 Information, consulting and other professional 28 services - 2,268,607 - Bank charges 28 - 172,369 - Rent expense 28 - 288,224 - Post-employment and other long-term benefits 5, 28 - - (1,920) Compensation expense 18 - - 10,441 Security services 28 - 48,758 - Other 28 - 169,377 - Losses less gain on disposals of property, plant and equipment 29 - 22,168 - Other operating expenses 29 31,469 - Losses less gains on origination of loans at non- market rate 31 - 8,353,301 - Interest expense on borrowings 31 - 2,078,959 - Interest expense on finance lease 31 - 941,749 - Other interest expenses 31 - 89 - Dividends declared 17 12,251,275 - -
Translated from the Russian original 26 F-153 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
The transactions with related parties for the year 2007 were as follows:
Entities under Key management In thousands of Kazakhstani Tenge Note Shareholders common control personnel
Revenue from sales of goods and services: Ferroalloys 24 - 176,929,974 - Chrome ore 24 - 27,714,423 - Ilmenite concentrate 24 - 1,581 - Other 24 - 74,969 - Insurance income 26 - 1,438,383 - Rent income 26 - 12,213 - Amortisation from financial guarantees 26 - 472,320 - Sales of inventory 26 - 43,428 - Interest income on bank deposits 30 - 747,892 - Unwinding of the present value discount 30 - 175,035 - Interest income on loans receivable 30 - 12,554 - Raw materials consumables purchases 25 - 8,446,433 - Electricity purchases 25 - 8,597,354 - Other 25 - 719,000 - Purchases of property, plant and equipment including fixed assets held under finance lease 7 - 247,368 - Purchases of ENRC Credit LLP interest 8 - 1,249,520 - Insurance costs 25,27,28 - 3,372,996 - Commission fees 25 - 1,184,090 - Transportation services - outbound 27 - 524,712 - Other 27 - 33,326 - Sponsorship and other financial aid 28 - 1,573,181 - Payroll and related expense 28 - - 302,760 Information, consulting and other professional services 28 - 958,226 - Membership fees 28 - 520,000 - Bank charges 28 - 242,973 - Rent expense 28 - 349,582 - Post-employment and other long-term benefits 28 - - 94 Security services 28 - 67,249 - Other 28 - 220,881 - Losses less gain on disposals of property, plant and equipment 29 - (68) - Other operating expenses 29 - 15,685 - Losses less gains on origination of loans at non-market rate 31 - 1,355,967 - Interest expense on finance lease 31 - 1,090,237 - Other interest expense 31 - 13 - Dividends declared 17 12,512,948 - -
Translated from the Russian original 27 F-154 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
6 Balances and Transactions with Related Parties (Continued)
In 2008 and 2007, the Company sold chromium ore and ferroalloys primarily to ENRC Marketing AG, Industrial Metals LLC, Serov Ferroalloy Plant. Prices for ferroalloys and chromium ore are linked to the market prices published by Metals Bulletin. At 31 December 2008 and 31 December 2007 guarantees issued by the Company were as follows:
In thousands of Kazakhstani Tenge 2008 2007
Entities under common control 178,739,600 179,507,699
7 Property, Plant and Equipment
Movements in the carrying amount of property, plant and equipment were as follows:
Machinery In thousands of Kazakhstani Freehold Buildings and and Construction Tenge land constructions equipment Other in progress Total
Cost at 31 December 2006 4,952,215 32,888,868 54,608,422 6,126,088 15,926,072 114,501,665 Accumulated depreciation - (5,315,362) (14,274,670) (2,444,827) - (22,034,859)
Carrying amount at 31 December 2006 4,952,215 27,573,506 40,333,752 3,681,261 15,926,072 92,466,806
Additions 102,763 879,153 2,711,358 1,066,279 14,368,020 19,127,573 Transfers - 7,104,371 9,834,481 121,627 (17,060,479) - Depreciation - (1,911,367) (6,217,689) (791,138) - (8,920,194) Disposals (644) (75,198) (266,017) (35,955) (19,641) (397,455) Provision for impairment - (251,202) (1,342,503) - - (1,593,705) Other - 118,888 2,505 - (118,677) 2,716
Cost at 31 December 2007 5,054,334 40,878,194 66,588,078 7,004,152 13,095,295 132,620,053 Accumulated depreciation - (7,440,043) (21,532,191) (2,962,078) - (31,934,312)
Carrying amount at 31 December 2007 5,054,334 33,438,151 45,055,887 4,042,074 13,095,295 100,685,741
Additions 83,527 597,007 3,132,464 1,677,597 29,176,305 34,666,900 Transfers - 3,580,455 8,128,762 202,148 (11,911,365) - Depreciation - (2,168,341) (7,553,893) (862,834) - (10,585,068) Disposals (17,824) (434,078) (253,118) (28,182) (370,349) (1,103,551) Provisions for impairment - (427,435) (279,587) (5,075) - (712,097) Other - 1,366 21,776 1,576 (8,365) 16,353
Cost at 31 December 2008 5,120,037 44,550,054 76,829,830 8,684,902 29,981,521 165,166,344 Accumulated depreciation - (9,962,929) (28,577,539) (3,657,598) - (42,198,066)
Carrying amount at 31 December 2008 5,120,037 34,587,125 48,252,291 5,027,304 29,981,521 122,968,278
Included in property, plant and equipment are assets held under finance leases with a carrying value of Tenge 7,931,358 thousand (2007: Tenge 8,954,415 thousand) (see Note 19). At 31 December 2008 property, plant and equipment has not been pledged as collateral for borrowings (2007: Tenge 21,958 thousand) (see Note 19). Buildings and constructions include historical costs for the acquisition of geological information and subscription bonuses incurred at signing of the contracts on subsurface use in the amount of Tenge 32,352 thousand (2007: Tenge 66,944 thousand). In December 2008 the Company's management has concluded to suspend the operation of ore mining and dressing workshop of Aktobe Ferroalloy Plant due to unprofitable technological process. Accordingly, provisions for impairment are made in the amount of Tenge 710,979 thousand.
Translated from the Russian original 28 F-155 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
7 Property, Plant and Equipment (Continued)
In December 2007 the Company’s management has concluded that it is not economically feasible to use the coke production facility located at the Aksu plant due to the high cost of coke production. As a result an impairment provision in the amount of Tenge 1,593,705 thousand was recognized. In July – September 2008 the Company sold the property complex of therapeutic mud-baths in Chromtau and property complexes of medical and sanitary part and hotel in Aksu to the Company’s related party – Medical Centre Eurasia for Tenge 209,407 thousand. Income from sales of the above property amounted to Tenge 20,861 thousand.
Depreciation charge
In thousands of Kazakhstani Tenge 2008 2007
Cost of sales 8,808,297 7,792,290 General and administrative expenses 163,950 166,818 Distribution costs 11,674 9,961 Other 1,601,147 951,125
Total depreciation charge 10,585,068 8,920,194
Other depreciation charge represents charges included in other operating expenses and capitalised in the cost of self-constructed fixed assets.
8 Investments in Associates
The Company’s interest in ENRC Credit LLP (the “ENRC Credit”) as at 31 December 2007 amounted to 21.68%, and was accounted as investments into associate using equity method. On 4 April 2008 the owners of ENRC Credit agreed to increase the owners’ equity of the partnership by Tenge 15,000,000 thousand. The owners agreed that the additional contribution should be made by the Company. Accordingly, the Company’s interest in ENRC Credit increased to 63.5%. During 2008 the Company made several additional contributions into the charter capital of ENRC Credit in the amount of Tenge 62,400,000 thousand and, accordingly, increased its share in the capital of ENRC Credit to 88.67% as at 31 December 2008. In January 2009 the Company made further contributions to ENRC Credit charter capital (see Note 37). Due to the increase in the Company's interest in ENRC Credit, this entity started to be accounted as a subsidiary purchased from the parties under common control (see Note 2) and was consolidated from 4 April 2008 in the Company’s financial statements. The table below summarises the movements in the carrying amount of the Company’s investment in associates:
In thousands of Kazakhstani Tenge 2008 2007
Carrying amount at 1 January 1,976,165 - Transfers from "available for sale investments” - 1,589,006 Contributions to charter capital of ENRC Credit - 1,249,520 Share of after tax profit / (loss) 41,393 (862,361) Consolidation of ENRC Credit (2,017,558) -
Carrying amount at 31 December - 1,976,165
9 Available for Sale Investments
Presented below is information on the Company’s equity investments available for sale as at 31 December 2008 and 31 December 2007:
2008 2007 Country of thousands % of thousands % of Company name registration Nature of activity of Tenge ownership of Tenge ownership
Hotel Alatau JSC Kazakhstan Hotel services - 23 - 23
Translated from the Russian original 29 F-156 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
9 Available for Sale Investments (Continued)
The table below summarises the movements in the carrying amount of the Company’s available for sale investments:
In thousands of Kazakhstani Tenge 2008 2007
Beginning of year - 1,624,891 Additions - - Disposals - (35,885) Impairment provision - - Transfers to “investments in associates” - (1,589,006)
End of year - -
Equity investments classified as available for sale at 31 December 2008 and 31 December 2007 are carried at cost less impairment, because they are not publicly traded and no reliable method for their fair valuation exists. These equity investments were made upon the decision of controlling shareholders. Management of the Company did not exercise significant influence over Hotel Alatau JSC during 2004 - 2007 as the Company did not have representation on the board of directors of the investee, participation in policy-making processes, including participation in decisions about dividends or other distributions, any transactions with the investee. Therefore it was not accounted for by the equity method of accounting. In 2006 and 2004, the Company’s management recognised an impairment on the investments in Hotel Alatau JSC in the total amount of Tenge 731,500 thousand in equal proportions during 2006 and 2004, respectively.
10 Other financial assets at fair value through profit and loss
In thousands of Kazakhstani Tenge 2008 2007
Bonds 8,452,837 -
Total other financial assets at fair value through profit and loss 8,452,837 -
In November and December 2008 the Company purchased government treasury bonds of the Republic of Kazakhstan for the purposes of sale in the near future. The table below summarises the movements in the carrying amount of the Company’s trading investments:
In thousands of Kazakhstani Tenge Note 2008 2007
Beginning of year - Additions 9,179,538 - Disposals (5,524) - Changes in fair values 31 (721,177) -
End of year 8,452,837 -
11 Investments Held to Maturity
In November 2008 the Company purchased government treasury bonds (the “GTB”) of the Republic of Kazakhstan. The GTB mature on 12 March 2009 for short-term ɆȿɄɄȺɆ (ɆɄɆ 012.0087) and on 21 November 2009 for short-term ɆȿɄɄȺɆ (ɆɄɆ 012.0094). The management intends to hold such investments to maturity.
In thousands of Kazakhstani Tenge 2008 2007
Bonds 525,753 -
Total investments held to maturity 525,753 -
Translated from the Russian original 30 F-157 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
12 Other Non-Current Assets
In thousands of Kazakhstani Tenge Note 2008 2007
Prepayments for property, plant and equipment and related services 4,084,597 3,916,431 Restricted cash (contractual interest rate: 0%, 4.5%-7% p.a., effective interest rate: 4.5%-7% p.a) 6 155,654 345,979 Long-term accounts receivable from sales of property, plant and equipment (contractual interest rate: 0%, effective interest rate: 13% p.a.) 6 142,646 161,121 Other long-term receivables 241,333 248,321 Less: provision for impairment of non-current assets (97,255) (168,795)
Total other non-current assets 4,526,975 4,503,057
Prepayments for property, plant and equipment and related services are mainly attributable to construction of the second line of pellet production facility in DGOK, which was started in June 2007. Construction is expected to be completed by 2009 (Tenge 1,348,452 thousand), construction of sintering plant in Aksu Ferroalloy Plant (Tenge 690,926 thousand) and acquisition of mine equipment. Restricted cash represents bank deposits for a special fund for the retirement of assets in accordance with the requirements of the subsurface use contracts in the amount of Tenge 130,141 thousand (2007: Tenge 85,533 thousand) and a bank guarantee deposit in the amount of Tenge 25,513 thousand (2007: Tenge 260,446 thousand) with a maturity date of 28 August 2020 securing the Company's employees mortgage liabilities. The bank guarantee deposit is interest free and carried at amortised cost. (see Note 35). Long-term accounts receivable from sales of property, plant and equipment represent mainly receivables for sales of housing to DGOK employees to be repaid by equal payments during 15 years. Long-term accounts receivable are carried at amortised cost and are neither impaired nor overdue. Other long-term receivables mainly represent long-term portion of interest free loans given to the Company’s employees for purchase of housing in the amount of Tenge 169,053 thousand as well as long-term portion of interest free mortgage loans given to the Group employees in 2006 and 2005 in the amount of Tenge 72,280 thousand. In accordance with the terms of the mortgage agreements, if individual labor contracts with Group employees (the "ILC") are not terminated within the five years from the date of the mortgage agreement and other terms of financing are complied with, the Group employees are exempt from repayment of the loan. In case of termination of ILC within this period of five years, the borrower should repay the amount in proportion to the remaining portion of time he/she will not be employed by the Group. Management of the Company has determined that all Group employees will adhere to the mortgage loan agreements terms, and therefore provision for impairment was established for the full amount of long-term receivable at 31 December 2008 and 31 December 2007. Movement on the Company impairment provision for impairment of other non-current assets are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Balance as at 1 January 168,795 306,505 Impairment provision 1,975 9,655 Reversal of impairment provision (73,515) (147,365) Balance as at 31 December 97,255 168,795
Translated from the Russian original 31 F-158 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
13 Inventories
In thousands of Kazakhstani Tenge 2008 2007
Raw materials, purchased 12,883,241 8,429,586 Finished products 4,298,817 1,482,476 Raw materials, produced 4,113,392 2,574,753 Work in progress 2,634,724 1,134,460 Finished products, in transit 1,930,540 2,661,258 Raw materials, in transit 1,320,831 947,542 Goods for resale 209,606 206,536 Less: provisions for obsolete and slow-moving inventory (348,364) (393,816)
Total inventories 27,042,787 17,042,795
14 Trade Receivables and Other Current Assets
In thousands of Kazakhstani Tenge Note 2008 2007
Trade receivables 6 106,806,872 59,371,319 Term deposits (2008: contractual interest rate: 3-4,75%, effective interest rate: 3,91-5,3%; 2007: contractual interest rate: 8.5%, effective interest rate: 8.84%) 6 19,142,241 12,610,775 Letters of credit 6 63,042 44,647 Other receivables 6 717,042 434,193 Less: impairment loss provision (182,839) (229,734)
Total financial assets 126,546,358 72,231,200 VAT recoverable 8,832,727 6,245,580 Prepayments 6 2,366,727 5,407,907 Prepaid insurance 6 337,603 541,822 Less: impairment loss provision (201,659) (59,549)
Total trade receivables and other current assets 137,881,756 84,366,960
Term deposits include USD denominated deposits in amount of Tenge 17,316,636 thousand (2007: Tenge 5,100,150 thousand) with the original maturity of less than 1 year. At 31 December 2008 trade and other receivables in the amount of Tenge 437,773 thousand (31 December 2007: Tenge 296,501 thousand) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default. The ageing analysis of trade receivables and other receivables as of 31 December 2008 and 31 December 2007 is as follows:
In thousands of Kazakhstani Tenge 2008 2007
Current and not impaired 106,903,302 59,279,277 Past due but not impaired - less than 30 days overdue - 70,964 - 30 to 90 days overdue - 25,200 - 90 to 180 days overdue 154,428 70,391 - 180 – 360 days overdue 101,933 87,002 - over 360 days overdue 181,412 42,944
Total past due but not impaired 437,773 296,501 Individually determined to be impaired (gross) - over 360 days overdue 182,839 229,734
Total individually impaired 182,839 229,734 Total trade receivables and other receivables 107,523,914 59,805,512 Less: impairment loss provision (182,839) (229,734)
Total trade receivables and other receivables, net 107,341,075 59,575,778
Translated from the Russian original 32 F-159 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
14 Trade Receivables and Other Current Assets (Continued)
At 31 December 2008, trade receivables and other receivables in amount of Tenge 182,839 thousand (2007: Tenge 229,734 thousand) were impaired and provided for. The individually impaired receivables mainly relate to customers, which are in unexpectedly difficult economic situations. The carrying amounts of the Company’s trade receivables and other receivables are denominated in the following currencies:
In thousands of Kazakhstani Tenge 2008 2007
US Dollars 105,693,960 58,765,266 Tenge 1,789,757 1,040,246 Russian Rubles 40,197 -
Total trade receivables and other receivable 107,523,914 59,805,512
Movement on the Company impairment provision for impairment of trade receivables and other current assets are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Balance as at 1 January 289,283 309,356 Impairment provision 235,206 264,241 Reversal of impairment provision (139,991) (284,314) Balance as at 31 December 384,498 289,283
15 Loans Receivable
In thousands of Kazakhstani Tenge Note 2008 2007
Short-term portion of loans receivable 6 3,594,605 9,162,018 Long-term portion of loans receivable 6 76,956,399 -
Total loans receivable 80,551,004 9,162,018
The Company’s loans mature as follows:
In thousands of Kazakhstani Tenge 2008 2007
Loans due: - within 1 year 3,594,605 9,162,018 - from 1 to 2 years 1,736,590 - - from 2 to 5 years 70,490,790 - - over 5 years 4,729,019 -
Total loans receivable 80,551,004 9,162,018
The Company’s loans are denominated in Kazakhstani Tenge.
Translated from the Russian original 33 F-160 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
15 Loans Receivable (Continued)
The effective interest rates at the balance sheet date were as follows:
In percent per annum 2008 2007
Loan to Kazakhstan Aluminium Smelter JSC 7.24-15.1 13.1-14.1 Loan to EEC JSC 11.3-14.1 - Loan to Zhol Zhondeushy LLP 8-16 - Loan to Transcom LLP 12-16 - Loan to Aluminium of Kazakhstan JSC 14.4-15.1 - Loan to Transsystema LLP 12-13.3 - Loan to Sary Arka Spetskoks 12 - Loan to Transremmash LLP 16.2 - Loan to Rudnensky Cement Plant LLP 9.5 - Loan to Zhairemsky GOK JSC 13-13.7 - Loan to Zhana Temir Zhol LLP 8 - Loan to KazSoda LLP 7.24-9.5 - Loan to Universal Service LLP 13.3 - Loan to Transremvagon LLP 13.3 - Loans to individuals 3-5-9-10 -
Kazakhstan Aluminium Smelter JSC According to the loan agreements dated 27 April 2005, 16 October 2007, 30 September 2008, ENRC Credit – the Company’s subsidiary provided Kazakhstan Aluminium Smelter JSC, the Company's related party, with the loans in the amount of Tenge 7,338,000 thousand at the interest rate of 6% per annum, Tenge 30,580,600 thousand at the interest rate of 8% per annum and Tenge 26,960,000 thousand at the interest rate of 2%, respectively. The loans mature on 31 December 2016, 1 December 2011 and 30 September 2013, respectively. At 31 December 2008, the carrying amount of outstanding loans was Tenge 49,078,912 thousand. According to the loan agreement dated 6 June 2007, Kazakhstan Aluminium Smelter JSC, the Company’s related party, was given an interest-free loan in eight tranches in the total amount of Tenge 10,460,000 thousand to finance an expansion of production volumes of aluminium. The loan was repayable in full on 31 December 2008. The loss recognised by the Company on initial recognition of the loan amounted to Tenge 1,709,813 thousand. During 2008 the Company recognised interest income from unwinding of the present value discount in the amount of Tenge 1,297,982 thousand (2007: Tenge 411,831 thousand). On 22 October 2008 Kazakhstan Aluminium Smelter JSC fully repaid the loan.
EEC JSC According to the loan agreements dated 20 April 2005, 8 August 2005 and 26 October 2007, ENRC Credit, the Company’s subsidiary provided EEC JSC, the Company’s related party, with loans in the amount of Tenge 3,292,300 thousand, Tenge 1,314,188 thousand and Tenge 5,056,070 thousand. The loans bore interest rates of 6% and 12% in accordance with the loan agreement dated 26 October 2007 and the loans agreements dated 20 April and 8 August 2005; interest rates were subsequently changed to 8 % starting from 1 July 2008. The loans mature in 2011 and 2012 with repayment of principal amount at maturity date. At 31 December 2008, the carrying amount of outstanding loans was Tenge 7,843,709 thousand.
Zhol Zhondeushy LLP According to the loan agreements signed during 2007 and 2008, ENRC Credit, the Company's subsidiary, provided Zhol Zhondeushy LLP, the Company's related party, with loans for the total amount of Tenge 9,656,961 thousand with the different maturities. Interest rates in relation to those loans agreement were set to 10%, were subsequently changed to 8% starting from 1 July 2008. During 2008 the total amount of the loans repaid in accordance with agreement terms was Tenge 1,913,369 thousand.
TransCom LLP According to the loans agreements signed during 2007 and 2008, ENRC Credit, the Company’s subsidiary, provided TransCom LLP, the Company’s related party, with loans in the total amount of Tenge 15,060,000 thousand maturing in 2011 and Tenge 380,000 thousand maturing in 2012, of which at 31 December 2008 Tenge 2,082,336 thousand was repaid in accordance with the loan terms. The loans were provided at the interest rate of 10 and 12% with further change to 8% starting from 1 July 2008.
Translated from the Russian original 34 F-161 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
15 Loans Receivable (Continued)
Aluminium of Kazakhstan JSC According to the loan agreement dated 26 October 2007, ENRC Credit, the Company’s subsidiary, provided Aluminium of Kazakhstan JSC, the Company’s related party, with a loan in the amount of Tenge 9,660,000 thousand which matures in 2011, of which at 31 December 2008 Tenge 5,892,000 thousand had been repaid early. The loan was provided at an interest rate of 10% which was changed to 8 % starting from 1 July 2008.
Transsystema LLP According to the loan agreements signed in 2006 and 2007, ENRC Credit, the Company’s subsidiary, provided Transystema LLP, the Company’s related party, with loans in the total amount of Tenge 4,058,796 thousand which mature in 2011, of which at 31 December 2008 Tenge 1,281,275 thousand was repaid in accordance with the loan agreement terms. The loans were provided at on interest rate of 10 and 12% which was changed to 8% starting from 1 July 2008.
Sary-Arka Spetskoks LLP According to the loan agreement dated 11 August 2005, ENRC Credit, the Company's subsidiary, provided Sary-Arka Spetskoks LLP, the Company's related party, with a loan for 5 years in the total amount of Tenge 1,350,000 thousand. The loans are provided at the interest rate of 12%. Principle is repayable during the period from August 2007 to August 2010 on a quarterly basis. As of 31 December 2008 Tenge 296,059 thousand was repaid in accordance with loan agreement terms.
Transremmash LLP According to the loan agreement dated 1 October 2008, ENRC Credit, the Company’s subsidiary, provided Transremmash LLP, the Company’s related party, with a loan in the amount of Tenge 940,000 thousand at an interest rate of 12%. As of 31 December 2008 an amount of Tenge 40,870 thousand was repaid.
Rudnensky Cement Plant LLP According to the loan agreement dated 7 October 2008 for credit line in the total amount of Tenge 6,000,000 thousand for the period of 5 years, ENRC Credit, the Company’s subsidiary, provided Rudnensky Cement Plant during October – November 2008, with loans in the total amount of Tenge 2,987,500 thousand at an interest rate of 2%. At 31 December 2008, Tenge 2,038,000 thousand had been repaid early.
Zhairemsky GOK JSC According to the loan agreement dated 20 December 2005, ENRC Credit, the Company’s subsidiary, provided Zhairemsky GOK JSC, the Company's related party, with a loan in the amount of Tenge 923,700 thousand for the period of 5 years at an interest rate of 6%. Loan is repayable during the period from January 2008 to December 2010 on a monthly basis. During 2008 the amount of Tenge 334,538 thousand was repaid in accordance with the loans agreement terms. According to the loan agreement dated 14 July 2008, a loan was provided in July 2008 for the amount of Tenge 700,000 thousand. The loan was repaid on 31 July 2008.
Zhana Temir Zhol LLP According to the loan agreement dated 5 September 2008, ENRC Credit, the Company's subsidiary, provided Zhana Temir Zhol LLP, the Company's related party, with a loan in three tranches in the total amount of Tenge 636,423 thousand for the period of 5 years at an interest rate of 8%.
KazSoda LLP According to the loan agreement dated 29 August 2008 a credit line in the total amount of Tenge 1,800,000 thousand for the period of 8 years, provided by ENRC Credit, the Company’s subsidiary, to KazSoda LLP, a related party. As at 31 December 2008 a loan of Tenge 221,094 thousand had been drawn at an interest rate of 2%.
Universal Service LLP According to the loan agreement dated 26 April 2007, ENRC Credit, the Company’s subsidiary, provided Universal Service LLP, the Company’s related party, with a loan in the amount of Tenge 204,650 thousand which matures on 1 December 2011 at an interest rate of 10%, which was changed to 8% starting from 1 July 2008. At 31 December 2008, Tenge 76,162 thousand was repaid.
Translated from the Russian original 35 F-162 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
15 Loans Receivable (Continued)
Transremvagon LLP According to the loan agreement dated 26 April 2007, ENRC Credit, the Company's subsidiary, provided Transremvagon LLP, the Company's related party, with a loan in the amount of Tenge 29,794 thousand which matures on 1 December 2011 at an interest rate of 10%, which was changed to 8% starting from 1 July 2008. At 31 December 2008, Tenge 7,448 thousand was repaid. The carrying amounts and fair values of loans receivable are as follows:
2008 2007
Carrying Fair Carrying Fair In thousands of Kazakhstani Tenge amount value amount value
Loan to Kazakhstan Aluminium Smelter JSC 49,078,912 52,917,348 9,162,018 9,111,570 Loan to EEC JSC 7,843,709 8,594,931 - - Loan to Zhol Zhondeushy LLP 6,769,694 7,030,180 - - Loan to TransCom LLP 5,329,154 5,746,291 - - Loan to Aluminium of Kazakhstan JSC 3,508,240 3,843,002 - - Loan to Transsystema LLP 2,668,335 2,872,364 - - Loan to Sary Arka Spetskoks 1,196,079 1,132,706 - - Loan to Transremmash LLP 865,765 982,422 - - Loan to Rudnensky Cement Plant LLP 748,547 799,908 - - Loan to Zhairemsky GOK JSC 655,871 691,751 - - Loan to Zhana Temir Zhol LLP 652,746 428,638 - - Loan to KazSoda LLP 154,987 219,875 - - Loan to Universal Service LLP 121,718 156,542 - - Loan to Transremvagon LLP 21,168 22,790 - - Loans to individuals 936,079 936,081 - -
Total loans receivable 80,551,004 86,374,820 9,162,018 9,111,570
16 Cash and Cash Equivalents
In thousands of Kazakhstani Tenge Note 2008 2007
Term deposits (contractual interest rate: 7% p.a. (2007: 6% p.a.), effective interest rate 7% p.a. (2007: 6% p.a.) 6 48,138,631 6,578,450 Cash in bank, Tenge 6 1,276,056 213,836 Cash in bank, EUR 236,429 53,930 Cash in bank, USD 6 177,085 496,057 Cash on hand 151,900 102,437 Cash in bank, RR 61,528 10,777
Total cash and cash equivalents 50,041,629 7,455,487
Term deposits include USD denominated deposits with original maturities of less than three months.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
17 Share Capital
31 December 2008 31 December 2007 In thousands of Kazakhstani Tenge Number Value Number Value
Ordinary shares 7,147,485 7,147,485 7,147,485 7,147,485 Preference shares 756,000 187,579 756,000 187,579
Total paid share capital - 7,335,064 - 7,335,064 Share capital indexation for hyperinflation - 4,442,888 - 4,442,888
Total share capital - 11,777,952 - 11,777,952
The number and value of ordinary and preference shares remained unchanged for the years 2008 and 2007. The total authorised number of ordinary shares is 7,147,485 shares (2007: 7,147,485 shares) with a par value of Tenge 1,000 per share (2007: Tenge 1,000 per share). All issued ordinary shares are fully paid. Each ordinary share carries one vote. The total authorised number of preference shares is 756,000 shares (2007: 756,000 shares) with a par value of Tenge 1,000 per share (2007: Tenge 1,000 per share). All issued preference shares are fully paid. The preference shares are not redeemable and rank ahead of the ordinary shares in the event of the Company’s liquidation. The preference shares give their holders the right to participate in general shareholders’ meetings without voting rights except for instances where decisions are made in relation to re-organisation and liquidation of the Company, when considering the issue specifying restriction of rights of preference shareholders. Preference shares get voting rights at the moment when dividends on preference shares are not paid in full in three months from the date of expiry of the period set for payment of such dividends. Dividends on preference shares should not be declared in the amount less than those declared to ordinary shareholders. Preference share dividends are set at 10% p.a. of nominal value (2007: 10% p.a. of nominal value) and rank above ordinary dividends. Dividends declared and paid during the year were as follows:
2008 2007
In thousands of Kazakhstani Tenge (except for Ordinary Preference shares Ordinary Preference shares dividends per share) shares Equity Liability Shares Equity Liability
Dividends payable at 1 January 34,233 199,824 75,600 3,338,066 172,846 75,600 Dividends declared during the year 11,078,602 1,097,073 75,600 11,314,469 1,122,879 75,600 Dividends paid during the year (11,067,287) (1,058,338) (75,600) (14,618,302) (1,095,901) (75,600)
Dividends payable at 31 December 45,548 238,559 75,600 34,233 199,824 75,600
Dividends per share declared during the year (expressed in Tenge per share) 1,550 1,450 100 1,583 1,483 100
All dividends are declared and paid in Kazakhstani Tenge. During the years ended 31 December 2008 and 31 December 2007 dividends on preference shares at guaranteed fixed amount of 10% p.a. of nominal value per share were accrued as a part of non-current preference shares liabilities in the amount of Tenge 75,600 thousand.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
18 Long-term Share-based Employee Benefit Plan
In May 2008 ENRC plc., the parent company, presented the long-term share-based key employee benefit plan (“LTEBP”). LTEBP bonuses recorded at 31 December 2008 are effective only upon achievement of an established target. The established target means the achievement of the overall shareholder income by ENRC Group companies to be compared with the total shareholder income of the comparative Group for the comparative period. Total shareholder income of the comparative Group includes 22 international mining companies. In case of normal course of operations, benefits will be awarded upon expiration of the third year from the benefit provision date. The estimated fair value of each awarded share is Tenge 2,004 thousand. Estimates are based on the Monte-Carlo model. The following information was used in the model for calculation purposes (share price as at the date of equity right awarding is Tenge 2,863 thousand and expected volatility is 42%, expected rate of dividend income is 1.01% on the basis of the previous rate of dividend income or on the basis of dividend income rate of the comparative Group if information on dividend payments is unavailable, and the risk-free interest rate is 2.55%). The number of shares issued under the LTEBP was as follows:
Number of shares 31 December 2008 31 December 2007
At the beginning of the period - - Provided for the period 26,680 -
At the end of the period 26,680 -
Below are the costs related to the share-based payments to the Company's employees in accordance with the ENRC long-term employee benefit plan:
In thousands of Kazakhstani Tenge 2008 2007
Compensation expense 10,441 -
Total costs 10,441 -
19 Borrowings
In thousands of Kazakhstani Tenge Note 2008 2007
Finance lease liabilities 6 6,314,942 7,225,249 Bank overdrafts 6 13 - Term loans - 20,377
Total borrowings 6,314,955 7,245,626
The Company’s borrowings mature as follows:
In thousands of Kazakhstani Tenge 2008 2007
Borrowings due: - within 1 year 1,640,849 1,777,836 - between 2 and 5 years 3,858,275 4,195,580 - after 5 years 815,831 1,272,210
Total borrowings 6,314,955 7,245,626
The Company’s borrowings are denominated in currencies as follows:
In thousands of Kazakhstani Tenge 2008 2007
Borrowings denominated in: - US Dollars 6,314,942 7,225,249 - Kazakhstani Tenge 13 20,377
Total borrowings 6,314,955 7,245,626
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
19 Borrowings (Continued)
The average effective interest rates at the balance sheet date were as follows:
31 December 2008 31 December 2007 Kazakhstani Kazakhstani In percent per annum Tenge US Dollars Tenge US Dollars Finance lease liabilities - 15.56 - 15.56 Term loans - - 11.57 -
Bank Turan Alem On 28 July 2007 Martuk Sut LLP signed a loan agreement for the purchase of property, plant and equipment in the amount of Tenge 30 million. The loan bears fixed annual interest at the rate of 11%. Under the terms of the loan, property, plant and equipment with a carrying amount of Tenge 21,958 thousand was pledged as collateral for this loan (see Notes 7, 34). As of 31 December 2008, the Company disposed its interest in Martuk Sut (see Notes 1, 33).
ENRC Leasing B.V. During the years 2004 - 2006 the Company signed three financial lease agreements with Perfetto Investments B.V for the total amount of USD 21,918 thousand, USD 40,459 thousand and USD 10,892 thousand, respectively. The finance lease agreements bear annual interest at the rate of 15%. The lease payables are to be repaid in equal semi-annual instalments by 11 September 2014, 9 October 2015 and 8 February 2016, respectively. The carrying amount of these lease payables as of 31 December 2008 and 2007 was Tenge 6,314,942 thousand and Tenge 7,225,249 thousand, respectively. In 2007 Perfetto Investments B.V was renamed to ENRC Leasing B. V. Minimum lease payments under finance leases and their present values are as follows:
Due between 2 Due after 5 In thousands of Kazakhstani Tenge Due in 1 year and 5 years years Total
Minimum lease payments at 31 December 2008 1,750,966 5,676,555 1,857,820 9,285,340
Less future finance charges (110,130) (1,818,279) (1,041,989) (2,970,398)
Present value of minimum lease payments at 31 December 2008 1,640,836 3,858,275 815,831 6,314,942
Minimum lease payments at 31 December 2007 1,876,366 6,183,319 3,065,884 11,125,569
Less future finance charges (118,907) (1,987,739) (1,793,674) (3,900,320)
Present value of minimum lease payments at 31 December 2007 1,757,459 4,195,580 1,272,210 7,225,249
Leased assets with carrying amount disclosed in Note 7 are effectively pledged for finance lease liabilities as the rights to the leased asset revert to the lessor in the event of default.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
20 Trade and Other Payables
In thousands of Kazakhstani Tenge Note 2008 2007
Trade payables 6 1,757,338 1,541,462 Payables to employees 6 1,676,577 1,534,436 Dividends payable 6, 17 359,707 309,657 Financial guarantees 6, 34 358,955 281,713 Pension funds 6 269,054 276,152 Provisions for claims 6 158,774 57,439 Advances received 6 66,651 126,112 Promissory notes - 13,325 Other creditors 6 393,642 411,645
Total trade and other payables 5,040,698 4,551,941
Trade payables of Tenge 592,109 thousand (2007: Tenge 503,283 thousand) are denominated in foreign currencies, mainly 47.6% in Russian Roubles (2007: 38%), 31.6% in Euro (2007: 20%) and 20.8% in USD (2007: 41%). Provisions for claims represent claims payable to ENRC Marketing AG for ferroalloys underdelivery during 2008 and 2007. Financial guarantees represent the outstanding balance of the financial guarantees issued by the Company in favour of its related parties (see Note 34).
21 Provision for Mining Assets and Waste Polygons Retirement Obligations
The Company has a legal obligation to landfill site restoration during the mining operations and decommissioning of its mining property after its expected closure in 2013 and 2017 at Kazmarganets and 2040 at DGOK. In accordance with the environment protection legislation, the Company has an obligation to landfill site restoration and waste polygons retirement after expected closure in 2010, 2016 and 2063 at Aksu Ferroalloy Plant and in 2043 and 2057 at Aktobe Ferroalloy Plant.
2008 2007 Mining Waste Mining Waste In thousands of Kazakhstani Tenge assets polygons Total assets Polygons Total
Current portion of provisions for asset retirement obligations 29,156 342,301 371,457 24,826 54,707 822,447 Long-term portion of provisions for asset retirement obligations 676,319 1,591,354 2,267,673 1,640,620 946,083 7,122,049
Total provisions for mining assets and waste polygons retirement obligations 705,475 1,933,655 2,639,130 1,665,446 1,000,790 2,666,236
The amount of the provision for mining assets and waste polygons retirement obligations is determined using the nominal prices effective at the reporting dates by applying the forecasted rate of inflation for the expected period of the life of the mines and waste polygons and discount rate at the reporting dates. Principal assumptions made in calculations of asset retirement obligations are presented below:
2008 2007
Discount rate as at 31 December 11.35% 7.40% Inflation rate as at 31 December 7.8% - 8.6% 6.7 – 15.5%
Mining assets retirement obligations should be settled at the end of the useful life of each mine varying from 2009 to 2043. Waste polygons retirement obligations should be settled at the end of the useful life of each polygon up to its closure varying from 2009 to 2063. Uncertainties in such costs estimates include potential changes in regulatory requirements, alternatives to closure and reclamation of disturbed lands and discount and inflation rates.
Translated from the Russian original 40 F-167 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
21 Provision for Mining Assets and Waste Polygons Retirement Obligations (Continued)
Movements in provisions for mining asset retirement obligations are as follows:
Mining assets Landfill decommissioning site In thousands of Kazakhstani Tenge costs restoration Total
Carrying amount at 1 January 2007 693,338 169,174 862,512
Additions to property, plant and equipment 455,250 118,640 573,890 Expensed - 169,848 169,848 Utilised during the year (2,262) (14,328) (16,590) Unwinding of the present value discount 53,532 22,254 75,786
Carrying amount at 31 December 2007 1,199,858 465,588 1,665,446 Additions to property, plant and equipment (480,855) (36,319) (517,174) Expensed (458,407) (86,155) (544,562) Utilised during the year (101) (24,725) (24,826) Unwinding of the present value discount 83,989 42,602 126,591
Carrying amount at 31 December 2008 344,484 360,991 705,475
Movements in provisions for waste polygons retirement obligations are as follows:
Waste polygons Landfill decommissioning site In thousands of Kazakhstani Tenge costs restoration Total
Carrying amount at 1 January 2007 - 521,141 521,141
Additions to property, plant and equipment 34,560 407,240 441,800 Expensed --- Utilised during the year --- Unwinding of the present value discount - 37,849 37,849
Carrying amount at 31 December 2007 34,560 966,230 1,000,790 Additions to property, plant and equipment 1,356 880,195 881,551 Expensed --- Utilised during the year - (43,858) (43,858) Unwinding of the present value discount 4,222 90,950 95,172
Carrying amount at 31 December 2008 40,138 1,893,517 1,933,655
22 Employee Benefits
Changes in benefit obligations are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Present value of defined benefit obligation at start of year 3,278,692 3,094,354 Charge for unwinding of discount 242,623 154,718 Benefits paid (142,069) (130,268) Current service expenses 139,069 171,740 Actuarial gains (1,768,314) (11,852)
Present value of defined benefit obligation at end of year 1,750,002 3,278,692
All defined benefit obligations as of 31 December 2008 and 2007 are wholly unfunded.
Translated from the Russian original 41 F-168 Level: 1 – From: 0 – Thursday, May 13, 2010 – 20:03 – eprint3 – 4221 Section 09c
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
22 Employee Benefits (Continued)
Employee benefits are classified into short-term and long-term portions in the following way:
In thousands of Kazakhstani Tenge 2008 2007
Short-term portion of employee benefits 132,986 108,936 Long-term portion of employee benefits 1,617,016 3,169,756
Total employee benefits 1,750,002 3,278,692
Amounts recognised in the balance sheet and income statement are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Present value of defined benefit obligation at end of year 1,750,002 3,278,692
Net liability 1,750,002 3,278,692
Charge for unwinding of discount 242,623 154,718 Current service expenses 139,069 171,740 Actuarial (gains)/losses (1,768,314) (11,852)
(Income) / Expense recognised in profit and loss (1,386,622) 314,606
Actuarial losses, current and past service expenses were included in the income statement as part of cost of sales in the amount of Tenge 1,270,968 thousand (2007: loss of Tenge 147,203 thousand), part of general and administrative expense in the amount of Tenge 121,576 thousand (2007: loss of Tenge 5,491 thousand) and part of other expenses and capitalised costs in the amount of Tenge 1,050 thousand (2007: loss of Tenge 7,194 thousand).
In thousands of Kazakhstani Tenge 2008 2007
Cumulative amount of actuarial gains and losses recognised in the income statement (257,245) 1,511,069
In thousands of Kazakhstani Tenge 2008 2007
Present value of defined benefit obligation at end of year 1,750,002 3,278,692
In thousands of Kazakhstani Tenge 2008 2007
Experience adjustment: loss on defined benefit obligation (19,947) 1,772
Charge for unwinding of discount was included in the finance costs (see Note 31). Principal actuarial assumptions at the balance sheet date are as follows:
2008 2007
Discount rate at 31 December 11.35% 7% Future salary increases 31 December 8% 12% Average labour turnover rate 31 December 13.1% 15%
The mortality rates used in calculating employee benefits as of 31 December 2008 and 2007 were based on official Kazakhstani actuarial center data.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
23 Other Taxes Payable
In thousands of Kazakhstani Tenge 2008 2007
Taxes and special payments of subsurface users 216,908 207,063 Individual income tax 192,326 231,660 Social tax 150,856 299,009 Environmental payments 121,553 85,275 Withholding tax 7,010 5,695 VAT 4,272 4,601 Other 69 4,908
Total other taxes payable 692,994 838,211
24 Revenue
In thousands of Kazakhstani Tenge Note 2008 2007
Ferroalloys 6 366,112,847 177,274,235 Chrome ore 6 56,536,032 30,715,467 Bricks 1,009,016 1,159,170 Heat and power 6 435,325 414,124 Crushed stone 374,279 399,474 Ilmenite concentrate 6 114,090 114,621 Other products 6 799,772 687,955 Other services rendered 6 807,804 704,671
Total revenue 426,189,165 211,469,717
25 Cost of Sales
In thousands of Kazakhstani Tenge Note 2008 2007
Materials 6 44,429,142 31,896,994 Payroll and related expenses 14,090,829 12,768,087 Electricity expense 6 19,989,759 11,130,550 Depreciation 7 8,808,297 7,793,169 Royalty 2,614,214 1,806,394 Gas 2,326,152 3,023,547 Commission fees 6 1,144,166 1,184,090 Insurance costs 6 1,117,880 1,687,051 Social tax 774,417 1,132,399 Repair and maintenance expenses 770,826 665,851 Realised foreign exchange difference on cash flow hedge - (648,120) Changes in inventories of finished goods, work in progress and raw materials produced 13 (5,125,053) 372,578 Employee benefits expenses 22 (1,270,968) 147,203 Other 6 4,314,129 2,709,071
Total cost of sales 93,983,790 75,668,864
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
26 Other Operating Income
In thousands of Kazakhstani Tenge Note 2008 2007
Insurance income 6 800,703 1,438,383 Net foreign exchange gain 658,952 - Amortisation from financial guarantees 6,20,34 315,787 473,817 Sales of inventory 6 207,156 70,425 Inventory surplus 31,726 119,745 Rent income 6 21,718 27,597 Gain on disposal of subsidiary 33 4,739 - Gain on sales of apartments to employees - 42 Reversal of provision for obsolete and slow-moving inventory - 141,777 Reversal of provision on receivables impairment - 197,124 Other 706,049 320,293
Total other operating income 2,746,830 2,789,203
Insurance income includes reimbursements for ferroalloys insurance coverage. Insurance income in 2007 includes amount of Tenge 822,706 thousand of insurance reimbursement in relation to break-downs identified at Company’s Akturbo power station.
27 Distribution Costs
In thousands of Kazakhstani Tenge Note 2008 2007
Transportation services – outbound 6 14,811,183 13,706,782 Insurance costs 6 541,164 1,654,543 Payroll and related expense 115,799 104,661 Materials 103,197 124,051 Customs fees 23,420 24,958 Depreciation 7 11,674 9,961 Other 6 453,729 315,639
Total distribution costs 16,060,166 15,940,595
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
28 General and Administrative Expenses
In thousands of Kazakhstani Tenge Note 2008 2007
Sponsorship and other financial aid 6 2,330,610 2,341,899 Information, consulting and other professional services 6 2,320,900 1,105,094 Payroll and related expense 6 2,288,539 2,249,497 Taxes other than on income 1,035,825 924,985 Provision for impairment of property plant and equipment 712,097 1,593,705 Rent expense 6 324,599 386,643 Transportation 6 289,304 374,060 Bank charges 6 216,016 278,701 Repair and maintenance 191,886 146,867 Provision for obsolete and slow-moving inventory 13 185,426 260,767 Depreciation 7 163,950 166,818 Social taɯ 145,348 187,042 Telecommunications expenses 127,398 125,980 Advertising expenses 84,713 89,350 Provision on receivables impairment 83,357 248,578 Business trips and representative expenses 81,917 79,582 Security services 6 69,416 94,563 Insurance costs 6 23,862 31,402 Fines 16,572 125,155 Membership fees 11,818 520,449 Employee benefits (income) / expenses 22 (121,576) 5,491 Other 6 1,321,529 1,150,254
Total general and administrative expenses 11,903,506 12,486,882
Provision for impairment of property, plant and equipment represents a provision for impairment of property, plant and equipment of the mining and dressing workshop of Aktobe Plant (see Note 7).
29 Other Operating Expenses
In thousands of Kazakhstani Tenge Note 2008 2007
Losses less gains on disposals of property, plant and equipment 6,7 337,043 374,550 Research and development expenses 186,576 - Exploration expenses 101,622 58,996 Production suspension expenses 97,026 260,565 Depreciation expense of property, plant and equipment leased out 19,027 19,611 Net foreign exchange loss - 2,900,336 Fair value revaluation of hedge derivative instruments - 309,870 Other operating expenses 6 320,143 378,494
Total other operating expenses 1,061,437 4,302,422
30 Finance Income
In thousands of Kazakhstani Tenge Note 2008 2007
Interest income on loans receivable 6,15 4,876,232 12,554 Interest income on bank deposits 6 3,358,762 1,094,607 Unwinding of the present value discount 6, 15 3,170,690 608,150 Net foreign exchange gain from borrowings 98,802 436,568 Interest income on employee loans 33,919 15,659 Interest on government bonds 10,700 - Income from disposal of investments (shares) 9 485 - Other interest income 6 - 2,220
Total finance income 11,549,590 2,169,758
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
31 Finance Costs
In thousands of Kazakhstani Tenge Note 2008 2007
Losses less gains on origination of loans at non-market rate 6,15 8,353,301 1,926,978 Interest expense on borrowings 6,20 2,078,959 1,686 Interest expense on financial lease 6,20 941,749 1,090,237 Changes in fair value of financial assets at fair value 10 721,177 - Employee benefits: unwinding of the present value discount 22 242,623 154,718 Asset retirement obligations: unwinding of the present value discount 21 221,764 113,635 Dividends on preference shares at guaranteed fixed amount: unwinding of the present value discount 17 75,600 75,600 Other interest expense 6 12,973 16,070
Total finance costs 12,648,146 3,378,924
32 Income Taxes
Income tax expense comprises the following:
In thousands of Kazakhstani Tenge 2008 2007
Current income tax expense 92,178,742 33,114,236 Current excess profit tax expense 9,372,784 4,367,838 Deferred excess profit tax expense 117,610 179,682 Deferred income tax (benefit) / expense (4,056,256) 642,256
Income tax expense for the year 97,612,880 38,304,012
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
32 Income Taxes (Continued)
Reconciliation between the expected and the actual taxation charge is provided below. In thousands of Kazakhstani Tenge 2008 2007
IFRS profit before tax 304,833,601 103,994,665
Theoretical tax charge at statutory rate of 30% (2007: 30%) 91,450,080 31,198,399
Tax effect of items which are not deductible or assessable for taxation purposes: - Losses less gains on origination of loans at non-market rate 1,435,023 294,723 - Loss from bonds fair value change 216,353 - - Non-deductible expenses for claims 103,687 218,450 - Advances and receivables impairment provision 66,643 80,164 - Inventory write-offs 55,628 78,836 - Non-deductible losses on sale of property, plant and equipment 32,169 88,892 - Non-deductible taxes 30,709 29,672 - Non-deductible exploration expenses 28,641 17,900 - Preference shares: unwinding of the present value discount 22,680 22,680 - Non-deductible foreign exchange loss 18,338 91,047 - Non-deductible general and administrative expenses 13,527 15,075 - Non-deductible losses from disposal of subsidiary 6,077 - - Penalties and fines 6,244 37,670 - Non-deductible expenses on conservation of property, plant and equipment 5,195 1,774 - Depreciation of non-production assets - 52,723 - Sponsorship and other financial aid expenses - 682,368 - Non-taxable income from financial guarantees - (69,863) - Non-deductible loss from investments into associates - 258,708 - Other non-deductible (income) / expenses (273,507) 309,362 - Corporate income tax for the previous years 176,185 527,595 - Excess profit tax 9,372,784 4,367,837 - Effect of disposal of subsidiary (5,457) - - Effect of rate change* (5,148,119) -
Income tax expenses for the year 97,612,880 38,304,012 *Starting from January 1 2009 New Tax Code is adopted in Kazakhstan. Changes in corporate income tax rate and EPT calculation methodology (see Note 34) impacted the reported amounts of deferred income tax liabilities
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
32 Income Taxes (Continued)
Differences between IFRS and Kazakhstani statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below, and is recorded at the rate applicable to period of assets realisation or liabilities settlement. Due to changes in the tax legislation of the Republic of Kazakhstan effective from 1 January 2009, the income tax rate in 2009 is 20%, in 2010 – 17.5%, in 2011 and further – 15% (2007: 30% ).
Charged/ 31 December (credited) 31 December In thousands of Kazakhstani Tenge 2007 to profit or loss 2008
Tax effect of deductible temporary differences Trade receivables 2,611,210 (1,018,735) 1,592,475 Employee benefits 950,103 (696,819) 253,284 Provision for asset retirement obligations 771,799 (367,511) 404,288 Vacation provisions 306,451 (72,579) 233,872 Taxes accrued but not paid 150,246 (78,246) 72,000 Finance lease 53,364 (28,256) 25,108 Intangible assets 4,635 (2,485) 2,150 Long-term employee benefits expenses - 1,566 1,566 Other payables 16,174 13,029 29,203
Gross deferred tax asset 4,863,982 (2,250,036) 2,613,946 Less offsetting with deferred tax liabilities (4,863,982) 2,250,036 (2,613,946)
Recognised deferred tax asset - - -
Tax effect of taxable temporary differences Property, plant and equipment 13,030,409 (5,899,481) 7,130,928 Inventories 798,377 (412,269) 386,108
Gross deferred tax liability 13,828,786 (6,311,750) 7,517,036 Less offsetting with deferred tax assets (4,863,982) 2,250,036 (2,613,946)
Net deferred tax liability at recorded at the rate applicable to period of liabilities settlement 8,964,804 (4,061,714) 4,903,090 Excess profit tax – inventories 3,213 (3,213) - Excess profit tax – property, plant and equipment 1,280,785 (182,138) 1,098,647 Excess profit tax – intangible assets (55) (81) (136) Excess profit tax – trade receivables (52,706) 52,706 - Excess profit tax – finance lease (20,310) 16,168 (4,142) Excess profit tax – vacation provisions (74,813) 45,585 (29,228) Excess profit tax – employee benefits (104,459) 51,739 (52,720) Excess profit tax – other payables (1,153) 943 (210) Excess profit tax - taxes accrued but not paid (60,901) 43,439 (17,462) Excess profit tax – provisions for asset retirement obligations (120,600) 92,462 (28,138)
Recognised deferred tax liability 9,813,805 (3,944,104) 5,869,701
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
32 Income Taxes (Continued)
Charged/ 31 December (credited) to 31 December In thousands of Kazakhstani Tenge 2006 profit or loss 2007
Tax effect of deductible temporary differences Trade receivables 1,785,976 825,234 2,611,210 Employee benefits 878,281 71,822 950,103 Provision for asset retirement obligations 395,699 376,100 771,799 Vacation provisions 281,387 25,064 306,451 Taxes accrued but not paid 117,899 32,347 150,246 Intangible assets 5,293 (658) 4,635 Finance lease 72,016 (18,652) 53,364 Other payables 83,139 (66,965) 16,174
Gross deferred tax asset 3,619,690 1,244,292 4,863,982 Less offsetting with deferred tax liabilities (3,619,690) (1,244,292) (4,863,982)
Recognised deferred tax asset - - -
Tax effect of taxable temporary differences Property, plant and equipment 10,845,654 2,184,755 13,030,409 Inventories 935,539 (137,162) 798,377 Other financial assets at fair value through profit or loss 161,045 (161,045) -
Gross deferred tax liability 11,942,238 1,886,548 13,828,786 Less offsetting with deferred tax assets (3,619,690) (1,244,292) (4,863,982) Net deferred tax liability at a standard tax rate of 30% 8,322,548 642,256 8,964,804 Excess profit tax – inventories 567 2,645 3,213 Excess profit tax – property, plant and equipment 914,787 365,998 1,280,785 Excess profit tax – intangible assets 23 (78) (55) Excess profit tax – trade receivables (4,765) (47,941) (52,706) Excess profit tax – finance lease (7,610) (12,700) (20,310) Excess profit tax – vacation provisions (17,345) (57,468) (74,813) Excess profit tax – employee benefits (126,291) 21,833 (104,459) Excess profit tax – other payables (967) (186) (1,153) Excess profit tax - taxes accrued but not paid (11,782) (49,119) (60,291) Excess profit tax – provisions for asset retirement obligations (77,298) (43,302) (120,600) Recognised deferred tax liability 8,991,867 821,938 9,813,805
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows:
In thousands of Kazakhstani Tenge 2008 2007
Deferred income tax assets: - Deferred income tax asset to be recovered after more than 12 months (643,019) (1,968,374) - Deferred income tax asset to be recovered within 12 months (2,102,963) (3,300,605) (2,745,982) (5,268,979) Deferred income tax liabilities: - Deferred income tax liability to be recovered after more than 12 months 7,541,606 12,772,717 - Deferred income tax liability to be recovered within 12 months 1,074,077 2,340,067 8,615,683 15,112,784 Deferred income tax liabilities (net) 5,869,701 9,813,805
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
33 Discontinued Operations
During 2008 the Company disposed of its subsidiary, Martuk Sut LLP, for Tenge 54,921 thousand disposal consideration. The Company has recorded a gain from the disposal of the subsidiary in the amount of Tenge 4,739 thousand within other operating income (see Note 26). Below are disposed assets and liabilities of Martuk Sut LLP:
In thousands of Kazakhstani Tenge 2008
Disposed assets: Property, plant and equipment 34,580 Inventories 22,691 Accounts receivable 5,485 Cash and cash equivalents 3,097 Total disposed assets 65,853 Disposed liabilities: Accounts payable 8,373 Other liabilities 5,753 Taxes payable 1,545 Total disposed liabilities 15,671 Net assets 50,182 Minority interest - Goodwill -
Total carrying amount of disposed net assets 50,182
Presented below is the result of discontinued operations recognized as a result of the disposal of Martuk Sut LLP:
In thousands of Kazakhstani Tenge 2008
Revenue 90,225 Expenses 82,853
Pre-tax profit from discontinued operations 7,372 Income tax 2,311
Profit/loss from discontinued operations 5,061
Presented below is the analysis of cash flows from discontinued operations:
In thousands of Kazakhstani Tenge 2008
Cash flows on operating activities 11,413 Cash flows on investing activities 51 Cash flows on financing activities (17,992)
Total cash flows (6,528)
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
34 Contingencies, Commitments and Operating Risks
Political and economic situation in Kazakhstan. In general, the economy of Kazakhstan continues to display the characteristics of an emerging market. These characteristics include, but are not limited to, the existence of a currency that is not freely convertible outside of the country and a low level of liquidity of debt and equity securities in the markets. The mining sector in Kazakhstan is still impacted by political, legislative, fiscal and regulatory developments in Kazakhstan. The prospects for future economic stability in Kazakhstan are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory and political developments, which are beyond the Company’s control. The financial condition and future operations of the Company may be adversely affected by continued economic difficulties related mainly to the current situation in the global financial markets. Management is unable to predict the extent and duration of the economic difficulties, nor quantify the impact, if any, on these financial statements.
Impact of global financial crisis. The slowdown in the growth rates of leading developed world economies - the USA, Japan, European Union, was very dramatic in autumn 2008 and caused the slowdown of development of the world economy and reduction of the world consumption. The oil and metal prices went down and such products are the main export products of Kazakhstan. Further, the effects of the crisis flowed from the financial sector into the real sector. The volume of financing has significantly reduced from August 2008 for the economy as a whole. Debtors of the Company may be affected by the lower liquidity situation which could in turn impact their ability to repay the amounts owed. Deteriorating operating conditions for debtors may also have an impact on management's cash flow forecasts and assessment of the impairment of financial and non-financial assets. To the extent that information is available, management have properly reflected revised estimates of expected future cash flows in their impairment assessments. Due to the reduction of production and consumption levels around the world as well as the fall of prices for the main export products of Kazakhstan, the Government has developed a stabilization plan envisaging the increase of governmental expenses for support and resumption of business activities. The anti-crisis program aims to prevent the work places cut-off and mass redundancies in the real sector. In the current environment, the influence and presence of the Government of the Republic of Kazakhstan in the economy increased. The new Tax Code is adopted which removed the term "stability" of tax regime from the subsurface use contracts and introduced the mineral resources production tax (“MRPT”). For the first time in state practice, oil and oil products export customs duty is introduced, and the same measures are planned in terms of export of products of mining and smelting industry. Management believes it is taking all the necessary measures to support the sustainability and development of the Company’s business in the current circumstances.
Tax legislation. Kazakh tax legislation and practice is in a state of continuous development, and therefore is subject to varying interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, tax authorities may challenge transactions and the Company may be assessed additional taxes, penalties and fines. Tax periods remain open to review by the Kazakh tax authorities for five years. Whilst there is a risk that the Kazakhstani tax authorities may challenge the policies, including those relating to transfer pricing and excess profits tax legislation (see Note 2), the management believes that they would be successful in defending any such challenge. Accordingly, at 31 December 2008 no provision for potential tax liabilities had been recorded (2007: no provision recorded). As at the date of these financial statements preparation, Kazakhstani tax authorities finished complex tax audit of the Company, started in 2008, for the years ended 31 December 2004, 2005, except for the compliance with legislation of transfer pricing. No significant violations were revealed upon the result of this tax audit. Management expects that during 2009 the Kazakh tax authorities will complete inspection of the Company’s transfer pricing accounting policies for the years ended 31 December 2004, 2005, which commenced in 2008.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
34 Contingencies, Commitments and Operating Risks (Continued)
Changes in tax legislation. New Tax Code and subordinate regulatory acts have been signed by the President of the Republic of Kazakhstan on December 10, 2008.The new Tax Code of the Republic of Kazakhstan is effective from 1 January 2009. Major changes include: corporate income tax rate decreased from 30% to 20% in the financial year 2009, to 17.5% in 2010, and to 15% in the year 2011; VAT rates are changed from 13% to 12%, the fixed social tax rate of 11% is introduced, the property tax rate is increased from 1% to 2% only in relation to real estate tax base, and other changes are introduced.
Capital expenditure commitments. At 31 December 2008 the Company has contractual capital expenditure commitments in respect of property, plant and equipment totalling Tenge 8,677,082 thousand (2007: Tenge 6,279,885 thousand). The Company’s management has already allocated the necessary resources in respect of these commitments. The Company believes that future net income and funding will be sufficient to cover this and any similar commitments.
Legal proceedings. From time to time and in the normal course of business, claims against the Company are received. On the basis of its own estimates and both internal and external professional advice management of the Company is of the opinion that no material losses will be incurred in respect of claims.
Guarantees. Guarantees are irrevocable assurances that the Company will make payments in the event that another party cannot meet its obligations. The Company has guaranteed the following obligations to its related parties:
In thousands of Kazakhstani Tenge Note 2008 2007
ENRC Marketing AG 8 178,739,600 178,044,000 TransRemMash LLP - 1,208,000 ZIKSTO LLP - 252,000 Individuals - 3,699
Total guarantees 178,739,600 179,507,699
The obligations guaranteed by the Company are denominated in currencies as follows:
In thousands of Kazakhstani Tenge 2008 2007
Obligations denominated in: - US Dollars 178,739,600 178,047,699 - Kazakhstani Tenge - 1,460,000
Total guarantees 178,739,600 179,507,699
As of 31 December 2008 the Company has the following maturity of outstanding financial guarantees:
In thousands of Kazakhstani Tenge Note 2008 2007
Short-term financial guarantee 20 358,955 281,713 Long-term financial guarantee 350,104 761,747
Total guarantees 709,059 1,043,460
As of 31 December 2008 outstanding financial guarantees related to the following companies:
In thousands of Kazakhstani Tenge Note 2008 2007
ENRC Marketing AG 8 709,059 1,018,275 TransRemMash LLP - 20,838 ZIKSTO LLP - 4,347
Total guarantees 709,059 1,043,460
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
34 Contingencies, Commitments and Operating Risks (Continued)
At 31 December 2008 the Company has a guarantee in the amount of 1,480 million USD to Deutsche Bank AG under the guarantee agreement with the latter on behalf of ENRC Marketing AG.
On 15 December 2006 ENRC Marketing AG (the "Borrower") entered into a Facility Agreement with ABN Amro Bank, Barclays Capital and Deutsche Bank AG (jointly the "Lenders"). Pursuant to the Facility Agreement, the Lenders provide to the Borrower the US$ 1 billion syndicated pre-export finance facility for 5 years. Under the Facility Agreement, the Company provides guarantee (the “Guarantee”) to the Lenders in respect of the obligations of the Borrower. The Company signed a Guarantee Fee Agreement with ENRC Marketing AG. According to the Guarantee Fee Agreement, the Company charges ENRC Marketing AG with US$ 10 million of commission fees, which was paid in February 2007. The loan facility was drawn down by the Borrower in 2007. According to the Guarantee Agreement concluded between the Company and Deutsche Bank AG, the Security Trustee, the Company has to comply with the following covenants: - the Company undertakes that its total debt (e.g. money borrowed or raised, bond, note, loan stock, debenture, letter of credit, guarantees and indemnities, including this guarantee, etc.) from the date of the guarantee until the expiry of the security period shall be an amount not exceeding US$ 1.5 billion; - the Company may declare or pay any dividends in any financial year provided that the amount of such dividends does not exceed its net income for the financial year in relation to which such dividends are declared. However, the Company can still declare dividends in excess of its net income provided that immediately after payment of such dividends, the ratio of total equity to the aggregated of total equity and total debt of the Company would be equal to or greater than 0.4:1; - the Company shall not make any loans or grant any credit to or for the benefit of any person in excess of US$ 100 million at any time.
On 12 April 2007 the Company extended the Guarantee Agreement for an additional amount of US$ 480 million totalling to US$ 1.480 billion. In 2007 the Company has recognized a financial guarantee liability in respect to ENRC Marketing AG. On 27 July 2007 the Company has issued a guarantee to BTA Bank totalling to Tenge 1,460,000 thousand in respect of Transremmash LLP and Zixto JSC. According to the guarantee contract, Transremmash LLP and Zixto JSC must perform monthly commission payments amounting to 3% from the annual guarantee amount.
Assets pledged and restricted. At 31 December 2008 and 2007 the Company has the following assets pledged as collateral:
31 December 2008 31 December 2007
Asset Related Asset Related In thousands of Kazakhstani Tenge Note pledged liability pledged liability
Property, plant and equipment 7 - - 21,958 20,377
Total - - 21,958 20,377
Insurance policies. The Company holds insurance policies in relation to the following risks: - Insurance of property - Insurance of civil responsibility of employer for causing damage to life and health of employee during his/her work duties - Insurance of civil responsibility of employer for causing damage to environment - Insurance of civil responsibility of owners of vehicles - Insurance of civil responsibility of owners of properties, operations of which can cause damage to third parties.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
34 Contingencies, Commitments and Operating Risks (Continued)
Environmental matters. The enforcement of environmental regulation in the Republic of Kazakhstan is evolving and the enforcement posture of government authorities is continually being reconsidered. The Company periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately. Thus, due to adoption of the Ecology Code of the Republic of Kazakhstan, during 2008 the Company created the decommissioning fund to arrange the measures for decommissioning of waste polygons and environmental monitoring upon closure. In addition to decommisioning fund, representing the special account for accumulation of funds, the Company accrued the provisions for waste polygons retirement. The amount of accrued provision for waste polygons retirement was based on the management's best estimates of future costs, which will be incurred by the Company for repayment of its current liabilities (see Note 21). In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage.
The new Tax Code of the Republic of Kazakhstan is effective from 1 January 2009, whereby the emission payment rates are increased and levying procedure is updated. In December 2005 the Company’s management made the decision on building and certification of management system in accordance with the requirements of standards: ISO 9001:2000, ISO 14001: 2004, OHSAS 18011:1999, as well as SA 8000. Management system complying with the requirements of standards: ISO 9001: 2000 (quality management system), ISO 14001: 2004 (environment protection management system), OHSAS 18011:1999 (health and labour safety management system) is implemented in Aksu and Aktobe Ferroalloy Plants and DGOK. These Company’s sub-divisions have certificates on compliance with the standards: ISO 9001: 2000, ISO 14001: 2004, OHSAS 18011:1999, issued by TUV CERT, international certification body. The development of management system in accordance with the above standards is commenced in Kazmarganets since January 2006.
Provision for mining assets and waste polygons retirement obligations. The estimate of the outstanding provision for mining assets and waste polygons retirement obligations was based on the legal contractual obligations in respect of site restoration and rehabilitation. This estimate might change upon completion of further environmental study works and reassessment of the existing liabilities.
35 Financial Risk Management
Financial risk factors. The Company’s activities expose it to a variety of financial risks: market risk, (including foreign exchange risk), liquidity risk and credit risk. The Company’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance.
(a) Credit risk
Financial assets, which potentially subject Company to credit risk, consist principally of trade receivables, issued loans, deposits with banks and cash and cash equivalents. The Company has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The clients which do not meet the solvency requirements of the Company can have the transactions with the Company only on the terms of prepayments. Borrowings are provided only to the Company’s related parties. Cash is placed in financial institutions, which are considered at time of deposit to have minimal risk of default. Additionally, the Company makes the analysis of external ratings of the financial institutions. Maximum credit risk exposure represents the current carrying value of trade receivables, issued loans and deposits with banks less impairment loss. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Company beyond the provisions for receivables impairment already recorded. As at 31 December 2008 the major trade debtor is ENRC Marketing AG. These aggregate receivables were Tenge 84,185,771 thousand (2007: Tenge 58,765,265 thousand) or 91% of total trade receivables and other receivables (2007: 99%). These receivables are short-term with a maturity period from 1 to 3 months, which is in compliance with the contract payment terms.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
35 Financial Risk Management (Continued)
The table below shows credit ratings as of 31 December 2008 and balances with banks and financial institutions where cash and cash equivalents and term deposits were placed as of 31 December 2008 and 31 December 2007:
31 December 31 December In thousands of Kazakhstani Tenge Rating 2008 2007
Cash and cash equivalents HSBC Bank* ȺȺ (Standard&Poor’s) 17,113,340 10 Eurasian Bank B (Standard&Poor’s) 16,269,136 862,987 RBS Bank* ȺȺ – (Fitch) 8,460,451 5,474,211 Bank CenterCredit ȼȼ – (Fitch) 8,045,560 12,272 ATF Bank recalled by (Standard&Poor’s) 1,027 - Halyk Bank Bȼ (Standard&Poor’s) 215 65 KazInvestBank B (Standard&Poor’s) - 1,000,500 Bank TuranAlem B (Standard&Poor’s) - 3,005
Total cash and cash equivalents 49,889,729 7,353,050
Term deposits and restricted cash RBS Bank* ȺȺ – (Fitch) 10,043,099 - HSBC Bank* ȺȺ (Standard&Poor’s) 8,978,882 - Eurasian Bank B (Standard&Poor’s) 275,914 7,856,595 ATF Bank recalled by (Standard&Poor’s) - 5,100,150
Total term deposits 19,297,895 12,956,754 * Rating is provided on international bank. Rating on Kazakhstani division of the bank is not available
(b) Market risk
(1) Foreign exchange risk. 99% of the Company’s sales represent export sales, and the Company’s borrowings are denominated in foreign currency, thus, it is exposed to foreign exchange risk. Foreign currency denominated assets (see Note 15) and liabilities (see Note 19) give rise to foreign exchange exposure. The Management Board sets limits on the level of exposure by currency and in total. Compliance with limits is monitored.
Foreign exchange risk arises when future foreign currency inflows or recognized assets and liabilities are denominated in currency other than the Company’s functional currency.
The Company exports its products to European markets and attracts the significant amounts of foreign currency in which receivables are denominated. As a result, the Company is exposed to exchange rate changes. Production expenses are denominated in Kazakhstani Tenge, while revenues are denominated in US dollars. Thus, the Company is exposed to risk that changes in exchange rates affect both revenue and financial position (balance sheet). The Company’s exposure to exchange rate risk arises due to: - Highly probable (purchase/sale) transaction denominated in foreign currency; and - Monetary items (mainly accounts receivable and payable, borrowings) denominated in foreign currency.
The Company is mainly exposed to risk of change in exchange rate of Tenge to US dollar. On 4 February 2009 the National Bank of the Republic of Kazakhstan ceased to maintain the exchange rate of Tenge to other foreign currencies. The exchange rate of Tenge to USD subsequenlly weakened by 25% and at the closing exchange rate on that day at the Kazakhstan Stock Exchange was 150.03 Tenge for 1 USD (31 December 2008: 120.77 Tenge for 1 USD).
As at 31 December 2008, if the exchange rate of US dollar to Tenge had increased by 25% with all other variables held constant, net profit for the year would have been Tenge 36,686,197 thousand lower (2007: increased/decreased by 4.2%, net profit would have been Tenge 2,575,532 thousand higher/lower). Since USD to Tenge exchange rate decrease is not expected, the sensitivity analysis for Tenge strengthening was not made. During the reporting year, the Company did not use forward contracts for hedging of foreign exchange risk. In 2007 the Company used forward contracts for hedging of foreign exchange risk. The Company signed an agreement for a range of forward foreign currency transactions with Morgan Stanley & CO INTERNATIONAL LIMITED to hedge the foreign exchange risk for the amount of 297,000 thousand US dollar for the period from 1 April 2007 to 2 December 2007. As of 31 December 2007 all forward contracts were closed.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
35 Financial Risk Management (Continued)
The main factor explaining the decrease/increase of sensitivity in 2008 is the significant amount of trade receivables denominated in foreign currency (trader - ENRC Marketing) – Tenge 26,514,049 thousand (2007 – Tenge 2,468,141 thousand). Decrease/increase of profit sensitivity to changes in US dollar exchange rate in 2008 in comparison with 2007 was caused by: - increase in trader’s accounts receivable (change in contractual payment terms and main product price rise); - increase in cash and cash equivalent balance due to increase in the Company’s revenue; - increase in advances issued (against delivery of equipment under investment program); - decrease in finance lease liabilities. (2) Cash flow and fair value interest rate risk. Sensitivity analysis shows the effect of changes in market interest rates on interest payments, interest income and expenses, and if applicable, on equity. The analysis of sensitivity to interest rate risk is based on the following assumptions: - changes in market interest rate effects interest income and interest expenses on financial instruments with floating interest rate, therefore, should be included into calculation for the purposes of sensitivity analysis; - financial instruments with fixed interest rate recognized at amortized costs are not exposed to interest rate risk, therefore, are not included into calculations for the purposes of sensitivity analysis; - changes in market interest rate on financial liabilities and financial assets with fixed interest rate affect income and losses given they are recognized at fair value through profit or loss. As at 31 December 2008 and 31 December 2007 the Company was not exposed to interest rate risk since the Company does not have any financial assets and liabilities with floating interest rate, nor financial instruments with fixed interest rate recognized at fair value through profit or loss. (3) Price risk. The Company is not exposed to price risk on equity securities owned by the Company and stated in the balance sheet as available for sale, since the management believes that carrying amount of such investments is immaterial, and accordingly, any fluctuations in price of such equity instruments will not have the significant effect on the financial instruments. The Company’s sales are made to related parties, which in their turn make sales to customers located mainly in Russia, China and Kazakhstan. The prices for the Company’s products are fixed on a quarterly basis. The Company is exposed to price risk, since the sales prices for the Company’s ferroalloys and chromium ore depend on changes in prices at London Metal Exchange, which in their turn depend on general and specific market fluctuations.
(c) Liquidity risk
Liquidity risk is defined as the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to liquidity management is to ensure the continuous and sufficient liquidity to meet the Company’s liabilities as they fall due (both under standard and non-standard situations), preventing unacceptable losses or the Company’s reputation damage risk. Below is the information on contractual terms of financial liabilities settlement, including interest payments as of 31 December 2008:
Cash flows In thousands of Carrying under Within 1-3 3-12 Over Kazakhstani Tenge value agreement 1 month months months 1-5 years 5 years
Liabilities Preference shares 568,421 756,000 75,600 302,400 378,000 Finance lease liabilities 6,314,942 9,285,340 139,769 1,611,196 5,676,554 1,857,820 Bank overdrafts 13 13 Trade and other payables 2,150,980 2,150,980 2,150,980
Total 9,034,343 12,192,333 2,150,993 139,769 1,686,796 5,978,954 2,235,820
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
35 Financial Risk Management (Continued)
Below is the information on contractual terms of financial liabilities settlement, including interest payments as of 31 December 2007:
Cash flows In thousands of Carrying under Within 1-3 3-12 Over Kazakhstani Tenge value agreement 1 month months months 1-5 years 5 years
Liabilities Preference shares 568,421 756,000 - - 75,600 302,400 378,000 Finance lease liabilities 7,225,249 11,125,566 - 149,051 1,727,312 6,183,319 3,065,884 Term loans 20,377 21,213 2,651 5,303 13,259 - - Trade and other payables 1,966,432 1,966,432 1,953,107 13,325 - - -
Total 9,780,479 13,869,211 1,955,758 167,679 1,816,171 6,485,719 3,443,884
In 2008 all liabilities of the Company were settled in full on a timely basis according to the terms of signed agreements. The Company has a credit facility (reserve letter of credit) for the amount of 25 million Euro under the agreement with JSC SB RBS Bank, Kazakhstan ʋCL070619A dated 19 June 2007. This reserve letter of credit was opened for the benefit of Outotec Oyj Company (under equipment purchase agreement) and Bateman International Projects BV (under project works agreement). As at 31 December 2008 the Company did not draw down any funds from the above credit facility. Capital risk management. Decisions in relation to Company’s activity on funding (through own or borrowed funds) are made at the level of Group’s management. The Group’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or sell assets to reduce debt. Consistent with others in the industry, the Company monitors capital on the basis of the gearing ratio.
36 Fair Value of Financial Instruments
Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Company using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Republic of Kazakhstan continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2008
36 Fair Value of Financial Instruments (Continued)
The fair value and carrying amounts of financial assets and financial liabilities as of 31 December 2008 and 31 December 2007 is presented in the table below:
31 December 2008 31 December 2007
Carrying Fair Carrying Fair In thousands Kazakhstani Tenge value value value value
Financial assets measured and fair value through profit or loss 8,452,837 8,452,837 - - Investments in associates - - 1,976,165 1,976,165 Trade and other receivables 137,881,756 137,881,756 84,366,960 84,366,960 Other non-current assets 4,526,975 4,529,957 4,503,057 4,478,006 Loans receivable 80,551,004 86,374,820 9,162,018 9,111,570 Cash and cash equivalents 50,041,629 50,041,629 7,455,487 7,455,487 Secured bank loan - - 20,377 20,377 Bank overdrafts 13 13 - -
Finance lease agreements liabilities 6,314,942 6,314,942 7,225,249 7,225,249
Trade payables and other payables 5,040,698 5,040,698 4,551,941 4,551,941
Financial instruments carried at fair value through profit or loss. Investments held for trading are carried on the balance sheet at their fair value. Fair values were determined based on quoted market prices. Total net fair value gain/loss that was recognised in the income statement in 2008 amounts to Tenge (721,177) thousand (2007: Tenge 206,035 thousand). Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty. Carrying amounts of trade receivables approximate fair values due to their short term maturities. Refer to Note 15 for the estimated fair values of loans receivable. Liabilities carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Refer to Note 19 for the estimated fair values of borrowings.
37 Events After the Balance Sheet Date
On 14 January 2009 the shareholders of the Company approved dividend payments in the amount of Tenge 12,037,008 thousand based on the results of the first six months and third quarter of 2008. On 19 January 2009 the founders of ENRC Credit decided to increase the share capital of the partnership by Tenge 24, 500,000 thousand. The founders decided to achieve this by means of the Company's additional contribution. Accordingly, the Company's interest in ENRC Credit increased up to 91.13%. Additionally, in January 2009 the Company has purchased an additional 0.057% of interest in ENRC Credit from its related party EFIC for the amount of Tenge 52,163 thousand. On 26 January 2009, the Company’s Board of Directors decided to purchase the blocking shareholding in JSC Shubarkol Komir at the Kazakhstani Stock Exchange. In February 2009, the Company purchased 879,369 ordinary shares of JSC Shubarkol Komir, representing 25%, for approximately USD 200 million. In accordance with the purchase agreement, the Company has an option to purchase the rest of the shares until 31 January 2011. In January – February 2009, the Company sold government treasury bonds in the total amount of Tenge 6,026,220 thousand that were reflected as other financial assets at fair value through profit and loss as of 31 December 2008. On 17 March 2009 the Company has signed an agreement for providing loan to ENRC Finance Limited, a related party, in the amount of USD 100 million for a period of 170 days.
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TNC Kazchrome JSC
International Financial Reporting Standards Consolidated Financial Statements and Independent Auditor’s Report
31 December 2009
(Translated from the Russian original)
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Contents
Independent Auditor’s report
Consolidated Financial statements
Consolidated Statement of Financial Position ...... 1 Consolidated Statement of Comprehensive Income...... 2 Consolidated Statement of Changes in Equity...... 3 Consolidated Statement of Cash Flows...... 4
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1 The Company and its Operations...... 5 2 Basis of Preparation and Significant Accounting Policies...... 6 3 Critical Accounting Estimates and Judgements in Applying Accounting Policies ...... 15 4 New Accounting Pronouncements...... 17 5 Employee Information...... 21 6 Balances and Transactions with Related Parties...... 22 7 Property, Plant and Equipment...... 26 8 Investments in Associates ...... 27 9 Available for Sale Investments ...... 28 10 Other Financial Assets at Fair Value Through Profit and Loss ...... 29 11 Investments Held to Maturity ...... 29 12 Other Non-Current Assets ...... 29 13 Inventories...... 30 14 Trade Receivables and Other Current Assets ...... 30 15 Loans Receivable ...... 32 16 Cash and Cash Equivalents ...... 35 17 Share Capital...... 35 18 Long-term Share-based Employee Benefit Plan...... 36 19 Borrowings...... 37 20 Trade and Other Payables...... 38 21 Provision for Mining Assets and Waste Polygons Retirement Obligations ...... 38 22 Employee Benefits...... 39 23 Other Taxes Payable ...... 41 24 Revenue ...... 41 25 Cost of Sales ...... 41 26 Other Operating Income...... 42 27 Distribution Costs...... 42 28 General and Administrative Expenses...... 42 29 Other Operating Expenses ...... 43 30 Finance Income...... 43 31 Finance Costs...... 43 32 Income Taxes ...... 43 33 Discontinued Operations ...... 47 34 Contingencies, Commitments and Operating Risks...... 48 35 Financial Risk Management ...... 51 36 Fair Value of Financial Instruments ...... 54 37 Events After the End of the Reporting Period ...... 55
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TNC Kazchrome JSC Consolidated Statement of Comprehensive Income
In thousands of Kazakhstani Tenge Note 2009 2008
Revenue 24 208,000,891 426,189,165 Cost of sales 25 (98,945,560) (93,983,790) Gross profit 109,055,331 332,205,375
Other operating income 26 25,263,210 2,746,830 Distribution costs 27 (12,120,078) (16,060,166) General and administrative expenses 28 (14,760,476) (11,903,506) Other operating expenses 29 (1,163,528) (1,061,437) Operating profit 106,274,459 305,927,096
Finance income 30 33,483,598 11,549,590 Finance costs 31 (9,223,497) (12,648,146) Share of after tax profit of associates 8 820,346 - Profit before income tax 131,354,906 304,828,540 Income tax expense 32 (28,982,711) (97,612,880) Profit for the year from continuous operations 102,372,195 207,215,660 Profit for the year from discontinued operations 33 -5,061
Profit is attributable to: Parent Company’s shareholders 101,457,128 207,682,677 Minority interest 915,067 (461,956) Profit for the year 102,372,195 207,220,721
Other comprehensive income - - Total comprehensive income for the year 102,372,195 207,220,721
Total comprehensive income for the year attributable to: Parent company’s shareholders 101,457,128 207,682,677 Minority interest 915,067 (461,956)
The accompanying notes on pages 5 to 55 are an integral part of these consolidated financial statements. Translated from the Russian original 2
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TNC Kazchrome JSC Consolidated Statement of Changes in Equity
Share Other Retained Minority Total In thousands of Kazakhstani Tenge capital reserves earnings Total interest Equity Balance at 1 January 2008 11,777,952 - 179,893,015 191,670,967 19,540 191,690,507 Total comprehensive income for the year - - 207,682,677 207,682,677 (461,956) 207,220,721 Total recognized profit for the year - - 207,682,677 207,682,677 (461,956) 207,220,721 Dividends declared --(12,174,817) (12,174,817) (858) (12,175,675) Share-based compensation expense - 10,441 - 10,441 - 10,441 Consolidation of ENRC Credit --(820,968) (820,968) 10,036,643 9,215,675 Balance at 31 December 2008 11,777,952 10,441 374,579,907 386,368,300 9,593,369 395,961,669 Total comprehensive income for the year - - 101,457,128 101,457,128 915,067 102,372,195 Total recognized profit for the year - - 101,457,128 101,457,128 915,067 102,372,195 Dividends declared --(116,832,795) (116,832,795) (858) (116,833,653) Share-based compensation expense - 35,917 - 35,917 - 35,917 Consolidation of ENRC Credit --(3,574) (3,574) 177,411 173,837 Balance at 31 December 2009 11,777,952 46,358 359,200,666 371,024,976 10,684,989 381,709,965
The accompanying notes on pages 5 to 55 are an integral part of these consolidated financial statements. Translated from the Russian original 3
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TNC Kazchrome JSC Consolidated Statement of Cash Flows
In thousands of Kazakhstani Tenge Note 2009 2008
Cash flows from operating activities Profit before income tax 131,354,906 304,833,601 Adjustments for: Depreciation of property, plant and equipment 10,689,335 9,166,826 Amortisation and impairment of intangible assets 1,917 786 Provision for impairment of property, plant and equipment 28 (1,633) 712,097 Share based payments expenses 18 35,917 10,441 Employee benefits 1,960,581 (1,629,245) Financial guarantees amortisation 26 (358,955) (315,787) Gain on disposal of subsidiary 26 - (4,739) Provision / (reversal of provision) for obsolete and slow-moving inventory 13 114,523 (45,452) (Reversal of provision) / provision on receivables impairment 14 89,669 (6,420) Share of after tax loss of associates 8 (820,346) - Changes in fair value of financial assets 10 367,302 721,177 Loss on initial recognition of financial guarantees 30 - (485) Losses less gains on disposal of property, plant and equipment 118,997 286,092 Losses less gains on disposal of financial assets 26 (1,132,111) - Foreign currency exchange rate difference on cash and cash equivalents (21,611,682) 85,441 Finance income 30 (33,483,597) (11,489,654) Finance costs 31 8,856,195 11,867,526
Operating cash flows before working capital changes 96,181,018 314,192,205 (Increase)/Decrease in inventories 13 (3,330,229) (9,977,232) Decrease/(Increase) in trade receivables and other current assets 14 69,889,510 (52,487,879) (Increase)/Decrease in restricted cash 12 (38,831) 190,325 Increase/(Decrease) in trade and other payables 20 1,062,324 21,762 Increase/(Decrease) in provision for asset retirement obligations 21 404,530 (613,246) Increase/(Decrease) in other taxes payable 23 7,439,109 (143,672)
Cash generated from operations 171,607,431 251,182,263 Income tax paid 32 (37,249,552) (92,511,599) Employee benefits paid 22 (146,526) (142,069)
Net cash from operating activities 134,211,353 158,528,595
Cash flows from investing activities Purchase of property, plant and equipment (29,811,676) (32,555,801) Proceeds from disposal of property, plant and equipment 268,030 139,193 Purchase of investments held to maturity 11 - (522,208) Proceeds from disposal of investments held to maturity 200,000 - Proceeds from sales of available for sale investments 335,484 - Proceeds from sales of investments at fair value through profit and loss 9,161,046 - Purchase of long-term available for sale investments 9 (284,000) - Proceeds from disposal of subsidiary - 51,824 Purchase of interest in associates 8 (32,878,018) - Proceeds from disposal of interest in associates 1,155,376 - Purchase of other financial assets 10 - (9,179,538) Proceeds from sales of investments and other financial assets 10 - 5,524 Loans receivable 15 (81,748,136) (47,935,516) Repayment of loans and receivables 15 38,806,946 40,937,457 Increase in other non-current assets 12 37,852 45,881 Decrease in other payables 20 (20,615) (7,007) Interest received 8,487,577 7,355,981 Dividends received 26 - 1,593
Net cash used in investing activities (86,290,134) (41,662,617)
Cash flows from financing activities Proceeds from borrowings 19 - 14 Repayment of borrowings 19 (13) (57,913,708) Repayment of finance lease liabilities 19 (1,201,686) (963,693) Interest paid 19 (1,080,431) (3,115,783) Dividends paid to Company’s shareholders 17 (68,309,370) (12,201,225)
Net cash used in financing activities (70,591,500) (74,194,395)
Effect of exchange rate changes on cash and cash equivalents 21,611,682 (85,441) Net change in cash and cash equivalents (1,058,599) 42,586,142 Cash and cash equivalents at the beginning of the year 16 50,041,629 7,455,487
Cash and cash equivalents at the end of the year 16 48,983,030 50,041,629
The accompanying notes on pages 5 to 55 are an integral part of these consolidated financial statements. Translated from the Russian original 4
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
1 The Company and its Operations
These financial statements have been prepared in accordance with International Financial Reporting Standards for the year ended 31 December 2009 for TNC Kazchrome JSC and its subsidiaries (the “Company” or “Kazchrome”). Principal activity The principal activity of the Company and its subsidiaries comprises the extraction and sale of chrome ore as well as the production of ferroalloys. Kazchrome is considered to be one of the world’s largest chrome ore and ferroalloy producers. The Company is regarded as a natural monopoly in some types of its activity. The Company’s head office is located at 312, Strelkovaya Diviziya Av., Promzone, Aktobe, the Republic of Kazakhstan. The Company is controlled by Eurasian Natural Resources Corporation Plc (the “Group” or “ENRC Plc”), a global natural resources group with fully integrated mining, processing, energy and transport operations with the principal assets located in the Republic of Kazakhstan. Subsurface use contracts The Company is a party to a number of subsurface use contracts granted by the Government of the Republic of Kazakhstan the terms of which are set out below: Commencement Expiry Subsurface use contract* Location year year
Extraction of chromium ore Chromtau, Aktobe oblast 1997 2041 Extraction of chromium ore Chromtau, Aktobe oblast 2002 2018 Extraction of chromium ore Chromtau, Aktobe oblast 2001 2012 Exploration of chromium ore Aktobe oblast 2003 2009 Extraction of manganese ore Karaganda oblast 1999 2024 Extraction of manganese ore Karaganda oblast 1998 2018 Extraction of titanium-zirconium Aktobe oblast 2003 2021
* Each contract includes a renewal clause. Principal operating divisions The Company has four main operating divisions: 9 Aksu Ferroalloys Plant – production of chromium, siliceous and manganese alloys; 9 Aktobe Ferroalloys Plant - production of chromium and siliceous alloys; 9 Donskoy Mining and Metal Enriching Plant (“DGOK”) – extraction, processing and dressing of chrome ore mined from open-cast and underground mines which is both sold directly and used in the production of ferroalloys; 9 Kazmarganets – extraction and processing of manganese ore which is used in the production of ferroalloys. Company’s shareholders During 2009 and 2008 the shareholders of the Company were:
In percent of ownership 31 December 2009 31 December 2008
ENRC N.V. 98.31 98.31 Other legal entities 0.40 0.40 Individuals 1.29 1.29
ENRC N.V. is owned by ENRC Plc. The shareholders of ENRC Plc (the “Group”) are: In percent of ownership 31 December 2009 31 December 2008
Kazakhmys Plc together with Kazakhmys Eurasia B.V.* 26 26 Mr. P. K. Chodiev 14.59 14.59 Mr. A. R. Ibragimov 14.59 14.59 Mr. A.A. Mashkevich 14.59 14.59 Public (including employees and directors) 18.58 18.58 State Property and Privatisation Committee of Ministry of Finance of the Republic of Kazakhstan 11.65 11.65
At 31 December 2009 and 2008, 7,115,776 of common shares and 653,416 of preference shares of the Company owned by ENRC N.V. were transferred to ENRC Management KZ LLP for the trust management.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
1 The Company and its Operations (Continued)
Subsidiaries In addition to the four main operating divisions, the Company has a number of subsidiaries which provide auxiliary services to the main operating entities: Country of In percent of ownership incorporation Activity 2009 2008
Molservis AZF JSC Kazakhstan Dairy products production 100.00 100.00 Lotos Aktobe LLP Kazakhstan Bricks production 100.00 100.00 Warehousing services and sales of combustive- Donskaya Neftebaza JSC Kazakhstan lubricating materials 77.62 77.62 Credit Partnership ENRC Credit LLP Kazakhstan Financial services 88.73 88.67 Chrometau Brick Plant LLP Kazakhstan Bricks production 100.00 -
Due to the increase of the Company’s interest in the share capital of ENRC Credit LLP from 21.68 percent to 88.67 percent as of 31 December 2008, the Company started to consolidate Credit Partnership ENRC Credit LLP (the “Partnership” or “ENRC Credit”) since 4 April 2008, which was the date when ownership increased and control gained. In January 2009 the Company purchased a further 0.057 percent in the share capital of ENRC Credit from a related party – JSC Eurasian Industrial Company for the total amount of Tenge 51,163 thousand. In January 2009 the Partnership’s General Participants Meeting made the decision on the increase of the share capital by Tenge 24,500,000 thousand in the form of the additional contribution to be made by the Company. Accordingly, the Company’s interest in ENRC Credit increased up to 91.13 percent. In December 2009 the Company contributed additionally Tenge 917,000 thousand, but due to contributions by other participants, the Company’s interest became 88.73 percent as of 31 December 2009. In September 2009 the Company’s Board of Directors made the decision to set up Chrometau Brick Plant LLP with creation of the share capital in the form of the property contribution – brick production workshop of DGOK. The transferred properly was valued at Tenge 632,695 thousand. Chrometau Brick Plant LLP was registered with the legal authorities on 22 December 2009 and as at the reporting date the property transfer as the contribution to the share capital was not completed.
2 Basis of Preparation and Significant Accounting Policies
Basis of preparation. The accounting policy used in preparing the consolidated financial statements described below and is based on International Financial Reporting Standards (“IFRS”). These standards are subject to interpretations issued from time to time by the International Financial Reporting Interpretation Committee (‘IFRIC’). These financial statement are also prepared under historical cost convention, except revaluation of certain financial instruments. The preparation of the financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also necessitates management to exercise its judgement in the process of applying the Company’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in Note 3. The financial statements have been drawn up on the basis of accounting policies consistent with those applied in the financial statements for the year ended 31 December 2008 except where new policies have been applied. New accounting policies and pronouncements and the effects of these policies have been outlined in Note 4. Functional and presentation currency. All amounts in these financial statements are presented in thousands of Kazakhstani Tenge ("Tenge"), unless otherwise stated. Functional currency is the currency of the primary economic environment in which the Company operates. The Company’s functional currency is Tenge.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Foreign currency transactions. The Company’s monetary assets and liabilities denominated in foreign currencies at 31 December 2009 are translated into the Tenge at the official exchange rate of the Kazakhstani Stock Exchange at the reporting date. Foreign currency transactions are accounted for at the exchange rate prevailing at the date of the transaction. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognised in as profit and loss. At 31 December 2009 the principal rate of exchange used for translating foreign currency balances was US dollar (USD) 1 = Tenge 148.46 (31 December 2008: USD 1= Tenge 120.77). Exchange restrictions and currency controls exist relating to converting the Tenge into other currencies. Currently, the Tenge is not freely convertible in most countries outside of the Republic of Kazakhstan. Accounting for the effects of hyperinflation. The Republic of Kazakhstan has previously experienced relatively high levels of inflation, and was considered to be hyperinflationary as defined by IAS 29 Financial Reporting in Hyperinflationary Economies (“IAS 29”). IAS 29 requires that the financial statements prepared in the currency of a hyperinflationary economy be stated in terms of the measuring unit current at the reporting date. As the characteristics of the economic environment of the Republic of Kazakhstan indicate that hyperinflation has ceased, effective from 1 January 1999 the Company no longer applies the provisions of IAS 29. Accordingly, the amounts expressed in the measuring unit current at 31 December 1998 are treated as the basis for the carrying amounts in these financial statements. Consolidated financial statements. Subsidiaries are all companies (including special purpose entities) in which the Company, directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to govern the financial and operating policies so as to obtain economic benefits. The existence and effect of potential voting rights that are presently exercisable or presently convertible are considered when assessing whether the Company controls another entity. Subsidiaries are consolidated from the date on which control is transferred to the Company (acquisition date) and are de-consolidated from the date that control ceases. Intercompany transactions, balances and unrealised gains on transactions between subsidiaries are eliminated; unrealised losses are also eliminated but considered an impairment indicator of the asset transferred. The Company and all of its subsidiaries use uniform accounting policies consistent with the Company’s policies. Minority interest is that part of the net results and of the net assets of a subsidiary, (including the fair value adjustments), which is attributable to interests which are not owned, directly or indirectly, by the Company. Minority interest forms a separate component of the Company’s equity. Purchases of subsidiaries from parties under common control. Purchases of subsidiaries from parties under common control are accounted for using the pooling of interest method. Under this method the financial statements of the combined entity are presented from the date of purchase. The assets and liabilities of the subsidiary transferred under common control are at the predecessor entity’s carrying amounts. Related goodwill inherent in the predecessor entity’s original acquisitions is also recorded in these financial statements. Any difference between the carrying amount of net assets, including the predecessor entity's goodwill, and the consideration paid is accounted for in these consolidated financial statements as an adjustment to equity. Transactions with minorities. The Company applies the accounting policy whereby the transactions with minorities in the subsidiaries are recognised as transactions with the third parties. Disposals for the benefit of minorities result in profit or loss for the Company, and are recognised in the statement of comprehensive income. Acquisitions of minority shares result in goodwill which is the difference between the consideration paid and fair value of acquired part of the subsidiary's net assets. Investments in associates. Investments in associated undertakings are accounted for by the equity method of accounting. These are undertakings over which the Company generally has between 20 and 50 percent of the voting rights, or otherwise the Company has significant influence, but which it does not control. Unrealised gains on transactions between the Company and its associated undertakings are eliminated to the extent of the Company's interest in the associated undertakings; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies for associates have been changed where necessary to ensure consistency with the policies adopted by the Company. The results and assets and liabilities of associates are incorporated in the financial statement using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post – acquisition changes in the Company’s share of the net assets of the associate, less any impairment in the value of individual investments. When the Company’s share of losses in an associate equals or exceeds its interest in that associate the Company does not recognise further losses, unless it has incurred legal or constructive obligations or made payments on behalf of associate.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Property, plant and equipment. Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment losses. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads. The cost of property, plant and equipment at 1 January 2004, the date of the Company’s transition to IFRS, was determined by reference to its depreciated replacement cost at that date (“deemed cost”). The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the given asset as a whole are depreciated individually, applying depreciation rates reflecting their anticipated useful lives. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Company and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the statement of comprehensive income during the reporting period in which they are incurred. Recognised as an item of property, plant and equipment are specialised spare parts and servicing equipment with a significant initial value and a useful life of more than one year. Other spare parts and servicing-related equipment are recognised as inventories and accounted for in the profit and loss at the moment they are used. Gains or losses on disposals determined by comparing proceeds with carrying amount are recognised in profit or loss. Mining assets are recorded at cost less accumulated amortisation and less any accumulated impairment losses. Expenditure, including evaluation costs, incurred to establish or expand productive capacity, to conduct mining- construction and mining-capital works, mining preparation works in the period of developing project capacities or mine reconstruction, are capitalised to mining assets as part of buildings and constructions. Mining assets are amortised using the units-of-production method based on the estimated economically recoverable reserves to which they relate or the straight line method if the estimated useful life of the individual asset is less than the respective life of mine. Depreciation. Land is not depreciated. The deemed cost of each item of property, plant and equipment is depreciated over its useful life to residual value. Each item's estimated useful life has due regard to both its own physical life limitations and/ or the present assessment of economically recoverable reserves of the mine property at which the item is located. Depreciation is charged to the profit and loss on a straight line basis over the estimated useful life of the individual asset or on a unit of production basis depending on the type of asset. Changes in estimates, which affect unit of production calculations, are accounted for prospectively. The expected useful lives are as follows:
Useful lives in years
Buildings and constructions 2to50 Machinery and equipment 2to35 Other equipment and motor vehicles 2to20 Mining assets – open pits and mines infrastructure 2 to 23 Mining assets – others Units of production basis
The residual value of an asset is the estimated amount that the Company would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Company expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting date. Stripping costs. Stripping (i.e. overburden and other waste removal) costs incurred in the development of mines and open pits before production commences are capitalised as part of the cost of constructing the mines and open pits and subsequently amortised using unit of production method over the lives of the mines or open pits. The stripping costs incurred subsequently during the production stage of its operations are included within the cost of inventory. Intangible assets. All of the Company’s intangible assets have definite useful lives and primarily include patent. Acquired patent is capitalised on the basis of the costs incurred to acquire and bring them to use. Intangible assets are amortised using the straight-line method over their useful lives: twelve years for patent. Impairment. The carrying amount of property, plant and equipment and all other non-financial assets are reviewed for impairment if there is any indication that the carrying amount may not be recoverable.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued) When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of ”value in use” (being the net present value of expected future cash flows of the relevant cash generating unit) and ”fair value less costs to sell” (the amount obtainable from the sale of an asset or cash generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal). Where there is no binding sale agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Company could receive for the cash generating unit in an arm’s length transaction. A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or assets groups. The Company distinguishes three cash generating units: Aktobe Ferroalloys Plant, Aksu Ferroalloys Plant and Donskoy Mining and Metal Enriching Plant. The estimates used for impairment reviews are based on detailed mine plans and operating budgets, modified as appropriate to meet the requirements of IAS 36 Impairment of Assets. Future cash flows are based on: - estimates of the quantities of the reserves for which there is a high degree of confidence of economic extraction; - future production levels; - future commodity prices (assuming the current market prices will revert to the Company ’s assessment of the long term average price, generally over a period of three to five years); and - future cash costs of production, capital expenditure, close down, restoration and environmental clean up. If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the profit and loss so as to reduce the carrying amount in the statement of financial position to its recoverable amount. A previously recognized impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognized in the statement of comprehensive income and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized in prior years. Long-term assets held for sale. A long-term asset is classified as intended for sale, if its carrying value is to be recovered mainly through its sale, rather than its further utilisation. Assets which meet the criteria of assets intended for sale classification are measured at the lower of their carrying value and their fair value less selling costs, and amortization of such assets is derecognised. Classification of financial assets. The Company classifies its financial assets into the following measurement categories: loans and receivables, held to maturity, available for sale and financial assets at fair value through profit and loss. The classification depends on the purpose for which the financial assets were acquired. Management determines the classification of its financial assets at initial recognition. (a) Loans and receivables Loans and receivables are unquoted non-derivative financial assets with fixed or determinable payments other than those that the Company intends to sell in the near term. Loans and receivables are recognised initially at fair value plus transaction costs. Subsequently, loans and receivable are stated at amortised cost using the effective interest method. Where a loan is provided at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss. The origination gain or loss is recorded in the statement of comprehensive income within other operating income/expenses (or within finance income/costs if a loan is issued by an entity other than ENRC Credit), except for loans issued to the Company's employees. Subsequently, the carrying amount of the loans is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded within other operating income/expenses (or within finance income/costs if a loan is issued by an entity other than ENRC Credit) using the effective interest method. If the loans are issued to the Company's employees, the difference between the fair value of the loan issue and net proceeds at origination is recognized as prepayment of employee benefits. Subsequently, the prepayment is amortized through profit/loss during the loan period. Amortization charge on prepayment is recognized at the relevant expense accounts depending on the employee’s employment place. Loans and receivables are included in current assets in the statement of financial position, except for those with maturities greater than 12 months after the reporting date, which are classified as non-current assets (see Note 15). An impairment provision is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms (see accounting policy for Trade and Other Receivables). The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The amount of the provision is recognised in the statement of comprehensive income.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
(b) Held-to-maturity The held-to-maturity classification includes quoted non-derivative financial assets with fixed or determinable payments and fixed maturities that the Company has both the intention and ability to hold to maturity. Management determines the classification of investment securities held to maturity at their initial recognition and reassesses the appropriateness of that classification at each reporting date. If the Company fails to keep these investments to maturity other than for certain specific circumstances – for example, selling an insignificant amount close to maturity – it will be required to reclassify the entire class as available-for-sale. The investments would therefore be measured at fair value rather than amortised cost. Held-to-maturity investments are initially recorded at fair value including transactions costs and subsequently carried at amortised cost (net of provision for impairment loss) including any discounts using the effective interest method over the period to maturity. Held-to-maturity investments are included in non-current assets unless for investments with maturities within 12 months of the reporting date. (c) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss are financial assets held for trading. A financial asset is classified in this category is acquired principally for the purpose of selling in the short term. Assets in this category are classified as current assets. Financial assets at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the profit and loss. Subsequently, financial assets at fair value through profit or loss are carried at fair value. Gains or losses arising from changes in the fair value of the “Financial assets at fair value through profit or loss” category are presented in the profit and loss within finance cost or income, in the period in which they arise. Dividend income from financial assets at fair value through profit or loss is recognised in the statement of comprehensive income as part of other income when the Company’s right to receive payments is established. All other financial assets are included in the available-for-sale category. (d) Available for sale investments Available-for-sale investments are non-derivatives that are either designated in this category or not classified in any of the other categories. Investments are initially carried at fair value plus transaction costs and subsequently carried at fair value. Interest income on available for sale debt securities is calculated using the effective interest method and recognised in profit or loss. Dividends on available-for-sale equity instruments are recognised in profit or loss when the Company’s right to receive payment is established. All other elements of changes in the fair value are deferred in other comprehensive income until the investment is derecognised or impaired at which time the cumulative gain or loss is removed from other comprehensive income to profit or loss. Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss events”) that occurred after the initial recognition of available-for-sale investments. A significant or prolonged decline in the fair value of an equity security below its cost is an indicator that it is impaired. The cumulative impairment loss – measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that asset previously recognised in profit or loss – is removed from equity and recognised in profit or loss. Impairment losses on equity instruments are not reversed through profit or loss. If, in a subsequent period, the fair value of a debt instrument classified as available for sale increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed through current period’s profit or loss. When it is not possible to obtain current market value for available for sale investments due to the nature of the local financial market and management cannot estimate fair value of those investments with adequate reliability investments available for sale are recognised in the statement of financial position at actual purchase cost. Available-for-sale investments are included in non-current assets unless management intends to dispose of the investment within 12 months of the reporting date (see Note 9). Regular purchases and sales of financial instruments are recognised on the settlement date, which is the date that an asset is delivered to or by the Company, with the change in value between the trade date and settlement date not recognised for assets carried at cost or amortised cost and recognised in equity for assets classified as available for sale. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition is only recorded if there is a difference between fair value and transaction price which can be evidenced by other observable current market transactions in the same instrument or by a valuation technique whose inputs include only data from observable markets. The Company derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (ii) the Company has transferred substantially all the risks and rewards of ownership of the assets or (iii) the Company has neither transferred nor retained substantially all risks and rewards of ownership, but has not retained control. Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.
Translated from the Russian original 10 F-199 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Inventories. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on the weighted average basis. Chrome, manganese and other extracted minerals are recognised as raw materials when delivered to the surface and is valued at the average cost of extraction. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses. Trade and other receivables. Trade and other receivables are initially recognised at fair value. Trade and other receivables are subsequently carried at amortised cost using the effective interest method less impairment provision. A provision for impairment of trade receivables is established when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of receivables. Presented below are the indicators of the trade receivables impairment: - any portion of the receivable is overdue and the late payment cannot be attributed to a delay caused by the settlement systems; - the counterparty experiences a significant financial difficulty as evidenced by its financial information that the Company obtains; - the counterparty considers bankruptcy or other financial reorganisation; - there is an adverse change in the payment status of the counterparty as a result of changes in the national or local economic conditions that impact the counterparty; - the value of collateral, if any, significantly decreases as a result of deteriorating market conditions.
The amount of the provision is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Carrying amount of an asset is decreased against the provisions account and the loss amount is recognised in the statement of comprehensive income within general and administrative expenses. Uncollectable trade receivables are written off against the trade receivables provisions. The amount of recovered loss is recognised in the statement of comprehensive income within other income. Prepayments. Prepayment is recognised in the financial statements at cost less provision for impairment. Prepayments paid to suppliers for future supplies of property, plant and equipment are recognised within other non- current assets. Prepayments for future supplies of inventories are recognised within other current assets. Foreign currency denominated prepayments for goods and services represent the nonmonetary items, and accordingly, are stated at the exchange rate at the prepayment date, and are not subject to restatement at the reporting date. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly, and a corresponding impairment loss is recognised in the statement of comprehensive income. Cash and cash equivalents. Cash and cash equivalents include cash in hand, deposits held at call with banks, and other short-term highly liquid investments. Cash equivalents are carried at amortised cost using the effective interest method. Balances restricted from being exchanged or used to settle a liability for at least twelve months after the reporting date are included in other non-current assets, while balances restricted for more than three months but less than twelve months after the reporting date are included in other current assets. Restricted balances are excluded from cash and cash equivalents for the purpose of cash flow statement. Term deposits. Term deposits include deposits with the maturity of more than three months. These deposits are classified as other current assets since management of the Company has an intention to hold the deposits for more than three months and does not intend to use the for short term cash needs. Term deposits are carried at amortized cost using the effective interest method. Share capital. Ordinary shares are classified as equity. Preference shares are compound financial instruments that contain both a liability and an equity component. The liability is initially recognised at its fair value by applying the relevant effective interest rate to the amount of mandatory annual dividends using a net present value formula for the period of the life of the mines. The life of mines is used rather than a perpetuity since the Company will not generate cash flows or profits beyond the life of the mines. Subsequently, the liability is measured at amortised cost. Effects of changes in cash flow estimates on carrying amounts are recognised in the statement of comprehensive income. At initial recognition, the equity component is the residual, i.e. it is the proceeds received from the issuance of the preference shares less the fair value of the liability. The equity component is not subsequently re-measured. Dividends. Dividends, except for the mandatory annual dividends on preference shares, are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Mandatory annual dividends on preference shares are recognised as finance costs in the statement of comprehensive income. Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the financial statements are authorised for issue.
Translated from the Russian original 11 F-200 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Provision for mining assets and waste polygons retirement obligations. Mining assets and waste polygons retirement obligations are recognized when there is a probable certainty of incurring the costs and those costs can be measured reliably. Mining assets retirement costs include the landfill site restoration and closure (dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas). Waste polygons retirement costs include dismantling and demolition of polygon infrastructure, environmental cleaning and discharge monitoring. Estimated landfill site restoration and remediation costs are provided for and incurred in the cost of property, plant and equipment in the accounting period when the obligation arising from the related disturbance occurs during the mine development phase or when the related damage occurs, based on the net present value of estimated future costs. Provisions for mining assets and waste polygons retirement obligations do not include any additional obligations which are expected to arise from future disturbance. The costs are estimated on the basis of a closure and restoration plan. The cost estimates are calculated annually during the life of the operation to reflect known developments, e.g. updated cost estimates and revisions to the estimated lives of operations, and are subject to formal review at regular intervals. Although the ultimate cost to be incurred is uncertain, the Company estimates their costs based on feasibility and engineering studies using current restoration standards and techniques for conducting restoration and remediation works. The amortisation or ”unwinding” of the discount applied in establishing the net present value of provisions is charged to the statement of comprehensive income in each reporting period. The amortisation of the discount is shown as a financing cost, rather than as an operating cost. Other movements in the provisions for mining assets and waste polygons retirement obligations, resulting from new disturbance as a result of mine development, updated cost estimates, changes to the estimated lives of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the lives of the assets to which they relate using the depreciation methods applied to those assets. Movements in the provisions for asset retirement obligations that relate to disturbance caused by the production phase are charged in the statement of comprehensive income. Where restoration and remediation works are conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the estimated outstanding continuous remediation work at each reporting date and the cost is charged to the profit and loss. Operating leases. Where the Company is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Company, the total lease payments, including those on expected termination, are charged to profit or loss on a straight-line basis over the period of the lease. When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term. Finance lease liabilities. Where the Company is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Company, the assets leased are capitalised in property, plant and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance lease balance outstanding. The corresponding rental obligations, net of future finance charges, are included in borrowings. The interest cost is charged to the statement of comprehensive income over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term if the Company is not reasonably certain that it will obtain ownership by the end of the lease term. Borrowings. Borrowings are initially recorded at fair value including transaction costs and subsequently measured at amortised cost using the effective interest method. Where a loan is obtained at interest rates different from market rates, the loan is re-measured at origination to its fair value, being future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss. The origination gain or loss is recorded in the statement of income within finance income/costs. Subsequently, the carrying amount of the borrowings is adjusted for amortisation of the gains/losses on origination and the amortisation is recorded as borrowing costs using the effective interest method.
Translated from the Russian original 12 F-201 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Borrowing costs that are directly attributable to the construction of an asset that necessarily takes a substantial period of time to get ready for its intended use form part of the cost of that asset. Exchange differences on foreign currency denominated borrowings to finance the construction of qualifying assets are capitalised at the extent they compensate the decrease of interest expenses. All other borrowing costs are expensed. Capitalisation of borrowing costs is suspended during extended periods when construction and development of a qualifying asset for its intended use or sale is interrupted (except where such interruptions are a necessary part of the process of getting an asset ready for its intended use or sale). Such costs do not qualify for capitalisation. Those costs that are not capitalised are expensed. Borrowings are classified as current liabilities unless the Company has an unconditional right to defer settlement of the liability for at least twelve months after the reporting date. Financial guarantees. Financial guarantees are contracts that require the Company to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognised at their fair value, which is normally evidenced by the amount of fees received. Financial guarantees are recognised when a premium is paid or in the case of a premium-free guarantees (intra group guarantees) when the borrower receives the money from the financing entity. When the Company issues a premium-free guarantee or a guarantee at a premium different from market premium, fair value is determined using valuation techniques (e.g. market prices of similar instruments, interest –rate differentials, etc). Losses at initial recognition of a financial guarantee liability are recognised in the statements of comprehensive income within other operating expenses. Financial guarantee liabilities are amortised on a straight line basis over the life of the guarantees with respective income presented within other operating income. At each reporting date, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the obligation at the reporting date. Trade and other payables. Trade payables are accrued when the counterparty performed its obligations under the contract. The Company recognizes trade payables at fair value. Subsequently trade payables are carried at amortised cost using the effective interest method. Value added tax (“VAT”). Value-added tax related to sales is payable to the tax authorities when goods are shipped or services are rendered. Input VAT can be offset against output VAT upon the receipt of a tax invoice from a supplier. Tax legislation allows the settlement of VAT on a net basis. Accordingly, VAT related to sales and purchases unsettled at the reporting date is stated in the statement of financial position on a net basis. Income taxes. Income taxes have been provided for in the financial statements in accordance with Kazakhstani legislation enacted on the reporting date. The income tax charge comprises current (corporate and excess profit) tax and deferred tax and is recognised in the profit and loss, except for where it is recognised directly in equity because it relates to transactions that are also recognised, in the same or a different period, directly in equity. Current tax is the amount expected to be paid to or recovered from the taxation authorities in respect of taxable profits or losses for the current and prior periods. Taxable income or losses are based on estimates where the financial statements are authorised prior to the filling of the relevant tax return. Taxes, other than on income, are recorded within operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry-forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. The deferred income tax is not accounted for if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit nor loss. The deferred tax assets and liabilities are settled within each separate subsidiary included in the consolidated financial statements of the Company. Deferred tax balances are measured at corporate income and excess profit tax rates enacted or substantively enacted at the reporting date which are expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred excess profit tax is calculated with respect to temporary differences in respect of assets and liabilities allocated to contracts for subsurface use at the expected rate of excess profits tax to be paid under the contract. Deferred tax assets for deductible temporary differences and tax loss carry-forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised. Excess profit tax. In accordance with tax legislation effective at 31 December 2008 excess profit tax was payable under subsurface use contracts where the cumulative internal rate of return during the current year exceeded 20 percent. The taxable base for excess profit tax (EPT) is the taxable income used for the calculation of the corporate income tax less the corporate income tax itself. Whereas, the EPT rate is based on the cumulative internal rate of return in respect to each subsurface use contract.
Translated from the Russian original 13 F-202 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
In accordance with the new Tax Code effective from 1 January 2009, the EPT calculation method has changed. Internal rate of return indicator is replaced by the ratio of annual income and annual allowed deductions under a contract. The allowed deductions can include the capital expenditures. Contractual income is determined based on the rules of separate accounting established by the Tax Accounting Policies of the Company. Taxable basis for EPT is the taxable income determined for the corporate income tax purposes reduced for the amount of corporate income tax as well as amount of 25 percent of allowed deductions including the capital expenditures. EPT should be paid in the years when the ratio of the annual income and the annual deductions exceeds 1.25. Liabilities for EPT are recorded in accordance with the Company's accounting policies for current and deferred tax and based on management's understanding of the provisions of the subsurface use contracts and tax regulations. Revenue recognition. Revenues from sales of goods are recognised at the point of transfer of the risks and rewards of ownership of the goods, normally when the goods are shipped. If the Company agrees to transport goods to a specified location, revenue is recognised when the goods are passed to the customer at the destination point. Sales of services are recognised in the accounting period in which the services are rendered, by reference to the stage of completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided. Sales are shown net of VAT and discounts. Revenues are measured at the fair value of the consideration received or receivable. When the fair value of goods received in a barter transaction cannot be measured reliably, the revenue is measured at the fair value of the goods or service given up. Revenue from sales of ferroalloys is subject to adjustment based on an inspection of the quantity and quality of product by the customer. In such cases, revenue is initially recognised on a provisional basis using the Company's best estimate of ferroalloys delivered and contained metal. Any subsequent adjustments to the initial estimate of the quantity delivered and metal content are recorded in revenue once they have been determined. Exploration costs. Exploration costs are expensed as incurred up to the point when the evaluation demonstrates that there are commercially viable reserves present and there are probable future economic benefits from the continued development and production of the resource. All subsequent costs are capitalised up to the point when commercial production commences. Payroll expense and related contributions. Wages, salaries, social tax, contributions to social insurance funds, paid annual leave and sick leave, bonuses, and non-monetary benefits are accrued in the year in which the associated services are rendered by the employees of the Company. Pension payments except for described below in employee benefits. The Company does not incur any expenses in relation to pension payments for its employees. In accordance with the legal requirements of the Republic of Kazakhstan, the Company withholds pension contributions from employees’ salary and transfers them into the employee’s designated pension fund. Upon retirement of employees, all pension payments are administered by such pension funds. Employee benefits. The Company provides long term employee benefits to employees before, on and after retirement, in accordance with a Collective Labour Agreement. The agreement provides for one-off retirement payments, financial aid for employees’ disability, significant anniversaries and funeral aid to the Company’s employees. The entitlement to some benefits is usually conditional on the employee remaining in service up to retirement age and the completion of a minimum service period. Such benefits are valued consistent with an unfunded defined benefit plan in accordance with IAS 19 Employee Benefits. The expected costs of the benefits associated with long term employee benefits are accrued over the period of employment using the projected unit credit method. For defined benefit post-employment plans, the difference between the fair value of the plan assets (if any) and the present value of the plan liabilities is recognised as an asset or liability on the statement of financial position. Actuarial gains and losses arising in the year are taken to the profit and loss. For this purpose, actuarial gains and losses comprise both the effects of changes in actuarial assumptions and experience adjustments arising because of differences between the previous actuarial assumptions and what has actually occurred. Other movements in the net surplus or deficit are recognised in the statement of comprehensive income, including current service cost, any past service cost and the effect of any curtailments or settlements. The most significant assumptions used in accounting for defined benefit obligations are the discount rate and the mortality assumptions. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to the statement of comprehensive income as interest cost. The mortality assumption is used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities.
Translated from the Russian original 14 F-203 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
2 Basis of Preparation and Significant Accounting Policies (Continued)
Employee benefits other than one-off retirement payments are considered as other long-term employee benefits. The entitlement to these benefits is usually conditional on the completion of a minimum service period. The expected cost of these benefits is accrued over the period of employment using the same accounting methodology as used for the defined benefit plan. These obligations are valued annually by independent qualified actuaries. Share based compensation. The Group issues equity settled share-based payments to certain employees which must be measured at fair value and recognized as an expense in the statement of comprehensive income, with a corresponding increase in equity in the case of equity-settled payments, and liabilities in the case of cash-settled awards. The fair values of equity-settled payments are measured at the dates of grant using Monte-Carlo evaluation model. The fair value is recognized over the period during which employees become unconditionally entitled to the awards, subject to the Group’s estimate of the number of awards which will lapse, either due to the employees leaving the Group prior to vesting or due to performance target not being made. The total amount recognized in the statement of comprehensive income as an expense is adjusted to reflect the actual number of awards that vest. If the Group cancels the vesting of the share instruments or makes the calculations for them during the period of vesting, the Group considers it as the acceleration of a vesting process and immediately recognises the amount which in other cases would be considered as the services received during the remaining vesting period. Any payments made to the employees in case of cancellation of share-based payments or calculation of them are stated as reverse purchase of share in the equity unless such payment exceeds the fair value of share -based payments evaluated at the date of reserve purchase. Any such excess is stated as expense. Provisions for liabilities and charges. Provisions for liabilities and charges are recognised when the Company has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small. Where the Company expects a provision to be reimbursed, for example under an insurance contract, the reimbursement is recognised as a separate asset but only when the reimbursement is virtually certain, i.e. when a counter party has confirmed and is financially solvent to pay reimbursement. Finance income and costs. Finance income and costs comprise interest expense on borrowings and loans payable, deposits, loans given by the Company to its employees, interest income/expense from unwinding of discount on provision for asset retirement obligations and other financial assets and liabilities, net foreign exchange gains/(losses) related to respective financial assets and liabilities. Interest income/expense is recognised as it accrues, taking into account the effective interest on the asset/liabilities. Transactions with state owned entities. Transactions with the state owned entities are not disclosed when they are done in the ordinary course of business with terms consistently applied to all public and private entities and where there is no choice of supplier such as electricity transmission services, telecommunications and etc.
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies
The Company makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial period include: Contract on subsurface use. The major contract of the Company on subsurface use for the extraction of chromium ore expires in 2041. The management of the Company expects that this contract will be extended at nominal cost until the end of the mine life which is expected to be in 2074. In these financial statements primarily depreciation charge and carrying amounts of property, plant and equipment were recorded on the assumption that the subsurface use contracts will be extended until the end of the mine life. The Company believes that it has a right to extend the contracts on subsurface use in accordance with the contracts and current subsurface use legislation. If the contracts are not renewed in 2041, the carrying amount of property, plant and equipment to be written off at the day of subsurface use contract expiry will be Tenge 4,348,989 thousand (2008: Tenge 3,306,800 thousand).
Translated from the Russian original 15 F-204 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Estimated useful life of mining assets and mineral reserves. The mining assets, classified within property, plant and equipment, are depreciated over the respective life of mine using the unit of production (UOP) method based on proved and probable mineral reserves. When determining mineral reserves, assumptions that were valid at the time of estimation may change when new information becomes available. Any changes could affect the prospective depreciation rates and asset carrying values. The calculation of the units of production rate of depreciation could be impacted to the extent that actual production in the future is different from current forecast production based on proved and probable mineral reserves, which would generally arise as a result of significant changes in any of the factors or assumptions used in estimating mineral reserves. These factors could include: - changes to proved and probable mineral 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 mineral 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 mineral reserves. The majority of other property, plant and equipment are depreciated on a straight line basis over their useful economic lives. Management reviews the appropriateness of assets useful economic lives at least annually; any changes could affect prospective depreciation rates and asset carrying values. As at 31 December 2009 the carrying amount of mining assets included within buildings and constructions was Tenge 6,490,361 thousand (2008: Tenge 3,688,329 thousand). Provision for mining assets and waste polygons retirement obligations. In accordance with the environmental legislation and the contracts on subsurface use, the Company has a legal obligation to remediate damage caused to the environment from its operations and to decommission its mining assets and waste polygons and restore a landfill site after its closure. Provision is made, based on net present values, for site restoration and rehabilitation costs as soon as the obligation arises from past mining activities. The provision for mining assets and waste polygons retirement obligation is estimated based on the Company’s interpretation of current environmental legislation in the Republic of Kazakhstan and the Company’s related program for liquidation of subsurface use consequences on the contracted territory and other operations supported by the feasibility study and engineering researches in accordance with the existing rehabilitation standards and techniques. Provisions for retirement obligations are subject to potential changes in environmental regulatory requirements and the interpretation of the legislation. Provisions for mining assets and waste polygons retirement obligations are recognized when there is a certainty of incurring those and when it is possible to measure the amounts reliably. As at 31 December 2009 the carrying amount of the provision for mining assets retirement obligations was Tenge 2,357,129 thousand (2008: Tenge 705,475 thousand). As at 31 December 2009 the carrying amount of waste polygons retirement obligations was Tenge 2,950,842 thousand (2008: Tenge 1,933,655 thousand). Construction of new workshop. During 2009, the Company commenced the preparatory works for construction of a new workshop for production of ferroalloys at Aktobe plant. At 31 December 2009 the design works on construction of the workshop have not been completed, and accordingly, the useful lives of the property, plant and equipment of Aktobe Ferroalloy Plant have not been revised. Upon completion of design works expected in 2010 the useful lives of the property, plant and equipment of Aktobe Ferroalloy Plant can be decreased, upon necessity, such revision will be made by 31 December 2010. Additionally, the Company expects to continue the operation of the current assets for production of new products given the Company Board of Directors’ approval expected in 2010. Impairment. The Company reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that these assets are impaired. Based on the analysis of the internal and external factors, the management determined the lack of impairment indicators at the reporting date. Land use right. The Company has a right for land use at the territory of its structural subdivisions and mines according to the long-term lease agreements with the Territorial Land Resources Management Committees with the different terms from 5 to 48 years. Such agreements have been extended in prior periods at the nominal cost and the Company’s management believes that lease agreements will be extended until the end of mines useful lives i.e., up to 2074. Tax and transfer pricing legislation. Kazakh tax and transfer pricing legislation is subject to varying interpretations (see Note 34). Related party transactions. In the normal course of business the Company enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties (see Note 6).
Translated from the Russian original 16 F-205 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
3 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued)
Fair value of financial guarantees. The fair values of premium-free financial guarantees issued by the Company are determined by using valuation techniques. The Company uses its judgement to determine fair value of financial guarantees issued by applying market prices of similar instruments (e.g. financial guarantees issued by commercial banks). Fair value of financial instruments. The management of the Company uses its judgement to select a variety of methods and verify assumptions that are mainly based on market conditions existing at each reporting date in determining the fair value of the Company’s financial instruments. Investments carried at cost. Management could not reliably estimate fair value of its available-for-sale investments in shares of ENRC Business and Technology Services LLP. The investments are carried at cost of Tenge 1,154,000 thousand as of 31 December 2009. The investee has not published recent financial information about its operations, its shares are not quoted and recent trade prices are not publicly accessible. Management estimates that fair value of these investments approximates its cost. Deferred income tax assessment. Estimation of deferred income tax as of the reporting date depends on the effective rate of income tax applicable for the periods when deductible/taxable temporary differences are reversed/settled. Since the officially established corporate income tax rate will change in the subsequent periods, and the excess profit tax rate which will be applied in future depends on rate of return on subsurface use operations, the estimation of effective rate of deferred income tax for the reporting date requires the judgment on: estimation of future taxable income and related deductions on subsurface use operations; expected mechanism for amortization of capital expenditures; expected useful life of property, plant and equipment and other assumptions which affect the estimations of amounts and periods when deductible/taxable temporary differences existing at the reporting date are reversed/settled.
4 New Accounting Pronouncements
(a) Standards, amendments and interpretations effective from 1 January 2009:
IFRS 7 (Amendment) ‘Financial Instruments: Disclosures’. The amendment requires enhanced disclosures about fair value measurements and liquidity risk. The entity is required to disclose an analysis of financial instruments using a three-level fair value measurement hierarchy. These changes in the accounting policies lead only to the additional disclosurea, and do not affect the financial results. IFRS 8, Operating Segments (new). IFRS 8 replaces IAS 14 and brings the reporting segments into line with the requirements of SFAS USA 131 Disclosure of Entity Segment and Related Information. The new standard requires to apply “the management approach”, whereby the segment information is presented on the basis applied for internal reporting. The new IFRS will not lead to the additional disclosures for the Company, since the Company does not place its debt or equity instruments at the open market. IAS 1, Presentation of Financial Statements (revised). The revised standard prohibits to present the items of income and expenses (i.e. non-owner changes in equity) in the statement of changes in equity and requires to present such items of income and expenses separately from changes in equity in the statement of comprehensive income. As a result, the Company presents all changes in owners’ equity in the statement of changes in equity whereas the non-owner changes in equity are presented in the statement of comprehensive income. For comparison purposes, the information for the prior periods was presented in accordance with the requirements of revised standard. Since this change in the accounting policies affect the presentation aspects, it does not affect the financial results. IFRS 2 (Amendment), Share-based Payment - Vesting Conditions and Cancellations. The revised standard relates to vesting conditions and cancellations. The amendment clarifies that vesting conditions are service conditions and performance conditions only. Other features of a share-based payment are not vesting conditions. These features should be included into calculations of fair value at the share-based payment agreement date related to the transactions with the employees and other entities providing the same services; such features should not affect the number of share-based payments for which vesting is expected, and on evaluation after share-based payment agreement date. All cancellations made whether by the entity or by other parties, should receive the same accounting treatment. The Company adopted the amended IFRS 2 from 1 January 2009. This amendment does not affect the Company’s financial statements. IAS 23 (Amendment), Borrowing Costs. This amendment requires that borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time to get ready for its intended use or sale form part of the cost of that asset. The option of immediately recognising as an expense borrowing costs is removed from this standard. This amendment will not impact the Company’s financial statements as the current Company’s policy is to capitalise interest costs on borrowings to finance the construction of property, plant and equipment during the period of time that is required to complete and prepare the asset for its intended use.
Translated from the Russian original 17 F-206 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
4 New Accounting Pronouncements (Continued)
IFRS 5 (Amendment), Non-current assets held for sale and discontinued operations (and the subsequent amendments to IAS 1 First Adoption of IFRS (effective from 1 July 2009). This amendment is developed as a part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that all of a subsidiary's assets and liabilities are classified as held for sale, if a partial disposal sale plan results in loss of control, and relevant disclosure should be made for this subsidiary if the definition of a discontinued operation is met. The Company will apply the revised IFRS 5 presumably to all partial sales of subsidiaries from 1 January 2010. IAS 23 (Amendment), 'Borrowing costs. The amendment is part of the IASB’s annual improvements project published in May 2008. The definition of borrowing costs has been amended so that interest expense is calculated using the effective interest method defined in IAS 39 'Financial instruments: Recognition and measurement’. This eliminates the inconsistency of terms between IAS 39 and IAS 23. This amendment does not have the significant impact on the Company’s financial statements. IAS 28 (Amendment), 'Investments in associates' (and consequential amendments to IAS 32, 'Financial Instruments: Presentation') and IFRS 7, 'Financial instruments: Disclosures'. The amendment is part of the IASB’s annual improvements project published in May 2008. An investment in associate is treated as a single asset for the purposes of impairment testing and any impairment loss is not allocated to specific assets included within the investment, for example, goodwill. Reversals of impairment are recorded as an adjustment to the investment balance to the extent that the recoverable amount of the associate increases. This new accounting pronouncement does not have the impact on the Company’s financial statements. IAS 36 (Amendment), 'Impairment of assets'. The amendment is part of the IASB’s annual improvements project published in May 2008. Where fair value less costs to sell is calculated on the basis of discounted cash flows, disclosures equivalent to those for value-in-use calculation should be made. The Company applies the IAS 36 (amendment) and provides the required disclosure where applicable for impairment tests. IAS 38 (Amendment), 'Intangible assets'. The amendment is part of the IASB’s annual improvements project published in May 2008. An amendment clarifies that prepayment may only be recognised in the event that payment has been made in advance of obtaining right of access to goods or receipt of services. This amendment does not have the significant impact on the Company’s financial statements. IAS 19 (Amendment), Employee benefits. The amendment is part of the IASB’s annual improvements project published in May 2008. - The amendment clarifies that a plan amendment that results in a change in the extent to which benefit promises are affected by future salary increases is a curtailment, while an amendment that changes benefits attributable to past service gives rise to a negative past service cost if it results in a reduction in the present value of the defined benefit obligation. - The definition of return on plan assets has been amended to state that plan administration costs are deducted in the calculation of return on plan assets only to the extent that such costs have been excluded from measurement of the defined benefit obligation. - The distinction between short term and long term employee benefits will be based on whether benefits are due to be settled within or after 12 months of employee service being rendered. - IAS 37, 'Provisions, contingent liabilities and contingent assets', requires contingent liabilities to be disclosed, not recognised. IAS 19 has been amended to be consistent. These amendments do not have the significant impact on the Company’s financial statements. IAS 39 (Amendment), 'Financial instruments: Recognition and measurement'. The amendment is part of the IASB’s annual improvements project published in May 2008. - This amendment clarifies that it is possible for there to be movements into and out of the fair value through profit or loss category where a derivative commences or ceases to qualify as a hedging instrument in cash flow or net investment hedge. - The definition of financial asset or financial liability at fair value through profit or loss as it relates to items that are held for trading is also amended. This clarifies that a financial asset or liability that is part of a portfolio of financial instruments managed together with evidence of an actual recent pattern of short-term profit-taking is included in such a portfolio on initial recognition. - The current guidance on designating and documenting hedges states that a hedging instrument needs to involve a party external to the reporting entity and cites a segment as an example of a reporting entity. This means that in order for hedge accounting to be applied at segment level, the requirements for hedge accounting are currently required to be met by the applicable segment. The amendment removes the segment example so that the guidance is consistent with IFRS 8, ‘Operating segments’ which requires disclosure for segments to be based on information reported to the chief operating decision maker. - When remeasuring the carrying amount of a debt instrument on cessation of fair value hedge accounting, the amendment clarifies that a revised effective interest rate (calculated at the date fair value hedge accounting ceases) are used. These amendments do not have the significant impact on the Company’s financial statements.
Translated from the Russian original 18 F-207 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
4 New Accounting Pronouncements (Continued)
IAS 1 (Amendment), 'Presentation of financial statements'. The amendment is part of the IASB’s annual improvements project published in May 2008. The amendment clarifies that some rather than all financial assets and liabilities classified as held for trading in accordance with IAS 39, 'Financial instruments: Recognition and measurement’ are examples of current assets and liabilities respectively. This amendment does not have the impact on the Company’s financial statements. IFRIC 15, Agreements for the Construction of Real Estate. The interpretation applies to the accounting for revenue and associated expenses by entities that undertake the construction of real estate directly or through subcontractors, and provides guidance for determining whether agreements for the construction of real estate are within the scope of IAS 11 or IAS 18. It also provides criteria for determining when entities should recognise revenue on such transactions. This amendment does not have the impact on the Company’s financial statements. There are a number of minor amendments to IFRS 7, 'Financial instruments: Disclosures', IAS 8, 'Accounting policies, changes in accounting estimates and errors', IAS 10, 'Events after the reporting period', IAS 18, 'Revenue' and IAS 34, 'Interim financial reporting', which are part of the IASB’s annual improvements project published in May 2008 These amendments are unlikely to have an impact on the Company’s accounts and have therefore not been analysed in detail. (b) Standards, amendments and interpretations effective in 2009, but not relevant. IFRS 1 (Amendment) First time adoption of IFRS and IAS 27 Consolidated and Separate Financial Statements. The amended standard allows first-time adopters to use a deemed cost of either fair value or the carrying amount under previous accounting practice to measure the initial cost of investments in subsidiaries, jointly controlled entities and associates in the separate financial statements. The amendment also removes the definition of the cost method from IAS 27 and replaces it with a requirement to present dividends as income in the separate financial statements of the investor. These amendments will not have any effect on the Company’s financial statements, since the Company completed the transition to the IFRS in 2005. IAS 29 (Amendment), Financial reporting in hyperinflationary economies. The guidance has been amended to reflect the fact that a number of assets and liabilities are measured at fair value rather than historical cost. The amendment will not have an impact on the Company’s operations, as the Company does not operate in hyperinflationary economies. IAS 31 (Amendment), Interests in joint ventures. Where an investment in joint venture is accounted for in accordance with IAS 39, only certain rather than all disclosure requirements in IAS 31 need to be made in addition to disclosures required by IAS 32, ‘Financial instruments: Presentation’ and IFRS 7 ‘Financial instruments: Disclosures’. The amendment will not have an impact on the Company’s operations as there are no interests held in joint ventures. IAS 40 (Amendment), Investment property. Where the fair value model is applied, such property is, therefore, measured at fair value. However, where fair value of investment property under construction is not reliably measurable, the property is measured at cost until the earlier of the date construction is completed and the date at which fair value becomes reliably measurable. The amendment will not have an impact on the Company’s operations, as there are no investment properties held by the Company. IAS 41 (Amendment), Agriculture. It requires the use of a market-based discount rate where fair value calculations are based on discounted cash flows and the removal of the prohibition on taking into account biological transformation when calculating fair value. The amendment will not have an impact on the Company’s operations as no agricultural activities are undertaken. IAS 20 (Amendment), Accounting for government grants and disclosure of government assistance. The benefit of a below-market rate government loan is measured in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. Income from government loans is measured as at loan origination as difference between the proceeds and the cost stated in accordance with IAS 39, ‘Financial instruments: Recognition and measurement’. The amendment will not have an impact on the Company’s operations as there are no loans received or other grants from the government. (c) Standards, amendments and interpretations to existing standards effective from and after 1 January 2010 and have not been early adopted by the Company: IAS 27 (Revised), Consolidated and Separate Financial Statements (effective for annual periods beginning on or after 1 July 2009). The revised standard requires the effects of all transactions with non-controlling interests to be recorded in equity if there is no change in control and these transactions will no longer result in goodwill or gains and losses. The standard also specifies the accounting when control is lost. Any remaining interest in the entity is re-measured to fair value and a gain or loss is recognised in profit or loss.The Company will apply the revised IAS 27 from 1 January 2010 .
Translated from the Russian original 19 F-208 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
4 New Accounting Pronouncements (Continued)
IFRS 3 (Revised), Business Combinations (effective for annual periods beginning from 1 July 2009). The revised standard continues to apply the acquisition method to business combinations, with some significant changes. For example, all payments to purchase a business are to be recorded at fair value at the acquisition date, with contingent payments classified as debt subsequently re-measured through the statement of comprehensive income. There is a choice on an acquisition-by-acquisition basis to measure the non-controlling interest in the acquiree either at fair vale or at the non-controlling interest’s proportionate share of the acquiree’s net assets. All acquisition-related costs should be expensed. The Company will apply IFRS 3 (Revised) from 1 January 2010. IAS 38 (Amendment), 'Intangible assets'. The amendment is part of the IASB’s annual improvements project published in April 2009. The amendment represents the explanation and guidance on measurement of market value of intangible asset acquired as a result of business combination and allows to group the intangible assets into one asset, if all assets have the same useful lives. The Company will apply these amendments from adoption of amendments to IFRS 3. The amendment does not have the significant impact on the Company’s financial statements. IFRS 5 (Amendment), 'Non-current assets held for sale and discontinued operations' (effective for the annual periods beginning from 1 July 2009). The amendment represents the explanation that IFRS 5 establishes the disclosures required on non-current assets (or held for sale groups) classified as held for sale or discontinued operations. Additionally, it explains that general requirement of IAS 1 will continue to apply. The Company will apply these amendments from 1 January 2010. It is expected that management will not have the significant impact on the financial statements. IAS 1 (Amendment) ‘Presentation of financial statements. The amendment represents the explanation that the potential settlement of a liability through issue of shares does not relate to its classification as long-term or current. The amendment allows to classify the liability as long-term (given that a legal entity has unconditional right to defer the settlement of liability through transfer of cash or other assets for the period at least 12 months after the end of the reporting period), regardless that a legal entity's counterparty can demand at any time the share-based settlement. The Company will apply the amendments to IFRS 1 from 1 January 2010. It is expected that the amendment will not have any significant impact on the Company’s financial statements. IFRS 2 (Amendments) ‘Share based payments’. The amendments to the standard were developed to explain how a subsidiary with the group should maintain the accounting for some share-based payments in its financial statements. Additionally, the amendments include the provisions envisaged in IFRIC 8 ‘Scope of IFRS 2’ and IFRIC 11 ‘Group and treasury share transactions’. For this reason, the above IFRICs are canceled. IFRS 9 ‘Financial instruments’ (effective prospectively to transfers of assets from customers received on or after 1 July 2009, earlier application permitted). The new standard proposes the easier approach to the accounting for the financial instruments thereby improving the investors and other users’ understating of the financial statements. The standard envisages the only approach to the determination whether the financial asset is measured at fair value or at amortized cost unlike the several rules envisaged by IFRS 39. The new standard envisages the only approach to accounting for impairment unlike the several methods envisaged in the previous version of this standard. This standard will come into effect from 1 January 2013. The Company is at the stage of assessment of the new standard effect on its financial statements. (d) Standards, amendments and interpretations to existing standards, published and obligatory to the reporting periods of the Company, beginning on or after 1 January 2010 or later periods but not relevant to the Company’s operations: IFRIC 18, ‘Transfers of Assets from Customers’ (effective prospectively to transfers of assets from customers received on or after 1 July 2009, earlier application permitted).The interpretation clarifies the accounting for transfers of assets from customers, namely, the circumstances in which the definition of an asset is met; the recognition of the asset and the measurement of its cost on initial recognition; the identification of the separately identifiable services (one or more services in exchange for the transferred asset); the recognition of revenue, and the accounting for transfers of cash from customers. This interpretation will not have any impact on the Company’s operations since to date the Company has not been engaged in such transactions. IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after 1 July 2009). The amendment clarifies when and how distribution of non-cash assets as dividends to the owners should be recognised. An entity should measure a liability to distribute non-cash assets as a dividend to its owners at the fair value of the assets to be distributed. A gain or loss on disposal of the distributed non-cash assets will be recognised in profit or loss when the entity settles the dividend payable. This interpretation will not have any effect on the Company’s operations, since to date the Company does not distribute non-cash assets to its owners.
Translated from the Russian original 20 F-209 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
5 Employee Information
The average number of employees (including executive directors) employed by the Company during the year was:
2009 2008
DGOK 7,721 7,577 Aksu Ferroalloys Plant 6,481 6,460 Aktobe Ferroalloys Plant 3,141 3,267 Kazmarganets 887 843 Administration 114 107 Subsidiaries 281 302
Total 18,625 18,556
Total staff costs (including executive directors) for the Company were:
in thousands of Kazakhstani Tenge 2009 2008
Wages, salaries and other bonuses 19,223,296 18,321,633 Post employment and other long-term benefits (see Note 23) 2,159,207 (1,386,622) Share based compensation expense 35,917 10,441
Total staff costs 21,418,480 16,945,452
Key management personnel compensation for the Company was:
in thousands of Kazakhstani Tenge 2009 2008
Wages, salaries and other bonuses 458,882 262,531 Share based compensation expense 35,917 10,441 Post employment and other long-term benefits 25,072 (1,920)
Total key management compensation 519,871 271,052
Translated from the Russian original 21 F-210 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
6 Balances and Transactions with Related Parties
For the purposes of these financial statements, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. The Company’s ultimate shareholders are disclosed in Note 1. The nature of the related party relationships for those related parties with whom the Company entered into significant transactions or had significant balances outstanding at 31 December 2009 and 2008 are detailed below. At 31 December 2009, the outstanding balances with related parties were as follows:
Entities under Key common management In thousands Kazakhstani Tenge Note Shareholders control personnel
Investments available for sale 9 - 1,154,000 - Investments in associates 8 - 32,542,988 - Restricted cash (contractual interest rate: 0%, - 4.5%-7% p.a., effective interest rate: 4.5%-7% p.a.) 12 194,485 - Long-term receivables 12 - 9,040 - Provision for impairment of other non-current assets 12 - (9,040) - Trade receivables 14 - 70,622,265 - Prepayments 14 - 1,238,541 - Prepaid insurance 14 - 214,128 - Other receivables 14 - 1,221,830 1,320 Term deposits (contractual interest rate: 1.2-10.3%, effective interest rate: 1.26-10.5%) 14 - 2,508,121 - Letters of credit, Tenge 14 - 346,974 - Provision for impairment of accounts receivables 14 - (61,900) (1,320) Long-term portion of loans receivable 15 - 100,622,362 5,204 Short-term portion of loans receivable 15 - 26,292,664 - Term deposits in Tenge (contractual interest rate: 1.6% , 3%, 5.75%, 6% p.a., effective interest rate: 1.6%, 3.04%. 6%, 6.09% p.a.) 14, 16 - 1,064,000 - Cash in bank, Tenge 16 - 204,410 - Cash in bank, EUR 16 - 154,766 - Cash in bank, USD 16 - 2,349 - Cash in bank, RR 16 - 59,814 - Dividends payable 17 48,959,590 - - Finance lease liabilities 19 - 6,607,647 - Present value of defined benefit obligation at end of year 22 - - 27,020 Trade payables 20 - 369,291 - Payables to employees 20 - - 8,902 Provisions for claims 20 - - - Advances received 20 - 1,932 - Financial guarantees 20, 34 - 350,104 - Other creditors 20 - 1,098,521 -
Translated from the Russian original 22 F-211 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
At 31 December 2008, the outstanding balances with related parties were as follows:
Entities under Key management In thousands Kazakhstani Tenge Note Shareholders common control personnel
Restricted cash (contractual interest rate: 0%, 4.5%-7% p.a., effective interest rate: 4.5%-7% p.a) 12 - 155,654 - Long-term receivables 12 - 70,960 1,320 Provision for impairment of other non-current assets 12 - (70,960) (1,320) Trade receivables 14 - 106,327,951 - Prepayments 14 - 1,097,274 - Prepaid insurance 14 - 337,603 - Other receivables 14 - 205,173 1,320 Term deposits (contractual interest rate: 3-4.75%, - effective interest rate: 3.91-5.3%) 14 120,260 - Letters of credit, Tenge 14 - 63,042 - Provision for impairment of accounts receivables 14 - (61,900) (1,320) Long-term portion of loans receivable 15 - 76,020,320 7,051 Short-term portion of loans receivable 15 - 3,594,605 - Term deposits (contractual interest rate: 7%, 8.5% p.a., effective interest rate: 7%, 8.5% p.a.) 14, 16 - 14,548,955 - Cash in bank, Tenge 16 - 1,245,139 - Cash in bank, EUR 16 236,429 - Cash in bank, USD 16 - 177,085 - Cash in bank, RR 16 - 61,528 - Dividends payable 17 359,707 - - Finance lease liabilities 19 - 6,314,942 - Present value of defined benefit obligation at end of year 22 - - 1,948 Trade payables 20 - 410,653 - Payables to employees 20 - - 16,926 Provisions for claims 20 - 158,774 - Advances received 20 - 3,347 - Financial guarantees 20, 34 - 709,059 - Other creditors 20 - 103,219 -
Translated from the Russian original 23 F-212 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
-
6 Balances and Transactions with Related Parties (Continued)
The transactions with related parties for the year 2009 were as follows:
Entities Key under common management In thousands of Kazakhstani Tenge Note Shareholders control personnel
Revenue from sales of goods and services: Ferroalloys 24 - 178,788,315 - Chrome ore 24 - 22,086,663 - Revenue form sales of heat and power 24 - 60,717 - Other income 24 - 45,924 - Insurance income 26 - 26 - Rent income 26 - 13,111 - Amortisation from financial guarantees 26 - 358,955 - Sales of inventory 26 - 161,266 - Interest income on bank deposits 30 - 204,637 - Unwinding of present value discount 30 - 8,740,410 - Interest income on loans given 30 - 6,311,458 - Raw materials and consumables purchases 25 - 4,455,815 - Electricity purchases 25 - 17,059,923 - Other 25 - 1,374,414 - Purchases of property, plant and equipment including fixed assets held under finance lease 7 - 521,593 - Insurance costs 25,27,28 - 1,534,916 - Commission fees 25 - 1,017,712 - Transportation services - outbound 27 - 577,426 - Other 27 - 42,557 - Sponsorship and other financial aid 28 - 4,124,177 - Payroll and related expense 5, 28 --458,882 Information, consulting and other professional services 28 - 2,824,913 - Bank charges 28 - 161,567 - Rent expense 28 - 253,421 - Post-employment and other long-term benefits 5, 28 --25,072 Share based compensation expenses 18 --35,917 Security services 28 - 76,160 - Transportation expenses - 3,948 - Other 28 - 215,406 - Gain less losses on disposals of property, plant and equipment 29 - 2,132 - Losses less gains on origination of loans at non-market rate 31 - 5,516,172 - Interest expense on borrowings 31 -- Interest expense on finance lease 31 - 991,965 - Other interest expenses 31 - 25,443 - Dividends declared 17 116,909,253 --
Translated from the Russian original 24 F-213 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
The transactions with related parties for the year 2008 were as follows:
Entities under Key management In thousands of Kazakhstani Tenge Note Shareholders common control personnel
Revenue from sales of goods and services: Ferroalloys 24 - 364,511,077 - Chrome ore 24 - 50,020,188 - Revenue from sales of heat and power 24 - 9,059 - Other income 24 - 112,236 - Insurance income 26 - 800,703 - Rent income 26 19,632 Amortisation from financial guarantees 26 - 315,787 - Sales of inventory 26 - 134,025 - Interest income on bank deposits 30 - 547,351 - Unwinding of present value discount 30 - 3,159,636 - Interest income on loans issued 30 4,844,059 161 Raw materials and consumables purchases 25 - 9,852,136 - Electricity purchases 25 - 18,707,274 - Other 25 - 1,311,058 - Purchases of property, plant and equipment including fixed assets held under finance lease 7 - 171,630 - Insurance costs 25,27,28 - 1,682,906 - Commission fees 25 - 1,144,166 - Transportation services - outbound 27 - 931,190 - Other 27 85,031 Sponsorship and other financial aid 28 - 1,666,281 - Payroll and related expense 5, 28 - - 262,531 Information, consulting and other professional services 28 - 2,268,607 - Bank charges 28 - 172,369 - Rent expense 28 - 288,224 - Post-employment and other long-term benefits 5, 28 - - (1,920) Share based compensation expense 18, 5 - - 10,441 Security services 28 - 48,758 - Other 28 - 169,377 - Losses less gain on disposals of property, plant and equipment 29 - 22,168 - Other operating expenses 29 31,469 - Losses less gains on origination of loans at non-market rate 31 - 8,353,301 - Interest expense on borrowings 31 - 2,078,959 - Interest expense on finance lease 31 - 941,749 - Other interest expenses 31 - 89 - Dividends declared 17 12,251,275 - -
Translated from the Russian original 25 F-214 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
6 Balances and Transactions with Related Parties (Continued)
In 2009 and 2008, the Company sold chromium ore and ferroalloys primarily to ENRC Marketing AG, ENRC Marketing LLC, Industrial Metals LLC, Serov Ferroalloy Plant. Prices for ferroalloys and chromium ore are linked to the market prices published by Metals Bulletin. At 31 December 2009 and 31 December 2008 guarantees issued by the Company were as follows: In thousands of Kazakhstani Tenge Note 2009 2008
Entities under common control 34 219,720,800 178,739,600
7 Property, Plant and Equipment
Movements in the carrying amount of property, plant and equipment were as follows: Buildings and Machinery In thousands of Kazakhstani Freehold construc- and Construction Tenge land tions equipment Other in progress Total
Cost at 31 December 2007 5,054,334 40,878,194 66,588,078 7,004,152 13,095,295 132,620,053 Accumulated depreciation - (7,440,043) (21,532,191) (2,962,078) - (31,934,312)
Carrying amount at 31 December 2007 5,054,334 33,438,151 45,055,887 4,042,074 13,095,295 100,685,741
Additions 83,527 597,007 3,132,464 1,677,597 29,176,305 34,666,900 Transfers - 3,580,455 8,128,762 202,148 (11,911,365) Depreciation - (2,168,341) (7,553,893) (862,834) - (10,585,068) Disposals (17,824) (434,078) (253,118) (28,182) (370,349) (1,103,551) Provision for impairment - (427,435) (279,587) (5,075) - (712,097) Other - 1,366 21,776 1,576 (8,365) 16,353
Cost at 31 December 2008 5,120,037 44,550,054 76,829,830 8,684,902 29,981,521 165,166,344 Accumulated depreciation - (9,962,929) (28,577,539) (3,657,598) - (42,198,066)
Carrying amount at 31 December 2008 5,120,037 34,587,125 48,252,291 5,027,304 29,981,521 122,968,278
Additions 2,783 1,490,102 3,189,991 1,405,508 28,283,312 34,371,976 Transfers - 13,412,980 17,060,776 564,024 (31,037,780) -- Depreciation - (2,283,895) (8,881,180) (1,042,345) - (12,207,420) Disposals (13,568) (92,479) (112,215) (65,142) (1,083,680) (1,367,084) Impairment reversals - 375 1,243 15 - 1,633 Other - 860 1,200 25 (83,566) (81,481)
Cost at 31 December 2009 5,109,252 59,293,564 95,767,879 10,266,926 26,059,807 196,497,428 Accumulated depreciation - (12,178,496) (36,255,773) (4,377,537) - (52,811,806)
Carrying amount at 31 December 2009 5,109,252 47,115,068 59,512,106 5,889,389 26,059,807 143,685,622
Included in property, plant and equipment are assets held under finance leases with a carrying value of Tenge 6,961,254 thousand (2008: Tenge 7,931,358 thousand) (see Note 19). Buildings and constructions include historical costs for the acquisition of geological information and subscription bonuses incurred at signing of the contracts on subsurface use in the amount of Tenge 29,053 thousand (2008: Tenge 32,352 thousand). In December 2008 the Company's management has concluded to suspend the operation of ore mining and dressing workshop of Aktobe Ferroalloy Plant due to unprofitable technological process. Accordingly, provisions for impairment are made in the amount of Tenge 710,979 thousand.
Translated from the Russian original 26 F-215 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
7 Property, Plant and Equipment (Continued)
Depreciation charge In thousands of Kazakhstani Tenge Note 2009 2008
Cost of sales 25 10,291,960 8,808,297 General and administrative expenses 28 189,879 163,950 Distribution costs 27 22,144 11,674 Other 1,703,437 1,601,147
Total depreciation charge 12,207,420 10,585,068
Other depreciation charge represents charges included in other operating expenses and capitalised in the cost of self-constructed fixed assets.
8 Investments in Associates
According to the decisions of ENRC Credit’s General Participants Meeting, during 2008 the Company made some contributions into the share capital of ENRC Credit thereby the Company increased its interest in the Partnership’s share capital. As a result of increase of the Company’s interest in ENRC Credit, this entity is classified as a subsidiary (see Note 2). On 16 February 2009 the Company acquired a 25 percent interest in Shubarkol Komir JSC (‘Shubarkol’), a major semi-coke and thermal coal producer incorporated in Kazakhstan, for a cash consideration of USD 200 million less 25 percent of net debt. Shubarkol is majority owned by Eurasian Industrial Company JSC (‘EIC‘), a private company controlled by the Founder Shareholders of the Company. In connection with the acquisition, the Company has entered into an off-take agreement with Shubarkol, secured a seat on Shubarkol’s Board and entered into a shareholders agreement with EIC. In addition the Company has a right of first refusal, combined with a call option, over all or part of the remaining shares in Shubarkol held by EIC. The call option is exercisable (at the Group’s discretion) at any time until 31 January 2011 which, if exercised will be subject to required regulatory approvals having been obtained and is expected to be subject to the approval of the Company’s shareholders. The price payable on any exercise of the call option is the aggregate value of the shares to be transferred, assuming Shubarkol has a total value of USD 800 million on a fully diluted basis, less any net debt at the time of the transfer. Because the call option is subject to the approvals noted above, it is not readily exercisable or convertible and hence the possession of the call option does not contribute to control over Shubarkol, the Company accounted for its investment in Shubarkol using equity accounting in accordance with the Company’s accounting policy. In October 2009 the Company set up Ismet Company LLP with the share capital of Tenge 2,265,000 thousand. In December 2009 the Company decided to sell 51 percent of its interest in the share capital of Ismet Company LLP in the amount of 51 percent to Eurasian Energy Company JSC for the amount of Tenge 1,155,150 thousand and 0.01 percent to Aluminum of Kazakhstan JSC for the amount of Tenge 226 thousand. At 31 December 2009 the Company’s interest in Ismet Company LLP was 48.99 percent. Accordingly at the reporting date Ismet Company LLP is accounted as an associate. Presented in the table below are the movements in carrying amount of the Company’s investments in associates:
In thousands of Kazakhstani Tenge 2009 2008
Carrying amount at 1 January - 1,976,165 Additions 32,878,018 - Share in after-tax profit 820,346 41,393 Consolidation of ENRC Credit - (2,017,558) Disposal (1,155,376) -
Carrying amount at 31 December 32,542,988 -
Presented below is the information on the Company’s interest and investments in associates at 31 December 2009. 2009 Country of Principal In thousands of %of Name of company incorporation activity Tenge ownership Shubarkol Komir LLP Kazakhstan Coal production and sales 31,433,364 25.00 Ismet Company LLP Kazakhstan Other activities 1,109,624 48.99
Translated from the Russian original 27 F-216 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
8 Investments in Associates (Continued)
In thousands of Kazakhstani Tenge 2009
Name of company Total assets Total liabilities Total revenue Net income
Shubarkol Komir JSC 19,024,182 9,026,190 15,835,914 4,281,887 Ismet Company LLP 2,403,566 137,397 - 1,169
9 Available for Sale Investments
Presented below is the information on the Company’s equity investments available for sale at 31 December 2009 and 31 December 2008: 2009 2008
Country of Principal Thousands %of Thousands %of Company name incorporation activity of Tenge ownership of Tenge ownership
ENRC Business & ERP system Technology implementation Services LLP Kazakhstan and support 1,154,000 28 - - Hotel Alatau JSC Kazakhstan Hotel services - 23 - 23
The table below summarises the movements in the carrying amount of the Company’s available for sale investments:
In thousands of Kazakhstani Tenge 2009 2008
Beginning of year -- Additions 1,154,000 - Disposals -- Impairment provision -- Transfers to “investments in associates” - - End of year 1,154,000 -
Investments in Hotel Alatau JSC are classified as available for sale and at 31 December 2009 and 31 December 2008 are recognized at cost less impairment since they are unquoted at the market and due to the lack of reasonable method for the fair value evaluation. The above equity investments are made in accordance with the decision of the ultimate shareholders.
Management of the Company did not exercise the significant influence over Hotel Alatau JSC during 2004 - 2007 as the Company did not have representation on the Board of Directors of the investee, participation in policy-making processes, including participation in decisions about dividends or other distributions, any transactions with the investee. Therefore it was not accounted for by the equity method of accounting. In 2006 and 2004, the Company’s management recognised the impairment on the investments in Hotel Alatau JSC in the total amount of Tenge 731,500 thousand in equal proportions during 2006 and 2004, respectively.
ENRC Business & Technology Services LLP («ENRC BTS») was set up in July 2009 by the Group companies to implement the Arrow program through implementation of ERP integrated system. The Company’s interest in ENRC BTS is 28 percent. Considering that the Company does not exercise the significant influence on ENRC BTS or participate in making the financial or operational decisions, the contribution into ENRC BTS share capital is classified as available for sale investment. The management cannot measure the fair value of investments in ENRC BTS with the reasonable level of reliability since this company is not quoted at the stock exchange, and the reliable information on the current transaction prices is not available for the public sources. Accordingly, investments in this company are shown in the statement of financial position at the actual purchase price. As of the reporting date the amount of the unpaid portion of the investment in ENRC BTS amounted to Tenge 870,000 thousand, which is included within other payables (Note 20).
Translated from the Russian original 28 F-217 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
10 Other Financial Assets at Fair Value Through Profit and Loss
In thousands of Kazakhstani Tenge 2009 2008
Bonds 22,419 8,452,837
Total other financial assets at fair value through profit and loss 22,419 8,452,837
During 2009 the Company sold the government treasury bonds of the Republic of Kazakhstan for the total amount of Tenge 9,496,700 thousand purchased in November and December 2008. The table below summarises the movements in the carrying amount of the Company’s other financial assets:
In thousands of Kazakhstani Tenge 2009 2008
Beginning of year 8,452,837 - Additions - 9,179,538 Disposals (8,063,116) (5,524) Changes in fair values (367,302) (721,177)
End of year 22,419 8,452,837
11 Investments Held to Maturity
At 31 December 2009 the Company sold the government treasury bonds of the Republic of Kazakhstan purchased in November 2008 which mature on 12 March 2009 for short-term treasury bonds, ɆȿɄɄ ȺɆ (ɆɄɆ 012.0087) and on 21 November 2009 for short-term ɆȿɄɄ ȺɆ (ɆɄɆ 012.0094). In thousands of Kazakhstani Tenge 2009 2008
Bonds - 525,753
Total investments held to maturity - 525,753
12 Other Non-Current Assets
In thousands of Kazakhstani Tenge Note 2009 2008
Prepayments for property, plant and equipment and related services 2,598,708 4,084,597 Restricted cash (contractual interest rate: 0%, 4.5%-7% p.a., effective interest rate: 4.5%-7% p.a.) 6 194,485 155,654 Long-term accounts receivable from sales of property, plant and equipment (contractual interest rate: 0%, effective interest rate: 13% p.a.) 6 191,746 142,646 Other long-term receivables 149,947 241,333 Less: provision for impairment of non-current assets 6 (32,040) (97,255)
Total other non-current assets 3,102,846 4,526,975
Prepayments for property, plant and equipment and related services are mainly attributable to construction of the Sary-Arka office building (Tenge 713,000 thousand), construction of sintering plant in Aksu Ferroalloy Plant (Tenge 158,607 thousand) and acquisition of railway and automobile transportation (Tenge 372,830 thousand). Restricted cash represents bank deposits for a special fund for the retirement of assets in accordance with the requirements of the subsurface use contracts in the amount of Tenge 177,994 thousand (2008: Tenge 130,141 thousand) and a bank guarantee deposit in the amount of Tenge 16,491 thousand (2008: Tenge 25,513 thousand) with a maturity date of 28 August 2020 securing the Company's employees mortgage liabilities. The bank guarantee deposit is interest free and carried at amortised cost. (see Note 35). Long-term accounts receivable from sales of property, plant and equipment represent mainly receivables for sales of housing to the Company’s employees to be repaid by equal payments during 15 years. Long-term accounts receivable are carried at amortised cost and are neither impaired nor overdue.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
12 Other Non-Current assets (Continued)
Other long-term receivables represent long-term portion of interest free loans given to the Company’s employees for purchase of housing in the amount of Tenge 108,867 thousand as well as long-term portion of interest free mortgage loans given to the Group employees in 2006 and 2005 in the amount of Tenge 9,040 thousand. In accordance with the terms of the mortgage agreements, if individual labour contracts with Group employees (the “ILC”) are not terminated within the five years from the date of the mortgage agreement and other terms of financing are complied with, the Group employees are exempt from repayment of the loan. In case of termination of ILC within this period of five years, the borrower should repay the amount in proportion to the remaining portion of time he/she will not be employed by the Group. The Company's management has determined that all Group employees will adhere to the mortgage loan agreements terms, and therefore provision for impairment was established for the full amount of long-term receivable at 31 December 2009 and 31 December 2008. Movement in the Company impairment provision for impairment of other non-current assets are as follows:
In thousands of Kazakhstani Tenge 2009 2008
Balance at 1 January 97,255 168,795 Impairment provision -1,975 Reversal of impairment provision (65,215) (73,515) Balance at 31 December 32,040 97,255
13 Inventories
In thousands of Kazakhstani Tenge 2009 2008
Raw materials, purchased 12,378,196 12,883,241 Finished products 2,463,201 4,298,817 Raw materials, produced 8,439,036 4,113,392 Finished products, in transit 3,338,353 1,930,540 Work in progress 3,075,939 2,634,724 Raw materials, in transit 811,999 1,320,831 Goods for resale 214,655 209,606 Less: provisions for obsolete and slow-moving inventory (462,887) (348,364)
Total inventories 30,258,492 27,042,787
14 Trade Receivables and Other Current Assets
In thousands of Kazakhstani Tenge Note 2009 2008
Trade receivables 6 71,001,151 106,806,872 Term deposits (contractual interest rate: 10.03%; (2008: 3-4.75%), effective interest rate: 10.50% (2008: 3.91-5.3%) 6 2,508,121 19,142,241 Letters of credit 6 346,974 63,042 Other receivables 6 3,035,307 717,042 Less: impairment loss provision (177,371) (182,839)
Total financial assets 76,714,182 126,546,358 VAT recoverable 4,071,866 8,832,727 Prepayments 6 4,380,731 2,366,727 Prepaid insurance 6 214,141 337,603 Less: impairment loss provision (371,517) (201,659)
Total trade receivables and other current assets 85,009,403 137,881,756
Term deposits include USD denominated deposits in amount of Tenge 2,508,121 thousand (2008: Tenge 17,316,636 thousand) with the original maturity of less than 1 year. At 31 December 2009 trade and other receivables in the amount of Tenge 161,689 thousand (2008: Tenge 437,773 thousand) were past due but not impaired. These relate to a number of independent customers for whom there is no recent history of default.
Translated from the Russian original 30 F-219 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
14 Trade Receivables and Other Current assets (Continued)
The ageing analysis of trade receivables and other receivables as of 31 December 2009 and 31 December 2008 is as follows:
In thousands of Kazakhstani Tenge 2009 2008
Current and not impaired 73,697,398 106,903,302 Past due but not impaired - less than 30 days overdue - - - 30 to 90 days overdue - - - 90 to 180 days overdue 22,357 154,428 - 180 to 360 days overdue 8,061 101,933 - over 360 days overdue 131,271 181,412
Total past due but not impaired 161,689 437,773 Individually determined to be impaired (gross) - over 360 days overdue 177,371 182,839
Total individually impaired 177,371 182,839 Total trade receivables and other receivables 74,036,458 107,523,914 Less: impairment loss provision (177,371) (182,839)
Total trade receivables and other receivables, net 73,859,087 107,341,075
At 31 December 2009, trade receivables and other receivables in amount of Tenge 177,371 thousand (2008: Tenge 182,839 thousand) were impaired and provided for. The individually impaired receivables mainly relate to customers, which are in unexpectedly difficult economic situations. The carrying amounts of the Company’s trade receivables and other receivables are denominated in the following currencies: In thousands of Kazakhstani Tenge 2009 2008
US Dollars 70,583,707 105,693,960 Tenge 3,411,519 1,789,757 Russian Rubles 41,225 40,197 Euro 7-
Total trade receivables and other receivable 74,036,458 107,523,914
Movement of impairment provision of trade receivables and other current assets is as follows:
In thousands of Kazakhstani Tenge 2009 2008
Balance at 1 January 384,498 289,283 Impairment provision 266,328 235,206 Reversal of impairment provision (101,938) (139,991) Balance at 31 December 548,888 384,498
Translated from the Russian original 31 F-220 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
15 Loans Receivable
In thousands of Kazakhstani Tenge Note 2009 2008
Short-term portion of loans receivable 6 26,292,664 3,594,605 Long-term portion of loans receivable 6 100,622,362 76,956,399
Total loans receivable 126,915,026 80,551,004
The Company’s loans mature as follows: In thousands of Kazakhstani Tenge 2009 2008
Loans due: - within 1 year 26,292,664 3,594,605 - from 1 to 2 years 20,329,004 1,736,590 - from 2 to 5 years 75,091,598 70,490,790 - over 5 years 5,201,760 4,729,019
Total loans receivable 126,915,026 80,551,004
The Company’s loans are denominated in Kazakhstani Tenge: Tenge 111,887,253 thousand or 88,16 percent; in the US dollars: Tenge 15,027,773 thousand or 11,84 percent (2008: total amount of loans issued is denominated in Kazakhstani Tenge). The effective interest rates at the reporting date were as follows:
In percent per annum 2009 2008
Loan to ENRC Finance Limited 3.7 - Loan to Kazakhstan Aluminium Smelter JSC 5-15.1 7.24-15.1 Loan to EEC JSC 12-14.3 11.3-14.1 Loan to Zhol Zhondeushy LLP 5 8-16 Loan to Transcom LLP 8-16 12-16 Loan to Aluminium of Kazakhstan JSC 5-7.27 14.4-15.1 Loan to Transsystema LLP 12-13.3 12-13.3 Loan to Sary Arka Spetskoks 12 12 Loan to Transremmash LLP 16.2 16.2 Loan to Rudnensky Cement Plant LLP 9.5 9.5 Loan to Zhairemsky GOK JSC 12.49-13.12 13-13.7 Loan to Zhana Temir Zhol LLP 8 8 Loan to KazSoda LLP 5 7.24-9.5 Loan to Universal Service LLP 13.3 13.3 Loan to Transremvagon LLP - 13.3 Loans to individuals 1-3-5-10 3-5-9-10
ENRC Finance Limited, UK
On 17 March 2009 the loan agreement was signed whereby the Company provides ENRC Finance Limited, the related party wholly owned by ENRC Plc, with the loan in the amount of 100,000 thousand US dollars repaid in September 2009. On 17 September 2009 the Company signed the loan agreement with ENRC Finance Limited for the amount of 100,000 thousand US dollars with the maturity date of 26 January 2010. Interest rate for this loan is LIBOR plus a margin of 3.5 percent. Kazakhstan Aluminium Smelter JSC According to the loan agreements dated 27 April 2005, 16 October 2007, 30 September 2008, and 14 April 2009 ENRC Credit – the Company’s subsidiary provided Kazakhstan Aluminium Smelter JSC, the Company's related party, with the loans in the amount of Tenge 7,338,000 thousand at the interest rate of 6 percent per annum, Tenge 17,006,378 thousand at the interest rate of 10 percent per annum and Tenge 38,960,000 thousand at the interest rate of 2 percent per annum with the subsequent change to 5 percent per annum from 28 February 2009, and Tenge 2,700,000 thousand at the interest rate of 5 percent, respectively. The loans mature on 31 December 2016, 1 December 2011, 30 September 2013, and 30 April 2014, respectively. At 31 December 2009, the carrying amount of outstanding loans was Tenge 62,756,743 thousand.
Translated from the Russian original 32 F-221 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
15 Loans Receivable (Continued)
Eurasian Energy Company JSC According to the loan agreements dated 20 April 2005, 8 August 2005 and 26 October 2007, ENRC Credit, the Company’s subsidiary provided EEC JSC, the Company’s related party, with loans in the amount of Tenge 3,292,300 thousand, Tenge 1,314,189 thousand and Tenge 5,056,070 thousand at the interest rate of 8 percent per annum with the subsequent change of interest rate to 5 percent per annum from 28 February 2009. The loans mature in 2011 and 2012 with repayment of principal amount at maturity date. During 2009 the early repaid loan amount is Tenge 7,237,354 thousand. At 31 December 2009, the carrying amount of outstanding loans was Tenge 2,222,322 thousand. Zhol Zhondeushy LLP According to the loan agreements ʋ22/03 and 23/03 dated 26 March 2009, ʋ 22ɄL/05 dated 25 May 2009, ENRC Credit, the Company's subsidiary, provided Zhol Zhondeushy LLP, the Company's related party, with loans for the total amount of Tenge 7,630,000 thousand which mature in 2011, 2014, 2016. The loans are provided at the interest rates of 5 percent per annum. At 31 December 2009 the carrying amount of outstanding loans was Tenge 7,524,272 thousand. TransCom LLP According to the loan agreements signed on 15 June 2005, 26 April 2007, 26 October 2007 and 27 August 2009, ENRC Credit, the Company’s subsidiary, provided TransCom LLP, the Company’s related party, with loans in the total amount of Tenge 380,000 thousand maturing in 2012 and Tenge 7,340,000 thousand maturing in 2011, and in the total amount of Tenge 500,000 thousand maturing in 2013. Loan agreements signed in 2005 and 2007 envisage the interest rate of 10 percent and 12 percent with the subsequent change of interest rate to 8 percent from 1 July 2008 and to 5 percent from 27 February 2009. At 31 December 2009 the carrying amount of outstanding loans was Tenge 4,030,289 thousand. Aluminium of Kazakhstan JSC According to the loan agreement dated 26 October 2007, ENRC Credit, the Company’s subsidiary, provided Aluminium of Kazakhstan JSC, the Company’s related party, with a loan in the amount of Tenge 9,660,000 thousand which matures in 2011 repaid in full amount at the reporting date. In accordance with the loan agreement dated 6 January 2009, the loan facility is provided for the total amount of Tenge 34,260,000 thousand with the maturity date of 1 January 2014 at the interest rate of 2 percent per annum with the subsequent change to 5 percent per annum from 28 February 2009. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 27,113,055 thousand. Transsystema LLP According to the loan agreements signed in 2005 and 2007, ENRC Credit, the Company’s subsidiary, provided Transystema LLP, the Company’s related party, with loans in the total amount of Tenge 4,058,796 thousand which mature in 2011. The loans were provided at the interest rates of 10 and 12 percent with the subsequent change to 8 percent from 1 July 2008 and to 5 percent from 27 February 2009. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 1,795,229 thousand. Sary-Arka Spetskoks LLP According to the loan agreement dated 11 August 2005, ENRC Credit, the Company's subsidiary, provided Sary-Arka Spetskoks LLP, the Company's related party, with a loan for 5 years in the total amount of Tenge 1,350,000 thousand. The loans are provided at the interest rate of 12 percent. Principle is repayable during the period from August 2007 to August 2010 on a quarterly basis. At 31 December 2009 Tenge 165,763 thousand was repaid in accordance with loan agreement terms. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 1,326,346 thousand. Transremmash LLP According to the loan agreement dated 1 October 2008, ENRC Credit, the Company’s subsidiary, provided Transremmash LLP, the Company’s related party, with a loan in the amount of Tenge 940,000 thousand at an interest rate of 12 percent. At 31 December 2009 an amount of Tenge 324,875 thousand was repaid. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 599,379 thousand. Rudnensky Cement Plant LLP According to the loan agreement dated 7 October 2008 for credit line in the total amount of Tenge 6,000,000 thousand for the period of 5 years, ENRC Credit, the Company’s subsidiary, provided Rudnensky Cement Plant during October – November 2008, with loans in the total amount of Tenge 2,987,500 thousand at an interest rate of 2 percent per annum. From 27 February 2009 the interest rate has changed to 5 percent per annum. At the reporting date, Tenge 2,038,000 thousand had been repaid early. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 894,598 thousand.
Translated from the Russian original 33 F-222 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
15 Loans Receivable (Continued)
Zhairemsky GOK JSC According to the loan agreement dated 20 December 2005, ENRC Credit, the Company’s subsidiary, provided Zhairemsky GOK JSC, the Company's related party, with a loan in the amount of Tenge 923,700 thousand for the period of 5 years at an interest rate of 6 percent with the change of the interest rate to 5 percent from 27 February 2009. Loan is repayable during the period from January 2008 to December 2010 in equal shares on a monthly basis. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 349,774 thousand. Zhana Temir Zhol LLP According to the loan agreement dated 5 September 2008 on opening of the credit line for the total amount of Tenge 2,400,000 thousand, ENRC Credit – the Company’s subsidiary provided Zhol Zhondeushy, the Company’s related party with the several tranches for the total amount of Tenge 1,024,424 thousand for the period of 5 years at the interest rate of 8 percent per annum with the subsequent change to 5 percent per annum from 27 February 2009. At the reporting date the carrying amount of the outstanding loan was Tenge 1,088,770 thousand. KazSoda LLP According to the loan agreement dated 29 August 2008, the credit line in the total amount of Tenge 1,800,000 thousand for the period of 8 years, provided by ENRC Credit, the Company’s subsidiary, to KazSoda LLP, at the interest rate of 2 percent per annum with the subsequent change to 5 percent per annum from 27 February 2009. At 31 December 2009 the carrying amount of the outstanding loan was Tenge 1,020,577 thousand. Universal Service LLP According to the loan agreement dated 26 April 2007, ENRC Credit, the Company’s subsidiary, provided Universal Service LLP, the Company’s related party, with a loan in the amount of Tenge 204,650 thousand which matures on 1 December 2011 at an interest rate of 10 percent, which was changed to 8 percent starting from 1 July 2008 and to 5 percent from 27 February 2009. At 31 Deɫember 2009, the carrying amount of the outstanding loan was Tenge 105,672 thousand. Transremvagon LLP According to the loan agreement dated 26 April 2007, ENRC Credit, the Company's subsidiary, provided Transremvagon LLP, the Company's related party, with a loan in the amount of Tenge 29,794 thousand which matures on 1 December 2011 at the interest rate of 10 percent per annum, which was subsequently changed to 8 percent per annum starting from 1 July 2008. On 6 February 2009 the loan was repaid early in full amount. The carrying amounts and fair values of loans and receivables are as follows: 2009 2008 Carrying Fair Carrying Fair In thousands of Kazakhstani Tenge amount Value amount value
Loan to Kazakhstan Aluminium Smelter JSC 62,756,743 66,028,085 49,078,912 52,917,348 Loan to Aluminium of Kazakhstan JSC 27,113,055 26,259,500 3,508,240 3,843,002 Loan to ENRC Finance LIMITED 15,027,773 15,027,773 - - Loan to Zhol Zhondeushy LLP 7,524,272 7,362,427 6,769,694 7,030,180 Loan to TransCom LLP 4,030,289 4,173,298 5,329,154 5,746,291 Loan to EEC JSC 2,222,322 2,368,778 7,843,709 8,594,931 Loan to Transsystema LLP 1,795,229 1,893,537 2,668,335 2,872,364 Loan to Sary Arka Spetskoks 1,326,346 1,358,466 1,196,079 1,132,706 Loan to Zhana Temir Zhol LLP 1,088,770 1,088,770 652,746 428,638 Loan to KazSoda LLP 1,020,577 929,192 154,987 219,875 Loan to Rudnensky Cement Plant LLP 894,598 942,825 748,547 799,908 Loan to Transremmash LLP 599,379 575,844 865,765 982,422 Loan to Zhairemsky GOK JSC 349,774 361,791 655,871 691,751 Loan to Universal Service LLP 105,672 111,827 121,718 156,542 Loan to Transremvagon LLP - - 21,168 22,790 Loans to individuals 1,060,227 1,060,229 936,079 936,072
Total loans receivable 126,915,026 129,542,342 80,551,004 86,374,820
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
16 Cash and Cash Equivalents
In thousands of Kazakhstani Tenge Note 2009 2008
Term deposits (contractual interest rate: 0.45%-7.6% p.a. (2008: 7% p.a.) effective interest rate: 0.46%-7.76% p.a. (2008: 7% p.a.) 6 48,401,363 48,138,631 Cash in bank, Tenge 6 234,245 1,276,056 Cash in bank, EUR 6 154,766 236,429 Cash in bank, USD 6 81,810 177,085 Cash in bank, RR 6 60,076 61,528 Cash on hand 50,770 151,900
Total cash and cash equivalents 48,983,030 50,041,629
Term deposits include USD denominated deposits with original maturities of less than three months.
17 Share Capital
31 December 2009 31 December 2008 In thousands of Kazakhstani Tenge Number Value Number Value
Ordinary shares 7,147,485 7,147,485 7,147,485 7,147,485 Preference shares 756,000 187,579 756,000 187,579
Total paid share capital - 7,335,064 - 7,335,064 Share capital indexation for hyperinflation - 4,442,888 - 4,442,888
Total share capital - 11,777,952 - 11,777,952
The number and value of ordinary and preference shares remained unchanged for the years 2009 and 2008. The total authorised number of ordinary shares is 7,147,485 shares (2008: 7,147,485 shares) with a par value of Tenge 1,000 per share (2008: Tenge 1,000 per share). All issued ordinary shares are fully paid. Each ordinary share carries one vote. The total authorised number of preference shares is 756,000 shares (2008: 756,000 shares) with a par value of Tenge 1,000 per share (2008: Tenge 1,000 per share). All issued preference shares are fully paid. The preference shares do not envisage the obligatory redemption by the company (issuer) and participate in the dividends distribution. The preference shares rank ahead of the ordinary shares in the event of the Company’s liquidation. Dividends on preference shares should not be declared in the amount less than those declared to ordinary shareholders. The dividends on the preference shares in excess of the guaranteed amount are controllable but not contractual since such distributions can be avoided if the dividends on ordinary shares are not distributed. Therefore, the preference share represents the compound instrument which consists of equity and liability components. The preference shares give their holders the right to participate in general shareholders’ meetings without voting rights except for instances where decisions are made in relation to re-organisation and liquidation of the Company, when considering the issue specifying restriction of rights of preference shareholders. Preference shares get voting rights at the moment when dividends on preference shares are not paid in full in three months from the date of expiry of the period set for payment of such dividends. Preference share dividends are set at 10 percent p.a. of nominal value (2008: 10 percent p.a. of nominal value) and rank above ordinary dividends.
Translated from the Russian original 35 F-224 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
17 Share Capital (Continued)
Dividends declared and paid during the year were as follows: 2009 2008 Ordinary Preference Ordinary Preference In thousands of Kazakhstani Tenge shares shares shares shares (except for dividends per share) Equity Liability Equity Liability
Dividends payable at 1 January 45,548 238,559 75,600 34,233 199,824 75,600 Dividends declared during the year 105,725,598 11,108,055 75,600 11,078,602 1,097,073 75,600 Dividends paid during the year (57,563,331) (10,670,439) (75,600) (11,067,287) (1,058,338) (75,600)
Dividends payable at 31 December 48,207,815 676,175 75,600 45,548 238,559 75,600 Dividends per share declared during the year 14,792 14,692 100 1,550 1,450 100
All dividends are declared and paid in Kazakhstani Tenge. During the years ended 31 December 2009 and 31 December 2008 dividends on preference shares at guaranteed fixed amount of 10 percent p.a. of nominal value per share were accrued as a part of non-current preference shares liabilities in the amount of Tenge 75,600 thousand.
18 Long-term Share-based Employee Benefit Plan
In May 2008 and April 2009 ENRC plc., the parent company, presented the long-term share-based key employee benefit plan (“LTEBP”). LTEBP bonuses recorded at 31 December 2009 are effective only upon achievement of an established target. The established target means the achievement of the overall shareholder income by ENRC Group companies to be compared with the total shareholder income of the comparative Group for the comparative period. Total shareholder income of the comparative Group includes 22 international mining companies. In case of normal course of operations, benefits will be awarded upon expiration of the third year from the benefit provision date. Estimates are based on the Monte-Carlo model. The following information was used in the model for calculation purposes:
Plan 1 Plan 2 Granting date 7 May 2008 20 April 2009 Fair value of each share (in Tenge) 2,004 883 Price per share at the vesting right date (in Tenge) 2,842 1,221 Expected volatility 42% 70% Expected rate of dividend income 1.01% 3.82% Risk-free interest rate 2.55% 1.27% Granting period 3years 3 years The number of shares under LTEBP was as follows: 31 December 2009 31 December 2008 In thousands of Kazakhstani Tenge Plan 1 Plan 2 Plan 1 Plan 2
At the beginning of the period 26,680 - -- Provided for the period - 18,365 26,680 - Cancelled during the period - (3,714) --
At the end of the period 26,680 14,651 26,680 -
Below are the costs related to the share-based payments to the Company's employees in accordance with the ENRC Plc long-term employee benefit plan: 31 December 2009 31 December 2008 In thousands of Kazakhstani Tenge Plan 1 Plan 2 Plan 1 Plan 2
Share-based compensation expenses 19,057 16,860 10,441 -
Total expenses 19,057 16,860 10,441 -
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
19 Borrowings
In thousands of Kazakhstani Tenge Note 2009 2008
Finance lease liabilities 6 6,607,647 6,314,942 Bank overdrafts 6 - 13
Total borrowings 6,607,647 6,314,955
The Company’s borrowings mature as follows:
In thousands of Kazakhstani Tenge 2009 2008
Borrowings due: - within 1 year 1,864,126 1,640,849 - between 2 and 5 years 4,306,287 3,858,275 - after 5 years 437,234 815,831
Total borrowings 6,607,647 6,314,955
The Company’s borrowings are denominated in currencies as follows: In thousands of Kazakhstani Tenge 2009 2008
Borrowings denominated in: - US Dollars 6,607,647 6,314,942 - Kazakhstani Tenge - 13
Total borrowings 6,607,647 6,314,955
The average effective interest rates at the reporting date were as follows: 31 December 2009 31 December 2008 Kazakhstani US Kazakhstani US In percent per annum Tenge Dollars Tenge Dollars Finance lease liabilities - 15.56 - 15.56
ENRC Leasing B.V. During the years 2004 - 2006 the Company signed three financial lease agreements with ENRC Leasing B.V. for the total amount of USD 21,918 thousand, USD 40,459 thousand and USD 10,892 thousand, respectively. The finance lease agreements bear annual interest at the rate of 15 percent. The lease payables are to be repaid in equal semi- annual instalments by 11 September 2014, 9 October 2015 and 8 February 2016, respectively. The carrying amount of these lease payables at 31 December 2009 and 2008 was Tenge 6,607,647 thousand and Tenge 6,314,942 thousand, respectively. Minimum lease payments under finance leases and their present values are as follows: Due between 2 Due after 5 In thousands of Kazakhstani Tenge Due in 1 year and 5 years years Total Minimum lease payments at 31 December 2009 1,989,261 6,325,414 947,171 9,261,846
Less: future finance charges (125,135) (2,019,127) (509,937) (2,654,199)
Present value of minimum lease payments at 31 December 2009 1,864,126 4,306,287 437,234 6,607,647
Minimum lease payments at 31 December 2008 1,750,966 5,676,554 1,857,820 9,285,340
Less: future finance charges (110,130) (1,818,279) (1,041,989) (2,970,398)
Present value of minimum lease payments at 31 December 2008 1,640,836 3,858,275 815,831 6,314,942
Leased assets with carrying amount disclosed in Note 7 are effectively pledged for finance lease liabilities as the rights to the leased asset revert to the lessor in the event of default.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
20 Trade and Other Payables
In thousands of Kazakhstani Tenge Note 2009 2008
Trade payables 6 2,068,550 1,757,338 Payables to employees 6 1,724,366 1,676,577 Pension funds 6 359,869 269,054 Financial guarantees 6, 34 350,104 358,955 Advances received 6 74,644 66,651 Provisions for claims 6 - 158,774 Other creditors 6 1,656,636 393,642
Total trade and other payables 6,234,169 4,680,991
Trade payables of Tenge 492,682 thousand (2008: Tenge 592,109 thousand) are denominated in foreign currencies, mainly 59.11 percent in Russian Roubles (2008: 47.6 percent), 20.75 percent in USD (2008: 20.8 percent), 15.51 percent in GBP (2008: 0 percent) and 4.63 percent in Euro (2008: 31.6 percent). Provisions for claims represent claims payable to ENRC Marketing AG for ferroalloys under-delivery during 2008. Financial guarantees represent the outstanding balance of the financial guarantees issued by the Company in favour of its related parties (see Note 34).
21 Provision for Mining Assets and Waste Polygons Retirement Obligations
The Company has a legal obligation to landfill site restoration during the mining operations and decommissioning of its mining property after its expected closure of assets at RU Kazmarganets and at DGOK.
2009 2008 Mining Waste Mining Waste In thousands of Kazakhstani Tenge assets polygons Total assets polygons Total
Current portion of provisions for asset retirement obligations and site restoration 43,990 354,640 398,630 29,156 342,301 371,457 Long-term portion of provisions for asset retirement obligations and site restoration 2,313,139 2,596,202 4,909,341 676,319 1,591,354 2,267,673
Total provisions for mining assets and waste polygons retirement obligations 2,357,129 2,950,842 5,307,971 705,475 1,933,655 2,639,130
The amount of the provision is determined using the nominal prices effective at the reporting dates by applying the forecasted rate of inflation for the expected period of the life of the mines and waste polygons and discount rate at the reporting dates.
Principal assumptions made in calculations of asset retirement obligations are presented below:
In percent 2009 2008
Discount rate at 31 December 5.96 11.35 Inflation rate at 31 December 5.6-7.3 7.8-8.6
The estimate of discount rate is based on risk free-rates on state bonds. The discount rate decreased in 2009 (from 11.35 percent to 5.96 percent) and increased in 2008 (from 7.4 percent to 11.35 percent) due to respective change in long-term risk free rates on state bonds.
Mining assets retirement obligations should be settled at the end of the useful life of each mine varying from 2009 to 2043. Waste polygons retirement obligations should be settled at the end of the useful life of each polygon up to its closure varying from 2009 to 2063. Uncertainties in such costs estimates include potential changes in regulatory requirements, alternatives to closure and reclamation of disturbed lands, discount and inflation rates.
Translated from the Russian original 38 F-227 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
21 Provision for Mining Assets and Waste Polygons Retirement Obligations (Continued)
Movements in provisions for mining asset retirement obligations are as follows: Mining assets Landfill decommissioning site In thousands of Kazakhstani Tenge costs restoration Total
Carrying amount at 1 January 2008 1,199,858 465,588 1,665,446
Deductions from property, plant and equipment (480,855) (36,319) (517,174) Period expenses (458,407) (86,155) (544,562) Utilised during the year (101) (24,725) (24,826) Unwinding of the present value discount 83,989 42,602 126,591
Carrying amount at 31 December 2008 344,484 360,991 705,475
Additions to property, plant and equipment 1,000,753 34,367 1,035,120 Period expenses (11) 570,889 570,878 Utilised during the year - (40,027) (40,027) Unwinding of the present value discount 55,176 30,507 85,683
Carrying amount at 31 December 2009 1,400,402 956,727 2,357,129
Movements in provisions for waste polygons retirement obligations are as follows: Waste polygons Landfill decommissioning site In thousands of Kazakhstani Tenge costs restoration Total
Carrying amount at 1 January 2008 34,560 966,230 1,000,790
Additions to property, plant and equipment 1,356 880,195 881,551 Utilised during the year - (43,858) (43,858) Unwinding of the present value discount 4,222 90,950 95,172
Carrying amount at 31 December 2008 40,138 1,893,517 1,933,655
Additions to property, plant and equipment 47,014 862,710 909,724 Utilised during the year - (126,321) (126,321) Unwinding of the present value discount 13,319 220,465 233,784
Carrying amount at 31 December 2009 100,471 2,850,371 2,950,842
22 Employee Benefits
Changes in benefit obligations are as follows:
In thousands of Kazakhstani Tenge 2009 2008 2007 2006 2005 Present value of defined benefit 1,750,002 3,278,692 3,094,354 1,655,101 1,375,687 obligation at the beginning of the year Charge for discount unwinding 198,625 242,623 154,718 82,755 68,784 Benefits paid (146,526) (142,069) (130,268) (115,156) (112,223) Current service expenses 62,295 139,070 171,740 62,667 50,033 Past service expenses - 246,030 - Actuarial (gains) / losses 1,898,288 (1,768,314) - 1,162,957 272,820
Present value of defined benefit 3,762,684 1,750,002 3,278,692 3,094,354 1,655,101 obligation at end of year
All defined benefit obligations at 31 December 2009 and 2008 are wholly unfunded.
Translated from the Russian original 39 F-228 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
22 Employee Benefits (Continued)
Employee benefits are classified into short-term and long-term portions in the following way:
In thousands of Kazakhstani Tenge 2009 2008
Short-term portion of employee benefits 147,955 132,986 Long-term portion of employee benefits 3,614,729 1,617,016
Total employee benefits 3,762,684 1,750,002
Amounts recognised in the statement of financial position and the statement of comprehensive income are as follows:
In thousands of Kazakhstani Tenge 2009 2008 2007 2006 2005 Present value of defined benefit obligation at end of year 3,762,684 1,750,002 3,278,692 3,094,354 1,655,101
Net liability 3,762,684 1,750,002 3,278,692 3,094,354 1,655,101
Charge for unwinding of discount 198,625 242,623 154,718 82,755 68,784 Current service expenses 62,294 139,069 171,740 62,667 50,033 Past service expenses - - - 246,030 - Actuarial losses/(gains) 1,898,288 (1,768,314) (11,852) 1,162,957 272,820
(Income) / Expense recognised in statement of comprehensive income 2,159,207 (1,386,622) 314,606 1,554,409 391,637
Actuarial losses, current service expenses were included in the statement of comprehensive income as part of cost of sales in the amount of Tenge 1,552,669 thousand (2008: profit of Tenge 1,270,968 thousand), as part of distribution costs in the amount of Tenge 3,500 thousand (2008: profit in the amount of Tenge 4,098 thousand), as part of general and administrative expense in the amount of Tenge 178,444 thousand (2008: profit of Tenge 121,576 thousand) and part of other expenses in the amount of Tenge 132 thousand (2008: profit of Tenge 1,050 thousand).
In thousands of Kazakhstani Tenge 2009 2008 2007 2006 2005 Cumulative amount of actuarial gains and losses recognised in the statement of comprehensive income 1,641,042 (257,245) 1,511,069 1,522,921 359,964
In thousands of Kazakhstani Tenge 2009 2008
Present value of defined benefit obligation at end of year 3,762,684 1,750,002
In thousands of Kazakhstani Tenge 2009 2008 2007 2006 2005 Experience adjustment: loss/(profit) on defined benefit obligation (4,955) (19,947) 1,772 5,855 5,980
Charge for unwinding of discount was included within finance costs (see Note 31). Principal actuarial assumptions at the reporting date are as follows: In percent 2009 2008
Discount rate at 31 December 5.96 11.35 Future salary increases at 31 December 8 8 Average labour turnover rate at 31 December 15.6 13.1
The mortality rates used in determination of the employee benefits at 31 December 2009 and 2008 were based on official Kazakhstani actuarial center data.
Translated from the Russian original 40 F-229 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
23 Other Taxes Payable
In thousands of Kazakhstani Tenge 2009 2008
Taxes and special payments of subsurface users 5,015,705 216,908 Withholding tax 2,536,788 7,010 Social tax 217,341 150,856 Individual income tax 199,271 192,326 Environmental payments 148,083 121,553 Value added tax 14,636 4,272 Other 279 69
Total other taxes payable 8,132,103 692,994
24 Revenue
In thousands of Kazakhstani Tenge Note 2009 2008
Ferroalloys 6 179,651,740 366,112,847 Chrome ore 6 25,134,623 56,536,032 Bricks 800,592 1,009,016 Heat and power 6 513,015 435,325 Crushed stone 361,925 374,279 Ilmenite concentrate 6 3,825 114,090 Other products 6 758,271 799,772 Other services rendered 6 776,900 807,804
Total revenue 208,000,891 426,189,165
25 Cost of Sales
In thousands of Kazakhstani Tenge Note 2009 2008
Materials 6 33,931,500 44,429,142 Payroll and related expenses 14,537,546 14,090,829 Electricity expense 6 17,163,987 19,989,759 Minerals extraction tax (Royalty in 2008)* 16,157,060 2,614,214 Depreciation 7 10,291,960 8,808,297 Gas expenses 1,889,216 2,326,152 Employee benefits expenses 22 1,552,669 (1,270,968) Commission fees 6 1,017,712 1,144,166 Insurance costs 6 1,005,611 1,117,880 Social tax 670,975 774,417 Repair and maintenance expenses 350,317 770,826 Changes in finished goods and production in process 13 (4,347,965) (5,125,053) Other 6 4,724,972 4,314,129
Total cost of sales 98,945,560 93,983,790
Starting from 1 January 2009 minerals extraction tax was introduced which replaced royalty (Note 34).
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
26 Other Operating Income
In thousands of Kazakhstani Tenge Note 2009 2008 Net foreign exchange gain 23,010,126 658,952 Net gain from disposal of government bonds 1,132,111 - Financial guarantees amortisation 6,20,34 358,955 315,787 Sales of inventory 6 187,455 207,156 Inventory surplus 14,473 31,726 Rent income 6 14,703 21,718 Insurance income 6 26 800,703 Net gain from disposal of subsidiary 33 - 4,739 Other 545,361 706,049
Total other operating income 25,263,210 2,746,830
Insurance income includes reimbursements for ferroalloys insurance coverage. On 4 February 2009 the National Bank of the Republic of Kazakhstan ceased to maintain the exchange rate of Tenge to other foreign currencies. The exchange rate of Tenge to USD subsequently weakened for 25 percent. Due to the fact that the export sales of Company's products are primarily carried out in US Dollars, the devaluation of Kazakhstani Tenge resulted in realization of the net foreign exchange gain in 2009.
27 Distribution Costs
In thousands of Kazakhstani Tenge Note 2009 2008 Transportation services – outbound 6 11,012,891 14,811,183 Insurance costs 6 434,383 541,164 Materials 138,361 103,197 Payroll and related expense 99,753 115,799 Customs fees 60,134 23,420 Depreciation 7 22,144 11,674 Other 6 352,412 453,729
Total distribution costs 12,120,078 16,060,166
28 General and Administrative Expenses
In thousands of Kazakhstani Tenge Note 2009 2008 Sponsorship and other financial aid 6 4,409,622 2,330,610 Information, consulting and other professional services 6 2,643,159 2,320,900 Payroll and related expense 6 2,523,603 2,288,539 Taxes other than on income 1,041,866 1,035,825 Rent expense 6 283,600 324,599 Transportation 237,127 289,304 Social taɯ 207,150 145,348 Bank charges 6 204,364 216,016 Provision for obsolete and slow-moving inventory 13 200,506 185,426 Depreciation 7 189,879 163,950 Employee benefits (income) / expenses 22 178,444 (121,576) Repair and maintenance 144,730 191,886 Fine and penalty 134,667 16,572 Telecommunications expenses 110,092 127,398 Provision on receivables impairment 14 105,463 83,357 Security services 6 94,922 69,416 Advertising expenses 88,404 84,713 Business trips and representative expenses 81,558 81,917 Membership fees 6 26,453 11,818 Insurance costs 6 16,392 23,862 Provision for impairment of property plant and equipment (1,633) 712,097 Other 6 1,840,108 1,321,529 Total general and administrative expenses 14,760,476 11,903,506
Sponsorship and other financial aid include charity payments rendered to non-commercial organisation ENRC Komek in the amount of Tenge 3,733,272 thousand (2008: Tenge 1,634,555 thousand).
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
29 Other Operating Expenses
In thousands of Kazakhstani Tenge Note 2009 2008
Production suspension expenses 352,022 97,026 Losses less gainson disposalsof property, plantandequipment 6,7 141,202 337,043 Exploration expenses 71,378 101,622 Research and development expenses 62,441 186,576 Depreciation expense of property, plant and equipment leased out 8,235 19,027 Other operating expenses 6 528,250 320,143
Total other operating expenses 1,163,528 1,061,437
30 Finance Income
In thousands of Kazakhstani Tenge Note 2009 2008
Net foreign exchange gain on deposits with maturity of less than 3 months 6 14,721,861 - Unwinding of present value discount 6,15 9,253,513 3,170,690 Interest income on loans receivable 6,15 5,823,023 4,876,232 Interest income on bank deposits 6 3,401,643 3,358,762 Interest on government bonds 211,422 10,700 Interest income on employee loans 72,136 33,919 Net foreign exchange gain from borrowings - 98,802 Income from disposal of investments (shares) 9 - 485
Total finance income 33,483,598 11,549,590
31 Finance Costs
In thousands of Kazakhstani Tenge Note 2009 2008
Losses less gains on origination of loans at non-market rate 6,15 5,516,172 8,353,301 Net foreign exchange loss from borrowings 1,712,333 - Interest expense on financial lease 6,20 991,965 941,749 Changes in financial assets fair value 10 367,302 721,177 Employee benefits: unwinding of present value discount 22 198,625 242,623 Asset retirement obligations: unwinding of present value discount 21 319,467 221,763 Dividends on preference shares at guaranteed fixed amount: unwinding of present value discount 17 75,600 75,600 Interest expense on borrowings 6,20 - 2,078,959 Other interest expense 6 42,033 12,973
Total finance costs 9,223,497 12, 648,146
32 Income Taxes
Income tax expense comprises the following:
In thousands of Kazakhstani Tenge 2009 2008
Current income tax expense 25,356,244 92,178,742 Deferred income tax (benefit) / expense 1,688,743 (4,056,256) Current excess profit tax expense 1,594,006 9,372,784 Deferred excess profit tax expense 343,718 117,610
Income tax expense for the year 28,982,711 97,612,880
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
32 Income Taxes (Continued)
Reconciliation between the expected and the actual taxation charge is provided below. In thousands of Kazakhstani Tenge 2009 2008
IFRS profit before tax 131,354,906 304,833,601
Theoretical tax charge at statutory rate of 20% (2008: 30%) 26,270,981 91,450,080 Tax effect of items which are not deductible or assessable for taxation purposes: - Sponsorship and other financial aid expenses 314,975 - - Social sphere maintenance 168,973 - - Inventory write-offs 53,496 55,628 - Non-deductible losses on sale of property, plant and equipment 46,663 32,169 - Advances and receivables impairment provision 43,318 66,643 - Depreciation of non-production assets 40,335 - - Penalties and fines 27,766 6,244 - Non-deductible taxes 22,859 30,709 - Preference shares: unwinding of present value discount 15,120 22,680 - Non-deductible exploration expenses 14,264 28,641 - Non-deductible general and administrative expenses 11,883 13,527 - Non-deductible expenses on conservation of property, plant and equipment 7,659 5,195 - Non-deductible losses from disposal of subsidiary - 6,077 - Non-deductible expenses for claims (7,399) 103,687 - Non-deductible foreign exchange loss (99,176) 18,338 - Loss from bonds fair value change (148,258) 216,353 - Non-taxable income from investments into associates (164,069) - - Losses less gains on origination of loans at non-market rate (680,897) 1,435,023 - Other non-deductible (income) / expenses 929,828 (273,507) - Corporate income tax for the previous years (17,603) 176,185 - Excess profit tax 1,594,006 9,372,784 - Effect of disposal of subsidiary - (5,457) - Effect of rate change* 537,987 (5,148,119)
Income tax expenses for the year 28,982,711 97,612,880
*Starting from January 1 2009 New Tax Code is adopted in Kazakhstan. Changes in corporate income tax rate and EPT calculation methodology (see Note 34) impacted the reported amounts of deferred income tax liabilities
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
32 Income Taxes (Continued)
Differences between IFRS and Kazakhstani statutory taxation regulations give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their income tax bases. The tax effect of the movements in these temporary differences is detailed below, and is recorded at the rate applicable to period of assets realisation or liabilities settlement.
Charged/ 31 December (credited) 31 December In thousands of Kazakhstani Tenge 2008 to profit or loss 2009
Tax effect of deductible temporary differences Trade receivables 1,592,475 (130,118) 1,462,357 Employee benefits 253,284 309,818 563,102 Provision for asset retirement obligations 404,288 424,425 828,713 Vacation provisions 233,872 (4,020) 229,852 Taxes accrued but not paid 72,000 1,001,957 1,073,957 Finance lease 25,108 408,926 434,034 Intangible assets 2,150 (1,819) 331 Long-term employee benefits expenses 1,566 7,706 9,272 Other payables 29,203 509 29,712
Gross deferred tax asset 2,613,946 2,017,384 4,631,330 Less: offsetting with deferred tax liabilities (2,613,946) (2,017,384) (4,631,330)
Recognised deferred tax asset - - -
Tax effect of taxable temporary differences Property, plant and equipment 7,130,928 3,426,192 10,557,120 Inventories 386,108 279,935 666,043
Gross deferred tax liability 7,517,036 3,706,127 11,223,163 Less: offsetting with deferred tax assets (2,613,946) (2,017,384) (4,631,330) Net deferred tax liability at the rates applicable to period of liabilities settlement 4,903,090 1,688,743 6,591,833 Excess profit tax – inventories - Excess profit tax – property, plant and equipment 1,098,647 367,608 1,466,255 Excess profit tax – intangible assets (136) (153) (289) Excess profit tax – trade receivables - - - Excess profit tax – finance lease (4,142) (6,170) (10,312) Excess profit tax – vacation provisions (29,228) 29,228 - Excess profit tax – employee benefits (52,720) (11,762) (64,482) Excess profit tax – other payables (210) 210 - Excess profit tax – taxes accrued but not paid (17,462) 17,462 - Excess profit tax – provisions for asset retirement obligations (28,138) (52,704) (80,842)
Recognised deferred tax liability 5,869,701 2,032,462 7,902,163
Translated from the Russian original 45 F-234 Level: 1 – From: 0 – Thursday, May 13, 2010 – 19:52 – eprint3 – 4221 Section 09d
TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
32 Income Taxes (Continued)
Charged/ 31 December (credited) 31 December In thousands of Kazakhstani Tenge 2007 to profit or loss 2008
Tax effect of deductible temporary differences Trade receivables 2,611,210 (1,018,735) 1,592,475 Employee benefits 950,103 (696,819) 253,284 Provision for asset retirement obligations 771,799 (367,511) 404,288 Vacation provisions 306,451 (72,579) 233,872 Taxes accrued but not paid 150,246 (78,246) 72,000 Finance lease 53,364 (28,256) 25,108 Intangible assets 4,635 (2,485) 2,150 Long-term employee benefits expenses - 1,566 1,566 Other payables 16,174 13,029 29,203
Gross deferred tax asset 4,863,982 (2,250,036) 2,613,946 Less: offsetting with deferred tax liabilities (4,863,982) 2,250,036 (2,613,946)
Recognised deferred tax asset - - -
Tax effect of taxable temporary differences Property, plant and equipment 13,030,409 (5,899,481) 7,130,928 Inventories 798,377 (412,269) 386,108
Gross deferred tax liability 13,828,786 (6,311,750) 7,517,036 Less: offsetting with deferred tax assets (4,863,982) 2,250,036 (2,613,946)
Net deferred tax liability at the rates applicable to period of liabilities settlement 8,964,804 (4,061,714) 4,903,090 Excess profit tax – inventories 3,213 (3,213) - Excess profit tax – property, plant and equipment 1,280,785 (182,138) 1,098,647 Excess profit tax – intangible assets (55) (81) (136) Excess profit tax – trade receivables (52,706) 52,706 - Excess profit tax – finance lease (20,310) 16,168 (4,142) Excess profit tax – vacation provisions (74,813) 45,585 (29,228) Excess profit tax – employee benefits (104,459) 51,739 (52,720) Excess profit tax – other payables (1,153) 943 (210) Excess profit tax – taxes accrued but not paid (60,901) 43,439 (17,462) Excess profit tax – provisions for asset retirement obligations (120,600) 92,462 (28,138)
Recognised deferred tax liability 9,813,805 (3,944,104) 5,869,701
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The offset amounts are as follows:
In thousands of Kazakhstani Tenge 2009 2008
Deferred income tax assets: - Deferred income tax asset to be recovered after more than 12 months (1,275,509) (643,019) - Deferred income tax asset to be recovered within 12 months (3,511,745) (2,102,963) (4,787,254) (2,745,982) Deferred income tax liabilities: - Deferred income tax liability to be recovered after more than 12 months 10,898,841 7,541,606 - Deferred income tax liability to be recovered within 12 months 1,790,576 1,074,077 12,689,417 8,615,683 Deferred income tax liabilities (net) 7,902,163 5,869,701
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
33 Discontinued Operations
During 2008 the Company disposed its subsidiary, Martuk Sut LLP, for Tenge 54,921 thousand. The Company has recorded a gain from the disposal of the subsidiary in the amount of Tenge 4,739 thousand within other operating income (see Note 26). Below are disposed assets and liabilities of Martuk Sut LLP: In thousands of Kazakhstani Tenge 2008
Disposed assets: Property, plant and equipment 34,580 Inventories 22,691 Accounts receivable 5,485 Cash and cash equivalents 3,097 Total disposed assets 65,853 Disposed liabilities: Accounts payable 8,373 Taxes payable 1,545 Other liabilities 5,753 Total disposed liabilities 15,671 Net assets 50,182 Minority interest - Goodwill - Total carrying amount of disposed net assets 50,182
Presented below is the result of discontinued operations recognized as a result of the disposal of Martuk Sut LLP: In thousands of Kazakhstani Tenge 2008
Revenue 90,225 Expenses 82,853
Pre-tax profit from discontinued operations 7,372 Income tax 2,311
Profit/loss from discontinued operations 5,061
Presented below is the analysis of cash flows from discontinued operations: In thousands of Kazakhstani Tenge 2008
Cash flows on operating activities 11,413 Cash flows on investing activities 51 Cash flows on financing activities (17,992)
Total cash flows (6,528)
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
34 Contingencies, Commitments and Operating Risks
Political and economic situation in Kazakhstan. In general, the economy of the Country continues to display the characteristics of an emerging market. These characteristics include, but are not limited to, the existence of national currency that is not freely convertible outside of the country and a low level of liquidity of debt and equity securities in the markets. The mining sector in Kazakhstan is still impacted by political, legislative, fiscal and regulatory developments in Kazakhstan. The prospects for economic stability in Kazakhstan are largely dependent upon the effectiveness of economic measures undertaken by the government, together with legal, regulatory and political developments, which are beyond the Company’s control. The financial condition and future operations of the Company may be adversely affected by continued economic difficulties related mainly to the current situation in the global financial markets. Management is unable to predict the extent and duration of the economic difficulties, nor quantify the impact, if any, on these financial statements. Impact of global financial crisis. The slowdown in the growth rates of leading developed world economies - the USA, Japan, European Union, was very dramatic in autumn 2008 and caused the slowdown of development of the world economy and reduction of the world consumption. The oil and metal prices went down and such products are the main export products of Kazakhstan. Further, the effects of the crisis flowed from the financial sector into the real sector. Due to the reduction of production and consumption levels around the world as well as the fall of prices for the main export products of Kazakhstan, the Government has developed a stabilization plan envisaging the increase of governmental expenses for support and resumption of business activities. 5 improvement areas were defined: stabilization of financial sector; development of housing sector, small and medium business support; development of agri-industrial complex; implementation of innovational, industrial and infrastructure projects. The anti-crisis program aims to prevent the work places cut-off and mass redundancies in the real sector. In the current environment, the influence and presence of the Government of the Republic of Kazakhstan in the economy increased. As a result of actions taken the situation in this country has stabilized. In general, the macroeconomic situation in Kazakhstan is still tough but manageable. The Company’s position in the economy surmounting the world financial crisis looks encouraging. The production report shows the recovery and improvement of production level marking off the difficult production period. The action plan to cope with the world markets recession in the end of the 2008, which– resulted in reduction of production levels for the successful business management in the tough environment, proved to be correct and is completely implemented. The Company observes the first indicators of stability and recovery of the economies in the USA, Europe and Russia and hopes that such recovery will be sustainable. However, the Company follows the conservative forecasts forthe year 2010. It is still difficult to predict the world economy situation for the year 2010, therefore the Company intends to continue to reduce the cost of production since it is the key factor to maintain the competitiveness. The management of ENRC Group companies follows and will follow the strategy of investments into the Kazakhstan’s mining sector aimed to improve the capacities and to ensure the effective production. Thus, in the beginning of 2009, the Group management declared on its intention to invest 1.2 billion US dollars into the capital expenditure program. Tax legislation. Kazakh tax legislation and practice is in a state of continuous development, and therefore is subject to varying interpretations and frequent changes, which may be retroactive. Further, the interpretation of tax legislation by tax authorities as applied to the transactions and activities of the Company may not coincide with that of management. As a result, tax authorities may challenge transactions and the Company may be assessed additional taxes, penalties and fines. Tax periods remain open to review by the Kazakh tax authorities for five years. Whilst there is a risk that the Kazakhstani tax authorities may challenge the policies, including those relating to transfer pricing and excess profits tax legislation (see Note 2), the management believes that they would be successful in defending any such challenge and notes that the amount of potential claim of the tax authorities cannot be reliably estimated. Accordingly, at 31 December 2009 no provision for potential tax liabilities had been recorded (2008: no provision recorded). As at the date of these financial statements preparation, Kazakhstani tax authorities finished complex tax audit of the Company, started in 2008, for the years ended 31 December 2004, 2005, and for the compliance with legislation of transfer pricing for the same years. No significant violations were revealed upon the result of these tax audits.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
34 Contingencies, Commitments and Operating Risks (Continued)
Changes in tax legislation. 10 December 2008 the President of Republic of Kazakhstan signed the new Tax Code and other legislative acts following the introduction of the new Tax Code, which came into force starting from 1 January 2009. During 2009 the government continued to introduce amendments to the Tax Code. The key changes made include: replacement of the royalty by the mineral extraction tax with the increase in rates from 1.4 percent to 16.2 percent from 2009 till 2012 and up to 16.8 percent in 2013, up to 17 percent in 2014; reduction of the corporate income tax rates: from 30 percent to 20 percent from 2009 till 2012, down to 17.5 percent in 2013, 15 percent in 2014; reduction of the VAT from 13 percent to 12 percent; introduction of the fixed social tax rate of 11 percent; increase in the property tax rate from 1 percent to 1.5 percent in relation to the taxable base which includes only immovable property and cancellation of the property tax in relation to other property; change in the methodology of excess profit tax calculations; and other changes. Changes in corporate income tax rates had an impact on calculation of deferred income tax amounts at 31 December 2009 and 31 December 2008 (Note 32). Transfer pricing. On 5 July 2008, the new law on transfer pricing was introduced, which is effective from 1 January 2009. This new law replaced previous law on transfer pricing. Under this law international transactions and transaction related to international ones and meeting specific criteria are subject to state control. This law prescribes Kazakhstan companies to maintain and, if required, to provide economic rationale and method of the determination of prices used in international transactions, including existence of the documentation supporting the prices and price differentials applied. Additionally, price differentials cannot be applied in the international transactions with companies registered in countries listed as countries with privileged taxation (offshore countries). In case of deviation of transaction price from market price the tax authorities have the right to adjust taxable base and to impose additional taxes, fines and interest penalties. The transfer pricing law in some areas lacks detailed clear-cut guidance as to how its rules should be applied in practice (for example the form and content of documentation supporting the discounts), and determination of the Company's tax liabilities within the context of the transfer pricing regulations requires an interpretation of transfer pricinglaw. The Company conducts transactions subject to state transfer pricing control. Sales of products to the Company’s cross-border customers are set at the market price based on arms-length principle. Capital expenditure commitments. At 31 December 2009 the Company has contractual capital expenditure commitments in respect of property, plant and equipment totalling Tenge 4,056,618 thousand (2008: Tenge 8,677,082 thousand). The Company’s management has already allocated the necessary resources in respect of these commitments. The Company believes that future net income and funding will be sufficient to cover this and any similar commitments. Legal proceedings. From time to time and in the normal course of business, claims against the Company are received. On the basis of its own estimates and both internal and external professional advice management of the Company is of the opinion that no material losses will be incurred in respect of claims. Guarantees. Guarantees are irrevocable assurances that the Company will make payments in the event that another party cannot meet its obligations. The Company has guaranteed the following obligations to its related parties:
In thousands of Kazakhstani Tenge Note 2009 2008
ENRC Marketing AG 8 219,720,800 178,739,600
Total obligations guaranteed 219,720,800 178,739,600
The obligations guaranteed by the Company are denominated in currencies as follows:
In thousands of Kazakhstani Tenge 2009 2008
Obligations denominated in: - US Dollars 219,720,800 178,739,600
Total obligations guaranteed 219,720,800 178,739,600
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
34 Contingencies, Commitments and Operating Risks (Continued)
As of 31 December 2009 the Company has the following maturity of outstanding financial guarantees: In thousands of Kazakhstani Tenge Note 2009 2008
Short-term financial guarantee 20 350,104 358,955 Long-term financial guarantee - 350,104
Total guarantees 350,104 709,059
As of 31 December 2009 outstanding financial guarantees related to the following companies:
In thousands of Kazakhstani Tenge Note 2009 2008
ENRC Marketing AG 8 350,104 709,059
Total guarantees 350,104 709,059
At 31 December 2009 and 31 December 2008 the Company has a guarantee in the amount of 1,480 million USD to Deutsche Bank AG under the guarantee agreement with the latter on behalf of ENRC Marketing AG. On 15 December 2006 ENRC Marketing AG (the "Borrower") entered into a Facility Agreement with ABN Amro Bank, Barclays Capital and Deutsche Bank AG (jointly the "Lenders"). Pursuant to the Facility Agreement, the Lenders provide to the Borrower the USD 1 billion syndicated pre-export finance facility for 5 years. Under the Facility Agreement, the Company provides guarantee (the “Guarantee”) to the Lenders in respect of the obligations of the Borrower. The Company signed a Guarantee Fee Agreement with ENRC Marketing AG. According to the Guarantee Fee Agreement, the Company charges ENRC Marketing AG with USD 10 million of commission fees, which was paid in February 2007. The loan facility was drawn down by the Borrower in 2007. According to the Guarantee Agreement concluded between the Company and Deutsche Bank AG, the Security Trustee, the Company has to comply with the following covenants: - the Company undertakes that its total debt (e.g. money borrowed or raised, bond, note, loan stock, debenture, letter of credit, guarantees and indemnities, including this guarantee, etc.) from the date of the guarantee until the expiry of the security period shall be an amount not exceeding USD 1.5 billion; - the Company may declare or pay any dividends in any financial year provided that the amount of such dividends does not exceed its net income for the financial year in relation to which such dividends are declared. However, the Company can still declare dividends in excess of its net income provided that immediately after payment of such dividends, the ratio of total equity to the aggregated of total equity and total debt of the Company would be equal to or greater than 0.4:1; - the Company shall not make any loans or grant any credit to or for the benefit of any person in excess of USD 100 million at any time. On 12 April 2007 the Company extended the Guarantee Agreement with ENRC Marketing AG for an additional amount of USD 480 million totalling to USD 1.480 billion. In 2007 the Company has recognized a financial guarantee liability in respect to ENRC Marketing AG. As of 31 December 2009 and 31 December 2008 management concluded that the Company is compliant with the covenants.
Insurance policies. The Company holds insurance policies in relation to the following risks: - Insurance of property; - Insurance of civil responsibility of employer for causing damage to life and health of employee during his/her work duties; - Insurance of civil responsibility of employer for causing damage to environment; - Insurance of civil responsibility of owners of vehicles; - Insurance of civil responsibility of owners of properties, operations of which can cause damage to third parties.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
34 Contingencies, Commitments and Operating Risks (Continued)
Environmental matters. The enforcement of environmental regulation in the Republic of Kazakhstan is evolving and the enforcement posture of government authorities is continually being reconsidered. The Company periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately in the financial statements. Thus, due to adoption of the Ecology Code of the Republic of Kazakhstan, during 2008 the Company created the decommissioning fund to arrange the measures for decommissioning of waste polygons and environmental monitoring upon closure. In addition to decommisioning fund, representing the special account for accumulation of funds, the Company accrued the provisions for waste polygons retirement obligations. The amount of accrued provision for waste polygons retirement obligations was based on the management's best estimates of future costs, which will be incurred by the Company for repayment of its current liabilities (see Note 21). In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage. The new Tax Code of the Republic of Kazakhstan is effective from 1 January 2009, whereby the emission payment rates are increased and levying procedure is updated. In December 2005 the Company’s management made the decision on building and certification of management system in accordance with the requirements of standards: ISO 9001:2000, ISO 14001: 2004, OHSAS 18011:1999, as well as SA 8000. Management system complying with the requirements of standards: ISO 9001: 2000 (quality management system), ISO 14001: 2004 (environment protection management system), OHSAS 18011:1999 (health and labour safety management system) is implemented in Aksu and Aktobe Ferroalloy Plants, DGOK and Kazmarganets. The Company’s all sub-divisions have certificates on compliance with the standards: ISO 9001: 2000, ISO 14001: 2004, OHSAS 18011:1999, issued by TUV CERT, international certification body. In July 2009 the Company’s subdivisions were subject to the observation audit on compliance of their environment management system to the requirements of ISO 14001:2004. Provision for assets retirement obligations. The estimate of the outstanding provision for assets retirement obligations was based on the legal contractual obligations in respect of site restoration and rehabilitation. This estimate might change upon completion of further environmental study works and reassessment of the existing liabilities.
35 Financial Risk Management
Financial risk factors. The Company’s activities expose it to a variety of financial risks: market risk, (including foreign exchange risk), liquidity risk and credit risk. The Company’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Company’s financial performance. (a) Credit risk Financial assets, which potentially subject Company to credit risk, consist principally of trade receivables, issued loans, deposits with banks and cash and cash equivalents. The Company has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The clients which do not meet the solvency requirements of the Company can have the transactions with the Company only on the terms of prepayments. Borrowings are provided only to the Company’s related parties. Cash is placed in financial institutions, which are considered at time of deposit to have minimal risk of default. Additionally, the Company makes the analysis of external ratings of the financial institutions. Maximum credit risk exposure represents the current carrying value of trade receivables, issued loans and deposits with banks less impairment loss. Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Company beyond the provisions for receivables impairment already recorded. As at 31 December 2009 the major trade debtor is ENRC Marketing AG. These aggregate receivables were Tenge 63,532,502 thousand (2008: Tenge 84,185,771 thousand) or 89 percent of total trade receivables and other receivables (2008: 91 percent). These receivables are short-term with a maturity period from 1 to 3 months, which is in compliance with the contract payment terms.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
35 Financial Risk Management (Continued)
The table below shows credit ratings as of 31 December 2009 and balances with banks and financial institutions where cash and cash equivalents and term deposits were placed as of 31 December 2009 and 31 December 2008:
31 December 31 December In thousands of Kazakhstani Tenge Rating 2009 2008
Cash and cash equivalents RBS Bank* A (Standard&Poor’s) 15,124,165 8,460,451 SB JSC Sberbank, Russia BBB (Fitch) 9,170,341 - HSBC Bank* Ⱥ (Standard&Poor’s) 7,433,365 17,113,340 ATF Bank BBB (Fitch) 6,022,330 1,027 Bank CenterCredit ȼ (Fitch) 5,006,842 8,045,560 Eurasian Bank B (Standard&Poor’s) 421,336 16,269,136 Halyk Bank B+ (Standard&Poor’s) 1,078 215
Total cash and cash equivalents 43,179,457 49,889,729
Term deposits and restricted cash Eurasian Bank B (Standard&Poor’s) 2,849,246 275,914 RBS Bank* A (Standard&Poor’s) - 10,043,099 HSBC Bank* Ⱥ (Standard&Poor’s) - 8,978,882
Total term deposits 2,849,246 19,297,895 * Rating is provided on international bank. Rating on Kazakhstani division of the bank is not available (b) Market risk (1) Foreign exchange risk. 99 percent of the Company’s sales represent export sales, and the Company’s borrowings are denominated in foreign currency, thus, it is exposed to foreign exchange risk. Foreign currency denominated assets (see Note 15) and liabilities (see Note 19) give rise to foreign exchange exposure. The Group management monitors foreign exchange risk exposure by currency and in total based on the Group consolidated position. Foreign exchange risk arises when future foreign currency inflows or recognized assets and liabilities are denominated in currency other than the Company’s functional currency. The Company exports its products to European markets and attracts the significant amounts of foreign currency in which receivables are denominated. As a result, the Company is exposed to exchange rate changes. Production expenses are denominated in Kazakhstani Tenge, while revenues are denominated in US dollars. Thus, the Company is exposed to risk that changes in exchange rates affect both revenue and financial position. The Company’s exposure to exchange rate risk arises due to: - Highly probable (purchase/sale) transaction denominated in foreign currency; and - Monetary items (mainly accounts receivable and payable, borrowings) denominated in foreign currency. The Company is mainly exposed to risk of change in exchange rate of Tenge to US dollar. According to the National Bank of the Republic of Kazakhstan in 2010 the targeted average exchange rate will remain at the level of 150 Tenge for 1 US dollar. Taking into account the situation at the world commodity and currency markets, as well as to create the environment for the flexibility of the exchange rates, the range of Tenge exchange rate will be expanded up to +15 Tenge (or 10 percent) and -22.5 Tenge (or 15 percent). As at 31 December 2009, if the exchange rate of US dollar to Tenge had increased/decreased by 10 percent/15 percent, respectively, with all other variables held constant, net profit for the year would have been Tenge 12,572,959 thousand/ Tenge 8,381,972 higher/lower, respectively (2008: increased/decreased by 25 percent, net profit would have been Tenge 36,686,197 thousand higher/lower). Since USD to Tenge exchange rate decrease is not expected, the sensitivity analysis for Tenge strengthening was not made. During the reporting year, the Company did not use forward contracts for hedging of foreign exchange risk.
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
35 Financial Risk Management (Continued)
The main factor explaining the decrease/increase of sensitivity in 2009 is the significant amount of trade receivables denominated in foreign currency (trader - ENRC Marketing AG) – decrease by Tenge 10,587,556 thousand/increase by Tenge 7,058,371 thousand (2008: decrease/increase by Tenge 26,514,049 thousand). Decrease/increase of profit sensitivity to changes in US dollar exchange rate in 2009 in comparison with 2008 was caused by: - increase in trader’s accounts receivable (change in contractual payment terms and main product price rise); - increase in cash and cash equivalent balance due to increase in the Company’s revenue; - increase in advances issued (against delivery of equipment under investment program); - decrease in finance lease liabilities. (2) Cash flow and fair value interest rate risk. Sensitivity analysis shows the effect of changes in market interest rates on interest payments, interest income and expenses, and if applicable, on equity. The analysis of sensitivity to interest rate risk is based on the following assumptions: - changes in market interest rate effects interest income and interest expenses on financial instruments with floating interest rate, therefore, should be included into calculation for the purposes of sensitivity analysis; - financial instruments with fixed interest rate recognized at amortized costs are not exposed to interest rate risk, therefore, are not included into calculations for the purposes of sensitivity analysis; - changes in market interest rate on financial liabilities and financial assets with fixed interest rate affect income and losses given they are recognized at fair value through profit or loss. As at 31 December 2009 the Company was exposed to potential market risk related to the loan issued by ENRC Finance Limited, UK with the variable LIBOR interest rate. (3) Price risk. The Company is not exposed to price risk on equity securities owned by the Company and stated in the statement of financial position as available for sale, since the management believes that carrying amount of such investments is immaterial, and accordingly, any fluctuations in price of such equity instruments will not have the significant effect on the financial instruments. The Company’s sales are made to related parties, which in their turn make sales to customers located mainly in Russia, China and Kazakhstan. The prices for the Company’s products are fixed on a quarterly basis. The Company is exposed to price risk, since the sales prices for the Company’s ferroalloys and chromium ore depend on changes in prices at London Metal Exchange, which in their turn depend on general and specific market fluctuations. (c) Liquidity risk Liquidity risk is defined as the risk that the Company will encounter difficulty in meeting obligations associated with financial liabilities. The Company’s approach to liquidity management is to ensure the continuous and sufficient liquidity to meet the Company’s liabilities as they fall due (both under standard and non-standard situations), preventing unacceptable losses or the Company’s reputation damage risk. Below is the information on contractual terms of financial liabilities settlement, including interest payments as of 31 December 2009:
Cash flows In thousands of Carrying under Within 1-3 3-12 Over Kazakhstani Tenge value agreement 1month months months 1-5 years 5 years
Liabilities Preference shares 568,421 756,000 - - 75,600 302,400 378,000 Finance lease liabilities 6,607,647 9,255,608 - 159,580 1,829,681 6,325,414 947,171 Bank overdrafts ------Trade and other payables 3,725,186 3,725,186 3,725,186 - - - -
ɂɬɨɝɨ 10,901,254 13,736,794 3,725,186 159,580 1,905,281 6,627,814 1,325,171
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
35 Financial Risk Management (Continued)
Below is the information on contractual terms of financial liabilities settlement, including interest payments as of 31 December 2008:
Cash flows In thousands of Carrying under Within 1-3 3-12 Over Kazakhstani Tenge value agreement 1month months months 1-5 years 5 years
Liabilities Preference shares 568,421 756,00 - - 75,6000 302,400 378,000 Finance lease liabilities 6,314,942 9,285,339 - 139,769 1,611,196 5,676,554 1,857,820 Bank overdrafts - 13 13 - - - - Trade and other payables 2,150,980 2,150,980 2,150,980 - - - -
Total 9,034,343 12,192,332 2,150,993 139,769 1,686,796 5,978,954 2,235,820
In 2009 all liabilities of the Company were settled in full on a timely basis according to the terms of signed agreements. The Company has a credit facility (reserve letter of credit) for the amount of 25 million Euro under the agreement with JSC SB RBS Bank, Kazakhstan ʋCL070619A dated 19 June 2007. This reserve letter of credit was opened for the benefit of Outotec Oyj Company (under equipment purchase agreement) and Bateman International Projects BV (under project works agreement). As at 31 December 2009 the Company did not draw down any funds from the above credit facility. Capital risk management. The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders or sell assets to reduce debt. Consistent with others in the industry, the Company monitors capital on the basis of the gearing ratio.
36 Fair Value of Financial Instruments
Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by an active quoted market price. The estimated fair values of financial instruments have been determined by the Company using available market information, where it exists, and appropriate valuation methodologies. However, judgement is necessarily required to interpret market data to determine the estimated fair value. The Republic of Kazakhstan continues to display some characteristics of an emerging market and economic conditions continue to limit the volume of activity in the financial markets. Market quotations may be outdated or reflect distress sale transactions and therefore not represent fair values of financial instruments. Management has used all available market information in estimating the fair value of financial instruments. The fair value and carrying amounts of financial assets and financial liabilities as of 31 December 2009 and 31 December 2008 are presented in the table below: 31 December 2009 31 December 2008 Carrying Fair Carrying Fair In thousands Kazakhstani Tenge value value value value Financial assets at fair value through profit and loss 22,419 22,419 8,452,837 8,452,837 Investments held to maturity - - 525,753 525,753 Investments in associates 32,542,988 32,542,988 - - Trade and other receivables 85,009,403 85,009,403 137,881,756 137,881,756 Other non-current assets 3,102,846 3,134,980 4,526,975 4,529,957 Loans receivable 126,915,026 129,542,342 80,551,004 86,374,820 Cash and cash equivalents 48,983,030 48,983,030 50,041,629 50,041,629 Bank overdrafts - - 13 13 Finance lease agreements liabilities 6,607,647 6,607,647 6,314,942 6,314,942 Trade payables and other payables 55,193,757 55,193,757 5,040,698 6,040,698
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TNC Kazchrome JSC Notes to the Consolidated Financial Statements – 31 December 2009
36 Fair Value of Financial Instruments (Continued)
Financial instruments carried at fair value through profit or loss. Investments held for trading are recognised in the statement of financial position at fair value. Fair values are determined based on quoted market prices. Total net fair value gain/loss recognised in the statement of comprehensive income in 2009 amounts to Tenge 367,302 thousand (2008: Tenge 721,177 thousand). Financial assets carried at amortised cost. The fair value of floating rate instruments is normally their carrying amount. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on credit risk of the counterparty. Carrying amounts of trade receivables approximate fair values due to their short term maturities. Refer to Note 15 for the estimated fair values of loans receivable. Liabilities carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Refer to Note 19 for the estimated fair values of borrowings.
37 Events After the End of the Reporting Period
On 14 January 2010 the Company’s Board of Directors has taken the decision to make the additional contribution into the share capital of Chrometau Brick Plant LLP in the amount of Tenge 16,451 thousand in the form of property transfer. In January-February 2010 this property of the estimated price of Tenge 649,145 thousand was transferred to the share capital of Chrometau Brick Plant LLP. On 20 January 2010 the Company sold the governmental bonds for the amount of Tenge 26,764 thousand. During January-February 2010 the Company paid out dividends accrued at the reporting date in the amount of Tenge 48,959,588 thousand. In February 2010 the Company has singed an agreement with ENRC Finance Limited for providing a loan in the amount of USD 95,000 thousand at the interest rate of LIBOR plus 3.5 percent for the period of 170 days.
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ISSUER A9.4.1.1 Eurasian Natural Resources Corporation PLC Second Floor 16 St. James Street London SW1A 1ER United Kingdom
GUARANTORS Sokolovsko- Sarbaiskoye Mining and Transnational Company Production Association JSC Kazchrome JSC 111500 030015 Republic of Kazakhstan Republic of Kazakhstan Kostanai region Aktobe Rudniy Industrial Zone 26 Lenin Str 312 Strelkovaya Diviziya Ave
TRUSTEE Deutsche Trustee Company Limited Winchester House 1 Great Winchester Street London EC2N 2DB
ISSUING AND PRINCIPAL PAYING AGENT A12.5.4.2 Deutsche Bank AG, London Branch A13.5.2 Winchester House 1 Great Winchester Street London EC2N 2DB
OTHER PAYING AGENT Deutsche Bank, Luxembourg S.A. 2 Boulevard Konrad Adenauer L-1115 Luxembourg Grand-Duchy of Luxembourg
LEGAL ADVISERS A12.7.1 To the Issuer and the Guarantors as to English law A13.7.1 Cleary Gottlieb Steen & Hamilton LLP City Place House 55 Basinghall Street London EC2V 5EH United Kingdom
To the Dealers and the Trustee To the Dealers and the Trustee as to English law as to Kazakh law Allen & Overy LLP GRATA Law Firm One Bishops Square 104, M. Ospanov Street Almaty, 050020 London E1 6AD Republic of Kazakhstan United Kingdom Level: 4 – From: 4 – Thursday, May 13, 2010 – 13:06 – eprint6 – 4221 Section 10
AUDITORS To the Issuer To the Guarantors PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Kazakhstan 1 Embankment Place 29/6 Satpaev Avenue London WC2N 6RH Hyatt Regency Hotel United Kingdom Office Tower, 4th Floor Almaty 050040 Kazakhstan
DEALERS Crédit Agricole Corporate and Investment Bank Deutsche Bank AG, London Branch Broadwalk House Winchester House 5 Appold Street 1 Great Winchester Street London EC2A 2DA London EC2N 2DB
Morgan Stanley & Co. International plc Natixis 25 Cabot Square 30 avenue Pierre Mendès France Canary Wharf 75013 Paris London E14 4QA France
Nomura International plc Société Générale Nomura House 29 Boulevard Haussmann 1, St Martin’s-le-Grand 75009 Paris London EC1A 4NP France
The Royal Bank of Scotland plc 135 Bishopsgate London EC2M 3UR Level: 4 – From: 4 – Thursday, May 13, 2010 – 13:06 – eprint6 – 4221 Section 10
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