9th Apr 2009 17:30
9 April 2009
Kazakhmys PLC ('the Company')
ANNUAL FINANCIAL REPORT
In accordance with LR 9.6.1, Kazakhmys PLC has today submitted two copies of the following documents:
- Annual Report and Accounts for the year ended 31 December 2008
- Notice of Annual General Meeting 2009
- Form of Proxy relating to the Annual General Meeting 2009
to the UK Listing Authority and will shortly be available for inspection at the UK Listing Authority's Document Viewing Facility, which is situated at:
Tel. No. (0) 20 7066 1000
The Annual Report and Accounts for the year ended 31 December 2008 and Notice of Annual General Meeting 2009 are available on the Company's website at www.kazakhmys.com
In compliance with DTR 6.3.5, the following information is extracted from the Annual Report and Accounts for the year ended 31 December 2008 ('2008 Annual Report and Accounts') and should be read in conjunction with Kazakhmys PLC's Trading Update announcement issued on 5 March 2009 and Preliminary Announcement issued on 31 March 2009. Together these constitute the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full 2008 Annual Report and Accounts and page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the 2008 Annual Report and Accounts.
Directors' Responsibility Statement
The following statement is extracted from page 69 of the 2008 Annual Report and Accounts.
"The Directors confirm to the best of their knowledge that:
• the consolidated financial statements have been prepared in accordance with International Financial Reporting Standards;
• the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and
• the Annual Report and Accounts includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face."
Risk Factors
The following description of Risk Factors is extracted from pages 48 to 50 of the 2008 Annual Report and Accounts.
"Managing Group risk
Kazakhmys has significantly improved its risk framework over the past few years, with good progress being made in better understanding and managing the Group's significant risks. Overall management of these risks is vested in the Board, with the Audit Committee having delegated authority for reviewing the Group's risk management framework. Kazakhmys has a risk management system in place to support the identification and management of the Group's significant risks. The Group's approach to internal control is business risk driven, with emphasis on both business and financial risks as explained in the Governance Framework on pages 54 to 59.
The following, which include two new risks: assets controlled by third parties and liquidity risk, represent the significant risks identified by Kazakhmys that could materially affect the Group's financial condition, performance, strategies and prospects. There may be other risks unknown, or currently believed immaterial, by Kazakhmys which could turn out to be material. These risks should be carefully considered in conjunction with the cautionary statement set out on the inside back cover.
Operational risks
Health, safety and the environment
Mining is a hazardous industry and failure to adopt and embed health, safety and environmental management systems could result in harm to Kazakhmys' employees, the environment and the communities in which the Group operates as well as fines and penalties and damage to its reputation. Policies and measures at a national and international level to tackle climate change will increasingly affect the business, presenting environmental and regulatory risks.
Impact
Health, safety and environmental incidents could lead to a number of adverse consequences, including harm to people, the environment and communities near Kazakhmys' operations as well as production disruption, reputational damage and financial loss.
Action
Kazakhmys recognises that the highest standards of health, safety, environmental and community practices are vital to its success, and are a key responsibility of all employees. The Group's policies and procedures in these areas are designed to identify relevant risks and opportunities and provide a clear framework for doing business. Further details are set out in the Corporate Responsibility Report commencing on page 34.
Business interruption
The business of mining, smelting and refining metals and the production of power involves a number of risks and hazards, including, but not limited to, geological and technological challenges, weather and other natural phenomena such as flood and earthquake, equipment failure and loss of key inputs such as coal, which can cause material mine or plant shutdowns or periods of reduced production.
Impact
Any disruption to operational activities could have a negative impact on the Group's profitability and cash flows, and may require the Group to make large unplanned capital expenditures. In addition to revenue losses, long-term business interruption could result in a loss of customers.
Action
Work is being carried out across the Group, with the support of appropriate in-house and third party specialists, to address operational risk issues. A combined property damage and business interruption catastrophic insurance programme is in place to mitigate the financial impact of a major incident at the Group's main concentrating, smelting and refining facilities, and power stations.
Assets controlled by third parties
Some Kazakhmys Group assets are managed by third parties under management service agreements. Management of these assets may not comply with the Group's operating standards, controls and procedures.
Kazakhmys also holds a 26% investment in ENRC PLC. The business and financial performance of this investment is not controlled by the Group.
Impact
Failure to adopt equivalent standards, controls and procedures at these third party managed businesses could lead to higher costs, reduced output and an adverse impact on Kazakhmys' results and reputation.
Decisions made by the board of ENRC PLC could have a material impact on the reported earnings of Kazakhmys. Furthermore, changes in market or macroeconomic conditions could impact the cash flows and the valuation of Kazakhmys' investment in ENRC PLC.
Action
Management service agreements entered into with third parties contain clear business objectives and require that an appropriate level of standards, controls and procedures is maintained. The operation of assets controlled by third parties is monitored on an ongoing basis including dialogue with the management of the third parties.
Kazakhmys monitors the business and financial performance of its 26% investment in ENRC PLC. The Group has the ability to exercise its rights as the single largest shareholder of ENRC PLC to influence the strategic decisions of ENRC PLC.
New projects
The identification and development of new projects involves many risks including geological, engineering and regulatory risks. If the Group fails to adopt an appropriate procurement and project management strategy, it may experience delays to project schedules and cost. Regulatory risks include failure to obtain and maintain applicable permits, licences or approvals from the relevant authorities to carry out or operate certain works.
There are numerous uncertainties in estimating mineral reserves. Reserves are estimated using available geological, technical and economic information. The process involves a number of informed judgements and assumptions that are valid at the time but may change when new information becomes available.
Impact
Projects may fail to achieve the desired economic returns due to an inability to recover mineral reserves and higher than expected capital and operating costs. Changes in reserves could result in asset write-offs, negatively impacting the Group's financial performance.
Action
Prior to an investment decision being made, certain activities are performed including, where appropriate, feasibility and other technical studies. The Group ensures that sufficient expertise, from both in-house and third party specialists, is utilised on projects throughout their life cycle. Furthermore, there are procedures in place addressing areas such as budgeting and management of capital expenditure projects.
Political risk
Most of the Group's mining and power operations are in Kazakhstan. Accordingly, the Group is substantially dependent on the economic and political conditions prevailing in Kazakhstan. As Kazakhstan has a relatively short history as an independent nation, there remains the potential for social, political, economic, legal and fiscal instability.
Impact
Political instability or social unrest may lead to a change in Government policy, which could result in the supportive business environment in Kazakhstan deteriorating. Changes to Kazakhstan's property, tax or mining regimes or other changes that affect the supportive business environment in Kazakhstan could negatively affect the Group's business, financial position and performance.
Action
Kazakhstan's Government has actively pursued a programme of economic reform, helping to make it one of the most politically stable and economically developed countries in Central Asia. While a number of former Soviet republics have experienced periods of political instability, this has not been the case for Kazakhstan. The Board continues to view the political, social and economic environment within Kazakhstan favourably, and looking forward, remains optimistic about the conditions for business in the region.
Subsoil use rights
In Kazakhstan and certain other countries in which the Group operates, all subsoil reserves belong to the State. Subsoil use rights are not granted in perpetuity, and any renewal must be agreed before the expiration of the relevant contract or licence. Rights may be terminated if the Group does not satisfy its licensing or contractual obligations, which may include periodic payment of royalties to State authorities and the satisfaction of mining, development, environmental, health and safety requirements.
Impact
As many of Kazakhstan's subsoil use laws have been adopted relatively recently, the legal consequences of a given breach may not be predictable. However, non-compliance with the requirements of subsoil use contracts could potentially lead to regulatory challenges and subsequently to fines/litigation and ultimately to the loss of operating licences. The loss of any of the Group's subsoil use rights could have a material adverse effect on its mining operations.
Action
The Group's management makes every effort to engage with the relevant regulatory authorities and ensure compliance with all relevant legislation and subsoil use contracts.
Financial risks
Commodity prices
Kazakhmys' results are strongly influenced by commodity prices which are dependent on a number of factors impacting world supply and demand. Due to these factors, commodity prices may be subject to significant fluctuations from year to year. The Group's normal policy is to sell its products under contract at prices determined by reference to prevailing market prices on international global metal exchanges.
Commodity price fluctuations can also have an impact on demand for specialist staff, equipment, materials and supplies in the mining sector, which can cause skills and material shortages and create cost pressure on the Group's operating and capital costs, which affect financial performance.
Impact
Commodity prices can fluctuate widely and could have a material impact on the Group's asset values, revenues, earnings and cash flows. In addition, commodity price increases could cause supply or capacity constraints in areas such as specialist staff or mining equipment.
Action
The Group keeps under regular review its sensitivity to fluctuations in commodity prices, and a sensitivity analysis showing the impact on profits of a 10% movement in commodity prices is set out on page 25. The Group does not as a matter of course hedge commodity prices, but may hedge a proportion of future cash flows of certain commodities where the Board determines it is in the Group's interest.
Liquidity risk
The Group is exposed to liquidity risks, including risks associated with refinancing borrowings as they mature, the risk that borrowing facilities are not available to meet cash requirements, and the risk that financial assets cannot readily be converted to cash without the loss of value.
Impact
Failure to manage financing risks could have a material impact on the Group's cash flows, earnings and financial position as well as reducing the funds available to the Group for working capital, capital expenditure, acquisitions, dividends and other general corporate purposes.
Action
The Group manages liquidity risk by maintaining adequate committed borrowing facilities and working capital funds. The Board monitors the net debt level of the Group taking into consideration the expected outlook of the Group. Further details are set out in the Financial Review on page 46.
Taxation
As the tax legislation in Kazakhstan has been in force for a relatively short period of time, tax risks in Kazakhstan are substantially greater than typically found in countries with more developed tax systems. Tax law is evolving and is subject to different and changing interpretations, as well as inconsistent enforcement. Tax regulation and compliance is subject to review and investigation by the authorities who may impose severe fines, penalties and interest charges.
Impact
The uncertainty of interpretation and application, and the evolution, of tax laws create a risk of additional and substantial payments of tax by the Group, which could have a material adverse effect on the Group's cash flows, earnings and financial position.
Action
The Group makes every effort to comply with tax legislation, and works closely with the tax authorities to ensure compliance. Further details are set out in the Financial Review on page 44."
Related Party Transactions
The following description of related party transactions is extracted from pages 126 to 127 of the 2008 Annual Report and Accounts.
"(a) Transactions with related parties
Transactions between the Company and its subsidiaries, which are related parties of the Company, have been eliminated on consolidation and are not disclosed in this note. Details of transactions between the Group and other related parties are disclosed below.
The following table provides the total amount of transactions which have been entered into with related parties for the relevant financial period:
|
$ million |
Sales to related parties |
Purchases from related parties |
Amounts owed by related parties |
Amounts owed to related parties |
|
Companies related to the Chairman |
||||
|
2007 |
- |
806 |
- |
- |
|
Companies under trust management1 |
||||
|
2008 |
14 |
11 |
37 |
1 |
|
2007 |
7 |
7 |
12 |
1 |
|
Other companies1 |
||||
|
2008 |
4 |
48 |
13 |
9 |
|
2007 |
2 |
31 |
4 |
3 |
1 A provision of $25 million (2007: $28 million) has been set against the balance.
(i) Government
On 24 July 2008, the Company issued 80,286,050 ordinary shares of 20 pence each to the Government, thereby making the Government a 15% shareholder of the Company and a related party with effect from this date.
Throughout the normal course of business, the Group conducts transactions with entities controlled by the Government. The principal activities relate to the payment of electricity transmission fees, use of railway infrastructure and payments to tax authorities. Transactions between the Group and Government departments and agencies are considered to be related party transactions unless they meet all of the following criteria:
they were done in the ordinary course of business of the Government department and/or company; there is no choice of suppliers; and they have terms and conditions (including prices, privileges, credit terms, regulations, etc) that are consistently applied to all entities, public or private.The Group did not have any non-arm's length or privileged transactions with entities controlled by the Government.
(ii) Option agreement with Chairman
Following approval of the transaction from the independent shareholders on 19 October 2007, and receipt of regulatory approval from the Government, the Group exercised the call option over Vladimir Kim's interest in Eurasia Natural Resources Corporation PLC (ENRC) for a total consideration of $806 million on 26 October 2007. This represented 100% of the initial investment of $751 million plus a 10% margin (reflecting the risk of the initial investment) and the actual financing and transaction costs incurred by Vladimir Kim less any dividends paid to him as a result of holding the stake.
(iii) ENRC
The Group received a dividend of $38 million from ENRC, the associated undertaking, in November 2008.
(iv) Companies under trust management agreements
The Group operates a number of companies under trust management agreements with local and state authorities. The activities include heating distribution systems, road maintenance and aviation services. The purpose of these agreements is to provide public and social services without any material financial benefit for the Group. Transactions between the Group and these companies are conducted on an arm's length basis.
(v) Other companies
Transactions with other companies primarily relate to the provision of goods and services, on an arm's length basis, with companies whose boards include members of senior management from the Group's subsidiaries.
(b) Terms and conditions of transactions with related parties
Prices for related party transactions are determined by the parties on an ongoing basis depending on the nature of the transaction."
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