Audited Results 2007 - Part 1

6th Mar 2008 07:03

Kazakhmys PLC06 March 2008 Part 1 6 March 2008 KAZAKHMYS PLC AUDITED RESULTS FOR THE YEAR ENDED 31 DECEMBER 2007 FINANCIAL HIGHLIGHTS • Solid financial results driven by strong commodity prices o EBITDA excluding special items increased to $2,336 million o EPS based on Underlying Profit up to $3.02 per share o Free Cash Flow of $895 million • Final dividend announced of 27.4 US cents per share, an increase of 7% o Total dividend of 41.0 US cents per share (2006: 38.5 US cents per share) • Cash return to shareholders of over $800 million over the year: o Including share buy-back programme of $390 million (completed in January 2008) o Special dividend of $235 million paid in October 2007 OPERATIONS AND STRATEGY • Cathode production from own material 341 kt o By-product production remains firm • Key first acquisitions: o 14.6% stake in ENRC PLC - currently valued at $4.2 billion o Ekibastuz power plant o Eurasia Gold - Dostan-Temir petroleum exploration • Major growth projects: o Boschekul on track for pre-feasibility completion end 2008 o Aktogay oxide feasibility to complete 2008 • Asset optimisation: o Abyz and Akbastau commenced operations in January 2008 o New concentrator and two concentrator upgrades completed o Operational challenges in 2007 but improvements being made ------------------------------ ------------- -------------$ million (unless otherwise stated) Year ended Year ended 31 December 31 December 2007 2006------------------------------ ------------- -------------Revenues 5,256.6 5,046.5Earnings: Profit before taxation, finance items and negative goodwill 2,048.4 2,071.6 Profit before taxation 2,025.9 2,167.8 EBITDA excluding special items (1) 2,336.3 2,308.4 Underlying Profit 1,409.5 1,402.7 EPS: Basic and diluted ($) 3.04 2.99 Based on Underlying Profit (2) ($) 3.02 3.00 Free Cash Flow (3) 895.3 1,327.2 ROCE (4) (%) 30.9 49.7 Cash cost of copper after by-product credits (5) (USc/lb) 58.9 31.5------------------------------ ------------- ------------- (1) Reconciliation of EBITDA excluding special items to profit before taxation, finance items and negative goodwill is found in note 4(a). (2) Reconciliation of EPS based on Underlying Profit is found in note 8(b). (3) Net cash flows from operating activities less sustaining capital expenditure on tangible and intangible assets. (4) Profit before taxation, finance items and negative goodwill over capital employed (borrowings and total equity, including minority interests). (5) Total of operating costs as presented in the income statement less by-product revenues, over the volume of copper cathodes and rods sold. All references to $ refer to US dollars unless otherwise stated. Vladimir Kim, Chairman of Kazakhmys PLC, said: "2007 was characterised by someimportant steps in the delivery of our strategy, but the year also posedsome operational challenges, which are being addressed. We believe that thereare further exciting opportunities to deliver on our strategy in the comingyear, from our existing assets, our growth projects and diversification in theregion. The underlying strength of demand from the newly industrialising partsof the world, such as our neighbour China, leads us to believe that the longterm outlook for metal demand and resources remains positive. We are,therefore, confident about the prospects for the Group." For further information please contact: ------------------------------- -------------------John Smelt, Head of Corporate Communications Tel: +44 20 7901 7882 Tel: +44 787 964 2675Olga Nekrassova, Financial Analyst (Russian language) Tel: +44 20 7901 7814------------------------------- -------------------Kazakhmys PLC------------------------------- ------------------- David Simonson Tel: +44 20 7653 6620Tom Randell Tel: +44 20 7653 6620Leonid Fink Tel: +44 20 7653 6620------------------------------- -------------------Merlin------------------------------- ------------------- - ends - NOTES TO EDITORS Kazakhmys PLC is the largest copper producer in Kazakhstan and one of theleading copper producers in the world. Kazakhmys is a fully integrated copperproducer from mining ore through to the production of finished copper cathodeand rod. The Group produces significant volumes of other metals as by-products,including zinc, silver and gold. Existing operations include 20 open pit andunderground mines, 9 concentrators, two copper smelting and refining complexes,a copper rod plant, a zinc plant and a precious metals refinery. Production isbacked by a captive power supply and significant rail infrastructure. Kazakhmysalso owns MKM, a copper products fabrication company in Germany, and has Goldand Petroleum Divisions with assets in Kazakhstan and other parts of CentralAsia. The Group's strategic aim is to diversify and participate in thedevelopment of the significant natural resource opportunities in Central Asia. CHAIRMAN'S STATEMENT 2007 was characterised by some important steps in the delivery of our strategy,but the year also posed some operational challenges. We added two new divisionsto our business, gold and petroleum, and after the year end we announced thepurchase of a substantial power business, an area in which we already operate.We also acquired a 14.6% stake in ENRC PLC, currently valued at $4.2 billion. Our strategy remains consistent with that set out at the time of Listing inOctober 2005: to create value by optimising our existing assets, completing ourgrowth projects and taking advantage of natural resource opportunities in theregion. STRATEGY: ASSET OPTIMISATION The optimisation of our existing assets will be through improved efficiency andtargeted output expansion. A major focus of the Group will be to ensure thatthe issues which led to reduced production in 2007 are addressed over the courseof 2008. The demand for commodities and the continued strength of global mining hascreated inflationary pressures in the mining industry, which have been felt inKazakhstan. Management will be implementing initiatives to protect profitmargins and maintain our competitive position as a lowest cost quartile copperproducer. STRATEGY: GROWTH PROJECTS On our major growth projects, in July 2007 we engaged Fluor to act as consultingengineers for the pre-feasibility study at Boschekul. Fluor have now also beenappointed to run the pre-feasibility study at Aktogay, for both the oxide andsulphide deposits. These projects remain on track and in line with the guidancegiven in our 2007 Interim Results. STRATEGY: DIVERSIFICATION In April 2007 we purchased an exploration petroleum block in western Kazakhstanand are now undertaking seismic and drilling work. In July 2007 we purchasedEurasia Gold Inc. which has now been fully integrated as Kazakhmys Gold.Kazakhmys Gold has some exciting development projects in Central Asia, which areprogressing to schedule. In October 2007, we became the owner of an 18.8% interest in ENRC PLC, for $806million, and after its successful listing in early December, we now own a 14.6%interest in this business. The stake is currently worth $4.2 billion, a 421%capital return on our investment, representing £4.64 per Kazakhmys share. Thisunderlines our ability to source exciting transactions in the region, creatingvalue for our shareholders. Since the year end, we announced the purchase of the Ekibastuz Power Plant andthe Maikuben coal field which, on completion in the first half of 2008, willbecome our newly formed Kazakhmys Power Division. This is the largest privatelyowned power business in Kazakhstan and it has significant potential to increasecurrent output through refurbishment. In a region with such strong economicgrowth, and likely rising power prices, the ownership of this business offersmany commercial opportunities and advantages, such as partnerships and off takeagreements. It also provides a hedge against rising power prices for our ownfuture needs. In considering these transactions and reviewing and setting the strategy of theGroup, we have had the benefit of the advice and considerable experience of ourBoard. I should like to thank them for their input and commitment over the year.We place a strong emphasis on sound corporate governance and our Board is thekey to ensuring that this commitment is fully observed. DIVIDENDS AND RETURNS TO SHAREHOLDERS Metals prices were generally firm over the year, leading to strong cash flows,particularly in the first six months. In September 2007, given the unusuallyhigh metals prices and the lower than anticipated spend on diversification up toJune 2007, the Board recommended a return of funds to shareholders. Thisconsisted of a $390 million share buy-back programme and a special dividendpayment of $235 million, or 50.0 US cents per share. The buy-back commenced atthe end of October 2007 and was completed within three months, well within thetimetable we had outlined. The Board is recommending an ordinary final dividend of 27.4 US cents per sharewhich, combined with the ordinary interim dividend, represents a total paymentover the year of 41.0 US cents per share. This is an increase of 7% on lastyear's full dividend of 38.5 US cents per share. This reflects our confidence inour core business and our view that the outlook for commodity prices shouldremain favourable in the foreseeable future. Kazakhmys listed on the London Stock Exchange in October 2005, at 540 pence pershare, raising $491 million. The total returned in cash to shareholders sinceListing, from dividends and the share buy-back programme, amounts to $1,163million. The share price currently stands at £17.33 representing a total capitalreturn since Listing of 221%. In addition to our Listing in London, approximately 2% of our shares are tradedon the Kazakh stock exchange. We are pleased to be part of the Kazakh exchange,the success of which is important to the development of businesses and theeconomy in Kazakhstan. CUSTOMERS Around 80% of our copper is sold under annual contracts with long standingcustomers, principally in Europe and China. Our business relies on these strongrelationships and I should like to thank our customers for their continuedsupport over the year. CORPORATE RESPONSIBILITY The success of our Group is principally due to the efforts of our employees andon behalf of the Board I should particularly like to thank them for theirsupport over the past year. We are committed to the welfare of our workforce andthose associated with the Group, including the local communities around ouroperations. Stability and development in the communities around us is part of our duty toKazakhstan and this will contribute to the success of the Group. In January2008, we were privileged to host the first national conference on corporatesocial responsibility in Kazakhstan, chaired by the President of Kazakhstan, atour operational headquarters in Zhezkazgan. Hosting the event at Zhezkazganreflected the lead that we have taken in social development within Kazakhstan, arole which it is important for us to maintain. Health and safety remains a key issue for the Group. The number of fatalitiesfell from 32 in 2006 to 23 in 2007, maintaining a downward trend set over thepast six years. Significant improvements have been made in several areas, suchas roof falls. It will take some time to ensure that the culture and behaviour,throughout all our operations, is based on a principle of safety first, but weare creating this environment as we continue to target zero fatalities. OUTLOOK We have continued to see strong demand for our products. Events in financialmarkets have given rise to uncertainty over the strength of western economies,but while there may be periods of weakness, the underlying strength of demandfrom the newly industrialising parts of the world, such as our neighbour China,leads us to believe that the long term outlook for metal demand and resourcesremains positive. We are, therefore, confident about the prospects for theGroup. CHIEF EXECUTIVE'S REVIEW In 2007 total ore output in our core copper business was 34.0 MT, compared to39.2 MT in 2006. The average copper grade of 1.22% was slightly higher than2006, at 1.17%, though this was largely due to the reduced output from theZhezkazgan Complex and the low grade Kounrad mine, which was closed for ascheduled push back in 2007. Copper cathode production from own ore was 341 kt,a decline of 7%, reflecting the reduction in ore output. In 2007, 39.0 kt ofcathode was produced from purchased concentrate, compared to 36.8 kt in 2006. Zinc metal in concentrate production was 132.8 kt, compared to 129.1 kt, mainlyas a result of the increased output of zinc bearing ores, particularly fromKosmurun mine. By-product gold production, excluding tolled material, increasedto 113.4 koz, benefiting from increased grades and higher output from theKosmurun mine. Silver production fell to 19.0 Moz from 21.5 Moz, principally asa result of the decline in production of silver bearing ores in the ZhezkazganComplex and East Region. In September 2007 we reported a flood at South Mine, in the Zhezkazgan Complex.This prevented ore output from the mine for most of the fourth quarter, but themine became fully operational, as anticipated, in December. The decline in oreoutput was also the result of a reduction in equipment availability across allregions. As previously mentioned, longer lead times have been experienced inseveral areas, due to the strength of the mining sector. Improvements were seentowards the year end in the deliveries of ordered equipment, in particular,larger items. Our own management of equipment and ordering is a key area ofmanagement focus to enable us to cope better with this environment. Copper prices remained firm in 2007, with an average realised price of $7,175per tonne, an increase of 2% on 2006. The average price received for silver andgold in 2007, rose by 17% and 14%, respectively. Zinc prices increased by only3% in 2007 compared to 2006, as China increased output. The change in commodityprices more than offset the decline in output, leading to an 8% increase inrevenue in Kazakhmys Copper, to $3.6 billion. Output was reduced at MKM, as thebusiness successfully focused on higher margin products, so that Group revenuerose by 4% from $5.0 billion in 2006 to $5.3 billion in 2007. EBITDA for the Group, excluding special items, was $2,336 million, an increaseof 1.2% from 2006. This represented a Group EBITDA margin of 44% with 62% forKazakhmys Copper, reduced at Group level by the lower margin of MKM. ForKazakhmys Copper, EBITDA, excluding special items, saw a slight decline to$2,233 million, from $2,296 million in 2006, as rising commodity prices wereoffset by inflationary cost pressures, higher prices on purchased concentrateand the impact of fixed costs on reduced production levels. Earnings per share,based on Underlying Profit, rose slightly from $3.00 per share in 2006 to $3.02per share in 2007. EPS benefited from a pre-listing dividend of $93.9 million,received from the holding in ENRC, and a lower tax rate. These were partlyoffset by the impact of tenge strength against the US dollar, which created aforeign exchange loss for our liquid funds on deposit, held by our Kazakhsubsidiaries in US dollars, though this has no impact on actual cash. Cost of production in 2006, from our own material after by-product credits, was9.0 US cents per pound. This was unusually low, due to the strong increase inby-product revenues, compared to inflation. In 2007 it returned to 32.9 UScents per pound, in line with the more standard levels seen in previous years.During 2007, cost inflation growth exceeded the rise in by-product credits, theformer being influenced by several issues, including transportation, fuel,labour and administrative costs. Our costs remain in the lowest quartile ofcopper producers globally. With high commodity prices and a low cost of production, Free Cash Flow remainedstrong at $895 million over 2007. This was a decline on 2006, principally dueto the timing of tax payments and an increase in sustaining capital expendituretargeted at upgrading our equipment. A programme of efficiency measures is being carried out to offset inflationarypressures. This includes an increase in the number of concentrators, to reducethe cost of transporting of ore, and upgrades to the existing concentrators. In2007 the construction of the Nurkazgan concentrator was completed and upgradeswere carried out at the Nikolayevsky and Karagaily concentrators. During 2008four other concentrators (Zhezkazgan, Orlovsky, Irtyshsky and Belousovsky) willcommence planned upgrades, which will focus on improving current recovery ratesand significantly increasing ore capacity in total. Further new concentratorsare being planned, including Kosmurun-Akbastau. In 2007 the management andmaintenance of our railway network was outsourced, though we retain ownership ofthe assets. Some long distance road haulage was also outsourced. We are alreadyseeing benefits in management efficiency and tariffs. There will be furtherinvestment in the transportation and logistics systems in 2008, in order toimprove efficiency and control costs. The Group has two major growth copper projects at Boschekul and Aktogay. In ourInterim Results we announced the appointment of Fluor to act as consultants forthe pre-feasibility study at Boschekul and they have now also been appointed atAktogay. The timetable for Boschekul remains consistent with previous guidance.The pre-feasibility study is due to be finished at the end of 2008 and thefeasibility study at the end of 2009. It is anticipated that first oreproduction will commence at the end of 2011, with most of the capex fallingbetween 2009 and 2011. At Aktogay there is a large sulphide and a smaller oxide deposit, both of whichare currently in pre-feasibility stage. The oxide pre-feasibility study shouldcomplete first, during 2008, and the sulphide pre-feasibility in H1 2009. Along with the major long term growth projects at Boschekul and Aktogay, thereare a number of smaller near term projects being implemented in Zhezkazgan andKaraganda. These should keep core production stable and offset grade and tonnagedeclines in the more mature mines. In January 2008, shortly after the year end,mining commenced at the Abyz and Akbastau mines. The North Nurkazgan open pitmine in the Karaganda Region and the Taskura open pit mine in the ZhezkazganComplex are scheduled to commence production in 2008. Further similar projectsare scheduled for the next three years. Capital expenditure in 2007 was $493.0 million, excluding the cost of acquiringEast Akzhar petroleum exploration block. Capital expenditure for KazakhmysCopper in 2008 is likely to be slightly higher, with further infrastructurespend, and additional spending of $90 million on the Petroleum and Golddevelopment programmes. Significant spending on our large growth projects, atBoschekul and Aktogay, is unlikely to commence until 2009. At the time of Listing in October 2005 one of our main strategic aims was todiversify our asset base and to take advantage of the many resourceopportunities available in the Central Asia region. Since the beginning of 2007we have started to see significant delivery of our diversification programme. In April 2007 we purchased the 602km2 oil and gas exploration block at EastAkzhar, in western Kazakhstan. Drilling has commenced on the shallow section andwill continue throughout the first half of 2008. The main part of theexploration activity is in the deeper section, where 3D seismic activity willstart in 2008 and continue throughout the year. In July 2007 we purchased Eurasia Gold Inc., then a Canadian listed preciousmetals company. Now renamed Kazakhmys Gold, the annual production for 12 monthsin 2007 was 52 koz, of which 33 koz is attributable to Kazakhmys. This wasslightly ahead of management expectations, both at the start of the year and atthe time of acquisition. Kazakhmys Gold has three major development projects, the Bozymchak deposit ofgold, copper and silver in Kyrgyzstan, the Mizek sulphide gold and copperdeposits in Kazakhstan and the Akjilga silver and copper exploration deposit inTajikistan. Worley Parsons have been appointed to complete the pre-feasibilitystudies at both Bozymchak and Mizek, which should be finished during 2008. Anexternal review of the reserve base has been carried out, as a result of whichthe declared measured and indicated gold equivalent resources on a JORC basishave increased from 1.9 Moz at the time of acquisition, to 2.3 Moz. Drilling iscontinuing at Bozymchak and Mizek, as both assets move towards feasibilitystudy, and this may lead to further increases in the resource base. In October 2007 shareholders approved the exercise of our option to purchase an18.8% holding in ENRC PLC, for a purchase price of $806 million. ENRCsubsequently listed on the London Stock Exchange and with the issue of newequity, our interest is now 14.6%. This has clearly been a very successfulinvestment, but the Board will continue to monitor the holding to ensure thatthe capital provides a good return for our shareholders. Since the period end, we have announced the acquisition of the Ekibastuz powerplant and the accompanying coal mine at Maikuben, for a total consideration ofup to $1.5 billion. The project offers significant potential to increase outputand to develop commercial relationships through surplus power generation. Asannounced, the project will require a capital investment of around $650 million,which is likely to be spread over the years 2008 to 2012. Extensive work was done by the Soviet State institutes on defining mineral resources in Kazakhstan. Technology has developed over the past 20 years and we believe that there is scope to re-evaluate some of this data with new exploration tools. This will be reviewed over the course of the year to see whether it can provide additional opportunities. There will be nominal spend at this stage. Progress was made on health and safety in 2007, but there is much more still todo. The total number of fatalities in 2007 was 23, a significant reduction from32 in 2006. I regret to announce that there have been six fatalities in thefirst two months of 2008, which are currently being investigated. As mentionedat the time of our Interim Results, we saw a significant improvement infatalities from roof falls, where the fatality rate decreased from 14 in 2006 tofour in 2007. This was a result of changing methods of inspecting and securingthe roof. A second major source of fatalities has been from electricalequipment. A visit was made to mines in South Africa in 2007, following whichrevised working practices have been successfully introduced. We are currently completing a new in-house training school which is principallyto develop operational skills, but will also feature and benefit health andsafety procedures. There will undoubtedly be challenges in 2008, though we anticipate that coppercathode production should be at least the level of 2007. As mentioned in theChairman's Statement we believe that there are further exciting opportunities todeliver on our strategy in the coming year, from our existing assets, our growthprojects and diversification in the region. MARKET OVERVIEW COPPER The copper market during 2007 continued to show similar strength to thatexperienced in 2006 with the average LME price remaining significantly abovelong-term historic prices. The year on year average copper price rose 6% from$6,731 per tonne to $7,126 per tonne. At the start of 2007, copper traded below $6,000 per tonne, partly as a resultof negative US employment and housing data, and also as buyers reducedinventories. Copper prices rebounded at the end of the first quarter on the backof continued strong Chinese demand, tightness of supply, large inflows ofinvestment fund capital into base metals, and a weakening US dollar. The copper price fell towards the end of 2007 as factors such as the US subprime mortgage lending intensified concerns about the health of the worldeconomy. This factor, amongst others, is expected to cause continued volatilityin copper prices during 2008 as low inventory levels and continued uncertaintyover the US and global economic outlook persist into the new year. Medium-termpricing of copper is largely dependent on whether demand growth from China andAsia is sufficient to offset declines in Western European and US markets and theextent to which supply increases in response to recent price strength. The global consumption of refined copper is estimated to have increased by 3.4%in 2007 to 18.1 MT with production estimated to have grown 5.2% to 18.2 MT.China remains the world's main growth driver with 2007 refined copperconsumption estimated at 4.6 MT. This compared to estimated Chinese internalproduction of 3.5 MT resulting in an import requirement of 1.1 MT. In 2008,Chinese consumption is expected to increase to 4.9 MT, but expectations ofgreater internal production may see import requirements reduce to 0.8 MT. In Western Europe, Kazakhmys' other main market, total refined copper productionwas estimated to be 1.8 MT and consumption 3.7 MT resulting in an importrequirement of 1.9 MT. In 2008, the consumption level and import requirements inWestern Europe are forecast to remain broadly unchanged. ZINC Average zinc prices fell by 1% to $3,250 per tonne during 2007 mainly due toChina's expansion of zinc production capacity in response to the high zincprices seen in 2006. This meant China, the world's largest zinc producer,shifted from a net importer to become a net exporter in 2007. There was a reduction in Chinese exports during March 2007, helping zinc pricesrecover from the downward pressure at the start of 2007. Prices howevercontinued to trend down later in the year due to weaker market conditions. GOLD AND SILVER Gold prices were strong in 2007, with average gold prices increasing by 15% to$696 per troy ounce with gold's safe haven status returning during the year asthe credit issues intensified in July. The interest rate cut by the US FederalReserve, market volatility, and the decline of the US dollar pushed the goldprice to record levels later in the year. Silver prices were also strong in 2007 with average silver prices increasing by17% to $13.4 per troy ounce. In 2008, the supply of silver is expected to expandfaster than demand which may create a source of downward pressure on prices. SALES CONTRACTS In 2007, Kazakhmys utilised its proximity to China and good infrastructure linksto Europe to sell copper into both markets. The majority of sales are made under annual contracts on a fixed premium to theprevailing LME price. Volumes above this level are sold on the spot market. Thispattern will continue in 2008 with annual contracts already signed with acombination of Chinese and European customers. The by-products produced by Kazakhmys Copper are principally sold under annualcontracts with the remainder sold on the spot market. Kazakhmys Gold sold all ofits production in 2007 as gold cathode sediment for processing into gold bullionunder an annual contract to Europe. This arrangement is not expected to changein 2008. SENSITIVITY ANALYSIS ON PRICES AND GRADES Fluctuations in commodity prices and ore grade can have a significant impact onKazakhmys Copper's revenues and earnings. Any changes in commodity prices have adirect effect on the revenues of the Kazakhmys Copper business, withconsequential impacts on earnings and the cash cost of copper resulting fromchanges in by-product credits. Changes in ore grades have a direct effect on the production figures of theKazakhmys Copper business. Revenues and earnings are directly impacted byproduction volumes, as is the cash cost of copper since the majority of costsare fixed in nature. The approximate effects on profit before taxation, finance items and negativegoodwill resulting from a 10% movement in commodity prices are shown below.Prior year commodity prices and ore grades are also provided to demonstrate thefluctuations in these variables. These sensitivities are based on 2007 figuresand assume that all other variables remain constant. They are estimatedcalculations only. KAZAKHMYS COPPER COMMODITY PRICE SENSITIVITY ---------------- -------------- -------------- --------- ---------- Average Average realised price realised price during year during year ended ended 31 December 31 December Impact of 10% 2007 2006 movement on profit(1) $ million % movement ---------------- -------------- -------------- --------- ----------Copper 7,175 7,025 2 243Zinc 3,237 3,145 3 32Silver 13.27 11.41 16 21Gold 695 610 14 6---------------- -------------- -------------- --------- ---------- (1) Profit before taxation, finance items and negative goodwill. KAZAKHMYS COPPER ORE GRADE MOVEMENT Average ore Average ore------------------------- grade during grade during year ended 31 year ended 31 December 2007 December 2006 ----------------- -----------------Copper (%) 1.22 1.17Zinc (%) 3.87 4.28Silver (g/t) 20.52 20.69Gold (g/t) 0.90 0.77------------------------- ----------------- ----------------- OPERATING REVIEW SUMMARY OF RESULTS Strong commodity prices during 2007, which remained significantly above theirlong term historical averages, have resulted in increased revenues and EBITDAexcluding special items of 4.2% and 1.2% respectively, to $5,256.6 million and$2,336.3 million. Sales volumes of copper cathodes and copper rods were up 4.6%(excluding tolling sales) despite production of copper cathodes falling 6.2% to380 kt in 2007. Despite adverse cost pressures existing in the mining sector inKazakhstan, the Group has seen solid stability in earnings in 2007. 2007 has seen the Group delivering on its strategy of growth throughdiversification as evidenced by the acquisitions of the oil and gas explorationlicence in Kazakhmys Petroleum for $450.0 million, Kazakhmys Gold for $270.9million, as well as acquiring a 14.6% interest in ENRC for $806.3 million. At 31December 2007, the Group's investment in ENRC had a market value of over $2.4billion. After taking dividends received of $93.9 million from ENRC intoaccount, this amounts to an unrealised return of over 200% on the originalinvestment. Since the year end, the fair value of the investment has grown towell over $3 billion. The Group also undertook a share buy-back programme of$390 million, completed in January 2008, and paid a special dividend of $235million in addition to the 2006 final and 2007 interim dividends of $184.1million. The strong earnings have given rise to a healthy Free Cash Flow of $895.3million for 2007, and together with the expansion of the Group in 2007 and thecontinued strong commodity prices expected during 2008, leaves the Group wellplaced to pursue future organic growth and further acquisition opportunities. Capital employed increased in the year to $6,630.7 million from $4,169.1 millionin 2006, a 59.0% increase, primarily due to the acquisition of the 14.6%interest in ENRC which increased capital employed by $1,594.7 million, andstrong profitability of the Group which contributed a further $1,415.7 million.Given the significant increase in capital employed during the year, ROCEdecreased from 49.7% to 30.9%. SUMMARY INCOME STATEMENT -------------------------------------- -------- -------- ------- $ million 2007 2006 % change-------------------------------------- -------- -------- -------Revenues 5,256.6 5,046.5 4.2Operating costs excluding depreciation, depletion, amortisation and special items (2,920.3) (2,738.1)-------------------------------------- -------- -------- ------- EBITDA excluding special items 2,336.3 2,308.4 1.2Special items: Less: write off of property, plant and equipment (26.2) (1.4) Add/(less): gain/(loss) on disposal of property, plant and equipment 1.8 (9.6) Less: depreciation, depletion and amortisation (263.5) (225.8)--------------------------------------- -------- -------- ------- Profit before taxation, finance items and negative goodwill 2,048.4 2,071.6 (1.1)Net finance (cost)/income (22.5) 89.7Recognition of negative goodwill - 6.5--------------------------------------- -------- -------- ------- Profit before tax 2,025.9 2,167.8 (6.5)Income tax (599.2) (754.7)--------------------------------------- -------- -------- ------- Profit for the period 1,426.7 1,413.1 1.0Minority interests (11.0) (13.4)--------------------------------------- -------- -------- ------- Profit attributable to equity shareholders of the Company 1,415.7 1,399.7 1.1 --------------------------------------- -------- -------- ------- EPS - basic and diluted $3.04 $2.99 1.7--------------------------------------- -------- -------- ------- EPS based on Underlying Profit $3.02 $3.00 0.7--------------------------------------- -------- -------- ------- REVIEW OF KAZAKHMYS COPPER KAZAKHMYS COPPER PRODUCTION SUMMARY kt (unless otherwise stated) 2007 2006--------------------------------------- ------- -------Ore extraction 33,967 39,240Average copper grade (%) 1.22 1.17Average zinc grade (1) (%) 3.87 4.28 Copper concentrate 1,445.7 1,596.2Copper in concentrate 389.9 433.5 own concentrate 347.9 383.2 purchased concentrate 42.0 50.3 Copper cathodes (2) 381.2 407.0 own concentrate 340.9 368.4 purchased concentrate 39.0 36.8 tolling concentrate 1.3 1.8Copper rod 35.7 28.5--------------------------------------- ------- ------- (1) Complex ores only.(2) Includes copper used to produce copper rod. In 2007, overall cathode output was 26 kt lower than in 2006 as ore volumesfell, particularly in the Zhezkazgan Complex. Kazakhmys Copper experienceddelays in obtaining new equipment and spare parts which affected a number ofmining operations, principally the result of pressure on suppliers from thebuoyant mining sector. Kounrad, a large but low grade mine in the BalkhashComplex produced limited quantities of ore in 2007. A major waste removalproject to expose additional reserves will continue at the mine throughout 2008. The Nurkazgan concentrator was constructed in 2007 with a production ramp-up dueto occur during 2008. Whilst the concentrator was being constructed, some outputfrom the West Nurkazgan open pit mine was stockpiled. At the year end, thisstockpile totalled over 1 MT of ore. The Nikolayevsky concentrator in the EastRegion has been successfully upgraded during the year, with the aim ofincreasing recovery rates from polymetallic ores. The Zhezkazgan and Balkhash smelters both underwent several weeks of maintenanceand repair work in 2007. These smelters are old and will continue to requiremaintenance in the future, which will result in temporary disruption to cathodeoutput from time to time. Surplus capacity exists and this disruption isunlikely to impact annual production volumes. Progress has been made in developing a number of new mines and mine extensions.The North Nurkazgan open pit mine in the Karaganda Region will start output in2008 after stripping of the initial overburden is completed. The existing WestNurkazgan deposit will switch to underground production. Overburden strippingwas carried out on the deposit at Akbastau, close to the existing Kosmurun mine,with ore mining having commenced in 2008. The Abyz mine, closed for overburdenremoval throughout 2007, has reopened. The Zhezkazgan Complex has been an areaof focus as the production capacity of the existing underground mines continueto slowly decline. The Taskura open pit mine extension is planned to commenceoutput in 2008. KAZAKHMYS COPPER REVIEW BY REGION ZHEZKAZGAN COMPLEX kt (unless otherwise stated) 2007 2006--------------------------------------- ------- -------Ore extraction 24,355 27,676Average copper grade (%) 0.82 0.82 Copper concentrate 491.1 541.1Copper in concentrate 178.6 199.3 Copper cathodes(1) 187.5 221.8 of which tolling - 0.7Copper rod 35.7 28.5--------------------------------------- ------- ------- (1) Includes copper used to produce copper rod. The Zhezkazgan Complex ore output was 12% lower than in 2006, at 24.4 MT, asproduction at the mature Zhezkazgan mines fell. Annensky mine produced 3.4 MT in spite of the major collapse there late in 2006,down from 4.2 MT in the prior year. The North and South mines both experiencedshortages of equipment thereby reducing output. The South mine also sufferedflooding in September with management successfully recovering operations inDecember. The South mine's output fell from 6.8 MT in 2006 to 5.2 MT in 2007.Across the Complex, mining operations were impacted by equipment downtime causedby delays in equipment delivery and shortages of spare parts required forrepairs. The newest of the Zhezkazgan mines, Zhomart, which commenced output in April2006, recorded ore extraction volumes of 2.9 MT, up from 2.2 MT in 2006 as itcompleted its first full year of production. The Complex's average copper grades in 2007 remained at the 2006 level of 0.82%.The increased contribution of the Zhomart mine, which has an above averagegrade, offset slightly lower grades at the Complex's older mines. The Zhezkazgan Complex's reduction in ore volumes and unchanged copper graderesulted in a decrease in copper in concentrate output from 199.3 kt in 2006 to178.6 kt in 2007. This impacted production from the Zhezkazgan smelter which hadcathode output of 187.5 kt, 15% lower than in 2006. The Zhezkazgan smelterunderwent a number of repairs during 2007 and further maintenance will berequired in 2008. The copper rod facility operated at close to capacity at 36 kt as market demandwas strong. BALKHASH COMPLEX kt (unless otherwise stated) 2007 2006---------------------------------------- ------- -------Ore extraction 2,126 4,371Average copper grade (%) 1.05 0.81 Copper concentrate (1) 187.9 257.1Copper in concentrate 32.5 43.4 Copper cathodes 193.6 185.2 of which tolling 1.3 1.1---------------------------------------- ------- ------- (1) Excludes concentrate processed by third parties. Ore production at the Balkhash Complex decreased by more than 2 MT mainly due tothe scheduled push back at the Kounrad mine, which began at the start of 2007and is expected to continue throughout 2008. The Kounrad mine produced 2.3 MT ofore in 2006 and only 0.4 MT in 2007. The Shatyrkul and Sayak mines both reportedlower production in 2007 compared to 2006 due to underground development workrunning behind schedule, as a result of delays in obtaining the requiredequipment. The Complex's ore grade increased from 0.81% to 1.05% due to the reduced outputat the Kounrad mine, which has the lowest grade in the Complex. Concentrate output fell in the Balkhash Complex primarily because of lower oreoutput and the stockpiling of ore at the Nurkazgan mine in preparation for thecommissioning of the Nurkazgan concentrator. The Balkhash smelter, which processes concentrate from the East and KaragandaRegions, produced 193.6 kt of copper cathodes including tolling arrangements,8.4 kt higher than in 2006. During 2007, the Balkhash smelter underwent a numberof repairs. In 2008, further maintenance will be required which may lead totemporary disruptions to production. EAST REGION kt (unless otherwise stated) 2007 2006--------------------------------------- ------- -------Ore extraction 4,140 4,441Average copper grade (%) 2.85 2.83 Copper concentrate (1) 506.2 534.5Copper in concentrate 95.9 98.7--------------------------------------- ------- ------- (1) Excludes concentrate processed by third parties. Ore extraction in the East Region in 2007 was only 7% down on 2006 despiteshortages of mining and ore transportation equipment. The Orlovsky mine suffereda fall in ore output from 1.5 MT of ore to 1.2 MT. The average copper gradeachieved in 2007 was 2.85%, in line with that in 2006. Copper in concentrate output was 3% below the 98.7 kt produced in 2006 as aresult of the Region's lower ore production. The Nikolayevsky concentrator underwent a major planned upgrade in 2007 duringwhich the flotation section was replaced. This has improved the recovery ratesfrom complex polymetallic ore. KARAGANDA REGION kt (unless otherwise stated) 2007 2006--------------------------------------- ------- -------Ore extraction 3,346 2,752Average copper grade (%) 2.21 2.59 Copper concentrate 231.6 230.8Copper in concentrate 33.3 33.7--------------------------------------- ------- ------- Ore extraction volumes in the Karaganda Region grew by 22% to 3.3 MT asproduction from the Kosmurun mine rose from 0.9 MT in 2006 to 1.5 MT in 2007.This was partially offset by the closure of the Abyz mine throughout 2007 foroverburden removal. The Abyz mine re-opened in early 2008. Overburden stripping at the new Akbastau mine and the North Nurkazgan open pitextension made good progress during 2007 and production is expected to commencein 2008. The decrease in the Region's average copper grade to 2.21% was due to a fall ingrade in some areas of the Kosmurun mine as higher volumes of polymetalliccopper/zinc ore were mined. At present, copper/zinc ore is processed at thirdparties to maximise the combined metal recovery. KAZAKHMYS COPPER - ZINC PRODUCTION kt (unless otherwise stated) 2007 2006---------------------------------------- ------- -------Average Zinc grade (%) 3.87 4.28Zinc in concentrate 132.8 129.1Zinc metal 45.2 59.5---------------------------------------- ------- ------- Production of zinc in concentrate increased by 3% due to greater polymetallicore production at the Kosmurun mine, however the ore has a lower than averagezinc grade at 2.77%, reducing the overall zinc grade from 4.28% to 3.87%. Summer production at the Balkhash zinc metal smelter continues to be affected byits cooling capacity which resulted in the production of zinc metal beinglimited to 45 kt in 2007. As demand for zinc concentrate has remained strong, agreater volume of zinc concentrate was sold in preference to metal. A technicalreview is underway on the zinc smelter which is expected to report in the secondhalf of 2008. KAZAKHMYS COPPER - PRECIOUS METALS PRODUCTION koz (unless otherwise stated) 2007 2006--------------------------------------- ------- -------Average silver grade (g/t) 20.52 20.69Silver 18,995 21,570 own production 18,985 21,530 Tolling 10 40 Average gold grade (g/t) 0.90 0.77Gold 137.0 165.5 own production 113.4 106.9 Tolling 23.6 58.6--------------------------------------- ------- ------- The Group's precious metals refinery, located in the Balkhash Complex, recoversgold and silver from the slimes produced during the electro refining of copperand carries out toll processing of precious metal concentrates for thirdparties. Silver production from own ores reduced by 12% to 19 Moz. The lower silverproduction is due to the decline in output at the Zhezkazgan and East Regionmines, with the silver grade largely unchanged on prior year at 20.52 g/t, downfrom 20.69 g/t in 2006. Own gold production as a by-product of the copper business increased by 6% in2007 supported by an increase in production of gold bearing Kosmurun ore. Thiswas sufficient to offset the impact of the overburden removal at the high goldcontent Abyz mine. KAZAKHMYS COPPER - TRANSPORTATION AND LOGISTICS The transportation of the Group's raw materials and production represents one ofthe largest logistics operations in Kazakhstan incorporating a Group ownednetwork of over 1,000 kilometres of railway and a fleet of 100 locomotives and800 wagons. In July 2007, the Group entered into a long-term agreement with a subsidiary ofFreight Services LLP to outsource the operation and maintenance of the Group'srailways. Freight Services LLP is an experienced freight operator based inAlmaty, Kazakhstan. Approximately 3,300 Group personnel have been reassigned tothe outsourcing company. The Group has committed $30 million to the initial phase of a railwayrefurbishment programme to improve the reliability of the network and to reducefuture operating and maintenance costs. KAZAKHMYS COPPER - POWER The Group's principal generation asset is the coal fired thermal power stationat Karaganda located on the northern grid of the Kazakhstan power network.Additional generation capacity is provided by smaller combined heat and powerplants at the Zhezkazgan and Balkhash Complexes. Fuel for the power assets issupplied by the Group owned Borly coal mines. At present, the majority of the Group's generation is dedicated to offsettinginternal electricity requirements. A credit system allows the Karagandageneration to be transferred through the national grid to the Group's Zhezkazganand Balkhash Complexes with the Group only bearing the cost of transmission. Anysurplus generation is sold to the grid. KAZAKHMYS COPPER - FUTURE DEVELOPMENTS MINE EXTENSIONS AND NEW MINE DEVELOPMENTS Kazakhmys Copper has several short to medium term mine expansion and productionupgrade projects in progress at existing mines. At the Zhezkazgan Complex, where a number of the mines are approaching maturity,the Taskura open pit extension to the existing North Mine is expected tosupplement production from 2008. The expected life of the mine is 2 years withestimated ore resources of 4 MT containing 32 kt of copper. The East Sary-Obaunderground mine is planned to commence output in 2010. The mine has an expectedlife of 20 years with estimated ore resources of 34 MT, containing over 495 ktof copper. In the other regions, additional medium-term development projects include theKosmurun, Shatyrkul, Itauz and Nurkazgan complex mine extensions. The Kosmurununderground mine is expected to commence production in 2011. The project has anexpected life of 13 years with estimated ore resources of 18.7 MT containingover 597 kt of copper. Kosmurun is in close proximity to the newly developedAkbastau mine which is expected to attain full production during 2008. Akbastauhas ore resources of 12.4 MT containing 208 kt of copper. Kazakhmys Copper has also approved the development of the West Nurkazganunderground mine, which is an extension of the West Nurkazgan open pit mine inthe Karaganda Region. Initial production from the West Nurkazgan undergroundmine is anticipated during 2008. Kazakhmys Copper's longer-term expansion projects include the large copperporphyry pits at Boschekul and Aktogay which will provide valuable productionreplacement as well as growth. The Boschekul site has measured and indicated resources of 176 MT of ore with1,269 kt of copper, although the size of the deposit has the potential toincrease significantly if mineralisation in the eastern section of the depositis proven. The project is currently at the pre-feasibility stage. The Aktogay mine, located in the Balkhash Complex, is also intended to be asignificant source of production for Kazakhmys Copper. The project will startwith the development of the deposit's oxide resource and continue with sulphideoperations if economically justified. The engineering group, Fluor, are acting as the study contractor for both theAktogay and Boschekul projects. CONCENTRATORS AND SMELTERS The Group has also committed to a medium-term programme of upgrades andrefurbishments to the existing smelting and concentrating facilities. Thisprogramme will also include the construction of new concentrators and willincrease production capacity, increase metal recovery rates and reducetransportation, consumable and maintenance costs. Funding has been approved to upgrade Zhezkazgan Concentrator No.2 which willincrease the processing capacity of the plant by around 5 MT of ore per year andimprove the metal recovery rates achieved at the plant. This project isanticipated to be completed in 2010. New concentrators include the Kosmurun concentrator which will be constructedfor the Akbastau and Kosmurun mines. The Kosmurun concentrator will have an oreprocessing capacity of around 2 MT per year and will achieve a significantreduction in ore transportation costs for the Akbastau and Kosmurun mines. AShatyrkul concentrator is also being considered to reduce transportation costsand is likely to have an ore processing capacity of around 0.5 MT per year. REVIEW OF KAZAKHMYS GOLD KAZAKHMYS GOLD - PRODUCTION SUMMARY koz (unless otherwise stated) H2 2007 H2 2006--------------------------------------- ------- -------Ore extraction (kt) 1,206 1,151Gold ore grade (g/t) 1.52 1.29Gold precipitation 32.7 30.1Gold dore production 32.5 28.4--------------------------------------- ------- ------- In the period since acquisition, ore output from the three operational mines(Mizek, Central Mukur and Zhaima) has increased by 5% compared to the sameperiod in 2006, principally as milder winter weather has enabled the heapleaching process to continue to operate in November. The increased ore output,coupled with a higher gold grade, has led to a 9% rise in the volume of goldrecovered. At Mizek, a new hydrometallurgical workshop has been constructed to recovercopper and improve gold recovery from ores with high copper content. Thisfacility will become fully operational in 2008. Whilst this was beingconstructed, the mine was focused on lower copper grade ore with any highercopper grade ore being stockpiled. KAZAKHMYS GOLD - FUTURE DEVELOPMENTS Since becoming part of the Group, Kazakhmys Gold has focused on the developmentof two main gold deposits, Mizek Sulphide and Bozymchak, both of which areexpected to result in profitable operations. As part of these developments,Kazakhmys Gold has continued to upgrade the confidence in ore quality, with thetotal measured and indicated gold resources having been raised from 1.9 MT to2.3 MT during 2007. Mizek Sulphide At the Mizek site in north east Kazakhstan, approximately 340 km southwest ofSemey, there is a large sulphide ore body which is the subject of apre-feasibility study, expected to complete by June 2008, withplanned extraction to commence in 2010. At present, Kazakhmys Gold is carryingout open pit mining on the oxide ore body located at the site. To exploit the sulphide ore, a new open pit and underground mine will beconstructed together with a concentrator to process the ore on-site. Inaddition, upgrades are planned for the power and water infrastructure. Bozymchak A pre-feasibility study on the Bozymchak deposit in south western Kyrgyzstan hasbeen in progress during 2007. Kazakhmys Gold was able to successfully extend thelicense to develop the central part of the deposit to December 2027. The site is 185 km from the nearest rail link and has a good water supply. In2008, the infrastructure will be developed including improving the road linksand installing power lines. Alongside this, the feasibility study will becarried out with production planned to commence in 2010. Exploration work willcontinue in 2008 focusing on both the main ore body below an existing adit andconducting further drilling across the site. Other Projects Kazakhmys Gold carried out further exploration work on the Akjilga silver andcopper deposit in Tajikistan in 2007. This will be stepped up in 2008 and thisproject is expected to enter the pre-feasibility stage in the second half of theyear. Kazakhmys Gold will also conduct exploration work at a number of othersites in Central Asia. REVIEW OF KAZAKHMYS PETROLEUM In April 2007, the Group acquired the petroleum exploration rights to EastAkzhar. This is a 602 km2 exploration block, located to the south of Aktobe in aregion home to numerous oil and gas operations on the eastern fringe of theCaspian depression. East Akzhar is in close proximity to the Loktibai-Kenkiyakoil pipeline and the Kenkiyak-Atyrau gas pipeline. Kazakhmys Petroleum has hired an experienced team to manage the exploration workwith subcontractors being brought in to undertake the various site activities.Re-analysis of the available data on the exploration area was completed in 2007and Kazakhmys Petroleum has started its shallow well drilling programme on thenorthern Elimisai section. This is expected to continue through to June 2008. The main focus of the exploration activity is the southern Akhzar subsaltsection which will be the subject of a 3D seismic survey conducted during 2008.The results of the survey will be used to plan the location of future new deepwells. REVIEW OF MKM PRODUCTION The Group's downstream copper business in Germany, MKM, is engaged in theproduction and sale of copper and copper alloy semi-finished products. MKM isorganised into three business units: wire products, tubes and bars and flatproducts (strips, plates and sheets). MKM's total sales were 265 kt, 8 kt less than in 2006, with the fall mainlyattributable to a cut in the wire section output from 167 kt to 155 kt. In 2007,MKM has focused on higher margin products within its portfolio, switching outputaway from lower margin wire rod to tubes and bars, and flat products which sawsales rise from 43 kt to 44 kt and 63 kt to 66 kt, respectively. Conti-M, MKM's continuous casting process for flat products, has beensuccessfully producing ETP and DHP grade copper in 2007. Previously, thisspecification rolled strip had to be sourced externally, which had a negativeimpact on profit margins. FINANCIAL REVIEW INCOME STATEMENT SUMMARY OF THE YEAR Revenues for the year amounted to $5,256.6 million, a 4.2% increase over 2006.Profit before taxation, finance items and negative goodwill was in line with theprior year at $2,048.4 million and our key performance measure for earnings,EBITDA excluding special items, was $2,336.3 million, 1.2% higher than in 2006.Earnings reflect the continued strength in commodity prices shown across theGroup's main products. Profit attributable to equity shareholders was $1,415.7 million, compared to$1,399.7 million in the prior year, an increase of 1.1%. Underlying Profit, amore informed measure of the Group's financial performance, increased slightlyfrom $1,402.7 million to $1,409.5 million. Basic and diluted EPS increased to $3.04 per share, up from $2.99 in 2006. EPSbased on Underlying Profit, was $3.02 per share compared to $3.00 per sharereported in 2006. The Directors recommend a final ordinary dividend of 27.4 US cents per share,which together with the interim ordinary dividend of 13.6 US cents per sharegives a total full year ordinary dividend of 41.0 US cents per share based onearnings for 2007 (2006: 38.5 US cents per share based on earnings for 2006).Coupled with a special dividend of 50.0 US cents per share which was declared atthe time of the interim results, the total full year dividend in respect of 2007earnings is 91.0 US cents per share. Dividend cover for the full year ordinarydividend is over seven times, and provides a solid platform to ensure a stabledividend flow in future years, subject to the performance of the business andthe underlying growth in earnings of the Group. KAZAKHMYS COPPER Revenues Revenues for Kazakhmys Copper increased from $3,330.4 million to $3,588.3million, a 7.7% increase compared to the prior year. With commodity pricescontinuing to remain above their long run historic averages, revenues generatedfrom the sales of our main products were strong, particularly for coppercathode, copper rod, zinc metal in concentrate and silver. Revenues from the sale of copper cathodes were $2,516.2 million, or 70.1% (2006:71.7%), of the total revenues of the Kazakhmys Copper business. Althoughproduction volumes, excluding tolling, were 6.2% lower than the previous year at380 kt, sales volumes of copper cathodes were 3.2% higher at 351 kt. This isprimarily due to 49 kt of shipments to Europe that were scheduled to bedelivered in December 2006 being delivered in January 2007 as the shipments tooklonger than anticipated over the New Year period. The comparative quantity ofcopper cathodes which was in transit at 31 December 2007 was 28 kt. Zinc metal sales volumes fell by 40.1% to 38 kt compared to 2006. This waspartially offset by slightly higher realised prices resulting in a fall inrevenues of 38.5% to $123.8 million from $201.3 million in 2006. The continueddifficulties faced by the Balkhash zinc smelter with its cooling systemsresulted in a fall in production of zinc metal from 60 kt to 45 kt whichimpacted the volume of zinc metal sales. However, with the relativeattractiveness of zinc concentrate prices and the availability of smeltingcapacity in the CIS, zinc is being sold as concentrate instead of beingstockpiled at the zinc smelter without a material impact on overall Groupprofitability. Zinc in concentrate sales volumes increased by 32.8% and revenues increased from$128.0 million to $200.5 million, an increase of 56.6%. This increase was drivenby higher levels of ore from the Artemyevsky and Kosmurun mines being processedin the year and the reduction in zinc concentrate inventory levels at theBalkhash zinc smelter. Capacity constraints at the zinc smelter in theproduction of zinc metal, as mentioned above, increased the volumes of zincconcentrate sold which, coupled with favourable prices for zinc concentrate, ledto the large rise in revenues. During 2007, zinc in concentrate accounted for5.6% of Kazakhmys Copper's revenues compared with 3.8% in 2006. Silver sales volumes were 7.8% down compared to the prior year at 19,323 koz,with production falling 11.8% to 18,985 koz. Whilst silver production decreaseddue to lower ore output from the silver-rich ores in the Zhezkazgan and EastRegion mines, sales volumes were supported by a reduction in silver inventorylevels across the year. Despite the reduction in sales volumes, revenuesincreased by 7.3% compared to the prior year predominantly due to a marked risein realised silver prices of 16.7% compared to 2006. Gold sales volumes from own ore were 38.1% higher than in 2006 at 116.0 koz andrevenues were 56.8% higher at $80.3 million. The higher revenues were drivenprimarily by increased production, which was 5.6% higher than 2006, a reductionin the volume of gold used internally within the jewellery factory and higherrealised prices, which were 13.9% more favourable than in 2006. Copper rod revenues were up from $196.1 million to $250.6 million, an increaseof 27.8% following a 25.0% increase in sales volumes due to strong demand fromthe Chinese market. Copper rod now accounts for 7.0% of Kazakhmys Copper'srevenues compared with 5.9% in 2006. Other revenues of $160.4 million compared to $125.7 million in the prior year,related to the sale of surplus electricity, heating and coal, as well as thesales of other minor by-products, such as lead, rhenium, selenium, cadmium andsulphuric acid. Whilst volatility was seen in copper prices throughout 2007, the average priceduring the year was 5.9% higher than in 2006. Gold and silver prices wereparticularly strong, rising 15.2% and 16.5%, respectively. The average marketand realised prices for our main products during the year are set out below: Comparison of market and realised prices for main products 2007 2006---------------------- ------------------- ------------------- Average Average Average Average market realised market realised price price price price---------------------- ---------- ---------- ---------- ----------Copper ($/tonne) 7,126 7,175 6,731 7,025Zinc metal ($/tonne) 3,250 3,237 3,273 3,145Silver ($/oz) 13.4 13.3 11.5 11.4Gold ($/oz) 696 695 604 610---------------------- ---------- ---------- ---------- ---------- The average realised prices for our main products do not differ significantlyfrom market prices as they are priced with reference to prevailing prices onglobal commodity exchanges. In line with industry practice, our sales agreementsfor copper cathodes provide for provisional pricing at the time of delivery withthe final price based on the market price for future periods. Additionally, apremium over LME prices is incorporated into our sales agreements for coppercathode which reflects delivery terms and other contractual commitments. Earnings $ million (unless otherwise stated) 2007 2006------------------------------------------ --------- ---------KAZAKHMYS COPPERProfit before taxation, finance items and negative goodwill 1,976.9 2,082.1 Add: loss from special items 23.3 10.3Add: depreciation, depletion and amortisation 233.2 203.2------------------------------------------ --------- ---------EBITDA excluding special items 2,233.4 2,295.6------------------------------------------ --------- ---------Revenues 3,588.3 3,330.4------------------------------------------ --------- ---------EBITDA excluding special items margin (%) 62.2 68.9------------------------------------------ --------- --------- Cost pressures were faced within Kazakhstan due to its strong economy and, incommon with other companies in the mining industry, there was more widespreadpressure on input costs. General cost inflation within Kazakhstan and the miningindustry was generally running in excess of 15% during 2007 which placespressure on input prices. In addition, the Kazakhstan tenge appreciated againstthe US dollar by 2.8%, with the average exchange rate strengthening from 126.09KZT/$ in 2006 to 122.55 KZT/$ in 2007. The strengthening of the Kazakhstan tengeagainst the US dollar adversely impacts the profitability of the KazakhmysCopper business in US dollar terms. The EBITDA margin (excluding special items) fell from 68.9% in 2006 to 62.2% in2007. Although commodity prices remained strong during 2007, the main reasonsbehind the lower margin were higher production costs, including the cost ofpurchased concentrate, with cost of sales for the Kazakhmys Copper businessincreasing by 27.2% from $965.9 million to $1,229.0 million. As a significantproportion of costs are fixed in nature, the reduction in production volumes didnot result in a corresponding decrease in operating costs, and hence the marginfell. Given the various production and technical issues experienced during the year,such as the flooding of the South mine, equipment shortages and the closure ofmines for overburden removal, copper cathode production from own concentratefell by 27 kt to 341 kt compared to 2006. To offset this reduction in ownconcentrate, the volume of cathodes produced from purchased concentrateincreased by 5.4% from 37 kt to 39 kt in 2007, which represents 10.3% of totalcopper cathode production in 2007 (2006: 9.1%). The cost of purchasedconcentrate increased by $38.7 million, or 12.7%, to $343.8 million compared to2006 due to the higher volumes of concentrate purchased as well as externalmarket factors. The cost of concentrate also increased from 2006 reflecting thehigher average copper price seen during the year and the gold and silverby-products contained within the concentrate. Excluding the effects of purchased concentrate on costs and revenues generatedfrom cathodes produced from purchased concentrate, the EBITDA excluding specialitems margin would have been 69.7% compared to 73.1% in 2006. This margin is amore informed measure when considering the results of the core mining business,and excludes the effects of purchased concentrate. Employee remuneration was higher, for both production and administrative staff,increasing by 19.0% to $314.3 million, following a pay rise in the fourthquarter of 2006 which was necessary to bring average salaries within thebusiness into line with the local market. Wages and salaries are increasinggenerally across Kazakhstan due to improvements in the standard of living and atight labour market for skilled labour across the natural resources sectorwithin the CIS. Outsourcing opportunities are being actively considered tomanage employee remuneration levels in the future, but with a current high rateof inflation within Kazakhstan, cost pressures are expected to continue. Transportation costs increased from $51.3 million to $95.5 million, an increaseof 86.2% compared to 2006. This increase is primarily attributable to highermaintenance spend in order to improve the reliability of equipment, and also dueto higher volumes of ore transported from the Kosmurun mine to the Karagailyconcentrator, approximately 220 km away. An evaluation is in progress on theconstruction of a new concentrator at the Kosmurun and Akbastau mines whichshould reduce these transportation costs in the future. Furthermore, railwaytransportation was outsourced midway during the year and this is expected toresult in cost efficiencies in the future. In addition, fuel costs increased by 23.1% to $74.2 million reflecting theglobal increase in costs for gasoline and diesel fuel and the increasedtransportation relating to the Kosmurun mine. Utility costs increased by 27.3%to $21.0 million as a result of above-inflation increases in tariffs and thehigher volumes of energy required to transmit electricity to the more remotemines in the East and Karaganda Regions. Selling and distribution costs fell slightly by 6.0% to $48.5 million,reflecting a shift in sales from Europe to China in 2007 compared to 2006, withlower relative transportation and tariff charges. Administrative costs rose by 55.2% to $325.3 million. This increase was mainlydue to increases in administrative wages and salaries as mentioned above,greater use of consultants in the areas of change management and automation, andhigher social responsibility costs (which more than doubled to $37.6 million)within Kazakhstan which reflects our commitment to the communities in which weoperate. Depreciation and depletion increased by 14.9% from $200.8 million to $230.7million. This was due to a higher book value of property, plant and equipmentattributable to rising levels of capital expenditure in recent years as well asthe effect of the appreciation of the Kazakhstan tenge against the US dollar.In addition, with increasing levels of overburden removal affecting the open pitmines, higher depletion charges have been recognised in 2007 compared to theprior year. The cash cost of copper after by-product credits is a measure in monitoring thelow cost producer status of the Kazakhmys Copper business. The cash cost ofcopper after by-product credits amounted to 58.9 US cents per pound compared to31.5 US cents per pound in 2006. This increase was primarily due to theincreased cost of purchased concentrate and other higher production costs asmentioned above, whilst credits from by-product revenues were largely staticacross the years. Excluding the effects of purchased concentrate, the cash costof copper was 32.9 US cents per pound which places the business amongst thelowest cost producers of copper in the world. The table shown below provides areconciliation of the cash cost of copper including purchased concentrate afterby-product credits from 2006 to 2007, which illustrates the relative importanceof the above factors. USc/lb------------------------------------------------- ---------Average cash cost for year ended 31 December 2006 31.5Increase in purchased concentrate 7.5Increase in other cost of sales 16.1Decrease in selling and distribution expenses (0.6)Increase in administrative expenses 5.6Increase in other operating expenses and other income 3.7Increase in by-product credits (4.9)------------------------------------------------- ---------Average cash cost for year ended 31 December 2007 58.9------------------------------------------------- --------- MKM Revenues For the year ended 31 December 2007, MKM reported revenues of $1,643.0 millioncompared to $1,716.1 million in 2006, a decrease of 4.3%. The main componentwithin MKM's revenues is the input value of copper, accounting for approximately98.0% of sales price. Contractual arrangements with customers ensure the inputprice of copper cathode is passed on in full. Whilst the reduction in revenuesis primarily due to a fall in sales volumes, this was partially offset by thehigher average copper price seen in 2007 compared to the prior year. Sales volumes during the year fell from 273 kt in 2006 to 265 kt in 2007, a fallof 2.9%. This reduction was primarily due to a change in sales strategy withthe focus during the year on selling higher value added products (tubes, barsand flat products) rather than lower margin wire rods. Whilst this strategycurtailed revenue growth, particularly in the lower margin wire rod business,increased volumes of higher margin products had a positive impact on relativeprofitability as well as working capital levels within the business and theassociated financing costs. Following this change in focus in MKM's sales activities, there were strongperformances in the revenues of the higher margin products with revenues forsheets up 21.2%, strips up 16.5% and bars up 26.2% compared to 2006 due topositive market conditions and increased customer demand for these products.However, revenues from wire rods were down 18.3% compared to 2006 as MKM movedaway from selling these lower margin products. The slowdown in the global economy seen in the second half of 2007 has had animpact on MKM, particularly in its larger western European markets and in NorthAmerica. Despite this, there is still good demand for sheets, bars andindustrial tubes. MKM is also strengthening its presence in its core markets,and is looking at new opportunities outside these markets, such as EasternEurope, the CIS and the Far East. Earnings $ million (unless otherwise stated) 2007 2006------------------------------------------ --------- ---------MKMProfit before taxation, finance items and negative goodwill 10.3 21.6 Add: loss from special items - 0.1Add: depreciation and amortisation 23.5 22.2------------------------------------------ --------- ---------EBITDA excluding special items 33.8 43.9------------------------------------------ --------- ---------Revenues 1,643.0 1,716.1------------------------------------------ --------- ---------EBITDA excluding special items margin (%) 2.1 2.6------------------------------------------ --------- --------- Although EBITDA excluding special items fell from $43.9 million (2.6% margin) in2006 to $33.8 million (2.1% margin) in 2007, the underlying performance of MKMwas masked by the impact of copper price fluctuations on the valuation of stock.These fluctuations were also impacted by falling stock levels at MKM. Thebusiness has been gradually managing stock levels downwards for working capitalpurposes during 2007. Included within earnings in 2007 is a cost ofapproximately $3 million (2006: contribution of approximately $24 million)arising from the impacts of copper price fluctuations on the valuation of stockand falling stock levels. Excluding the impact of these material influences onearnings, the improvements made in the underlying trading performance of MKMcompared to the prior year can be seen, with EBITDA excluding special itemsincreasing from $19.9 million in 2006 to $36.8 million in 2007, an increase of84.9%. As described previously, MKM's earnings prepared under IFRS are particularlyvolatile due to the impacts of copper price fluctuations on the valuation ofstock and stock levels. In assessing MKM's performance, management uses a moreinformed trading measure termed the 'Gross Value Add' (GVA) as MKM is primarilya fabricating downstream business. This measure is commonly used in thisindustry to measure the 'value add' of the production process to purchased rawmaterials. Despite sales volumes falling by 2.9%, the GVA rose from $169.8million to $207.7 million, an increase of 22.3% due to a combination of highermargin products being sold and greater conversion charges. KAZAKHMYS GOLD On 5 July 2007, the Group acquired 96.34% of the ordinary shares of Eurasia Gold(subsequently renamed Kazakhmys Gold), a company listed on the Toronto StockExchange. Since the offer was accepted by holders of more than 90% of theEurasia Gold shares, Kazakhmys Gold Inc., an indirectly wholly owned subsidiaryof the Company, exercised its right under Canadian legislation to acquire theoutstanding Eurasia Gold shares not already owned by it. On 12 September 2007,the Group completed the compulsory acquisition, thereby taking its interest inEurasia Gold to 100% with the total consideration being paid for the company of$270.9 million. The principal activity of Kazakhmys Gold and its subsidiaries isthe mining and processing of gold ore into refined ore, and exploration anddevelopment activity in the precious metals sector within Central Asia. The results of Kazakhmys Gold have been consolidated into those of the Groupfrom the date of acquisition. Revenues Revenues for Kazakhmys Gold for the period since acquisition, from the threeoperating mines (Zhaima, Mizek and Mukur) amounted to $25.3 million, whichcomprised $25.0 million of gold dore (34.1 koz) and $0.3 million of silver (23.5koz). The average realised price for gold dore over the period sinceacquisition was $734.1 per ounce, which was slightly above the average LBMAmarket price of $732.4 per ounce. The gold dore is sold for further processinginto gold bullion under an annual sales contract with a European refiner. Earnings $ million (unless otherwise stated) 2007 2006------------------------------------------ --------- ---------KAZAKHMYS GOLDProfit before taxation, finance items and negative goodwill 0.8 -Add: depreciation, depletion and amortisation 5.7 ------------------------------------------- --------- ---------EBITDA excluding special items 6.5 ------------------------------------------- --------- ---------Revenues 25.3 ------------------------------------------- --------- ---------EBITDA excluding special items margin (%) 25.7 ------------------------------------------- --------- --------- EBITDA excluding special items for the period since acquisition was $6.5 million(25.7% margin). Of the total depreciation, depletion and amortisation charge of$5.7 million for the period since acquisition, $4.0 million was attributable tothe uplift in tangible fixed assets and mining assets which were identifiedduring the fair value exercise at the time of acquisition. Cost of salesamounted to $21.5 million and other operating costs were $3.0 million. Comparedto the performance in prior years, earnings benefited from the milder winterweather experienced in Kazakhstan at the end of 2007, which allowed the heapleaching process to continue for longer in the season than would normally beexpected. KAZAKHMYS PETROLEUM On 2 April 2007, the Group acquired Kazakhmys Petroleum LLP (previously calledDostan-Temir LLP), a company which held a licence to conduct oil and gasexploration and development activity on a 602 km2 petroleum block in the EastAkzhar region in western Kazakhstan. The total consideration payable was $450.0million, including the subscription bonus which was payable to the Governmentwhen the exploration licence was signed. $ million 2007 2006------------------------------------------ --------- ---------KAZAKHMYS PETROLEUMLoss before taxation, finance items and negative goodwill (1.4) -Add: loss from special items 1.1 ------------------------------------------- --------- ---------EBITDA excluding special items (0.3) ------------------------------------------- --------- --------- The four year exploration licence was signed on 22 May 2007 and thereafter,Kazakhmys Petroleum has been engaged in purchasing and analysing geological andgeophysical data relating to the exploration block. In June 2007, the Groupengaged an experienced team to manage the exploration programme, and the welldrilling programme commenced in the shallow northern area of the block. 3Dseismic work has also commenced in the deeper southern area of the block, andwill continue throughout 2008. Once this data has been interpreted, the deepdrilling programme will commence. Since the Group adopts a successful efforts approach to exploration activity,the majority of the costs incurred during the year have been capitalised.Operating costs charged to the income statement during the period amounted to$1.4 million. GROUP EARNINGS Profit before taxation, finance items and negative goodwill decreased slightlyfrom $2,071.6 million to $2,048.4 million, split between $1,976.9 million forKazakhmys Copper, $10.3 million for MKM, $0.8 million for Kazakhmys Gold, a lossof $1.4 million for Kazakhmys Petroleum and a profit of $61.8 million forunallocated corporate costs (which includes dividend income of $93.9 millionfrom ENRC PLC). Depreciation, depletion and amortisation amounted to $263.5 million in 2007, anincrease of 16.7% compared to $225.8 million in 2006, as a result of increasedcapital expenditure in the Group and acquisitions of new businesses made duringthe year. $ million (unless otherwise stated) 2007 2006------------------------------------------ --------- ---------EBITDA excluding special items:Kazakhmys Copper 2,233.4 2,295.6MKM 33.8 43.9Kazakhmys Gold 6.5 -Kazakhmys Petroleum (0.3) - Unallocated income/(costs) excluding special items(excluding depreciation of $1.1 million; 2006: $0.4million) 62.9 (31.1)------------------------------------------ --------- ---------Total EBITDA excluding special items 2,336.3 2,308.4------------------------------------------ --------- ---------Total EBITDA excluding special items margin (%) 44.4 45.7------------------------------------------ --------- --------- Consistent with other international mining companies, EBITDA excluding specialitems has been chosen as the key measure in assessing the underlying tradingperformance of the Group between the current and prior years. This performancemeasure removes depreciation, depletion, amortisation and non-recurring orvariable items in nature which do not impact the underlying trading performanceof the business. During 2007, these non-recurring or variable items related to a gain on disposalof fixed assets of $1.8 million, the write off of property, plant and equipmentof $26.2 million and the tax benefit of a Group restructuring of $30.8 million.Despite the significant cost pressures faced by the Group's operations inKazakhstan and the lower production levels, the overall margin at the level ofEBITDA before special items was in line with the prior year at 44.4% compared to45.7% in 2006. NET FINANCE ITEMS Net financing costs were $22.5 million during 2007, which contrasts with netfinancing income of $89.7 million that arose in the prior year. A net foreign exchange loss of $92.2 million is included within the net financecost, compared to a gain of $26.4 million that was recognised in 2006. Theforeign exchange loss primarily arose on the high level of US dollar denominatedcash deposits and current investments held with Kazakhmys LLC during themajority of the year, as a result of the appreciation of the Kazakhstan tengeagainst the US dollar which moved from 127.00 KZT/$ as at 31 December 2006 to120.30 KZT/$ at 31 December 2007, a 5.3% movement. Net financing costs, other than foreign exchange gains, includes a finance costof $13.7 million which predominantly relates to interest payable on the MKM bankloan. Unwinding of long-term provisions and employee benefits also gave rise toan interest charge of $10.5 million. Finance income primarily relates to interest earned from US dollar denominateddeposits placed with financial institutions in the UK, and to a lesser extent,fixed term deposits placed with financial institutions in Kazakhstan denominatedeither in US dollar or Kazakhstan tenge. Interest income of $93.9 million is19.6% higher than the 2006 figure of $78.5 million reflecting the higher cashand deposit balances compared to 2006 as a result of continued buoyant commodityprices, and the effect of higher global interest rates received on the Group'sliquid funds. TAXATION The effective tax rate for the year was 29.6% compared to a rate of 34.8% in theprior year. The overall tax charge was $599.2 million, a reduction of $155.5million compared to the prior year, reflecting the lower taxable profits andeffective tax rate. The effective tax rate has decreased from 2006 principally due to thenon-recurring benefit of a Group tax restructuring that took place during 2007which lowered the effective rate by 1.5%, and the absence of a need for anyadditional accrual for withholding tax at the end of 2007. Partially offsettingthese factors were higher disallowable items within Kazakhmys LLC, principallyarising from higher social spending and other items of expenditure withinKazakhstan which are non-deductible, and the reduced benefit of the tax holidayassociated with the Balkhash zinc smelter which lowered the effective rate by1.3% in 2007 compared to 2.1% in 2006 as a result of reduced zinc metal revenuescaused by lower zinc production. Excess profits tax is levied in addition to corporate tax on the profitsattributable to certain subsoil contracts where the internal rate of returnexceeds 20%. For 2007, excess profits tax of $36.5 million was charged toearnings which represented an incremental 1.8% to the effective tax rate, upfrom 0.7% in 2006. In the prior year, the incremental impact arising fromexcess profits tax was masked by a release of $49.4 million from the excessprofits tax liability relating to prior years as the excess profits taxmethodology was re-considered following developments in the interpretation oftax legislation within Kazakhstan. Excluding the effects of this reassessment,last year's charge arising from excess profits tax increased the effective taxrate by 3.0%. The determination of excess profits tax depends on a number offactors, including the profitability of individual subsoil contracts, the levelof capital expenditure and future pricing assumptions. Withholding taxes of $91.8 million had been recognised in 2006 in relation tothe unremitted earnings of Kazakhmys LLC existing as at 31 December 2006 whichwere expected to be remitted to the UK in the future through dividenddistributions. This contributed an additional 4.2% to the effective tax rate in2006. Based on the expected dividend flows in the future, an additional chargeto the income statement is not required for 2007. Following an increase in trade taxes in Germany, the effective tax rate for MKMslightly increased from 35.98% to 37.34% during the year. However, following theGerman government's decision to reduce corporate tax rates, the effective taxrate for MKM will fall in 2008. The effect of this lower tax rate has resultedin a reduction in German deferred taxes which reduces the effective tax rate by0.5% in 2007. The recurring effective tax rate is expected to remain at levels in excess ofthe statutory Kazakhstan tax rate of 30% due to excess profits taxes arising onprofitable subsoil contracts at the current time of high commodity prices, andthe additional withholding tax payable on dividend distributions from Kazakhstanto the UK. MINORITY INTERESTS In the second half of 2007, the Company issued 2,559,665 ordinary shares of 20pence each and paid $11.5 million in consideration for 227,959,211 participatingshares in Kazakhmys LLC owned by minority shareholders. As a result of thistransaction, the Company's interest in Kazakhmys LLC increased from 99.08% as at31 December 2006 to 99.73% as at 31 December 2007. There are no immediate plansto acquire further minority interests. As a result of the smaller interest held by minority shareholders in KazakhmysLLC during the year, the minority interest's attributable share of earnings andnet assets reduced in the year. PROFIT FOR THE YEAR AND UNDERLYING PROFIT Profit for the year attributable to equity shareholders increased from $1,399.7million to $1,415.7 million, a slight increase of 1.1%. Underlying Profit isseen as a more informed measure of the Group's financial performance as itremoves non-recurring or variable items (and their resulting tax and minorityinterest impacts) that have taken place during the year, to give a morerepresentative figure of underlying Group performance. It provides a moreconsistent basis for comparing the underlying trading performance of the Groupbetween 2007 and 2006. The reconciliation of Underlying Profit from profit attributable to equityshareholders is set out below: $ million 2007 2006 % change----------------------------------- --------- ---------- --------Profit attributable to equity shareholders of the Company 1,415.7 1,399.7 1.1Special items: Recognition of negative goodwill - (6.5) Write off of property, plant and equipment 26.2 1.4 (Gain)/loss on disposal of fixed assets (1.8) 9.6Tax effect of special items 0.3 (1.5)Release of deferred tax liability following Group restructuring (30.8) -Minority interest effect of special items (0.1) ------------------------------------ --------- ---------- --------Underlying Profit 1,409.5 1,402.7 0.5----------------------------------- --------- ---------- -------- EARNINGS PER SHARE The income and share data used in the basic and diluted EPS and EPS based onUnderlying Profit computations are shown below. Basic EPS for the year increased from $2.99 per share to $3.04 per share, anincrease of 1.7%. There are no differences between basic and diluted EPS. EPSbased on Underlying Profit increased from $3.00 per share to $3.02 per share, anincrease of 0.7%. The weighted average number of shares in issue reduced slightly from 467.5million shares during 2006 to 466.1 million shares in 2007, due to the issue of2.6 million shares to acquire the minority interests in Kazakhmys LLC betweenJune and September 2007, offset by the purchase and cancellation of 9.9 millionshares towards the end of 2007 as part of the Company's share buy-backprogramme. 2007 2006 % change---------------------------------- ---------- ---------- --------Weighted average number of shares in issue 466,073,506 467,474,200 (0.3) ---------------------------------- ---------- ---------- -------- Profit attributable to equityshareholders of the Company ($ million) 1,415.7 1,399.7 1.1 Underlying Profit ($ million) 1,409.5 1,402.7 0.5---------------------------------- ---------- ---------- --------EPS - basic and diluted ($) 3.04 2.99 1.7---------------------------------- ---------- ---------- --------EPS based on Underlying Profit ($) 3.02 3.00 0.7---------------------------------- ---------- ---------- -------- DIVIDENDS The Directors recommend a final ordinary dividend of 27.4 US cents per share,which together with the interim ordinary dividend of 13.6 US cents per sharegives a total full year ordinary dividend of 41.0 US cents per share based onearnings for 2007 (2006: 38.5 US cents per share based on earnings for 2006).Coupled with a special dividend of 50.0 US cents per share which was declared atthe time of the interim results, the total full year dividend in respect of 2007earnings is 91.0 US cents per share. The Company intends to maintain a dividend policy which will take into accountthe profitability of the business and underlying growth in earnings of theGroup, as well as its cash flows and growth requirements. The Directors willalso ensure that dividend cover is prudently maintained. Interim and finalordinary dividends will be paid in the approximate proportions of one-third andtwo-thirds of the total annual dividend, respectively. The Directors alsopropose special dividends when they deem these appropriate after taking intoconsideration the capital structure of the Group, operating cash flows and majorfuture funding commitments. SHARE BUY-BACK PROGRAMME Commencing on 24 October 2007, the Group began a share buy-back programme as ameans of returning cash to shareholders. During 2007, the Group bought back andcancelled 9.9 million ordinary shares at an average price of £13.16 per shareand at a total cost of $270.3 million, including expenses. This reduced theissued share capital of the Company to 460,123,288 ordinary shares as at 31December 2007. The buy-back programme was completed by the end of January 2008, whereby a totalof 15.1 million ordinary shares at an average price of £12.73 per share havebeen bought back and cancelled at a total cost of $390.1 million, includingexpenses. The Group considers share buy-back programmes and special dividends as anintegral part of managing the Group's capital base effectively. ENRC INVESTMENT Following approval from the independent shareholders at an extraordinary generalmeeting held on 19 October 2007, and receipt of regulatory approvals from theGovernment, the Group exercised the call option over Vladimir Kim's interest inEurasian Natural Resources Corporation PLC (ENRC) and acquired 18.8% of theshares at a price of $806.3 million on 26 October 2007. In December 2007, shortly after ENRC listed on the main board of the LondonStock Exchange, the Group received a dividend of $93.9 million from ENRC whichrepresented a return on the original investment of 11.6%. The dividend is shownwithin unallocated corporate income. At the time of the listing of ENRC in December 2007, new shares were issued byENRC which the Group did not subscribe to and hence the Group's interest in ENRCreduced from 18.8% to 14.6%, taking into account the full exercise of theover-allotment option. At 31 December 2007, the market value of this investmentwas $2,401 million, a return of over 200% on the original investment taking thereceipt of dividends into account, and represented a value of £2.61 perKazakhmys share in issue at that time. Since the year end, the market value ofthe investment has grown to well over $3 billion. CASH FLOWS A summary of cash flows is shown below highlighting the key items. $ million 2007 2006----------------------------------------- --------- ---------EBITDA 2,311.9 2,297.4Recognition of negative goodwill - (6.5)Write off of assets and impairment losses 30.1 9.9Gain on disposal of assets held for trading (0.5) -(Gain)/loss on disposal of property, plant and equipment (1.8) 9.6Foreign exchange loss adjustment (57.2) (13.5)Working capital movements (282.7) (254.6)Interest paid (13.7) (6.8)Income tax paid (849.6) (623.3)----------------------------------------- --------- ---------Net cash flows from operating activities 1,136.5 1,412.2Sustaining capital expenditure (241.2) (85.0)----------------------------------------- --------- ---------Free Cash Flow 895.3 1,327.2Expansionary and new project capital expenditure (701.8) (260.1)Interest received 121.3 77.2Acquisition of subsidiaries, net of liquid funds and borrowings acquired (265.2) (2.0)Capital transactions between subsidiary and shareholders (281.8) 1.6Dividends paid (423.9) (233.4)Acquisition of interest in ENRC (806.3) -Other movements (0.3) 3.7----------------------------------------- --------- ---------Cash flow movement in net liquid funds (1,462.7) 914.2----------------------------------------- --------- --------- SUMMARY OF THE YEAR During the year, the net liquid funds position of the Group reduced from$1,745.3 million to $298.3 million, a reduction of $1,447.0 million. Key cashoutflows during the year were income tax payments of $849.6 million, significantcapital expenditure of $943.0 million, including $450.0 million for the oil andgas exploration licence acquired within Kazakhmys Petroleum in the first half of2007, the acquisition of Kazakhmys Gold for $270.9 million in the second half of2007, the acquisition of an 18.8% interest in ENRC for $806.3 million in October2007, net repayment of borrowings of $112.4 million primarily within MKM and atotal return to shareholders of $694.2 million. Despite adverse working capital movements, significantly higher payments to thetax authorities and increased sustaining capital expenditure, Free Cash Flow, akey performance indicator of the Group's ability to translate earnings into cashflow available for returns to shareholders, and investment and financingpurposes, was a healthy $895.3 million. The Group's ability to generate continued positive Free Cash Flow provides fundsfor additional investment in expanding the Group's existing operations andcapacities, as well as providing flexibility to respond to any capitalmanagement initiatives and opportunistic acquisitions. OPERATING CASH FLOWS Operating cash flows decreased by $275.7 million from $1,412.2 million in 2006to $1,136.5 million in 2007 primarily due to the increased tax payments madeduring the year which increased by $226.3 million to $849.6 million. The higherlevel of tax payments is mainly attributable to the 2007 schedule of taxpayments on account that was agreed with the tax authorities being based onearnings for 2006, which were significantly higher than earnings in 2005 (onwhich the 2006 tax payments schedule was based upon). In addition, payments weremade to the tax authorities in April 2007 in respect of the final instalment of2006 tax due of $38.4 million and the excess profits tax relating to 2006 of$62.6 million. The tax liability for the Kazakhmys Copper business at the yearend is approximately $200 million lower than at the comparative year end,reflecting the markedly higher tax remittances during 2007. Working capital levels for the Group increased by $282.7 million during 2007.Increased levels of inventories held by Kazakhmys Copper offset the reduction ininventory held within MKM. Additionally, the level of goods in transit held byKazakhmys Copper at 31 December 2007 fell significantly compared to 31 December2006 when 49 kt of copper cathodes were in transit and were sold in early 2007.At 31 December 2007, 28 kt of copper cathodes were in transit which were sold inearly 2008. The increased inventory balances within the Kazakhmys Copperbusiness were mainly attributable to targeted increases in spare parts andconsumables in order to reduce stoppage time of plant and equipment, andstockpiled ore at the Nurkazgan mine awaiting processing prior to thecommissioning of the adjoining concentrator in 2008. There was also an adverseworking capital impact relating to the expiry of a 2006 sales contract, wherebyin December 2006, the customer made a significant payment in advance of thegoods being shipped in early 2007. FINANCING CASH FLOWS Of the total interest income of $121.3 million, $100.1 million was received byKazakhmys Copper arising from the significantly higher cash and bank depositlevels held during the year compared to 2006. During the year, short term bankdeposits held within Kazakhmys LLC were converted to cash on maturity and weregradually moved from Kazakhstan financial institutions to financial institutionsbased in western Europe in order to reduce credit and counterparty risk over thecourse of the year. These funds were utilised by the Group to fund theacquisitions executed during the year, as well as returning cash to shareholdersthrough dividends and the share buy-back programme. Given the change in sales strategy during the year within MKM of focusing onhigher margin products and increasing the levels of tolling, inventory levelsreduced by approximately 25% in volume terms and this had a direct impact on thefinancing requirements of the business. Accordingly, MKM repaid externalborrowings, and when combined with the repayment of external borrowings withinKazakhmys Gold after its acquisition, the Group made a net repayment ofborrowings of $112.4 million during the year. During 2007, the total returns to shareholders amounted to $694.2 million whichcontrasted with $233.4 million that were returned during 2006. Total dividendsof $423.9 million were paid by the Group, representing the 2006 final dividendof $120.1 million, the 2007 interim dividend of $64.0 million, a specialdividend of $235.0 million and dividends paid by Kazakhmys LLC to minorityinterests of $4.8 million. The Group also commenced a share buy-back programme,as described previously, at a total cost of $270.3 million, including expenses. INVESTING CASH FLOWS Capital expenditure on mining assets, property, plant and equipment andintangible assets amounted to $943.0 million (2006: $345.1 million), splitbetween $241.2 million for sustaining capital expenditure and $701.8 million forexpansionary and new project capital expenditure. Included within the lattercategory, is the acquisition cost of the petroleum licence of $450.0 million,which includes the subscription bonus that was payable to the Government whenthe exploration licence was signed in May 2007. Details of the major areas ofcapital expenditure during the year are described below. Proceeds from thedisposal of property, plant and equipment were $8.0 million as redundant assetsare normally sold for scrap or negligible value. The acquisition cost of Eurasia Gold amounted to $270.9 million, of which $260.1million was paid in July 2007 when the original offer closed, with a furtherpayment in September 2007 for the compulsory purchase of the minority interestsnot acquired initially. BALANCE SHEET SUMMARY MOVEMENTS Shareholders' funds as at 31 December 2007 stood at $6,419.2 million, anincrease of $2,559.3 million compared to the balance as at 31 December 2006. Theincrease was primarily due to the acquisition of the 14.6% interest in ENRCwhich increased shareholders' funds by $1,594.7 million, retained earnings forthe year of $1,415.7 million, positive currency translation movements of $223.1million offset by the returns to shareholders. The currency translation differences largely arose in respect of Kazakhmys LLCdue to the appreciation of the Kazakhstan tenge against the US dollar from arate of 127.00 KZT/$ as at 31 December 2006 to 120.30 KZT/$ as at 31 December2007, a 5.3% movement. There was also an appreciation of the Euro against the USdollar in respect of MKM which contributed to the positive currency translationmovement. NON-CURRENT ASSETS AND LIABILITIES Property, plant and equipment as at 31 December 2007 was higher compared to theprior year balance, after capital expenditure of $455.1 million and the benefitsof $112.3 million arising from currency translation differences which wereoffset by depreciation of $228.9 million. Significant expansionary and newproject capital expenditure during the year related to the construction of a newconcentrator at the Nurkazgan mine, expenditure on the Balkhash acid plant whichis expected to be commissioned during 2008, construction of initialinfrastructure related to the Group's major growth projects at Aktogay andBoschekul, the opening of new mines and extensions at the North Nurkazgan, EastSary-Oba and Taskura mines and payments for new aircraft as part of the fleetreplacement programme. Disposals of property, plant and equipment were notsignificant during the year. Mining assets increased from $143.5 million at 31 December 2006 to $388.0million at 31 December 2007. This increase was primarily due to acquisition ofKazakhmys Gold during the year, which increased mining assets by $238.6 million,reflecting the development potential of the mining reserves within thisbusiness. Also included within mining assets are mine stripping costs whichincreased from $45.7 million to $56.8 million due to overburden removal,primarily at the Abyz mine, but also at the Kounrad, Nurkazgan and Kosmurun openpit mines. Intangible assets increased by $538.6 million from $28.9 million at 31 December2006 to $567.5 million at 31 December 2007. This increase was mainly representedby the purchase of Kazakhmys Petroleum and the related oil and gas licence for$450.0 million. In addition to this acquisition, $26.4 million in respect ofcontractual reimbursements to the Government for geological information andsocial commitments relating to the oil and gas licence have also beencapitalised, with a corresponding provision. New mining licences, totalling $9.4million, were acquired by Kazakhmys Copper during the year, and relate to thedevelopment of new mineral deposits across Kazakhstan. Goodwill of $45.9 million has been recognised relating to the acquisition ofKazakhmys Gold. The goodwill arises from the requirement to recognise adeferred tax liability on the fair value adjustments recognised at the time ofacquisition, and this goodwill will be tested annually for impairment inaccordance with international accounting standards. The liability for employee benefits increased by $4.5 million to $37.2 million.The main component of the liability relates to unfunded post-retirement benefitsof $33.6 million for employees in Kazakhmys LLC. The Group has no pensionobligations, other than a contingency in respect of the payment obligations ofthe Kazakhmys LLC-sponsored pension fund, termed the Accumulating Pensions Fundsof Kazakhmys LLC Corporation (the 'Fund'). Certain of Kazakhmys LLC's employeesand former employees are beneficiaries. The Fund's rules set out that thepayment obligations to fund beneficiaries are based on the nominal value ofcontributions made by the beneficiaries, indexed in accordance with a formulaset out in the Fund's rules. In the event that the assets of the Fund areinsufficient to cover the payment obligations to the beneficiaries, the votingshareholders of the Fund (including Kazakhmys LLC) are jointly liable for theshortfall. The last valuation as at 31 December 2007 showed that the payment obligations ofthe Fund were $191.4 million, and the market value of its assets was $208.8million. No deficit has arisen within the Fund at any balance sheet date sinceits inception. Provisions of $111.9 million were $52.6 million higher than in 2006. Theincrease was primarily as a result of new provisions in respect of thecontractual reimbursements to the Government for geological information andsocial commitments relating to the oil and gas exploration, referred topreviously. Site restoration provisions of $44.0 million were $15.6 millionhigher than in 2006, which are determined with reference to the requirements ofsubsoil use contracts in accordance with Kazakhstan legislation. WORKING CAPITAL Working capital increased by $282.7 million during 2007. Inventory levelsincreased within the Kazakhmys Copper business primarily due to higher levels ofspare parts and consumables and stockpiled ore at the Nurkazgan mine, partiallyoffset by the reduction of goods in transit of copper cathode by 21 kt. Therewas also an increase in advances paid and VAT reclaimable reflecting upfrontpayments remitted to suppliers towards the end of 2007 in respect of significantitems of capital expenditure. Furthermore, there was an adverse impact relatingto the expiry of a 2006 sales contract, whereby in December 2006, the customermade a significant payment in advance of the goods being shipped in early 2007.Working capital levels within MKM fell primarily as a result of managementreducing inventory levels held within the business and increasing tollinglevels. NET LIQUID FUNDS Net liquid funds consists of cash and cash equivalents, current investments andborrowings. A summary of the net liquid funds position as at 31 December 2007and 2006 is shown below. $ million 2007 2006------------------------------------------ --------- ---------Current investments 57.3 1,237.2Cash and cash equivalents 438.5 785.4Borrowings (197.5) (277.3)------------------------------------------ --------- ---------Net liquid funds 298.3 1,745.3------------------------------------------ --------- --------- The level of net liquid funds has dropped significantly during the year as aresult of the acquisitions completed by the Group during 2007, which exceeded$1.5 billion, and the returns to shareholders amounting to almost $700 million. After the staged withdrawal of funds from Kazakhstan during the year, surplusfunds within the Group are held predominantly in the UK, with funds remainingwithin Kazakhstan utilised mainly for working capital purposes. Cash and cash equivalents include $189.5 million of fixed rate deposits with amaturity of less than three months, with the remaining balance being held ascash in low interest on-demand or interest free accounts. Of the total cash andcash equivalents balance of $438.5 million, Kazakhmys Copper held $216.9 million(of which $20.5 million was held in the UK), MKM held $6.7 million, KazakhmysGold held $13.6 million, Kazakhmys Petroleum held $20.9 million and corporateentities held $180.4 million (of which $94.1 million was held in the Netherlandsand $86.3 million was held in the UK). Of the total cash and cash equivalentsbalance, $316.1 million (2006: $726.2 million) was denominated in US dollars,$107.9 million (2006: $22.5 million) was denominated in Kazakhstan tenge, $14.3million (2006: $36.1 million) was denominated in Euros with the remaining balancebeing held in other currencies. Current investments include fixed rate deposits of $50.0 million and $7.3million held in US dollars and Kazakhstan tenge, respectively, within KazakhmysCopper. The maturities of these deposits, which are held with financialinstitutions based in Kazakhstan, are of varying periods up to 12 months. Borrowings reduced from $277.3 million to $197.5 million primarily due toimproved working capital management at MKM which reduced financing requirements.By the year end, Kazakhmys Gold had repaid most of its outstanding borrowingsabsorbed by the Group at the time of acquisition. On 29 February 2008, the Group signed a five year pre-export finance debtfacility of $2.1 billion to be used for general corporate purposes, includingthe acquisition of the Ekibastuz power plant. CAPITAL EMPLOYED A summary of capital employed is shown below. $ million (unless otherwise stated) 2007 2006------------------------------------------- -------- ---------Equity shareholders' funds 6,419.2 3,859.9Minority interests 14.0 31.9Borrowings 197.5 277.3------------------------------------------- -------- ---------Capital employed 6,630.7 4,169.1------------------------------------------- -------- ---------Profit before taxation, finance and negative goodwill 2,048.4 2,071.6------------------------------------------- -------- ---------ROCE (%) 30.9 49.7------------------------------------------- -------- --------- Capital employed increased in the year by $2,461.6 million to $6,630.7 millionfrom $4,169.1 million in the prior year, a 59.0% increase, primarily due to theacquisition of the 14.6% interest in ENRC which increased capital employed by$1,594.7 million. The remainder of the increase was due to a combination offactors: the continued strong profitability of the Group during the year whichoffset the returns to shareholders, positive currency translation differencesdue to the appreciation of the Kazakhstan tenge against the US dollar and areduction in the level of borrowings reflecting the improved working capitalmanagement and financing position of MKM. Earnings have not risen at the samerate as the increase in capital employed, primarily due to the uplift in equityarising from the investment in ENRC, and as a result, ROCE has fallen from 49.7%in 2006 to 30.9% in 2007. The minority interests balance fell from $31.9 million to $14.0 millionreflecting the acquisition of the majority of the remaining minority interestsin Kazakhmys LLC in September 2007. PAYMENT OF DIVIDENDS The Board has recommended a final dividend for the year ended 31 December 2007of 27.4 US cents per share which if approved will be paid to shareholders on 8May 2008 to shareholders on the register at the close of business on 4 April2008. For those shareholders who have elected to receive their dividends insterling, the currency conversion rate of £0.503916 to the US dollar was basedon the average foreign currency exchange rate for the five business days endingtwo days before the date of this preliminary results announcement. ANNUAL GENERAL MEETING The 2008 Annual General meeting will be held at 12.15pm on Wednesday 30 April2008 at Claridge's (the Ballroom entrance), Brook Street, Mayfair, London W1K4HR. The Annual Report and Accounts and details of the business to be conducted atthe Annual General Meeting will be mailed to shareholders and posted on theCompany's website (www.kazakhmys.com) in late March 2008. FORWARD LOOKING STATEMENTS This announcement includes forward-looking statements with respect to thebusiness, strategy and plans of Kazakhmys and its current goals, assumptions andexpectations relating to its future financial condition, performance andresults. By their nature, forward-looking statements involve known and unknown risks,assumptions, uncertainties and other factors which may cause actual results,performance or achievements of Kazakhmys to be materially different from anyfuture results, performance or achievements expressed or implied by suchforward-looking statements. Shareholders are cautioned not to place undue reliance on the forward-lookingstatements. Except as required by the Listing Rules and applicable law,Kazakhmys does not undertake any obligation to update or change anyforward-looking statements to reflect events occurring after the date of thisannouncement. AVAILABILITY OF THE ANNOUNCEMENT This announcement will shortly be available on the Company's website(www.kazakhmys.com) CONSOLIDATED INCOME STATEMENT Year ended 31 December 2007 $ million Notes 2007 2006------------------------------------- ------ --------- ---------Revenues 4 5,256.6 5,046.5Cost of sales (2,832.2) (2,612.4)------------------------------------- ------ --------- ---------Gross profit 2,424.4 2,434.1Selling and distribution expenses (81.4) (81.4)Administrative expenses (360.0) (280.8)Other operating income 136.0 44.7Other operating expenses (40.5) (35.1)Write offs and impairment losses 5 (30.1) (9.9)------------------------------------- ------ --------- ---------Profit before taxation, finance items and negative goodwill 2,048.4 2,071.6Finance income 6 260.1 266.8Finance costs 6 (282.6) (177.1)Recognition of negative goodwill 3 - 6.5------------------------------------- ------ --------- ---------Profit before taxation 2,025.9 2,167.8Income tax expense 7(a) (599.2) (754.7)------------------------------------- ------ --------- ---------Profit for the year 1,426.7 1,413.1------------------------------------- ------ --------- ---------Attributable to:Equity shareholders of the Company 1,415.7 1,399.7Minority interests 11.0 13.4------------------------------------- ------ --------- --------- 1,426.7 1,413.1------------------------------------- ------ --------- ---------Earnings per share attributable to equityshareholders of the CompanyBasic and diluted 8(a) $3.04 $2.99EPS based on Underlying Profit 8(b) $3.02 $3.00------------------------------------- ------ --------- --------- DividendsDividend per share (US cents) 9 89.3 48.8Total amount of dividends 9 419.1 228.1------------------------------------- ------ --------- --------- CONSOLIDATED BALANCE SHEET At 31 December 2007 $ million Notes 2007 2006------------------------------------- ------ --------- ---------AssetsNon-current assetsIntangible assets 567.5 28.9Tangible assets 2,517.3 1,958.3------------------------------------- --------- ---------Property, plant and equipment 2,129.3 1,814.8Mining assets 388.0 143.5------------------------------------- --------- ---------Available for sale investments 2,401.0 -Other non-current investments 12.2 6.2------------------------------------- --------- --------- 5,498.0 1,993.4------------------------------------- --------- ---------Current assetsInventories 815.1 730.6Prepayments and other current assets 211.8 110.4Trade and other receivables 332.9 263.5Investments 57.3 1,237.2Cash and cash equivalents 438.5 785.4------------------------------------- --------- --------- 1,855.6 3,127.1------------------------------------- --------- ---------TOTAL ASSETS 7,353.6 5,120.5------------------------------------- --------- ---------Equity and liabilitiesShare capital 10(a) 170.3 173.3Share premium 481.0 503.4Capital reserves 10(b) 2,084.0 266.2Retained earnings 3,683.9 2,917.0------------------------------------- --------- ---------Equity attributable to shareholders of the 6,419.2 3,859.9CompanyMinority interests 14.0 31.9------------------------------------- --------- ---------TOTAL EQUITY 6,433.2 3,891.8------------------------------------- --------- ---------Non-current liabilitiesDeferred tax liability 283.0 347.7Employee benefits 37.2 32.7Provisions 97.7 57.4Borrowings 195.9 277.3------------------------------------- --------- --------- 613.8 715.1------------------------------------- --------- ---------Current liabilitiesProvisions 14.2 1.9Borrowings 1.6 -Trade and other payables 223.4 330.4Income taxes payable 65.3 176.9Dividend payable 2.1 4.4------------------------------------- --------- --------- 306.6 513.6------------------------------------- --------- ---------TOTAL LIABILITIES 920.4 1,228.7------------------------------------- --------- ---------TOTAL EQUITY AND LIABILITIES 7,353.6 5,120.5------------------------------------- --------- --------- CONSOLIDATED CASH FLOW STATEMENT Year ended 31 December 2007 $ million Notes 2007 2006-------------------------------------- ------ --------- ---------Cash flows from operating activities Cash receipts from customers 5,258.6 5,076.6 Cash paid to employees and suppliers (3,258.8) (3,034.3)-------------------------------------- --------- --------- Cash inflow before interest and income taxes 1,999.8 2,042.3 paid Interest paid (13.7) (6.8) Income taxes paid (849.6) (623.3)-------------------------------------- --------- ---------Net cash inflow from operating activities 11 1,136.5 1,412.2-------------------------------------- --------- --------- Cash flows from investing activities Interest received 121.3 77.2 Proceeds from disposal of property, plant and 8.0 3.4 equipment Purchase of property, plant and equipment (455.1) (281.1) Investments in mining assets (29.6) (63.6) Purchase of intangible assets (458.3) (0.4) Licence payments for subsoil contracts (3.3) (1.6) Proceeds from disposal of non-current 3.0 2.6 investments Acquisition of non-current investments (8.5) (0.7) Proceeds from disposal of assets held for 51.8 1.0 trading Acquisition of assets held for trading - (50.8) Acquisition of available for sale investments (806.3) - Receipts from/(investments in) short-term bank 1,132.6 (784.7) deposits (net) Acquisition of subsidiaries (net of cash acquired) 3 (259.3) (2.0) --------- -----------------------------------------------Net cash flows used in investing activities (703.7) (1,100.7)-------------------------------------- --------- --------- Cash flows from financing activities Purchase of minority interests (11.5) - Proceeds from contribution to charter capital of - 1.6 subsidiary by minority interests Purchase of Company's issued share capital (270.3) - Proceeds from borrowings - 249.5 Repayment of borrowings 12 (112.4) (41.5) Dividends paid by the Company (419.1) (230.4) Dividends paid by subsidiary to minority (4.8) (3.0) interests --------- -----------------------------------------------Net cash flows used in financing activities (818.1) (23.8)-------------------------------------- --------- --------- Net (decrease)/increase in cash and cash (385.3) 287.7 equivalents Cash and cash equivalents at the beginning of the 785.4 522.0 year Effect of exchange rate changes on cash and cash 38.4 (24.3) equivalents -------------------------------------- --------- --------- Cash and cash equivalents at the end of the year 12 438.5 785.4-------------------------------------- --------- --------- CONSOLIDATED STATEMENT OF CHANGES IN EQUITY Year ended 31 December 2007 Attributable to equity shareholders of the Company ---------------------------------------------------------- $ million Notes Share Share Capital Retained Minority Total capital premium reserves earnings Total interests equity ---------------- ------- ------- ------- -------- -------- ------ ------- At 1 January 173.3 503.4 157.3 1,765.8 2,599.8 26.3 2,626.12006 --------------- ------- ------- ------- -------- -------- ------ ------- Profit for the - - - 1,399.7 1,399.7 13.4 1,413.1year ------- ------- ------- -------- -------- ------ ----------------------Currency - - 80.7 - 80.7 0.4 81.1translationdifferences --------------- ------ ------- ------- ------- -------- ------- ------ ------- - - 80.7 1,399.7 1,480.4 13.8 1,494.2Contribution tocharter capital 10(c) - - - - - 1.6 1.6of subsidiary byminorityshareholders Transfer to 10(b) - - 28.2 (28.2) - - -reserve fund Gain fromdilution of - - - 7.8 7.8 (7.8) -minorityinterest insubsidiary Acquisition of - - - - - 1.0 1.0minorityinterest insubsidiary Equity dividends 9 - - - (228.1) (228.1) - (228.1)paid by theCompany --------------- ------- ------- ------- -------- ------- ------ -------Equity dividends - - - - - (3.0) (3.0) paid bysubsidiary tominorityshareholders At 31 December 173.3 503.4 266.2 2,917.0 3,859.9 31.9 3,891.82006 ------- ------- ------- -------- ------- ------ ---------------------- Profit for the - - - 1,415.7 1,415.7 11.0 1,426.7yearUnrealised gain 10(b) - - 1,594.7 - 1,594.7 - 1,594.7on available forsaleinvestments --------------- ------- ------- ------- -------- ------- ------ -------Currency - - 223.1 - 223.1 0.5 223.6translationdifferences --------------- ------- ------- ------- -------- ------- ------ ------- Shares issued - - 1,817.8 1,415.7 3,233.5 11.5 3,245.0pursuant toacquisition of 10(a) 1.1 66.4 - (52.3) 15.2 (27.3) (12.1) minorityinterest insubsidiary (netof issue costsof $1.0 million) Purchase of 10(a) (4.1) (88.8) - (177.4) (270.3) - (270.3) Company's issuedshare capitalEquity dividends 9 - - - (419.1) (419.1) - (419.1)paid by theCompany --------------- ------- ------- ------- -------- ------- ------ -------Equity dividends - - - - - (2.1) (2.1)paid bysubsidiary tominorityshareholders --------------- ------- ------- ------- -------- ------- ------ -------At 31 December 170.3 481.0 2,084.0 3,683.9 6,419.2 14.0 6,433.22007 --------------- ------- ------- ------- -------- ------- ------ ------- NOTES TO THE FINANCIAL INFORMATION Year ended 31 December 2007 1. General information (a) Organisation and operation Kazakhmys PLC (the 'Company') is a public limited company incorporated in theUnited Kingdom of Great Britain and Northern Ireland. The Company's registeredaddress is 6th Floor, Cardinal Place, 100 Victoria Street, London SW1E 5JL,United Kingdom. The Group comprises the Company and its consolidatedsubsidiaries. The figures shown are based on the statutory accounts for the relevant years onwhich the auditors reports were unqualified but do not constitute statutoryaccounts as defined in section 240 of the Companies Act 1985. The annual reportand accounts for the current year were approved by the Board of Directors on 5March 2008 but have not yet been delivered to the Registrar of Companies. 2. Basis of preparation The financial statements have been prepared using consistent accountingpolicies. The Group has changed the presentation in respect of its minedevelopment costs and mine stripping costs from that disclosed in the 2006Annual Report. Mine development costs, which were previously included withinproperty, plant and equipment, have now been reclassified under "Mining assets"which includes mine stripping costs. The revised presentation of mining assetsis consistent with the Group's internal management reporting structure. (a) Basis of accounting The consolidated financial statements have been prepared on a historical costbasis, except for certain classes of property, plant and equipment which havebeen revalued at 1 January 2002 to determine deemed cost as part of thefirst-time adoption of International Financial Reporting Standards (IFRS) atthat date, and derivative financial instruments which have been measured at fairvalue. The consolidated financial statements are presented in US dollars ($) andall monetary amounts are rounded to the nearest million dollar ($ million)except when otherwise indicated. (b) Basis of consolidation The consolidated financial statements set out the Group's financial position asat 31 December 2007 and the Group's financial performance for the year ended 31December 2007. Subsidiaries are those enterprises controlled by the Group. Control exists whenthe Group has the power, directly or indirectly, to govern the financial andoperating policies of an enterprise so as to obtain benefits from itsactivities. Subsidiaries are consolidated from the date on which control istransferred to the Group and cease to be consolidated from the date on whichcontrol is transferred out of the Group. On acquisition of a subsidiary, thepurchase consideration is allocated to the assets, liabilities and contingentliabilities on the basis of their fair value at the date of acquisition. Theexcess of the cost of the acquisition over the fair value of the Group's shareof identifiable net assets of the subsidiary acquired is recognised as positivegoodwill. Negative goodwill arises where the fair value of the Group's share ofidentifiable net assets of the subsidiary exceeds the cost of the acquisition.Negative goodwill is recognised directly in the income statement. The financial statements of subsidiaries are prepared for the same reportingyear as the Company, using consistent accounting policies. All intercompanybalances and transactions, including unrealised profits arising from intra-grouptransactions, have been eliminated in full. Unrealised losses are eliminated inthe same way as unrealised gains except that they are only eliminated to theextent that there is no evidence of impairment. Minority interests primarily represent the interests in Kazakhmys LLC not heldby the Company. The Company applies the equity concept method of consolidationand accounts for the acquisition of minority interests within equity. (c) Statement of compliance The consolidated financial statements of the Company and all its subsidiarieshave been prepared in accordance with IFRS as issued by the InternationalAccounting Standards Board (IASB) and interpretations issued by theInternational Financial Reporting Interpretations Committee (IFRIC) of the IASB,as adopted by the European Union up to 31 December 2007, and in accordance withthe provisions of the Companies Acts 1985 and 2006. (d) Comparative figures Where a change in the presentational format of the consolidated financialstatements has been made during the year, comparative figures have been restatedaccordingly. (e) Changes in accounting policies There have been no changes in accounting policies. The accounting policiesadopted are consistent with those of the previous financial year. The Group adopted new and amended IFRS and IFRIC interpretations during theyear. Adoption of these revised standards and interpretations did not have anysignificant impact on financial statements of the Group. 3. Business acquisitions Eurasia Gold Inc. On 5 July 2007 the Group acquired 96.34% of the ordinary shares of Eurasia GoldInc. (Eurasia Gold) a company listed on the Toronto Stock Exchange. Since theoffer was accepted by holders of more than 90% of the Eurasia Gold shares,Kazakhmys Gold Inc., an indirectly wholly owned subsidiary of Kazakhmys PLCexercised its right under the compulsory acquisition provisions of the BusinessCorporations Act (British Columbia) to acquire the outstanding Eurasia Goldshares not already owned by Kazakhmys Gold Inc. at the same price of CA$0.85 foreach Eurasia Gold share. On 12 September 2007, the Group completed thecompulsory acquisition, thereby taking its interest in Eurasia Gold to 100%. Theprincipal activity of Eurasia Gold and its subsidiaries is the mining andprocessing of gold ore into refined gold dore. Eurasia Gold was purchased for a total consideration of $270.9 million in cash.At the acquisition date, the net identifiable assets and liabilities of EurasiaGold, including fair value adjustments, were as follows: --------------------------------- ----------- --------- --------- Carrying value Fair value Fair value at at acquisition adjustments acquisition date$ million--------------------------------- ----------- --------- ---------AssetsProperty, plant and equipment (1) 8.6 (0.2) 8.4Mining assets (1) 7.6 231.0 238.6Other assets (1) 2.0 (2.0) -Inventories (2) 11.2 4.1 15.3Trade and other receivables 9.0 - 9.0Cash and cash equivalents 11.6 - 11.6LiabilitiesDeferred tax liability (3) - (46.8) (46.8)Provisions (1.2) - (1.2)Loans and borrowings (9.2) 3.3 (5.9)Trade and other payables (4.0) - (4.0)--------------------------------- ----------- --------- ---------Net identifiable assets 35.6 189.4 225.0Goodwill arising on purchase (4) 45.9--------------------------------- ----------- --------- ---------Purchase consideration paid 270.9--------------------------------- ----------- --------- --------- (1) Fair value adjustments have been made to reflect the fair values of land and buildings, plant and machinery, reserves and resources and other exploration and development projects.(2) Inventories have been revalued to their net realisable value.(3) The increase in the deferred tax liability largely reflects the tax effect of the fair value adjustments.(4) Goodwill has been recognised as a consequence of the requirement to recognise a deferred tax liability on the fair value adjustments. From the date of acquisition, Eurasia Gold has contributed an after tax loss of$2.1 million to the net profit of the Group. If the combination had taken placeat the beginning of the year, the net profit of the Group would have been $4.1million lower at $1,422.6 million and revenues would have been $11.9 millionhigher at $5,268.5 million. 4. Segment information A segment is a distinguishable component of the Group that is engaged either inproviding products or services in a particular business sector (businesssegment), or in providing products or services within a particular economicenvironment (geographical segment), which is subject to risks and rewards thatare different from those of other segments. Segment information is presented inrespect of the Group's primary basis of segmentation in business segments, whichare based on the Group's management and internal reporting structures. Segment results, assets and liabilities include items directly attributable to asegment as well as those that can be allocated on a reasonable basis.Unallocated items comprise corporate head office assets and liabilities,borrowings, income taxes payable, deferred taxes and dividends payable/receivable. The Group's principal operations are based in Kazakhstan, with MKM being basedin Germany. The Group's activities principally relate to: • Kazakhmys Copper operations which involve the production and sale of: - Copper cathodes and copper rod; - Zinc metal and zinc metal in concentrate; - Gold and silver; and - Other by-products (lead, rhenium, selenium, cadmium and sulphuric acid). • Kazakhstan and Central Asia gold production, exploration anddevelopment activity. • Kazakhstan oil and gas exploration and development activity. • German copper processing operation. Segmental information is also provided in respect of revenues, by destinationand by product. (a) Business segments In the year ended 31 December 2007, the Group operated the following fourbusiness segments: Kazakhmys Copper (previously known as Kazakh Mining) The Kazakhmys Copper business, which involves the processing and sale of copperand other metals, is managed as one business segment. The products are subjectto the same risks and returns, exhibit similar long-term financial performanceand are sold through the same distribution channels. The Group processessubstantially all the copper ore it produces and utilises most of the copperconcentrate it processes. The Group has a number of activities that exist solelyto support the mining operations including power generation, coal mining andtransportation. These other activities generate less than 10% of total revenues(both external and internal) and the related assets are less than 10% of totalassets. The UK operation consists of two functions: • A trading function responsible for the purchases of products from theKazakhmys Copper operations, application of an appropriate mark-up and thenonward sale to third parties; • A corporate head office function. For the purposes of business segmental reporting, the trading function isregarded as a sales function on behalf of the Kazakhmys Copper business andconsequently the assets and liabilities related to those trading operations,i.e. trade creditors and trade receivables, are included within the KazakhmysCopper business segment. The expenses, assets and liabilities of the corporatehead office function are disclosed separately as unallocated items. The price at which sales are made to the Company by Kazakhmys LLC is based onthe prevailing price of commodities as determined by the LME. Kazakhmys Gold In September 2007, the Group completed the acquisition of Eurasia Gold Inc. (seenote 4). The principal activities of Eurasia Gold (subsequently renamedKazakhmys Gold) and its subsidiaries is the mining and processing of gold oreinto refined ore and exploration and development activity in the precious metalsector within the Central Asian region. Kazakhmys Petroleum In April 2007, the Group acquired Kazakhmys Petroleum LLP (previously calledDostan-Temir LLP), a company which holds a licence to conduct oil and gasexploration and development activity in the East Akzhar Exploration Block inwestern Kazakhstan. MKM MKM operates in Germany, where it manufactures copper and copper alloysemi-finished products. MKM faces different risks to the Group's otherbusinesses and is therefore shown as a separate business segment. In the year ended 31 December 2006, the Group operated two business segments:Kazakhmys Copper and MKM. Income statement information 2007 ----------------------- ----------------------------------- $ million Kazakhmys MKM Kazakhmys Kazakhmys Total Copper Gold Petroleum ----------------------- --------- ------- --------- --------- ------- Sales to external 3,588.3 1,643.0 25.3 - 5,256.6customers --------- -------- --------- --------- -------------------------------Gross profit 2,359.3 61.3 3.8 - 2,424.4Operating costs (382.4) (51.0) (3.0) (1.4) (437.8)----------------------- --------- -------- --------- --------- --------Segment results 1,976.9 10.3 0.8 (1.4) 1,986.6Unallocated corporate 61.8income (net) 1 --------- -------- --------- --------- -------------------------------Profit before taxation andfinance items 2,048.4Net finance costs (22.5)----------------------- --------- -------- --------- --------- --------Profit before taxation 2,025.9Income tax expense (599.2)----------------------- --------- -------- --------- --------- --------Profit for the year 1,426.7----------------------- --------- -------- --------- --------- -------- 1 Includes dividend income of $93.9 million from ENRC PLC. 2006 ----------------------- $ million Kazakhmys MKM Total----------------------------------- Copper --------- --------- --------- Sales to external customers 3,330.4 1,716.1 5,046.5----------------------------------- --------- --------- ---------Gross profit 2,364.5 69.6 2,434.1Operating costs (282.4) (48.0) (330.4)----------------------------------- --------- --------- ---------Segment results 2,082.1 21.6 2,103.7Unallocated corporate costs (32.1)----------------------------------- --------- --------- ---------Profit before taxation, finance items and 2,071.6negative goodwillNet finance income 89.7Recognition of negative goodwill 6.5----------------------------------- --------- --------- ---------Profit before taxation 2,167.8Income tax expense (754.7)----------------------------------- --------- --------- ---------Profit for the year 1,413.1----------------------------------- --------- --------- --------- This information is provided by RNS The company news service from the London Stock Exchange

---

Related Shares:

KAZ.L