22nd Jun 2007 07:01
Frontier Mining Ltd22 June 2007 Frontier Mining Ltd. ("the Company" or "Frontier") Final Results for the year ended 31 December 2006 Highlights: • Revenue of $2,974,472 from gold and silver sales in 2006, providing a gross operating margin of $1,005,632 • Debt free with net current assets of $3.4 million • Capital expenditures of $5.3 million • $3.1 million spent on exploration • Discovery of three new significant gold/silver deposits at the Naimanjal Complex • Several new areas of potential oxide gold-silver mineralisation discovered at Koskuduk • Potential for Koskuduk to be a polymetallic target confirmed by reinterpretation of historical data and metallurgical test work Post Year End Highlights: • Gold and silver resources increased at Naimanjal • Two year exploration extension for the evaluation of a commercial discovery at the Baltemir License, our fifth since listing in September 2004 • Strengthened management team Brian Savage, CEO of Frontier commented, "We have made further progress acrossour portfolio of projects this year and have reported encouraging results fromthe various gold and copper exploration programmes we are running concurrently.We believe our prospective exploration assets are balanced well with ourproducing Naimanjal mine, which provides important revenues for the Company.Despite the issues encountered in 2006 and the subsequent downgrading of ourproduction targets, we are positioned to meet our stated gold and silverproduction targets and we look forward to the coming year with confidence." Enquiries Frontier Mining Ltd Brian Savage 020 7898 9100Parkgreen Communications Louise Goodeve/Justine Howarth 020 7851 7480Evolution Securities Limited Tim Redfern 020 7071 4300 About Frontier Mining Ltd: Frontier Mining Ltd. is a mineral exploration and development company that wasincorporated in the state of Delaware, USA, on 5 August 1998 for the purpose ofexploring and developing gold and copper deposits in the Republic of Kazakhstan.Through its subsidiaries and affiliates, Frontier locates, evaluates,acquires, explores and develops mineral properties. Frontier has two licenses owned by its wholly owned subsidiaries in Kazakhstan.They are the Naimanjal exploration and mining licence, held by FML Kazakhstan,and the Baltemir exploration licence, held by Baltemir LLP. Frontier has oneproducing gold mine, Naimanjal; one pre-feasibility stage gold project,Koskuduk; and one exploration stage gold prospect, Baltemir. Frontier also has one potential copper porphyry deposit with associated gold andmolybdenum, Baitimir; and several copper/gold prospects along a 25-km trendincluding both VMS and porphyry types. Metallurgical tests on its Beschoku andYubileiny copper projects confirm the oxide copper ore is amenable to extractionusing low cost SX-EW technology. Frontier shares are traded on the AIM market of the London Stock Exchange.Frontier has 132,979,597 ordinary shares issued and 6,057,091 outstandingoptions and warrants, giving 139,026,688 fully diluted ordinary shares. Further company information may be accessed at the Frontier Mining Ltd. websiteat: www.frontiermining.com Chairman's Statement I am pleased to report the financial results of Frontier for the financial yearended 31 December 2006. During 2006, we made progress developing our Naimanjalgold/silver mine and continued to advance our other gold and copper projects. The Naimanjal Complex The Naimanjal Complex is a highly mineralised commercial discovery area of about170 square kilometres consisting of the existing Naimanjal gold/silver mine andsix satellite deposits. The Naimanjal gold/silver mine is only a small part ofthis area. During 2006 Naimanjal produced 4,879 ounces of gold and 10,187 ounces of silver,of which 4,675 ounces of gold and 8,703 ounces of silver were sold during 2006.Although we are disappointed that we did not meet our production targets in2006, we are now well placed to ramp up production over the coming year, and itis important to remember that Frontier is currently one of the few goldproducers on AIM. Furthermore, we have increased gold and silver resources atNaimanjal and expect to convert a good portion of these resources to reservesduring 2007. Although we are still operating under pilot production status in Kazakhstan, wehave reported revenue of $2,974,472 from sales of gold and silver during 2006.The average price received for gold was $611.68 per ounce and $13.20 per ouncesilver, set against a cash cost of $364.00 per ounce. The issues that caused lower than expected gold and silver production during2006 were lower than expected recoveries and lower than expected grade due toboth higher dilution and higher ore losses than forecast. In response to this,we made modifications to the Merrill Crowe circuit and installed a carboncircuit to help increase recovery as well as through put. Unfortunately,colder than expected weather in November required us to cease stackingoperations, and caused a slow down in recovery due to lower solutiontemperatures in the heap. We plan to start heating solutions one month earlierthis year to increase the solution temperature in the heap well ahead of winterweather. We have implemented stricter grade control procedures to better defineore zones, with a particular emphasis on minimising ore losses and fullyappreciated the importance of silver. It is important to note that because goldand silver are not directly correlated, we can have gold with silver, goldwithout silver, and silver without gold. Our grade models are based on a goldequivalent, thus incorporating silver in our mine plans and therefore,minimising the loss of silver and improving overall economics. Exploration at Naimanjal during 2006 led to the discovery of three newsignificant gold/silver deposits, including Pit 3 West, Grassy Knoll South, andArea 124. The Naimanjal exploration programme included 39 core holes totaling1,826 metres, 374 reverse circulation ("RC") holes totaling 16,131 metres, 93trenches totaling 14.8 line kilometres, 18 line kilometres of ground magnetics,42.5 line kilometres of induced polarisation and resistivity, and a geochemicalprogramme consisting of 950 soil samples over 19 line kilometres. Exploration on the satellite deposits Baritovy, Jal, Ergozy, and Jantailakincluded 42 RC drill holes totaling 1,421 metres, 52 trenches totaling 3.5 linekilometres, 49 line kilometres of induced polarisation and resistivity surveys,and a geochemical programme consisting of 503 soil samples over 9.3 linekilometres. A Pilot Production Licence has now been granted on the Baritovy satellitedeposit, 9 kilometres from the existing Naimanjal mine. Koskuduk Prospect Frontier's drilling programme at Koskuduk in 2006 was designed to test theshallow strike extensions of known mineralisation and areas of anomalous soilgeochemistry. This successfully identified several new areas of potential oxidegold mineralisation, and further infill drilling is now required. The base metal potential of Koskuduk was discovered during this latest drillprogramme, with assays indicating that Koskuduk has a polymetallicgold-silver-zinc-lead signature at depth. The potential for Koskuduk to be apolymetallic target has also been confirmed by the re-interpretation of ahistoric data set comprising approximately 159 diamond holes (approximately37,387 metres) and approximately 4,930 RC holes (approximately 147,153 metres),which were drilled from 1991 to 1994 by a joint venture between theSemipalatinsk Exploration Party and Semgeo JSC. Baltemir Baltemir is situated about 56 kilometres east of Frontier's producing gold/silver mine, Naimanjal. The Licence covers an area of 154 square kilometres andis held by Frontier's wholly owned subsidiary, Baltemir LLP. So far, theBaltemir exploration programme, overseen by Behre Dolbear, has identified thepotential for a small gold resource of narrow high grade vein material at WestBaltemir occurring within a zone 1 kilometre wide and 7 kilometres long. Todate, twenty-five core holes totaling 1,941 metres have been drilled at variouslocations along this quartz vein system. Earlier this year, the Ministry of Energy and Mineral Resources of the Republicof Kazakhstan approved a two year exploration extension for the evaluation of acommercial discovery at Frontier's Baltemir License in north east Kazakhstan.The exploration license is now valid until 5 March 2009. Beschoku & Yubileiny The Beschoku prospect is a high grade gold-copper breccia pipe complex with avariably developed oxide zone that is located within the same structuralcorridor as the Yubileiny prospect. Data indicate that drilling has only testedthe periphery of a significant anomaly that will be explored further in the 2007program. The Yubileiny prospect is approximately 20 kilometres to the southeastof Beschoku and is a structurally controlled copper target with the potentialfor polymetallic silver-lead-copper mineralisation at depth. Metallurgicaltests on Beschoku and Yubileiny confirm the oxide copper is amenable toextraction using low cost SX-EW technology. Baitimir The Baitimir prospect is located approximately 25 kilometres to the north ofBeschoku and comprises a copper-mineralised dioritic and granodioritic intrusivecomplex with a variably developed secondary copper zone. The 2006 trenchingprogramme intercepted significant mineralisation including 10 metres grading1.06% copper and 88 metres grading 0.47% copper. Outlook We are forecasting production of 15,000 ounces of gold and 50,000 ounces ofsilver at Naimanjal during 2007. Included in this forecast are plans totransport an initial small tonnage of higher grade ore from Baritovy toNaimanjal for stacking and processing, while additional exploration isundertaken to further define and extend the Baritovy deposit. The two issues that will have the greatest impact on production in 2007 aregrade control and water. Grade control will ensure we maximize the grade to theheap leach pads and minimise ore losses. Water will ensure that the heap leachpads are sufficiently saturated because second lifts will be stacked on certainheap leach pad cells this year. The 2007 exploration programme at Naimanjal and satellites will include over 400RC holes totaling 20,000 metres, 32 core holes totaling 3,400 metres, 18,000metres of trenching, along with soil sampling, geological mapping and outcropsampling. The programme will focus on expanding known reserves and resources;follow-up drilling and trenching on five new mineralised areas explored in 2006at Naimanjal; initial trenching and drilling on two new prospects; andtrenching, core and/or RC drilling at the satellite projects at Baritovy, Jal,Ergozy, Jantailak, Crystalnoye, and Toksanbai. At Koskuduk, our main focus in 2007 will be the completion of a scoping studyincluding metallurgical test work on both oxide and sulphide mineralisation,defining the near surface oxide gold resources and reserves to a JORC standard,and identifying polymetallic structural zones for drilling. At Baltemir, Behre Dolbear has recommended a limited three phase explorationprogramme to test the potential of three key targets. The exploration programmeincludes 70 trenches totaling 1,050 metres, 35 core holes totaling 1,420 metres,and finally, metallurgical test work. At our copper projects, Beschoku, Yubileiny, and Baitimir, we will be focusingour efforts on Beschoku, the high grade gold-copper breccia pipe complex, whilecontinuing to do limited additional drilling at Yubileiny and defining highgrade areas at Baitimir to drill both sulphide and oxide material. I would like to thank my fellow directors, staff and consultants for their hardwork and dedication and, most of all, our loyal shareholders for their continuedsupport of the Company. Brian C. SavageChairman and Chief Executive Officer 22 June 2007 FRONTIER MINING LTD(A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF OPERATIONSFOR THE YEAR ENDED DECEMBER 31, 2006(Expressed in US Dollars) Notes 2006 2005 Revenue 5 2,974,472 231,781Cost of sales 6 (1,968,840) (324,115)Gross profit / (loss) 1,005,632 (92,334) Selling, general and administrative expenses 8 3,340,652 2,867,619Legal and related fees 576,404 515,645Operating loss 2,911,424 3,475,598 Interest income (187,888) (33,093)Finance costs 84,777 7,187Other expenses, net 27,956 12,118Foreign exchange (gain)/loss (191,786) 886,431 Loss before taxation 2,644,483 4,348,241 Taxation (1,051,840) - Consolidated net loss 1,592,643 4,348,241 Loss per share - basic and diluted 25 0.01 0.05 FRONTIER MINING LTD(A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED BALANCE SHEETAT DECEMBER 31, 2006(Expressed in US Dollars) Notes 2006 2005 ASSETSNon-current assetsExploration and development costs 9 9,745,844 6,883,607Property, plant and equipment 10 9,577,021 4,999,869Intangible assets 43,478 49,691Long-term value added tax receivable 11 436,159 400,622Deferred tax asset 24 1,100,856 -Restricted cash 12 112,000 112,000 21,015,358 12,445,789Current assetsInventory 13 2,984,369 934,835Trade accounts receivable 14 586,404 142,445Current portion of value added tax receivable 11 320,000 -Prepaid expenses 15 134,878 282,706Other accounts receivable 16 26,101 249,174Cash and cash equivalents 17 1,253,063 13,958,038 5,304,815 15,567,198TOTAL ASSETS 26,320,173 28,012,987 SHAREHOLDERS' EQUITY AND LIABILITIESShareholders' equityShare capital 18 1,325,816 1,325,816Share premium 18 36,440,425 36,440,425Accumulated deficit (14,321,876) (12,729,233) 23,444,365 25,037,008Non-current liabilitiesProvision for future site restoration 19 59,477 119,187Due to Government of the Republic of Kazakhstan 20 700,188 689,605Debt to US Trade and Development Agency 21 240,000 340,000Deferred tax liability 24 49,016 - 1,048,681 1,148,792Current liabilitiesAccounts payable 22 959,720 863,287Debt to US Trade and Development Agency 21 100,000 -Due to Government of the Republic of Kazakhstan 20 31,587 132,146Other current liabilities 23 735,820 831,754 1,827,127 1,827,187TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES 26,320,173 28,012,987 FRONTIER MINING LTD (A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITYFOR THE YEAR ENDED DECEMBER 31, 2006 (Expressed in US Dollars) Notes Share Share premium Treasury Accumulated Total capital stock deficit At January 1, 2005 611,179 12,139,942 (670) (8,380,992) 4,369,459Placement of shares 18 175,000 7,812,897 - - 7,987,897Shares granted 18 6,350 239,013 - - 245,363Private placement 18 400,000 12,359,240 12,759,240Exercise of 18 131,954 3,850,673 670 - 3,983,297warrantsExercise of options 18 1,333 38,660 39,993Net loss - - - (4,348,241) (4,348,241)At December 31, 1,325,816 36,440,425 - (12,729,233) 25,037,0082005 Net loss - - - (1,592,643) (1,592,643) At December 31, 1,325,816 36,440,425 - (14,321,876) 23,444,3652006 FRONTIER MINING LTD(A DEVELOPMENT STAGE ENTERPRISE) CONSOLIDATED STATEMENT OF CASH FLOWSFOR THE YEAR ENDED DECEMBER 31, 2006(Expressed in US Dollars) Notes 2006 2005OPERATING ACTIVITIES:Loss before taxation (2,644,483) (4,348,241)Adjustments for non cash flow items:Depreciation of property, plant and equipment 10 762,474 471,244Amortization of intangible assets 7,987 8,978Increase in provision for tax liabilities 23 15,800 30,000Foreign Exchange (gain)/loss, net (191,786) 886,431Loss from disposal of property, plant and equipment 10 31,430 -Finance costs 19/20 84,777 7,187Operating cash flows before movement in working capital (1,933,801) (2,944,401) Increase in value added tax receivable 11 (355,537) (400,622)Increase in inventory 13 (2,049,534) (934,835)Increase in trade accounts receivable 14 (443,959) (142,445)Decrease/ (increase) in prepaid expenses 15 147,828 (208,563)Decrease/ (increase) in other accounts receivable 16 223,073 (223,071)Increase in restricted cash 12 - (112,000)Increase in accounts payable 22 96,433 661,947Increase /(decrease)in other current liabilities 23 (111,734) 400,051 NET CASH USED IN OPERATING ACTIVITIES (4,427,231) (3,903,939) INVESTING ACTIVITIES:Additions to exploration and development costs 9 (3,096,700) (2,960,759)Purchase of property, plant and equipment 10 (5,371,056) (5,549,860)Purchase of intangible assets (1,774) (11,340)NET CASH USED IN INVESTING ACTIVITIES (8,469,530) (8,521,959) FINANCING ACTIVITIES:Capital contributions, net of direct issue cost - 24,770,427Repayment of short-term debts - (412,106)NET CASH FLOWS FROM FINANCING ACTIVITIES - 24,358,321 Net decrease/(increase) in cash and cash equivalents (12,896,761) 11,932,423 Effects of exchange rate changes on the balance of cash held in 191,786 (625,128)foreign currencies Cash and cash equivalents at beginning of year 17 13,958,038 2,650,743 Cash and cash equivalents at end of year 17 1,253,063 13,958,038 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED DECEMBER 31, 2006(Expressed in US Dollars) 1. NATURE OF THE BUSINESS Frontier Mining Ltd ("Frontier" or "the Company") was incorporated under thelaws of the state of Delaware on August 5, 1998, for the purpose of exploring,and if warranted, developing gold and copper deposits in the Republic ofKazakhstan. The principal activities of the Company and its subsidiaries (the "Group") as ofDecember 31, 2006 are as follows: Operating entity Principal activity Country of incorporation Frontier Mining Ltd Management of the Group United States of AmericaFML Kazakhstan LLP Exploration and development Republic of KazakhstanBaltemir LLP Exploration Republic of Kazakhstan Through its wholly owned subsidiaries, FML Kazakhstan LLP ("FMLK") and BaltemirLLP, Frontier holds interests in, or is the beneficial owner of, non-producingand producing gold and copper properties in Kazakhstan. The Group is activelyexploring and developing its wholly owned Naimanjal and Baltemir contractlicense areas. The Naimanjal contract dated August 16, 1999, represents the combinedexploration and extraction contract for a 30-year period. The Naimanjal licenseNo. 1166DD currently covers an approximate area of 529 square kilometres in theNorth Eastern Kazakhstan. The Baltemir license No. 1256D issued by the Competent Agency on August 16,1999, covers an area of approximately 154 square kilometres in the North EasternKazakhstan. On August 27, 2005, the Group received regulatory approvals for a 21/2 yearextension of the exploration period to evaluate four commercial discoveries onthe Naimanjal license. On August 27, 2005, the Company received regulatory approvals and commencedpilot production on the Naimanjal Mine. At December 31, 2006, the Company's registered office was located at: 2711Centerville Road, Suite 400, Wilmington, Delaware 19808, the USA. At December31, 2006, the Company had four representative offices, two of which were locatedin the Republic of Kazakhstan, one in Colorado, USA, and one in London, England. The number of employees of the Group at December 31, 2006, was 189 people (2005:89 employees). Organization history - On August 5, 1998, the founders of Frontier agreed thatFrontier, upon its incorporation, would issue 280,000 ordinary shares at US$0.01 par value per share to its founders as compensation and acquire, fromSEMTECH in exchange for the assets and assumption of liabilities and theissuance of 200,000 ordinary shares of Frontier at par value: • 100% of Polygon Resources LLP, • 70% of Besshoky LLP ("Besshoky") and • 50% of Semgeo LLP. The purchase accounting was used to account for the acquisition and,accordingly, the assets acquired and liabilities assumed were recorded at theirrespective fair market values as of the acquisition date. On October 31, 1998, Polygon Resources LLP was re-registered in Kazakhstan asFML Kazakhstan LLP ("FMLK") to reflect the name change and the Company's 100%ownership. In September 1999, Frontier acquired 100% of Baltemir LLP by issuing to itsowners 50,000 ordinary shares of Frontier and agreeing to pay historicalexploration expenses to the main shareholder. Besshoky LLP and Semgeo LLP ceased their operations and were liquidated by theCompany in January and February 2004, respectively. Political and economic environment - The Kazakhstan economy continues to displaycertain traits consistent with that of a market economy in transition. Thesecharacteristics have in the past included: • higher than normal historic inflation, • lack of liquidity in the capital markets, and • the existence of currency controls, which cause the national currency tobe illiquid outside of Kazakhstan. The continued success and stability of the Kazakhstan economy will besignificantly impacted by the government's continued actions with regard tosupervisory, legal, and economic reforms. Meanwhile, the Group's operations and financial position will continue to beaffected by Kazakhstan political developments including the application ofexisting and future legislation and tax regulations. The likelihood of suchoccurrences and their effect on the Group could have a significant impact on theGroup's ability to continue operations. As of December 31, 2006, the Group doesnot believe that any material matters exist relating to the developing marketsand evolving fiscal and regulatory environment in Kazakhstan, including currentpending or future governmental claims and demands, which would requireadjustment to the accompanying consolidated financial statements in order forthose statements not to be misleading. 2. PRESENTATION OF FINANCIAL STATEMENTS Consolidated subsidiaries - FML Kazakhstan LLP (100% ownership) and Baltemir LLP(100% ownership). Basis of presentation - These consolidated annual financial statements have beenprepared in accordance with International Financial Reporting Standards("IFRS"). IFRS include standards and interpretations approved by InternationalAccounting Standards Boards ("IASB"), including International AccountingStandards ("IAS") and interpretations issued by the International FinancialReporting Interpretations Committee ("IFRIC"). In absence of specific IFRSguidance for the extractive industries, the Group has developed accountingpolicies in accordance with practices in the mining industry so that they do notcontradict the IFRS principles. These consolidated financial statements are presented in US Dollars ("US$"),unless otherwise indicated. The US Dollar is used as the functional andpresentation currency as the majority of the Group's transactions aredenominated and measured in US Dollars. Transactions in other currencies aretreated as transactions in foreign currencies. The consolidated annual financial statements are prepared under the historicalcost basis, except for mark-to-market valuation of certain financial instrumentsin accordance with IAS 39 "Financial Instruments: Recognition and Measurement",which is more fully described in note 4 (h). Adoption of new and revised standards - The Group has adopted all the new andrevised Standards and Interpretations issued by the IASB and the IFRIC that arerelevant to its operations and effective for reporting periods ending December31, 2006. At the date of authorization of these consolidated annual financial statements,the following Standards, Interpretations and amendments to published Standardswere issued but not yet effective: • IFRS 7 "Financial Instruments: Disclosures"; • Amendments to IAS 1 "Presentation of Financial Statements" on capitaldisclosures; • IFRIC 8 "Scope of IFRS 2"; • IFRIC 9 "Reassessment of Embedded Derivatives"; • IFRIC 7 "Applying the Restatement Approach under IAS 29 "FinancialReporting in Hyperinflationary Economies"; • IFRIC 10 "Interim Financial Reporting and Impairment"; • IFRIC 11 "IFRS 2 - Group and Treasury Share Transactions"; • IFRIC 12 "Services Concession Arrangements". Management anticipates that the adoption of these Standards and Interpretationsin future periods will have no material impact on the consolidated annualfinancial statements of the Group. Going concern - These consolidated annual financial statements were prepared ona going concern basis and there is no evidence that the Group is intending or ina position to terminate or significantly reduce its operations in the nearfuture. The Group operates as a natural resources exploration company. To date, theGroup has not earned significant revenues and is considered to be in theexploration and development stage. The Group has an accumulated deficit of US$14,321,876 and US$ 12,729,233 as of December 31, 2006, and 2005, respectively.This factor, as well as other factors, raise doubt about whether the Group cancontinue as a going concern. Additional financing will be required to fund any material expenditures relatingto new mineral exploration projects or advancing the Group's current projects.Whilst the Group has been successful in raising financing in the past, there canbe no assurance that the Group will be able to continue to raise such additionalfinancing as may be required for future operations. The Group intends to seek additional financing through the issuance of equity ordebt instruments. The consolidated annual financial statements do not include any adjustments toreflect the possible future effects on the recoverability and classification ofassets and liabilities that may result from the outcome of this uncertainty. 3. ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of consolidated annual financial statements in conformity withIFRS requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, revenues and expenses and thedisclosure of contingent assets and liabilities. Due to the inherent uncertaintyin making those estimates, actual results reported in future periods coulddiffer from such estimates. The estimates and assumptions that have a significant risk of causing a materialadjustment to the carrying amounts of assets and liabilities within the nextfinancial year are discussed below. Useful economic lives of property, plant and equipment - The Group's mining andnon-mining property, plant and equipment are depreciated on a straight linebasis over their useful economic lives or life of mine whichever is shorter.Management periodically reviews the appropriateness of the useful economic livesof the assets. The review is based on the current condition of the assets andthe estimated period during which they will continue to bring economic benefitto the Group. Exploration and evaluation assets - Management's judgment is involved indetermination of whether the expenditures which are capitalised as explorationand evaluation assets will be recouped by future exploration or sale. Todetermine this, management estimates the possibility of finding recoverable orereserves related to particular area of interest unless evaluation activitieshave not reached a stage that permits a reasonable assessment of the existenceof commercially recoverable ore reserves. Mine evaluations - The decision to develop a mine is based on the economics ofan identified resource extraction. These economics change over time andmanagement's judgments are based on best available information at a time,including mineral resource prices and reserve estimations. In the case ofdeferred exploration costs, these relate to ongoing exploration activities thatmanagement is actively undertaking to further assess the future opportunity toexploit reserves in those areas of interest. Provision for mine abandonment and site restoration - The Group's miningactivities are subject to various laws and regulations governing the protectionof the environment. The Group estimates the provision for mine abandonment andsite restoration obligations based on management's understanding of the currentlegal requirements in the various jurisdictions, terms of the license agreementsand internally generated engineering estimates. Provision is made, based on netpresent values, for mine abandonment and site restoration costs as soon as theobligation arises. Actual costs incurred in future periods could differmaterially from the amounts provided. Additionally, future changes toenvironmental laws and regulations, life of mine estimates and discount ratescould affect the carrying amount of this provision. Impairment of assets - The Group reviews the carrying amounts of its tangibleand intangible assets to determine whether there is any indication that thoseassets are impaired. In making the assessment of impairment, assets that do notgenerate independent cash flows are allocated to an appropriate cash generatingunit. Management applies their judgment in allocating assets that do notgenerate independent cash flows to appropriate cash generating units and inestimating the timing and value of the underlying cash flows within thevalue-in-use calculation. Subsequent changes to the cash generating unitallocation or to the timing of cash flows could impact the carrying value of therespective assets. Contingencies - By their nature, contingencies will only be resolved when one ormore future events occur or fail to occur. The assessment of such contingenciesinherently involves the exercise of significant judgment and estimates of theoutcome of future events (see note 26). 4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Group's significant accounting policies are set out below: (a) Basis of consolidation Subsidiaries The consolidated annual financial statements incorporate financial statements ofthe Company and its subsidiaries, from the date that control effectivelycommenced until the date that control effectively ceased. Control is achievedwhere the Company has power to govern the financial and operating policies of anentity so as to obtain benefit from its activities. The results of subsidiaries acquired or disposed of during the year are includedin the consolidated income statement from the effective date of acquisition orup to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements ofsubsidiaries to bring their accounting policies into line with those used byother members of the Group. All intra-group transactions, balances, income and expenses are eliminated infull on consolidation. (b) Property, plant and equipment Property, plant and equipment is stated at cost less accumulated depreciationand impairment losses. Depreciation is computed on a straight-line basis over the following estimateduseful lives: YearsMachinery & equipment 4 - 10Transport& vehicles 3 - 5Office equipment 3 - 7 The useful life and depreciation method are reviewed periodically to ensure thatthe method and period of depreciation are consistent with the expected patternof economic benefits from items of property, plant and equipment. The initial cost of property, plant and equipment comprises its purchase price,including import duties and non-refundable purchase taxes and any directlyattributable costs of bringing the asset to its working condition and locationfor its intended use. Capitalized cost includes major expenditures for improvements and replacementsthat extend the useful lives of the assets or increase their revenue generatingcapacity. Repairs and maintenance expenditures that do not meet the foregoingcriteria for capitalization are charged to the consolidated income statement asincurred. (c) Exploration and development costs The decision to develop a mine property within a project area is based on anassessment of the commercial viability of the property, the availability offinancing and the existence of markets for the product. Initially, theexploration costs are capitalized and then reviewed for impairment on a regularbasis. Expenditures related to the following activities are included in theinitial measurement of exploration assets: • acquisition of rights to explore, mining licenses; • topographical, geological, geochemical and geophysical studies; • exploratory drilling; • trenching; • sampling; and • activities in relation to evaluating technical feasibility andcommercial viability of extracting a mineral resource. Expenditures not included in the initial measurement of exploration assets are: • the development of a mineral resource once technical feasibility andcommercial viability of extracting a mineral resource have been established; and • administration and other general overhead costs. Once the decision to proceed to develop is made, development and otherexpenditures relating to the project are capitalized and carried at cost withthe intention that these will be amortized by charges against earnings fromfuture mining operations. At the same time, the exploration assets accumulatedin respect of the property, for which the decision to proceed with thedevelopment has been made, are reclassified into the development costs. Upon reaching designed commercial production capacity, exploration anddevelopment costs are consistency amortized using the unit of production methodbased on the volumes of proved and probable reserves of ore and are written offas the assets are depleted. (d) Site restoration costs Provision is made for the close down, restoration and environmental clean upcosts where there are legal or constructive obligations to do so (which includesthe dismantling and demolition of infrastructure, removal of residual materialsand remediation of disturbed areas) in the accounting period when the relatedenvironmental disturbance occurs, based on the estimated future costs. Theprovision is discounted where material and the unwinding of the discount isshown as a finance cost in the consolidated statement of operations. At the timeof establishing the provision, a corresponding asset is capitalized andamortised on a unit of production basis upon the commencement of production. The provision is reviewed on an annual basis for changes in cost estimates oreconomic useful life of existing operations. (e) Impairment of tangible and intangible assets At each balance sheet date, the Group reviews the carrying amounts of itstangible and intangible assets to determine whether there is any indication thatthose assets have suffered an impairment loss. If any such indication exists,the recoverable amount of the asset is estimated in order to determine theextent of the impairment loss (if any). Where it is impossible to estimate therecoverable amount of an individual asset, the Group estimates the recoverableamount of the cash-generating unit to which the asset belongs. If the recoverable amount of an asset (or cash-generating unit) is estimated tobe less than its carrying amount, the carrying amount of the asset (orcash-generating unit) is reduced to its recoverable amount. Impairment lossesare recognized as an expense immediately, unless the relevant asset is land,buildings, other than investment property, or equipment, carried at a revaluedamount, in which case the impairment loss is treated as decrease in revaluationreserve. (f) Inventories Materials are stated at the lower of cost or net realizable value. Costcomprises direct materials, customs duties, and transportation and handlingcosts. Cost is calculated usingthe first-in-first-out method. Work-in-process is valued at the net unit cost of production based on theweighted average method. Finished goods are measure at the lower of net production costs on the weightedaverage basis, or net realizable value. Net realizable value represents theestimated selling price less all estimated costs to completion and costs to beincurred in marketing, selling and distribution. (g) Equity instruments Equity instruments issued by the Group are recorded at the time proceeds arereceived, net of direct issue cost. Changes in the fair value of a contractarising from variations in market interest rates do not affect the amount ofcash or other financial assets to be paid or received, or the number of equityinstruments to be received or delivered. Changes in the fair value of an equityinstrument are not recognized in the financial statements. (h) Financial instruments Financial instruments recognized on the Group's balance sheet mainly includetrade and other receivables, cash and cash equivalents, borrowings and trade andother payables Accounts receivable - Accounts receivable are stated at their net realizablevalue after deducting provisions for uncollectible amounts. Cash and cash equivalents - Cash and cash equivalents include cash on hand, cashwith banks, deposits and marketable securities with original maturity of threemonths or less. Restricted cash - Restricted cash includes deposits with banks pursuant to thesubsurface use contracts. The Group is obliged to accumulate cash to meet theobligations to restore and make the mines safe after use and the estimated costsof cleaning up any chemical leakage. Trade and other payables - Trade and other payable are initially measured asfair value and are subsequently measured at amortised cost using the effectiveinterest method. Borrowings - Loans and borrowings are initially measured at proceeds received,net of direct transaction costs. Subsequently loans and borrowing are measuredat amortised cost, which is calculated by taking into account any discount orpremiums on settlement. Finance charges, including premiums payable onsettlement or redemption, are accounted for on accrual basis and added to thecarrying amount of the instrument to the extent that they are not settled in theperiod in which they arise. (i) Interest on borrowings Interest on borrowings relating to major qualifying capital projects underconstruction are capitalised during the construction period in which they areincurred. Once a qualifying capital project has been fully commissioned, theassociated borrowing costs are expensed in the income statement as and whenincurred. Other interest is expensed in the income statement as and when incurred. (j) Employee benefit costs The Group accounts for its employee benefit costs in accordance with the pensionscheme of the Republic of Kazakhstan, which requires current contributions bythe employer and employee calculated as a percentage of current gross salarypayments. Such contributions (social tax payments) are charged to expense asincurred. (k) Provisions A provision is recognized when, and only when the Company has a presentobligation (legal or constructive) as a result of a past event and it isprobable (that is, more likely than not) that an outflow of resources embodyingeconomic benefits will be required to settle the obligation, and a reliableestimate can be made of the amount of the obligation. Provisions are reviewed ateach balance sheet date and adjusted to reflect the current best estimate. Wherethe effect of the time value of money is material, the amount of the provisionis determined based on the present value of the expenditures expected to berequired to settle the obligation. (l) Revenue recognition Revenue is recognized when legal title, and all the risks and benefitsassociated with the ownership of goods, are passed to the customers, and it isprobable that the economic benefits associated with the transaction will flow tothe Group and the amount of revenue can be measured reliably. Revenue ismeasured at the fair value of the consideration received or receivable andrepresents amounts receivable for goods and services provided in the normalcourse of business, net of discounts and Value Added Tax ("VAT"). (m) Taxation Frontier is subject to United States federal, state and foreign income taxes.There are currently no income taxes payable. For companies working under Kazakhlegislation, current taxes are calculated in accordance with the regulations ofthe Republic of Kazakhstan and are based on the companies' operating resultsprepared under Kazakh Accounting Standards after adjustments for tax purposes. Deferred income taxes are accounted for using the balance sheet liability methodin respect of temporary differences between the tax basis of assets andliabilities and their reported amounts in the accompanying consolidated annualfinancial statements to the extent that there is a reasonable expectation oftheir realization. Deferred tax liabilities are generally recognized for alltaxable temporary differences and deferred tax assets are recognized to theextent that it is probable that taxable profits will be available against whichdeductible temporary differences can be utilized. A valuation allowance is provided when it is probable that some portion or allof the deferred tax assets will not be realized. Deferred tax assets andliabilities are offset when they relate to income taxes levied by the sametaxation authority and the Company intends to settle its tax assets andliabilities on a net basis. Deferred tax assets and liabilities are measured using the tax rates expected toapply to taxable income in the years in which those temporary differences areexpected to be recovered or settled. It is charged or credited to theconsolidated statement of operations, except when it relates to items creditedor charged directly to equity, in which case the deferred tax is also dealt within equity. (n) Reclassifications Certain prior period 2005 comparative amounts have been reclassified to conformto current year presentation. The following summarizes the most significantreclassifications: Nature of reclassification Account As previously Amount of As reclassified reported ReclassificationBalance SheetReclassification of current portion USTDA liability - 100,000 (100,000) -of USTDA liability to non-current currentReclassification of current portion USTDA liability - 240,000 100,000 340,000of USTDA liability to non-current non-current Statement of cash flowsReclassification of non cash foreign Foreign exchange loss - 886,431 886,431exchange loss from Purchase ofProperty and EquipmentReclassification of non cash foreign Purchases of property (5,288,557) (261,303) (5,549,860)exchange loss from Purchase of and equipmentProperty and Equipment Reclassification of non cash foreign Effect of exchange rate - (625,128) (625,128)exchange loss from Purchase of changes on the balancesProperty and Equipment of cash held in foreign currencies Reclassification of non cash amounts Changes in working 821,751 (821,751) -from changes in exploration and capital due todevelopment costs Government of Republic of KazakhstanReclassification of non cash amounts Changes in exploration (3,782,510) 821,751 (2,960,759)from changes in exploration and and development costsdevelopment costs Reclassification of funds restricted Cash and cash 14,070,038 112,000 13,958,038for site restoration equivalents at end of yearReclassification of funds restricted Increase in funds (112,000) (112,000)for site restoration restricted for site restoration 5. REVENUE During 2006, the Group remained in pilot production at the Naimanjal mine. Therevenue recognized during 2006 comprised of amounts invoiced for initial salesof gold and silver produced from pilot production during 2006. In 2006, salesof silver represented approximately 4% of total sales (2005: 4.5%) 6. COST OF SALES 2006 2005On-mine and concentrating costs (see note 7) 2,716,645 594,255Ore transportation expenses 261,225 42,470Other expenses (including royalty) 374,953 137,273Cash operating cost 3,352,823 773,998 Amortization and depreciation of operating assets 304,516 361,829(see note 12)Total cost of production 3,657,339 1,135,827 Change in finished goods and work-in-process (see (1,688,499) (811,712)note 15)Total 1,968,840 324,115 7. ON-MINE AND CONCENTRATING COSTS 2006 2005Consumables and spares 571,514 125,016Labour 1,088,931 238,199Power and other utilities 280,694 61,402Maintenance 270,037 59,069Third party services 505,469 110,569Total (see note 6) 2,716,645 594,255 8. GENERAL AND ADMINISTRATIVE EXPENSES 2006 2005Payroll and related staff costs 914,066 1,092,553Travel and accommodation 523,496 434,986Depreciation and amortization 465,945 118,393Financial and consulting services 315,205 179,616Public relations and promotion 282,180 74,101Rent and office services 206,565 223,599Printing stationary and office miscellaneous 106,604 67,620Telecommunication 98,774 143,673Audit and accounting fees 95,138 112,047Insurance 91,480 46,168Taxes other than income tax 67,551 56,582Bank charges 38,965 30,056Shares grants and options to Directors, Management - 245,363and employeesOther expenses 134,683 42,862TOTAL 3,340,652 2,867,619 9. EXPLORATION AND DEVELOPMENT COSTS 2006 2005 As of January 1 6,883,607 3,210,726Additions 2,862,237 3,672,881 As of December 31 9,745,844 6,883,607 10. PROPERTY, PLANT AND EQUIPMENT Cost: Machinery & Transport & Office Capital work Total equipment vehicles equipment in progress (Naimanjal complex) At December 31, 2005 781,451 81,481 313,141 4,335,289 5,511,362 Additions 2,816,930 799,802 59,097 1,695,227 5,371,056Disposals (1,812) - (35,546) (318) (37,676)Transfer 51,208 17,038 - (68,246) -At December 31, 2006 3,647,777 898,321 336,692 5,961,952 10,844,742 Accumulated depreciation:At December 31, 2005 (333,380) (22,602) (155,511) - (511,493) Charge for the year (528,137) (165,350) (68,987) - (762,474)Disposal 515 - 5,731 - 6,246At December 31, 2006 (861,002) (187,952) (218,767) - (1,267,721) Net carrying amount: At December 31, 2005 448,071 58,879 157,630 4,335,289 4,999,869 At December 31, 2006 2,786,775 710,369 117,925 5,961,952 9,577,021 11. VALUE-ADDED TAX RECEIVABLE 2006 2005 Long term portion of value added tax receivable 436,159 400,622Current portion of value added tax receivable 320,000 -At December 31 756,159 400,622 In accordance with the Kazakh tax code, VAT receivable can be recovered byeither an offset against VAT payable generated from local sales or through adirect reimbursement from tax authorities, which is only available after theCompany commences commercial production, as evidenced by an approval from anappropriate governmental authority. 12. RESTRICTED CASH Restricted cash as of December 31, 2006, of US$ 112,000 (December 31, 2005:$112,000), represents cash held in a restricted bank account for future siterestoration works. Pursuant to the Naimanjal and Baltemir Subsurface UseContracts, the Group is obliged to accumulate cash sufficient to meet theobligations to restore and make the mines safe after use and the estimated costsof cleaning up any chemical leakage (see note 19). 13. INVENTORY 2006 2005Finished goods 144,814 124,363Work-in-process 1,895,730 588,770Ore in warehouse 459,667 98,579Stores and materials 484,158 123,123Total 2,984,369 934,835 14. TRADE ACCOUNTS RECEIABLE Trade accounts receivable as of December 31, 2006, comprise of amount receivablefrom Metalor Technologies S.A. for sales of gold in November and December 2006(see note 6). 15. PREPAID EXPENSES As of December 31, 2006, and December 31, 2005, prepaid expenses primarilyrelate to materials, works and services for the operation of the plant at theNaimanjal mine. 16. OTHER ACCOUNTS RECEIVABLE 2006 2005 Due from employees (see note 26) 5,132 41,511Deferred expenses - 112,771Other receivables 8,314 86,869Security deposit on office rent 12,655 8,023 26,101 249,174 17. CASH and cash equivalents 2006 2005 GBP current bank account 1,141,170 13,627,397US Dollars current bank account 86,193 202,564KZT current bank account 25,700 5,484Cash on hand - 2,243Cash on transit - 120,350 1,253,063 13,958,038 18. SHARE CAPITAL AND PREMIUM As of December 31, 2006, the Company's authorized capital comprises 500,000,000ordinary shares of US$ 0.01 par value per share (December 31, 2005: 500,000,000shares at US$ 0.01 par value each) Movements in the share capital issued for the years ended December 31, 2005 and2006 were as follows: Number of Share capital Treasury Share premium Total shares issued stocks and outstanding January 31, 2005 61,117,897 611,179 (670) 12,139,942 12,750,451AIM placement, net of direct 17,500,000 175,000 7,812,897 7,987,897issue costPrivate placement, net of direct 40,000,000 400,000 - 12,359,240 12,759,240issue costShares granted to Directors and 635,000 6,350 - 239,013 245,363ManagementExercise of warrants 13,262,366 131,954 670 3,850,673 3,983,297Exercise of options 133,310 1,333 - 38,660 39,993 December 31, 2005 132,648,573 1,325,816 - 36,440,425 37,766,241 December 31, 2006 132,648,573 1,325,816 - 36,440,425 37,766,241 Changes to the Company's stock options are summarized as follows: 2006 2005 Number of Wt. avg. Number of Wt. avg. options option price options option price At beginning of year 140,000 $0.30 303,300 $0.38Granted 4,180,000 $0.30 - -Exercise - - (133,300) $0.30Expired (140,000) $0.30 (30,000) $0.30At end of year 4,180,000 - 140,000 $0.30 The Company maintains an incentive share option plan ("plan") under whichdirectors, officers and key personnel may be granted options to purchaseordinary shares of the Company. Management believes the Company is incompliance with the Association of British Insurers' guidelines allowing up to10% of the issued shares to be made available in options to executive directorsand employees In 2006 the Company has reserved 277,091 ordinary shares forissuance upon the exercise of options granted under the terms of the plan (2005:4,457,091). 19. PROVISION FOR FUTURE SITE RESTORATION As of December 31, 2006 environmental restoration provisions are related toobligations to restore and make safe mines after use and the estimated costs ofcleaning up any possible contamination. Most of these costs are expected to beincurred at the end of the mines' useful operations, approximately between theyears 2025 to 2026. The extent and cost of future remediation programs areinherently difficult to estimate. They depend on the estimated lives of themines, the scale of any possible contamination and the timing and extend ofcorrective actions. 2006 2005 As of January 1 119,187 112,000Un-winding of the discount 6,373 7,187Changes in estimates (66,083) -At of December 31 59,477 119,187 To fund the future costs of the Baltemir mine and Naimanjal mines, the Group isrequired to transfer funds into a special deposit account (see note 12). Thefollowing assumptions were used to estimate the net present value of theprovision for future site restoration: • Total undiscounted amount of future estimated cash out flows in current year 2006 prices is US$ 480,000 • Expected timing of future cash outflows 20 years • Discount rate - approximately 12% per annum • Inflation rate - approximately 8% per annum 20. DUE TO GOVERNMENT OF THE REPUBLIC OF KAZAKHSTAN The Group is obligated to reimburse the Government of Kazakhstan the amount ofUS $1,436,400 for the historical cost of geological studies performed in respectof the Naimanjal contract. The Group paid US$ 14,364 upon assuming theliability: the remaining amount was discounted at a rate of 12% per annum toarrive to the net present value of the remaining liability. Pursuant to theexploration contract, the historical cost of geologic studies is to be repaid in40 equal, quarterly installments, commencing from the date of commercialproduction as evidenced by an approval from the appropriate governmentalauthority. 2006 2005 As of January 1 821,751 -Obligations raised during the period - 821,751Change in estimate* (168,380) -Un-winding of the discount 78,404 -As of December 31 731,775 821,751 Current portion of due to Republic of Kazakhstan 31,587 132,146Non-current portion of due to Republic of Kazakhstan 700,188 689,605 731,775 821,751 \* The present carrying value estimation of the obligation as of December 31,2005, was based on the assumption that full commercial production would begin inearly 2007. In 2006, the expected start of the full commercial production wasdeferred to the last quarter of 2007. This resulted in a revision to theestimated fair value of the amount due to the Government of the Republic ofKazakhstan. 21. DEBT TO US TRADE AND DEVELOPMENT AGENCY 2006 2005 Current portion of debt to TDA 100,000 -Non-current portion of debt to TDA 240,000 340,000 340,000 340,000 As of December 31, 2006 debt comprised of a grant received from the US Trade andDevelopment Agency ("TDA"). The grant is interest free and denominated in USDollars. In accordance with the terms of the grant, the grant is refundable tothe TDA when the Company succeeds in obtaining funding for the Naimanjal minebased on the feasibility study that the grant was provided to finance,. 22. ACCOUNTS PAYABLE 2006 2005 Geological works and services 404,592 463,287Consulting services 555,128 400,000 959,720 863,287 23. OTHER CURRENT LIABILITIES 2006 2005 Due to employees (see note 26) 252,839 322,283Tax penalties provision 381,418 365,618Taxes other than on income 51,785 91,330Unused vacation 31,299 51,514Other 18,479 1,009 735,820 831,754 24. TAXATION The effective income tax rate differs from statutory income tax rates. Areconciliation of the income tax expenses based on statutory rates with actualexpense is as follows for years ended December 31, 2006 and 2005: 2006 2005Deferred tax assetsExploration and development costs 564,466 292,708Property and Equipment 319,239 49,813Accrued expenses 57,016 120,000Accretion expense 28,788 2,156Tax loss carried forward 2,121,976 2,416,096 3,091,485 2,880,773 Deferred tax liabilitiesExploration and development costs 49,016 42,362Net position before valuation allowance 3,042,469 2,838,411 Valuation allowance (1,990,629) (2,838,411) Net tax position 1,051,840 - The Group had previously not recognized a deferred tax asset due to a lack ofcertainty that existed regarding the sufficiency of future taxable income towhich prior year Kazakhstani tax losses could be applied. In 2006, management revised its future cash flow forecasts to take intoconsideration, among other things, significantly higher global commodity pricesand an increase in estimated recoverable ore reserves. Therefore, as ofDecember 31, 2006, management believes that the amount and timing of realizingthe potential tax benefits is reasonably determinable and will be utilizedagainst future taxable income. Income tax expense for the year can be reconciled to the loss per theconsolidated income statement as follows: Loss before income tax (2,644,483) (4,348,241) Tax benefit at the statutory tax rate of Kazakhstan of 30% (793,345) (1,304,472) Non-deductible expenditures incurred outside of Kazakhstan 589,287 786,676 Change in unrecognized deferred tax asset in prior years (847,782) 517,796 Income tax benefit (1,051,840) - 25. EARNINGS/LOSS PER SHARE Basic earnings/(loss) per share is calculated by dividing the net earnings/(loss) for the year attributable to ordinary shareholders by the weightedaverage number of ordinary shares outstanding during the year. Diluted earnings/(loss) per share is calculated by dividing the net earnings/(loss) for the year attributable to ordinary shareholders by the weightedaverage number of ordinary shares outstanding during the year, adjusted for theeffects of dilutive options and other shares reserved for issuance. The following reflects the net earnings/(loss) for the year and share data usedin the basic and diluted earnings/(loss) per ordinary share computations: 2006 2005 Net loss attributable to common shareholders for basic (1,592,644) (4,348,241)earnings per shareNet loss attributable to common shareholders for diluted (1,592,644) (4,348,241)earnings per share Weighted average number of common shares for basic earnings 132,638,587 82,752,099per shareEffect of dilution:Options 515,342 56,170Warrants - 3,570,444Adjusted weighted average number of common shares for 133,153,929 86,378,713diluted earnings per share Loss per share- basic and diluted 0.01 0.05 26. RELATED PARTY TRANSACTIONS In considering each possible related party relationship, attention is directedto the substance of the relationship, and not merely the legal form.Transactions with related parties for the years ended December 31, 2006 and 2005and balances as of those dates were carried out at market terms and were asfollows: December 31, 2006 December 31, 2005 Related party Total Related party Total transactions category transactions categoryOther accounts receivables (see note 16) 5,132 26,101 128,380 249,174Other current liabilities (see note 23) 252,839 735,820 41,511 322,283 At December 31, 2006, related parties primarily include the directors andmanagement of the Company who own the majority of the Company's share capital. Key management personnel totals to 3 persons as of December 31, 2006 (2005: 3persons). Total compensation to key management personnel included in the generaland administrative expenses in the statement of operations was US$ 614,400 forthe year ended December 31, 2006 (2005: US$ 614,400). 27. COMMITMENTS AND CONTINGENT LIABILITIES License commitments In 2006, the Group continued contracts for exploration and subsequent productionfor Naimanjal license and exploration for Baltemir license. Each contractincludes a work program defining the Group's obligations to invest intoexploration on the licenses. The total amounts of the minimum work programcommitments are US$ 1,835,000 to December 15, 2007 for Naimanjal and US$ 414,000for Baltemir to December 31, 2007. Taxation Legislation and regulations regarding taxation, foreign currency translationsand licensing of foreign currency loans in the Republic of Kazakhstan continueto evolve as the central government manages the transformation from a command toa market-oriented economy. The various legislation and regulations are notalways clearly written and their interpretation is subject to the opinions ofthe local tax inspectors, National Bank officials, and the Ministry of Finance.Instances of inconsistent opinions between local, regional, and national taxauthorities and between National Bank and the Ministry of Finance are notunusual. The current regime of penalties and interest related to reported and discoveredviolations of Kazakhstan's law, decrees and related regulations are severe.Penalties include confiscation of the amounts at issue (for currency lawviolations), as well as fines of generally 50% of the taxes unpaid. Interest isassessable at rates of generally 0.03% per day. As a result, penalties andinterest can result in amounts that are multiples of any unreported taxes. The Group believes that it has paid or accrued all taxes that are applicable.Where practice concerning the provision of taxes is unclear, the Group hasaccrued tax liabilities based on management's best estimate. Because of the uncertainties associated with the Kazakh tax and legal systems,the ultimate amount of taxes, penalties and interest, if any, assessed may be inexcess of the amount expensed to date and accrued at December 31, 2006. Althoughsuch amounts are possible and may be material, it is the opinion of the Group'smanagement that these amounts are either not probable, not reasonablydeterminable, or both. Environmental matters The Group is subject to various environmental laws and regulations of theRepublic of Kazakhstan. While management believes that substantial compliancewith such laws and regulations has been achieved, there can be no assurancesthat contingent liabilities do not exist. Legal issues In the ordinary course of business, the Group can be subject to legal actionsand complaints. Management is not aware of any current or pending legal actionor complaint. Management believes that the ultimate liability, if any, arisingfrom such actions or complaints will not have a material adverse effect on thefinancial condition or the results of future operations of the Group. Liquidation fund The Group will be required to make a monetary contribution to the extent thatthe environmental clean-up costs required exceed the liquidation fund. TheGroup's management believes that the Group is in compliance with the commitmentsset forth in both the Naimanjal and Baltemir Subsurface Use Contracts. However,such compliance may be questioned by the relevant authorities whoseinterpretation may differ significantly from the Group's. Insurance The insurance industry in the Republic of Kazakhstan is in the process ofdevelopment, and many forms of insurance coverage common in developed marketsare not yet generally available. The Group does not have full coverage for itsmining, processing and transportation facilities, for business interruption, orfor third party liabilities in respect of property or environmental damagearising from accidents on the Group's property or relating to the Group'soperations. 28. CONCENTRATION OF BUSINESS RISK The Group's main business activities are within the Republic of Kazakhstan.Laws and regulations affecting businesses operating in the Republic ofKazakhstan are subject to rapid changes and the Group's assets and operationscould be at risk due to negative changes in the political and businessenvironment. The Group sells all finished goods to Metalor Technologies S.A. and the Groupcould be at risk due to changes in market situation in country of the purchaser. 29. FINANCIAL INSTRUMENTS In the normal course of its operations, the Group is exposed to commodity price,credit, currency, and operational risks. Commodity price risk The Group is exposed to fluctuations in gold product prices as a result ofmarket conditions and changes in London Metal Exchange (LME) quotes. The Groupbelieves it has no significant exposure to commodity price risk as at December31, 2006. Credit risk Credit risk is the risk that a customer may default or not meet its obligationsto the Group on a timely basis, leading to financial loss to the Group. As ofDecember 31, 2006, the Group believes that its maximum exposure to credit riskrelates to its cash and accounts receivable as reflected in their carryingvalue. Currency risk Currency risk is the risk that the financial results of the Group will beadversely impacted by changes in exchange rates to which the Group is exposed. The majority of the Group's activities are denominated in USD. The Group doesnot hedge its foreign currency risks. The Group believes it has no significantexposure to foreign currency exchange rate risk as of December 31, 2006. Operational risk Operational risk is the risk of the Group incurring financial losses as a resultof business interruption and possible damage to the Group's property throughnatural disasters and technological accidents. In accordance with the subsoilcontracts, the Group is obliged to carry medical insurance, insurance againstaccidents during production and occupational diseases to its employees. At December 31, 2006, the Group believes it had sufficient insurance policies inforce in respect of public liability and other insurable risks. Fair value of financial instruments Disclosure of estimated fair values of financial instruments is made inaccordance with the requirements of IAS 32 "Financial instruments: Disclosureand presentation" and IAS 39 "Financial Instruments: Recognition and Measurement". Fair value is defined as the amount for which the instrument can be exchangedbetween knowledgeable willing parties in an arm's length transaction, other thanin forced or liquidation sale. As no readily available market exists for a partof the Group's financial instruments, judgment is necessary in arriving at fairvalue, based on current economic conditions and specific risks attributable tothe instrument. The estimates presented herein are not necessarily indicative ofthe amounts the Group could realize in a market exchange from the sale of itsfull holdings of a particular instrument. As of December 31, 2006, the followingmethods and assumptions were used by the Group to estimate the fair value ofeach class of financial instrument for which it is practicable to estimate suchvalue: Cash - Carrying amount of cash balances represents their fair value. Trade and other accounts receivable - The carrying amount of trade and otheraccounts receivable is considered a reasonable estimate of their fair value asthe allowance for estimated irrecoverable amounts is considered a reasonableestimate of the discount required to reflect the impact of credit risk. Accounts payable - The carrying amount accounts payable is a reasonable estimateof their fair value. 30. SUBSEQUENT EVENTS Subsurface contracts & licenses In March 2007, the Ministry of Economics and Natural Resources responsible forexploration and mining approved "Commercial Discoveries" and explorationextension request for the gold deposit located within the Baltemir license areato March 2009. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
FML.L