19th Sep 2006 07:03
Kazakhmys PLC19 September 2006 Kazakhmys PLC Results for six months ended 30 June 2006 Financial highlights o Revenues up by 90% to $2,279.8 million following an 82% increase in the average LME copper price for the period o EBITDA excluding special items for the period up by 124% to $1,081.3 million o Profit before taxation, finance items and negative goodwill up by 174% to $984.5 million o EPS based on Underlying Profit up by 124% to $1.32 per share o Average realised copper price up 88% from $3,458 per tonne to $6,510 per tonne, representing a 7% premium over the average LME copper price for the period o Free Cash Flow(3) up by 316% to $622.3 million, despite adverse working capital movements of $197.0 million mainly within MKM o Interim dividend declared of 12.8 US cents per share in respect of 2006 earnings Key business developments o Expansionary and new project capital expenditure up 91% to $95.4 million, representing investment for organic growth o Completion of the Zhaman-Aybat mine in the first quarter of 2006 ahead of schedule o Accelerating scoping study on the Boschekul mine with preparation scheduled to commence later this year o Strengthening of the Board with the appointment of David Munro as Strategy Director and Philip Aiken as non-executive director o YK Cha to stand down as Chief Executive with effect from 31 December 2006 after over ten years' service with the Group and continuing as a Special Adviser to the Board Financial highlights for six months ended 30 June 2006 ------------------------------------------------------------------------------------------------------------------------ Six months Six months$ million, unless stated ended 30 ended 30 June % change June 2006 2005------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ Revenues 2,279.8 1,202.1 90%Earnings: EBITDA excluding special items (1) 1,081.3 482.8 124% Profit before taxation, finance items and negative goodwill 984.5 359.5 174% Underlying Profit (3) 619.3 236.7 162%EPS: Basic and diluted ($) 1.35 0.56 141% Based on Underlying Profit (2) ($) 1.32 0.59 124%Free Cash Flow ((3)) 622.3 149.5 316%ROCE (3) (%) 27.7% 17.1% 62%Cash cost of copper after by-product credits ((3)) ($/tonne) 563.1 869.4 (35%)------------------------------------------------------------------------------------------------------------------------ Kazakhmys' Executive Chairman Vladimir Kim commented: "Our strong 2006 earnings at the half year have already exceeded the full year2005 earnings following a period of particularly buoyant commodity prices.Despite the operational difficulties experienced at the beginning of the year,these results demonstrate the resilience of our business. The interim dividendof 12.8 US cents per share reflects our confidence in the business and thecontinued strength in copper prices. We are also confident that the newappointments to the Board will strengthen the leadership of Kazakhmys as we seekto build a world-class metals and mining company. Finally, I would like toexpress my gratitude to YK Cha, our Chief Executive, who has decided to standdown at the end of this year in order to spend more time in his native Koreaalthough we are pleased that he will continue as a Special Adviser to theBoard." (1) Reconciliation of EBITDA excluding special items to profit before taxation, finance items and negative goodwill is found in Note 4(a) to the interim consolidated financial statements. (2) Reconciliation of EPS based on Underlying Profit to basic and diluted EPS is found in Note 9 to the interim consolidated financial statements. (3) Refer to the Glossary on page 44 for the definition of these key financial indicators. CHAIRMAN'S STATEMENT I am pleased to present Kazakhmys PLC's half year financial results for the sixmonths ended 30 June 2006. The first six months of 2006 saw us achieve strong growth in both revenues andprofits, as we reaped the benefit of particularly attractive commodity prices.Revenues rose by 90% to $2,279.8 million, and pre-tax profits increased by 166%to $955.9 million. Our Earnings per share based on Underlying Profit for thehalf year was higher than the 2005 full year figure. We delivered this impressive performance despite adverse weather conditions inthe first two months of 2006. Overall, our copper cathode production from ownconcentrate increased slightly compared to the same period in 2005. Coppercathode production volumes improved in the second quarter, rising by 11%compared to the first quarter as weather conditions improved. Our total copperproduction of 187.9 thousand tonnes was down 6% from the first half of 2005,primarily due to lower volumes of copper produced from purchased concentrate andthrough tolling arrangements as a result of the Group's aim to reduce volumes ofpurchased concentrate. Output of by-products such as zinc and gold rose, in part, due to the highercontribution from the Abyz and Artemyevskoe mines that produce ores with ahigher by-product content. In the first six months of 2006, our zinc productionvolume increased by 17% from 29 to 34 thousand tonnes and our own goldproduction increased by 15% from 47 to 54 thousand ounces. We continue to see significant potential in terms of investment opportunities inKazakhstan, which offers an environment of both political stability and economicgrowth. We are actively screening for opportunistic acquisitions that offerbenefits to our shareholders. Our healthy balance sheet and robust Free CashFlow of $622.3 million for the first six months of 2006 place us in a strongposition to achieve these goals. We remain committed to our strategy of exploiting organic growth opportunities.The feasibility studies on our Aktogay project continue as we consider furtherthe mining methodology and processing technologies. We expect to report theoutcome of our feasibility studies on this project in the next six to twelvemonths. We are also launching, ahead of plan, a scoping study on the Boschekulproject located approximately 200 kilometres north-east of Astana, the capitalof Kazakhstan. The annual production from the Boschekul project is estimated tobe 20 million tonnes of ore. Our commitment to organic growth through new projects and expansions at existingoperations is highlighted by a 91% increase in expansionary capital expenditurefrom $50.0 million in the first half of 2005 to $95.4 million in thecorresponding period of 2006. Significant sums invested during the periodinclude the Zhaman-Aybat mine, the acid plant at the Balkhash complex and theexpansions at our Karagaily and Nurkazgan concentrators. The interim dividend of 12.8 US cents per share announced today reflects ourconfidence in the business, whilst taking account of growth opportunities. We are in advanced stages of seeking regulatory approval for a secondary listingon the Kazakhstan stock exchange, an objective we declared at the time ofListing. This development will allow Kazakhstan investors to participatedirectly in the continued growth of Kazakhmys and we expect this will make ameaningful contribution to the development of Kazakhstan's capital markets.Admission to the Kazakhstan stock exchange is expected to take place by the endof the year. I would also like to report several changes in our management structure.Firstly, I would like to pay particular tribute to YK Cha who will be standingdown as Chief Executive with effect from 31 December 2006. Mr Cha has decided tospend more time in his native Korea pursuing other business opportunities. MrCha has been a key member of our management team since the mid-1990s. Heinstigated a strong sales and marketing strategy, developing a keen insight intothe Chinese market and built deep relationships with Chinese end-users, whichmade a significant contribution to Kazakhmys' success in sales and marketing. Healso played a significant role in the preparation and execution of oursuccessful London Listing last year and has made a great contribution to thetransformation of Kazakhmys PLC into a FTSE 100 company. Kazakhmys will continueto benefit from Mr Cha's experience as he will serve as a Special Adviser to theBoard after the end of the year. One of our non-executive directors, David Munro, has agreed to join ourexecutive management team as Strategy Director with effect from 1 October 2006.David brings a wealth of mining and strategic development experience and we areconfident that his knowledge and skills will be important in shaping ourbusiness going forward. In line with our previous commitment, I am pleased to announce that Philip Aikenhas agreed to join the Kazakhmys PLC Board with effect from 1 November 2006.There is no doubt that Philip's 35 years of industry experience, includingseveral senior roles at BHP Billiton, will be invaluable to the Board. Philipwill join the Audit, Remuneration and HSE committees. In addition, we arelooking to further deepen the Board's range and experience by appointing anotherindependent non-executive director in due course. Looking forward, we believe the commodity price environment will continue to befavourable for the mining community. Supply fundamentals remain tight asuncertainty remains over production from a number of geographic regions. We seecopper prices staying above long-term historical averages for the remainder ofthe year and into 2007. Over the full year, we continue to expect copper cathodeproduction volumes to be moderately higher compared to 2005. In conclusion, I would like to thank all our employees who contributed so muchto Kazakhmys' strong performance in the first half of 2006 in spite of thechallenging operating environment at the start of the year. Their dedication isan invaluable element in delivering on our commitments in the future. REVIEW OF OPERATIONS Highlights o Extracted ore volumes slightly increased despite adverse weather conditions, with marginally improved grades o Copper cathode produced from our own concentrate increased from the first to second quarter of 2006, totalling 169 thousand tonnes for the six months compared to 167 thousand tonnes in the corresponding period of 2005 o Copper cathode production from purchased concentrate was 32% lower, down from 25.6 to 17.5 thousand tonnes in line with the Group's plan to reduce purchased concentrate volumes o Output of by-products such as zinc, gold and silver rose, in particular zinc which increased by 18% compared to the corresponding period of 2005 Copper In the first half of 2006, the Group extracted 20,127 thousand tonnes of orewith an average copper grade of 1.10%, an increase from 1.03% of thecorresponding period of 2005. Copper cathode production over the first half of the year was 187.9 thousandtonnes, a 6% decrease compared to the same period of 2005. This is primarily dueto lower volumes of copper produced from purchased concentrate and throughtolling arrangements as a result of the Group's plan to reduce volumes ofpurchased concentrate. In the first quarter of 2006, copper cathode production fell by 7%, compared tothe same period of 2005, to 89.1 thousand tonnes due to the disruptions early in2006 when temperatures in some parts of Kazakhstan remained below minus 40(0)Cfor nearly two weeks. Production volumes have improved in the second quarter,and we produced 98.8 thousand tonnes of copper cathode, an 11% increase comparedto the first quarter. In the first half of 2006, copper cathode produced from purchased concentratefell by 32% compared to the same period of 2005, in line with our aim to reducecopper cathode production volumes from purchased concentrate. Purchasedconcentrate will be gradually substituted by increasing the contribution fromthe recently commissioned Abyz, Kosmurun and Nurkazgan mines. To accommodateincreasing ore volumes from these mines, concentrator capacity at the Karagailyplant has been upgraded, increasing capacity by 50% to 1.5 million tonnes peryear. Copper rod production increased significantly from 5.9 thousand tonnes in thefirst half of 2005 to 14.3 thousand tonnes in the same period of 2006 due tomore favourable market conditions. At the Zhezkazgan complex, extracted ore volumes were marginally higher with 2%growth in the first half of 2006 compared to the first half of 2005. Coppercathode production volumes were adversely affected by the scheduled maintenanceshutdown of the Zhezkazgan copper smelter. Although extracted ore volumes at the Balkhash complex were down in the firstsix months of 2006 compared to the first six months of 2005, both copperconcentrate and copper cathode production were up due to higher ore grades.Compared to the first half of 2005, copper concentrate production increased from91.8 thousand tonnes to 133.0 thousand tonnes and copper cathode productionexcluding tolling rose from 75.2 thousand tonnes to 81.2 thousand tonnes. East Region mines performed well, with higher copper grades from recentlycompleted mines generating an increase in copper concentrate production from241.2 thousand tonnes in the first half of 2005 to 259.5 thousand tonnes in thefirst half of 2006. Mines at the recently established Karaganda complex performed without anysignificant business interruptions, and the ramp-up at the recently completedAbyz, Nurkazgan and Kosmurun mines has progressed smoothly. Ore extractionvolumes increased significantly from 455 thousand tonnes in the first six monthsof 2005 to 1,473 thousand tonnes in the same period of 2006. Copper concentrateproduction increased by 85% from 38.5 thousand tonnes to 71.2 thousand tonnes. Zinc The contribution from zinc-rich ores from the Artemyevskoe mine increased theaverage zinc grade in the first half of 2006 to 4% compared with 3% in the sameperiod of 2005. Zinc metal production in the first half of 2006 stood at 33.8thousand tonnes in comparison to 28.7 thousand tonnes of the first half of 2005,an 18% increase. The ramp-up at the zinc plant was slightly slower in the secondquarter of 2006 due to technical problems with the coolers, which are currentlybeing rectified. Precious Metals In the first half of 2006, the Group produced 10.7 million ounces of silver, alevel comparable to the same period for the prior year. Out of the 10.7 millionounces of refined silver produced, only 32 thousand ounces were produced undertolling arrangements. The Group also produced 77.7 thousand ounces of gold, 24% higher than the sameperiod in 2005. Out of the 77.7 thousand ounces of gold produced, 53.6 thousandounces were produced from our own concentrate (a 15% increase compared to thefirst half of 2005). This increased gold production is the result of a largerore contribution from the Abyz and Artemyevskoe mines that produce ores with ahigher gold content. Gold production through tolling arrangements also increasedfrom 16 thousand ounces for the first half of 2005 to 24 thousand ounces in thecorresponding period of 2006. MKM For the first half of 2006, MKM total production was 135.3 thousand tonnes ofcopper products. The wire products business unit, the main volume driver for theperiod, produced 82.4 thousand tonnes, a 39% increase compared to the sameperiod of 2005. Out of the 82.4 thousand tonnes produced, wire rod represented62.5 thousand tonnes and drawn wire 19.9 thousand tonnes compared to 43.8thousand tonnes and 15.4 thousand tonnes, respectively, for the same period of2005. Total flat products manufactured were comparable to the correspondingperiod of 2005 and stood at 31.5 thousand tonnes, comprising 1.1 thousand tonnesof pre-rolled products, 7.7 thousand tonnes of sheets and 22.7 thousand tonnesof strips. MKM also produced 10.1 thousand tonnes of tubes and 11.3 thousandtonnes of bars against 9.5 thousand tonnes and 10.8 thousand tonnes,respectively, in the same period of 2005. FINANCIAL REVIEW Basis of preparation The financial information set out on pages 14 to 35 has been prepared usingconsistent accounting policies with those adopted in the financial statementsfor the year ended 31 December 2005. The Group has changed the segmentalreporting presentation from that disclosed in the 2005 Annual Report. Whilstcorporate costs were not material during 2005, the increased size of the headoffice following the Listing has resulted in the need to separate corporatecosts and balances from the Kazakh Mining segment. The revised segmentalreporting is consistent with the Group's internal management reportingstructure. Summary of results Buoyant commodity prices, particularly copper, seen throughout the first half ofthe year have resulted in substantial increases in revenues and profit beforetaxation of 90% and 166%, respectively, to $2,279.8 million and $955.9 million.Whilst sales volumes of copper cathode and rod remained flat at 178 thousandtonnes and adverse cost pressures were experienced in Kazakhstan, these factorswere more than compensated for by the higher prices seen across the Group's mainproducts. A summary of the consolidated income statement is set out below: Six months Six monthsSummary Group income statement ended ended Change 30 June 2006 30 June 2005 % $ million $ million Revenues 2,279.8 1,202.1 90%Operating costs excluding depreciation, depletion, amortisation and special items (1,198.5) (719.3) 67% -------- ---------EBITDA excluding special items 1,081.3 482.8 124%Special items: Add/(less): write back/(off) of property, plant and 10.2 (0.3) equipment Less: loss on disposal of fixed assets (4.0) (10.6)Less: depreciation, depletion and amortisation (103.0) (112.4) -------- ---------Profit before taxation, finance items and negative goodwill 984.5 359.5 174%Net finance expenses (including net foreign exchange losses) (35.1) (0.5) Recognition of negative goodwill 6.5 - -------- ---------Profit before taxation 955.9 359.0 166%Income tax (317.0) (126.9) -------- ---------Profit for the period 638.9 232.1 175%Minority interests (6.2) (6.0) -------- ---------Profit attributable to equity shareholders of the parent 632.7 226.1 180% -------- --------- -------- ---------EPS - basic and diluted $1.35 $0.56 141% -------- --------- -------- ---------EPS based on Underlying Profit $1.32 $0.59 124% -------- --------- -------- --------- Following these results and in line with the Group's dividend policy, theDirectors have declared an interim dividend of 12.8 US cents per share. The improved earnings have strongly benefited the Group's cash flows and netliquid funds position, with the latter standing at $1,221.4 million as at 30June 2006, rising to $1,514.4 million by 31 August 2006. The continued highcommodity prices and healthy funding position leaves the Group well placed topursue future organic growth and opportunistic acquisitions. The definitions of our key financial indicators are shown in the Glossary andthese measures are set out below: Six months ended Six months endedKey financial indicators 30 June 2006 30 June 2005 EBITDA excluding special items ($ million) 1,081.3 482.8 EPS based on Underlying Profit ($) 1.32 0.59 Free Cash Flow ($ million) 622.3 149.5 Return on Capital Employed (%) 27.7% 17.1% Cash cost of copper after by-product credits ($/tonne) 563.1 869.4 Income statement Revenues As the Kazakh Mining and MKM businesses are different in nature, the twosegments have been analysed separately. A summary of production and salesvolumes, and revenues by major categories of products for the half year ended 30June 2006 and 2005 are set out below: Production and sales Production Sales volumes/revenues --------------------- -------------------------------------------- Six months Six months Six months Six months Six months Six months ended ended ended ended ended ended 30 June 30 June 30 June 30 June 30 June 30 June 2006 2005 2006 2005 2006 2005 kt kt kt kt $ million $ million Copper cathodes: From own and purchased 187 193 163 173 1,060.2 595.5concentrate From tolling 1 7 1 7 5.7 15.3 Zinc: Zinc metal 34 29 37 38 102.4 46.8Zinc concentrate 154 109 81 8 59.1 1.6 Silver (koz) 10,692 10,638 10,835 10,963 117.8 77.2 Gold (koz): From own production 54 47 47 33 28.2 14.2From tolling 24 16 24 16 1.9 1.1 Copper rod 14 6 15 5 98.6 20.1 Other - - - - 47.0 19.8 -------- ------- Kazakh Mining 1,520.9 791.6 MKM 135 111 134 110 758.9 410.5 -------- ------- Total 2,279.8 1,202.1 ======= ======== Revenues of the Kazakh Mining business increased from $791.6 million to $1,520.9million, a 92% improvement against the prior period. The major contribution torevenues remained copper cathodes which accounted for 70% of revenues. Withprices rising across all commodities, revenues from each of our main productsshowed substantial increases. Copper prices escalated significantly during April and May 2006 reaching $8,788per tonne on 12 May 2006. The average market and realised prices for our mainproducts during the period are set out below: Comparison of market and Six months ended 30 Six months ended 30 realised prices for main June 2006 June 2005 products ------------------- ----------------------- Average Average Average Average market realised market realised price price price price Copper cathode ($/tonne) 6,070 6,510 3,328 3,458 Zinc metal ($/tonne) 2,762 2,767 1,294 1,231 Silver ($/oz) 10.95 10.87 7.06 7.04 Gold ($/oz) 590 600 427 430 The average realised prices for our main products do not differ significantlyfrom market prices with the exception of copper. In line with industry practice,our sales agreements for copper cathodes provide for provisional pricing at thetime of delivery with the final price based on the market price for futureperiods. With a higher proportion of our sales volumes in the second quarter(62% for the second quarter compared to 38% for the first quarter), pricingadjustments have generally been positive. Additionally, a premium over LMEprices is incorporated into our sales agreements. Offsetting higher commodity prices, sales volumes for copper cathodes declinedcompared to the prior period. Copper cathode production including tollingdecreased by 6% compared to the prior period. Given that 68% of sales were toEurope, compared with 33% in the prior period, and the longer delivery time forEuropean sales, a sizeable time lag arises between production and salesrecognition for accounting purposes. In addition, 14 thousand tonnes of copper cathodes were utilised in themanufacture of copper rods, whose sales volumes increased by 200%, reflectingimproved customer demand in the Chinese market. Sales volumes of zinc metal remained flat in line with production, although withthe realised price increasing by 125%, revenues increased by 119% to $102.4million. Similarly, sales volumes of silver were largely unchanged from theprior period reflecting flat production, but revenues increased by 53% to $117.8million in line with the increase in realised prices. Sales volumes of goldincreased by 42% reflecting higher production volumes due to the Artemyevskoemine which was commissioned in March 2006. Other revenues improved from $19.8 million to $47.0 million. These revenuesrelate to the sales of surplus electricity, heating and coal, and minorby-products arising from the copper cathode production process. MKM's revenues increased by 85% to $758.9 million reflecting an increase insales volumes of 22%, but more significantly, higher copper prices that arepassed on to the customer in full. Of the $348.4 million increase in revenues,$270.8 million resulted from the increase in copper prices. Wire rods and drawnwire delivered the highest increase in sales volumes against the prior year,with an increase of 39%. Together, these wire products account for 61% of MKM'ssales volumes. Earnings Profit before taxation, finance items and negative goodwill increased from$359.5 million to $984.5 million, an increase of 174%, split between $973.1million for the Kazakh Mining business, $30.0 million for MKM less $18.6 millionfor unallocated corporate costs. A reconciliation of profit before taxation,finance items and negative goodwill to EBITDA excluding special items bybusiness segment is set out below: Six months Six months ended ended Reconciliation of EBITDA excluding special items 30 June 2006 30 June 2005 $ million $ million KAZAKH MINING Profit before taxation, finance 973.1 347.2 items and negative goodwill (Less)/add: (gain)/loss from special (6.6) 10.9 items Add: depreciation, depletion and 92.3 102.0 amortisation ------- -------- EBITDA excluding special items 1,058.8 460.1 ------- -------- Revenues 1,520.9 791.6 ------- -------- EBITDA excluding special items 70% 58% margin ------- -------- MKM Profit before taxation, finance 30.0 15.6 items and negative goodwill Less: gain from special items (0.1) - Add: depreciation and amortisation 10.6 10.4 ------- -------- EBITDA excluding special items 40.5 26.0 ------- -------- Revenues 758.9 410.5 ------- -------- EBITDA excluding special items 5% 6% margin ------- -------- Unallocated corporate costs (18.0) (3.3) excluding special items ------- -------- Total EBITDA excluding special items 1,081.3 482.8 ======== ====== Kazakh Mining The margin at the level of EBITDA, excluding special items for the Kazakh Miningsegment, increased substantially from 58% in the prior period to 70% in thefirst half of 2006. The significant increase in copper prices seen since thebeginning of 2006 had the most favourable impact on margins. To a lesser extent,margins also increased as the proportion of copper cathodes produced frompurchased concentrate reduced from 13% to 10%, primarily resulting from anincrease in mined ore and an improvement in mined ore grade from 1.03% to 1.10%. However, the Kazakh Mining segment also experienced a number of adverse costpressures, in common with other companies in the mining industry. Employeeremuneration (production and administration) increased by 34% from the priorperiod to $106 million due to rising prosperity within Kazakhstan and theconsequential wage pressures for the business, and a tightening market forskilled labour across the natural resources sector within the CIS. Although the copper content of purchased concentrate within the productionprocess decreased from 29 thousand tonnes to 19 thousand tonnes, rising copperprices increased the cost of this input raw material from $78.2 million to $96.0million, a 23% increase. In common with other mining companies, there was alsosignificant cost pressure from mining and processing consumables and fuel, whichincreased by around 27% to $136.8 million. In addition, the Kazakhstan tenge appreciated against the US dollar by 3%, withthe average exchange rate strengthening from 131.2 KZT/$ in the prior period to127.1 KZT/$. As certain costs are denominated in US dollars,, the strengtheningof the Kazakhstan tenge resulted in higher costs for the Kazakh Mining business. Selling and distribution costs increased by 77% to $24.5 million, reflecting agreater proportion of sales to Europe and the resulting higher transportationcosts. Administration costs rose by 41% to $105.1 million, mainly reflectinghigher employee remuneration costs in Kazakhstan and additional compliance andrelated costs following the Listing. Depreciation, depletion and amortisation amounted to $92.3 million, a smalldecrease from the prior period. Although capital expenditure increased during2005 and 2006 compared to earlier years, additional depreciation of $16.0million was expensed in the first half of 2005 relating to the commissioning ofthe Balkhash zinc smelter. The cash cost of copper after by-product credits amounted to $563.1 per tonnecompared to $869.4 per tonne in the prior period. The significant increases inby-product revenues and the cost of purchased concentrate masked the underlyingcost of production of copper cathode from own mined ore as explained above. MKM Although EBITDA excluding special items rose from $26.0 million to $40.5million, the increase was largely attributable to a reduction of cost of salesof $27.5 million arising from increased stock valuation due to higher copperprices. The effect of this increased stock valuation does not translate intooperating cash flows. Except for the effects of increased copper price onpurchased raw materials, cost of sales remained comparable with the priorperiod. With the increase in sales volumes of lower margin wire rods by 43%, the marginat the level of EBITDA excluding special items decreased from 6% to 5%. Thecontinued production difficulties associated with the ContiM(c) equipment, whichexisted at the time of acquisition in December 2004, also depressed margins. Net finance items Net finance costs were $35.1 million which contrasted with net finance costs of$0.5 million during the prior period. Included within net finance costs is a net foreign exchange loss of $63.8million, which increased substantially from the prior year loss of $1.7 milliondue to the strong appreciation of the Kazakhstan tenge against the US dollarsince the beginning of the year. Of the foreign exchange losses in the period,$92.7 million were attributable to losses arising on the revaluation of USdollar denominated deposits and trade receivable balances into Kazakhstan tengewithin Kazakhmys LLC. Interest income increased from $10.0 million to $34.0 million, primarily as aresult of the utilisation of higher operating cash flows and of the Listingfunds. Following the repayment of short-term credit lines within Kazakhmys LLCin early 2006, a minor amount of interest expense arose on the new loan facilityentered into by MKM, which stood at $184.5 million as at 30 June 2006. Negative goodwill Negative goodwill of $6.5 million arose during the period upon the acquisitionof ZhREK JSC, an electricity transmission company in Kazakhstan. The acquisitionof this business will assist in maintaining tighter cost control over thetransmission of electricity from our power plants to the operations. Taxation The effective tax rate for the period was 33.2% compared to a rate of 35.3% inthe prior period. The overall tax charge was $317.0 million, an increase of$190.1 million compared to the prior period as a result of the significantincrease in earnings within the Kazakh Mining business. 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 the period, excess profits tax of $25.3 million was charged toearnings representing an incremental 2.6% to the effective tax rate. Withholding taxes of $6.8 million were accrued during the period representing anincremental 0.7% to the effective tax rate. These withholding taxes relate toprofits arising within Kazakhmys LLC which have either been, or will be,remitted to the UK for dividend purposes. The effective rate of taxation has decreased from the prior period principallydue to higher non-taxable income arising from the Balkhash zinc smelter forwhich Kazakhmys LLC benefits from a tax holiday, and the rate of excess profitstax and withholding taxes not having increased at the same proportion asearnings. The effective tax rate is expected to remain above the statutory Kazakhstan rateof tax of 30% due to excess profits tax and the imposition of withholding taxeson the remittance of earnings to the UK. Minority interests Capital contributions of $186.7 million were made by Kazakhmys PLC to KazakhmysLLC in the first quarter of 2006, and included subscribing to the rights ofminorities who did not participate in the initial capital contribution. As aconsequence, the Company's interest in Kazakhmys LLC increased from 98.68% as at31 December 2005 to 99.08% as at 30 June 2006. Despite the smaller interest held by minority shareholders in Kazakhmys LLC,their attributable share of earnings and assetsincreased slightly due to the higher earnings reported by Kazakhmys LLC in theperiod. Underlying Profit and earnings per share A reconciliation of attributable profit to Underlying Profit is set out below: Six months Six months ended ended Reconciliation to Underlying Profit 30 June 2006 30 June 2005 Change $ million $ million % Profit attributable to equity 632.7 226.1 180% shareholders of the parent Special items: Recognition of negative goodwill (6.5) - Write (back)/off of property, plant (10.2) 0.3 and equipment Loss on disposal of fixed assets 4.0 10.6 Tax effect of special items (0.8) (0.2) Minority interest effect of special 0.1 (0.1) items ----- --------- Underlying Profit 619.3 236.7 162% ===== ========= The increase in Underlying Profit of 162% principally reflects the favourableimpact of higher commodity prices on earnings. Basic earnings per share rose from 56 US cents to 135 US cents, an increase of141%. There is no difference between basic and diluted earnings per sharefigures. Earnings per share based on Underlying Profit was 132 US cents compared to 59 UScents for the prior period, a rise of 124%. At the time of Listing, 58.4 millionshares were issued, and in the absence of other changes in issued share capital,these newly issued shares have resulted in the weighted average number of sharesin issue increasing by 14%. If earnings per share based on Underlying Profit forthe prior period was determined using the actual number of shares in issue forthe current period, then earnings per share based on Underlying Profit wouldhave shown an increase from 51 US cents to 132 US cents, a 159% increase. Dividends The Directors have declared an interim dividend of 12.8 US cents per share inrespect of the 2006 financial year. This is in line with our dividend policy andtakes account of the growth requirements for the Group. The Board intends to maintain a dividend policy which will take into account theprofitability of the business and underlying growth in earnings of the Group, aswell as its cash flows and growth requirements. The Directors will also ensurethat dividend cover is prudently maintained. Interim and final dividends will bepaid in the approximate proportions of one-third and two-thirds of the totalannual dividend, respectively. Cash flows A summary of cash flows is shown in the table below: Six months ended Six months endedCash flow summary 30 June 2006 30 June 2005 $ million $ million EBITDA 1,087.5 471.9 Recognition of negative goodwill (6.5) - Write (back)/off of assets and impairment losses (5.7) 3.6 Loss on disposal of property, plant and equipment 4.0 10.6 Foreign exchange loss adjustment (14.4) (2.5) Working capital movements (197.0) (31.4) Interest paid (0.2) (7.1) Income tax paid (169.2) (190.2) ------ --------Net cash flows from operating activities 698.5 254.9 Sustaining capital expenditure (76.2) (105.4) ------ --------Free Cash Flow 622.3 149.5 Expansionary and new project capital expenditure (95.4) (50.0) Interest received 46.5 6.3 Acquisition of subsidiaries, net of cash acquired (2.0) - Dividends paid (170.4) (54.9) Other movements 0.6 2.5 ------ --------Cash flow movement in net liquid funds 401.6 53.4 ====== ======== Cash flows from operating activities during the period were $698.5 million,which compared to $254.9 million in the prior period. Despite adverse workingcapital movements compared to the prior period, the impact of higher earningswere seen in strong operating cash flows, and an increase in net liquid funds. Adverse working capital movements were largely attributable to higher inventorylevels due to the impact of rising commodity prices, increased sales volumeswithin MKM and the time lag between production and sales recognition asdescribed earlier. These factors together accounted for an adverse movement of$179.2 million in working capital. Aside from these effects, working capital wastightly controlled within both businesses. The difference between the workingcapital movements across balance sheets, and those seen in the cash flow summaryare mainly attributable to the appreciation of the Kazakhstan tenge which is anon-cash movement. Income tax payments decreased by $21.0 million to $169.2 million. At thebeginning of a financial year in Kazakhstan, a schedule of tax payments to bemade during the course of the year is agreed with the tax authorities, and afinal payment is remitted with the submission of the tax return by March of thefollowing year. The payment schedule agreed for 2006 is at a similar level tothe amount of tax paid in respect of 2005. The reduction in tax payments for thesix month period results from a non-recurring amount of tax payable inKazakhstan in the first half of 2005 relating to acquisitions undertaken byKazakhmys LLC in previous years. Notwithstanding this effect, the overall amountof tax payable for the year as a whole is expected to show a significantincrease compared to the prior year due to the higher earnings within the KazakhMining business. Capital expenditure in aggregate (including expenditure on intangible assets andmine stripping costs) amounted to $171.6 million, split between $76.2 millionfor sustaining capital expenditure and $95.4 million for expansionary and newproject capital expenditure. Significant items within the latter categoryrelated to $19.6 million for the final construction costs of the Zhaman-Aybatmine and $15.6 million for initial construction costs on the Aktogay project.Consistent with the Group's commitment to its employees and local communities,$12.9 million was invested in the construction of a new sports and socialcomplex in Satpayev, which is one of the most advanced in Kazakhstan. Interest received increased by $40.2 million to $46.5 million reflecting thehigher net liquid funds position of the Group. Dividends paid during the periodby the Company of $168.3 million related to the payment of the final dividend of36 US cents per share for the 2005 financial year. Given the strong cash flows generated by the Kazakh Mining business, the shortterm credit facilities were repaid early in the period. Financing for MKM, whichhad previously been undertaken by way of intercompany loans from Kazakhmys LLC,was provided by a new four year loan facility entered into with Deutsche Bank of$250.0 million, of which $184.5 million had been drawn down as at 30 June 2006.This facility carries an interest rate of Euribor +1.45%. Balance sheet Shareholders' funds were $3,346.3 million as at 30 June 2006, an increase of$746.5 million compared with the balance as at 31 December 2005. The increasereflected retained earnings for the period of $632.7 million, favourablecurrency translation differences of $273.4 million and a gain arising from areduction in the minority interest of Kazakhmys LLC of $8.7 million offset bythe final 2005 dividend declared during the period of $168.3 million. Thecurrency translation differences were mainly attributable to the consolidationof the results and balances of Kazakhmys LLC into US dollars, as the functionalcurrency of this company is the Kazakhstan tenge. Property, plant and equipment increased by 17% to $1,988.3 million over theperiod after the effect of depreciation was more than offset by capitalexpenditure of $165.0 million and favourable currency translation differences of$216.0 million. Disposals of property, plant and equipment were not materialduring the period. Net liquid funds increased from $829.5 million to $1,221.4 million on account ofthe increased operating cash flows, with $146.8 million held as cash and$1,259.2 million held in the form of deposits with varying maturities betweenone and 12 months. FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------------------------------- Six months ended 30 Six months Year ended 31 June 2006 ended 30 June 2005 December 2005 $ million $ million $ million------------------------------------------------------------------------------------------------- Group Revenues 2,279.8 1,202.1 2,597.5 Profit before taxation, finance items and 984.5 359.5 842.5negative goodwill EBITDA excluding special items 1,081.3 482.8 1,073.5 EBITDA excluding special items margin (%) 47.4% 40.2% 41.3% Net finance items and negative goodwill (28.6) (0.5) 5.6 Profit before taxation 955.9 359.0 848.1 Effective tax rate (%) 33.2% 35.3% 35.1% Profit for the period 638.9 232.1 550.8 Equity minority interests (%) 1.0% 2.6% 2.2% Profit attributable to equity shareholders 632.7 226.1 538.8 Underlying Profit 619.3 236.7 549.8 EPS: Basic and Diluted ($) 1.35 0.56 1.29EPS based on Underlying Profit ($) 1.32 0.59 1.31 Dividend per share (US cents) (1) 12.8 12.0 (2) 36.0 Return on Capital Employed (%) (3) 27.7% 17.1% 31.5% Free Cash Flow 622.3 149.5 450.2 Net liquid funds 1,221.4 277.7 829.5 Cash cost of copper after by-products credits 563.1 869.4 997.2($/tonne) Kazakh Mining Revenues 1,520.9 791.6 1,740.9 Profit before taxation, finance items and 973.1 347.2 840.3negative goodwill EBITDA excluding special items 1,058.8 460.1 1,053.7 EBITDA excluding special items margin (%) 69.6% 58.1% 60.5% Net liquid funds 920.6 223.7 328.0 Cash cost of copper after by-product credits 563.1 869.4 997.2($/tonne) Average KZT/$ exchange rate 127.10 131.20 132.88 MKM Revenues 758.9 410.5 856.6 Profit before taxation and finance items 30.0 15.6 21.8 EBITDA excluding special items 40.5 26.0 39.1 EBITDA excluding special items margin (%) 5.3% 6.3% 4.6% Net liquid (debt)/funds (166.0) 25.3 (4.8) Average Euro/$ exchange rate 0.81 0.78 0.80------------------------------------------------------------------------------------------------- (1) Dividend per share is based on the earnings for that period. (2) Calculated based on the Company's dividend policy of interim and finaldividends being paid in the approximate proportion of one-third and two-thirdsof the total final annual dividend. (3) Return on Capital Employed is calculated based on profit before taxation,interest and negative goodwill for that period. Interim consolidated income statementfor the six months ended 30 June 2006 Notes Six months Six months Year ended$ million ended 30 June ended 30 June 31 December 2006 2005 2005------------------------------------------------------------------------------------------------------------------------ Revenues 4 2,279.8 1,202.1 2,597.5Cost of sales (1,153.4) (724.5) (1,506.6)------------------------------------------------------------------------------------------------------------------------ 1,126.4 477.6 1,090.9Gross profit Selling and distribution expenses (38.1) (27.6) (55.5)Administrative expenses (116.1) (85.5) (185.3)Other operating income 19.9 21.1 39.0Other operating expenses (13.3) (22.5) (34.8)Write back/(off) of assets and impairment losses 5 5.7 (3.6) (11.8)------------------------------------------------------------------------------------------------------------------------ Profit before taxation, finance items and negative goodwill 984.5 359.5 842.5Finance income 6 62.9 53.8 87.4Finance costs 6 (98.0) (54.3) (81.8)Recognition of negative goodwill 7 6.5 - ------------------------------------------------------------------------------------------------------------------------- Profit before taxation 955.9 359.0 848.1Income tax expense 8 (317.0) (126.9) (297.3)------------------------------------------------------------------------------------------------------------------------ Profit for the period 638.9 232.1 550.8------------------------------------------------------------------------------------------------------------------------Attributable to:Equity shareholders of the parent 632.7 226.1 538.8Minority interests 6.2 6.0 12.0------------------------------------------------------------------------------------------------------------------------ 638.9 232.1 550.8------------------------------------------------------------------------------------------------------------------------ Earnings per share attributable to equity shareholders of the parent: Basic and diluted 9 $1.35 $0.56 $1.29 EPS based on Underlying Profit 9 $1.32 $0.59 $1.31------------------------------------------------------------------------------------------------------------------------ Interim consolidated balance sheetas at 30 June 2006 $ million Notes As at As at As at 31 December 30 June 2006 30 June 2005 2005------------------------------------------------------------------------------------------------------------------------ ASSETS Non-current assets Intangible assets 30.3 21.2 21.6Tangible assets 2,040.8 1,620.4 1,743.1------------------------------------------------------------------------------------------------------------------------ Property, plant and equipment 11 1,988.3 1,597.9 1,701.3 Mine stripping costs 52.5 22.5 41.8------------------------------------------------------------------------------------------------------------------------Investments 7.3 5.8 5.8------------------------------------------------------------------------------------------------------------------------ 2,078.4 1,647.4 1,770.5------------------------------------------------------------------------------------------------------------------------Current assetsInventories 541.2 319.7 377.7Prepayments and other current assets 79.4 96.8 41.5Trade and other receivables 304.2 141.1 210.8Investments 12 823.8 313.5 356.5Restricted cash 2.9 2.9 1.0Cash and cash equivalents 13 582.2 169.0 522.0------------------------------------------------------------------------------------------------------------------------ 2,333.7 1,043.0 1,509.5------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS 4,412.1 2,690.4 3,280.0------------------------------------------------------------------------------------------------------------------------EQUITY AND LIABILITIES Equity Share capital 14 173.3 151.1 173.3Share premium 14 503.4 - 503.4Foreign currency translation reserve 14 421.3 129.9 147.9Reserve fund 14 37.6 9.4 9.4Retained earnings 2,210.7 1,563.1 1,765.8------------------------------------------------------------------------------------------------------------------------Equity attributable to shareholders of the parent 3,346.3 1,853.5 2,599.8Minority interests 28.7 46.7 26.3------------------------------------------------------------------------------------------------------------------------ Total equity 3,375.0 1,900.2 2,626.1------------------------------------------------------------------------------------------------------------------------ Non-current liabilitiesDeferred tax liability 280.2 232.7 260.9Employee benefits 32.7 27.2 28.7Provisions 55.4 41.1 44.5Borrowings 15 184.5 44.5 ------------------------------------------------------------------------------------------------------------------------- 552.8 345.5 334.1------------------------------------------------------------------------------------------------------------------------Current liabilitiesProvisions 3.7 11.2 1.4Borrowings 0.1 160.3 49.0Trade and other payables 193.1 163.3 158.7Dividend payable 1.9 1.1 3.1Income tax payable 285.5 108.8 107.6------------------------------------------------------------------------------------------------------------------------ 484.3 444.7 319.8------------------------------------------------------------------------------------------------------------------------ Total liabilities 1,037.1 790.2 653.9------------------------------------------------------------------------------------------------------------------------ TOTAL EQUITY AND LIABILITIES 4,412.1 2,690.4 3,280.0------------------------------------------------------------------------------------------------------------------------ The interim consolidated financial statements were approved by the Board ofDirectors on 18 September 2006. Interim consolidated cash flow statementfor the six months ended 30 June 2006 $ million Notes Six months Six months Year ended ended ended 31 December 30 June 2006 30 June 2005 2005------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES Cash receipts from customers 2,340.4 1,209.6 2,529.4 Cash paid to employees and suppliers (1,472.5) (757.4) (1,561.5)------------------------------------------------------------------------------------------------------------------------ Cash inflow before interest and tax paid 867.9 452.2 967.9 Interest paid (0.2) (7.1) (9.0) Income tax paid (169.2) (190.2) (333.3)------------------------------------------------------------------------------------------------------------------------ 698.5 254.9 625.6Net cash inflow from operating activities 16------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES Interest received 46.5 6.3 17.3 Proceeds from disposal of property, plant and equipment 0.1 3.9 7.3 Purchase of property, plant and equipment (165.0) (144.6) (333.7) Mine stripping costs (5.9) (7.0) (26.5) Purchase of intangible assets (0.7) (3.8) (5.2) Licence payments for subsoil contracts (0.9) (0.4) (0.9) Proceeds from disposal of non-current investments 1.1 0.2 0.2 Acquisition of non-current investments (1.3) (1.2) (3.0) Proceeds from disposal of available for sale securities 1.0 0.5 0.5 Acquisition of available for sale securities - (0.7) (1.0) Investment in short term bank deposits, net (447.2) (56.8) (98.3) Acquisition of subsidiaries, net of cash acquired (2.0) - - Acquisition of Apro business - - (1.0)------------------------------------------------------------------------------------------------------------------------ Net cash flows used in investing activities (574.3) (203.6) (444.3)------------------------------------------------------------------------------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES Proceeds on issue of shares by parent company - - 548.4 Proceeds from contribution to charter capital of subsidiary by minority interests 1.6 - - Transaction costs associated with issue of shares - - (57.2) Receipt of funds from preference shares - - 0.1 Redemption of preference shares - - (0.1) Proceeds from borrowings 167.0 326.0 525.6 Repayment of borrowings (41.4) (222.8) (580.3) Dividends paid by the Company (168.3) - (109.9) Dividends paid by subsidiary to former shareholders - (53.6) (53.6) Dividends paid by subsidiary to minority interests (2.1) (1.3) (1.3)------------------------------------------------------------------------------------------------------------------------ Net cash flows (used in)/from financing activities (43.2) 48.3 271.7------------------------------------------------------------------------------------------------------------------------Net increase in cash and cash equivalents 81.0 99.6 453.0 Cash and cash equivalents at the beginning of the period 522.0 74.1 74.1Effect of exchange rate changes on cash and cash equivalents (20.8) (4.7) (5.1)------------------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at the end of the period 13 582.2 169.0 522.0------------------------------------------------------------------------------------------------------------------------ Interim consolidated statement of changes in equityfor the six months ended 30 June 2006 Attributable to equity shareholders of the parent ---------------------------------------------------$ million Note Share Share Foreign Reserve Retained Total Minority Total capital premium currency fund earnings interests equity translation reserve -------------------------------------------------------------------------------------------------------- At 31 December 2004 151.1 - 218.3 14.8 1,382.4 1,766.6 47.2 1,813.8Profit for the six months - - - - 226.1 226.1 6.0 232.1Transfer from reserve fund - - - (5.4) 5.4 - - -Equity dividends paid by - - - - - - (2.9) (2.9)subsidiary to minority shareholders Equity dividends paid by 10 - - - - (50.8) (50.8) (1.3) (52.1)subsidiary prior to share exchange transactions Currency translation - - (88.4) - - (88.4) (2.3) (90.7)differences -------------------------------------------------------------------------------------------------------- At 30 June 2005 151.1 - 129.9 9.4 1,563.1 1,853.5 46.7 1,900.2-------------------------------------------------------------------------------------------------------- At 31 December 2004 151.1 - 218.3 14.8 1,382.4 1,766.6 47.2 1,813.8Profit for the year - - - - 538.8 538.8 12.0 550.8Transfer from reserve fund - - - (5.4) 5.4 - - -Shares issued pursuant to 1.9 32.5 - - - 34.4 (25.9) 8.5Kinton Trade Limited transaction Shares issued pursuant to 20.3 528.1 - - - 548.4 - 548.4Listing of the Company Transaction costs associated - (57.2) - - - (57.2) - (57.2)with issue of shares Equity dividends paid by 10 - - - - (50.8) (50.8) (1.3) (52.1)subsidiary prior to share exchange transactions Equity dividends paid by - - - - - - (5.3) (5.3)subsidiary to minority shareholders Equity dividends paid by the 10 - - - - (110.0) (110.0) - (110.0)Company Currency translation - - (70.4) - - (70.4) (0.4) (70.8)differences -------------------------------------------------------------------------------------------------------- At 31 December 2005 173.3 503.4 147.9 9.4 1,765.8 2,599.8 26.3 2,626.1Profit for the six months - - - - 632.7 632.7 6.2 638.9Contribution to charter - - - - - - 1.6 1.6capital of subsidiary by minority shareholders Transfer to reserve fund - - - 28.2 (28.2) - - -Gain from dilution of - - - - 8.7 8.7 (8.7) -minority interest in subsidiary Acquisition of minority 7 - - - - - - 0.9 0.9interest in subsidiary Equity dividends paid by - - - - - - (0.9) (0.9)subsidiary to minority shareholders Equity dividends paid by the 10 - - - - (168.3) (168.3) - (168.3)Company Currency translation - - 273.4 - - 273.4 3.3 276.7differences -------------------------------------------------------------------------------------------------------- At 30 June 2006 173.3 503.4 421.3 37.6 2,210.7 3,346.3 28.7 3,375.0 -------------------------------------------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOWRelated Shares:
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