Interim Results

26th Sep 2007 07:03

Aricom PLC26 September 2007 Press Release 26 September 2007 Aricom plc ("Aricom" or "the Company" or "the Group") Interim Report for the six months to 30 June 2007 Aricom plc (AIM: TIO), the Anglo-Russian developer of mineral resources, issuesthese interim financial results for the six months to 30 June 2007 ("the Period") further to the trading update released in July. Highlights of the interim financial results and progress during and followingthe Period include: - Total gross funds raised of US$575 million during the Period by issueof shares and warrants - Progress on intention to move to Main Market - Net assets at end of Period of US$1.1 billion (at 31 December 2006:US$444 million) - Cash and cash equivalents at end of Period of US$530 million (at 31December 2006: US$90 million) - Loss for the Period of US$(0.8 million) (for six months ended 30 June2006: US$(1.0 million)) - Purchases of remaining 50% interest in Kimkanskoye and Sutarskoye ("K&S") (completed August 2007 taking the Group's interest to 100%) and 60% interestin Garinskoye (completed September 2007) - Successful completion of the acquisition of a majority interest inGiproruda mining institute - Construction of Kuranakh project continues on schedule - Kuranakh construction costs impacted by global steel prices andadditional blasting requirements - Positive project studies on both K&S and Garinskoye deposits suggestinga total valuation of US$3.7 billion Pavel Maslovskiy, Chairman, said: "As we approach the start of Aricom's first operation we near a milestone in thedevelopment of the Company. It is rare for mining companies to take early stagegreenfield sites through the entire process of developing the resource base,analysing the feasibility of a project, constructing the project and thenoperating it. I am very proud of what Aricom has achieved to date at Kuranakhand although the challenge of actually finishing construction and commissioningthe project remains, I have great confidence in the team's ability to concludethis as a result of their tremendous success to date. The achievement at Kuranakh also makes Aricom well placed in contemplating thefurther development and construction of K&S and Garinskoye. I am delighted toreport excellent progress at both these projects during 2007, the results ofwhich hint at a very exciting future. The completion of what was the second largest ever secondary fundraising on AIMshows the degree of confidence that the investment community has placed in ourteam. More recently the financial markets appear to have weakened although Istill see the fundamentals for our business as being very positive - iron oreprice forecasts continue to rise and the market for titanium is increasinglyimportant for, among other uses, aircraft manufacturing. Our latest development is our co-operation agreement with the RosoboronexportGroup. I believe this is a significant step forward for Aricom as our expertisein the mining sphere is recognised in our participation in this new form ofpublic private partnership to find interesting investment opportunities for bothparties." Aricom plc Interim Financial Statements for the six months ended 30 June 2007 Corporate Update Treasury Fundraising Aricom successfully raised approximately US$555 million (US$532 million net)through a placing of 133 million units, each consisting of three ordinary sharesand one warrant, each warrant giving the right to subscribe for one ordinaryshare at an exercise price of £0.80 per share (subject to adjustment). Theplacing was approved by shareholders on 4 June 2007. On 4 June 2007, Aricom also issued 17,076,372 ordinary shares to theInternational Finance Corporation ("IFC") for a total of US$20 million and alsogranted IFC an option to subscribe for a matching amount of additional newshares at £0.74 each, subject to adjustment. These fundraisings allow Aricom to commit to and commence the constructionprogrammes at K&S and Garinskoye. Following the successful completion of thesefundraisings, Aricom is reviewing ways of expediting the construction anddevelopment programmes. Project Finance In May 2007, the Group received commitment letters for a US$65 million projectfinance facility to complete the financing of the Kuranakh project. BayerischeHypo- und Vereinsbank AG, Caterpillar Financial (Zurich), VTB Bank Europe plcand ING Bank jointly committed to the facility. Following the fundraising, theproject finance process has been suspended, three of these commitment lettershave lapsed. The Group expects to renew the discussions later in 2007. Listing As announced on 10 May 2007 at the time of placing, Aricom intends to seekadmission of its ordinary shares and warrants to the Official List of theFinancial Services Authority and to trading on the Main Market of the LondonStock Exchange before the end of the year. Aricom is making good progress inthis regard and expects to submit a draft prospectus to the UKLA for reviewshortly. As part of this prospectus, Wardell Armstrong International ("WAI") ispreparing a full Mineral Expert's Report on the assets. Mergers & Acquisitions Garinskoye In March 2007, Aricom entered into a conditional agreement to acquire a 60%interest in LLC Garinsky Mining & Metallurgical Complex ("Garinsky") and anoption to acquire an additional 25% interest. The acquisition has now beencompleted. In 2006, Garinsky submitted their proposal for developing the assetfor the licence in competition with a number of other Russian companies. InDecember 2006, Garinsky received the licence and commenced mobilisation of adrilling team and planning for the exploration works which commenced in thefirst quarter of 2007. Completion of K&S In April 2007, after WAI completed its competent person's report and valuationof K&S, Aricom conditionally agreed to acquire the remaining 50% interest in K&Sto bring its ownership to 100% Following the valuation, Aricom issued theadditional consideration (being 65 million ordinary shares) due to MalavasiaEnterprises Inc. for its existing 50% interest in LLC KS GOK (formerly LLCRubicon) ("KS GOK") and gave notice to Philotus Holdings Limited to exercise theoption to acquire the remaining 50% interest. The acquisition pursuant to theexercise of the option was subsequently completed in August 2007 and theconsideration comprised the issue of 123,782,467 ordinary shares. Giproruda In March 2007, Aricom agreed to acquire a 68.49% holding in OJSC "Institute forEngineering of Ore Mining Enterprises Giproruda" ("Giproruda"), conditional onFederal Antimonopoly Service ("FAS") approval. This approval was granted in May2007 and the acquisition was completed in June 2007. There was a cashconsideration of RUR211 million (US$8.1 million). On 13 July 2007, the Group obtained the full voting rights in respect of its68.49% interest in Giproruda after a mandatory offer to minority shareholderswas made in accordance with Russian legislation and accordingly Giproruda becamea subsidiary of Aricom. On 21 September 2007, the mandatory offer to minority shareholders lapsed. Atotal of 1,735 shares were tendered under the offer and have been acquiredsubject to final contract. The completion of the acquisition of these shareswill increase the Group's interest in Giproruda to 69.99% from 68.49% for afurther consideration of US$236,000. Management New Chief Financial Officer Brian Egan joined the Company on 31 July 2007 as Chief Financial Officer. BrianEgan, aged 44, was the Group Chief Financial Officer of Gloria-JeansCorporation, a leading Russian clothing manufacturer and retailer and has over15 years' experience in senior financial roles. He was previously VP of Financeof the EMEA Region/Ingredients Division with Associated British Foods Plc,Financial Director of Georgia-Pacific Ireland Limited and Chief FinancialOfficer of Coca-Cola HBC Russia. He is a member of the Institute of CharteredAccountants in Ireland. Long Term Incentive Plan The Company is intending that a long term incentive plan ("LTIP") be establishedto operate in conjunction with an employee benefit trust ("EBT") to provide aneffective and flexible means of holding assets for the benefit of employees andtheir families and providing valuable long-term benefits. Contributions to theEBT will be at the discretion of the Remuneration Committee, which will alsorecommend allocations under the LTIP. The Trust will be administered andoperated by a third party trustee. The maximum number of ordinary shares that may be allocated in respect of anybeneficiaries under the LTIP in any financial year shall be limited to 200% ofannual salary, calculated by reference to the market value of the ordinaryshares at the date of allocation. No new ordinary shares will be issued throughthe LTIP. The maximum number of ordinary shares that may be allocated under theLTIP shall not exceed at any time 5% of the Company's issued share capital andthe number of ordinary shares which may be held in the EBT shall also not at anytime exceed 5% of the Company's issued share capital, unless the shareholders ofthe Company give their approval to raise these limits. No further options overordinary shares will be granted under the Company's existing share option schemeand it is intended to operate the EBT in conjunction with any other scheme inorder to comply with the guidelines as set down by the Association of BritishInsurers. Awards of ordinary shares will be subject to agreed performance conditions asrecommended by the Remuneration Committee. The current intention is for theperformance conditions to be set by reference to operational, profitability andHSE targets. However, completion of the performance conditions can be waived bythe trustees at their sole discretion, but having regard to any recommendationsby the Remuneration Committee, in circumstances where such conditions havebecome either inappropriate or overly onerous by external circumstances. Project Update KURANAKH PROJECT - Titanomagnetite Deposit at Pre-Production Stage H1 2007 Highlights • Approval of the OVOS Environmental Impact Assessment • Completion of the 40 km power line from Olekma to Kuranakh • Assembly of the first mining shovel completed in August forcommencement of stripping in September Background: OOO Olekminsky Rudnik ("Olekma"), a 100% owned subsidiary of Aricom,holds the licence for the exploration and development of the Kuranakh ilmeniteand titanomagnetite deposit in the north west of the Amur Region. The licence covers an area of 85 km2 and was explored extensively both duringthe Soviet era and subsequently by Aricom. Eight individual ore zones were identified within the licence area along astrike length of 5 km and over a width of 1.5 km. At this time, two ore zones,Ore Zone 1 and Ore Zone 3, are scheduled for mining by open-pit methods, as theyare currently believed to host the highest grades and lowest stripping ratios.According to the feasibility study these two ore bodies support a mine life of15 years. However the Directors believe that with further successful explorationthis period will be extended as the other six ore bodies may be exploited. 2007 Progress Construction: Crushing and Screening Site The crushing and screening site is fully cleared and foundation construction forthe workshop is now well underway. Kapstroy, Aricom's construction contractor atKuranakh, and Aricom believe that the crushing and screening complex should beoperational and producing pre-concentrate in December 2007 assuming weatherconditions continue to permit construction as planned. Mining Equipment The erection of the five EKG5A electric rope shovels is proceeding on schedule.Pre-stripping of the overburden at Kuranakh has commenced. Pre-strip material isbeing used to complete all haulroads in and around the site. Accommodation Camp The accommodation and administration blocks are being constructed on threeterraces cut into the hillside overlooking the tailings dam. Construction of theadministration block, laundry and canteen, on the lower terrace, has recentlybeen completed. Process Plant Site The process plant site, located approximately 1 km east of the accommodationcamp, is being cleared and levelled. Progress was slowed due to excessiverainfall hampering the bulldozing efforts however completion is still expectedin April/May 2008 as scheduled in the feasibility study. Fuel Facility and Explosives Storage The tank farm and pumping and piping are complete and operational. Theexplosives storage is complete, licensed and operational. Rail Connection The civil works associated with the rail spur line from BAM to the process plantsite have been substantially completed. Once the final approvals have beenreceived from the rail authorities the rail beds will be equipped with tracks,points and signalling equipment. The rail spur and sidings are currentlyexpected to be fully operational by March 2008. Human Resources A major activity taking place during the second half of 2007 is the accelerationof the recruitment campaign for all levels of operators, staff and management.Visits are being made to the training institutes in the Amur and neighbouringregions as well as an extensive advertising campaign both in the Russian FarEast and major university cities. Our Far East division now has a total staff of 95 of which 61 are workingdirectly at Kuranakh and a further 23 support staff are based at Tynda. Those atKuranakh are predominantly mechanics, electricians and operators engaged in thecommissioning of the EKG shovels; operators for the ROC L8 drill; mining andblasting supervisors. The total complement at Kuranakh when it reaches fullcapacity will be 489 although it is expected that approximately half of thesepermanent positions will be filled by current Kapstroy personnel. Construction Costs As previously reported, the construction programme at Kuranakh is experiencingcapital cost pressures which have, to the end of the Period, resulted in anestimated 15.8% overrun. Management reports and analysis estimate that the finalconstruction cost will be US$110 million. Aricom's analysis of the costs incurred to date show three primary reasons forthe cost overrun: • Increases in global steel prices. Increases in the price of structuralsteel used for the building frameworks at both the Kuranakh mining/crushing siteand the Olekma processing facility have led to a significant increase in costs.The majority of the structural steel has been purchased and further additionalcosts caused by increasing steel prices are expected to be minimal. • Extra drilling, blasting and rock removal. There has been a significantamount of additional drilling, blasting and removal of hard material during theconstruction of both the main haulroad (from the town of Olekma to Kuranakh) andthe construction of the terraces for the accommodation camp. This work is nowcomplete and it is not expected that there will be further related overruns. • Power line foundations. Additional costs were incurred in laying thefoundation works associated with the installation of the power line pylonsbetween the town of Olekma and Kuranakh. This work is now complete and it is notexpected that there will be further overruns. Construction Summary Aricom continues to estimate the following timetable: Third quarter 2007 - Mine pre-strip commencement; December 2007 - Production scheduled to commence at Kuranakh. Pre-concentratefrom the crush and screen plant to be produced and sent to Olekma stockpile; and April/May 2008 - Completion of construction and commissioning of Olekma processplant. Environmental Impact Assessment The OVOS (identification of possible impacts on the environment) and OOS (actionplan to deal with identified impacts) were approved by the Department of NaturalResources of the Amur Region in April. In addition Aricom commissioned DEBEnvironmental Consultants to prepare a Public Consultation and DisclosureStrategy document which was completed in May and WAI will be appointed Aricom'sHSE auditor which will include regular visits to all sites. Second Half Programme During the second half of 2007 construction is scheduled to continue in order tocomplete all of the key structures by December. This should allow theinstallation and commissioning of the process plant equipment to take placeinside and not be subject to any potential delays on account of the weather. K&S PROJECT - Magnetite Iron Ore Deposit at Advanced Development Stage 2007 Highlights • Completion of WAI Valuation Report • Purchase of the remaining 50% of KS GOK • Commencement of the Environmental Baseline Study • Commissioning of the Feasibility Study • Completion of all confirmation drilling at Kimkanskoye • Good progress on confirmation drilling at Sutarskoye Background: In April 2006, Aricom acquired an option to purchase a 50% interestin KS GOK ("the Option") which holds the licences to develop the K&S iron oredeposits. The licences over the two deposits were granted to KS GOK in February2006 and have a term of 20 years, which is extendable with the consent of thelicensing authority. Aricom has exercised the Option to purchase the 50%interest which was completed after FAS approval and now owns 100% of KS GOK. The initial feasibility study was carried out by Peter Hambro Mining Engineering("PHME") and was completed in March 2007. This study reports on mining andprocessing at K&S as well as the viability of producing a metal product such asdirect reduced iron or pig iron. The independent valuation was carried out byWAI in February 2007 and completed in April 2007. The study estimates a netpresent value of US$1.7 billion at a 10% discount rate and an internal rate ofreturn of 35%. The K&S deposits, first identified in the early 1950s, are located in the JewishAutonomous Region ("EAO"). They signify a transformational change in theanticipated magnitude of Aricom's mining operations. These large deposits aretogether estimated to be able to sustain a mining rate of 10 million tonnes perannum of iron ore mined and are located close to both the Trans-Siberian railway(4 km) and the Chinese border (600 km). Kimkanskoye: The licence covers an area of 22.4 km2. The deposit is divided intoseven ore zones of which the most important is the Central area. The ore, whichis 80% magnetite and 20% haematite, has an average grade of 36% Fe. Themagnetite can be recovered by conventional magnetic separation and the haematiteby flotation. Sutarskoye: The licence covers an area of 27 km2. The deposit is divided intothree ore zones of which the main zone is Yuzhni, which lies on either side ofthe Sutara river. The ore is mainly magnetite with some silicate magnetite withan average grade of 33% Fe. There is almost no haematite present at Sutarskoye. 2007 Progress Valuation and Purchase Following the completion of the initial feasibility study by PHME in March 2007WAI carried out an independent competent person's report and valuation of theproject in March. This report and valuation is based upon a mining rate of 10million tonnes per year of ore and producing both pig iron and iron oreconcentrate. The WAI report confirms the technical and economic viability of theproject and estimates that the project has a net present value of US$1.7 billionat a 10% discount rate and an internal rate of return of 35%. SubsequentlyAricom paid the additional consideration of 65 million ordinary shares for theacquisition of initial 50% of the project from Malavasia Enterprises Inc. InAugust 2007 Aricom acquired the remaining 50% from Philotus in consideration forthe issue of 123,782,467 ordinary shares. Environmental All necessary licences have been obtained by Dalgeophysica (Aricom's drillingexploration subcontractor) which allow them to carry out exploration drilling,build a temporary accommodation camp on Sutarskoye and extract water from localsources for living purposes. Baseline environmental data collection commenced inMay in preparation for the Environmental Impact Assessment report which began inJuly 2007. Exploration Dalgeophysica continued with the confirmation drilling and trenching ofSutarskoye using 2 core drills. Some 3,753 linear metres of drilling and 18,384m3 of trenches were completed by the end of May 2007. The total explorationprogram at Sutarskoye includes 137 holes each of 160 linear metres (21,920linear metres) and 58,000 m3 of trenches. Due to flooding of the Sutara river overlying the Sutarskoye deposit, access tothe drilling positions has been difficult, even with assistance from thebulldozers. Consequently the work was concentrated in Kimkan and performed byfour contractors: Dalgeophysica, Argo, AmurTiSiZ and DV AGP. - Dalgeophysica - Due to postponement of the exploration works at Sutara,the field works concentrated on the assessment of engineering-geologicalconditions of Kimkan site. In July, Dalgeophysica conducted data processingworks on the final project report. Drilling began in the middle of the month atcross-sections IX and XVIII of the Central area using one drill. 4 geotechnicalbore holes were made (458 metres in total), 40 samples were taken. Currently twodrills are being used that will render it possible to finish plannedgeotechnical works at Kimkanskoye by the end of September. - 30.6 km of magnetic exploration has been undertaken and lithochemicalsamples have been taken to determine barren core in stockpiling areas and areaof facilities. 1,000 samples have been taken for spectrum analysis. Results ofgeophysical works are also being processed and analysed. - Argo LLC - Additional hydrogeological exploration works began onexploration of the groundwater needed to meet the requirements of the processplant. The following works were completed in July - drilling of boreholes (12-20metres deep including piping); completion of water extraction bore hole nearKimkan Central (220 metres); and continuation of base development works. - DV AGP - In July, the enterprise conducted horizontal and verticaltie-in work to interpret aerial-photos and conducted topographic works. Theresults will be included in the Giproruda feasibility study on the project. - AmurTiSiZ - Engineering surveys are being conducted in the area ofplant facilities and camp. Drilling works commenced with 48 bore holes completedin August. Samples are taken to determine physical and mechanical properties ofthe core. A contract has been concluded with the Yekaterinburg Mining Institute to assistwith engineering-geological exploration of Kimkan site and conduct laboratoryanalysis of ore and core samples. Preliminary calculation of Kimkan open pitsides stability has been received and passed on for inclusion in the feasibilitystudy. The assessment of mechanical properties of samples taken has begun. The exploration drilling results of the works at K&S are being entered into aMicromine geological model which will generate JORC reserves and resourcesestimates following the completion of the drilling in 2008. Second Half Programme Aricom has commissioned a feasibility study based upon a mining rate of 10million tonnes per year of ore and the production of both pig iron and iron oreconcentrate. The study is expected to be completed by early 2008. As part of this study PHME will work with Irgiredmet, in Irkutsk, to prepare theenvironmental and social impact assessment to international standards. Thisreport will form the basis of the OVOS which is expected to be submitted to theregional environmental authorities by the end of 2007. Initial environmentalbaseline data from K&S is being collected by Amurgeologica under the guidance ofthe Aricom Environmental Engineer. Public consultation meetings are scheduled to be held with the localcommunities, at Isvestkovaya in order to advise them of Aricom's future plansand to understand their views. The Group's community work is intended to beundertaken in accordance with the World Bank's Equator Principles and will seekto ensure that Aricom can maximise the benefit that the project will bring tothose communities. Aricom currently anticipates that all drilling and evaluation works are onschedule to be completed in 2008 and that the Kimkanskoye deposit will commenceoperations in 2009/2010 and reach full production in 2010/2011 at a mining rateof 10 million tonnes per annum. Production at Sutarskoye should commence in2013, in accordance with the provisions of the licence. GARINSKOYE - Magnetite Iron Ore Deposit at Advanced Development Stage 2007 Highlights • Commencement and completion of initial drilling • Publication of the PHME scoping study Background: In October 2006, Rosnedra (the Federal Subsoil Service, RussianFederation) initiated a tender for the licence to mine iron ore on theGarinskoye deposit. The supporting documentation estimated that the depositcontained iron ore reserves and resources of 388.8 million tonnes in the Russiancategories A, B and C with an average grade of 42% and 2,590 million tonnes ofRussian categories P1 and P2 contained in the flanks. Of the A, B and C1categories, 39% (82.5 mt) were defined as 'rich ore' and contained an averagegrade in excess of 50% Fe of which 67.7 mt had an average grade of 56% Fe. In December 2006, LLC Amur Mining, subsequently renamed Garinsky, a company inrespect of which Aricom acquired a 60% interest on 24 September 2007, submittedtheir proposal for developing the asset for the licence in competition with anumber of other Russian companies. In December 2006, Garinsky received thelicence and commenced exploration works and studies with the initial workfocusing on a comprehensive programme of confirmation drilling. Followingsuitable positive results from this, a feasibility study should be completed inthe early 2008 and the project could be in full production by 2012. Aricom hasalso acquired an option over a further 25% interest in Garinsky at an exerciseprice of US$100 million. As magnetite is the predominant source of iron at the Garinskoye project itcould be concentrated using the same magnetic separation process as at Aricom'sKuranakh project. This should result in an initial production of standard ironore fines averaging +/-65% iron which would then be developed into a number ofpremium products including standard pellets, direct reduced iron (DRI), or pigiron. 2007 Progress: Exploration In January, a drill rig provided by Regis reached the site and commenceddrilling. By the end of July the exploration team had completed the following: • Core drilling 4,504 m (25 holes) • Mechanical trenching 3,408 m3 • Sampling - Trenching 298 samples, Core sampling 720 samples, Magneticprospecting 50x5m 2.8 linear km; and • Construction of a temporary accommodation camp for the 20 manexploration and drilling crew consisting of 5 houses, canteen, and core store. The exploration drilling being carried out was completed in September 2007 atwhich time the drills commenced geotechnical borehole drilling. It is planned todrill 15 geotechnical holes to depths ranging from 150-500 m. In addition all Soviet era drilling results are being entered into a Microminemodel. Preliminary sample analyses, for the confirmation boreholes, have beenreceived from the laboratory and indicate that good intersections of +40% Fehave been found. The following preliminary ore body intersection results havebeen obtained: Length of Per cent.Hole No. Depth Intersection Fe C-051 100m 20.4m 43.4C-051 180m 6.0m 57.1C-051 240m 34.5m 33.3C-161 55m 35.5m 45.8C-161 137m 20.1m 41.7C-162 15m 20.7m 41.3C-162 37m 4.5m 42.5K-01 43m 9.3m 49.1K-01 118m 22.4m 38.6K-01 155m 88.8m 41.3 All references to the exploration results and mining included in this releasewere approved for release by Mr. Martin Smith, C Eng. BSc (Hons) MIMMM,Technical Director for Aricom. Mr. Smith has more than twenty years experiencein the fields of activity concerned and is a Competent Person. Mr. Smith hasconsented to the inclusion of the material in the form and context in which itappears. The PHME Garinskoye scoping study was published in May. The study is based upona mining rate of 10 million tonnes per year of ore and the production of bothpig iron and iron ore concentrate. The study estimates that the project has anet present value of US$1.95 billion at a 10% discount rate and an internal rateof return 43%. Second Half Programme Based upon the economic viability of the project demonstrated in the PHMEGarinskoye scoping study, Aricom's in-house design institute, Giproruda, willprepare a pre-feasibility study for delivery during 2008. This study will bebased upon a mining rate of between 10 million tonnes and 20 million tonnes peryear of ore and will investigate a number of methods of producing pig iron usingboth gas and coal as the reductant. The study will investigate the optimallocation of the process plant and iron foundry either at the Garinskoye depositor another more optimal location where it could also process the concentratecoming from K&S. Construction of the access road to connect the site to the Federal road Svobodny- Fevralsk, which is to be 60 kilometres in length, is intended to be commencedduring the winter of 2007. This could allow an initial mining operation from thehigh grade core of the deposit to commence early in 2009 at the rate of 2million tonnes per year of ore. The average insitu grade of this ore is expectedto be 59% Fe. The ore should require minimal crushing, screening andbeneficiation prior to shipment. Full scale production at the rate of 5 million tonnes per annum is expected tocommence in 2011 reaching 10 million tonnes per annum by 2012. For this, Aricomis studying, among other possibilities, the feasibility of installing an 80kilometre conveyor belt to take the dry screened ore directly from the miningsite to a processing and metallisation plant to be constructed closer to therail connection at Shimanovsk. BOLSHOI SEYM PROJECT- Titanomagnetite Exploration Deposit 2007 Highlights • Agreement with KM Technologies (Overseas) Limited on 2007 explorationcampaign Background: The Group has a 49% stake in LLC Uralmining ("Uralmining"), aRussian company holding the licence to develop the Bolshoi Seym deposit. TheGroup is in the process of negotiating a joint venture agreement with the otherproposed participant in Uralmining, KM Technologies (Overseas) Limited, acompany related to the Interros investment group, a large Russian privateinvestment company. The Bolshoi Seym deposit is located in the Tyndinskii region 27 km from theMosturaya station (on the Baikal Amur railway) and 40 km to the south east ofOlekma where Aricom are constructing their Kuranakh project process plant. TheDirectors believe it represents a natural extension to Aricom's activities inthis area. The licence covers an area of 26 km2. The licence was granted to Uralmining inNovember 2005 and has a term of 25 years which may be extended, with the consentof the licensing authority. The licence requirement is to start production by 1December 2013 with a minimum extraction rate of 2 million tonnes per year of orestarting from 2014. 2007 Progress: Exploration The exploration plan being developed was finalised during the first quarter of2007. Third quarter mobilisation of exploration drilling contractor followingthe construction of an access road and a temporary accommodation camp. The 2007 planned exploration works focus on: 1. Defining the geological structure of the ore zones and bodies by meansof exploratory boreholes and trenches. 2. Defining the outlines of the mineralisation. 3. Studying the geomorphology, bedding conditions, physical compositionand internal structure of ore bodies, including their continuity and possiblediscontinuity. 4. Carrying out geological and technological mapping of ore layers bytypes of ores. 5. Studying the physical-mechanical properties of ores and host rocks,sufficient for calculating reserves and substantiation of the stability of thesidewalls of the open-pit. 6. Determining the extent of the permafrost zone. The contract for geological drilling, analysis, interpretation and obtaining GKZapproval will be carried out by Vostokgeologica, an Interros company. The workwill include: • 40,000 m of drilling • 150,000 m3 of trenching • Environmental baseline studies and monitoring • GKZ reserve calculations and approval GIPRORUDA 2007 Highlights • Awarded ISO 9001:2000 Quality Management System • Commenced the Garinskoye pre feasibility study In March 2007, Aricom announced that it had agreed to acquire a 68.49% interestin OJSC Giproruda ("Giproruda") for a cash consideration of US$8.1 millionconditional on FAS approval. Aricom received the necessary approval andcompleted the acquisition in June 2007. Following a mandatory offer to minorityshareholders this interest will, subject to final contract, increase to 69.99%. Based in St. Petersburg and employing 148 people, Giproruda is one of Russia'smost respected mining design institutes specialising in the analysis and designof open pit and underground mining projects. Giproruda has considerableexperience in the design of open pits and underground mines in extreme mining,geological and climatic conditions. Iron ore is a key area of specialisation for the institute. This will be ofspecific benefit in the analysis and design of a number of Aricom's future andexisting development projects. Giproruda will continue its work programme forother customers and believes it currently has a 60% market share in the projectdesign services sector in the Russian mining sphere. However, it will becomemore involved with Aricom's portfolio of projects and has commenced theGarinskoye pre feasibility study for delivery in early 2008. 2007 Progress Income for the first six months of 2007 was 35% more than forecast. During the first half of 2007 Giproruda acquired three new clients and commencedstudies on: - The design and construction of an apatite ore mining and beneficiationplant. - An iron ore project feasibility study. - The design of the reconstruction and expansion of an iron ore open pitmine and beneficiation plant in Kazakhstan. In addition to the Datamine software currently in use, Giproruda has decided topurchase the Micromine software in order to be compatible with the Aricom/PHMEgeological computer modelling department. On 8 June 2007 Giproruda was awarded the ISO9910:2000 rating in the fields ofdesign, construction supervision and ecological feasibility of open pits,underground mines and their associated infrastructure. Second Half Programme The order book for the second half of 2007 is 30% over budget. Giproruda willcontinue with the studies commissioned earlier in the year and aims to deliverthe Garinskoye pre feasibility study early in 2008. Titanium Sponge Plant - Potential Downstream Chinese Joint Venture H1 2007 Highlights • Initial Feasibility study received and soon to be complete • Technology studies carried out and initial project analysis completed • City of Jiamusi selected for the potential construction site Background: In June 2006, Aluminium Corporation of China ("Chinalco"), thelargest nonferrous metal company in China and owner of China's largest titaniummetal processing plant, signed a Memorandum of Understanding with Aricom for thedesign and development of a titanium sponge production plant in China (the "Project"). It is intended to source ilmenite feedstock for the plant from Aricom's Kuranakhmine. Whilst Aricom is a mining company this step downstream in the titaniummetal process represents a move to try and capture the higher margins availablein the processing of the ilmenite to be produced by Kuranakh. The proposed jointventure would utilise Aricom's capital, production of ilmenite, expertise intitanium resources and technology together with Chinalco's capital,technologies, local power base and proficiency in engineering design/construction and metal production. 2007 Progress An initial feasibility study has been received from the Chinese design instituteSAMI of China Aluminium International Engineering Corporation Limited, thewholly owned subsidiary of Chinalco, in coordination with a specialist designinstitute in Ukraine. Now that the proposed location of the plant has beenagreed as the city of Jiamusi in Heilongjiang Province of China, this study isbeing adapted to fit the specific design criteria. Based on such progress,Chinalco and Aricom signed a heads of agreement and jointly entered into acooperation agreement with Jiamusi City in May 2007. These two agreements setforth the principles for the completion of this project. The next step is thecompletion of a Chinese feasibility study based on the Ukrainian input and thechosen site. This study is expected by the year end and will be key in theprogress of the joint venture. Second Half Programme This feasibility study is now nearing completion. On receipt of this, Chinalco'sdesign team will add their input before the intended joint venture presses aheadwith the investment decision. It is expected that construction could commence in2007 with commissioning of a plant in 2010. Aricom Proposed Russia-China Bridge in EAO Aricom is intending to work in a private public partnership on the constructionof a bridge over the Amur River in the EAO. The site is close to the Russiantown of Nizhneleninskoye and the Chinese town of Tongjiang. The river at thislocation has an approximate width of 1,000 metres and maximum depth of 5-6metres. The Russian railway network has a connection to the town of Nizhneleninskoyefrom the Trans Siberian Railway station at the capital of the EAO, Birobidjan.This connects the network to Nizhneleninskoye where there is an establishedcrossing point of the river/border. This crossing is served by a natural icebridge for 3 months of the year and a ferry for the remainder. The project is currently seeking inter governmental approval. As a result of thework completed jointly with the Government of the EAO, Ministry of Transport ofRussia, Ministry for Economic Development of Russia, Ministry of the RegionalDevelopment of Russia and Aricom, the construction of the railway bridge and therefurbishment of the Birobidjan-Leninsk railway branch are included into theFederal special programme "Economic and Social development of the Far East andTransbaikal before the year 2013". The project is also included in the "Draft ofthe Strategy of development of railway transport in Russia before 2030". A number of consents are required for the project from the Russian authorities.To date initial drafts have received no primary objections on the constructionof the railway bridge and the signing of an intergovernmental agreement. Oncompletion of these documents the complete set will be filed by the Minister forTransport of Russia to the Chairman of Russian Government with the request topass the Governmental Decree on the suggested projects. It is hoped that the signing of the intergovernmental agreement on theconstruction of the railway bridge may be agreed and signed during the visit ofthe Chairman of the Chinese Government to Moscow in November 2007. In order tofacilitate the immediate commencement of works following such an approval,Aricom is carrying out the preliminary works, namely: geological survey in theplace where the bridge is to be built, and the hydrological survey. These worksare being carried out in partnership with Chinese specialists. Health, Safety and Environmental As the Group grows it continues to remain focused on operating to the beststandards of Health, Safety and Environmental ("HSE") practice. Morespecifically the Group has a stated intention to operate to the World Bank'sEquator Principles where they are deemed to be reasonable, possible andappropriate. No environmental concerns were encountered during the Period and there were noaccidents. The Aricom Draft Health and Safety procedures were completed during the Periodand are under review by the newly formed HSE Committee of the Board. IFC hasbeen involved in this process and is reviewing Aricom's action plan, including: • Health and Safety Procedures • Emergency Response Plan • Kuranakh environmental management plan • List of all Aricom environmental permits and approvals received to date Financial Review Introduction The financial highlights presented in these unaudited interim accounts cover thesix months to 30 June 2007. The accounts are presented in accordance withInternational Financial Reporting Standards ("IFRS") as adopted by the EuropeanUnion. This is the first time the interim accounts have been prepared underIFRS. An explanation of the transition is set out in note 18. Fundraising During the six months ended 30 June 2007, the Company successfully raised US$555million before expenses through a placing of 133 million units, each consistingof three ordinary shares and one warrant, at a price per unit of £2.10. Afurther US$20 million was raised through a placement of 17,076,372 ordinaryshares with the International Finance Corporation (the "IFC"). In addition, IFCwas granted an option to subscribe for a further 17,076,372 ordinary shares atan exercise price of £0.74. Project Finance In May 2007, the Group received commitment letters for a US$65 million projectfinance facility to complete the financing of the Kuranakh project. BayerischeHypo- und Vereinsbank AG, Caterpillar Financial (Zurich), VTB Bank Europe plcand ING Bank jointly committed to the facility. Following the fundraising, theproject finance process has been suspended, three of these commitment lettershave lapsed. The Group expects to renew the discussions later in 2007. Results of operations The Group made a loss for the six months ended 30 June 2007 of US$(0.8 million)compared to a loss from continuing operations for the equivalent period in 2006of US$(1.1 million). Administration expenses have increased as expected fromUS$2.2 million to US$6.1 million in line with the expansion of the Group'soperations in advance of becoming a fully operational producer. Investment revenues Income from investments and cash balances has increased due to the amount ofcash available for earning interest following the placing in early June 2007 andfunds raised in April 2006. The Company made a gain of US$230,000 from forward contracts put in place tohedge the RUR/USD exposure. Tax A current tax charge of US$0.7 million for the Period (2006: US$7,000) has beenaccrued relating to expected investment revenues. A deferred tax credit of US$1.8 million (2006: US$nil) reflects the recognitionof a deferred tax asset in respect of expenses at Olekma deferred for taxpurposes. Associate A 68.49% interest in Giproruda, a leading mining design consultancy, wasacquired on 8 June 2007. Due to restrictions on voting rights prior to 13 July2007, the Group has treated this as an associate as at 30 June 2007. Minority interest At 30 June 2007, the Group had a 50% interest in KS GOK but as the Group had thepower to control KS GOK, it was consolidated, resulting in a minority interestof US$183.6 million. A minority interest share of losses of US$773,000 is shown in the incomestatement reflecting a 50% interest in the losses incurred in KS GOK, thecompany holding the licences for the K&S deposits, in relation to mobilisationcosts in that company. This minority interest was acquired on 9 August 2007. On 11 January 2007, the Company acquired the 26% minority interest in Olekma ata cost of US$11 million. This increased the Company's mining properties byUS$12.1 million reflecting the fair value of the net assets acquired. Property, plant and equipment A further US$18.0 million was invested in property, plant and equipment in thePeriod. Following the valuation of the K&S deposits by WAI, Aricom issued 65 millionordinary shares to Malavasia Enterprises Inc. as additional consideration. Dueto the increase in the ordinary share price from the time of the WAI valuationto the date of the issue of the additional 65 million ordinary shares, the costof the K&S deposits on the Group's balance sheet increased by US$18.5 millionand reduced by US$7.4 million due to a reduction in the estimated amount payableto Philotus Holdings Limited. Financial assets Financial asset investments of US$3 million represent the amount spent on theacquisition of 49% of Uralmining which holds the licence to develop the BolshoiSeym deposit. Derivatives instruments of US$18.4 million mainly represent the Company's optionto acquire Philotus Holdings Limited's 50% interest in KS GOK. Other financial assets of US$28.1 million mainly represent a loan to LapwingLimited which was repaid on 24 September 2007. Cash and cash equivalents and financial assets carried at fair value Liquid assets have increased to US$570 million (2006: US$114 million) duelargely to the successful placing in June 2007. This figure includes US$530million in cash and one day access liquidity funds and US$40 million in otherfinancial assets with maturities of up to one year. Events after the balance sheet date Events after the balance sheet date are set out in Note 16 to the InterimFinancial Statements. Independent Review Report to the members of Aricom plc Introduction We have been instructed by the Company to review the financial information forthe six months ended 30 June 2007 which comprises the consolidated incomestatement, the consolidated statement of recognised income and expense, theconsolidated balance sheet, the consolidated cash flow statement and relatednotes 1 to 18. We have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the Company, in accordance with Bulletin 1999/4issued by the Auditing Practices Board. Our work has been undertaken so that wemight state to the Company those matters we are required to state to them in anindependent review report and for no other purpose. To the fullest extentpermitted by law, we do not accept or assume responsibility to anyone other thanthe Company, for our review work, for this report, or for the conclusions wehave formed. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of, and has been approved by, the Directors. The Directorsare also responsible for ensuring that the accounting policies and presentationapplied to the interim figures are consistent with those applied in preparingthe preceding annual accounts except where any changes, and the reasons forthem, are disclosed. Review work performed We conducted our review in accordance with the guidance contained in Bulletin1999/4 issued by the Auditing Practices Board for use in the United Kingdom. Areview consists principally of making enquiries of group management and applyinganalytical procedures to the financial information and underlying financial dataand, based thereon, assessing whether the accounting policies and presentationhave been consistently applied unless otherwise disclosed. A review excludesaudit procedures such as tests of controls and verification of assets,liabilities and transactions. It is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the six monthsended 30 June 2007. Deloitte & Touche LLP Chartered Accountants London 25 September 2007 Consolidated Income Statement 2007 2006 2006 Six months Six months Year ended to 30 June to 30 June 31 December Notes US$'000 US$'000 US$'000Revenue - - -Administrative expenses (6,107) (2,223) (7,336)Other operating income/ 25 (76) (140)(expenses)Share of associate's profit 44 - - -------- -------- --------Operating loss (6,038) (2,299) (7,476)Investment revenues 4,081 1,592 5,043Finance costs (37) (413) (122) -------- -------- --------Loss before tax (1,994) (1,120) (2,555)Tax credit/(charge) 5 1,173 (7) (135) -------- -------- --------Loss for the period/year fromcontinuing operations (821) (1,127) (2,690)Discontinued operationsProfit for the period/year fromdiscontinued operations - 108 108 -------- -------- --------Loss for the period/year (821) (1,019) (2,582) -------- -------- --------Attributable to:Equity holders of the parent (48) (931) (1,905)Minority interest (773) (88) (677) -------- -------- -------- (821) (1,019) (2,582) -------- -------- --------Basic and diluted loss per share 6From continuing operations US$(0.00) US$(0.00) US$(0.01) -------- -------- --------From continuing and discontinued US$(0.00) US$(0.00) US$(0.01)operations -------- -------- -------- Consolidated Statement of Recognised Income and Expense 2007 2006 2006 Six months Six months Year ended to 30 June to 30 June 31 December US$'000 US$'000 US$'000Exchange differences on translation of foreign operations 9 - - -------- -------- --------Net income recognised directly in equity 9 - -Loss for the period/year (821) (1,019) (2,582) -------- -------- --------Total recognised income and expense for the (812) (1,019) (2,582)period/year -------- -------- --------Attributable to:Equity holders of the parent (39) (931) (1,905)Minority interests (773) (88) (677) -------- -------- -------- (812) (1,019) (2,582) -------- -------- -------- Consolidated Balance Sheet As at As at As at 31 30 June 30 June December 2007 2006 2006 Notes US$'000 US$'000 US$'000Non-current assetsGoodwill 58 - 58Property, plant and equipment 7 462,005 231,331 420,978Investment in associates 8,201 - -Financial asset investments 2,981 2,981 2,981Deferred tax asset 2,463 - -Other non-current assets 107 18,200 105 -------- -------- -------- 475,815 252,512 424,122 -------- -------- --------Current assetsInventories 628 17 180Trade and other receivables 12,997 4,997 6,873Financial assets carried at fair value 8 40,580 - -Cash and cash equivalents 9 529,521 114,149 89,668Derivative financial instruments 10 18,437 - 18,474Other financial assets 11 28,076 735 - -------- -------- -------- 630,239 119,898 115,195 -------- -------- --------Total assets 1,106,054 372,410 539,317 -------- -------- --------Current liabilitiesTrade and other payables (13,632) (4,196) (11,813)Bank overdrafts and loans - (7,006) -Deferred consideration 12 - - (83,798) -------- -------- -------- (13,632) (11,202) (95,611) -------- -------- --------Net current assets 616,607 108,696 19,584 -------- -------- --------Non-current liabilitiesIncome tax liability (585) - -Deferred tax liability (240) - -Other non-current liabilities - (289) (99) -------- -------- -------- (825) (289) (99) -------- -------- --------Total liabilities (14,457) (11,491) (95,710) -------- -------- --------Net assets 1,091,597 360,919 443,607 -------- -------- -------- Consolidated Balance Sheet (continued) As at As at As at 31 30 June 30 June December 2007 2006 2006 Notes US$'000 US$'000 US$'000EquityShare capital 13 1,774 816 816Share premium account 13 917,197 273,000 263,800Share option reserve 13 10,387 295 9,857Other reserves 13 9 - -Retained loss 13 (21,325) (8,654) (9,628) -------- -------- --------Equity attributable to equity holders of the parent 908,042 265,457 264,845Minority interest 13 183,555 95,462 178,762 -------- -------- --------Total equity 1,091,597 360,919 443,607 -------- -------- -------- The accompanying notes are an integral part of this balance sheet. These financial statements were approved by the Board of Directors on 25September 2007. GJ Hambro B EganDirector Director Consolidated Cash Flow Statement 2007 2006 2006 Six months Six months Year ended to 30 June to 30 June 31 December Note US$'000 US$'000 US$'000Net cash used in operating activities 14 (7,501) (4,349) (8,457)Investing activitiesInterest received 3,404 1,517 4,502Income received on derivative financial 230 - -instrumentDisposal of subsidiary, net of cash disposed - (311) (291)Purchases of property, plant and equipment (21,355) (8,476) (32,552)Purchases of investments and other non-current assets - (2,942) (2,886)Purchase of option - (9,000) (9,000)Acquisition of an associate 15 (8,148) - -Acquisition of minority interest 15 (11,000) - -Acquisitions of subsidiaries, net of cash - - (31)acquiredAcquisition of K&S deposits - (24,669) (24,759)Purchase of short-term investments (40,423) - -Loan to Lapwing Limited (27,600) - -Other loans issued (729) - - -------- -------- --------Net cash used in investing activities (105,621) (43,881) (65,017) -------- -------- --------Financing activitiesNew loans raised - - 1,216Repayments of borrowings - (8,797) (10,013)Repayments of obligations under finance leases - (1,347) (1,347)Proceeds on issue of shares 574,937 169,199 169,199Share issue costs (22,506) (6,415) (6,415)Loans made to Sovetsko-Gavanskiy Morskoi Torgoviy Port (SG MTP) prior to acquisition - - (360)Loans receivable repaid - - 735 -------- -------- --------Net cash from financing activities 552,431 152,640 153,015 -------- -------- --------Net increase in cash and cash equivalents 439,309 104,410 79,541Cash and cash equivalents at beginning of period/year 89,668 9,543 9,543Effect of foreign exchange rate changes 544 196 584 -------- -------- --------Cash and cash equivalents at end of period/year 529,521 114,149 89,668 -------- -------- -------- Notes to the Consolidated Financial Statements 1. General information Aricom plc is a company incorporated in the United Kingdom under the CompaniesAct 1985. These financial statements are presented in United States dollars. Foreignoperations are included in accordance with the policies set out in note 2. 2. Accounting policies and basis for preparation The financial information is presented for the first six months of 2007 and doesnot constitute statutory accounts within the meaning of section 240 of theCompanies Act 1985 and conforms with the accounting policies set out in thefinancial statements of Aricom plc for the year ended 31 December 2006, exceptas described below. This interim report should be read in conjunction with the statutory accountsfor the year ended 31 December 2006, a copy of which has been delivered to theRegistrar of Companies. The auditors' report on those accounts was not qualifiedand did not contain statements under Section 237(2) or (3) of the Companies Act1985. The same accounting policies, presentation and methods of computation arefollowed in this condensed set of financial statements as applied in the Group'slatest annual audited financial statements. In the current financial year, the Group will adopt International FinancialReporting Statement 7 Financial instruments: Disclosures (IFRS 7) for the firsttime. As IFRS 7 is a disclosure standard, there is no impact of that change inaccounting policy on the half-yearly financial report. Full details of thechange will be disclosed in our annual report for the year ending 31 December2007. First time adoption of IFRS The Group has adopted IFRS as endorsed by the European Union, with the first setof financial information published under IFRS being the financial statements forthe year ended 31 December 2006. The date of transition was 1 January 2005 andas a result the comparative information for the six months ended 30 June 2006has been adjusted to conform with IFRS. Under IFRS 1 First time adoption ofInternational Financial Reporting Standards, IFRS are applied retrospectively atthe transitional balance sheet date with all adjustments to assets andliabilities as stated under UK Generally Accepted Accounting Practices (UK GAAP)recognised in retained earnings unless certain exemptions are applicable. There was no overall effect on the balance sheet as at 1 January 2005 from theadoption of IFRS. Total equity remained at US$2.8 million. The presentation of the income statement under IFRS differs somewhat from thatunder UK GAAP. A charge of US$114,000 was incurred in 2005 under IFRS comparedto the nil charge which was incurred under UK GAAP under the accounting policiesin force for 2005. This charge relates to the adoption of IFRS 2 Share-basedpayment. Under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, thedisposal of the subsidiary LLC Chemelt and CJSC Chemelt-East ("the LLC ChemeltGroup") is dealt with differently in comparison with the treatment under UKGAAP. As it was concluded that the LLC Chemelt Group was a group held for saleas at 31 December 2005 under IFRS, the assets of this group were recognised inone line in the balance sheet as Assets held for sale. Additionally, totalliabilities relating to those assets held for sale have been recognised as oneline item within total liabilities as Liabilities related to assets held forsale. As the LLC Chemelt Group was sold in the year ended 31 December 2006, IFRS 5requires the profit from the discontinued operation to be disclosed as one lineon the face of the Income Statement for both the year ended 31 December 2006 and30 June 2007. The impact on cash flows is negligible. A more detailed analysis of the effects of transition to IFRS including theeffect of presentational changes is given in note 18. New Accounting Policies to address events in the period During the period, the Group established the following new policies, none ofwhich represent changes to the policies adopted in the 31 December 2006financial statements. Purchases of a minority interest in a controlled entity The cost of the acquisition is measured at the aggregate of the fair values ofassets given, at the date of exchange, liabilities incurred or assumed, andequity instruments issued by the Group in exchange for shares purchased in acontrolled entity, plus any costs directly attributable to the transaction. Theidentifiable assets, liabilities and contingent liabilities of a controlledentity are recognised at fair value at the date of the exchange transaction, butonly to the extent of the proportion of equity acquired. Investments in associates An associate is an entity over which the Group is in a position to exercisesignificant influence, but does not control or have joint control, throughparticipation in the financial and operating policy decisions of the investee.Significant influence is the power to participate in the financial and operatingpolicy decisions of the investee but is not control or joint control over thosepolicies. The results and assets and liabilities of associates are incorporated in thesefinancial statements using the equity method of accounting except whenclassified as held for sale. Investments in associates are carried in thebalance sheet at cost as adjusted by post-acquisition changes in the Group'sshare of the net assets of the associate, less any impairment in the value ofindividual investments. Losses of the associates in excess of the Group'sinterest in those associates are not recognised. Any excess of the cost of acquisition over the Group's share of the fair valuesof the identifiable net assets of the associate at the date of acquisition isrecognised as goodwill. Any deficiency of the cost of acquisition below theGroup's share of the fair values of the identifiable net assets of the associateat the date of acquisition (i.e. discount on acquisition) is credited in theincome statement in the period of acquisition. Where a Group company transacts with an associate of the Group, profits andlosses are eliminated to the extent of the Group's interest in the relevantassociate. Losses may provide evidence of an impairment of the asset transferredin which case appropriate provision is made for the impairment. 3. Exchange Rates The US Dollar rates of exchange applicable to the period are as follows: Six months to Six months to Year ended 30 June 2007 30 June 2006 31 December 2006 Closing Average Closing Average Closing AverageRussian rouble: US$ 25.82 26.08 27.08 27.68 26.33 27.18US$: Pound sterling 2.01 1.97 1.85 1.79 1.96 1.86 The representation of figures in US Dollars should not be construed as meaningthat underlying amounts can or will be settled in dollars. 4. Segmental information Business segments For management purposes, during the period, the Group was organised into threeoperating divisions - mine development, engineering services and corporate.These divisions are the basis on which the Group reports its primary segmentinformation. In 2006 the Group had three operating divisions: trading, minedevelopment and corporate. The trading division was disposed of in June 2006. The principal activities are as follows: • Mine development - the development of the Group's mines in Russia; • Engineering services - activities conducted by the Group associate,Giproruda, which was acquired in June 2007; and • Corporate - the head office activities of the Group. Segment information about these businesses is presented below.Six months ended Mine Engineering30 June 2007 development services Corporate Eliminations Consolidated US$'000 US$'000 US$'000 US$'000 US$'000RevenueExternal sales - - - - - -------- -------- -------- -------- --------Total revenue - - - - - -------- -------- -------- -------- --------ResultOperating loss (2,992) - (3,090) - (6,082)Share of associate's profit before tax - 54 - - 54 -------- -------- -------- -------- --------Segment result (2,992) 54 (3,090) - (6,028)Investment revenues 4,081Finance costs (37) --------Loss before tax (1,984)Tax 1,173Tax on associate's profit (10)Profit for the period from discontinued operations - --------Loss after tax and discontinued operations (821) -------- Mine DiscontinuedSix months ended Trading development Corporate operations Eliminations Consolidated30 June 2006 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000RevenueExternal sales 6,997 - - (6,997) - - -------- -------- -------- -------- -------- --------Total revenue 6,997 - - (6,997) - - -------- -------- -------- -------- -------- --------ResultSegment result (operating profit/(loss)) 32 (1,020) (1,279) (32) - (2,299) -------- -------- -------- -------- -------- --------Operating loss (2,299)Investment revenues 1,592Finance costs (413) --------Loss before tax (1,120)Tax (7)Profit for theperiod from discontinued operations 108 --------Loss after tax and discontinued operations (1,019) -------- Mine DiscontinuedYear ended 31 Trading development Corporate operations Eliminations ConsolidatedDecember 2006 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 TradingRevenueExternal sales 6,997 - - (6,997) - - -------- -------- -------- -------- -------- --------Total revenue 6,997 - - (6,997) - - -------- -------- -------- -------- -------- --------ResultSegment result (operating profit/loss) 32 (3,140) (4,336) (32) - (7,476)Inter-segment sales - - 250 - (250) - -------- -------- -------- -------- -------- --------Segment result (operating profit/loss) 32 (3,140) (4,086) (32) (250) (7,476)Investment revenues 5,043Finance costs (122) --------Loss before tax (2,555)Tax (135)Profit for the year from discontinued operations 108 --------Loss after tax and discontinued operations (2,582) -------- Prices for intercompany sales are established with reference to market rates forsimilar goods and services as appropriate. Other informationSix months ended Mine Engineering30 June 2007 Trading development services Corporate Consolidated US$'000 US$'000 US$'000 US$'000 US$'000Capital additions - 17,655 - 387 18,042Acquisition of minority interest - 12,148 - - 12,148Change in value of deferred consideration - 18,492 - - 18,492Change in estimated consideration - (7,360) - - (7,360)Depreciation and amortisation - 262 - 5 267 -------- -------- -------- -------- --------Balance sheetAssetsSegment assets - 483,829 - 611,561 1,095,390Investment in associate - - 8,201 - 8,201 -------- -------- -------- --------Unallocated assets 2,463 --------Consolidated total assets 1,106,054 --------LiabilitiesSegment liabilities - (11,686) - (1,776) (13,462) -------- -------- -------- --------Unallocated liabilities (995) --------Consolidated total liabilities (14,457) --------Six months ended Mine Discontinued30 June 2006 Trading development Corporate operations Consolidated US$'000 US$'000 US$'000 US$'000 US$'000Capital additions - 9,056 133 - 9,189Acquisition of KS GOK - 203,891 - - 203,891Depreciation and amortisation 1 184 6 (1) 190 -------- -------- -------- -------- --------Balance sheetAssetsSegment assets - 256,244 116,166 - 372,410 -------- -------- -------- --------Unallocated assets - --------Consolidated total assets 372,410 --------LiabilitiesSegment liabilities - (10,622) (869) - (11,491) -------- -------- -------- --------Unallocated liabilities - --------Consolidated total liabilities (11,491) -------- Year ended 31 Mine Corporate DiscontinuedDecember 2006 Trading development Year ended operations Consolidated US$'000 US$'000 US$'000 US$'000 US$'000Capital expenditure - 30,795 204 - 30,999Acquisition of KS GOK - 371,670 - - 371,670Acquisition of subsidiaries - 306 - - 306Depreciation and amortisation 1 418 11 (1) 429 -------- -------- -------- -------- --------Balance sheetAssetsSegment assets - 456,902 82,415 - 539,317 -------- -------- -------- --------Unallocated assets - --------Consolidated total assets 539,317 --------LiabilitiesSegment liabilities - (10,220) (85,391) - (95,611) -------- -------- -------- --------Unallocated liabilities (99) --------Consolidated total liabilities (95,710) -------- Geographical segments The Group's operations are located in Russia and the United Kingdom. The Group'strading and mine development divisions are located in Russia. The Group'scorporate activities are carried out in Russia and the United Kingdom. There were no sales in the period. The following is an analysis of the carrying amount of segment assets andadditions to property, plant and equipment analysed by the geographical area inwhich the assets are located: Carrying amount Additions to property, of segment assets plant and equipment 2007 2006 2006 2007 2006 2006 Six months Six months Year ended Six months Six months Year ended to 30 June to 30 June 31 December to 30 June to 30 June 31 December US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Russia 492,030 116,166 456,902 40,935 212,947 402,827United Kingdom 611,561 256,244 82,415 387 133 147Unallocated assets 2,463 - - - - - -------- -------- -------- -------- -------- -------- 1,106,054 372,410 539,317 41,322 213,080 402,974 -------- -------- -------- -------- -------- -------- 5. Tax 2007 2006 2006 Six months Six months Year ended to 30 June to 30 June 31 December US$'000 US$'000 US$'000Current tax expense (663) (7) (135)Deferred tax credit 1,836 - -Tax on discontinued operations - (5) (5) -------- -------- --------Tax income/(expense) for the period/year 1,173 (12) (140) -------- -------- -------- UK corporation tax is calculated at 30% (2006: 30%) of the estimated assessableprofit for the period. Taxation for other jurisdictions is calculated at the rates prevailing in therespective jurisdictions. The charge for the period can be reconciled to the loss per the income statementas follows: 2007 2006 2006 Six months Six months Year ended to 30 June to 30 June 31 December US$'000 US$'000 US$'000Loss before tax:Continuing operations (1,994) (1,120) (2,555)Discontinued operations - 113 113 -------- -------- -------- (1,994) (1,007) (2,442)Tax at the UK corporation tax rate of 30% (2006: 30%) (598) (302) (733)Tax effect of share of associates' profit (13) - -Tax effect of losses not recognised 111 294 744Tax effect of expenses that are not deductible in determining taxable profit 492 20 129Tax effect of utilisation of tax losses notpreviously recognised (178) - -Effect of different tax rates of subsidiariesoperating in other jurisdictions 138 - -Benefit of previously unrecognised temporary (1,125)differences -------- -------- --------Tax (income)/expense for the period/year (1,173) 12 140 -------- -------- -------- In addition to the amount charged to the income statements, deferred taxrelating to the equity component of share options amounting to US$379,000 hasbeen credited directly to equity (see note 13). 6. Basic and diluted loss per ordinary share From continuing and discontinued operations The calculation of the basic and diluted loss per share is based on thefollowing data: Six months Six months Year ended to 30 June to 30 June 31 December 2007 2006 2006 Number Number Number '000 '000 '000Number of sharesWeighted average number of ordinary shares for the purposes of basic and diluted loss per share 542,917 218,260 336,081 -------- -------- -------- US$'000 US$'000 US$'000Basic and diluted loss per shareLoss for the purposes of basic and diluted loss pershare being net loss attributable to equity holders of the parent (48) (931) (1,905) -------- -------- -------- 30 June 30 June 31 December 2007 2006 2006 US$ US$ US$Basic and diluted loss per share (0.00) (0.00) (0.01) -------- -------- --------From continuing operations Six months Six months Year ended to 30 June to 30 June 31 December 2007 2006 2006 US$'000 US$'000 US$'000Net loss attributable to equity holders of the parent (48) (931) (1,905)Adjustments to exclude profit for the period from discontinued operations - (108) (108) ---- ---- ----Loss from continuing operations for the purpose ofbasic and diluted loss per share excluding discontinued (48) (1,039) (2,013)operations -------- -------- -------- Six months Six months Year ended to 30 June to 30 June 31 December 2007 2006 2006 US$ US$ US$Basic and diluted loss per share (0.00) (0.00) (0.01) -------- -------- -------- The denominators used are the same as those detailed above for both basic anddiluted loss per share from continuing and discontinued operations. Basic and diluted EPS are the same because the only outstanding share optionsand warrants are antidilutive as the Group has made a loss. The Company had financial instruments issued as at 30 June 2007 which arepotentially dilutive: 22,576,372 options and 133,000,000 warrants. From discontinued operations Six months Six months Year ended to 30 June to 30 June 31 December 2007 2006 2006 US$'000 US$'000 US$'000Basic profit per share n/a 0.00 0.00 -------- -------- --------Diluted profit per share n/a 0.00 0.00 -------- -------- -------- 7. Property, plant and equipment Fixtures Mining Other Assets Land and and Plant and properties fixed under buildings equipment machinery and leases assets construction Total US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Cost orvaluationAt 1 January 3,836 2,221 3,454 374,617 - 37,472 421,6002007Additions 277 185 440 - 484 16,656 18,042Revaluation ofminority interest - - - 12,148 - - 12,148Change in valueof deferred - - - 18,492 - - 18,492considerationChange inestimated consideration - - - (7,360) - - (7,360)Disposals - (7) (22) - - - (29)Transfers 66 4 - (2,351) 572 1,709 - -------- -------- -------- -------- -------- -------- --------At 30 June 2007 4,179 2,403 3,872 395,546 1,056 55,837 462,893 -------- -------- -------- -------- -------- -------- --------Comprising:At cost 4,179 2,403 3,872 395,546 1,056 55,837 462,893 -------- -------- -------- -------- -------- -------- --------Accumulated depreciation and impairmentAt 1 January (22) (105) (495) - - - (622)2007Charge for the (19) (68) (180) - - - (267)periodEliminated on - 1 - - - - 1disposals -------- -------- -------- -------- -------- -------- --------At 30 June 2007 (41) (172) (675) - - - (888) -------- -------- -------- -------- -------- -------- --------Carrying amountAt 30 June 2007 4,138 2,231 3,197 395,546 1,056 55,837 462,005 -------- -------- -------- -------- -------- -------- --------At 1 January 3,814 2,116 2,959 374,617 - 37,472 420,9782007 -------- -------- -------- -------- -------- -------- -------- At 30 June 2007, US$1,979,000 (2006: US$1,651,000) cumulative capitalisedinterest and borrowing costs were included within assets under construction inthe above table. The effective rate of interest capitalised in 2006 was 14.31%.Depreciation of US$177,000 (2006: US$319,000) relating to assets used in theconstruction of the Kuranak project was capitalised during the six months ended30 June 2007. No assets were held under finance leases either at 30 June 2007 or 31 December2006. There are no restrictions on title and no property, plant and equipment has beenpledged as security. 8. Financial assets carried at fair value Financial assets carried at fair value comprise highly rated certificates ofdeposit, commercial paper, floating rate notes and bonds of maturities rangingfrom 9 months to 6 years. 9. Cash and cash equivalents Cash and cash equivalents comprise cash held by the Group and short-term bankdeposits with an original maturity of three months or less and short-termhighly-liquid investments in money market funds. The carrying amount of theseassets approximates their fair value. 30 June 30 June 31 December 2007 2006 2006 US$'000 US$'000 US$'000Bank accounts and deposits 121,153 103,401 78,013Money market funds 408,368 10,748 11,655 -------- -------- -------- 529,521 114,149 89,668 -------- -------- -------- Investments in money market funds are held for the purposes of diversificationof risk. Accordingly, as these funds are available on demand and haveinsignificant risk of change in value they are classified as cash equivalents. At 30 June 2007, US$175,000 was held as security in relation to derivativefinancial instruments which the Group had entered into. The security depositmatures in October 2007. Credit risk The Group's credit risk is primarily attributable to its cash and cashequivalents which are spread across a number of banks and funds. The Group isusing a portfolio approach to minimise credit risk. Market risk The Group has no significant concentration of market risk. Foreign exchange risk The Group is exposed to foreign exchange risk in that it sources materials,construction work and labour partly in Russian Roubles and also incurs overheadcosts in Russian Roubles, Cyprus Pounds and GB Pounds. These risks are mitigatedto the extent considered necessary by the Board through a combination of holdingthe relevant currencies and entering into forward contracts. Cash flow risk The Group is exposed to cash flow risk to the extent that it is exposed to cashflow interest rate risk due to holding deposits with floating interest rates. The Group intends to enter into borrowings which will be linked to US$ LIBOR andwill then be exposed to cash flow interest rate risk. As at 30 June 2007 theGroup had not entered into any such arrangements. Cash deposits are a mixture offixed and floating interest rates. 10. Derivative financial instruments In 2006 Aricom plc purchased an option (the "Philotus option") to buy fromPhilotus Holdings Limited its 50% stake in KS GOK. The option was acquired for atotal consideration of US$18.2 million including cash of US$9 million and anoption to acquire 18,262,987 ordinary shares in Aricom at a price of £0.28 perordinary share. At 30 June 2007, the fair value of the Group's currency derivatives is estimatedto be an asset of US$237,000 (31 December 2006: US$274,000). 11. Other financial assets 30 June 30 June 31 December 2007 2006 2006 US$'000 US$'000 US$'000Short-term loans 28,076 735 - ---------- ---------- ---------- 28,076 735 - ---------- ---------- ---------- Short-term loans issued comprise: - a loan made to Lapwing Limited in connection with the acquisition ofGarinsky for €20.22 million (US$27,337,000 at 30 June 2007) (see note 16). Theloan is interest free and short-term; - a US$700,000 loan (RUR18.08 million) made to Garinsky drawn down undera RUR140 million facility and US$10,000 (RUR243,000) interest accrued. The loanis bearing interest at 11% and is repayable in 3 years and 1 month after finaldrawdown; - US$29,000 loans issued to employees by subsidiaries. As at 30 June 2006 the loans issued comprise a loan to the disposed subsidiaryLLC Chemelt. The full amount was repaid during the second half of 2006. The Directors consider that the carrying amount of other financial assetsapproximates their fair value. 12. Deferred consideration At 31 December 2006, the deferred consideration for KS GOK was estimated atUS$83.8 million based on the market price of 65 million ordinary shares at themarket price of £0.6525 per ordinary share on 4 April 2007 being the date theindependent valuation of K&S deposits was obtained. The 65 million ordinary shares were issued on 20 April 2007 when the price perordinary share was £0.785. This led to an increase in the value of miningproperties in the amount of US$18.5 million and of minority interest in theamount of US$9.2 million. 13. Reconciliation of changes in equity Share Share Share premium Retained option Translation Minority Total capital account loss reserve reserve interests equity US$'000 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Balance at 1 January 2007 816 263,800 (9,628) 9,857 - 178,762 443,607Revaluation of minority interest -- -- 1,148 - - 11,000 12,148Acquisition of minority interest - - - - - (11,000) (11,000)Total recognised income and expense - - (48) - 9 (773) (812)Recognition of equity element of Directors' options - - - 379 - - 379Share-based payments - - 129 151 - - 280Shares issued 958 676,268 - - - - 677,226Expenses on issue of equity shares - (22,871) - - - - (22,871)Minority interest in revaluation ofdeferred consideration - - (9,246) - - 9,246 -Change in estimated consideration - - (3,680) - - (3,680) (7,360) -------- -------- -------- -------- -------- -------- --------Balance at 30 June 2007 1,774 917,197 (21,325) 10,387 9 183,555 1,091,597 -------- -------- -------- -------- -------- -------- -------- The minority interest at 30 June 2007 of US$183.6 million represents the 50%minority interest in KS GOK. 14. Notes to the Cash Flow Statement (a) Reconciliation of operating loss to net cash outflow from operatingactivities Six months Six months Year ended to 30 June to 30 June 31 December 2007 2006 2006 US$'000 US$'000 US$'000Operating loss from continuing operations (6,038) (2,299) (7,476)Operating profit from discontinued operations - 32 32Adjustments for: Depreciation of property, plant and equipment 267 190 430 Depreciation capitalised (177) (175) (319) Loss on disposal of fixed assets 28 - 9 Share option expense 280 68 429 Share of associates' profit (44) - - Other non-cash adjustments 898 - (109) --------- --------- ---------Operating cash flows before movements in working capital (4,786) (2,184) (7,004) (Increase)/decrease in inventories (448) 461 298 Increase in receivables (1,180) (2,881) (2,936) (Decrease)/increase in payables (1,084) 977 2,519 --------- --------- ---------Cash used in operations before interest and tax (7,498) (3,627) (7,123)Interest paid - (710) (1,290)Income tax paid (3) (12) (44) --------- --------- ---------Net cash used in operating activities (7,501) (4,349) (8,457) (b) Major non-cash transactions 65 million ordinary shares were issued on 20 April 2007 in satisfaction of thedeferred consideration payable in relation to the acquisition of a 50% interestin the K&S Deposits. The share price on 20 April was £0.785 valuing the 65million shares at US$102.3 million. 15. Acquisitions Acquisition of associate On 28 May 2007, the Group's acquisition of a 68.49% interest in Giproruda wasapproved by the Russian FAS. A cash consideration of US$8,148,000 was paid andtransfer of ownership was effected on 8 June 2007. Giproruda is a highly respected Russian engineering company based in St.Petersburg specialising in non-precious metals mine and processing plant design. At 30 June 2007, Russian legislation limited the Group's voting power until suchtime that the Russian Federal Financial Market Service approved Aricom'smandatory offer to minority shareholders. Accordingly, Giproruda has beenrecognised as an associate between 8 June and 30 June 2007. A summary of the book values and fair values of the assets and liabilities ofGiproruda as at 8 June 2007 is disclosed in note 16. Acquisition of minority interest in Olekma On 11 January 2007, the Group acquired the 26% in Olekma that it did not alreadyown, taking its interest in the Kuranakh project to 100%. The purchase price ofUS$11 million was paid in January 2007. It was concluded that the US$11 million paid reflected the fair value of 26% ofthe Kuranakh project. In accordance with the Group's accounting policy foracquiring minority interests, the percentage of the assets and liabilitiesacquired have been recognised at this fair value, resulting in an US$12.1million increase in the carrying value of Kuranakh. 16. Events after the balance sheet date and litigation (a) On 23 July 2007, Senior Non-Executive Director Sir Malcolm Fieldexercised options over 1,000,000 ordinary shares at an exercise price of £0.15. (b) On 31 July 2007, Peter Howes resigned as a Finance Director of theCompany and Brian Egan was appointed in his place. 400,000 of the options issued to Peter Howes were cancelled on 31 July 2007. (c) Acquisition of control in Giproruda On 13 July 2007, the Aricom Group obtained the full voting rights in respect ofits 68.49% interest in Giproruda after a mandatory offer to minorityshareholders was made in accordance with Russian legislation. Subsequent to thisdate Giproruda is considered to be a subsidiary of Aricom. Set out in the table below is a summary of the fair values of the assets andliabilities acquired in the business combination. Book value Fair value Fair value US$'000 adjustment US$'000Net assets acquiredProperty, plant and equipment 1,128 10,954 12,082Deferred tax asset 49 49Other non-current assets 104 104Inventories 11 11Contracts in progress 1,661 1,661Trade and other receivable 1,494 1,494Cash and cash equivalents 1,800 1,800Trade and other payables (2,416) (2,416)Deferred tax liability (259) (2,629) (2,888) -------- -------- --------Net assets 3,572 8,325 11,897 -------- -------- --------Aricom share of net assets acquired 8,148Total consideration 8,148 --------Satisfied by:Cash 8,148 --------Net cash outflow arising on acquisitionCash consideration 8,148 -------- 8,148 -------- No goodwill arose on acquisition as the consideration payable was equal toAricom's share of the fair value of the net assets acquired. The fair value ofthe net assets acquired has been provisionally estimated and includes theDirectors' valuation of the Company's interest in the property that Giprorudaoccupies. On 21 September 2007, the mandatory offer to minority shareholders lapsed. Atotal of 1,735 shares were tendered under the offer and are now subject to finalcontract. The completion of the acquisition of these shares will increase theGroup's interest in Giproruda to 69.99% from 68.49% for a further considerationof US$236,000. (d) Exercise of option over 50% of KS GOK On 9 August 2007, the Company acquired an interest in the 50% of KS GOK it didnot already own, through the issue of 123,782,467 million ordinary shares toPhilotus Holdings Limited pursuant to an agreement approved by shareholders on18 April 2006. The number of ordinary shares issued was determined in accordancewith the acquisition agreement, and approved by the Independent Directors,following a valuation report from WAI. (e) Acquisition of an interest in the Garinskoye deposit through asubscription for shares in Lapwing Limited and purchase of option and ongoingproceedings On 24 September 2007, Aricom UK Limited subscribed for 60% of the share capitalof Lapwing Limited under an agreement dated 29 March 2007. Under the sameagreement, Aricom UK Limited acquired for a premium of US$19.7 million an optionto purchase a further 25% interest. The exercise period of the option is twoyears from the date of subscription but can be shortened in certaincircumstances. Lapwing Limited owns 100% of the ordinary share capital ofGarinsky, the company which holds the licence to develop and exploit theGarinskoye iron ore deposit in the Amur region of Russia. A loan issued to Lapwing Limited for €20.22 million was repaid on 24 September2007. The Group has been informed that there are two related court proceedingsinitiated against the Russian Federal Agency on Subsoil Use ("Rosnedra"), inwhich proceedings Garinsky is an interested party, regarding the results of thetender for granting the Garinskoye licence ("Tender"). One of the proceedingshas been suspended pending the outcome of the second, in respect of which thereis a preliminary hearing scheduled for late September 2007. Whilst the result ofthis litigation, as of any litigation, is at the discretion of the court, theCompany and, on the basis of the documentation reviewed, its legal advisorsbelieve that the current allegations of the claimant on the procedural defectsof the tender process are unlikely to be of sufficient materiality to void theTender. In addition, Rosnedra has, in one of the proceedings to date, tabled adefence to the effect that the Tender process corresponded to the relevantregulations. In respect of the claimant's current allegations that theirproposal was superior in relation to technical mining issues, the Company isvery confident of the merits of Garinsky's technical proposals. The Company thusbelieves that these proceedings do not represent a material threat to theGarinskoye licence or the Group. 17. Related party transactions Transactions between the Company and its subsidiaries, which are relatedparties, have been eliminated on consolidation and are not disclosed in thisnote. Transactions between the Group and its other related parties are disclosedbelow. All of the arrangements were carried out at arm's length and have beenreviewed by independent members of the Board. During the period, Group companies entered into the following transactions withrelated parties who are not members of the Group: Related parties Philotus Holdings Limited and its subsidiary Expokom (Cyprus) Limited, PeterHambro Mining plc and its subsidiaries are considered to be related parties dueto Mr. Peter Hambro and Dr Pavel Maslovskiy's shareholdings and directorships inthose companies and in Aricom plc. Mr. Peter Hambro is a Director and the beneficial owner of Peter Hambro Limited. LLC Expobank and its subsidiary OJSC Asian-Pacific Bank (former LLCAmurpromstroybank) are considered related parties as Mr. Peter Hambro and DrPavel Maslovskiy have an interest in LLC Expobank. Philotus option As described in note 16, on 9 August 2007, the Company issued 123,782,467ordinary shares to Philotus Holdings Limited pursuant to an agreement approvedby shareholders on 18 April 2006. The number of ordinary shares issued wasdetermined by a committee of the Independent Directors following a valuationreport from WAI. Expokom (Cyprus) Limited debt At 30 June 2007 and 31 December 2006, KS GOK owed RUR190 million (US$7.36million as at 30 June 2007) to Expokom (Cyprus) Limited following arestructuring of amounts owed to Expobank at 30 June 2006. On the acquisition of the remaining 50% interest in KS GOK on 9 August 2007 asdescribed in note 16, this became a debt between two wholly owned subsidiariesand will be eliminated on consolidation. Contracts with LLC Kapstroy LLC Kapstroy ("Kapstroy") is a subsidiary of Peter Hambro Mining Plc and istherefore considered a related party. Olekma has signed agreements with Kapstroy for the construction of the mine andthe processing plant at Kuranakh. The amount payable under these contractsduring the period was US$11,912,000 (during six months ended 30 June 2006:US$5,776,000). The amount owed to Kapstroy by Olekma at 30 June 2007 under thesecontracts was US$3,024,000 (31 December 2006: US$1,688,000). During the period, Olekma also sold some materials and goods and charged rent toKapstroy in relation to the construction project for US$860,000 (for six monthsended 30 June 2006: US$807,000). The amount owed by Kapstroy to Olekma for thesetransactions was US$537,000 (31 December 2006: US$1,688,000). Disposal of LLC Chemelt to Mr. Bugulov The Group's pigment trading business, LLC Chemelt, was sold to Mr. Artur Bugulovfor US$20,000 on 30 June 2006. Mr. Bugulov was a director of LLC Chemelt at thetime of the sale and is therefore treated as a related party. Finance leases with LLC EXPO-leasing The Group entered into finance leases in 2005 with LLC EXPO-leasing, asubsidiary of LLC Expobank, to lease operating equipment with a capital cost ofUS$1,779,000. Under the agreements the Group incurred interest charges duringthe six months ended 30 June 2006 of US$143,000. The leases were repaid as at 30June 2006. Banking arrangements with LLC Expobank The Group has bank accounts with LLC Expobank and its subsidiary OJSCAsian-Pacific Bank. The bank balances at 30 June 2007 and 30 June 2006 are set out below: 30 June 30 June 31 December 2007 2006 2006 US$'000 US$'000 US$'000LLC Expobank 8,613 18,821 30,104OJSC Asian-Pacific Bank 629 1,958 125 --------- --------- --------- During the six months ended 30 June 2007 the Group earned interest on thebalances held on accounts with the above banks of US$716,000 (US$136,000 duringsix months ended 30 June 2006). The bank charges incurred with LLC Expobank and its subsidiaries during the sixmonths ended 30 June 2007 were US$71,000 (bank charges and interest payableamounted to US$410,000 during six months ended 30 June 2006). At 30 June 2007 and 31 December 2006 there were no loans outstanding from LLCExpobank. Trading transactions In addition to the transactions described above there were transactions (set outbelow) that related to the day-to-day operation of business: Recharges to related parties Purchases Six months Six months Year ended Six months Six months Year ended to 30 June to 30 June 31 December to 30 June to 30 June 31 December 2007 2006 2006 2007 2006 2006 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Peter HambroMining plc and itssubsidiariesPeter Hambro 10 - - 149 59 348Mining plcOJSC Irgiredmet - - - 60 109 133CJSC MC Peter Hambro Mining - - - 569 - 10LLC NPGF Regis - - - 67 762 1,954LLC Obereg CHOP - - - 69 15 38CJSC PeterHambro Mining 1 - - 1,236 510 2,479EngineeringCJSC Pokrovsky - - - 88 - 135RudnikOther relatedpartiesPeter Hambro 10 - - 215 - 48Limited --------- --------- --------- --------- --------- --------- Amounts owed by related parties Amounts owed to related parties Six months Six months Year ended Six months Six months Year ended to 30 June to 30 June 31 December to 30 June to 30 June 31 December 2007 2006 2006 2007 2006 2006 US$'000 US$'000 US$'000 US$'000 US$'000 US$'000Peter HambroMining plc and itssubsidiariesPeter Hambro - - - 115 39 243Mining plcOJSC Irgiredmet - - - - - -CJSC MC Peter Hambro Mining - - - 571 - 2LLC NPGF Regis - - - - 279 213LLC Obereg CHOP - - - 20 4 8CJSC PeterHambro Mining - - - - - 559EngineeringCJSC Pokrovsky - - - 174 2 116RudnikOther relatedpartiesPeter Hambro - - - 215 - -Limited --------- --------- --------- --------- --------- --------- The amounts outstanding are unsecured and will be settled in cash. No guaranteeshave been given or received. 18. Explanation of transition to IFRS This is the first interim period for which the Group has presented its financialstatements under IFRS. The following disclosures are required in the year oftransition. The last financial statements under UK GAAP were for the year ended31 December 2005 and the date of transition to IFRS was therefore 1 January2005. The Group published financial information in accordance with IFRS for the yearended 31 December 2005 and the interim period ended 30 June 2006 as required byIFRS 1 First time adoption of International Financial Reporting Standards ("IFRS1"), on 10 April 2007 in its news release entitled IFRS Restatement. The newsrelease is published on the Company's website www.aricom.plc.uk and includesexplanations of the significant UK GAAP to IFRS differences and reconciliationsfor: • total shareholders equity as at 1 January 2005 (the date of transitionto IFRS), 31 December 2005 and 30 June 2006; and • profit attributable to shareholders for the year ended 31 December 2005and the period ended 30 June 2006. A summary of the detailed information presented in the news release is providedbelow. Changes to the Group's reported financial information for the six months ended30 June 2006 as a result of the adoption of IFRS are summarised as follows: First time adoption of IFRS The rules for first-time adoption of IFRS are set out in IFRS 1 First timeadoption of International Financial Reporting Standards. These transition ruleshave been applied to the amounts reported previously under UK GAAP to arrive atthe IFRS financial statements. While the applicable Standards andInterpretations in force at the first reporting date, 1 January 2005, have beenapplied to the financial statements from that date, the Group has availed itselfof certain exemptions given under IFRS 1 in the application of particularStandards to prior periods. These exemptions are: IFRS 3 Business combinations A first time adopter may elect not to apply retrospectively IFRS 3 BusinessCombinations to past business combinations. Aricom acquired LLC Chemelt, Brasenose Services Limited ("Brasenose"), RTCLimited ("RTC") and Arfin Limited ("Arfin") on 31 December 2003, the date ofadmission of the Company's ordinary shares to trading on AIM. The Company haselected not to apply retrospectively the requirements of IFRS 3 to theseacquisitions. Accordingly, the Company has elected not to apply IAS 21 TheEffects of Changes in Foreign Exchange Rates retrospectively to fair valueadjustments and goodwill arising in these business combinations. The following Standards have been adopted early by the Group: • IFRS 6 Exploration for and Evaluation of Mineral Resources isapplicable to the Group from 1 January 2006. However the Group has adopted thisstandard early from 1 January 2005. All other Standards and Interpretations applicable as at 30 June 2006 have beenapplied in the preparation of the financial statements for the period ended 30June 2006. The preparation of the interim 2006 IFRS financial information was in accordancewith IFRS applicable as at 30 June 2006. Changes arising due to adoption of IFRS are: Six months ended 30 June 2006 Change UK GAAP under IFRS IFRS $'000 $'000 $'000Income StatementRevenue 6,997 (6,997) -Net loss from continuing operations (1,019) (108) (1,127)Profit from discontinued operations - 108 108Loss for the year (1,019) - (1,019)Balance SheetNet Assets 360,919 - 360,919Earnings per shareLoss per share (basic) US$(0.00) - US$ (0.00) Changes arise principally due to the following: IFRS 2 Share-based Payment The UK GAAP interim financial statements were prepared under UK GAAP with theearly adoption of FRS 20 Share-based Payment which is comparable to IFRS 2Share-based Payment. There was therefore no difference in the reported figuresarising from the application of IFRS 2 to this interim period. IFRS 5 Non-current Assets held for Sale and Discontinued Operations IFRS 5 Non-current Assets held for Sale and Discontinued Operations stipulatescertain criteria for an asset to be shown as held for sale, which differ fromthe provisions under UK GAAP (FRS3.4). It was concluded that under IFRS 5 at 31December 2005 LLC Chemelt Group was held for sale as the Board had approvedactive marketing of the company for sale. The effect of determining LCC Chemelt Group as held for sale is to recognise allof the related assets on one line on the balance sheet "assets held for sale"and disclose all liabilities related to those assets as "liabilities associatedwith assets held for sale". These assets and liabilities are measured at thelower of their carrying value and fair value less costs to sell, and are notdepreciated from the point at which they are considered to be held for sale. Itwas anticipated at the time that LLC Chemelt Group would be sold for a profit(as it had net liabilities), and hence the assets and liabilities were measuredat their carrying amounts. As the LLC Chemelt Group was sold in the six months ended 30 June 2006, IFRS 5requires the profit from the discontinued operations to be disclosed as one lineon the face of the Income Statement. The full adjustments are detailed overleaf: Restated Group financial information for the six months ended 30 June 2006 CONSOLIDATED INCOME STATEMENT for the six months ended 30 June 2006 Effect of transition UK GAAP to IFRS IFRS US$'000 US$'000 US$'000Continuing operationsRevenue 6,997 (6,997) -Cost of sales (6,400) 6,400 - -------- -------- --------Gross profit 597 (597) - -------- -------- --------Distribution costs (566) 566 -Administrative expenses (2,223) - (2,223)Other operating expenses (76) - (76) -------- -------- --------Operating loss (2,268) (31) (2,299) -------- -------- --------Profit on sale of subsidiaries 45 (45) -Finance income 1,525 67 1,592Finance costs (309) (104) (413) -------- -------- --------Loss before tax (1,007) (113) (1,120)Tax (12) 5 (7) -------- -------- --------Net loss for the year from continuing operations (1,019) (108) (1,127)Discontinued operationsProfit for the year from discontinued operations - 108 108 -------- -------- --------Loss for the year (1,019) - (1,019) -------- -------- -------- CONSOLIDATED BALANCE SHEET for the six months ended 30 June 2006 Effect of transition UK GAAP to IFRS IFRS US$'000 US$'000 US$'000Non-current assetsProperty, plant and equipment 231,331 - 231,331Financial asset investments 2,939 42 2,981Other non-current assets 18,200 - 18,200 -------- -------- -------- 252,470 42 252,512 -------- -------- --------Current assetsInventories 17 - 17Trade and other receivables 5,774 (777) 4,997Cash and cash equivalents 114,149 - 114,149Other financial assets - 735 735 -------- -------- -------- 119,940 (42) 119,898 -------- -------- --------Total assets 372,410 - 372,410Current liabilitiesTrade and other payables (4,196) - (4,196)Bank overdrafts and loans (7,006) - (7,006)Obligations under finance leases - - - -------- -------- -------- (11,202) - (11,202) -------- -------- --------Net current assets 108,738 (42) 108,696 -------- -------- --------Non-current liabilitiesOther non-current liabilities (289) - (289) -------- -------- -------- (289) - (289)Total liabilities (11,491) - (11,491)Net assets 360,919 - 360,919 -------- -------- --------EquityShare capital 816 - 816Share premium 273,000 - 273,000Other reserves 295 - 295Retained earnings (8,654) - (8,654) -------- -------- --------Equity attributable to equity holders of parent 265,457 265,457Minority interest 95,462 - 95,462 -------- -------- --------Total equity 360,919 - 360,919 -------- -------- -------- CONSOLIDATED CASH FLOW STATEMENT for the six months ended 30 June 2006 Effect of transition UK GAAP to IFRS IFRS US$'000 US$'000 US$'000Net cash from operating activities (3,627) (722) (4,349)Investing activitiesInterest received 1,517 - 1,517Disposal of subsidiary, net of cash disposed (311) - (311)Purchases of property, plant and equipment (8,751) 275 (8,476)Purchases of investments and other non-current assets (11,940) 8,998 (2,942)Purchase of option - (9,000) (9,000)Acquisitions, net of cash acquired (24,711) 42 (24,669) -------- -------- --------Net cash used in investing activities (44,196) 315 (43,881) -------- -------- --------Tax paid (12) 12 -Financing activitiesInterest paid (395) 395 -Repayments of borrowings (8,797) - (8,797)Repayments of obligations under finance leases (1,347) - (1,347)New finance lease obligations - - -Proceeds on issue of shares 169,199 - 169,199Share issue costs (6,415) - (6,415) -------- -------- --------Net cash from financing activities 152,245 395 152,640 -------- -------- --------Net increase in cash and cash equivalents 104,410 - 104,410Cash and cash equivalents at beginning of period 9,543 - 9,543Effect of foreign exchange rate changes 196 - 196 -------- -------- --------Cash and cash equivalents at end of period 114,149 - 114,149 -------- -------- -------- This information is provided by RNS The company news service from the London Stock Exchange

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