Preliminary Results

9th Apr 2008 07:01

Eurasian Natural Resources Corp Plc09 April 2008 9 April 2008 Eurasian Natural Resources Corporation PLC Announcement of 2007 Preliminary Results (Unaudited) "ENRC delivered record results in 2007. Buoyant markets for ferroalloys and iron ore were complementedby the strength and breadth of the businesses. The outlook for 2008 is for a very strong performance inour core commodities and principal markets, tempered by higher costs."Dr. Johannes Sittard, Chief Executive Officer Business Highlights for 2007o Completion of the initial public offering in December, raising US$3.1bn.o Commissioning of the aluminium smelter in December.o In March, signed a long-term iron ore supply contract with MMK linked to world benchmark prices.o Trade finance facility increased to US$1.5bn in April.o Record output across the operations.o Results continued to demonstrate the benefits of our high quality assets, diversified revenues and integrated operations including energy and logistics. Financial Highlights for 2007o Delivered strong organic growth 2007 versus 2006:o Record revenue of US$4.1bn, up 26%.o Record EBITDA (before exceptional items) of US$1.9bn, up 52%. EBITDA margin (before exceptional items) of 46%.o Record EBITDA of US$1.7 bn, up 38%.o EPS (before exceptional items) US$0.97, up 73%. EPS US$0.79, up 44%.o Revenue performance fuelled by stronger chrome ore, ferroalloy and iron ore prices and by greater volumes in the Ferroalloys Division.o Partially offset by a strong increase in costs, particularly labour and materials.o Capital expenditure of over US$0.9bn. Approved capex pipeline increased to US$4.0bn.o Strong balance sheet with liquid funds available of approximately US$2.9 bn. Operating cash flow increased 46% to almost US$1.1bn. Outlook for 2008o Platform for a very strong year with a positive price outlook for our core commodities.o New revenue stream from aluminium; expected sales of about 100,000 tonnes.o Completion of Serov ferroalloy acquisition in April.o Management focus on control of costs. For further information, please contact: ENRCMounissa Chodieva +44 (0) 20 7389 1879James S Johnson +44 (0) 20 7389 1862 M: CommunicationsHugh Morrison +44 (0) 20 7153 1534Edward Orlebar +44 (0) 20 7153 1523Julia Kalcheva +44 (0) 20 7153 1517 Summary Group Financial Information (Unaudited):In millions of US$ 2007 2006 Growth Revenue 4,106 3,256 26% Costs(1) (2,503) (2,253) 11% EBITDA (before exceptional items) 1,906 1,256 52%Exceptional items (IPO costs) (182) (6)EBITDA(2) 1,724 1,250 38% Depreciation and amortisation (303) (253) 20%EBIT(3) 1,421 997 43% Profit Before Tax 1,321 971 36%Effective Tax rate 38.4% 29.4%Net income attributable to shareholders 798 550 45% Earnings per share (US$) 0.79 0.55 44%Earnings per share (before exceptional items) (US$) 0.97 0.56 73% EBITDA margin (before exceptional items)(4) 46.4% 38.6% Net cash generated from operations 1,079 739 46% Capital expenditure 911 563 62%Liquid funds available((5)) 2,921 395Net cash/(net debt)((6)) 1,124 (1,148) 198% (1) Costs: cost of sales; distribution costs; selling, general and administrative expenses; and other operating expenses - net (excludes costs incurred in relation to the initial public offering, which are classified as exceptional items).(2) EBITDA: profit before finance income, finance costs, income tax expense, depreciation and amortisation.(3) EBIT: profit before finance income, finance costs and income tax expense.(4) EBITDA margin before exceptional items: EBITDA before exceptional items as a percentage of revenue.(5) Liquid funds available: cash and cash equivalents plus term deposits and financial assets.(6) Net cash/(net debt): Cash and cash equivalents less Borrowings (non-current and current). Forward looking statementsThis announcement includes forward-looking statements that reflect the current views of the Group'smanagement with respect to future events. These forward-looking statements include matters that are nothistorical facts nor are statements regarding the Group's intentions, beliefs or current expectationsconcerning, among other things, the Group's results of operations, financial condition, liquidity,prospects, growth, strategies, and the industries in which the Group operates. Forward-lookingstatements are based on current plans, estimates and projections, and therefore too much reliance shouldnot be placed upon them. Such statements are subject to risks and uncertainties, most of which aredifficult to predict and generally beyond the Group's control. The Group cautions you thatforward-looking statements are not guarantees of future performance and that if risks and uncertaintiesmaterialise, or if the assumptions underlying any of these statements prove incorrect, the Group'sactual results of operations, financial condition and liquidity and the development of the industry inwhich the Group operates may materially differ from those made in, or suggested by, the forward-lookingstatements contained in this announcement. In addition, even if the Group's results of operations,financial condition and liquidity and the development of the industry in which the Group operates areconsistent with the forward-looking statements contained in this announcement, those results ordevelopments may not be indicative of results or developments in future periods. Except as required bythe Listing Rules and applicable law, the Group does not undertake any obligation to update or changeany forward-looking statements to reflect events that occur or circumstances that arise after the dateof this announcement. CHAIRMAN'S STATEMENT "2007 was a year of tremendous achievement for ENRC, culminating in the IPO and the opening of thealuminium smelter. Our diversified mix of high-quality assets and our integrated operations position uswell to rise to the opportunities available in our chosen businesses." The past year has been enormously eventful for Eurasian Natural Resources Corporation PLC and itssubsidiaries ('ENRC', or the 'Group'), its first year as a single operating group. This culminated atthe end of 2007 with our very successful initial public offering (IPO) and the formal opening of our newaluminium smelter by President Nazarbayev of the Republic of Kazakhstan. ENRC's businesses comprise the integrated mining, processing and smelting of ferroalloys, iron ore,alumina and aluminium, together with coal mining, electricity generation and logistics to support theseoperations. Our scale ensures that ENRC is a substantial participant in world markets. We have theadvantage of proximity to China and Russia, which are two of the world's fastest-growing markets for ourproducts. Our vertical integration enables us to be an advantaged low-cost producer in our chosenbusinesses. The IPO in early December was the fulfilment of the combined efforts over a number of years of a greatnumber of employees and advisors, of the Government of Kazakhstan and of our Founder Shareholders - Mr.Patokh Chodiev, Mr. Alijan Ibragimov and Mr. Alexander Machkevitch. To all of these people I would liketo extend the thanks of the Board for their efforts and for making possible the new opportunities whichare now available to the Group. Our US$3.1bn IPO was completed and the shares commenced trading on 12 December 2007 at an offer price of540p a share. This was the largest IPO by funds raised by way of ordinary shares on the main market ofthe London Stock Exchange in 2007. Our market capitalisation (as at 31 March 2008) makes us the 7thlargest listed mining company in the world and, on entry, we were the 30th largest company in the FTSE100 Index. Subsequent to our IPO we have benefited from some particular tailwinds affecting theindustry, not all of which could have been anticipated: substantial interest rate cuts by the US FederalReserve; mergers and acquisitions activity in the sector; the South African power situation; and variousweather events - particularly affecting ferroalloys and iron ore. However, these have all played to theGroup's inherent strengths: its diversified, high-quality assets; its integrated operating capabilities;and its strategic location. We believe that these factors underpin our positive outlook for the next fewyears. From an operational perspective, in 2007 we benefited from strong demand across our range of productsand from higher prices, notably in ferroalloys and iron ore. 2007 represented a record year for EBITDA(before exceptional items). These results were underpinned by the security of our logistics and energysupply and by our low cost power advantage. Strong growth in our principal markets - China and Russia -and the strength of demand and pricing in chrome ore, ferroalloys and iron ore, have allowed us toleverage our management expertise, high quality assets, diversified revenues and integrated operations.These combined events were ideal to deliver improved margins and record results. Nonetheless, whilst we believe that we have all of the essential ingredients for success, we remainalert to those risks inherent in a complacency that can be induced by sustained favourable markets. Werecognise the underlying cyclicality of our industry and the challenges of operating in the region aswell as the prevailing climate of uncertainty in the global economy. In response we are focused on therigorous control of costs in our businesses, the pursuit of a range of asset enhancements, brownfieldand greenfield growth and merger and acquisition opportunities. All of these, accompanied by a strongfinancial discipline, are directed towards underpinning the performance of the business and building itsgrowth. As announced at the time of the IPO, there is no final dividend for 2007 because the IPO was so close tothe year end. Going forward the dividend policy is for our payout to be progressive and in line withpeers, taking into account the investment and growth opportunities that are available to us. The firstdividend to be declared is expected to accompany the 2008 half-year results and will representapproximately one-third of the full year dividend. The investment required for our announced capex pipeline of some US$4.0bn out to 2011 is significantlyexceeded by accumulating cash flow, added to the IPO proceeds and our potential debt capacity. Theopportunities that our new position has opened up, together with our management capability andexperience, offer an exciting outlook for 2008 and beyond, but this will always be within the confinesof rigorous financial discipline. STRATEGYThe IPO was a key milestone in the development of the Group. Looking ahead it is worth reiterating ourfive strategic goals:o Maintain and improve on our low cost operations;o Continue expansion and development of the existing reserves and capacity;o Add value and customer diversity by expanding our product portfolio;o Expand our asset portfolio and footprint in the region's natural resources sector and within our core commodities worldwide; ando Commit to high standards of corporate responsibility. Accompanying these strategic goals is our commitment to deliver shareholder value as we pursue theenhancement and growth of the Group. SUSTAINABLE DEVELOPMENTENRC is in a long-term, capital-intensive business with a resource life of many decades and investmentsthat may have lives of 30 years or more. It is therefore important that the Group remains committed tothe principles of sustainable development. We see sustainable development as a positive for ourbusiness, opening new opportunities and raising performance. EMPLOYEES2007 was a year of challenge across the Group. The operating Divisions delivered a record performancedespite challenges from the weather and the day-to-day issues that beset life on the ground. Inaddition, the delivery of the aluminium smelter, on budget and ahead of time, was a significantachievement and a testament to the quality of operational and project management available to us.Further, across the Group a large number of people were involved in preparing for and delivering the IPO.The accomplishments of 2007 reflect on the commitment, dedication and hard work of our workforceworldwide. Our safety performance in 2007 was disappointing and fell short of expectations. The rate of reportableaccidents fell, however, tragically there was a rise in fatalities to 15, from 11 in 2006. Health andsafety is a key focus for the Group and we have intensified training, and invested in infrastructure toimprove our safety record. To drive this we have a Board committee dedicated to health and safety. Inaddition we introduced a position of Group Safety Officer and are undertaking a thorough review ofprocedures and standards, implementation and adherence. RECENT DEVELOPMENTS AND OUTLOOKRecently there was some market speculation following the announcement of the 2007 financial results ofKazakhmys PLC concerning a possible combination with ENRC. In accordance with our legal obligations, wemade a statement on 12 March 2008 confirming that we had engaged in an informal dialogue with KazakhmysPLC in relation to a possible transaction. This is only one of a number of strategic opportunities thatwe are evaluating with a view to creating further shareholder value. At the end of March 2008, we completed the listing of ENRC's ordinary shares on the Kazakhstan StockExchange ('KASE'). There were no new shares issued in connection with this listing. We believe that thelisting will enable us to access a wider investment base in Kazakhstan and will further efforts todevelop Kazakhstan's capital markets. The Kazakhstan economy remains robust, notwithstanding problems in the banking sector that surfaced inmid-2007. Expectations for 2008 are for around 5%-6% real GDP growth, although certain sectors,construction and banking among them, are likely to remain weak. Whilst economic growth may be slowerthan in recent years, the fiscal position, foreign currency reserves and the strength of the oil andmining sectors differentiate Kazakhstan from other emerging markets in which economic crises haveoccurred in recent years. However, domestic inflation remains a big challenge, with a much higher thanexpected outturn for 2007, and is a key focus for us in managing our Kazakhstani Tenge cost base through2008. For the mining sector as a whole the world economic outlook will weigh on expectations for 2008. ENRC,with its greater focus on China and Russia, expects the latent structural demand in these markets, fromboth industry and consumers, and with accompanying domestic supply issues, to mitigate any slowdown indemand from the United States and Europe. In addition, for the industry, there are issues over thelonger-term growth potential of supply and of structural deficits affecting a broad range of minerals.Day-to-day there are also practical issues across the metals and mining industry as to shortages ofequipment, infrastructure, people and power. Despite these conditions we believe that with its 'Tier 1'assets, its captive energy and logistics capabilities the Group is well positioned to rise to theopportunities available and to manage the challenges of this environment. Sir David CookseyChairman CHIEF EXECUTIVE OFFICER'S STATEMENT 2007 was a year of tremendous success for ENRC and its stakeholders. The Group's record results are atestament to the strength and breadth of our businesses, most specifically, our high quality assets,diversified revenue base and fully integrated energy and logistics capabilities. In addition our successis a credit to the operational management team in Kazakhstan and all of the employees, to whom we offerour sincere thanks for their efforts. Whilst we were helped by strong chrome ore, ferroalloys and ironore prices, we faced weaker pricing conditions in alumina and aluminium as well as significant costpressures across our operations. As the Chief Executive Officer of ENRC I am pleased that our senior management team has worked togetherso well. In little more than a year we have worked hard to bring to fruition the IPO of the Group and tooperate as a listed company. This remains an ongoing journey, to be helped by the advice and guidance ofthe Board. I am also delighted with the high calibre of non-executive Directors that have been appointedto the Board. The Board has very quickly become engaged with the Group under the leadership of ourChairman, Sir David Cooksey. COST MANAGEMENTA key focus for management in 2008 will be costs. In 2007 total costs and unit costs were lower than orequal to targeted levels. In common with the metals and mining industry worldwide, however, we haveexperienced continued cost pressures on materials and services, offsetting savings achieved by ourbusinesses. Costs of raw materials, services and wages all rose strongly, exacerbated by the high rateof inflation in Kazakhstan, reaching 19% for 2007, and by the appreciation of the Tenge. We expect costpressures to continue in 2008. In the short term the opportunities to reduce costs or increase productivity will be limited. Managementis committed to implementing cost control initiatives; however, these will be medium-term programmesacross the breadth of our business and we anticipate that these benefits will take two to four years tobe fully realised. In 2008 we will commence a number of specific initiatives:o A review, conducted by external consultants, of productivity and de-bottlenecking in a number of our businesses;o A review of management structures to identify greater efficiencies;o A spin off of non-core businesses; ando Investment to replace imported or purchased materials; for example, caustic soda. In addition ENRC will, over the medium term, seek to improve volume throughout, increasing theproductivity of our fixed assets and investing in equipment modernisation to reduce maintenance support. CAPITAL EXPENDITURECapital expenditure in 2007 amounted to US$911 million (2006: US$563 million), including capital repairsof US$279 million (2006: US$233 million). The highlight of our investment programme in 2007 was thestart up of the first phase of our aluminium smelter at an annual capacity of 62,500 tonnes. Formallyopened by President Nazarbayev of the Republic of Kazakhstan on 12 December 2007, the project hasoperated ahead of schedule and is running to budget. We anticipate increasing the smelter's annualcapacity to 125,000 tonnes during 2008 and are confident of reaching the planned full annual capacity of250,000 tonnes per annum by 2011. The responsibility for this project is in the hands of localmanagement under the leadership of the General Director of JSC Aluminium of Kazakhstan ('AoK'), Mr.Almaz Ibragimov, and its delivery reflects very well on the considerable operational and projectmanagement capabilities we have available to us. The aluminium smelter will remain a key aspect of capital expenditure in 2008 with the continuingbuild-up to its Phase 1 capacity of 125,000 tonnes per annum, and beginning its build up of anadditional Phase 2 annual capacity of 125,000 tonnes. The Board has reviewed the Group's capital expenditure plans and has confirmed a number of additionalprojects from 2008 to be implemented over the next 3 years. These will include:o An anode plant with a capacity of 150,000 tonnes per annum to secure the supply of anodes required for aluminium production. Total capital expenditure is estimated to be about US$175 million and the plant is targeted to be in production in 2010; ando A caustic soda plant with a capacity of 400,000 tonnes per annum to secure the supply of caustic soda required for aluminium production. Total capital expenditure is estimated to be about US$150 million and the plant is targeted to be in production in 2010. ACQUISITIONSWe recently announced the completion of the acquisition of a controlling interest in Serov group andcertain related entities ('Serov'). Serov is a ferroalloy producer in eastern Russia. Under the terms ofthe acquisition we will receive the economic benefit for the full year 2008. The total acquisitionconsideration amounted to US$210 million. The acquisition of Serov demonstrates a number of important aspects of our strategy. This transaction isENRC's first acquisition outside of Kazakhstan and reinforces our position in low-carbon andmedium-carbon ferrochrome, with an incremental annual sales volume of approximately 200,000 tonnes. Inaddition the transaction allows the Group to benefit from further vertical integration within itsferroalloys business and provides ENRC with an important asset base in Russia supporting its strategy ofpursuing regional expansion opportunities. Merger and acquisition opportunities are an important element of our strategy. We believe that ourpresence in the region and our operational capabilities in our core commodities leave us well equipped tosuccessfully execute value enhancing transactions in the years ahead. Nonetheless, a tight financialdiscipline will complement our approach to any such opportunities. INDUSTRY OVERVIEW AND OUTLOOKWe anticipate that the outlook for mining and metals over the next few years is likely to remainpositive across our core commodities. For ENRC this will be reinforced by our strategic location,proximate to two key 'BRIC' economies, which are expected to drive demand growth from consumers and forinfrastructure investment. Stainless steel production is estimated to grow 5% per annum or more over thenext decade, whilst the outlook for alumina and aluminium should be driven by the existing structuralshortage within the CIS. We anticipate further efforts from competitors to raise supply in our corecommodities, but it appears that in the face of infrastructure and materials constraints, new productionwill predominantly be at the higher end of the cost curve, in contrast to our favoured cost position. Recent developments in the power situation in South Africa have been foremost in shaping the near termpositive price outlook for a number of metals. This situation may take a number of years to resolve andtherefore threatens the expected expansion of South Africa's ferroalloy production capacity. In theimmediate future we would expect the energy cutbacks to be partially offset by capacity coming back onstream and the implementation of energy conservation measures, all of which should combine to ease someof the current pressure on prices. Nonetheless, for ENRC, and specifically ferroalloys and iron ore, thevalue of our reserves and resources, combined with our integrated long energy position and logisticscapacity, offer key medium term advantages. Whilst the short-term outlook for the world economy, particularly the United States and in Europe, isuncertain, any abatement in demand in these markets is likely to be at least offset by continuing growthin China and Russia. These are key markets for ENRC where currently the bulk of our iron ore and aluminais sold on secure long-term, benchmark-priced contracts. Whilst our ability to grow capacity in 2008 islimited, our medium-term plans will support growth in these critical markets. I would like to offer a positive view on the prospects for medium-term growth in the Chinese and Russianmarkets. Their potential scale of demand growth in ferroalloys, iron ore, alumina and aluminium, and inother metals is immense, based on their populations and the demand in their countries. The prospects forENRC in these markets are enhanced by structural capacity shortages, particularly in China, that areexpected to emerge. Kazakhstan and ENRC are strategically well positioned to seize the opportunities inthese key markets. Overall I anticipate a strong year for ENRC in 2008. Even with modest volume growth across our existingferroalloys, iron ore and alumina and aluminium businesses, we expect that strong prices should resultin higher revenue. Ferrochome should benefit from a further expected increase in global stainless steelproduction to some 31 million tonnes in 2008, notwithstanding the anticipated slowdown in the UnitedStates and Europe. Iron ore has seen an exceptionally strong rise in benchmark prices for 2008 and whilstthe weather impacts of 2007-2008 may not recur, there is likely to be a structural deficit in iron orefor the next few years. Aluminium is facing an improved pricing outlook over 2007 whilst alumina is setto rise due to limitations in the availability of bauxite. With our self-sufficiency in bauxite we willbenefit. Underpinning our operations we remain long on energy and benefit from our extensive coalreserves that should allow us to maintain an advantaged cost position for energy production. Dr Johannes SittardChief Executive Officer Results of operations (Unaudited)The following table sets out information about the results of the Group's operations for the years ended31 December 2007 and 31 December 2006 respectively: 2007 vs. 2006In millions US$ 2007 2006 +/- %Revenue 4,106 3,256 850 26.1%Cost of sales (1,701) (1,542) (159) 10.3%Gross profit 2,405 1,714 691 40.3%Gross margin, % 58.6% 52.6% 6.0% Distribution costs (373) (407) 34 (8.4)%Selling, general and administrative expenses (606) (290) (316) 109.0%Net other operating income/(expenses) (5) (20) 15 (75)%Operating profit 1,421 997 424 42.5%Operating profit margin, % 34.6% 30.6% 4.0% Depreciation, amortisation and impairment (303) (253) (50) 19.8% Exceptional items (182) (6) (176) 2933.3% EBITDA before exceptional items 1,906 1,256 650 51.8% EBITDA margin, % before exceptional items 46.4% 38.6% 7.8% Finance income 58 24 34 141.7%Finance costs (158) (50) (108) 216%Profit before income tax 1,321 971 350 36.0%Profit before income tax margin, % 32.2% 29.8% 2.4%Income tax expense (507) (285) (222) 77.9%Effective Tax rate, % 38.4% 29.4% 9.0%Profit for the year 814 686 128 18.7%Profit margin, % 19.8% 21.1% (1.3)% Depreciation and amortisation in cost of sales (271) (241) (30) 12.4%Depreciation and amortisation in selling, general and admin exp. (32) (12) (20) 166.7% The following table sets out selected financial information of the Group by Division: Alumina and Intra Ferroalloy Iron Ore Aluminium Energy Logistics GroupIn millions of US$ Division Division Division Division Division Corporate Eliminations TotalSegment revenue2007 2,178 991 608 314 232 - (217) 4,1062006 1,473 829 612 263 277 - (198) 3,256Segment operating profit2007 1,038 359 159 71 27 (233) - 1,4212006 476 244 226 41 38 (28) - 997Segment operating margin2007 47.7% 36.2% 26.2% 22.6% 11.6% _ _ 34.6%2006 32.3% 29.4% 36.9% 15.6% 13.7% _ _ 30.6%EBITDA beforeexceptional items2007 1,138 448 220 107 44 (51) - 1,9062006 547 323 277 77 54 (22) - 1,256EBITDA margin before exceptional items2007 52.2% 45.2% 36.2% 34.1% 19.0% - - 46.4%2006 37.1% 39.0% 45.3% 29.3% 19.5% - - 38.6% OPERATING REVIEW OVERVIEWENRC is a leading diversified natural resources group with integrated mining, processing, energy,logistical and marketing operations. The Group's production assets are located in the Republic ofKazakhstan, where it employs over 64,000 people. In 2007, the Group accounted for approximately 4% ofKazakhstan's GDP. The Group currently sells its products around the world, including in Russia, China,Japan, Western Europe and the United States. For the year ended 31 December 2007, the Group had revenueof US$4,106 million (2006: US$3,256 million) and net profit of US$814 million (2006: US$686 million). DESCRIPTION OF ENRC'S BUSINESSThe Group has five operating Divisions: Ferroalloy DivisionThe Ferroalloy Division produces and sells ferrochrome and other ferroalloys, primarily to steelproducers, and sells chrome ore and manganese ore to third-party ferroalloy producers and the chemicalindustry. The Ferroalloy Division's vertically integrated operations include chrome ore and manganeseore mines, two ferroalloy processing plants and a gas-fired power station. The Ferroalloy Division'schrome ore reserves are believed to be the largest in the CIS (166 million tonnes as at 31 December2007) and are believed to have a higher grade (42.2%) than those of other large-scale producers. In 2007, the Ferroalloy Division produced approximately 3.9 million tonnes of saleable chrome ore (2006:3.4 million tonnes), 0.9 million tonnes of manganese ore concentrate (2006: 0.9 million tonnes) andapproximately 1.5 million tonnes of ferroalloys (2006: 1.4 million tonnes), including approximately 1.1million tonnes of its primary product, high-carbon ferrochrome (2006: 1.0 million tonnes). For the yearended 31 December 2007, the Ferroalloy Division had total third-party revenue of US$2,178 million (2006:US$1,473 million), which represented 53.0% of the consolidated revenue (2006: 45.2%). Competitive PositionThe Ferroalloy Division has several strategic advantages over its major competitors. First, Kazakhstan'sgeographic location provides the Group with access to the rapidly-growing Russian and Chinese markets atrelatively low transportation costs. Secondly, based on 2006 data, the Ferroalloy Division is believedto be the largest producer of ferrochrome, on a chrome content basis, in the world. Thirdly, based on2006 data, the Group is located at the bottom of the ferrochrome cost curve, on a chrome content basis.This cost advantage is driven, in part, by the relatively low cost of electricity consumed by theGroup's ferroalloy plants, which results from the generation of a significant proportion of thatelectricity from within the Group and the relatively low cost of procuring energy in Kazakhstan. Thehigher chrome content of the Group's chrome ore reserves renders its ferrochrome more attractive tostainless steel producers that want to limit waste products and carbon content and they are believed tohave a higher percentage of chrome content than those of other large-scale producers. Finally, the Groupcan manufacture a wide range of products and reach diverse customers because of its ability to producehigh-, medium- and low-carbon ferrochrome and specialty grades of ferrochrome, such as low-phosphorusferrochrome. Production SummaryThe following table sets out the production volumes for each of the Ferroalloy Division's principalsaleable products for the years ended 31 December 2007 and 31 December 2006. Year ended 31 DecemberProduct (in kilotonnes) 2007 2006 Chrome ore(1) 3,881 3,410Manganese ore 927 862Ferro manganese 338 314Ferroalloys:High-carbon ferrochrome 1,070 963Medium- and low-carbon ferrochrome 77 77 Ferrosilicochrome 126 104 Ferrosilicomanganese 160 203 Ferrosilicon 37 51Total Ferroalloys 1,470 1,398 (1) A proportion of the Ferroalloy Division's chrome ore is consumed in the production of the Division's ferro alloys. For the year ended 31 December 2007 this proportion was 65.9% (2006: 66.8%). Supply and DemandA majority of the Ferroalloy Division's revenue is derived from ferrochrome sales. Most ferrochrome isproduced in South Africa (45.3% of 2006 global production) and Kazakhstan (13.6%). Kazakhstanihigh-carbon ferrochrome typically has a chrome content of approximately 68%, while South African "chargechrome" typically has a chrome content of approximately 50% and relatively higher silicon and ironcontents. Whilst the relative prices of Kazakhstani high-carbon ferrochrome and charge chrome are subjectto fluctuation, over the last eight years, Kazakhstani high-carbon ferrochrome has consistentlycommanded a premium when compared to charge chrome. Ferrochrome consumption is largely determined by stainless steel production. Typically, the demand forstainless steel follows overall economic growth. The rapid growth in stainless steel production in Chinaand, to a lesser extent, India has driven the recent increase in demand for ferrochrome. Stainless steelproduction in China rose at a compound annual growth rate of 38.4% from 1996 to 2006. It is anticipated that growth in global stainless steel production and demand for high-carbonferrochrome are likely to average approximately 5.1% and 4.1% per annum, respectively, between 2008 and2016. As a result of an anticipated rising demand for ferrochrome, it is estimated that ferrochromeproducers will operate near full capacity over the next several years, and anticipated that globalferrochrome capacity utilisation will be over 90% between 2008 and 2010. ENRC believes that the future supply demand balance of chrome ore will depend on two key factors. First,India may reduce chrome ore exports to secure supply for its domestic ferrochrome producers. India,which historically has been the largest chrome ore supplier to China, recently imposed an export tax onchrome ore which is a move in this direction. Secondly, the amount of future South African chrome oreexports is uncertain. South Africa has cut back exports due to increased internal consumption, andlobbyists continue to urge the government to promote the reduction of exports in furtherance of domesticproduction of ferrochrome and the consequent creation of jobs. In addition ENRC believes that thelimitation of electricity to South African ferrochrome producers announced earlier this year is likelyto limit supply of ferrochrome in 2008 as well as prejudice the country's ability to expand productionin the near term. Sales and PricingThe ferrochrome markets in Europe are predominantly negotiated markets, with prices agreed on aquarterly basis and generally under long-term contracts of one to five years. In the United States,prices tend to follow those published in either of the two major industry journals, Ryan's Notes andMetals Week. In Japan, prices tend to be negotiated with a quarterly time lag. Demand in the high-carbon ferrochrome market was surprisingly strong in 2007 mainly as a result of thehigh nickel prices that made standard austenitic stainless steels less cost effective than higher chromesubstitutes such as duplex steels or standard ferritic stainless steel. Total stainless steel productionwas estimated to be 28.3m tonnes in 2007 versus 28.5 million tonnes in 2006. ENRC is confident thatstainless steel production will continue to grow in 2008, hence high carbon ferrochrome demand is likelyto remain strong. China is the world's largest producer of stainless steel and the largest consumer offerrochrome and it is likely to remain so. Developments in the Chinese economy will ultimately have asignificant impact on the ferrochrome market. Prices of low-carbon and medium-carbon ferrochromeperformed well during the year as a result of increased demand, particularly from the alloy steel sector,and the tightness of supply resulting from an industry running close to capacity. Chrome ore prices generally correlate to the price of ferrochrome. In 2007, the Ferroalloy Division's top five customers accounted for 30.3% of total sales to thirdparties (2006: 25.5%) and included Taiyuan Iron and Steel (Group) Co. Ltd (2007: 10.3%; 2006 6.9%) inChina, Pohang Iron and Steel Company (2007: 6.1%; 2006: 5.8%) in South Korea, JFE Steel Corporation(2007: 5.7%; 2006: 5.5%) in Japan, ChEMK (2007: 4.1%; 2006: 3.5%) and the Serov ferroalloy plant (2007:4.1%; 2006: 2.9%) in Russia. The following table sets out the Ferroalloy Division's volume of third-party sales by product for theyears ended 31 December 2007 and 2006: Year ended 31 DecemberProduct (in kilotonnes) 2007 2006Ferroalloys: High-carbon ferrochrome 1,033 899 Medium-carbon ferrochrome 35 37 Low-carbon ferrochrome 35 38 Ferrosilicochrome 59 54 Ferrosilicomanganese 173 188 Ferrosilicon 33 52Total Ferroalloys 1,368 1,268Chrome ore 1,177 1,093Manganese ore* 880 730 * Includes manganese concentrate and ferromanganese concentrate. Of the Ferroalloy Division's third-party sales in 2007 23.8% were made in Europe (2006: 27.2%), 19.6% inRussia (2006:18.5%), 18.4% in Japan (2006: 19.3%), 17.9% in China (2006: 12.7%), 10.8% in the UnitedStates (2006: 10.8%), 4.2% in South Korea and the Far East (2006: 7.7%) and 5.3% in Kazakhstan, theUkraine and the rest of the world (2006: 3.8%). Key InitiativesThe Ferroalloy Division's principal strategic objectives are to increase production of ferrochrome, theDivision's most significant product, and to continue to reduce operating costs. To pursue theseobjectives the Ferroalloy Division intends to:o construct new furnaces at the Aksu processing plant at a cost of approximately US$160 million. This is expected to increase the Ferroalloy Division's annual ferrochrome production by more than 200,000 tonnes by 2011; and o complete construction of a second pelletising plant which is expected to be commissioned by the end of 2009 and an enrichment plant at the Donskoy Unit at an aggregate cost of approximately US$110 million (of which approximately US$30 million is attributable to the enrichment plant) of which US$25 million has already been spent. The second pelletiser is expected to increase the Ferroalloy Division's supply of chrome pellets, increasing the productivity of its furnaces. Pellets, as compared to chrome ore, increase a furnace's ferroalloy production rate and reduce electricity consumption. The Ferroalloy Division also expects the pelletiser to increase operating efficiency by lowering electricity consumption and increasing production. On 4 December 2007, ENRC entered into a conditional agreement to acquire a controlling interest in OAOSerov Ferrochrome Factory, OAO Saranovskaya Mine Rudnava, OAO Serov Metalconcentrate Works and certainrelated entities (the 'Serov group') for an aggregate consideration of US$210m. This acquisition wascompleted on 3 April 2008. The Serov group owns a chrome ore mining facility and a ferroalloy smelter ineastern Russia. The acquisition of the smelter results in incremental production of 200,000 tonnes oflow- and medium-carbon ferrochrome. The Group is Serov's largest supplier of chrome ore. ENRC believesthat the operations of the Serov group will complement the Ferroalloy Division's existing business,including its ferroalloy product range and also provide the Group with an important asset base inRussia, which supports the Group's strategy to pursue both regional and international expansionopportunities in our core commodities. Iron Ore DivisionThe Iron Ore Division, which operates the largest iron ore mining and processing enterprise inKazakhstan, produces and sells iron ore concentrate and pellets primarily to steel producers. On thebasis of 2006 data, it is believed to be the sixth largest iron ore exporter by volume in the world andto be in the lowest third of the industry cost curve for global iron ore pellet production. The Iron OreDivision's operations include iron ore mines, crushing, beneficiation and pelletising plants and athermal power station. In 2007, the Iron Ore Division mined approximately 40.2 million tonnes of iron ore (2006: 38.8 million).This was processed into 16.8 million tonnes of iron ore concentrate (2006: 16.1 million tonnes), ofwhich 7.6 million tonnes were retained for sale (2006: 7.0 million tonnes) and the balance was used toproduce 8.5 million tonnes of iron ore pellets (2006: 9.0 million tonnes). For the year ended 31December 2007, the Iron Ore Division had total third-party revenue of US$991 million (2006: US$829million), which represented 24.1% (2006: 25.5%) of the Group's consolidated revenue. Competitive PositionThe Iron Ore Division has several significant strategic advantages over its major competitors. Firstly,the location of the Group's iron ore reserves in northern Kazakhstan provides access to the importantcustomer base of steel production plants in Russia, China and Kazakhstan at relatively low logisticscosts. In particular, the Group's facilities are located within 340 kilometres of its key customer, TheMagnitogorsk Iron and Steel Works Open Joint Stock Company (MMK), and this proximity providessignificant logistical advantages. Secondly, the Iron Ore Division operates large-scale iron ore minesand processing plants at relatively low production costs. Based on 2006 data, the Group is located inthe lowest third of the industry cost curve for global iron ore pellet production. This cost advantageis driven, in part, by the relatively low cost of labour in Kazakhstan and the relatively low cost ofelectricity consumed by the Group's iron ore mining and processing operations, which results from theinternal generation of a portion of that electricity within the Group and the relatively low cost ofenergy in Kazakhstan. Supply and DemandThe market for iron ore is primarily regional, as iron ore is a bulk commodity and, relative to itsvalue, is expensive to transport. China, Australia and Brazil are the largest producers of iron ore,each accounting for around 20% of global output based on iron content. Other significant producersinclude the CIS and India. Global production of iron ore was 1,644 million tonnes in 2006 as compared to972 million tonnes in 1998. This represents a compound annual growth rate of 6.8%. Typically, steel production and, as a result, demand for iron ore, follow overall growth in industrialproduction. Global demand for iron ore has increased recently, primarily as a result of the significantgrowth in demand for iron ore in China that cannot be satisfied domestically. Other important sources ofdemand include India, the Middle East, South America and the CIS. It is predicted that iron ore demand will remain strong in the medium-term. ENRC expects Chineseeconomic growth to be between 7% and 10% per annum between 2008 and 2012, and that this will result in anaverage annual increase in domestic steel production of approximately 62 million tonnes. With thequality of domestic Chinese iron ore declining, it is anticipated that China will become more dependenton imported iron ore. We expect increasing demand for iron ore to continue in other parts of Asia aswell. It is anticipated that iron ore supply will struggle to meet rising demand until 2009. Thereafter, moresignificant increases in supply are expected as expansions planned by three major iron ore producers arecompleted in Brazil and Australia and new producers in these countries enter the iron ore market. Sales and PricingIn April 2007, the Group entered into a long-term contract with MMK - the Iron Ore Division's largestsingle customer accounting for 16.3% of total Group sales in 2007 (2006: 12.5%) - which extends until2017 and requires MMK to purchase specified quantities at prices determined by reference to publishedworld price indices for iron ore concentrate and pellets. Prices are revised annually on 1 April byreference to the aforementioned world price indices. Tightness in the iron ore market during 2007 was highlighted by the fact that spot prices tradedsignificantly higher than contract prices for the duration of the year. The strong steel market,particularly in China, was the main factor. The long lead time in new iron ore projects has limited theindustry's ability to respond quickly to rising prices. The 65% increase in prices announced by Vale for2008 contracts represents an attempt to close the gap with the spot market. Key InitiativesThe Iron Ore Division's principal strategic objectives are to increase mining, concentrating andpellitising capacities and expand its customer base through diversification of its product portfolio. Asdisclosed at the time of the IPO, the Iron Ore Division plans to:o expand mining operations and increase iron ore concentrate capacity by approximately 4.0 million tonnes per annum by 2010, through an investment totalling US$320 million (US$45 million has already been spent); ando construct a 1.8 million tonnes per annum DRI plant and 5.0 million tonnes per annum iron ore pelletiser for approximately US$800 million (on the basis of current estimates, which are subject to change depending on the process technology ultimately selected). DRI is a higher value product and has a broader customer base than the Group's existing iron ore products because, compared to concentrate or pellets, it is cheaper to transport long distances relative to its price and can be used in electric furnaces. Construction is planned to commence in 2008 and is currently scheduled to be completed by 2011. In light of strong forecast demand, the Group is currently assessing the feasibility of extending theaforementioned expansion plans. The Alumina and Aluminium DivisionThe Alumina and Aluminium Division produces and sells alumina, to aluminium producers, and, from 2008,aluminium. Based on 2006 data, ENRC believes that the Alumina and Aluminium Division is the fifthlargest supplier of traded alumina by volume in the world and is in the lowest quartile of the industrycost curve for alumina producers globally. The Alumina and Aluminium Division's vertically integratedoperations include two bauxite mining units, a limestone mine, an alumina refinery and a power station.The new aluminium smelter allows the Division to process its alumina into aluminium. The smelter wascommissioned on 12 December 2007 with an annual capacity of 62,500 tonnes and is expected to achieve aproduction capacity of 125,000 tonnes per annum by 31 December 2008. The Group has commencedconstruction of Phase 2 of the smelter which will increase production capacity to 250,000 tonnes perannum by 2011. In 2007, the Alumina and Aluminium Division mined approximately 5.0 million tonnes of bauxite (2006: 4.9million) and produced approximately 1.5 million tonnes of alumina (2006: 1.5 million tonnes). For theyear ended 31 December 2007, the Alumina and Aluminium Division had revenue of US$608 million (2006:US$612 million). US$607 million of this was derived from third-party sales (2006: US$602 million),representing 14.8% (2006: 18.5%) of the Group's consolidated revenue. Competitive PositionThe Alumina and Aluminium Division has several strategic advantages over its major competitors. First,the Group's bauxite reserves provide a reliable supply of the principal raw material for the productionof alumina and aluminium. Secondly, the Alumina and Aluminium Division has integrated energy operationsthat supply it with a reliable and cost-effective source of energy. Thirdly, the Group is a low-costalumina producer being located in the lowest quartile of the alumina cost curve (based on 2006 data).This cost advantage is driven, in part, by the internal supply of bauxite, the relatively low cost oflabour in Kazakhstan and the relatively low cost of electricity consumed by the Group's bauxite miningand alumina processing operations. Supply and DemandThe majority of the world's alumina is manufactured by integrated producers for internal consumption intheir own aluminium smelters. The former Eastern Bloc, Australasia, Latin America and China, arebelieved to be the largest producers of alumina, together accounting for approximately 92% of globalalumina production in 2006. Global alumina production increased from 53.3 million tonnes in 2000 to 73.8million tonnes in 2006. A large proportion of the new capacity has come from brownfield expansions.Forecasts show that global alumina production will rise to 91.6 million tonnes by 2011, primarily drivenby new capacity at greenfield and brownfield sites in China. Global alumina demand has increased significantly in recent years driven by increased aluminiumproduction and the related demand for alumina in China. ENRC expects that global alumina demand willcontinue to grow and will reach 84.5 million tonnes in 2011 (which is a compound annual growth rate of5%), driven primarily by further growth in China. Demand for alumina is also expected to increase in theMiddle East, Latin America and the CIS. ENRC's view is that between 2008 and 2011,the global alumina market will remain oversupplied due to thevolume of new alumina capacity outstripping the forecasted global demand. In contrast demand for aluminain the CIS is expected to continue to exceed supply. In 2006 CIS alumina production was insufficient tomeet alumina demand from the local aluminium industry and the CIS had an alumina supply deficit ofnearly 2 million tonnes in 2006. We expect the deficit in the CIS to rise to 4.3 million tonnes over thenext five years because the pace of new aluminium smelting capacity expansion in the region, includingthe Group's new aluminium smelter, will outpace new alumina refining capacity. Sales and PricingThe Group has a long-term contract with United Company RUSAL ('UC RUSAL') that extends until 2016 andprovides for UC RUSAL to purchase specified quantities of alumina at prices determined by reference to apercentage of the London Metal Exchange ('LME') prices for aluminium. The global alumina market was very resilient in 2007 contrary to many predictions of gloom. The Chinesealumina industry, which was anticipated to cause a global oversupply, struggled to secure the bauxite itrequired mainly as a result of supply interruptions from West Africa. The spot alumina price increasedfrom US$220 per tonne at the beginning of the year to US$400 per tonne at the end. Almost 100% of ENRC'ssales are based on a percentage of the aluminium price and therefore ENRC has almost no exposure to spotalumina prices Going forward, ENRC has long-term contracts which provides for all sales of primary aluminium, until2018 to be made to Glencore International AG and to be priced by reference to LME spot prices less salescommission. Key InitiativesThe Alumina and Aluminium Division's principal strategic objectives are to maximise alumina capacitythrough brownfield expansion, to invest in aluminium production to exploit its surplus of low costelectricity, bauxite and alumina, and to diversify its customer base. The Alumina and Aluminium Divisionwill pursue its objectives through :o further increasing the production of alumina by approximately 300,000 tonnes per annum by 2010 through an investment of US$240 million of which US$80 million has already been spent. This should allow the Alumina and Aluminium Division to fulfil the aluminium smelter's needs for alumina without reducing the alumina available for sale to third parties below one million tonnes per annum; ando Investing US$90 million in upgrading the quality of alumina produced from alumina flour to sandy alumina, which is more efficient in aluminium smelters and generally commands a higher price. US$20 million has already been spent. Beginning in 2008, ENRC intends to spend approximately a further US$330 million on increasing the annualcapacity of the aluminium smelter to 250,000 tonnes of aluminium by 2010. Also, as reported in the ChiefExecutive Officer's statement, the Board has recently approved a 400,000 tonnes caustic soda plant(investment approximately US$150 million) and a 150,000 tonnes anode production plant (investmentapproximately US$175 million). Both are expected to come on-stream by 2010. Energy DivisionThe Energy Division is one of the largest electricity providers in Kazakhstan, accounting forapproximately 16% of the country's recorded electricity production. The Energy Division provides acost-effective energy supply to the Group's principal operating Divisions as well as producing a surplusfor sales to third parties in Kazakhstan. In 2007 the Energy Division produced 12.1 million KWh (2006:11.5 million KWh) of which 65.4% (2006: 53.9%) was used internally within the Group. Coal production increased 2.8% to 18.4 million tonnes (2006: 17.9 million tonnes). In addition to sales of surplus electricity, the Energy Division also sold 6,4 million tonnes of coal tothird parties (2006: 6.3 million tonnes) which represented 34.5% of total coal mined (2006: 35.2%). For the year ended 31 December 2007, the Energy Division had revenue of US$314 million (2006: US$263million), of which US$181 million was derived from third-party sales (2006: US$154 million),representing 4.4% (2006: 4.7%) of the Group's consolidated revenue. Sales and PricingElectricitySpot electricity prices in Kazakhstan increased slightly during the year as a result of growing demandand supply tightness. The market grew approximately 6.5% in 2007 to a total of 76.5 million KWh. Supplyconstraints are likely to be heightened in 2008 as the new ENRC aluminium smelter ramps up creating thesingle largest increase in demand in the country. Kazakhstan has a long term electricity expansion planand no shortages of the type experienced in South Africa are anticipated at this time. CoalDue to the limited number of producers in Kazakhstan the domestic market is controlled by theGovernment. In 2007 the price was increased by 19% compared to 2006 and it is anticipated that the pricewill rise again in 2008. This increase may be limited, however, as the Government attempts to controlinflation. In Russia, due to Russia's net export position, prices tend to respond to world market priceincreases. With FOB Russian port prices increasing from 62US$/tonne to 100US$/tonne during 2007, anincrease in exports can be anticipated. Key InitiativesThe primary aim of the Energy Division is the supply of low-priced electricity to the Group's mining,smelting and refining businesses. To pursue its primary aim, the Energy Division intends to:o invest approximately US$200 million in the period up to 2011 to construct a new turbine and generator (US$10 million already spent). It is expected that the new generator will increase total installed electricity generating capacity by 325MW by 2012;o install overburden stripping equipment at a cost of approximately US$85 million (US$5 million already spent) to increase efficiency; ando complete refurbishment of certain existing generator blocks (Turbine 1) at a cost of approximately US$100 million (US$60 million already spent). Logistics DivisionThe Logistics Division provides effective transportation and logistics services to the Group's principaloperating Divisions and to third parties. The Logistics Division's operations include freightforwarding, wagon repair services and railway construction and repair services. The Logistics Divisionmitigates many of the risks associated with the supply of raw materials and delivery of products tocustomers by providing the Group with reliable delivery services. In addition, the Logistics Divisionoperates a railway transfer and reloading terminal on the Kazakhstan and China border, facilitating theGroup's access to the growing market in China. For the year ended 31 December 2007, the Logistics Division transported over 60.9 million tonnes ofgoods (2006: 61.7 million tonnes), of which approximately 87.7% (2006: 87.3%) was intra Group. For theyear ended 31 December 2007, the Logistics Division had revenue of US$232 million (2006: US$277million), of which US$149 million was derived from third-party sales (2006: US$198 million),representing 3.6% (2006: 6.1%) of the Group's consolidated revenue. Key InitiativesOn 21 March 2008, the Logistics Division won the state tender for the construction of some 300km ofrailway in South-East Kazakhstan (China gateway project). The new railway will facilitate the increase incargo carried between Kazakhstan and China by up to 30m tonnes per annum. It will provide ENRC'soperations with a secure transportation route with increased capacity for products to be sold into thegrowing Chinese market. The construction period is estimated to be about 4 years and the requiredinvestment is expected to be approximately US$900 million. Sales and MarketingThe Group's sales and marketing function provides ENRC's operating Divisions with a fully integrated andcentrally organised sales and marketing resource. This facilitates the efficient coordination of theGroup's external sales, monitoring of key markets and general production strategy. The sales andmarketing function performs the following key functions: strategy and planning; commercial contractterms and customer relations; market research; and coordinating logistics. The centralisation of thisfunction provides significant operational advantages to the Group including the identification andexploitation of market synergies and improved operational efficiencies. In addition, as the markets inwhich the Group operates are geographically diverse and complex, the size, scope and expertise of thesales and marketing function enables it to gather significant market information that is not otherwisegenerally available. FINANCIAL REVIEW Year ended 31 December 2007 compared to year ended 31 December 2006 RevenueThe GroupThe Group's revenue increased by US$850 million, or 26.1%, from US$3,256 million for the year ended 31December 2006 to US$4,106 million for the year ended 31 December 2007. The Ferroalloy Division accountedfor 82.9% of the revenue increase. This reflects the benefit of higher ferroalloys prices which werethe result of higher demand for ferroalloys. Demand was driven up by rapid growth in stainless steelproduction in China and, to a lesser extent, in India. The remaining 19.1% of the total revenueincrease, was attributable to the Iron Ore Division, primarily the result of higher iron ore pricesfollowing resolution of the Group's contractual negotiations with MMK in April 2007. Total revenue,however, was adversely affected by a reduction in railway-repair services volumes in the LogisticsDivision which had a 5.8% negative impact on total. The Ferroalloy Division The Ferroalloy Division's third party revenue increased by US$705 million, or 47.9%, from US$1,473million for the year ended 31 December 2006 to US$2,178 million for the year ended 31 December 2007. Thisincrease was primarily due to higher achieved ferroalloy prices, which increased by US$331 per tonne, or34.4%, from US$962 per tonne for the year ended 31 December 2006 to US$1,293 per tonne for the year ended31 December 2007, and higher achieved chrome ore prices, which increased by US$74 per tonne, or 42.0%,from US$176 per tonne for the year ended 31 December 2006 to US$250 per tonne for the year ended 31 December 2007. The above price increases led to a US$539 million increase in revenue. In addition, a 7.6% increase in ferroalloy sales volumes and a 7.6% increase in chrome ore sales volumes, accounted for US$108 million in revenue. The balance of the increase was attributable to an increase in sales of other products. The Iron Ore DivisionThe Iron Ore Division's third party revenue increased by US$162 million, or 19.5%, from US$829 millionfor the year ended 31 December 2006 to US$991 million for the year ended 31 December 2007. This increasewas primarily due to a US$11 per tonne, or 22.9%, rise in iron ore prices, from US$48 per tonne for theyear ended 31 December 2006 to US$59 per tonne for the year ended 31 December 2007. This increaseaccounted for a rise of US$168 million in revenue. The key to the price increase was the resolution ofthe Group's contractual negotiations with MMK and the resulting ten-year supply agreement with MMK,which took effect for the last three quarters of the year ended 31 December 2007 and under which theprice of iron ore sold to MMK is determined by reference to published world price indices. The priceincrease was partially offset by a 1.4% decline in volumes, which reduced revenue by US$11 million. The Alumina and Aluminium DivisionThe Alumina and Aluminium Division's third party revenue increased by US$5 million, or 0.8%, from US$602million for the year ended 31 December 2006 to US$607 million for the year ended 31 December 2007. A3.4% decline in alumina prices, which are linked to the LME aluminium price, combined with a 0.6% fallin sales volumes resulted in US$23 million revenue reduction. This was offset by rising sales ofby-products and sales of surplus heat and electrical energy. The Alumina and Aluminium Division's salesto other Group Divisions declined by US$9 million from US$10 million for the year ended 31 December 2006to US$1 million for the year ended 31 December 2007. The Energy DivisionThe Energy Division's third party revenue increased by US$27 million, or 17.5%, from US$154 million forthe year ended 31 December 2006 to US$181 million for the year ended 31 December 2007. This increase wasdue to a US$19 million increase in revenue from sales of electricity to third parties, resulting from a47.7% increase in the average electricity tariff. It was partially offset by 12.3% reduction in thevolume of electricity sold (as more electricity was consumed within the Group). Also a 8.8% increase inthe average price of coal, driven by prices of exported coal, and 2.0% increase in volumes of coalsales, resulted in US$10 million increase in revenue from coal sales. The Energy Division's sales toother Group Divisions increased by US$24 million, or 22.0%, from US$109 million for the year ended 31December 2006 to US$133 million for the year ended 31 December 2007. The Logistics DivisionThe Logistics Division's third party revenue declined by US$49 million, or 24.7%, from US$198 millionfor the year ended 31 December 2006 to US$149 million for the year ended 31 December 2007. The declinewas primarily driven by a reduction in volumes and in prices for railroad repair services. The LogisticsDivision's sales to other Group Divisions increased by US$4 million, or 5.1%, from US$79 million for theyear ended 31 December 2006 to US$83 million for the year ended 31 December 2007. Cost of SalesThe GroupThe Group's cost of sales increased by US$159 million, or 10.3%, from US$1,542 million for the yearended 31 December 2006 to US$1,701 million for the year ended 31 December 2007. Driven by volumeincreases as well as increases in prices for materials and labour, the Ferroalloys and Iron OreDivisions accounted for 57.2%,and 34.6% respectively of the overall increase. Volumes increased due tostronger demand for ferroalloys. Rising material and labour costs resulted in the Alumina and AluminiumDivision accounting for 29.6% of the Group's cost increase. Despite an underlying increase in costs, asignificant fall in railroad repair volumes in the Logistics Division resulted in a 28.3% reduction intotal cost of sales. Exchange rate fluctuations accounted for an increase of US$53 million in cost ofsales. The Ferroalloy DivisionThe Ferroalloy Division's cost of sales increased by US$91 million, or 13.7%, from US$663 million forthe year ended 31 December 2006 to US$754 million for the year ended 31 December 2007. On a per tonne basis, cost of sales increased by US$32 per tonne, or 11.4%, from US$281 per tonne forthe year ended 31 December 2006 to US$313 per tonne for the year ended 31 December 2007. This increasewas primarily driven by a US$11 per tonne increase in payroll expenses, and a US$37 per tonne rise inthe cost of materials used in production. In addition, an increase in royalty costs paid by theFerroalloy Division to the Republic of Kazakhstan, which are determined on either a flat rate or asliding scale as a percentage of the volume of the extracted resource, resulted in a further increase ofUS$4 per tonne. Exchange rate fluctuations accounted for an increase of US$20 million in cost of sales. The Iron Ore DivisionThe Iron Ore Division's cost of sales increased by US$55 million, or 15.2%, from US$362 million for theyear ended 31 December 2006 to US$417 million for the year ended 31 December 2007. On a per tonne basis,cost of sales increased by US$4 per tonne, or 18.2%, from US$22 per tonne for the year ended 31 December2006 to US$26 per tonne for the year ended 31 December 2007. This increase was primarily driven by aUS$3 per tonne increase in the cost of materials and energy used in production with an increase inpayroll expenses adding a further US$1 per tonne. Exchange rate fluctuations accounted for an increaseof US$13 million in cost of sales. The Alumina and Aluminium DivisionThe Alumina and Aluminium Division's cost of sales increased by US$38 million, or 12.1%, from US$314million for the year ended 31 December 2006 to US$352 million for the year ended 31 December 2007. On aper tonne basis, cost of sales of alumina increased by US$27 per tonne, or 13.0%, from US$208 per tonnefor the year ended 31 December 2006 to US$235 per tonne for the year ended 31 December 2007. Thisincrease was primarily due to an increase in raw materials expenses of US$13 per tonne, an increase inpayroll expenses of US$9 per tonne, and an increase in amortisation of US$5 per tonne. Exchange ratefluctuations accounted for an increase of US$9 million in cost of sales. The Energy DivisionThe Energy Division's cost of sales declined by US$7 million, or 4.2%, from US$168 million for the yearended 31 December 2006 to US$161 million for the year ended 31 December 2007. The reduction wasprimarily driven by a decline of US$19 million in purchases of materials for resale. This was offset byUS$9 million increase in payroll expenses and US$3 million increase in materials costs. Exchange ratefluctuations accounted for an increase of US$5 million in cost of sales. The Logistics DivisionThe Logistics Division's cost of sales declined by US$41 million, or 18.6%, from US$220 million for theyear ended 31 December 2006 to US$179 million for the year ended 31 December 2007. The reduction wasmainly driven by reduced volumes of railroad repair resulting in a US$32 million reduction in costs ofmaterials, a US$3 million reduction in payroll and a US$14 million reduction in other costs. Exchangerate fluctuations accounted for an increase of US$6 million in cost of sales. Distribution CostsThe GroupThe Group's distribution costs declined by US$34 million, or 8.4%, from US$407 million for the yearended 31 December 2006 to US$373 million for the year ended 31 December 2007. This decline wasprincipally due to a reduction in distribution costs in the Iron Ore Division which resulted from agreater proportion of iron ore sales being made to MMK. The decline was partially offset by increaseddistribution costs in the Ferroalloy and Energy Divisions due to higher per tonne transportation andrelated costs. Exchange rate fluctuations accounted for an increase of US$9 million in distributioncosts. The Ferroalloy DivisionThe Ferroalloy Division's distribution costs increased by US$33 million, or 15.3%, from US$215 millionfor the year ended 31 December 2006 to US$248 million for the year ended 31 December 2007. On a pertonne basis, distribution costs increased by US$12 per tonne, or 13.2%, from US$91 per tonne for theyear ended 31 December 2006 to US$103 per tonne for the year ended 31 December 2007. This increase wasprimarily driven by an increase of US$8 per tonne in transportation and related costs principallyrelating to a rise in Kazakhstani railroad tariffs. Exchange rate fluctuations accounted for an increaseof US$4 million in distribution costs. The Iron Ore DivisionThe Iron Ore Division's distribution costs declined by US$44 million, or 31.4%, from US$140 million forthe year ended 31 December 2006 to US$96 million for the year ended 31 December 2007. On a per tonnebasis, distribution costs declined by US$3 per tonne, or 33.3%, from US$9 per tonne for the year ended31 December 2006 to US$6 per tonne for the year ended 31 December 2007. This decline primarily resultedfrom the resumption of sales volumes to MMK and the attendant reduction in sales to more distantcustomers in China. Transportation costs per tonne are significantly higher for deliveries to Chinacompared to deliveries to MMK, which is located within 340 km of the SSGPO processing plant. Exchangerate fluctuations increased distribution costs by US$3 million. The Alumina and Aluminium DivisionThe Alumina and Aluminium Division's distribution costs declined by US$2 million, or 6.3%, from US$32million for the year ended 31 December 2006 to US$30 million for the year ended 31 December 2007.Distribution costs declined by US$1 per tonne, or 4.8%, from US$21per tonne for the year ended 31December 2006 to US$20 per tonne for the year ended 31 December 2007. This decline was principallydriven by a US$4 per tonne reduction in insurance expense, partially offset by an increase intransportation costs. Exchange rate fluctuations accounted for an increase of US$1 million indistribution costs. The Energy DivisionThe Energy Division's distribution costs increased by US$22 million, or 66.7%, from US$33 million forthe year ended 31 December 2006 to US$55 million for the year ended 31 December 2007. This increase wasprimarily due to an increase in transportation costs due to higher railroad tariffs imposed by theKazakhstan state railroad monopoly. Exchange rate fluctuations accounted for an increase of US$1 millionin distribution costs. The Logistics DivisionThe Logistics Division's distribution costs were immaterial. Selling, General and Administrative ExpensesThe GroupThe Group's selling, general and administrative expenses increased by US$316 million, or 109%, fromUS$290 million for the year ended 31 December 2006 to US$606 million for the year ended 31 December2007. US$176 million of the increase was due to consulting expenses and employee bonuses associated withthe IPO which were accounted for at the Group level. Exchange rate fluctuations accounted for anincrease of US$9 million in selling, general and administrative expenses. The Ferroalloy DivisionThe Ferroalloy Division's selling, general and administrative expenses increased by US$28 million, or24.8%, from US$113 million for the year ended 31 December 2006 to US$141 million for the year ended 31December 2007. This increase was primarily in external consulting costs and payroll expenses. Includedin the increase was a US$13 million fixed asset impairment charge for a non-operational coke processingplant. Exchange rate fluctuations accounted for an increase of US$3 million in selling, general andadministrative expenses. The Iron Ore DivisionThe Iron Ore Division's selling, general and administrative expenses increased by US$23 million, or36.5%, from US$63 million for the year ended 31 December 2006 to US$86 million for the year ended 31December 2007. This increase was primarily due to an increase in payroll and depreciation charges.Exchange rate fluctuations accounted for an increase of US$2 million in selling, general andadministrative expenses. The Alumina and Aluminium DivisionThe Alumina and Aluminium Division's selling, general and administrative expenses increased by US$36million, or 94.7%, from US$38 million for the year ended 31 December 2006 to US$74 million for the yearended 31 December 2007. US$16 million of this increase was related to construction and launch of theGroup's new aluminium smelter. Increases in payroll expenses, sponsorship and other expenses alsocontributed to the overall increase. Exchange rate fluctuations accounted for an increase of US$2 millionin selling, general and administrative expenses. The Energy DivisionThe Energy Division's selling, general and administrative expenses increased by US$12 million, or 57.1%,from US$21 million for the year ended 31 December 2006 to US$33 million for the year ended 31 December2007. The increase was driven by a rise in payroll expenses, consulting fees and tax and royaltypenalties. Exchange rate fluctuations accounted for an increase of US$1 million in selling, general andadministrative expenses. The Logistics DivisionThe Logistics Division's selling, general and administrative expenses increased by US$6 million, or26.1%, from US$23 million for the year ended 31 December 2006 to US$29 million for the year ended 31December 2007. This increase was primarily due to an increase in payroll expenses. Exchange ratefluctuations accounted for an increase of US$1 million in selling, general and administrative expenses. Operating ProfitThe GroupThe Group's operating profit increased by US$424 million, or 42.5%, from US$997million for the yearended 31 December 2006 to US$1,421 million for the year ended 31 December 2007. This increase cameprimarily from the Ferroalloy and Iron Ore Divisions where increased revenues drove up operating profit(132.5% and 27.1% respectively of the total operating profit increase). The Alumina and AluminiumDivision and the Logistics Division both had lower operating profit than in the prior year. Across thebusinesses, exchange rate fluctuations reduced operating profit by US$57 million. Corporate costsincreased by US$205 million, of which US$176 million was the increase in exceptional items. The Ferroalloy DivisionThe Ferroalloy Division's operating profit increased by US$562 million or 118.1% from US$476 million forthe year ended 31 December 2006 to US$1,038 million for the year ended 31 December 2007. The increasewas mainly driven by the rise in prices and volumes for ferroalloys, and chrome ore. Exchange ratefluctuations reduced operating profit by US$25 million. The Iron Ore DivisionThe Iron Ore Division's operating profit increased US$115 million or 47.1% from US$244 million for theyear ended 31 December 2006 to US$359 million for the year ended 31 December 2007. The increase wasprimarily driven by a rise in iron ore prices, mainly resulting from the resolution of a pricing disputewith MMK. Exchange rate fluctuations reduced operating profit by US$15 million. The Alumina and Aluminium DivisionThe Alumina and Aluminium Division's operating profit declined by US$67 million, or 29.6% from US$226million for the year ended 31 December 2006 to US$159 million for the year ended 31 December 2007.Revenue was flat reflecting stable alumina prices but increases in operating costs adversely impactedprofitability. Exchange rate fluctuations reduced operating profit by US$11 million. The Energy DivisionThe Energy Division's operating profit increased by US$30 million or 73.2% from US$41 million for theyear ended 31 December 2006 to US$71 million for the year ended 31 December 2007. The increase wasmainly due to rising prices for exported coal and higher electricity tariffs. Exchange rate fluctuationsreduced operating profit by US$4 million. The Logistics DivisionThe Logistics Division's operating profit declined by US$11 million, or 28.9% from US$38 million for theyear ended 31 December 2006 to US$27 million for the year ended 31 December 2007. The reduction wasmainly due to reduced volumes of railway repair services. Exchange rate fluctuations reduced operatingprofit by US$2 million. CorporateCorporate expenses, including administrative costs, costs of consultancy services and payroll expensesat the Group's head office, increased by US$205 million in the year ended 31 December 2007. The increasewas caused primarily by IPO costs increasing by US$176 million, which were classified as exceptionalitems. INCOME TAX EXPENSE The Group's income tax expense for the year ended 31 December 2007 is US$507 million, an effective taxrate of 38.4%, compared with US$285 million, and an effective tax rate of 29.4%, for the year ended 31December 2006. The increase in the Group's effective tax rate is mainly due to costs relating to the IPO (4.3percentage points) and UK head office costs on which deferred tax has not been recognised (2.9 percentagepoints). Going forward, the Group expects the recurring effective rate of tax to be in excess of 30% due toexcess profits tax arising in Kazakhstan on certain subsoil contracts. LIQUIDITY AND CAPITAL RESOURCES LiquidityOverviewThe following table summarises the Group's cash flow during the years ended 31 December 2006 and 31December 2007. In millions of US$ 2007 2006Cash flow from operating activities 1,079 739Net cash used for investing activities -1,351 -573Net cash generated from financing activities 2,481 0Net increase in cash and cash equivalents 2,209 166Cash and cash equivalents at beginning of the year 336 165Exchange gains on cash and cash equivalents 3 5Cash and cash equivalents at the end of the period 2,548 336 Cash flow from operating activitiesThe Group generated US$1,079 million as cash (assets) from operating activities for the year ended 31December 2007 as against US$739 million for the year ended 31 December 2006; the cash increase beingUS$340 million or 46.0%. Profit after tax was US$814 million (2006: US$686 million). Subject toadjustments for the depreciation of fixed assets, the operating cash flow increased by US$303 million(2006: US$253 million) and, on account of the fair value adjustments on the derivative financialinstruments (derivatives), it increased by another US$46 million (2006: US$nil). Due to changes in theworking capital, the cash flow generated from operating activities decreased by US$130 million (2006:US$221 million). The amount of interest paid exceeded interest received resulting in a net outflow ofcash to the amount of US$99 million (2006: US$37 million). Income tax payments resulted in an outflow ofcash amounting to US$469 million (2006: US$277 million). Net cash used for investing activitiesThe Group used US$1,351 million for investing activities in 2007 as compared to US$573 million in 2006;the increase being US$778 million or 135.8%. Most of these cash resources, US$1,042 million in 2007(2006: US$504 million), were directed to financing capital expenses, that is, for purchasing fixedassets. Of this amount, prepayments for fixed assets (included in other non-current assets) totalledUS$208 million in 2007(2006: US$33 million). 40.0% of the Group's capital expenditure in 2007, amountingto US$365 million, consisted of payments for fixed assets for the Alumina and Aluminium Division,including: US$201 million (2006: US$133 million) for the construction of the new aluminium smelter; andUS$141 million for expanding alumina production. For the reconstruction and replacement of the Iron OreDivision's fixed assets the Group invested US$227 million in 2007 (2006: US$107 million). In 2007, theGroup spent US$279 million on capital repairs, compared with US$233 million invested in 2006 for thispurpose. The inflow of cash from the sale of fixed assets, intangible assets and investments amounted to US$70million (2006: US$21 million). The outflow of cash on investments amounted to US$100 million (2006: US$17million). Net cash used for financing activitiesThe Group used cash resources to the net amount of US$ 2,481 million in its financing activities duringthe year ended 31 December 2007 (2006: US$nil). The main sources of cash inflows were: issue of shareson the IPO, amounting to US$3,055 million excluding charges for the IPO; as well as proceeds from loansamounting to US$1,423 million (2006: US$328 million), of which none were with related parties (2006:US$136 million). Cash outflows occurred as a result of making payments on loans to the amount ofUS$1,240 million (2006: US$141 million), of which US$1,011 million was to related parties (2006: US$140million), from paying shareholders' dividends to the amount of US$500 million (2006: US$nil) and payingminority interest dividends of US$66 million (2006: US$4 million). CAPITAL EXPENDITURES During the year ended 31 December 2007 the Group's capital expenditure amounted to US$911 million ascompared to US$563 million for the year ended 31 December 2006, an increase of US$348 million or 61.8%.The table below shows the purpose of the capital expenditure. Almost two thirds of capital expenditure in 2007 related to investment in new property construction anddevelopment, amounting to US$581 million, which was US$300 million higher than in 2006. New construction and development was spread across the Divisions, however, costs of the new smelter werereflected in the Alumina and Aluminium Division's larger share of the capital expenditure. US$342million of this amount corresponded to investment in fixed assets for the Alumina and Aluminium Division,US$108 million for the Energy Division, US$60 million for the Ferroalloys Division, US$58 million forthe Iron Ore Division and US$13 million for the Logistics Division. A list of the largest Group investment projects is shown below: Estimated Capex cost of budget Date ofIn millions of US$ completion 2008 commissioningFerroalloys700k tonnes pelletiser 85 70 2009200k tonnes expansion of ferroalloy smelting capacity (Aksu) 160 5 2010Capital repairs and other projects 165 165 Alumina and AluminiumPhase 2 - aluminium smelter (125k tonnes) 330 240 2010Alumina production expansion by 300k tonnes 160 80 2010Caustic soda plant 150 80 2010Anode production plant 175 100 2010Sandy alumina production 70 45 2010Capital repairs and other projects 170 170 Iron orePelletiser (4 million tonnes) and DRI plant(1.8 million tonnes) 800 365 2011Mine expansion by 4 million tonnes 275 30 2011Capital repairs and other projects 145 145 EnergyOverburden stripping equipment 80 55 2010Refurbishment of Turbine 1 40 40 2008Construction of Turbine 2 - 325 megawatt 190 75 2011 Capital repairs and other projects 35 35 LogisticsChina gateway project 910 - 2011Capital repairs and other projects 20 20 Total approved 3,960 1,720 CONTRACTUAL OBLIGATIONS Long term supply agreementsThe Group also has the following long-term supply agreements:o Alumina - ENRC has entered into a contract with UC RUSAL, a large aluminium producer, to supply a minimum of 1 million tonnes of alumina per annum. This contract expires on 31 December 2016. Pricing is determined by a formula linked to the LME aluminium price;o Aluminium - ENRC has entered into a 10 year contract to sell 100% of aluminium produced by Kazakhstan Aluminium Smelter to Glencore International AG. Pricing is determined by reference to the LME aluminium price less sales commission; ando Iron ore - ENRC has entered into a contract with MMK, a large Russian steel producer, to supply up to 15 million tonnes of iron ore per annum. This contract expires in 2017. Pricing is determined by reference to published price indices for iron ore concentrates and pellets. SIGNIFICANT FACTOR AFFECTING THE GROUP'S RESULTS OF OPERATIONS Exchange ratesThe Group's principal products are commodities typically priced by reference to US Dollars. Asubstantial portion of the Group's costs are incurred in Kazakhstani Tenge (KZT). Accordingly, the Groupmay be materially affected by exchange rate fluctuations between the US Dollar and the KZT and, to alesser extent, other currencies including the Swiss Franc, Japanese Yen, European Euro and BritishPound. In 2007, the Group entered into a number of US$/KZT foreign exchange forward contracts topartially hedge against fluctuations in the exchange rate. Hedge accounting has been applied for theseinstruments since 18 September 2007, with fair value movements since that date being held in equity. The functional currency of all the significant operating entities is the KZT, while for the sales andmarketing entities it is the US Dollar. The functional currency for each entity in the Group is thecurrency of the primary economic environment in which it operates. The results and financial position ofall Group entities that have a functional currency different from US Dollars, the Group's presentationcurrency, are translated into US Dollars as follows: 1. assets and liabilities are translated at the closing rate as at each balance sheet date;2. income and expenses for each income statement are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and3. all resulting exchange differences are recognised as a separate component of equity. The following table sets out, for the periods indicated, the relevant period-end and average exchangerates of the KZT to the US Dollar, as applied in the preparation of the Group's audited consolidatedfinancial information for the relevant periods and expressed in KZT per US Dollar. Period Period end Average2007 120.30 122.552006 127.00 126.092005 133.77 FACTORS AFFECTING COMPARABILITY Key factors affecting comparability of the Group's results of operations and financial condition include: Relationship with MMKHistorically, MMK has been one of the Group's principal customers. In 2006 and the first quarter of2007, the results of operations of the Iron Ore Division were materially and adversely affected byprotracted contractual negotiations with MMK, which resulted in reduced sales volumes and prices. The Group and MMK reached agreement and signed a long-term supply contract that became effective inApril 2007 and will expire in 2017. Under this agreement, MMK is required to purchase specifiedquantities of iron ore products at prices determined by reference to published world price indices forconcentrates and pellets. Prices are revised each year on 1 April. Initial Public Offering (IPO)The Group undertook an initial public offering in 2007. This resulted in the receipt of US$ 3.1 billionof cash proceeds in December 2007. In 2007 costs amounting to US$278 million were incurred in connectionwith the IPO. Of these US$96 million were recorded in the share premium account as directly attributableto the equity cost and US$182 million were recorded within 'selling, general and administrativeexpenses' in the income statement (2006: US$6 million). Given the non-recurring nature of these costs,they have been classified in the income statement as 'exceptional items' and hence excluded from EBITDAbefore exceptional items. Trade finance facility amounting to US$1.5 billionThe Group successfully borrowed US$1.4 billion under its US$1.5 billion trade finance loan facility.Part of the amount was used to refinance the US$1 billion promissory notes issued to shareholders in2006, which had been treated as a pre-IPO distribution of retained earnings in 2006, with the remainingamount being used for general corporate purposes. CONSOLIDATED INCOME STATEMENT (Unaudited) Years ended 31 DecemberIn millions of US$ Note 2007 2006Revenue 2 4,106 3,256Cost of sales 3 (1,701) (1,542)Gross profit 2,405 1,714 Distribution costs 4 (373) (407)Selling, general and administrative expenses 5 (606) (290)Other operating expenses - net (5) (20)Operating profit 1,421 997 Analysed as: EBITDA before exceptional items * 9 1,906 1,256 Depreciation and amortisation (303) (253) Exceptional items 5 (182) (6) Finance income 58 24Finance costs (158) (50)Profit before income tax 1,321 971Income tax expense 6 (507) (285) Profit for the year 814 686 Profit is attributable to: Equity shareholders of the Group 798 550Minority interests 16 136 In US$Earnings per share - basic and diluted 7 0.79 0.55 * EBITDA before exceptional items is defined as profit before interest, taxation, depreciation andamortisation adjusted for exceptional items (refer note 5). CONSOLIDATED BALANCE SHEET (Unaudited) As at 31 DecemberIn millions of US$ Note 2007 2006AssetsNon-current assetsProperty, plant and equipment 3,232 2,543Goodwill and intangible assets 390 389Loans receivable 7 21Deferred tax asset 8 12Other non-current assets 322 43Total non-current assets 3,959 3,008 Current assetsInventories 438 361Trade and other receivables 1,045 637Financial assets 170 21Loans receivable 28 240Cash and cash equivalents 2,548 336Total current assets 4,229 1,595Total assets 8,188 4,603 EquityShare capital and share premium 8 3,257 200Reserves 2,457 2,011Equity attributable to the Group's equity shareholders 5,714 2,211 Minority interests 75 61Total equity 5,789 2,272 LiabilitiesNon-current liabilitiesBorrowings 1,065 876Deferred tax liabilities 295 280Asset retirement obligations 86 44Employee benefit obligations 52 48Other non-current liabilities 51 -Total non-current liabilities 1,549 1, 248 Current liabilitiesBorrowings 359 608Trade and other payables 370 393Current income tax payable 28 20Other taxes payable 93 62Total current liabilities 850 1,083Total liabilities 2,399 2,331Total liabilities and equity 8,188 4,603 CONSOLIDATED CASHFLOW STATEMENT (Unaudited) As at 31 DecemberIn millions of US$ Note 2007 2006Net cash generated from operating activities 1,079 739 Cash flow from investing activitiesPurchase of property, plant and equipment (1,042) (504)Proceeds from sales of property, plant and equipment 71 19Proceeds from sales (purchase) of intangible assets (1) 2Purchases of investments - (17)Prepayments for acquisition of subsidiary 10 (100) -Proceeds from sale of investments 24 18Loans and deposits granted to related parties (119) (91)Other loans and deposits granted (243) -Proceeds from repayment of loans and deposits to related parties 21 -Proceeds from repayment of other loans and deposits 38 -Net cash used for investing activities (1,351) (573) Cash flow from financing activitiesRelated party borrowings - proceeds - 136Other borrowings - proceeds 1,423 192Related party borrowings - repayments (1,011) (140)Bank borrowings - repayments (229) (1)Proceeds from issuance of shares 3,055 -Shareholders' settlement agreement - repayment (191) -Net withdrawal of invested capital - (183)Dividends paid to equity shareholders (500) -Dividends paid to minority interests (66) (4)Net cash generated from financing activities 2,481 -Net increase in cash and cash equivalents 2,209 166Cash and cash equivalents at beginning of year 336 165Exchange gains on cash and cash equivalents 3 5Cash and cash equivalents at end of year 2,548 336 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited) Attributable to equity holders of the Group Share Share Retained Translation Hedge Minority TotalIn millions of US$ Note Capital Premium Earnings Reserve Reserves Total Interests EquityBalance as at 31 December 2005* - - 1,581 86 - 1,667 681 2,348 Profit for the year 550 - - 550 136 686Currency translation differences - 126 - 126 1 127Total recognised income and expense for year ended 31 December 2006 - - 550 126 - 676 137 813Net withdrawal of invested capital and distributions - - (276) - - (276) (79) (355)Change in minority interests attributable to Government shares - - 1,144 - - 1,144 (640) 504Other changes inminority interests - - - - - - (38) (38)Share issue pursuant toshare exchange agreement 8 200 - (200) - - - - -Promissory notes issued pursuant to share exchange agreement - - (1,000) - - (1,000) - (1,000)Balance as at 31 December 2006 200 - 1,799 212 - 2,211 61 2,272 Profit for the year - - 798 - - 798 16 814Currency translation differences - - - 165 - 165 3 168 Total recognised income and expense for year ended 31 December 2007 - - 798 165 - 963 19 982 Dividends paid - - (500) - - (500) - (500)Shares issued on initial public offering 8 58 2,999 - - - 3,057 - 3,057Unrealised loss on cash flow hedge - - - - (17) (17) - (17)Other changes in minority interest - - - - - - (5) (5)Balance as at 31 December 2007 258 2,999 2,097 377 (17) 5,714 75 5,789 * At 31 December 2005, retained earnings represents invested capital NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. PRINCIPAL ACCOUNTING POLICIES Basis of preparationThe preliminary financial information is unaudited. This preliminary announcement does not constitutethe Group's full financial statements for the year ended 31 December 2007. The financial information forthe year ended 31 December 2006, set out in this announcement does not constitute statutory accounts asdefined in section 240 of the Companies Act 1985 and has been extracted from the Prospectus issued on 7December 2007 relating to the Company's IPO (the 'Listings Prospectus'). This preliminary financial information has been prepared in accordance with International FinancialReporting Standards ('IFRS') and International Financial Reporting Interpretations Committee ('IFRIC')interpretations (as adopted by the European Union), those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS, the Listing Rules of the Financial Services Authority ('FSA') and on abasis consistent with the accounting policies set out in the Listings Prospectus. 2. SEGMENT INFORMATION The Group's primary format for reporting segment information is business segments and the secondaryformat is geographical segments. Segment results, assets and liabilities include items directly attributable to the segment as well asthose that can be allocated on a reasonable basis. Segment assets consist primarily of property, plantand equipment, intangible assets, inventories and receivables and mainly exclude investments and incometax balances. Segment liabilities comprise primarily trade and other payables. Capital expenditurecomprises additions to property, plant and equipment and intangible assets. Unallocated items comprisemainly investments and related income, interest-bearing loans, borrowings, finance income and costs, andtaxation. The Group is organised on the basis of five main business segments:o Ferroalloys - Principal activity comprises the extraction and sale of chrome ore as well as the production of ferroalloys from chromium and manganese ores;o Iron Ore - Principal activity comprises extraction, processing and manufacturing of iron ore products;o Alumina and Aluminium - Principal activity comprises extraction and processing of bauxite and limestone, and smelting of alumina and aluminium;o Energy - Principal activity comprises coal production and power generation; ando Logistics - Kazakhstan's main freight forwarder and railroad operator, providing international logistics for all ENRC operations; also rail construction and repair services for the Kazakhstani state rail company. Internal charges between segments have been reflected in the performance of each business segment. TheGroup has a number of activities that exist principally to support the mining operations including powergeneration, coal mining and transportation. Inter-segment transfers or transactions are entered intounder a cost plus pricing structure. Segment information for the main reportable business segments of the Group for the years ended 31December 2007 and 31 December 2006 is set out below: 2007 Segmental Analysis Alumina &In millions of US$ Ferroalloys Iron ore Aluminium Energy Logistics Corporate Eliminations GroupRevenue 2,178 991 607 181 149 - - 4,106Inter-segment revenue - - 1 133 83 - (217) -Segment revenue 2,178 991 608 314 232 - (217) 4,106 Segment operating profit 1,038 359 159 71 27 (233) - 1,421Finance income 58Finance costs (158)Profit before income tax 1,321Income tax expense (507)Profit for the year 814 EBITDA before exceptional 1,138 448 220 107 44 (51) - 1,906itemsDepreciation and amortisation (100) (89) (61) (36) (17) - - (303)Exceptional items - - - - - (182) - (182)Segment operating profit 1,038 359 159 71 27 (233) - 1,421 Capital expenditure 168 227 365 89 57 5 - 911 Segment assets 1,962 1,222 1,396 514 245 52 (27) 5,364Segment liabilities (259) (145) (117) (37) (39) (76) 27 (646) 4,718Unallocated assets and liabilities (net) 201Prepayment - Serov 100IPO proceeds 2,461Loans receivable 35Borrowings (1,424)Deferred and current income taxation (net) (302)Total equity 5,789 Average numberof employees 21,020 19,420 13,870 6,420 3,200 220 - 64,150 Geographical segment information for the main reportable business segments of the Group for the yearended 31 December 2007 is set out below: Geographical segmental analysis Europe & Rest ofIn millions of US$ Eurasia* Middle East Asia Pac* World Total2007Revenue 2,167 566 1,114 259 4,106Assets 4,655 609 47 53 5,364Capital expenditure 907 4 - - 911 * Eurasia comprises Kazakhstan, Russia and other countries of the former Soviet Union; Asia Pacific(Asia Pac) comprises China, Korea and Japan. External revenue is based on where the customer is located. Segment assets and capital expenditure arebased on where the assets are located. 2006 Segmental Analysis Alumina &In millions of US$ Ferroalloys Iron ore Aluminium Energy Logistics Corporate Eliminations GroupRevenue 1,473 829 602 154 198 - - 3,256Inter-segment revenue - - 10 109 79 - (198) -Segment revenue 1,473 829 612 263 277 - (198) 3,256 Segment operating profit 476 244 226 41 38 (28) - 997Finance income 24Finance costs (50)Profit before income tax 971Income tax expense (285)Profit for the year 686 EBITDA before exceptional 547 323 277 77 54 (22) - 1,256itemsDepreciation and amortisation (71) (79) (51) (36) (16) - - (253)Exceptional items - - - - - (6) - (6)Segment operating profit 476 244 226 41 38 (28) - 997 Capital expenditure 170 107 227 42 16 1 - 563 Segment assets 1,584 1,096 887 365 246 58 - 4,236Segment liabilities (243) (146) (69) (24) (72) - - (554) 3,682Unallocated assets and liabilities (net) 73Loans receivable 261Borrowings (1,484)Deferred and current income taxation (net) (260) Total equity 2,272 Average numberof employees 20,500 18,750 12,500 6,300 3,800 150 - 62,000 Geographical segment information for the main reportable business segments of the Group for the yearended 31 December 2006 is set out below: Geographical segmental analysis Europe & Rest ofIn millions of US$ Eurasia* Middle East Asia Pac* World Total2006Revenue 1,724 405 957 170 3,256Assets 3,795 357 35 49 4,236Capital expenditure 563 - - - 563 * Eurasia comprises Kazakhstan, Russia and other countries of the former Soviet Union; Asia Pacific(Asia Pac) comprises China, Korea and Japan. External revenue is based on where the customer is located. Segment assets and capital expenditure arebased on where the assets are located. 3. COST OF SALES Years ended 31 DecemberIn millions of US$ Note 2007 2006 Materials and components used (835) (721)Staff costs (354) (295)Depreciation and amortisation (271) (241)Other cost of sales (241) (285) Total cost of sales (1,701) (1,542) 4. DISTRIBUTION COSTS Years ended 31 DecemberIn millions of US$ 2007 2006 Transportation costs (269) (309)Other distribution costs (104) (98) Total distribution costs (373) (407) 5. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Years ended 31 DecemberIn millions of US$ Note 2007 2006 Staff costs (290) (96)Professional and other services (74) (35)Sponsorship and donations (34) (24)Depreciation, amortisation and impairment (32) (12)Other selling, general and administrative expenses (176) (123) Total selling, general and administrative expenses (606) (290) Costs incurred in relation to the initial public offering (exceptional item) (182) (6) Exceptional itemCosts related directly to the new issue of shares have been deducted from equity. Attributable IPO costsare allocated between the share premium account and income statement in proportion to the number of newshares issued compared to the existing number of shares. Other costs attributable to the listing havebeen expensed. Costs expensed for the year ended 31 December 2007, in relation to the initial public offering, areUS$182 million, of which US$150 million relates to the IPO bonuses which are included in staff costs inthe table above. The remaining US$32 million is included within professional and other services. Costsof US$96 million have been taken to equity. 6. INCOME TAXESIncome tax expense comprises the following: Years ended 31 DecemberIn millions of US$ 2007 2006 Corporate income tax - current period (474) (250)Corporate income tax - prior period (22) -Deferred tax expense - current period (11) (35) Income tax expense for the year (507) (285) Taxation has been provided at current rates on the profits earned in the period. The effective tax rateis higher than the statutory rate due primarily to costs incurred in relation to the listing on theLondon Stock Exchange which are not tax deductible and interests costs incurred in the UK which are notavailable to offset against current year profits. All taxation in the table above is overseas taxation. The effective rate of tax, excluding the costs relating to the listing which are non-recurring, is 34.2%. Reconciliation between the expected and the actual taxation charge is provided below: Years ended 31 DecemberIn millions of US$ Note 2007 2006 Profit before tax 1,321 971Notional tax charge at UK corporation tax rate 30% (2006: 30%) 396 291Items not deductible for tax purposes 62 39 Effects of different tax rates in other countries (78) (48) Income not chargeable for tax purposes (12) (7) Excess profits tax - current year 33 - - prior period 5 - Utilisation of previously unrecognised tax loss carry forwards - 7 Unrecognised deferred tax asset 89 - Prior year adjustment 17 - Other (5) 3 Income tax expense for the year, an effective rate of 38% (2006: 29%) 9 507 285 7. EARNINGS PER SHARE AND DIVIDENDS PER SHAREBasic earnings per share ('EPS') is calculated by dividing net profit for the year attributable toordinary equity shareholders of the Group by the weighted average number of ordinary shares outstandingduring the period.The Group has no dilutive potential ordinary shares. The following reflects the income and adjusted share data used in the EPS computations: Years ended 31 DecemberIn millions of US$ 2007 2006Net profit attributable to equity shareholders of the Group 798 550 Exceptional items attributable to equity shareholders of the Group 182 6 Net profit before exceptional items 980 556 Number of shares: pro-forma 1,000,000,000Weighted average number of ordinary shares* 1,015,767,123EPS - basic and diluted (US$) 0.79 0.55EPS before exceptional items (US$) 0.97 0.56 * For 2006, the EPS calculation has assumed that the ordinary shares in issue pursuant to share exchangeagreements in relation to the acquisition of the Group have been in issue throughout the period, and iscalculated after taking into account the share split which occurred on 8 November 2007. The dividends paid in 2007 and 2006 were pre-IPO dividends amounting to US$500 million (US$0.49 pershare) and US$187 million (US$0.19 per share) respectively. 8. SHARE CAPITAL Number Share (Allotted and Share Capital Premium Called-up) £'000 US$'000 US$'000As at 8 December 2006 50,000 13 - -Issuance of ordinary shares of US$10 each 20,000,000 - 200,000 -Reverse share split of 50,000 ordinary shares to 1 specialshare of £50,000 (one-quarter paid) (49,999) - - - As at 31 December 2006 20,000,001 13 200,000 -Share split 980,000,000 - - -Redemption of special share (1) (13) - -Issuance of shares on IPO 287,750,000 - 57,550 2,999,023As at 31 December 2007 1,287,750,000 - 257,550 2,999,023 9. RECONCILIATION OF NON-GAAP MEASURES Years ended 31 DecemberIn millions of US$ Note 2007 2006Profit for the period 814 686Add:Depreciation and amortisation Cost of sales 3 271 241 Selling, general and administrative expenses 5 32 12Finance costs 158 50Income tax expense 507 285Less:Finance income (58) (24)EBITDA after exceptional items 1,724 1,250Exceptional items 5 182 6EBITDA before exceptional items 1,906 1,256EBITDA before exceptional items 1,906 1,256Divide by:Revenue 4,106 3,256EBITDA before exceptional items margin 46% 39% Profit for the period 814 686Add:Finance costs 158 50Income tax expense 6 507 285Exceptional items 5 182 6Less:Finance income (58) (24)EBIT before exceptional items 1,603 1,003Divide by:Capital employed weighted average Borrowings 1,393 862 Equity including Minority Interest 2,614 2,310Return on Capital Employed 40% 32% 10. EVENTS AFTER THE BALANCE SHEET DATE Acquisition of the Serov GroupIn July 2007, ENRC transferred US$100 million to a subsidiary of International Mineral Resources BV(IMR), a company controlled by the Founder Shareholders, as a partial prepayment for ENRC's intendedacquisition of the Serov group ('Serov') and certain related entities. Serov's principal activitycomprises the mining of chrome ore, processing and sale of ferroalloys in eastern Russia. ENRC completedits due diligence and shareholder approval of the transaction was granted prior to the listing of ENRCon 12 December 2007. On 3 April 2008 US$110 million was paid to satisfy the balance of the consideration payable in respectof the Group's acquisition of a controlling interest in Serov . Fulfilment of obligation related to AoKOn 25 April 2003, ENRC signed an agreement with the State Property and Privatisation Committee of theMinistry of Finance of the Republic of Kazakhstan for the purchase of 31.8% of the issued share capitalof Aluminium of Kazakhstan (AoK) and paid the full purchase price. The transfer of legal title to theshares was subject to the fulfilment of certain conditions, the primary one being the first stage ofcommissioning by 31 December 2007 of an aluminium smelter in Kazakhstan with a production capacity of atleast 60,000 tonnes per annum. This milestone was achieved in December, with an opening ceremony on 12December 2007 attended by the President of Kazakhstan, to mark the occasion. On 29 January 2008 a deedof fulfilment of obligations by ENRC and transfer of title of the shares in AoK to ENRC was dulyexercised by the committee. Long Term Incentive PlansThe Company has adopted a long term incentive plan for executive directors, management and senioremployees providing awards. The total number of share awards granted pursuant to this long term incentiveplan, in conjunction with all other employee share plans operated by the Group, cannot exceed 10.0% ofthe issued share capital of the Company. The share awards will be subject to appropriate performanceconditions, and all awards will be granted by the Remuneration Committee. SHAREHOLDER INFORMATION Registered OfficesEurasian Natural Resources Corporation PLC16 St James's StreetLondon SW1A 1ERUnited Kingdom Telephone: +44 (0) 20 7389 1440Facsimile: +44 (0) 20 7389 1441Website: www.enrc.com Registered in England and WalesCompany number: 06023510 Listing The principal trading market for Eurasian Natural Resources Corporation PLC Ordinary Shares is theLondon Stock Exchange (LSE). The shares are also listed on the Kazakhstan Stock Exchange (KASE). Results timetable Wednesday, 9 April 20082007 Preliminary results Wednesday, 14 May 20082008 First-half Interim Management Statement2008 Q1 Production report Wednesday, 11 June 2008Annual General Meeting Wednesday, 6 August 20082008 Q2 Production report Thursday, 21 August 20082008 Half-year results Wednesday, 12 November 20082008 Second-half Interim Management Statement2008 Q3 Production report All future dates are provisional and subject to change. This information is provided by RNS The company news service from the London Stock Exchange

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