Production report for Q3 ended 30 September 2010

28 October 2010

Kazakhmys PLC Production Report for the Third Quarter Ended 30 September 2010 and Interim Management Statement

l Copper cathode production for the first 9 months of 2010 reaches 239 kt

§ Production remains on track to meet the full year target of at least 300 kt

§ Work in progress will be rebuilt in the final quarter

l By-product output in the first 9 months of 2010 is in line with annual targets

§ Increase in zinc grades leads to 16% increase in zinc in concentrate output

§ Silver production reduced 22% to 10,282 koz, with lower grades and lower contribution from stockpiled ore

§ Gold production declined 6% to 97 koz, as higher mining output largely offsets the lower contribution from stockpiled ore

l Kazakhmys Power continues to benefit from strong market demand

§ 26% increase in net generated power during the first 9 months of 2010

§ Acceleration of modernisation programme with refurbishment of a further unit to commence in Q4 2010

l Commodity pricing has remained firm over the period

§ Average copper price of $7,100 per tonne for the first 9 months of 2010

§ Sales of products have been in line with production

§ Net debt has been reduced to $489 million at 30 September 2010, from $585 million at 30 June 2010, taking advantage of strong commodity pricing and continued cost control

Oleg Novachuk, Chief Executive Officer, said: "This has been another solid quarter for production in our Copper Division and, combined with firm markets and pricing, has led to further strengthening of our balance sheet. The Power Division continues to see positive demand and the modernisation programme is accelerating to meet the power needs of Kazakhstan's economic growth. We remain on track to meet the production targets set out at our interim results in August and we look forward to reporting at the end of the year."

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Kazakhmys PLC is a leading international natural resources group with significant interests in copper, gold, zinc, silver, power generation and petroleum.

It is the largest copper producer in Kazakhstan and one of the top ten worldwide with 16 operating mines, 10 concentrators and 2 copper smelters. Kazakhmys Copper operations are fully integrated from mining ore through to the production of finished copper cathode and rod. Total copper cathode equivalent produced in 2009 from own ore was 320 thousand tonnes. Production is backed by a captive power supply and significant rail infrastructure.

Kazakhmys Copper produces significant volumes of other metals, including zinc, silver and gold. In 2009, it produced 149 thousand tonnes of zinc in concentrate. The Group is in the top ten largest silver producers in the world (17 million ounces produced in 2009).

Kazakhmys Gold, which acquired Eurasia Gold Inc in July 2007, includes new development and exploration opportunities. Kazakhmys Gold has measured and indicated gold equivalent resources of 2.5 million ounces. The Group produced 182 thousand ounces of gold in 2009.

Kazakhmys Power has a 50% interest in the coal fired Ekibastuz GRES-1 plant, the largest in Kazakhstan with a nameplate capacity of 4,000 MW.

Kazakhmys Petroleum is continuing its work programme at the East Akzhar exploration block, located on the eastern fringe of the Caspian depression, which was acquired in April 2007.

The Group is part of the FTSE-100 index of companies listed on the London Stock Exchange and is also listed on the Kazakhstan Stock Exchange (KASE). It had revenues of $3.7 billion in 2009 with EBITDA of $1.6 billion. The Group employs some 62,000 people, principally in Kazakhstan. The Group's strategic aim is to optimise its current operations, deliver its major growth projects and to diversify and participate in the development of the significant natural resource opportunities in Central Asia.

Copper Summary

1Includes copper sold in concentrate and cathode converted into rod.

Ore extraction of 24,806 kt in the first 9 months of 2010 was in line with the same period in 2009. An increase in output from the Karaganda Region offset a reduction in ore volumes from the Zhezkazgan Complex.

The average copper grade over the first 9 months of 2010 was 1.10%, compared to 1.18% in the prior period in 2009. The most significant factor in the decline in copper grade was Orlovsky mine in the East Region, where the grade fell from 4.39% to 3.67%. In Zhezkazgan, there was also a decline in grades at Zhomart and the impact of higher volumes from the low grade West mine.

The combination of higher ore output but lower grades in the first 9 months of 2010 against the comparative period, led to a 6% reduction in metal in ore mined, which is reflected in the production of copper in own concentrate of 251.9 kt. Production of copper in concentrate during 2010 has benefited from the reprocessing of waste material from the Balkhash furnaces and converters. Reprocessing waste material helped partially offset the loss of the additional copper in concentrate which was produced in 2009 from stockpiled ore.

Own copper in concentrate production in Q3 2010 decreased by 7% compared to Q2 2010, due to the lower grade ore mined during the quarter.

Copper cathode equivalent production from own concentrate declined by 5% to 238.9 kt, compared to 252.3 kt in the corresponding period in 2009, due to lower volumes of concentrate output.

The production of 74.6 kt of copper cathode equivalent in Q3 2010 was 13% below the previous quarter, reflecting the 7% decrease in own copper in concentrate production and some build up of concentrate.

Production of copper rod, which is produced to customer order, increased markedly in 2010 due to strong demand from the Chinese market.

By-products Summary

1 Includes slimes from purchased concentrate.

2 Represents tolled materials provided via third parties.

Zinc by-product

Zinc in concentrate production during the first 9 months of 2010 has increased by 16% from the comparative period in 2009. An increase in zinc grade in the East Region and the recommencement of operations at Abyz mine, contributed to a 27% increase in zinc metal in ore mined during the first 9 months of 2010 compared to the previous period despite the prior period benefiting from the processing of stockpiled ore.

In Q3 2010 the production of zinc in concentrate was 9% higher compared to Q2 2010 due to the higher grade of ore and the impact of timing differences on the receipt of concentrate processed by third parties.

Silver by-product

The production of silver during the first 9 months of 2010 was 10,282 koz, a reduction of 22% from the corresponding period in 2009. Production in 2009 benefited from the processing of stockpiled ore and a reduction of work in progress.

Production of silver in Q3 2010 was in line with the previous quarter, as a 14% increase in silver in concentrate output was offset by a higher level of work in progress at the end of September 2010.

Gold by-product

There was a 40% increase in gold mined during the first 9 months of 2010 compared to the previous period in 2009, mainly due to the recommencement of output from Abyz mine. Abyz has contributed 27% of the gold mined to date in 2010. The substantial increase in gold mined is not reflected in an increase in gold production, as in 2009, gold production benefited from the processing of stockpiled ore.

Gold output in Q3 2010 rose by 19% to 35 koz compared to the previous quarter, due to lower levels of work in progress at the end of September compared to the end of Q2 2010.

Kazakhmys Copper Review by Region

1 Includes copper used to produce copper rod.

2 Represents tolled materials provided via third parties.

Ore extraction of 17,378 kt in the first 9 months of 2010 was 4% below the comparative period in 2009 mainly due to North mine undergoing stripping work early in 2010, but partially offset by higher output at other mines in the Complex.

In Q3 2010 output increased by 4% to 6,078 kt, compared to Q2 2010, reflecting the ramp up of the North mine following the completion of stripping work.

The average copper grade in the first 9 months of 2010 decreased to 0.82% compared to 0.87% during the prior period. The reduction is mainly due to the recommencement of operations at the low grade West mine and an increase in mined ore volumes at the low grade South mine. Zhomart mine has seen a further decline in grade as operations move to less rich areas.

The reduction in grade and ore output has led to a lower level of copper in concentrate production during the first 9 months of 2010, compared to the same period in 2009. However, the production of copper in concentrate benefited from an increase in recovery rates at the Complex's concentrators, so that a 10% reduction in metal mined led to only a 7% reduction in copper in concentrate output in the first 9 months of 2010.

The reduction of copper in concentrate output in Q3 2010, compared to Q2 2010, reflects the decline in grade at the Complex.

Copper in concentrate is transferred from Zhezkazgan to Balkhash, so that the output of cathode does not match the production of concentrate from the Complex. The first Zhezkazgan furnace has been successfully recommissioned following its refurbishment and the second furnace has now been suspended pending a full maintenance programme.

Production of copper cathodes increased 9% to 91.6 kt in the first 9 months of 2010 over the comparative period, reflecting the higher volumes of concentrate processed at the smelter. During the first 9 months of 2009, 20.4 kt of copper in concentrate were sold directly to China. There have been no sales of copper in concentrate during 2010.

Kazakhmys Copper Review by Region

1Excludes concentrate processed by third parties.

Ore output at the Balkhash Complex rose 5% during the first 9 months of 2010 compared to the same period in 2009. The Complex benefited from the delivery of mining equipment in Q4 2009 and in the first half of 2010.  

The average copper grade during the first 9 months of 2010 declined to 1.26% compared to 1.33% in the comparative period. The decrease was due to a decline in grade at Sayak mine, where operations moved to a less rich area.

Production of copper in concentrate in the first 9 months of 2010 increased by 21% compared to the corresponding period in 2009. The increase in copper in concentrate was achieved by the reprocessing of waste material from the Balkhash furnaces and converters.

The copper concentrate from the Balkhash Complex, Karaganda and East Regions is mainly processed at the Balkhash smelter. Since 2009, there have also been shipments of concentrate from Zhezkazgan, where one of the furnaces has been under maintenance. The production of copper cathode at Balkhash has remained in line with the comparative period as the lower volumes of copper in concentrate from the East Region were offset by higher volumes received from Zhezkazgan and a reduction of work in progress.

Q3 2010 copper cathode output was affected by annual plant maintenance, reducing copper cathode production from own concentrate by 9% to 46.3 kt.

Kazakhmys Copper Review by Region

1Excludes concentrate processed by third parties.

Ore extraction in the East Region during the first 9 months of 2010 increased by 2% to 3,431 kt compared to 2009. Slight declines in output from several mines were offset by a 17% increase in ore extraction at Artemyevsky mine, which benefited from the commissioning of a backfill cement plant and new lifting equipment on the main shaft at the beginning of the year.

During the first 9 months of 2010 the average copper grade achieved was 2.50%. The reduction in grade compared to the same period in 2009 was mainly due to lower grades at Orlovsky and Nikolaevsky mines, where mining operations moved to less rich areas.

Severe weather in Q1 2010 caused transportation problems leading to some delays in the processing of ore. The backlog in the processing of ore has been recovered during Q2 and Q3 2010. The Region's lower production of copper in concentrate by 21% in the first 9 months of 2010 compared to the previous period reflects the 12% reduction of metal in ore mined due to lower grades and an increase in ore volumes processed by third parties which are not reflected in the figures above.

Copper in concentrate output of 19.7 kt in Q3 2010 is lower than the previous quarter reflecting a reduction in grade and recovery rate.

Kazakhmys Copper Review by Region

1Excludes concentrate processed by third parties.

During the first 9 months of 2010, ore output in the Karaganda Region increased by 77% compared to the corresponding period in 2009. Output from Abyz mine has increased significantly with the recommencement of operations in June 2009, following the stripping work in the first half of 2009. Ore extraction at Nurkazgan underground mine has continued to ramp up following commencement of operations in Q1 2009. An upgrade of the conveyor at Nurkazgan mine should improve the transportation of ore to the concentrator and allow a further increase in mine capacity.

The average copper grade during the first 9 months of 2010 improved slightly to 1.00% from 0.90% in the comparative period. The contribution from Abyz mine, with a copper grade of 1.75%, more than offset the decrease in grade and higher volumes from Nurkazgan mine.

In Q3 2010, compared to the previous quarter, a decline in grade at both Abyz and Nurkazgan mines has reduced the average grade for the Region to 0.92%.

Copper in concentrate production in the Karaganda Region during the first 9 months of 2010 has increased by 28% to 21.5 kt, benefiting from the higher volumes of metal mined. This increase is despite the copper in concentrate produced in 2009 from Akbastau and Abyz stockpiled ores.

Copper in concentrate production in Q3 2010 increased despite a decline in the volume of metal mined as the processing of stockpiled ore from Akbastau contributed 3 kt to the overall copper in concentrate production.

Other Divisions Review

During the first 9 months of 2010 ore extraction decreased compared to the prior period due to severe winter conditions and power supply outages which took place in Q1 2010. There is also a gradual decline in output as Mukur and Mizek mines mature.

Mining work at Mizek and Mukur mines has moved to less mineral rich areas, resulting in a lower gold grade achieved during the first 9 months of 2010 compared to the prior period.

Production of gold doré reflects the lower quantity of gold metal mined and processed as the output and grade have decreased. The increase in gold doré production during Q3 2010, in comparison with Q2 2010, is due to higher gold ore grade and gold precipitation as a result of mining a richer area and an increase in gold recovery rates due to normal seasonal changes.

Other Divisions Review

Kazakhmys Petroleum continues its drilling and testing programme at the East Akzhar exploration block in western Kazakhstan.

The first well will undergo further acid fracturing after initial testing did not deliver a satisfactory inflow of oil. The fracturing requires the installation of new equipment and well tubing and the timing of work will depend on the delivery of additional equipment.

Acid treatment on the third well was applied at the end of July 2010. The testing of the well is expected to continue for a further 3 months.

The testing of the second well will take place when the results of the first and the third well have been obtained.

The drilling of the fourth well commenced in May 2010 and at the end of September, 4,745 metres had been drilled, out of a projected 5,200 metres. The well is scheduled to be completed by the end of the year.

Other Divisions Review

1 The net dependable capacity is the maximum capacity a unit can sustain over a specified period modified for seasonal limitations and reduced by the capacity required for servicing the station auxiliary production.

On 26 February 2010, the Group completed the sale of 50% of Ekibastuz GRES-1 to Samruk-Kazyna with the Group retaining a 50% interest. The results shown above are for 100% of the business.

During the first 9 months of 2010, net power generated increased by 26%, compared to the corresponding period of 2009. The increase was led by both new customers and growth in demand from existing customers.

Net power generated at Ekibastuz GRES-1 in Q3 2010 was 2% below the level achieved in Q2 2010, reflecting seasonal factors and the import into Kazakhstan of cheap power from Kyrgyzstan under a temporary arrangement.

During the first 9 months of 2010 net dependable capacity increased by 185 MW to 2,153 MW, compared to the prior period in 2009. The increase was due to maintenance carried out at several units. Net dependable capacity decreased by 32 MW in Q3 2010, compared to Q2 2010, due to the restriction of load caused by higher water temperatures in the summer.

The installation of the new electrostatic precipitator at Unit 5 to reduce emissions was completed in September 2010 and commissioning work is ongoing.

There are 8 units at Ekibastuz GRES-1, 3 of which require rehabilitation. The work on the rehabilitation of Unit 8 has commenced and the unit is expected to be in operation by the end of 2012. The rehabilitation of Unit 2 is scheduled to begin by the end of this year and should be operational by the end of 2014. At that point, the capacity of the power station should have increased to 3,500 MW.

Interim Management Statement

Disposal of shares in Kazakhmys PLC by Chairman of the Board

On 5 October 2010, the Group's Chairman, Vladimir Kim, sold 58,876,793 ordinary shares, approximately 11.0% of Kazakhmys' shares in issue, to the National Welfare Fund Samruk-Kazyna JSC ("Samruk-Kazyna"). Mr. Kim's interest in the Company is now 149,306,795 ordinary shares, or approximately 27.9% of the shares in issue. As a result of the transaction, the Government of Kazakhstan's interest in the Group has increased to 139,162,843 ordinary shares, representing approximately 26.0% of the shares in issue. The Government's interest is held via The State Property & Privatisation Committee's existing 15.0% holding and the 11.0% shareholding of Samruk-Kazyna.

There are no other material events and transactions in the period covered by this Interim Management Statement that require disclosure.

Interim Management Statement

Sales volumes

The following table sets out the sales volumes of the major products produced by Kazakhmys Copper:

Total copper product sales for the 9 months ended 30 September 2010 were below the comparative period in 2009, as cathode equivalent production fell by 6% and there was a 9 kt lower contribution from cathode inventory movements.

In 2009, copper rod sales were limited to local demand as premiums in China were unattractive resulting in a greater volume of cathode sales. In 2010, sales of rod into China have resumed under annual contracts, with 10% of annual cathode production expected to be sold as copper rod. Copper concentrate was sold on a trial basis to China in the prior period. Sales of copper concentrate ceased in Q3 2009.

Zinc in concentrate sales were higher in the period ended 30 September 2010 than in the comparable period last year, due to the timing of sales and increased production over the period. Zinc production has exceeded sales volumes resulting in a build up of inventory. No zinc metal sales have taken place in 2010 following the suspension of the zinc smelter in the first half of 2009.

Silver sales for the 9 months ended 30 September 2010 were slightly below production due to goods-in-transit of 321 koz carried forward into the following quarter.

Lower production of gold in the 9 months to 30 September 2010 coupled with 10.8 koz held as goods-in-transit at the end of the period has led to a decrease in sales volumes when compared to the same period in 2009.

Interim Management Statement

Commodity prices

The following table sets out the average realised prices for the Group's major metal products:

1The realised price excludes any impact of the copper hedges noted below.

The following table sets out the average LME/LBMA prices:

Realised prices will differ from the average LME/LBMA prices during the same period, principally because of the timing of sales over the period not occurring evenly. Premiums or discounts to metal exchange prices, negotiated with customers, will also impact the realised average prices. The LME copper price began 2010 at $7,464 per tonne and ended the period on 30 September 2010 at $8,053 per tonne.

The rise in the realised electricity tariff in period to 30 September 2010, when compared to the same period in 2009, is the result of the higher domestic tariff ceilings set by the Government of Kazakhstan to encourage investment in the power sector. In 2010 the ceiling tariff for domestic sales is 4.68 KZT/kWh. The average tariff achieved during the full year 2010 may be lower than that for reported for the 9 months as export sales to Russia resumed in June 2010 at a lower tariff than domestic sales.

Copper hedging

In 2009, the Group entered into a hedging programme over production of 8.5 kt per month. The Group made net settlements under these contracts of $62.5 million for the nine months to 30 September 2009. These contracts expired in December 2009, with no further hedging taking place in 2010.

Exchange rates

The KZT/$ exchange rate at 30 September 2010 was KZT/$ 147.47 compared to KZT/$ 150.95 at 30 September 2009. The KZT/$ exchange rate for the 9 months ended 30 September 2010 was KZT/$ 147.16 compared to KZT/$ 146.73 for the corresponding period.

Interim Management Statement

Except as described in this statement, there has been no significant change in the financial position of the Group since 30 June 2010.

Net debt for continuing subsidiary businesses

The net debt position of the Group at 30 September 2010 was $489 million compared to $585 million as at 30 June 2010. Net debt is presented excluding MKM, which is held for sale, and Kazakhmys Power and ENRC, which are not consolidated as subsidiaries. The reduction in net debt is due to strong operating cash flows driven by copper prices, which averaged in excess of $7,100 per tonne during the period, and continued control over the Group's cost base.

Gross debt at 30 September 2010 was $1,653 million, a decrease of $31 million from the position at 30 June 2010. The outstanding balance on the pre-export credit facility was $1,262 million at 30 September 2010, a reduction of $130 million from the balance at 30 June 2010, as $44 million of principal is repaid monthly. During Q3 2010, an additional $100 million was drawn down under the CDB - Samruk-Kazyna finance facility for the Bozshakol project.

Total cash and cash equivalents for the Group were $1,164 million at 30 September 2010, compared with $1,099 million at 30 June 2010. The increase in cash and cash equivalents during the quarter reflects the operating cash flows generated by the Group and proceeds from the drawing under the CDB - Samruk-Kazyna facility, partially offset by the principal repayments made under the pre-export credit facility.

Net debt for MKM and Kazakhmys Power

The net debt/funds balances for MKM and Kazakhmys Power are excluded from the Group balances described above. MKM's net debt of $179 million at the end of Q3 2010 has increased by $28 million from $151 million at the end of Q2 2010, reflecting increased working capital balances due to higher copper prices. The net funds of Kazakhmys Power at 30 September 2010 were $104 million, an increase of $22 million compared to the position as at 30 June 2010 of $82 million. The net funds at Kazakhmys Power will be used to finance the rehabilitation of the power station.

Holding in ENRC PLC

The Group's holding of 334,824,860 shares in ENRC PLC had a market value of $4,861 million based on a share price of 918.5 pence on 30 September 2010, compared to a value of $4,344 million as at 30 June 2010 when the share price was 861.0 pence.

Following the 2010 interim dividend announced by ENRC PLC on 18 August 2010 of 12.5 US cents per share, the Group received $42 million in October 2010.

Interim dividend of the Company

Following the 2010 interim dividend announcement by the Company on 26 August 2010 of 6.0 US cents per share, the Company paid $32 million to its shareholders in October 2010.

 Kazakhmys Copper Production Appendix

Kazakhmys Copper Production Appendix

Kazakhmys Copper Production Appendix

Kazakhmys Copper Production Appendix

Kazakhmys Copper Production Appendix

Kazakhmys Copper Production Appendix

1 Includes slimes from purchased concentrate.

Kazakhmys Copper Production Appendix

1 Includes slimes from purchased concentrate.