Interim Results
KazakhGold Group Ltd
28 September 2006
KazakhGold Group Limited
Interim financial statements for the six month period to
30 June 2006
H1 2006 Business Highlights
• Gold production of 95,160 oz
• Combined July and August '06 production of 46,966 oz
• A further reduction in cash production costs, which averaged US$180
per contained oz
• Higher than anticipated output of cathodic sludge impacted revenue and
margins - work was initiated to enhance the electrolysis process
• Gold inventory increased by 30,611 oz due to a delay in sales to
Kyrgyzstan and additional stockpiling. Inventory has now been reduced since
the first half
• Capital expenditure of US$22.6 million, included the upgrading of mine
shafts at Aksu and Zholymbet and exploration of recently acquired mine
properties
• Production commenced at the Kaskabulakskoe mine in Eastern Kazakhstan
• Preparation of an accelerated investment plan to exploit more fully
the Group's significant reserves and resources. This raises the long-term
production target, albeit at lower than anticipated growth in 2007-8. The
plan has an associated financing requirement of some US$120 million, that
the Group intends to satisfy through debt finance
• Management team strengthened: Chief Accountant and Chief Geologist
appointed to JSC Kazakhaltyn MMC, the Group's principal operating
subsidiary; recruitment of London-based CFO commenced.
Interim Results Summary
(Six months to 30 June 2006)
Revenue (US$ '000) 31,578
EBITDA (US$ '000) 12,698
Operating profit (US$ '000) 7,119
Profit before tax (US$ '000) 6,231
Cash (US$ '000) 32,456
Net assets (US$ '000) 686,714
Earnings per share (basic & diluted - US$) 0.06
Weighted average number of shares in issue 47,100,000
Total ore extracted (tonnes) 2,244,518
Head grade (grammes/tonne) 1.92
Recovery rate (%) 68.8
Gold production (oz) 95,160
Average cash production cost (US$ per contained oz) 180.0
Analysts Presentation
The company will host a presentation for analysts at 10.00am London time on September 28 at the offices
of ING, 60 London Wall, London EC2M 5TQ.
For those who are unable to attend, telephone conference call facilities will be available. Please
call: +44 (0) 20 7162 9961. Password: KazakhGold.
Investors Facility: KazakhGold will also be hosting a results presentation for investors at 2.00pm
London time on September 28 by conference call. Please call: +44 (0) 20 7162 9961. Password:
KazakhGold.
Replay facility: +44 (0) 20 7031 4064; pin: 721437. The replay will be active until October 12.
In addition, ING will be arranging one-to-one meetings with investors over the following few days.
Press briefing: 11.30am at ING offices
President & CEO Statement
It is my pleasure to present KazakhGold Group Limited's first interim results,
for the six months to 30 June 2006. During the period, the Group made further
progress towards its objective of becoming one of Central Asia's leading gold
mining companies - for this, the Board is grateful to all employees.
Revenue for the period was US$31.58 million, with EBITDA of US$12.7 million and
profit before tax of US$6.2 million. Earnings per share were US$0.06 and net
assets at the period close were US$686.7 million. Cash flow from operations,
before changes to working capital and provisions, was US$27.5 million. Cash
absorbed by operating activities was US$7.5 million, reflecting sales of
cathodic sludge, an increase in trade and other receivables and inventory.
Operations
Over the period, there was further expansion of open pit mining activity at
Aksu, Bestobe and Zholymbet, in accordance with our strategy. Production began
in June at the Group's recently acquired Kaskabulakskoe mine, in Eastern
Kazakhstan, which will make a minimal contribution to the second half.
In the first half 2,244,518 tonnes of ore were extracted, with an average head
grade of 1.92 grammes/tonne, and a recovery rate of 68.8 per cent. Gold
production was 95,160 oz. The Group has reallocated 8,715 oz of gravity
concentrate production, held in inventory as finished goods at the 2005 year
end, to work in progress. This follows the decision to process the concentrate
further during the first half. As a result, reported production for the 14 weeks
to 31 December 2005 has been re-stated to 43,976 oz. This adjustment has no
impact on the 2005 year-end financial results.
The Group benefits from a low-cost production base and is committed to retaining
this competitive advantage. In the first half, cash production costs continued
to reduce and averaged US$180.0 per contained ounce.
During the period, the performance of our recently installed high-pressure
electro-winning vessels was sub-optimal. Representatives from the manufacturers
have worked with us to resolve matters, in order to achieve the designed
specification for the equipment. This has now resulted in a higher output of
cathodic gold and we expect this trend to continue in the final quarter of the
year.
Gold sales in the first half were 64,549 oz, at an average achieved sales price
of US$507/oz, based on the prevailing tenge/US$ exchange rate at the time of
each sale. This compares with US$448/oz for the final quarter of 2005, using the
year-end exchange rate.
The Group's gold inventory increased by 30,611 oz to 48,821 oz in the first
half. This was due to the temporary suspension of shipments to Kyrgyzstan,
following disagreement with a customer regarding the grade of product shipped.
In August, sales were resumed and a new customer was added in Dubai. Inventory
levels are expected to decline in the second half, as we smelt some of the
build-up of cathodic sludge into gold dore.
Capital expenditure and loan repayments
In 2005, US$46 million was allocated from the Group's Initial Public Offering
(IPO) proceeds for capital expenditure in the current year. US$18 million was
for construction of a 2.5 million tonnes annual capacity Carbon-in-Pulp (CIP)
plant at Bestobe, to be operational from the first quarter of 2007. A further
sum was allocated for a 1.0 million tonnes annual throughput capacity heap leach
facility at Zholymbet, due to commence operation in the first quarter of 2006.
After careful evaluation of our accelerated investment plan, outlined below, we
deferred implementation of these investments. This was in order not to
compromise the greater economies of scale from the construction of the larger
facilities identified in our new plan.
In the event, capital expenditure over the period was US$22.6 million, which
included US$11.7 million for the refurbishment of a mine shaft at Aksu, as well
as equipment to accelerate open pit and other mine development activity. At
Zholymbet, US$5.2 million was invested, which included refurbishment of a mine
shaft, equipment for open pit mining and construction of a new tailings dam. Of
the remaining expenditure, the majority was allocated to geological exploration
and drilling equipment for our new mine sites.
During the first half all bank loans and promissory notes were repaid, amounting
to US$21.6 million and US$3.0 million respectively.
Shareholders
In July, the free float of the Group's shares increased by 11.5 per cent to 39
per cent, following the sale by Gold Lion Limited ('Gold Lion') of 5.5 million
secondary shares in the form of Global Depositary Receipts. The sole
beneficiaries of Gold Lion are the Assaubayev family. Gold Lion has confirmed to
the Group that it intends to retain a majority shareholding in the Group.
Accelerated investment plan
With gold reserves and resources of 46.6 million oz, based on the latest review
in 2005 and excluding the eight new properties acquired last year, the Group has
the opportunity and capability to raise production levels even further from
those anticipated at the time of our IPO. With this in mind, an accelerated
investment plan has been prepared that will significantly increase the long-term
production target of the Group. It reduces the average life-of-mine estimated
cash production cost per ounce, from US$182/oz to US$143/oz, and should place
the Group amongst the world's top twenty gold producers. The plan envisages an
additional financing requirement of some US$120 million, which the Group intends
to satisfy through debt finance.
Under the accelerated plan, the focus changes to the use of CIP processing
technology. Total annualised processing capacity for the Group will increase
from 3.0 million tonnes in June 2006 to 19.5 million tonnes in 2008, which is
3.0 million tonnes ahead of the Group's original plan prepared in 2005.
CIP processing technology has a number of distinct benefits for the Group. It
offers the possibility of gold recovery rates of over 90 per cent, compared with
some 60 per cent from heap leach processing. Under the accelerated investment
plan, the Group will be able to raise average recovery rates from 73.0 per cent
to 82.3 per cent. CIP processing also provides a more stable and predictable
cash flow, as heap leach technology loses its effectiveness at the low winter
temperatures experienced in Kazakhstan. CIP technology allows the processing of
both oxide and sulphide ores, and is ideally suited to regions such as Northern
Kazakhstan, where our three main mines are located.
While production will be increased significantly from 2009, the accelerated
investment plan does mean that production growth will be less dramatic in 2007
and 2008, compared with the original 2005 plan. This arises principally from the
delayed construction of Bestobe's CIP plant, which had originally been scheduled
to be operational from 2007.
The Group is appointing an international firm of mining consultants to assist
with the planning, and potentially to have an involvement with the
implementation of the accelerated investment plan. Loan financing options are
currently being evaluated with the aim of commencing work by the end of 2006.
Outlook
The Group has gold reserves and resources estimated to be the largest in
Kazakhstan. This gives us the opportunity to transform production growth through
implementation of the foregoing accelerated investment plan. While this
constrains production growth in the short-term, it enables the long-term
production target of the Group to be significantly increased. Gold recovery
rates will also rise materially, cash costs will reduce significantly and cash
flow will be much more predictable.
Although the Group is committed to driving down production costs per ounce, some
65 per cent of our costs are in Kazakh tenge and so are adversely impacted when
the tenge strengthens against the US dollar. In the first half the tenge
appreciated by 13 per cent against the dollar, although it has since stabilised.
Wardell Armstrong International is converting the reserves at Aksu, Bestobe and
Zholymbet to the JORC classification standard, and this work is due to be
concluded in early 2007. JORC classification will improve the quality of our
reserve estimates and promote greater international understanding of the
opportunity that the Group represents.
Overall, with increases in production and improved electrolysis, we are set to
make further progress by the year-end. With the opportunity to implement an
accelerated investment plan and favourable macroeconomic conditions in
Kazakhstan, the Group faces the future with confidence.
Dr Kanat Assaubayev
President & Chief Executive Officer.
Further Information: www.kazakhgold.com
Aidar Assaubayev Ron Marshman
Deputy Chief Executive City of London PR Ltd
KazakhGold Group Limited Tel: +44 (0) 207 628 5518
Tel: +44 (0) 870 067 0431 Email: aidar_assaubayev@kazakhaltyn.kz
KazakhGold Group Limited
Interim financial statements for the six month period to
30 June 2006
Consolidated income statement Six months to 26 September
30 June to 31
December
Note 2006 2005
US$000 US$000
Unaudited Audited
Revenue 4 31,578 20,357
Cost of sales (14,269) (14,863)
Gross profit 17,309 5,494
Other operating income 430 1,473
Distribution expenses (731) (86)
Administrative expenses (8,193) (6,954)
Other operating expenses (1,696) (640)
Operating profit/(loss) 7,119 (713)
Financial income 1,154 277
Financial expense (2,042) (647)
Net financing costs (888) (370)
Profit/(loss) before taxation 6,231 (1,083)
Taxation (3,208) (1,090)
Profit/(loss) for the period attributable to equity shareholders 3,023 (2,173)
Basic earnings/(loss) per share 5 US$0.06 US$(0.05)
Diluted earnings per share 5 US$0.06 -
All amounts relate to continuing operations.
Consolidated balance sheet
26 September
30 June to 31 Dec
2006 2005
Non-current assets US$000 US$000
Unaudited Restated
Property, plant and equipment 62,876 49,797
Mining properties 858,517 761,975
Exploration and development costs 14,617 9,013
Intangible assets 1,231 1,092
Other financial assets 2,011 1,713
939,252 823,590
Current assets
Inventories 22,247 7,629
Trade and other receivables 48,902 20,112
Other financial assets 3,931 -
Cash and cash equivalents 32,456 87,887
107,536 115,628
Total assets 1,046,788 939,218
Equity and liabilities
Equity attributable to shareholders
Share capital 8 8
Share premium 97,429 97,429
Capital contributions 510,000 510,000
Translation reserve 75,425 (41)
Retained earnings 3,852 714
Total equity 686,714 608,110
Non-current liabilities
Interest-bearing loans and borrowings 23,074 24,543
Other financial liabilities 1,471 1,197
Provisions 418 241
Deferred tax liabilities 305,196 271,134
330,159 297,115
Current liabilities
Interest-bearing loans and borrowings - 20,464
Trade and other payables 23,385 10,959
Current tax payable 5,981 2,156
Other financial liabilities 549 414
29,915 33,993
Total equity and liabilities 1,046,788 939,218
Consolidated cash flow statement
Six months to 26 September to 31
30 June December
2006 2005
Cash flows from operating activities US$000 US$000
Unaudited Audited
Profit/(loss) before tax for the period 6,231 (1,083)
Adjustments for:
Depreciation, depletion and amortisation 5,579 1,411
Foreign exchange loss arising from translation of investment in 11,969 -
subsidiaries
Foreign exchange gain arising from operations 1,516 8
Interest payable 2,042 647
Loss on disposal of non-current assets 84 640
Equity-settled share-based payment expenses 115 2,887
Cash flows from operating activities before changes in working 27,536 4,510
capital and provisions
Increase in trade and other receivables (33,019) (6,095)
(Increase)/decrease in inventories (14,618) 5,511
Increase in trade and other payables 12,457 888
Increase in provisions 177 241
Cash (absorbed by)/generated from operating activities (7,467) 5,055
Cash flows from investing activities
Acquisition of property, plant and equipment (16,840) (6,930)
Proceeds from the disposal of non-current assets 838 385
Capitalised exploration and development costs (4,530) (4,491)
Acquisition of mining licences (138) (114)
Cash held in subsidiary companies at the date of acquisition - 565
Net cash flow from investing activities (20,670) (10,585)
Cash flows from financing activities
Proceeds from the issue of share capital - 106,507
Share issue costs - (9,070)
Proceeds from the issue of bonds - 24
(Redemption)/issue of promissory notes (3,007) 3,007
Repayment of borrowings (21,630) (6,284)
Interest paid (1,956) (647)
Payment of finance lease liabilities (701) (120)
Net cash flow from financing activities (27,294) 93,417
Net (decrease)/increase in cash and cash equivalents (55,431) 87,887
Cash and cash equivalents at the beginning of the period 87,887 -
Cash and cash equivalents at the end of the period 32,456 87,887
Statement of changes in equity for the Group
For the six month period ended 30 June 2006
Share Share Capital Translation Retained Total
Capital Premium Contributions Reserve Earnings
US$000 US$000 US$000 US$000 US$000 US$000
Unaudited Unaudited Unaudited Unaudited Unaudited Unaudited
Balance at 1 January 2006 8 97,429 510,000 (41) 714 608,110
Equity settled share-based payments - - - - 115 115
Foreign exchange on translation of - - - 75,466 - 75,466
foreign operations
Profit after tax for the period - - - - 3,023 3,023
Balance at 30 June 2006 8 97,429 510,000 75,425 3,852 686,714
Share capital is the amount subscribed for shares at nominal value.
Share premium represents the excess of the amount subscribed for share capital
over the nominal value of these shares net of share issue expenses.
Capital contributions represent the value of Romanshorn LC AG and its
subsidiaries, the beneficial ownership of which was acquired by the Company in
2005.
Exchange differences arising on translating the net assets and the results of
overseas operations to US dollars are recognised directly in the translation
reserve.
Retained earnings represent the cumulative profit/(loss) of the Group
attributable to the equity shareholders.
Notes forming part of the interim financial statements
1. Corporate information
KazakhGold Group Limited ('the Company') is a company incorporated in Jersey. The Company is centrally
managed and controlled in the United Kingdom and therefore resident in the United Kingdom for the purposes
of United Kingdom taxation liabilities.
2. Basis of preparation and accounting policies
These primary statements and selected notes comprise the unaudited interim consolidated results of the
Company and its subsidiaries ('the Group') for the six months ended 30 June 2006.
The comparative figures presented are from the period of incorporation on 26 September 2005 to 31 December
2005. The financial statements for the period ended on 31 December 2005 were prepared in accordance with
International Financial Reporting Standards (IFRSs and IFRIC interpretations) as adopted by the European
Union and also in accordance with the Companies (Jersey) Law 1991. These comparative figures have been
restated as detailed in note 3 below.
These unaudited interim consolidated results of the Group presented in this interim announcement have been
prepared on the basis of the accounting policies adopted within the financial statements for the period
ended 31 December 2005. As permitted, the group has chosen not to adopt IAS34 Interim Financial Reporting.
Details of the significant accounting policies are set out below:
a. Measurement convention
The financial statements are prepared on the historical cost basis except that the following assets and
liabilities are stated at their fair value: financial instruments classified as fair value through the
profit or loss or as available-for-sale.
b. Basis of consolidation
Where the Company has the power, either directly or indirectly, to govern the financial and operating
policies of another entity or business so as to obtain benefits from its activities, it is classified as a
subsidiary. The consolidated financial statements present the results of the Company and its subsidiaries as
if they formed a single entity. Inter-company transactions and balances between Group companies are
therefore eliminated in full.
c. Business combinations
The Company owns the entire share capital of Romanshorn LC AG. As the controlling party of Romanshorn LC AG
and KazakhGold Group Limited at the time of the acquisition was the same, the acquisition was accounted for
as a capital contribution with the assets and liabilities acquired initially recognised at fair value and a
corresponding increase to equity credited to the capital contributions reserve.
d. Exploration and development
Exploration and development costs are capitalised as intangible assets until the decision is made to proceed
to development, whereupon the related expenditures are transferred to non-current assets as mining
properties, or until the projects are determined not to be commercially viable, whereupon the related costs
are written off to the income statement.
e. Mining properties
Once a decision is made to proceed with the development of a mining project, exploration and development
expenditure other than that on buildings, machinery and equipment is capitalised under non-current assets as
mining properties, together with any amount transferred from exploration and development.
Depreciation, depletion and amortisation of mining properties are calculated using the 'units of production
method' based upon actual production and estimated recoverable reserves. This amount is charged to cost of
sales in the income statement.
f. Foreign exchange
On consolidation, the results of overseas operations are translated into US dollar, the presentational
currency of the Group, at rates approximating to those ruling when the transaction took place. All assets
and liabilities of overseas operations are translated at the rate ruling at the balance sheet date.
Goodwill and fair value adjustments arising on the acquisition of an overseas entity are treated as assets
and liabilities of the overseas entity and translated at the rate ruling at the balance sheet date. The
functional currency of JSC Kazakhaltyn MMC is deemed by the directors of that entity to be Kazakh Tenge.
Exchange differences arising on translating the opening net assets at the opening rate and the results of
overseas operations at the actual rate are recognised directly in equity (the 'translation reserve').
3. Restatement
During the period ended 31 December 2005 the Company acquired the entire share capital of Romanshorn LC AG,
the non-trading parent company of JSC Kazakhaltyn MMC.
On fair valuing the assets and liabilities acquired in this transaction in 2005, the Company fair valued the
mining properties net of deferred tax. The financial statements of 2005 have been restated to show the fair
value of the mining properties gross of deferred tax.
There is no impact upon equity, profit/(loss) before and after taxation and cash flows for the preceding
period.
The effect of this restatement on those financial statements is summarised below:
Increase in mining properties US$000
Increase in deferred tax liability 268,161
Change in equity (268,161)
-
4 Revenue
The Group operates in one segment, the mining and production of gold
in Kazakhstan. The revenues from this segment are analysed as Six months 26 September
follows: to 30 to 31
June December
2006 2005
US$000 US$000
Unaudited Audited
By product
Cathodic sludge 28,654 16,998
Cathodic gold - 682
Free gold 1,514 1,841
Flotation and gravitational concentrate 1,173 602
Quartzite ore 237 138
Dore bars - 96
31,578 20,357
By destination market
Kyrgyzstan 17,733 10,633
Kazakhstan 8,624 7,178
Switzerland 3,812 1,805
Russia 1,409 741
31,578 20,357
5 Earnings/(loss) per share
The calculation of basic earnings/(loss) per share is based upon the net
profit after tax attributable to the ordinary shareholders of US$3,023,000
(2005: a loss of US$2,173,000) and a weighted average number of shares in 26 September
issue, for the period 1 January 2006 to 30 June 2006, of 47,100,000 (2005: to 31
40,212,371). Six months to December
30 June 2006 2005
Unaudited Audited
Earnings/(loss) per share US$0.06 US$(0.05)
The numerator for the calculation of the basic earnings/(loss) per share is
the profit after tax of US$3,023,000 (2005: a loss of US$2,173,000). The
denominator for the calculation of the basic earnings per share is 47,100,000
(2005: 40,212,371).
Diluted earnings per share US$0.06 -
The numerator for the calculation of the diluted earnings per share is the
profit after tax of US$3,023,000. No diluted loss per share for 2005 has been
presented as the share options were anti-dilutive. The denominator for the
calculation of the diluted earnings per share is 47,139,025.
INDEPENDENT REVIEW REPORT TO KAZAKHGOLD GROUP LIMITED
Introduction
We have been instructed by the Company to review the financial
information for the six months ended 30 June 2006 which comprises the
consolidated balance sheet and the related consolidated income
statement, consolidated cash flow statement, and the consolidated
statement in changes in equity and related notes 1 to 5. We have read
the other information contained in the interim report and considered
whether it contains any apparent misstatements or material
inconsistencies with the financial information.
Our report has been prepared in accordance with the terms of our
engagement to assist the Company in meeting the requirements of the
Listing Rules of the Financial Services Authority and for no other
purpose. No person is entitled to rely on this report unless such a
person is a person entitled to rely upon this report by virtue of and
for the purpose of our terms of engagement or has been expressly
authorised to do so by our prior written consent. Save as above, we do
not accept responsibility for this report to any other person or for any
other purpose and we hereby expressly disclaim any and all such
liability.
Directors' responsibilities
The interim report, including the financial information contained
therein, is the responsibility of, and has been approved by the
directors. The directors are responsible for preparing the interim
report in accordance with the Listing Rules of the Financial Services
Authority which require that the accounting policies and presentation
applied to the interim figures should be consistent with the preceding
annual accounts except where any changes, and the reasons for them, are
disclosed.
Review work performed
We conducted our review in accordance with guidance contained in
Bulletin 1999/4 issued by the Auditing Practices Board for use in the
United Kingdom. A review consists principally of making enquiries of
Group management and applying analytical procedures to the financial
information and underlying financial data and based thereon, assessing
whether the accounting policies and presentation have been consistently
applied unless otherwise disclosed. A review excludes audit procedures
such as tests of controls and verification of assets, liabilities and
transactions. It is substantially less in scope than an audit performed
in accordance with International Standards on Auditing (United Kingdom
and Ireland) and therefore provides a lower level of assurance than an
audit. Accordingly we do not express an audit opinion on the financial
information.
Review conclusion
On the basis of our review we are not aware of any material
modifications that should be made to the financial information as
presented for the six months ended 30 June 2006.
BDO STOY HAYWARD LLP
Chartered Accountants
London
27 September 2006
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