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JSC NAC Kazatomprom (KAP)

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Tuesday 30 April, 2019

JSC NAC Kazatomprom

Integrated Annual Report 2018

RNS Number : 5221X
JSC National Atomic Co. Kazatomprom
30 April 2019
 

2018 INTEGRATED ANNUAL REPORT

NAC KAZATOMPROM

 

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http://www.rns-pdf.londonstockexchange.com/rns/5221X_1-2019-4-30.pdf

 

 

TABLE OF CONTENTS

 

ABOUT THIS REPORT..

KEY FIGURES - 2018

2018 KEY EVENTS

STATEMENT OF THE CHAIR OF THE BOARD OF DIRECTORS

STATEMENT OF THE CHIEF EXECUTIVE OFFICER

BUSINESS MODEL

COMPANY DEVELOPMENT STRATEGY

BUSINESS TRANSFORMATION

LISTING INFORMATION

ABOUT KAZAKHSTAN

ABOUT THE COMPANY

ACTIVITY PROFILE

MAIN PRODUCTS

COMPANY HISTORY

COMPANY ASSET STRUCTURE

GEOGRAPHY AND TARGET MARKETS

ASSOCIATION MEMBERSHIP AND INTERNATIONAL COMPLIANCE

OPERATING AND FINANCIAL REVIEW

SIGNIFICANT FACTORS AFFECTING GROUP OPERATING RESULTS

KEY PERFORMANCE INDICATORS

CAPITAL EXPENDITURES REVIEW

RESERVES AND GEOLOGICAL SURVEYS

FINANCIAL ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

INDEBTEDNESS

GUIDANCE FOR 2019

SENSITIVITY ANALYSIS FOR 2019

FORWARD-LOOKING STATEMENTS

SUSTAINABLE DEVELOPMENT

PROGRAMME OF SUSTAINABLE DEVELOPMENT

SUSTAINABLE DEVELOPMENT INITIATIVES

GOVERNANCE DIAGNOSTICS

SUSTAINABLE ECONOMIC DEVELOPMENT

CREATED AND DISTRIBUTED DIRECT ECONOMIC VALUE

SCIENCE AND INNOVATION

ECONOMIC EFFECT IN REGIONS OF OPERATION

CHARITY AND SPONSORSHIP

PROCUREMENT

SOCIAL RESPONSIBILITY

COMPANY STAFF

SOCIAL POLICY

SOCIAL STABILITY

OCCUPATIONAL HEALTH AND SAFETY

ENVIRONMENTAL RESPONSIBILITY

WASTE MANAGEMENT

DIRECT GREENHOUSE GAS EMISSIONS

ENERGY EFFICIENCY

WATER RESOURCES

NUCLEAR SAFETY

DEVELOPMENT PLANS

INTERACTION WITH THE STAKEHOLDERS

CORPORATE GOVERNANCE AND ETHICS

CORPORATE GOVERNANCE STRUCTURE

CORPORATE GOVERNANCE CODE

GENERAL MEETING OF SHAREHOLDERS

BOARD OF DIRECTORS

COMPOSITION OF THE BOARD OF DIRECTORS

CHANGES IN THE COMPOSITION OF THE BOARD OF DIRECTORS IN 2018

ACTIVITY OF THE BOARD OF DIRECTORS

ASSESSMENT OF THE ACTIVITY OF THE BOARD OF DIRECTORS

ENGAGEMENT OF INDEPENDENT DIRECTORS

COMMITTEES OF THE BOARD OF DIRECTORS

MANAGEMENT BOARD

COMPOSITION OF THE MANAGEMENT BOARD

ACTIVITY OF THE MANAGEMENT BOARD IN 2018

MANAGEMENT BOARD COMMITTEES

REMUNERATION OF DIRECTORS AND EXECUTIVES

STATEMENT OF RESPONSIBILITY OF MEMBERS OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD

EMPLOYMENT AGREEMENTS OF SENIOR MANAGEMENT

CONFLICTS OF INTEREST

INTERNAL AUDIT SYSTEM

ORGANISATIONAL STRUCTURE OF THE COMPANY'S CORPORATE CENTRE

CORPORATE ETHICS

RISK MANAGEMENT AND INTERNAL CONTROL

INFORMATION ON TAXATION IN THE UNITED KINGDOM

EXTERNAL AUDIT

ABOUT THIS REPORT

PRINCIPLES FOR DEFINING REPORT CONTENT AND SUBJECT LIMITATIONS

ESSENTIAL SUBJECTS

STANDARDS AND GUIDELINES

EXTERNAL VERIFICATION

INFORMATION FOR SHAREHOLDERS

CONTACT INFORMATION

ANNEXES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INDEX OF GRI-COMPLIANT STANDARDS IN THIS REPORT

GENERAL DISCLOSURES

SPECIFIC DISCLOSURES

GLOSSARY

 

ABOUT THIS REPORT

 

The purpose of this Integrated Annual Report is to inform readers about the material aspects of the business of joint stock company (JSC) Kazatomprom (the Company), Kazakhstan's national atomic company. With this report, the Company aims to help investors and other stakeholders understand how it formulates its development strategy, manages its operations, achieves its financial performance, ensures the long-term sustainability of its business and develops value for stakeholders and interested parties. It addresses the following questions.

·      What do the Company, its subsidiaries, associates and joint ventures do?         

·      In what environment does the Company operate?

·      How will the Company's corporate-governance structure provide for value creation for stakeholders in the short, medium and long term?

·      What is the Company's business model?

·      What are the main risks and opportunities influencing the Company's ability to create value for stakeholders in the short, medium and long term, and how are these being managed?

·      What are the Company's goals, aims and objectives, and how does it intend to achieve them?

·      To what extent has the Company met its goals, aims and objectives for the reporting period, and what has been the effect on its valuation for stakeholders?

·      What are the key challenges and uncertainties the Company is likely to face in pursuing its development strategy and what are the potential implications for its business model and future performance?

 

 

 

KEY FIGURES - 2018

 

102-7

 

Table 1. Key indicators - Production KAP2

 

2017

2018

Change (%)

Kazatomprom uranium mining world ranking
(in volume terms)

1

1

-

Kazatomprom share of the global natural uranium mining market, (including all participations, subsidiaries and affiliates (%)

21%

23%

9%

Kazatomprom uranium -production output in volume terms (including all participations, subsidiaries and affiliates, tonnes)

12,093.4

11,476.0

-5%

Output of niobium products (tonnes of Nb)

27.0

25.6

-5.2%

Output of beryllium products (tonnes of Be)

1,585.2

1,711.7

8.0%

Output of tantalum products (tonnes of Ta)

140.0

131.7

-6%

Electrical power output (million kWh)

114.8

117.8

2.6%

 

Table 2. Finance

 

2017

2018

Change (%)

Revenue (KZT million)

277,046

436,632

58%

Operating profit (KZT million)

32,602

77,480

138%

Net profit (KZT million)

139,154

380,266

173%

Net debt/Adjusted EBITDA

-1.3

0.54

142%

Profitable mining investments (100% base) (KZT billion)

75.4

81.5

8.0%

Free float (%)

0.00%

14.92%

-

Net income per share (KZT/share)

534.1

1,435.0

169%

 

 

Table 3. Staff and social responsibility indicators

 

2017

2018

Change (%)

Staff

 

 

 

Number of employees

25,020

20,507

-18%

Social sphere

 

 

 

Social-security tax and social contributions (KZT million)

6,163

6,034

-2%

 

 

Table 4. Health and safety indicators

 

2017

2018

Change (%)

Occupational safety

 

 

 

Injury frequency rate (number of injuries per 1,000 employees)

0.31

0.15

-52%

 

2018 KEY EVENTS

 

January

§ 10 January 2018: The termination of the activities of Ulba FtorComplex LLC is registered by order of the Department of Justice of Ust-Kamenogorsk, Department of Justice of East Kazakhstan region No. 41.

February

§ 8 February 2018: The Board of Directors of NAC Kazatomprom JSC approves a new development strategy for 2018-2028.

March

§ 2 March 2018: The "Kazatomprom Town Hall: In Lockstep with Time" is held in the city of Shymkent, during which Galymzhan Pirmatov, Chairman of the Board of NAC Kazatomprom JSC, presents NAC Kazatomprom JSC's strategic priorities for 2018-2028, in line with the new development strategy.

§ 7 March 2018: A Memorandum of Understanding is signed by NAC Kazatomprom JSC and a consortium of Japanese companies (EAHL) in Nur-Sultan (Astana), setting out the basic conditions for the parties' interaction with respect to Baiken-U LLP, Kyzylkum LLP and JV Kharasan-U LLP.

April

§ 4 April 2018: The termination of the activities of Geotechnoservice LLP is registered by Order of the Department of Justice of South Kazakhstan region No. 22.

June

§ 29 June 2018: NAC Kazatomprom JSC sells 100% of its shares in the authorised capital of KAES JSC to Samruk-Kazyna JSC.

§ Transition to the target model of personnel management was completed within the transformation programme. The project covers the corporate centre and 6 subsidiaries and affiliates.

July

§ 3 July 2018: NAC Kazatomprom JSC completes the sale of 100% of its shares in MAEK-Kazatomprom LLP to Samruk-Kazyna JSC.

§ 1 July 2018: In the corporate centre of NAC Kazatomprom JSC and Kazatomprom-SaUran LLP a single integrated SAP system was put into operation.

§ 31 July 2018: Transition to new strategic planning and performance management processes completed.

August

§ 29 August 2018: At an Extraordinary General Meeting of the shareholders in Ulba-Konversia LLP approves the voluntary liquidation of the legal entity. The liquidation committee also approves decisions on the procedure for and terms of liquidation.

September

§ 3 September 2018: NAC Kazatomprom JSC signs an agreement with EAHL, under which, and under a number of specific conditions, to buy 40.05% of Energy Asia (BVI) Limited (owner of 95% of shares in the authorised capital of Baiken-U LLP and 40% of shares in the authorised capital of Kyzylkum LLP) and 16.02% of shares in the authorised capital of JV Kharasan-U LLP.

§ 28 September 2018: NAC Kazatomprom JSC enters into an agreement to sell its 76% stake in the authorised capital of Kyzyltu LLP for KZT 3,834,000,000. The buyer is Stepnogorsk Mining-Chemical Complex LLP.

§ In September 2018, NAC Kazatomprom JSC became a Vision Zero partner.

§ Implementation of the SAP ERP project (enterprise resource management system) at TTK LLP was launched under the Transformation programme.

§ 24 September 2018: NAC Kazatomprom approved a Transformation programme roadmap for 2017-2018.

§ The Board of Directors of NAC Kazatomprom JSC approved the Code of Ethics and Compliance.

October

§ 12 October 2018: NAC Kazatomprom JSC signs an agreement to sell its 100% stake in the share capital of Sareco LLP. The buyer is NMC Tau-Ken Samruk JSC.

§ Transition to the target model of integrated security was completed within the transformation programme. The project covers the corporate centre and 6 subsidiaries and affiliates.

§ 15 October 2018: The integrated planning system has been put into commercial operation at the first-tier enterprises.

November

§ The Company listed its shares and global depository receipts (GDRs) on LSE and Astana International Exchange (AIX).

§ The first stage of automated processes implementation in accordance with the target IT management model within the transformation programme implementation plan has been completed.

 

December

§ 7 December 2018: the General Meeting of Shareholders of Kazatomprom-Damu LLP approves the voluntary liquidation of the legal entity.

§ 13 December 2018: NAC Kazatomprom JSC completes a transaction to acquire 40.05% of the shares of Energy Asia (BVI) Limited (EAL) and 16.02% of shares in the authorised capital of JV Kharasan-U LLP. Consequently, the Company's stake in Baiken-U LLP increases from 5% to 52.5% (5% direct participation and 47.5% indirectly through EAL), its stake in Kyzylkum LLP increases from 30% to 50% (30% direct participation and 20% indirectly through EAL) and its stake in JV Kharasan-U LLP increases from 33.98% to 50% (direct participation).

§ 21 December 2018: The termination of the activities of Betpak-Dala LLP is registered by Order of the Department of Justice of Turkestan Region No. 208.

§ 28 December 2018: Kazatomprom and Cameco Corporation entered into an Agreement under which Kazatomprom will receive by 2020 (upon receipt of necessary permits from state bodies) the right to use refining and uranium conversion technologies. This would allow Kazatomprom to proceed with assessment of the economic feasibility of such technologies application in the Republic of Kazakhstan, subject to favourable market conditions.

§ December 2018: The first 30 students -20 of whom are employees of the subsidiaries and affiliates of NAC Kazatomprom JSC and 10 of whom are undergraduates not associated with NAC Kazatomprom JSC and its enterprises - graduate from the Master's degree programmes of the International Scientific and Educational Centre of the Nuclear Industry, founded with KazNRTU named after scientist K.I. Satpaiev.

 

 

STATEMENT OF THE CHAIR OF THE BOARD OF DIRECTORS

102-14

 

Dear Shareholders,

 

2018 was an historic year for Kazatomprom and the Republic of Kazakhstan, due to our successful privatisation and dual listing on two international exchanges. Kazatomprom is the first national company to successfully place its shares simultaneously via initial public offering (IPO) on the Astana International Exchange (AIX) and the London Stock Exchange (LSE).

 

Kazatomprom's IPO was the first major milestone of the State Privatisation Programme adopted by the Government at the end of 2015 as part of the plan formulated by the First President of the Republic of Kazakhstan Nursultan Nazarbayev to reduce the state's share in the economy.

 

The company has entered a new phase of its corporate development. It now counts Kazakh investors and leading international investment funds amongst its shareholders. This means additional responsibility for Kazatomprom in terms of delivering transparency and corporate governance. Kazatomprom, as a public company, is committed to achieving the highest international standards of corporate governance.

 

Last year also saw approval of the new Kazatomprom development strategy for 2018‒2028. The strategic objectives for this period were developed based upon our vision - to be the partner of choice for the global nuclear fuel industry. The company will focus on its core business - the mining and processing of uranium and associated mineral resources - while continuing to optimise production, processing and sales volumes based on market conditions. It will also strengthen the marketing function and expand sales channels, apply best practices in its business activities and develop a corporate culture corresponding to its status as an industry leader. To guide the achievement of these strategic goals and objectives, the new Board of Directors includes three independent directors who are established professionals with deep international management experience in natural resources, as well as the uranium and nuclear industries.

 

In 2018, the International Atomic Energy Agency (IAEA) announced the selection of Kazatomprom as a supplier of low enriched uranium (LEU) to the IAEA LEU Bank. The Board of Directors of Kazatomprom believes its selection reflects the high level of trust the global community has in the company as a reliable and recognised supplier of uranium products.

 

Within the framework of improving health and safety across our business in 2018, Kazatomprom was one of the first national companies of the Republic of Kazakhstan to become an official participant in a global programme to promote the concept of 'zero injury' (Vision Zero), which prioritises the health, safety and wellbeing of our employees and contractors. The programme was developed by the International Social Security Association (ISSA) to help prevent industrial accidents and reduce occupational health risks.

 

The Board of Directors is confident in the long-term prospects of the industry and believes that nuclear energy as a carbon-free, stable source of electricity will remain an important and growing part of the global energy supply mix. The results we achieved in 2018 confirm the effectiveness of the strategy we have implemented to date and will ensure the company's sustainable development in the interests of all its shareholders.

 

 

 

Chair of the Board of Directors of NAC Kazatomprom JSC

 

Jon Dudas

 

 

 

 

 

 

STATEMENT OF THE CHIEF EXECUTIVE OFFICER

 

102-14

Dear Colleagues, Partners and Investors,

 

I am proud to present Kazatomprom's annual report for 2018. The achievements of the atomic holding company mirror the contribution it has made to the socio-economic development, preservation of the environment and wellbeing of the citizens of the Republic of Kazakhstan.

 

At the end of 2018, Kazatomprom placed 15% of its shares on the international markets and it was very well received by both domestic and foreign investors. The company's main shareholder, Samruk-Kazyna Sovereign Wealth Fund, received and transferred to the State's National Fund $450 million from the sale of its shares. Our successful IPO is both the result of a strong preparatory collaboration with Samruk-Kazyna in the lead up to the flotation and a sign of confidence from our new shareholders. Our ability to meet our obligations will build the company's reputation and this, along with market and operational factors, will be reflected in the value of our shares.

 

The company's mission, per our new development strategy, is to effectively and safely develop uranium deposits and components of the nuclear value chain to create long-term value for all of our stakeholders. Our planned operating activities will not start with an increase in production volumes, but an appropriate response to market conditions. Kazatomprom reduced its uranium production by about 8% from previously planned production levels in 2017 and will do so again, by 20%, between 2018 and 2020. Partially due to Kazatomprom's actions in 2018, global supply and demand for uranium products became more balanced.

 

As the world's largest uranium producer, we have been able to forge strong relationships with most of the world's leading uranium consumers with a view to supplying our natural uranium products to more regions, solidifying our customer base. Our main customers are nuclear power operators and our key export markets are China, Southeast Asia, North America, Europe and the Asia-Pacific region. In 2018, Kazatomprom produced a record amount of natural uranium, becoming not only the world's largest uranium producer, but also the world's largest seller.

 

As part of our efforts to expand our presence in all areas of the nuclear fuel cycle, Kazatomprom signed an agreement with Cameco Corporation in December 2018, which will allow us to use Cameco's refining and conversion technologies by 2020. If market conditions are favourable, this will enable us to explore the economic feasibility of using these technologies in the Republic of Kazakhstan.

 

Last year, we completed the acquisition of a 40.05% stake in Energy Asia (BVI) Limited and a 16.02% stake in the share capital of JV Kharasan-U from Energy Asia Holdings (BVI) Limited. The purchases brought Kazatomprom's shareholdings in Baiken-U LLP, Kyzylkum LLP and JV Kharasan-U LLP to 52.5%, 50% and 50%, respectively.

 

Kazatomprom applies best practices when it comes to health and safety and environmental protection, and these topics will remain of paramount importance to our team. In 2018, we adopted an environmental and social action plan to achieve full compliance with the best international industry practices, including IFC Performance Standards. We continue to support the socio-economic and infrastructural development of uranium mining regions, allocating funds for these purposes under our subsoil-use contracts. We also met all of our social-guarantee commitments in 2018 and further improved our corporate governance processes.

 

Kazatomprom's results in 2018 were entirely due to the efforts of the entire workforce - a close-knit and highly efficient team, working in line with our core values. 

 

Our 2018 results confirm the effectiveness of our strategy and the importance of the priorities we identified. I am confident that in 2019, Kazatomprom will maintain its momentum and continue to strengthen its leading position in the global uranium market, achieving high production rates, maximising the efficiency of all business processes and increasing the long-term value of the company.

 

 

Galymzhan Pirmatov

 

Chief Executive Officer,

NAC Kazatomprom JSC

 

 

BUSINESS MODEL

КАP1

The Kazatomprom Group is the largest producer of natural uranium globally (in production volume terms), with priority access to one of the world's largest resource bases. According to UxC data, the Group's uranium production, including the output and refined products of its jointly controlled entities and attributable associates, for the year ended 31 December 2018 corresponded to approximately 23% of total global primary uranium production and around 40% of global in situ leach recovery (ISR) uranium production. 

Through its subsidiaries, jointly controlled entities and associates, the Group operates 26 deposits, grouped into 13 asset clusters, all of which are located in Kazakhstan. All of the Group's uranium deposits are suitable for ISR. The combination of cost-efficient ISR technology, which has a smaller environmental impact than other mining methods, and the Group's long-life mining asset base will allow it to remain amongst the highest-output and lowest-cost uranium producers globally, according to UxC data. The Group can draw on more than 40 years of ISR experience in Kazakhstan's uranium mining industry. In addition to being cost efficient and having a low environmental impact, ISR technology offers enhanced operational flexibility compared with conventional mining, improving the scalability of Group operations and allowing it to increase or decrease production quickly and cost efficiently in response to evolving market conditions.

The Company is Kazakhstan's national importer and exporter of uranium and its compounds, nuclear power-plant fuel, special equipment and technologies, as well as rare metals. Its status as the country's flagship operator gives the Company certain privileges. For example, it can access subsoil use agreements through direct negotiation with the Government, rather than through the tender process that would otherwise be required. This effectively gives the Company priority access to the high-quality and ISR-conducive deposits of natural uranium that are abundant in Kazakhstan.

The Group only produces uranium from deposits in Kazakhstan. According to UxC data, for the year ending 31 December 2018, Kazakhstan is one of the largest uranium producing countries which accounted for about 44% of global uranium production. The Group also possesses the largest uranium ore reserves of its competitors, according to UxC data. As of 31 December 2018, the Group's attributable proved and probable ore reserves contained 305,600 tonnes of UME; its attributable measured and indicated mineral resources (including those mineral resources modified to produce the ore reserves) contained 476,700 tonnes of UME, in accordance with the terms and definitions of the JORC Code.

As the Republic of Kazakhstan's national atomic company, the Company has partnered with most of the leading players in the global uranium mining industry. The Group has built 10 successful asset-level partnerships with Cameco, CGNPC, Kansai, Marubeni, Orano (formerly Areva), RosAtom and Sumitomo, as well as the Energy Asia consortium, demonstrating the prominence of the Group's asset base on a global scale. These collaborations have also given the Group access to its partners' technologies, at the same time allowing it to improve its technological and management know-how. For the years to 31 December 2017 and 31 December 2018, 60.4% and 49.1%, respectively, of the Group's attributable mined uranium stemmed from its joint-venture (JV) and associate participations.

The Group's primary customers are operators of nuclear power plants and the principal export markets for the Group's products are China, South and Eastern Asia, North America and Europe. The Group sells uranium products under long-term contracts, short-term contracts as well as on the spot market via its Switzerland-based trading subsidiary. The price of uranium accounts for a relatively small fraction of the overall cost of producing nuclear energy and most of the Group's customers tend to prioritise security of supply, which the Group is well positioned to provide on more favourable terms, thanks to its size and uranium production output.

While uranium mining is the predominant focus of its operations, the Group is also present (through its subsidiaries, JVs and associates) in most of the other stages of the 'front-end' nuclear fuel cycle, with the exception of uranium conversion. These stages include production of nuclear fuel components and uranium reconversion. The Group has access to production facilities for uranium enrichment. The Group produces uranium products, including natural uranium concentrate, uranium dioxide ceramic powder and fuel pellets, which are used in the manufacture of nuclear fuel assemblies, the fuel used by nuclear power stations to generate electricity. In addition, the Group is currently engaged in the construction of a fuel assembly plant for the Chinese market, which it expects to be operational by the end of 2019. Further, by the end of 2020 it is planned that the plant certification procedure by the technology provider (Framatome) will occur followed by commissioning of the first output. Commercial deliveries of fuel assemblies to China are scheduled to begin in 2021. The Group is well placed to develop a conversion facility, should conversion become economically attractive in future; besides that, the Group plans to secure access to the requisite conversion technologies.

In addition to its uranium operations, the Group is engaged in the manufacture of certain rare metal products, primarily tantalum and beryllium.

The Group has a stable financial position and positive cash flow from its operating activities. The Group expects to finance its operating activities and planned capital investments in existing production assets from its own funds and available debt financing facilities in the foreseeable future. At the same time, the Group shares a significant portion of the risk and cost of field development with joint-venture partners. The listing of Kazatomprom's shares on the Astana International Exchange (AIFC) and the London Stock Exchange, along with the availability of credit ratings, provide the Group with favourable conditions for accessing the capital markets.

Figure 1: NAC Kazatomprom JSC business model

 

 

COMPANY DEVELOPMENT STRATEGY

Kazatomprom's mission is to develop uranium deposits and the components of the uranium value chain, creating long-term value for all of the Company's stakeholders, in accordance with the principles of sustainable development.

Kazatomprom's vision is to become the preferred partner of the global nuclear industry. This vision allows the Company to operate in step with the priorities of its customers and partners in the industry.

In 2018, the Company adopted a new development strategy, focusing on five strategic objectives for 2018-2028:

•      Focus on uranium mining as the main activity;

•      Optimise production, processing and sales based on market conditions;

•      Create value by enhancing the marketing function and expanding sales channels;

•      Apply best practices in business activities;

•      Develop a corporate ethics culture commensurate with an industry leader.

 

·      Focus on mining operations as the core business. Kazatomprom's core business activity is uranium mining. The Company believes that mining - in particular, the ISR extraction method - is the most attractive segment of the nuclear-fuel value chain in terms of sustainable profitability and returns on capital. It further expects it to remain so for as long as current market fundamentals persist. The Company's access to ISR-conducive uranium deposits in Kazakhstan gives it a natural competitive advantage in ISR uranium mining. Accordingly, Kazatomprom intends to maintain its primary focus on its uranium mining operations, while retaining the option to expand its presence in other segments of the front-end cycle, such as conversion, as well as in its rare metals operations.   

To streamline its operations, Kazatomprom has progressively disposed of a significant number of non-core assets, including- more than 30 non-core subsidiaries over the past five years. Most recently, these included MAEK, the utility company, which accounted for a material portion of the Group's revenue (but a small share of profit) in the periods under review. The Company aims to complete its non-core asset disposal programme by the end of 2019.

 

Kazatomprom has also increased its interest in a select number of uranium mining joint ventures. Most notably, as of 1 January 2018, it increased its equity stake in its joint venture with Cameco, JV Inkai LLP, from 40% to 60%, while in December 2018, it raised its equity stake in Baiken-U LLP, a joint venture with the Energy Asia Limited consortium, from 5.0% to 52.5% and increased its equity interest in JV Kharasan-U LLP, a joint venture with RosAtom and Marubeni Corporation, from around 34% to 50%.

Kazatomprom is currently engaged in the construction of a fuel assembly plant in Kazakhstan together with China General Nuclear (CGN). Expansion into new segments of the nuclear value chain could allow Kazatomprom to offer a broader range of products to its customers and capture additional margins. The Company may consider further strengthening its market position by selectively acquiring or investing in high-quality assets in the nuclear-fuel chain.

 

·      Continue to pursue a market-centric approach to uranium production, optimizing production, processing and sales volumes based on market conditions.

In the past two years, Kazatomprom has substantially changed its strategic approach to become a market-centric, rather than a production-led operator. Crucially, this involves setting production targets based upon market and sales-volume forecasts, as well as adapting production plans to changing market conditions.

The Group's use of ISR technology allows it to respond to changes in uranium market conditions by ramping up or reducing its uranium production far more rapidly and cost effectively than most of its peers, which rely on conventional mining methods to develop non-ISR-amenable deposits. The Group's uranium deposits can be developed exclusively using ISR technology, giving it the flexibility to react rapidly to uranium market prices and adjust its production accordingly, without a meaningful impact on the per-unit cost of production.

For example, in the year ended 31 December 2017, the Group cut its uranium output by 8% from the previous year. In November 2017, it announced its intention to reduce its planned contractual obligations production volumes by 20% for 2018-2020. While the Company's production plans beyond 2020 currently envisage a return to 'pre-production-cut' levels, the Company enjoys full technical and legal flexibility to keep production at reduced levels if market conditions dictate, as long as any amendments to its subsoil-use agreements with the Government are approved.

·      Continue to enhance sales and marketing capabilities and optimise the contracts portfolio.

Kazatomprom has strengthened a number of areas of its sales and marketing function over the past two years. Notably, it has created a new sales channel through its wholly owned subsidiary THK in Switzerland, allowing it to engage with new categories of customer, such as US-based utility companies, which prefer to purchase uranium on the spot market. THK has also enhanced the Company's analytical capability, enabling it to undertake arbitrage operations, and facilitating its expansion into the short-term/spot market, which requires significant operational flexibility. Moreover, Kazatomprom has expanded its physical sales presence in each of its main target regions and will continue to strengthen this sales network.

In addition, with the launch of THK's operations in 2017, Kazatomprom became able to offer complex sales-formula pricing terms to its customers. The Company plans to build on these capabilities and offer customers a wider range of pricing options than it could before, due to certain limitations of Kazakhstan's legislation.

The Company stopped its sales to uranium traders in 2016, in line with its strategy to bypass intermediaries and build direct relationships with customers that are contracting smaller amounts.

·      Maintain global leadership in the uranium mining industry through operational excellence. 

Kazatomprom prides itself on being the world's leading uranium producer and seeks to build on this standing in future in terms of scale, operating efficiency and innovation. It intends to continue investing in the exploration and development of its reserve base to ensure sustainable low-cost production from its mines in the long term, while its current reserve base allows it to maintain current production levels for around 15 years.

The Company views its low production costs as a key competitive advantage and plans to work continuously on sustaining its attractive position on the global uranium-mining cost curve. Kazatomprom intends to achieve this by continuing to optimise its mining development plans and stringent cost controls. The Company takes a disciplined approach to production planning, focusing overwhelmingly on value and economic returns rather than maximizing production volumes.

Kazatomprom remains focused on the ongoing optimisation and digitalisation of its business processes and the further strengthening of its sales and marketing function. Kazatomprom continues to follow its Transformation Initiative for 2016 to 2025, aimed at increasing the transparency, efficiency and harmonisation of processes across the Company. 

·      Develop an ethics culture commensurate with an industry leader and continue to improve health, labour and environmental policies in line with global best practices. 

Kazatomprom is committed to best health and safety practices and these will remain of paramount importance to the management team going forward. Kazatomprom strives to be an employer of choice in Kazakhstan. It aims to ensure that its facilities are a completely safe working environment and that they are not inflicting damage on Kazakhstan's natural ecosystem. Furthermore, the Company has signed up to the international Vision Zero movement to promote zero work-related injuries and is focused on maintaining a low lost time injury frequency rate and the lowest possible level of occupational accidents. In 2016-2017 Kazatomprom stepped up its investment in health and safety from KZT 5.1 billion in 2015 to more than KZT 7.1 billion in 2017 and will continue to increase this investment in the coming years.

·      Another one of the Kazatomprom's strategic priorities is to ensure a balance between shareholder income and optimal capital structure. The Company runs high-margin and cash-generative operations with a relatively limited capital-expenditure profile for expansion and low leverage. Kazatomprom will, therefore, seek to pay dividends to its shareholders, while preserving a conservative balance-sheet structure that allows it to maintain a comfortable leverage level in case of adverse changes in commodity prices. The Company's dividend policy is to distribute no less than 75% of its free cash flow if the Company's leverage ratio is below or equal to 1.0x net debt/adjusted EBITDA and no less than 50% of its free cash flow if the ratio is above 1.0x and below 1.5x net debt/adjusted EBITDA.

 

 

 

 

Table 5. Review of Company development strategy implementation in 2018

 

Strategic goals

Steps towards strategic goal implementation in 2018

To focus on the core business

·      The acquisition of a 40.05% stake in Energy Asia (BVI) Limited (47.5% in Baiken-U LLP and 20% in Kyzylkum LLP) and 16.02% of the share capital of JV Kharasan-U LLP was completed.

·      The increase in reserves in 2018 amounted to 96,057 tonnes, including in category C1 - 50,747 tonnes, C2 - 45,310 tonnes.

·      A Portfolio of investment projects of the Company for 2018 have been formed in accordance with the key provisions of Investment Policy of the Company

To optimise production, processing and sales based on market conditions

·      Based on forecasts of uranium market needs for 2018, the Company reduced its volume of uranium mined by 20% relative to planned volumes for 2018 set out in its subsurface use contracts.

To create value by enhancing the marketing function and expanding the sales channels

·      The Company developed and implemented a methodological base of procedures, methods, questionnaires, and standard forms of purchase and sale agreements aimed at strengthening marketing functions.

·      Planned uranium sales revenue was exceeded by 5% due to an increase in the customer base, as the Company attracted new customers in the US, Europe and South Korea, expanded the geography of uranium supplies, stopped uranium sales to traders, sold uranium derivative instruments and optimised its uranium sales-contract portfolio.

To apply best practices in business activities

·      In the area of occupational safety, processes were put in place for conducting behavioural safety audits and for identifying hazardous conditions and actions, or potentially dangerous near-miss accidents. Some 1,800 audits were conducted and 6,200 near misses registered.

·      The use of alternative chemical reagents in the process of manufacturing finished uranium products achieved savings of KZT 109.2 million.

·      The economic effect of cost optimisation in the construction of production wells amounted to KZT 107.6 million.

·      The Company developed and approved its IT strategy.

·      The Company carried out a primary inventory of digitisation projects and created a list of future priority projects.

·      The Company is implementing a portfolio approach to investment activities, in this regards the methodology on the portfolio project management have been developed and approved in 2018.

·      Twelve business processes (some automated) were implemented in the Corporate Centre and its subsidiaries. As of the end of the year, coverage corresponded to 32% of all business-process reengineering planned until 2021, in accordance with the Company's transformation programme charter.

·      SAP ERP and EIS information systems were implemented in the Corporate Centre, as well as in certain individual subsidiaries and affiliates.

·      Supporting the International Social Security Association (ISSA) initiative to improve safety, health and well-being at work, the Company is registered as a member of the international Vision Zero program. This participation reflects the Company's conviction that a strong safety culture can reduce accidents, injuries and illnesses at work.

To develop an ethics culture commensurate with an industry leader

·      The Company updated and approved its Human Resources (HR) Policy for 2018-2028 based on global industry best practices, designing a system of principles, key directions, approaches and human-resource management methodology based on business needs.

·      The Company formulated and approved a system of corporate values and began its dissemination to employees.

·      The Company improved its corporate governance in accordance with best international practices (based on the recommendations of independent consultants), ensuring that its corporate-governance rating was maintained.

·      Educational programme has been deployed.

 

 

 

BUSINESS TRANSFORMATION

KAP3

In 2015, the Company and 12 of its subsidiaries embarked on a transformation initiative, with a view to implementing the principles set out by its then sole shareholder, Samruk-Kazyna. The principal aims of the transformation initiative were to improve transparency and operational efficiency, as well as to standardize and harmonise business processes, based on Samruk-Kazyna's reference model. As part of the initiative, in 2016, the Company developed a portfolio of 24 projects on various aspects of Kazatomprom's operations, such as production, procurement, resource management, and business planning and modelling efficiency. By 2017, it had implemented seven of these projects, including:

              A category-based procurement management system, allowing the Group to optimise its approach to procurement and achieve short- and long-term benefits, using approved category-based strategies. Kazatomprom implemented this strategy in the fuel and lubricants category and the power category.

 

              An information security model, designed to improve information security and incident management processes based on a Security Information and Event Management (SIEM) class control and analysis system. This allowed Kazatomprom to avail of unified systems, as well as the services and risk-oriented approach offered by the system.

              A targeted risk-management model, enabling Kazatomprom to automate risk-management processes, such as a risks registry, report monitoring, visualisation and prediction. These capabilities improved the Company's risk-analysis capabilities and keep senior management appraised of pertinent risks, ensuring timely reaction.

·      A sales and marketing model, designed to increase the Company's margins by improving its market perception, strengthening its sales and marketing capabilities, developing a better understanding of the strengths and weaknesses of both Kazatomprom and its competitors, and improving the Company's understanding of customer and potential customer needs.

In the first half of 2018, the Company's transformation programme was expanded by the inclusion of additional initiatives aligned with the master plan for implementing the Samruk-Kazyna's transformation programme for 2018-2021, approved by the Chairman of the Samruk-Kazyna Board on 14 May 2018.

 

Thus, in addition to the business-process reengineering initiative, in 2018, Kazatomprom's transformation programme included initiatives to:

·      Digitise business processes;

·      Simplify the legal structure;

·      Transform human capital;

·      Implement change management and a project management approach.

As part of the business-process reengineering initiative in 2018, the Company completed the following transformation initiative projects:

·      A new model of personnel management, aimed at ensuring the Company's compliance with the best practices in human-resource management, strengthening staff engagement, accumulating and preserving knowledge within Kazatomprom and enhancing the role of Kazatomprom corporate culture;

·      A new health and safety model, aimed at reducing the number of accidents at work by introducing the timely monitoring of potentially dangerous situations, by conducting behavioural safety audits at Kazatomprom facilities and by checking contractors for compliance with safety-monitoring requirements;

·      A new model of strategic planning and performance management, aimed at creating a unified process of strategic planning and performance management, creating a clear hierarchy of goals with a specified relationship to key performance indicators (KPIs). Motivational KPIs were then set for Company executives, subsidiaries and associates, all focused on achieving the Company's strategic goals, so as to meet its shareholders' expectations in the strategic long and medium term.

 

 

 

A number of IT systems were introduced in 2018:

·      In July 2018, the SAP Enterprise Resource Planning (ERP) system was put into commercial use in the Corporate Centre and Kazatomprom-SaUran LLP and, in December 2018, in the Trade and Transport Company LLP.

·      In October 2018, the integrated planning system was put into operation in the Corporate Centre and four enterprises (RU-6 LLP, the Ortalyk LLP production company, APPAK LLP and Kazatomprom-SaUran LLP).

·      In October 2018, the integrated planning system was put into commercial operation in the corporate centre and four enterprises (RU-6 LLP, Production Enterprise Ortalyk LLP, Appak LLP and Kazatomprom-SaUran LLP).

·      In December 2018, the Digital Mine system was piloted at Kazatomprom-SaUran LLP.

·      In December 2018, the IT service management (ITSM) system was launched in the Corporate Centre and in two Group enterprises (KAP Technology LLP and RU-6 LLP).

Based on the Transformation initiative projects implementation results the Company expects to gain economic benefits due to work efficiency increase.

Following the other initiative projects implementation in 2018a digitisation office was created, while seven subsidiaries and affiliates were removed from the structure. The company established a code of ethics and compliance with corporate values, along with a leadership development programme for 2019‒2020. Leadership-development modules were run for the CEO and CEO‒1 management levels. A company ethics analysis was conducted and a roadmap approved for corporate culture development in 2018‒2021.

As part of the plan to implement change management and a project approach, the change-management function was structured within the business transformation department. Professional requirements for employees in certain positions in the Corporate Centre and in subsidiaries were updated to reflect project-management competencies, and training was provided for the CEO, CEO‒1, CEO‒2 management levels on change and project management.

In 2019, the company plans to continue implementing the following key Transformation projects:

·      SAP ERP replication in the Company's production facilities;

·      An integrated planning system in production companies of the second wave; and

·      Digital Mine replication in two mining facilities.

Under the digitisation framework, there are plans to diagnose business problems, to identify potential growth with the need for digitalisation, to develop a portfolio of projects of digitalisation and to start implementing them.

As part of the plan to transform people, the Company plans to continue its work on the development of a corporate ethics culture and to train at least 60% of management at CEO ‒1, ‒2 and ‒3 levels on the leadership development programme.

To implement change management and project management approach, the Company plans to adapt and approve change- and project-management standards, update change management competencies and incorporate the Corporate Centre and subsidiaries (included in the perimeter of the transformation) into the corporate model, training mid- and lower-level corporate managers in the Corporate Centre and subsidiaries on project and change management.

 

 

 

LISTING INFORMATION

102-5

In November 2018, the Company listed its shares and global depositary receipts (GDRs) on the Astana International Exchange (AIX) and London Stock Exchange (LSE), respectively.

The successful placement occurred despite vulnerable market conditions characterised by high volatility. For example, in the second half of 2018 some 17 IPO transactions in the EMEA region were cancelled.

The Company's IPO attracted significant interest among investors evidenced by the existence of top-tier international investors amongst the Company's new shareholders.

 

Table 6. Share and GDR listings

Instrument

Currency

ISIN

Astana International Exchange (AIX)

London Stock Exchange

(LSE)

Ordinary shares

KZT

KZ1C00001619

KAP

 ‒

Global depositary receipts (GDRs); 1 GDR corresponds to 1 ordinary share

USD

US63253R2013

 

 

KAP.Y

KAP

 

There are a total 259,356,608 Kazatomprom shares in issue (including those represented by the GDRs), of which 14.92% are in free circulation and the remaining 85.08% are owned by the state-run Sovereign Wealth Fund Samruk-Kazyna. The shares and GDRs were listed in November 2018 in connection with the initial public offering (IPO) of Kazatomprom, priced at USD 11.60 per GDR, or the equivalent KZT 4,322.74 per common share, on the day of announcement. Consequently, at the time of the IPO, the Company's market value (capitalisation) was around USD 3 billion. The value of the placed shares (including those represented by the GDRs) was about USD 450 million.

 

 

 

ABOUT KAZAKHSTAN

Key facts

The Group's activities and assets are predominantly concentrated in Kazakhstan. Kazakhstan became an independent sovereign state in 1991 following the collapse of the USSR. Since then, the country has undergone large-scale changes, transitioning from a centralised command economy and embracing a market-based model of economic development. Kazakhstan is a unitary state with a presidential form of government. According to its constitution, the country is a democratic, secular, legal and social state, the highest values of which are the person, their life, rights and freedoms. The President of the Republic of Kazakhstan is the head of state, its highest official, who determines the main directions of domestic and foreign policy and represents Kazakhstan at home and abroad. 102-4

·      The population is approximately 18.4 million people (as of 1 January 2019).

·      The capital city is Nur-Sultan (previously Astana, renamed in March 2019), with a population of more than 1 million people.

·      The largest city is Almaty, with a population of 2 million.

·      The ethnic makeup of the population is one of the most multinational in the world: Kazakhs - 67.5%, Russians - 19.8%, Uzbeks - 3.2%, Ukrainians - 1.5%, Uigurs - 1.5%, Tatars - 1.1%, other - 5.6%).

·      The ratio of urban to rural dwellers is about 58:42.

·      The national currency is the tenge (₸), denoted internationally as KZT.

·      As of 31 December 2018, the exchange rate was KZT 384.2per USD 1.

·      Gross domestic product (GDP) per capita is USD 9,331 (2018).

·      GDP growth in 2018 was 4.1%.

·      The territory spans 2,724,900 square kilometres. It shares borders with the Russian Federation, China, Kyrgyzstan, Uzbekistan and Turkmenistan. Its land border stretches 13,200 km.

·      Kazakhstan's main trading partners are the Russian Federation, China, the countries of the European Union and the Commonwealth of Independent States (CIS).

·      Kazakhstan has 67% of the world's proven uranium reserves suitable for mining by the ISR method.

·      According to World Bank and International Finance Corporation Doing Business Survey for 2019, Kazakhstan ranks 28th in the world for the ease of doing business, the best in its region.

·      Kazakhstan is a founder member of the Eurasian Economic Union (EEU), which includes Russia, Belarus, Armenia and Kyrgyzstan.

·      The volume of foreign investment in Kazakhstan since 1991 has totalled about USD 300 billion.

 

Republic of Kazakhstan credit ratings as of 31 December 2018

Moody's: Baa3 (Stable) - October 2018

S&P: ВВВ- (Stable) - September 2018

Fitch: BBB (Stable) - September 2018

The Republic of Kazakhstan is a huge country located in Central Asia, occupying an area roughly equivalent to ​​Western Europe. It has enormous mineral reserves and considerable potential for economic growth. Kazakhstan's resource base comprises more than 5,000 mineral deposit sites, the value of which is estimated in the tens of trillions of dollars. Of the 105 elements of the periodic table lying beneath the country's surface, 99 have been identified. Seventy deposits have been explored and more than 60 elements have been in production. Currently, there are 493 known deposits, containing 1,225 types of mineral raw material.

 

Table 7. Kazakhstan's mineral deposits by global ranking

 

RESOURCE

global ranking

ZINC, TUNGSTEN STEEL, BARITES

1

SILVER, PLUMB, CHROMITE, URANIUM

2

COPPER, FLUOR

3

MOLYBDENUM

4

GOLD

6

COAL

7

PETROLEUM

12

GAS

24

Source: Committee of Geology and Subsoil Use of the Ministry of Investment and Development of the Republic of Kazakhstan, Statistical Review of British Petroleum.

Geological and economic assessments of the mineral reserves of Kazakhstan show coal, oil, copper, iron, lead, zinc, chromites, gold and manganese to have the greatest weight in terms of economic importance. Ores of ferrous and non-ferrous metals mined in Kazakhstan are exported to Japan, South Korea, the US, Canada, Russia, China and the EU.

 

Kazakhstan depends on neighbouring states for access to world markets; its main exports are uranium (all of the Group's uranium products are exported), oil, natural gas, steel, copper, ferroalloys, iron ore, aluminium, coal, plumb, zinc and wheat. Thus, good neighbourly relations are crucial to realizing export opportunities.

 

Kazakhstan is a country with a fast-growing economy and a long-term development plan. From 2005 to 2017, average GDP growth was about 9%. All national economic, social and international policy is implemented in accordance with the country's plan for sustainable long-term development. The main goal of the Government's Kazakhstan 2050 strategy is to join the world's 30 most developed countries by 2050.

 

Kazakhstan is committed to the principles of economic liberalisation. The national privatisation programme will have reduced the percentage of state participation in the economy by 2020. In the World Bank's Ease of Doing Business rankings for 2019, Kazakhstan came in top in the region, polling in 28th place globally, ahead of Russia (31st), Turkey (43rd), Kyrgyzstan (70th) and China (46th) and just a little behind Azerbaijan (25th).

 

Between 2005 and 2018, foreign direct investment in Kazakhstan exceeded USD 280 billion.

 

To develop the country's financial-services sector and improve the region's access to international capital markets, Kazakhstan has established a financial hub - the Astana International Financial Centre (AIFC) - with a special legal regime based on English law. The main AIFC strategic priorities are the development of the capital market, asset management, wealth management (private banking for high net worth individuals), financial technologies and Islamic finance. In 2018, the Astana International Exchange (AIX) came into operation and commenced trading with the placement of securities of NAC Kazatomprom JSC.

 

Sources: Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstan, World Bank, World Trade Organization, BP Statistical Review, International Monetary Fund, Kazakh Invest.

 

 

 

ABOUT THE COMPANY

 

ACTIVITY PROFILE

§ Geological exploration

§ Natural uranium mining

§ Uranium products: natural uranium concentrate, ceramic-grade uranium dioxide powders and fuel pellets

§ Bulk concentrate of rare-earth metals

§ Beryllium, tantalum, niobium products

§ Science, social security and personnel training

 

MAIN PRODUCTS

Table 8: Main product characteristics

Uranium products

-     Uranium mining; reprocessing and sale of uranium products

Beryllium products

-     Production and sale of beryllium products; research and development

Tantalum products

-     Production and sale of tantalum products; research and development

Energy resources

-     Production and sale of electrical power, heating and water

Other

-     Sale of products and services connected to main production activities

102-2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPANY HISTORY

For more than 60 years, Kazakhstan has been a key global supplier of raw materials and components for nuclear fuel. Some of the entities that currently belong to Kazatomprom subsidiary Ulba Metallurgical Plant JSC (UMP) began operating in 1949 and have been involved in the production of uranium products since 1954. In 1996, JV Katco LLP and JV Inkai LLP (subsequently transferred to the Company) were launched as joint ventures with Areva (now Orano) and Cameco, respectively.

The Company was established in 1997 by decree of the President of the Republic of Kazakhstan, as the national operator of Kazakhstan's nuclear fuel industry. Since inception, the Company has adhered to the principles of the non-military use of atomic energy, supplying the produced uranium and uranium products only under the guaranty that a customer is not engaged in the utilisation of uranium or uranium products for military purposes. A brief history of the Company is provided below:

 

1997                    The Company is established. Kazatomprom is the 13th largest uranium miner globally in volume terms. The Company buys a stake in JV Inkai LLP, a Group joint venture with Cameco.

2000                    The Group becomes the world's sixth-largest producer of uranium in volume terms, according to the NEA, IAEA and Red Data Book. The Group launches tantalum and beryllium production, focused on peace-time production.

2002                    The Group extends the reach of its uranium product sales to include the US and European markets. It also enters the Chinese and South Korean markets.

2003                    The Group is now the world's second-largest producer of beryllium (29% of world production) and the fourth-largest producer of tantalum in volume terms.

2007                    The Сompany is assigned a credit score for the first time.

2010                    The Group becomes the world's largest uranium producer in volume terms, according to the NEA, IAEA and Red Data Book.

2012                    The Group commissions a sulphuric acid plant with an annual capacity of 500,000 tonnes.

2013                    Through equity participation, the Group gains access to the enrichment plants of Urals Integrated Electrochemical Plant JSC and the International Uranium Enrichment Centre (IUEC) with respective annual separation capacities of 2.5 million and 60,000 tonnes.

2015                    The Group enters into a strategic agreement on commercial terms with CGNPC for the design and construction of a fuel assembly plant and the joint development of uranium deposits in Kazakhstan. UMP JSC takes over as operator of the bank of low enriched uranium in the Republic of Kazakhstan, established under the umbrella of the IAEA.

2016                    The Group undertakes an asset restructuring programme.

2017                    Trading Company Kazakatom AG (THK - Trade House Kazakatom AG), a new trading company established in Switzerland, begins operations.

2018                    The Company lists its ordinary shares and global depository receipts (GDRs) on LSE and AIX.

The Company's Board of Directors adopted a new development strategy focusing on five key elements: (i) reorientation to the core area of focus; (ii) optimisation of production, processing and sales volumes based on market conditions; (iii) value creation by expanding sales and marketing; (iv) introducing advanced business processes; and (v) fostering the corporate culture of an industry leader.

 

 

COMPANY ASSET STRUCTURE

In this document, 'the Group' refers to the Company and its consolidated subsidiaries, i.e. the companies that the Group controls by having (i) the power to direct activities that significantly affect their returns, (ii) exposure or rights to variable returns from its involvement in those entities, and (iii) the ability to use its power over these entities to affect the level of Group returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity.

The Group, with its Associates and Joint Ventures ("JVs"), are collectively referred to as "the Holding".

 102-1 102-10 102-7

 

Main assets and corporate structure

The Holding's main assets are:

•      Subsoil use contracts that grant Group subsidiaries mining rights in respect of 9 uranium deposits located in the Chu-Sarysu and Sirdariya regions, in which there were combined proven and probable ore reserves containing 234,000 tonnes of UME, as well as measured and estimated mineral resources containing 374,200 tonnes of UME as of 31 December 2018;

•      Subsoil use contracts that grant joint ventures and associates of the Group mining rights in respect to 11 uranium deposits located in the Chu-Sarysu and Sirdariya regions, in which proven and probable ore reserves are registered on a 100% basis in the amount of 286,600 tonnes of UME and total mineral resources (including measured, estimated and pre-estimated mineral resources) in the amount of 365,800 tonnes of UME as of 31 December  2018;

•      Thirteen uranium production companies, out of which 5 are subsidiaries (excluding Baiken-U LLP) and 8 JVs and associated companies of the Group;

•      Ulba Metallurgical Plant JSC, a facility for  the production of uranium products and rare-earth metals, with an annual capacity of 3,728 tonnes of U3O8, 317 tonnes of UO2 powder made from UF6, 155 tonnes of UO2 powder made from scrap and 108 tonnes of fuel pellets, as well as 1,626.9 tonnes, 141.9 tonnes and 25.2 tonnes of products from the rare earth metals beryllium, tantalum and niobium, respectively;

•      Uranium trading subsidiary, Trade House Kazakatom AG (THK), located in Zug, Switzerland; and

•      Ancillary enterprises, including:

two sulphuric acid production plans, with an aggregate annual production capacity of 680,000 tonnes;

Volkovgeologia JSC - a company that conducts geological work and technological drilling; and

A transport and logistics company serving the assets of the Group.

The following table lists the Group's subsidiaries, JVs, joint operations (JOs) and associates as of 31 December 2018. In all cases, the share is equal to the Group's voting rights, with the exception of Ulba Metallurgical Plant JSC and Volkovgeologia JSC, in which the Group has 100% voting rights.

Table 9: Holding's subsidiaries, JVs, JOs and associates (31 December 2018)

Treatment

Name

Share (%)

Uranium mining and processing

Subsidiaries

Ortalyk LLP

100.00

Kazatomprom-SaUran LLP(1)

100.00

RU-6 LLP(1)

100.00

APPAK LLP

65.00

JV Inkai LLP(2)

60.00

Baiken-U LLP (4) (5)

52.50

Joint ventures

JV Budenovskoye LLP

51.00

Semizbai-U LLP

51.00

Joint operations

JV Akbastau JSC (3)

50.00

Karatau LLP (3)

50.00

Associates

JV Katco LLP

49.00

JV South Mining Chemical Company LLP

30.00

JV Zarechnoye JSC

49.98

JV Kharasan-U LLP (4)

50.00

Kyzylkum LLP (5)

50.00

     Zhanakorgan-Transit LLP (6)

60.00

Energy Asia (BVI) Limited (4) (5)

40.05

 

 

 

Nuclear fuel cycle and metallurgy

Subsidiaries

Ulba Metallurgical Plant JSC

90.18

     ULBA-CHINA Co Ltd(6)

100.00

     Mashzavod JSC(6)

100.00

     Ulba FA LLP(6)

51.00

 

 

 

Nuclear fuel cycle

Joint ventures

Uranium Enrichment Centre JSC

50.00

     Ural Electrochemical Integrated Plant JSC(6)

25.00

Investments

International Uranium Enrichment Centre JSC

10.00

 

 

 

Ancillary operations

Subsidiaries

High Technology Institute LLP

100.00

KazakAtom TH AG

100.00

KAP-Technology JSC

100.00

Trading and Transportation Company LLP

99.99

Volkovgeologia JSC

90.00

     Rusburmash-Kazakhstan LLP(6)

49.00

Korgan-KAP LLP

100.00

Power System International Limited (5)

100.00

Joint ventures

SKZ-U LLP

49.00

Uranenergo LLP

48.54

     Shieli-Energoservice LLP(6)

99.75

     Taukent-Energoservice LLP(6)

99.75

     Uranenergo-PUL LLP(6)

100.00

Associates

JV SKZ Kazatomprom LLP

9.89

       

 

 

 

1 The Company transferred its rights and obligations under the subsoil use licences relating to Kanzhugan, Southern Moinkum, Eastern Mynkuduk and Uvanas deposits, along with the associated production assets to Kazatomprom-SaUran LLP and its rights and obligations under the subsoil use licences relating to the Southern and Northern Karamurun deposits, to RU-6 LLP, in November 2018. Rights and obligations under the subsoil use licence relating to Central Moinkum are planned to be transferred to Kazatomprom-SaUran LLP in 2019.

2 The Company increased its interest in JV Inkai LLP from 40% to 60% and started fully consolidating this entity in its financial statements with effect from 1 January 2018.

3 JV Akbastau JSC and Karatau LLP were classified as joint operations with effect from 1 January 2018.

4 On 13 December 2018, the Company completed the acquisition of 40.05% of the shares in EAL and a 16.02% stake in the issued capital of JV Kharasan-U LLP from Energy Asia Holdings (BVI) Limited.

As a result of these transactions, the Company increased its interests in Baiken-U LLP from 5% to 52.5% (direct ownership 5%, indirect ownership through Energy Asia (BVI) Limited 47.5%), its interest in JV Kyzylkum LLP from 30% to 50% (direct ownership 30%, indirect ownership through Energy Asia (BVI) Limited 20.0%) and in JV Kharasan-U from 33.98% to 50% (direct ownership).

5 The Company holds 100% (direct ownership) of Power System International Limited (PSIL) and 40.05% (direct ownership) of Energy Asia (BVI) Limited. PSIL holds 9.95% (direct ownership) of Energy Asia (BVI) Limited. Energy Asia (BVI) Limited holds 40% (direct ownership) of Kyzylkum LLP and 95% (direct ownership) of Baiken-U LLP.

6 These companies are third-level entities for the Company through interests in the subsidiaries, JVs and associates presented above these companies in the table.

 

 

The following assets are currently for sale or subject to restructuring:

Table 10: Assets for sale or subject to restructuring

Treatment

Name

Share (%)

Alternative Energy

Subsidiaries

Kazakhstan Solar Silicon LLP(7)

100.00

MK KazSilicon LLP(7)

100.00

Astana Solar LLP(7)

100.00

Nuclear fuel cycle

 

 

Joint venture

JV UKR TVS Closed Joint Stock Company

33.33

Auxiliary operations

Associates

 Caustic JSC(8)

40.00%

       

 

7 The Company intends to dispose of its interests in Astana Solar LLP, MK KazSilicon LLP and Kazakhstan Solar Silicon LLP before the end of 2019.

8 The Company intends to dispose of its entire block of shares in Caustic JSC before the end of 2020.

 

 

 

GEOGRAPHY AND TARGET MARKETS

Mineral assets

KAP4

 

The Company's mineral assets are located in four main administrative regions of Kazakhstan (Figure 2): the Kyzylorda Region (Shieli and Zhanakorgan districts), the Turkestan Region (Sozak and Otyrar districts), the North Kazakhstan Region (Ualikhanov district) and the Akmola region (Enbekshilder district) (Figure 2).

 

Figure 2: Location of mineral assets and mining and processing facilities

 

 

Uranium deposits in Kazakhstan are grouped into six uranium provinces (Figure 3).

 

Figure 3: Kazakhstan's uranium provinces and distribution of uranium reserves  

 

 

 

 

With the exception of the Semyzbay field in Northern Kazakhstan, which is located in the North Kazakhstani and Akmola regions, the Company's fields are located in the south of Kazakhstan in the Shu-Sarysu (8) and Syrdarya (5) provinces. All mines are located in areas that are sparsely populated and have minimal vegetation cover. Natural vegetation in mine areas varies from desert to shrub and steppe. Only six mines are located within 10km of human settlements, all of them villages. In all regions, the climate is continental, with hot summers, harsh winters and little rainfall (300mm or less).

 

 

Uranium products market

KAP2

 

The key factor affecting the Company's financial results is the sales price for uranium products, as the uranium segment accounted for 84% of consolidated revenues in 2018.

Although the average annual sales price of a uranium producer depends upon the structure of sales (in particular, the share of deliveries under long-term contracts and price formulae used in each contract), in the long term, the market price for uranium products is determined by the balance of supply and demand. Based on the opinion of industry experts, Kazatomprom expects that in the long term, nuclear power, as a stable source of meeting base-load electricity demand not associated with greenhouse gas emissions, will maintain and strengthen its position in the overall structure of growing energy production, which will ensure growth in demand for uranium energy products. This, in turn, will lead to a rise in prices for these products from current levels; prices have been depressed by declining demand for uranium following the accident at the Fukushima power station in 2011, against a backdrop of rising global uranium production in previous years. A detailed analysis of factors affecting the price of uranium products is provided in the 'industry overview' section of the Kazatomprom IPO Prospectus.

Figure 4: Spot prices for uranium, 2000-2018

 

Source: UxC

On the demand side of the uranium products market in 2018, multidirectional factors were at play. Consumer sentiment was dented by uncertainty surrounding the ongoing investigation under Section 232 of the United States Trade Expansion Act, which could limit the access of US operators of nuclear power plants to imported uranium if it were to lead to the introduction of quotas or customs duties. In terms of the prospects for introducing additional generating capacity, demand for construction during the year was affected, on the one hand, by the delay in the construction of a nuclear reactor in the United Arab Emirates and the slow pace of restarting Japan's reactors and, on the other, by a delay in plans to reduce the proportion of nuclear energy in France and popular opposition to plans to abandon nuclear power in Taiwan and South Korea. The persistence of an uncertain situation on the demand side led to low activity in the market for medium-term and long-term contracts: the long-term U3O8 price stagnated at around USD 30 per pound, with a small volume of purchases - just over 90 million pounds of U3O8 - significantly less than annual consumption.

On the supply side, an important factor was the reduction in supply and investment in the expansion of uranium production from the largest global producers, including Kazatomprom, as well as in supply from secondary sources. As a result, after a long period of market oversupply, in 2018, there was a shift towards market balance, or even a small deficit. As a result, in the spot market in 2018, there was an increase in price from USD 24 to almost USD 29 per pound of U3O8, with high trading volumes.

Realisation and sales

102-6 102-9 102-10

Customers

The Group sells its products to more than 22 customers in 11 countries. In 2018, the Company's top three and top five uranium-product customers accounted for 45% and 62% of Group revenues, respectively.

In May 2018, the Company entered into a supply agreement with Yellow Cake plc, a long-term corporate buyer and holder of uranium, listed on LSE AIM. Under the agreement, the Company initially supplied 8.1 million pounds (or about 3,112 tonnes) of U3O8 worth USD 170 million and Yellow Cake will have the right to purchase additional U3O8 to a cap of USD 100 million annually from 2019 to 2027.

The Group estimates that there are around 70 end-users of uranium globally. The company is seeking to expand its client base and is negotiating with potential customers in Europe, North and South America and the Middle East.

The following table shows the geographical distribution of customers for the Group's uranium products by revenue for the calendar years 2015 to 2018.

Table 11: Group sales of uranium products by region, 2015‒2018 (%)

Regions

Year ended December 31

2018

2015

2016

2017

China……………………………………………………………………….

44%

47%

60%

34%

Europe……………………………………………………………………...

19%

16%

18%

9.2%

India………………………………………………………………………..

-

11%

8%

23.2%

South Korea..………………………………………………………………

3%

6%

4%

-

USA………………………………………………………………………..

20%

12%

4%

4.5%

Other(1)……………………………………………………………………..

14%

8%

6%

29.1%

Total……………………………………………………………………….

100%

100%

100%

100%

     

·     Sales to other countries, to uranium funds and THK sales on the cash market

 

Realisation and marketing

In 2017, Kazatomprom established Trading House Kazakatom AG (THK), a subsidiary trading company based in Switzerland, to improve the Company's marketing function, strengthen its cooperation with partners, facilitate sales of uranium and uranium products in Kazakhstan and, more generally, increase the Company's global reach. THK's key activities are:

•     The sale and purchase of uranium in the cash market with the aim of generating additional profit, thanks to THK's quick decision-making procedures;

•       Assistance in creating additional liquidity in the spot uranium market and improving the reliability of the Kazatomprom portfolio of contracts for uranium mining; and

•     Improving the global reach of the Company in the uranium market by offering a wider choice of pricing and contractual structures and providing additional market tools for Kazatomprom customers, such as offer kits and more flexible pricing structures.

 

Since its launch, THK has helped Kazatomprom to enjoy some tangible benefits in the uranium market. Notably, THK achieved additional spot sales on the cash market of more than USD 80 million for the year ended 31 December 2018. THK also acquired new customers for the Company during this period and concluded a number of long-term contracts for the supply of uranium (with the term of some contracts concluding in 2029).

 

The Company believes that, due to the scope of work and coverage of THK, the Company can more easily understand both sides of the global uranium market: the demand side, as the leading producer and seller of natural uranium, and the supply side. As a result, Kazatomprom can get a better sense of the market, improving its analytical capabilities and allowing management to make more informed decisions.

 

Transportation

102-9

Transportation of U3O8 is carried out in special 20-foot sealed containers and any such load is accompanied by security personnel until it reaches its destination. The Company insures risks associated with the transportation of uranium.

The Group delivers U3O8 and finished products to the following destinations for conversion or to end customers:

·    Western countries. The Group transports U3O8 to companies such as ConverDyn (US), Cameco (Canada) and Comurhex (France) by rail to the port of St. Petersburg in Russia, then by sea to various ports in the US, Canada and Europe, then, finally, by rail or road to the processing facilities in question. In some cases, the Group enters into swap (exchange) agreements to reduce transportation costs. These can include the exchange of U3O8 with partners of the Group at the conversion facility.  Please see the following section on 'realisation and sales' for more.

·    China. When transporting materials to China, the Company delivers its cargo to the Alashankou railway station near the Kazakhstan-China border.

·    Russia. When shipping to the Russian Federation - recipients include Angarsk Electrolysis and Chemical Combine OJSC (AECC)), Siberian Chemical Combine OJSC (SCC) and Chepetsk Mechanical Plant OJSC (Rosatom) - the Group delivers its cargo to the Sukhovskaia railway station for delivery to AECC in Angarsk, to the Tomsk-2 railway station for delivery to the Siberian Chemical Combine in the city of Seversk, and to the Glazov railway station for delivery to the base of the Chepetsk Mechanical Plant OJSC (Rosatom) in Glazov.

·      India. The company delivers U3O8 to destinations in India by rail to the port in St. Petersburg, Russia, and then by sea to the port of Mumbai, India. From the port of Mumbai, the client organises their own transport to the destination.

 

The average cost of shipping products to specified destinations ranges from USD 0.5 to USD 3.0 per kilogram of U3O8.

As far as possible, the Group tries to enter into swap agreements to minimise delivery times (physical transportation of materials takes, on average, 100 days, while deliveries under swaps agreements take, on average, 25 days), transportation costs and the risks associated with transporting uranium products.

 

 

ASSOCIATION MEMBERSHIP AND INTERNATIONAL COMPLIANCE

Kazatomprom is an active member of a number of professional industrial nuclear power organisations:

102-13

§ World Nuclear Association, London, United Kingdom

Website: http://www.world-nuclear.org.

Member since 1993

 

§ World Nuclear Fuel Market Norcross, Georgia, USA

Website: http://www.wnfm.com.

Member since 2002

§ Nuclear Society of Kazakhstan, Nur-Sultan, Republic of Kazakhstan

Website: http://www.nuclear.kz.

Member since 2002

§ Tantalum-Niobium International Study Centre, Brussels, Belgium

Website: http://www.tanb.org.

Member since 1999

§ Nuclear Energy Institute                   Washington, DC, USA

                              Website: http://www.nei.org

Member since 2018

 

 

The Company strictly observes key agreements in relation to the peaceful use of nuclear energy to which the Republic of Kazakhstan is party: 102-12 103-2

 

 

 

Table 12. International agreements on the peaceful use of nuclear energy to which Kazakhstan is party

 

Document

Place and date of signing

Date of effect

Agreement on the Privileges and Immunities of the IAEA

 

Vienna,

1 June 1959

Law of the Republic of Kazakhstan No. 178-I of 30 October 1997 on ratification

Convention on the Physical Protection of Nuclear Material and Nuclear Facilities

 

Vienna, New York

3 March 1980

Law of the Republic of Kazakhstan No.17 of 22 December 2004 on joining

Law of the Republic of Kazakhstan No. 416-IV of 19 March 2011 on ratification of the amendment to the Convention

Convention on Early Notification of a Nuclear Accident

 

Vienna,

26 September 1986

Law of the Republic of Kazakhstan No. 243-IV 

of 3 February 2010

on ratification, effective 9 April 2010

Convention on Assistance in the case of Nuclear Accident or Radiological Emergency

 

Vienna,

26 September 1986

Law of the Republic of Kazakhstan No. 244-IV of February 03, 2010 on ratification,

effective 9 April 2010

Agreement on Basic Principles of Cooperation in Peaceful Uses of Atomic Energy (of CIS member-states)

Minsk, 

26 June 1992

Effective the day of signing

Treaty on the Non-Proliferation of Nuclear Weapons (NPT)

(Washington, London, Moscow, Geneva, 1 July 1968)

 

13 December 1993

Supreme Council Regulation of the Republic of Kazakhstan of 13 December 1993, No. 2593-XII, on joining, effective the day of signing

Convention on Nuclear Safety

 

Vienna, 17 June 1994

Act of the Republic of Kazakhstan, 3 February 2010, No. 245-IV on ratification, effective 8 June 2010

Memorandum on security guarantees in connection with the accession of the Republic of Kazakhstan to the Treaty on the Non-Proliferation of Nuclear Weapons

5 December 1994

Effective the day of signing

 

Agreement on the Application of Safeguards in Connection with the Treaty on the Non-Proliferation of Nuclear Weapons, signed between the Republic of Kazakhstan and the IAEA

Almaty, 19 June 1995

Decree of the President of the Republic of Kazakhstan of 19 June 1995, No. 2344

Comprehensive Nuclear-Test-Ban Treaty

New York,

30 September 1996

Law of the Republic of Kazakhstan of 14 December 2001, No. 270, on ratification

Joint Convention on the Safety of Turning Wasted Production and on the Safety of Radioactive Waste Management

Vein,

5 September 1997

Law of the Republic of Kazakhstan of 3 February 2010,

No. 246-IV, on ratification, effective 8 June 2010

International Convention for the Suppression of Acts of Nuclear Terrorism

(General Assembly of the United Nations 13 April 2005)

New York,

14 September 2005

Law of the Republic of Kazakhstan of 14 May 2008, No. 33-IV, on ratification

Central Asian Nuclear-Weapon-Free Zone Treaty

 

Semipalatinsk

8 September 2006

 

Approved by Decree of the President of the Republic of Kazakhstan, No. 176 of 7 September 2006

Law of the Republic of Kazakhstan No. 120-IY of 5 January 2009 on ratification  

Additional Minutes to the Agreement between Kazakhstan and the IAEA for application of safeguards in connection with the Treaty on the Non-Proliferation of Nuclear Weapons

2007

Law of the Republic of Kazakhstan, No. 229, of 19 February 2007

Vienna Convention on Civil Liability for Nuclear Damage 1997 (Consolidated text of Vienna Convention on Civil Liability for Nuclear Damage of 21 May 1963, as amended per the Minutes of 12 September 1997)

February 2011

Law of the Republic of Kazakhstan, No. 405-IV,

of 10 February 2011 on ratification, effective 29 June 2011

 

 

OPERATING AND FINANCIAL REVIEW

 

This Operating and Financial Review is intended to assist with understanding and assessment of trends and significant changes related to the operations and financial position of NAC Kazatomprom JSC ('the Company' or 'Kazatomprom'). This review is based on the audited consolidated financial statements of the Group, in each case without material adjustment, unless otherwise stated. It should be read in conjunction with those statements and the accompanying notes, in addition to the Kazatomprom Q4 2018 operations and trading update, and other Company reports. All financial data and discussions thereof are based upon the audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS), unless otherwise indicated.

 

SIGNIFICANT FACTORS AFFECTING GROUP OPERATING RESULTS

The significant factors affecting the Group's operating results for 2017 and 2018, which the Company expects to continue to affect the Group's operating results in future, include:

•       The price received for the sale of natural uranium and changes in natural uranium product prices;

•       Changes in the Group structure;

•       The impact of changes in exchange rates;

•       Taxation, including mineral extraction tax;

•       The price and availability of sulphuric acid;

•       The impact of changes in ore reserves estimates; and

•       Transactions with JVs and associates.

 

 

Changes in natural uranium product prices

Spot market prices for U3O8, the Group's main marketable product, have the most significant effect on Group revenue. The majority of Group revenue is derived from sales of U3O8 in the spot market and from contracts with price formulas referencing the spot price. In addition to spot prices, the Group's effective realised price depends on the proportion of contracts in the portfolio with a fixed price component in a given period. The average realised price for each period can, therefore, deviate from the prevailing spot-market price.

Table 13. Average spot-market and realised prices per pound of U3O8

 

 

 

2017

2018

Change

 

Average market spot price (per lb U3O8)

USD

 

22.07

24.64

12%

 

 

KZT

 

7,196

8,497

18%

 

Average realised price by the Group (per lb U3O8)

USD

 

23.85

24.46

3%

 

 

KZT

 

7,779

8,435

8%

 

Average realised price by Kazatomprom (per lb U3O8)

USD

 

24.15

24.37

1%

 

 

KZT

 

7,874

8,406

7%

 

 Source: Market prices per UxC LLC

 

Change in Group structure

In 2018, the Group completed several projects that resulted in a change in accounting treatment:

·    The Group's shareholding in JV Inkai LLP increased from 40% to 60%, effective 1 January 2018, resulting in a change in accounting treatment from equity to full consolidation.

·      Agreements were signed with Uranium One Inc., under which the Company and Uranium One Inc. have the obligation to purchase all of the output of JV Akbastau JSC and Karatau LLP on equitable terms, with financing of the joint arrangements in proportion to their shareholdings. As a result, the Group's investments in these two operations were reclassified as JOs in the consolidated financial statements and accounted for by recognizing the Group's direct right in joint assets, liabilities, income and expenses in proportion to its ownership, effective 1 January 2018. 

In accordance with IFRS, the Group assessed the fair values of the assets and liabilities acquired in the above business combinations of JV Inkai LLP, JV Akbastau JSC and Karatau LLP, resulting in a net gain of KZT 313.5 billion being recorded in the 2018 statement of profit and loss.

·      In December 2018, the Company increased its interest in JV Kharasan-U LLP (from 34% to 50%), its effective interest in JV Kyzylkum LLP (from 30% to 50%) and its effective interest in Baiken-U LLP (from 5% to 52.5%). The company expects to fully consolidate the results of these operations, except for JV Kyzylkum LLP, once the agreements are finalised in 2019. The fair-value assessments of the assets and liabilities acquired in these transactions have yet to be completed and, accordingly, no gain or loss was recognised in 2018.

During the periods under review, the Group also disposed of seven non-core assets: 102-49

·      In July 2018, the Company transferred its entire interest in MAEK-Kazatomprom LLP to its then sole shareholder, Samruk-Kazyna, resulting in the elimination of the Group's Energy segment. This transaction was cash neutral, as an amount equivalent to the sale proceeds was paid to Samruk-Kazyna as a dividend in 2018.

·      That entity has a utilities business and owns a non-operating BN-350 nuclear reactor, which is currently being decommissioned. In accordance with the sale and purchase agreement, in relation to its period of ownership of MAEK-Kazatomprom LLP, the Group:

• is not exposed to any liabilities associated with the reactor, unless caused by the Group's gross negligence or intentional guilty actions; and

• may be responsible for financial and environmental liabilities that may be identified in future periods relating to the utilities business.

Management believes that the Group had no obligations under this agreement as of 31 December 2018 and, accordingly, no liability is recognised in the consolidated financial statements.

·      In June 2018, the Company transferred its entire block of shares in Kazakhstan Nuclear Power Plants JSC to its then sole shareholder, Samruk-Kazyna. This transaction was also cash neutral.

·      In December 2018, the Company entered into an advisory and consulting services agreement with Samruk-Kazyna in relation to MAEK-Kazatomprom LLP and Kazakhstan Nuclear Power Plants JSC. According to the agreement terms, the Company will provide consulting services with respect to all matters raised for Samruk-Kazyna's consideration in its capacity as a sole participant in MAEK-Kazatomprom LLP, including the approval of the implementation plan for a management reporting system and the formation of a supervisory board and management board. The services agreement will be effective until December 2021, or until MAEK is transferred by Samruk-Kazyna to the Government of Kazakhstan (whichever comes first).

·      The agreement with respect to Kazakhstan Nuclear Power Plants JSC includes the same scope of the Company's services and is expected to remain effective until December 2021, or until a feasibility study for nuclear power-plant construction is completed and approved by the competent state authorities of the Republic of Kazakhstan (whichever comes first).

·      In September 2018, the Company signed an agreement to sell its 76% interest in Kyzyltu LLP to the other shareholder, Stepnogorsk Mining and Chemical Plant LLP (SMCP), for KZT 3.8 billion. Currently, the Company is awaiting payment. Under the terms of the sale and purchase agreement, from 7 December 2018, the Company will charge SMCP an amount of 0.01% of the total sum per day until the payment is completed. Ownership rights will be transferred after the Company receives the full amount of the purchase price.

·      In October 2018, the Company transferred its entire interest in Sareco LLP, a company engaged in the manufacture of an insignificant volume of rare earth metal products, to the national mining company, Tau-Ken Samruk JSC, a related entity of Samruk-Kazyna.

·      In December 2018, Kazatomprom-Damu LLP began the dissolution of the legal entity following approval at the Annual General Meeting.

·      JV Betpak Dala LLP was also dissolved as a legal entity. All necessary liquidation measures are in progress.

·      In January 2019, the General Meeting of Shareholders approved the interim liquidation balance of ULBA Conversion LLP. The legal entity is expected to be dissolved by the end of 2019.

In total, the number of Group subsidiaries, JVs, JOs and associates decreased from 50 as of 31 December 2017 to 44 as of 31 December 2018.

In 2019, the Company expects to dispose of its entire interests in Astana Solar LLP, Kazakhstan Solar Silicon LLP and MK KazSilicon LLP, as well as its holdings in Shieli-Energoservice LLP, Taukent-Energoservice LLP and Uranenergo-PUL LLP. In 2020, it expects to dispose of its entire stake in Caustic JSC.

 

 

Impact of changes in exchange rates

Fluctuations in the KZT/USD exchange rate can significantly affect the Group's consolidated operating results, primarily because:

·      Uranium spot prices are typically quoted in USD, so most of the Group's sales contracts and consolidated revenues are denominated in USD. In 2017, 78% of Group revenue was denominated in USD; this rose to 87% in 2018. The increase was due to higher USD revenues from the uranium segment in 2018 than in 2017.

·      A substantial portion of Group expenses, including most of its operating production expenses and more than two-thirds of its capital expenditure, are denominated in KZT. The main expenses not denominated in KZT relate to the purchase of industrial pumps used in ISR operations and resins used in processing uranium.

·      Most of the Group's borrowings are denominated in foreign currencies. As of 31 December 2018, 99% of the Group's borrowings were denominated in USD.

As most of the Group's revenue is denominated in USD, while a significant share of its costs is in KZT, an appreciation of the USD against the KZT generally has a positive effect on the Group's financial performance. However, because the Group has significant outstanding USD-denominated liabilities, the positive effect of an appreciating USD may be fully or partially offset. In addition, although the Company purchases uranium and uranium products from its JVs and associates under KZT-denominated contracts, the prices are determined by reference to the prevailing spot-market prices of U3O8, which are in turn denominated in USD. Accordingly, a significant appreciation of USD would result in a corresponding increase in the KZT-denominated uranium purchase costs under such contracts.

Where possible, the Group attempts to mitigate the risks associated with exchange rates by matching the currency of its interest payments and financial liabilities with the currency of its cash flows. Through this matching, the Group is able to hedge without the use of derivatives. For monetary assets and liabilities denominated in currencies other than KZT, the Group attempts to keep its net exposure to an acceptable level by buying or selling such currencies at spot rates when necessary to address short-term imbalances.

In 2018, the KZT/USD exchange rate fluctuated between KZT 332.3 and KZT 384.2 per USD. The following table provides annual average rates and year-end closing KZT/USD exchange rates.

Table 14. Annual average and year-end closing rate for KZT/USD

 

 

 

2017

2018

 

Change

Average exchange rate for the period1

KZT/USD

 

326.08

344.90

 

6%

Closing exchange rate for the period

KZT/USD

 

332.33

384.20

 

16%

1 The average rates are calculated as the average of the daily exchange rates on each calendar day.

Source: National Bank of Kazakhstan

Taxation and mineral extraction tax (MET)

Kazakhstan's MET is determined by applying a 29% tax charge to the taxable base related to mining production costs (based on a formula - see footnotes to Table 15). Taxable expenditures are made up of all direct expenditures associated with mining operations, including wellfield development depreciation charges and any other depreciation charges attributable to direct mining activities, but specifically exclude processing and general and administrative expenses. The MET is calculated separately for each subsoil use licence.

The resulting MET paid is therefore dependent upon the cost of mining operations.

Table 15. Summary of taxes accrued by the Group

(KZT million)

 

 

2017

2018

 

Change

Corporate income tax1

 

 

14,675

31,412

 

114%

Mineral extraction tax2

 

 

13,280

17,720

 

33%

Excess profit tax3

 

 

5,609

 

Other taxes and off-budgetary payments4

 

 

38,470

49,684

 

29%

Total tax accrued

 

 

72,035

98,816

 

37%

1 Applicable rate: 20%; calculation: taxable income (based on tax reporting accounts) multiplied by corporate income tax rate.

2 Applicable rate: 18.5% for uranium cost in pregnant solution; calculation: the tax charge is a cost of mining and is based on a deemed 20% profit margin on certain expenditures, and a MET rate of 18.5%. The tax charge of 29% is determined by the following formula: (1 + 20%) × 18.5% ÷ (1 - (1 + 20%) × 18.5%).

3 Applicable rate: 10-60%. Abolished as of 1 January 2018 for subsoil use licences relating to solid mineral deposits, including uranium.

4 Includes property tax, land tax, transport tax, social tax, off-budgetary payments, VAT and PIT.

Total tax accrued, including corporate income tax, MET and other taxes, increased by 37% on the year to KZT 98,816 million in 2018, due to an increased tax base resulting from higher sales volumes and higher spot prices, as well as accounting changes related to the change in the Group structure (see section Company Asset structure on page 25 for details).

Price and availability of sulphuric acid

Extraction of uranium using the ISR mining method requires substantial amounts of sulphuric acid. If sulphuric acid is unavailable, it could impact the Group's uranium production schedule. Higher prices for sulphuric acid could adversely impact the Group's profits.

The Group's weighted average price of sulphuric acid increased slightly to KZT 21,557 per tonne in 2018 (from KZT 21,529 per tonne in 2017). On average in 2018, the price of sulphuric acid represented about 16% of the Group's uranium production cost.

Impact of changes in ore reserve estimates

The Group reviews its estimates of Ore Reserves and Mineral Resources on a regular basis. As a result, certain Ore Reserves and Mineral Resources may be reclassified in accordance with applicable standards. Such reclassifications may have an impact on the Group's financial statements. For example, if a reclassification results in a change to the Group's life of mine plans, there may be a corresponding impact on depreciation and amortisation expenses, impairment charges, as well as mine closure charges incurred at the end of mine life.

Transactions with JVs and associates

The Company purchases U3O8 from its subsidiaries, JVs and associates, principally at spot price with discounts, which can vary by operation. Purchased volumes generally correspond to the Company's interest in the respective selling entities.

The Group's Uranium segment revenue is primarily composed of two streams:

•       The sale of U3O8 purchased from JVs and associates, and

•       The sale of U3O8 produced by the Company and by its consolidated subsidiaries and JOs.

Cost of sales of purchased uranium is equal to the purchase price from JVs and associates (using equity accounting), which in most cases is the prevailing spot price with certain applicable discounts. The share of results of JVs and associates therefore represents a significant part of the Group's profits and should be considered accordingly in the assessment of the Group's financial results. In 2018, the weighted average discount on pounds purchased from operations was 4.2% of the prevailing spot price.

When uranium produced by the Company, consolidated subsidiaries and JOs, is sold, the cost of sales is predominantly represented at the cost of production. For those sales, the full mining margin is therefore captured in the consolidated results of the Group.

The following table provides the volumes purchased by the Company; these volumes were accounted for using the purchase price in the Company's cost of sales for the periods indicated:

Table 16. Volume of U3O8 purchased by the Company, 2017‒2018

(tU)

 

 

2017

2018

 

Change

U3O8 purchased from JVs and associates

 

 

6,877

3,022

 

(56)%

U3O8 purchased from non-controlled investment1

 

 

1,882

1,647

 

(12)%

Total

 

 

8,759

4,669

 

(47)%

1 Non-controlled investment is Baiken-U LLP, with 5% direct ownership by the Company.

The volume of U3O8 purchased from JVs, associates, and non-controlled investments that is accounted for in cost of sales using purchased price, totalled 4,669 tonnes in 2018, a decrease of 47% compared to 2017 mainly due to the change in the Group structure (see section Company Asset structure on page 25 for details). Note that total volumes of purchased uranium are higher since the Company and THK also buys from subsidiaries and third parties.

 

 

KEY PERFORMANCE INDICATORS

Table 17. Consolidated financial indicators

(KZT billion unless noted)

 

 

2017 4 (recalculated)

2018

 

Change

Group consolidated revenue

(according to the financial statements)

 

 

277.0

436.6

 

58%

Operating profit

 

 

32.6

77.5

 

138%

Net profit

 

 

139.2

380.3

 

173%

     Gain on exercise of put option (one-time effect)1

 

107.7

 

     Gain from business combinations (one-time effect)

 

313.5

 

Adjusted net profit

 

 

31.5

66.8

 

112%

Earnings per share attributable to owners (basic and diluted), KZT/share

534.1

1,435.0

 

169%

Adjusted EBITDA2

 

 

96.7

131.3

 

36%

Adjusted attributable EBITDA3

 

 

128.2

140.2

 

9%

Operating cash flow

 

 

23.4

58.3

 

149%

1 In 2017 the Group recognised a gain from the exercise of a put option of KZT 107.7 billion because of the difference between the consideration received and the carrying amount of the investments.

2 Adjusted EBITDA is calculated by excluding from EBITDA all items not related to the main business and having a one-time effect.

3 Adjusted Attributable EBITDA is calculated as an adjusted EBITDA less the share of the results in the net profit in JVs and associates plus the share of adjusted EBITDA of JVs and associates engaged in the uranium segment (except Budenovskoye JV LLP's EBITDA due to minor effect it has during each reporting period) less non-controlling share of adjusted EBITDA of Appak LLP and Inkai JV LLP less any changes in the unrealised gain in the Group.

4 Due to classification of operations of MAEK-Kazatomprom LLP as discontinued.

 

Consolidated revenues were KZT 436.6 billion in 2018, an increase of 58% compared with 2017, mainly due to an increase in sales of uranium products as a consequence of market-share growth and the change in Group structure (see section Company Asset structure on page 22 for details).

Operating profit was KZT 77.5 billion in 2018, an increase of 138% compared with 2017, mainly due to the rise in U3O8 sales volumes, the appreciation of the USD against the KZT, and higher average sales price.

Net profit for the year was KZT 380.3 billion, an increase of 173% compared to 2017. However, a significant portion of the year-over-year increase is associated with one-time effects of transactions in both years, especially the exercise of the put option in 2017 and the change in investment value resulting from the inclusion of JV Inkai LLP, Karatau LLP, JV Akbastau JSC in the consolidation (see section Company Asset structure on page 22 for details). The one-time effects of these transactions increased net income by KZT 107.7 billion and KZT 313.5 billion in 2017 and 2018 respectively. Adjusting for those effects, adjusted net profit was KZT 66.8 billion, an increase of 112% compared to 2017.

Adjusted EBITDA totalled KZT 131.3 billion in 2018, an increase of 36% from 2017, while adjusted attributable EBITDA was KZT 140.2 billion, an increase of 9% compared with 2017. The increases were mainly driven by the increase in operating profit and the change in Group structure (see section Company Asset structure on page 22 for details).

For similar reasons, operating cash flows totalled KZT 58.3 billion, an increase of 149% from 2017.

Table 18. Production and sales metrics

 

 

 

2017

2018

 

Change

Production volume as U3O8 (100% basis)

tU

 

23,321

21,705

 

(7)%

Group production volume as U3O8 (attributable basis)1

tU

 

12,093

11,476

 

(5)%

U3O8 sales volume (consolidated)

tU

 

10,111

16,647

 

65%

     Including KAP HQ/THK U3O8 sales volume

tU

 

9,300

15,287

 

64%

Group inventory of finished goods (U3O8)

tU

 

9,085

7,892

 

(13)%

KAP/THK inventory finished goods (U3O8)

tU

 

8,999

7,353

 

(18)%

Average sales price of the Group

KZT/kg

 

20,222

21,930

 

8%

Average sales price of the Group

USD/lb U3O8

 

23.85

24.46

 

3%

Average weekly spot price

USD/lb U3O8

 

22.07

24.64

 

12%

Average month-end spot price

USD/lb U3O8

 

21.78

24.59

 

13%

1 Group production volumes as U3O8 (attributable basis) are not equal to the volumes purchased by the Company and THK.

Production volumes of U3O8 on a 100% basis decreased by 7% at all uranium mining entities for 2018, compared to 2017. Production was reduced in accordance with the Company's decision that saw production at all operations reduce by 20% against subsoil-use licence volumes. Attributable production volumes were lower for the same reason.

Consolidated U3O8 sales volumes in 2018 totalled 16,647 tonnes, an increase of 65% compared to 2017. Consolidated sales in 2018 were favourably impacted by the sale of 3,112 tU to uranium fund Yellow Cake PLC following its initial public offering; the effect of the change in the Group structure; and transformation of the Group's marketing sales function that included the creation of THK, which resulted in the acquisition of new customers and higher direct contracting without the use of intermediaries.

Consolidated Group inventory of finished U3O8 products at 31 December 2018 amounted to 7,892 tU, which is 13% lower than at the end of 2017. At the HQ/THK level, inventory of finished U3O8 products was 7,353 tU, a decrease of 18% compared to 2017. The lower inventory levels are the result of an increase in sales volumes in 2018, as well as the Company's target to maintain an optimum inventory level of approximately six months of annual attributable production.

The average KZT sales price realised by the Group in 2018 was KZT 21,930 per kg (24.46 USD/lb), an increase of 8% compared to 2017 due to the increase of average spot price for uranium products and the appreciation of USD against KZT.

Table 19. Uranium segment financial metrics

(KZT billion unless noted)

 

 

2017

2018

 

Change

Average exchange rate for the period

KZT/USD

 

326.08

344.90

 

6%

Uranium segment revenue

 

 

205.6

366.8

 

78%

      Including U3O8 sales proceeds (across the Group)

 

 

204.5

365.1

 

79%

Share of a revenue from uranium products

%

 

74%

84%

 

13%

Attributable cash cost

USD/lb

 

12.02

11.56

 

(4)%

Attributable all-in sustaining cost

USD/lb

 

16.09

15.08

 

(6)%

Investments of mining companies

(100% basis)1

 

 

81.5

75.4

 

(7)%

1 Excludes liquidation funds and closure costs and includes expansion investments. In section Error! Reference source not found. total results includes liquidation funds and closure cost.

Consolidated U3O8 sales were KZT 365.1 billion in 2018, an increase of 79% compared to 2017, mainly due to an increase in sales of uranium products, reflecting market share growth and the change in the Group structure.

Attributable Cash Cost (C1) and All-In-Sustaining Costs (AISC) decreased by 4% and 6% respectively in 2018, compared to 2017. The decreases were primarily due to depreciation of KZT. It should be noted that despite of the 7% decrease in production volumes (see section Production and Sales metrics for details), the cost of production per unit in KZT changed insignificantly due to cost optimisation efforts to further position the Group's U3O8 unit production costs among the lowest in the industry.

Investment costs of mining companies (on 100% basis) totalled KZT 75.4 billion, a decrease of 7% compared to 2017, mainly due to the decrease of sustaining capital costs substantiated by the cost optimisation programme (see section  Capital Expenditures Review for details).

Table 20. UMP segment

Rare metals products

 

 

2017

2018

 

Change

Beryllium products

KZT/kg

 

8,267

10,447

 

26%

 

Sales, tons

 

1,599.6

1,662.1

 

4%

Tantalum products

KZT/kg

 

95,369

104,076

 

9%

 

Sales, tons

 

135.0

137.7

 

2%

Niobium products

KZT/kg

 

19,906

24,088  

 

21%

 

Sales, tons

 

23.7

22.9

 

(3)%

Increased consumer demand for beryllium and tantalum products in 2018 resulted in higher sales.

Sales of niobium in 2018 decreased compared to the prior year due to a reduction in quantity of orders for niobium alloying additives and for niobium-containing sublimates.

 

 

Table 21. UO2 power and fuel pellets

Sales

 

 

2017

2018

 

Change

Fuel pellets

tonnes

 

75.2

84.3

 

12%

Ceramic powder

tonnes

 

10.2

10.2

 

Dioxide from scraps

tonnes

 

15.3

8.3

 

(46)%

Sales of fuel pellets in 2018 increased to 84.3 tons, 12% higher than in 2017 due to increased amounts of tolling services according to customer agreements.

Sales volumes of ceramic powder in 2018 were unchanged compared to 2017.

The decline in sales volumes of dioxide from scraps is due to a reduction in scrap recycling.

Table 22. Other segments

(KZT billion unless noted)

 

 

2017

2018

 

Change

Revenue1

 

 

80.3

79.2

 

(1)%

     Including external revenue

 

 

39.1

31.4

 

(20)%

Cost of sales1

 

 

75.3

77.0

 

2%

Gross profit1

 

 

5.0

2.2

 

(57)%

1 All indicators include intra-group transactions (eliminations), for more details see the annual financial statements.

Other segments include services such as drilling, transportation of commodities and sulphuric acid, R&D and training which are provided to mining entities.

Total external revenue from other segments was 79.2 billion in 2018, which was similar to 2017. External revenue from the Other segments represented about 7% of the Group's total consolidated revenue in 2018, compared to about 14% in 2017. A decrease in the Other segments gross profit is mainly due to the change in the Group structure (see section Company Asset structure on page 22 for details).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CAPITAL EXPENDITURES REVIEW

The Group primarily incurs capital expenditures in relation to its subsidiaries engaged in the mining of natural uranium, as well as expenditures of a similar nature relating to its JVs and associates engaged in the mining of natural uranium. Such expenditures are comprised of the following key components:

•       Well construction costs;

•       Expansion costs, which typically include expansion of processing facilities, extension of services and transport routes to new wellfield areas, implementation of new systems and processes;

•       Sustaining capital - largely reflecting recurring, infrastructure, maintenance and equipment replacement related costs which are assumed to cease three years prior to cessation of production;

•       Liquidation-fund contributions and mine-closure costs, which are not included in the calculation of AISC

The following table provides the capital expenditures for the Group's subsidiaries, JVs and associates engaged in uranium mining for the periods indicated. Capital expenditure amounts shown were derived from stand-alone management information of certain entities within the Group on an unconsolidated basis, and they are therefore not comparable with or reconciled to the amounts of additions to property, plant and equipment as presented in the financial statements. Investors are strongly cautioned to not place undue reliance on capital expenditure information, as it represents unaudited unconsolidated financial information on an accounting basis which is not in compliance with IFRS:

Table 23. Group capital expenditure (KZT millions)

Enterprise name

 

2017

 

2018

Stake

WC1

S2

LF/C3

Total

Ownership

WC1

S2

LF/C3

Total

Ortalyk LLP

100%

2,555

543

169

3,267

100%

2,321

5,0104

171

7,502

Kazatomprom-SaUran LLP

100%

5,197

1,185

639

7,020

100%

6,778

1,478

2,990

11,245

RU-6 LLP

100%

2,453

541

282

3,276

100%

2,472

676

1,062

4,210

Appak LLP

65%

2,046

209

87

2,341

65%

999

257

68

1,325

JV Inkai LLP

40%

5,258

8,077

-

13,335

60%

8,707

2,324

31

11,062

Semizbay-U LLP    

51%

2,364

470

137

2,971

51%

2,996

980

115

4,091

Karatau LLP

50%

4,369

2,558

99

7,026

50%

2,376

685

80

3,141

JV Akbastau JSC     

50%

3,103

2,486

144

5,733

50%

2,031

1,192

79

3,301

JV Zarechnoye JSC

49.98%

3,386

535

11

3,931

49.98%

3,971

182

10

4,162

JV Katco LLP

49%

10,252

2,866

768

13,886

49%

9,275

2,447

1,368

13,090

JV Kharasan-U LLP5

34%

6,582

254

182

7,018

34%

4,983

1,611

142

6,736

JV SMCC LLP

30%

3,962

2,761

858

7,582

30%

5,813

339

535

6,688

Baiken-U LLP5

5%

4,389

3,051

233

7,674

5%

4,674

861

146

5,681

Total of mining assets

 

55,918

25,535

3,609

85,061

 

57,396

18,041

6,798

82,235

1 Well construction

2 Sustaining

3 Liquidation fund/closure

4 Includes expansion investments in amount of KZT 4.6 billion.

5 As of 31 December 2018, the share in Kharassan was 50%, in Baiken-U, 52.5%.

 

 

In order to achieve the planned levels of production, on an annual basis, the Group's mining companies assess the required level of wellfield and mining preparation based upon the availability of reserves. These costs relate to the capitalised costs of maintaining the sites, with the main component being wellfield construction.

 

 

 

 

 

 

Diagram 1. Wellfield construction and sustaining costs, 2018 in KZT millions

 

Table 24. Wellfield construction and sustaining costs

(KZT millions)

 

 

2017

2018

 

Change

Well construction

 

 

 55,918  

 57,395  

 

3%

Sustaining

 

 

 25,535  

 13,419  

 

(47)%

Total wellfield construction and sustaining costs

 

 

 81,452  

 70,8141  

 

(13)%

1 Excludes expansion investments of KZT 4.6 billion

Wellfield construction and sustaining costs for the 13 mining entities in 2018 amounted to KZT 70.8 billion, which is 13% lower than in 2017. The change was mainly due to the decrease of sustaining capital expenses related a cost optimisation program. A 3% rise in the cost of well construction is related to higher piping costs, higher pump prices combined with KZT depreciation.

Diagram 2. Production vs. increase in ready-to-mine reserves, tonnes

 

During 2018, 23,199 tU of reserves were added to production, down 11% from 2017. The increase in ready-to-mine reserves was smaller due to lower uranium production volumes in the mine plan in 2018 compared with 2017. The increase in ready-to-mine reserves is made according to the results of the GPR complex that included construction of technological wells on technological blocks, piping of technological wells and technological blocks, acidification of technological blocks. KAP4

The information presented in Table 25 reflects wellfield development depreciation (commonly known as PGR), property, plant and equipment, and depreciation and amortisation data for each mining asset as of 31 December 2018.

 

 

Table 25. Depreciation and amortisation, 31 December 2018

(KZT million unless noted)

PGR volumes (tU)

PGR

Exploration value

Book value of PPE (excl. wellstock)

Gross value of PPE (excl. wellstock)

D&A (excl. wellstock)

Ortalyk LLP

 2,711  

 9,909 

 328  

 12,749  

 18,168  

 1,046  

Kazatomprom-SaUran LLP

 4,993  

 11,088  

 2,870  

 6,518  

 15,085  

 1,059  

RU-6 LLP

 2,954  

 7,838 

 -    

 3,058  

 5,589  

 391  

Appak LLP

 2,447  

 3,942  

 2,158  

 4,118  

 8,280  

 368  

JV Inkai LLP

 4,901  

 19,901  

 20,320  

 59,706  

 95,428  

 2,244  

Semizbay-U LLP    

 2,902  

 5,611  

 31 

 7,990  

 16,346  

 809  

Karatau LLP

 3,070  

 6,772 

 3,202  

 11,733  

 22,708  

 1,272  

JV Akbastau JSC     

 2,277  

 4,758 

 6,893 

 7,509  

 10,831  

 402  

JV Zarechnoye JSC

 2,502  

 8,406 

 664  

 2,811  

 8,435  

 668  

JV Katco LLP

 4,881  

 22,590  

 4,432  

 17,502  

 50,212  

 3,538  

JV Kharasan-U LLP

 4,108  

 9,637  

 9,893 

 10,738  

 15,379  

 681  

JV SMCC LLP

 4,813  

 9,615  

 6,479  

 12,290  

 19,269  

 1,949  

Baiken-U LLP

 3,176  

 9,246 

 7,193 

 11,318  

 19,475  

 1,135  

 

 

 

 

 

 

 

                       

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RESERVES AND GEOLOGICAL SURVEYS

Diagram 3. Reserves and resources, 31 December 2018, thousand tU

 

Mineral reserves of all mining assets as of 31 December 2018 (including annual depletion) totalled an estimated 520,600 tU, (100% basis, 305,600 tU attributable to the Company, or 59%). Total mineral resources (including reserves) were estimated at 740,000 tU (100% basis, 476,700 tU attributable to the Company). In comparison to the first half of 2018, as reported in the IPO prospectus, total resources increased by about 66,000 tU (100% basis, about 41,000 attributable).

The Company pays significant attention to the evaluation of prospective deposits and the projects portfolio, including exploration projects. In 2018, the Company was awarded uranium exploration contracts for site No. 2 and No. 3 of the Inkai deposit with duration of 4 years. According to the Report of the Competent Authority of the Ministry of Energy of the Republic of Kazakhstan, as of 1 July 2017, the mineral resources for sites No. 2 and 3 are 125,100 tonnes (of which 42,000 tonnes are on site No. 2, and 83,100 tonnes on site No.3). In 2019, the Company plans to start geological studies on site No.2 of the Inkai deposit.

FINANCIAL ANALYSIS

The table below shows financial information related to the consolidated results of the Group for 2017 and 2018:

Table 26: Key financial information, 2017‒2018

(KZT millions)

 

2017

(recalculated) ²          

2018 

Change

Revenue

 

 277,046  

 436,632  

58%

COGS

 

(209,934)  

(313,817)  

49%

Gross profit

 

 67,112  

 122,815  

83%

Selling expenses

 

(4,316)  

(10,530)  

144%

G&A

 

(30,194)  

(34,805)  

15%

Operating profit

 

 32,602  

 77,480  

138%

Other income/(loss), including:

 

 77,294  

 312,436  

304%

     Gain on exercise of put option (one-time effect)

107,714

 

 

     Net gain from business combinations (one-time effect)1

 

313,517

 

Share in the results of associates

 

 22,007  

 22,786  

4%

Share of JV results

 

 22,107  

(4,743)  

(121)%

Pre-tax income

 

 154,010  

 407,959  

165%

Corporate income tax

 

(17,287)  

(28,797)  

67%

Income from discontinued operations

 2,431  

 1,104  

(55)%  

Net profit

 

 139,154  

 380,266  

173%

Adjusted net profit (net of one-time effect)

31,440

66,759

112%

Net profit attributable to shareholders

138,527

372,176

169%

Net profit attributable to non-controlling interest

627

8,090

1,191%

1 Includes the gain in amount of KZT 5 million from other investments.

² Due to classification of operations of MAEK-Kazatomprom LLP as discontinued.

 

Net profit of the Group in 2018 is significantly affected by the transactions related to change in the Group structure:

•      a gain from increase of additional interest in JV Inkai LLP of KZT 95,929 million

•      a gain from the change of classification of Karatau LLP and JV Akbastau JSC to joint operations of KZT 124,632 million and KZT 92,951 million, respectively

The components of revenue, cost of goods sold, general and administrative expenses, distribution costs, and other income and expenses are changed in 2018 compared to 2017 due to the change in the Group structure (see section Company Assets Structure on page 22 for details).

 

 

 

 

 

 

 

 

 

 

 

Revenue

Diagram 4. Revenue by source (KZT millions)

 

The main factors influencing the change in revenue in 2018 compared to 2017 are presented in the graph below:

Diagram 5. Sources of changes in revenue (KZT millions)

 

Cost of sales

Cost of sales totalled KZT 313,817 million in 2018, an increase of 49% compared to 2017. The increased is mainly due to higher uranium sales volumes in 2018 and the change in the Group structure (see section Company Assets Structure on page 22 for details).

The table below shows the Group's cost of sales for 2017 and 2018 by component:

Table 27. Cost of sales by component, 2017‒2018

 

 

Proportion of cost of sales

(KZT millions)

2017          

2018 

Change

2017

2018

Materials and supplies

 143,771  

 202,817  

41%

69%

64%

Wages and salaries

 22,830  

 24,024  

5%

11%

8%

Processing and other services

 5,052  

 10,354  

105%

2%

3%

Depreciation and amortisation

 13,623  

 39,866  

193%

6%

13%

Taxes other than income tax

 10,552  

 22,033  

109%

5%

7%

Other

 14,106  

 14,723  

4%

7%

5%

Cost of Sales

 209,934  

 313,817  

49%

100%

100%

The cost of materials and supplies was KZT 202,817 million in 2018, an increase of 41% from 2017. The increase was largely due to higher uranium sales volumes and the change in the Group structure.

Wages and salaries totalled KZT 24,024 million in 2018, an increase of 5% from 2017, mainly due to the change in the Group structure.

The cost of processing and other services was KZT 10,354 million in 2018, an increase of 105% from 2017, mainly as a result of higher costs associated with third-party services.

The other cost categories - including depreciation and amortisation, taxes and other expenses, and other - totalled KZT 76,622 million in 2018, an increase of 100% from 2017, mainly due to the consolidation of expenses attributable to JV Inkai LLP and an increase in sales of uranium products at Group level compared with products purchased from JVs and associates during 2018.

The main factors influencing the change in cost of sales in 2018 are presented in the graph below:

Diagram 6. Changes in cost of sales, 2018 vs. 2017 (KZT millions)

 

Selling expenses

Table 28. Selling expenses, 2017‒2018

 

 

Proportion of selling expenses

(KZT millions)

2017          

2018 

Change

2017

2018

Shipping, transportation and storing

 2,868  

 7,275  

154%

66%

69%

Wages and salaries

 484  

 950  

96%

11%

9%

Rent

 85  

 106  

24%

2%

1%

Materials

 169  

 221  

31%

4%

2%

Depreciation and amortisation

 65  

 67  

3%

2%

1%

Others

 645  

 1,911  

196%

15%

18%

Selling expenses

 4,316  

 10,530  

144%

100%

100%

Selling expenses totalled KZT 10,530 million in 2018, an increase of 144% from 2017, mainly due to an increase in the costs of loading, transporting and storing (associated with higher uranium sales volumes) and the change in the Group structure.

Selling expenses related to sales of HQ/THK volumes increased by 123% on the year in 2018. This constituted 29% of the total increase in selling expenses; the remainder related to the change in the Group structure (see section Company Assets Structure on page 22 for details).

General & administrative expenses (G&A)

Table 29. General and administrative expenses, 2017‒2018

 

 

Proportion of G&A expenses

(KZT millions)

2017          

2018 

Change

2017

2018

Wages and salaries

 16,556  

 17,809  

8%

55%

51%

Consulting and information services

3,150  

 4,488  

42%

10%

13%

Rent

 1,086  

 1,166  

7%

4%

3%

Depreciation and amortisation

 696  

 808  

16%

2%

2%

Other

 8,706  

 10,534  

21%

29%

31%

G&A expenses

 30,194  

 34,805  

15%

100%

100%

G&A expenses were primarily influenced by the change in the Group structure, including wages and salaries (KZT 17,809 million in 2018, 8% higher than 2017), rent expenses (1,166 million, 7% higher than 2017), and depreciation and amortisation (KZT 808 million, 16% higher than 2017).

The cost of consulting and information services was KZT 4,488 million in 2018, an increase of 42% from 2017, largely due to an increase in services purchased by the Company during 2018.

Other expenses totalled KZT 10,534 million in 2018, an increase of 21% from 2017. The increase was largely related to expenses on the construction of social facilities in the newly formed Turkestani region. Other expenses also includes maintenance and repairs, travel expenses, communication expenses, materials, taxes other than income tax, utility costs, corporate events, fines and penalties, and certain other expenses.

The share of associate and JV results

The share of results of associates and JVs in 2018 was KZT 18,042 million, a decrease of 59% from 2017. The decrease was mainly down to the change in Group structure (see section Company Assets Structure on page 22 for details). The increase in the average spot price in 2018 compared with 2017 positively impacted the operating results of the associates and JVs and their resulting contributions to the Group.

Profit before tax and tax expense

Diagram 7. Profit before tax and tax expense, 2017‒2018, KZT millions

 

 

Table 30. Profit before tax and tax expense, 2017‒2018

(KZT millions)

 

 

2017

2018

Change

Profit before tax

 

 

 154,010  

 407,959  

165%

Non-taxable one-time effects

 

 

 107,714  

 313,517  

191%

Taxable profit before tax

 

 

 46,296  

 94,442  

104%

Corporate income tax

 

 

17.287

28.797

67%

The Group's profit before tax was KZT 407,959 million in 2018, an increase of 165% from 2017. The increase was mainly due to the change in the Group structure and the resulting recognition of a KZT 313.5 billion profit related to the business combination, as well as higher uranium sales volumes in 2018.

The corporate tax rate applicable to the majority of the Group's profits was 20% in both 2018 and 2017. The Group's effective tax rates were 11% and 7% in 2017 and 2018, respectively. The effective tax rate differed from corporate income tax primarily due to certain elements of reported income not being recognised in tax accounting.

 

 

LIQUIDITY AND CAPITAL RESOURCES  

Kazatomprom's management pays special attention to preserving financial stability in a constantly changing market environment. The Group's financial management policy is aimed at maintaining a strong capital base to support existing operations and business development.

Capital resources

The Group's liquidity requirements primarily relate to funding working capital, capital expenditures, service of debt, and payment of dividends. The Group has historically relied primarily on cash flow from operating activities, and to a smaller degree, external sources of financing, to fund its working capital and long-term capital requirements. It is expected that there will be no significant change in the sources of the Group's liquidity in the foreseeable future. As required, the Company will consider entering into project financing arrangements to fund certain investment projects. The Group also obtains capital for its operations through the formation of joint ventures with industry partners, and in the past, it has raised financing in the international debt capital markets.

Dividends received

The Company is the parent company for the Group, and in addition to revenue from its business operations, it receives dividends and other payments from its subsidiaries, JVs and associates, and other investments. In 2017 and 2018, the Group received dividends of KZT 36,486 million and KZT 12,773 million, respectively, from its JVs and Associates and other investments. The decrease in 2018 was primarily due to the change in the Group structure (see section Company Assets Structure on page 22 for details). The Company strives to use its voting power to maximise its dividend flow from subsidiaries, JVs and associates. Dividends received by the Company from investees domiciled in the Republic of Kazakhstan are exempt from dividend tax.

In 2018, the Company paid dividends in the amount of KZT 161,661 million to Samruk-Kazyna.

Working capital

The table below provides the Group's working capital as at 31 December 2017 and 2018:

Table 31. Group working capital, year end, 2017 and 2018

(KZT millions)

 

 

20171

20182

Change

Inventory

 

 

 169,675  

170,261  

Receivables

 

 

 58,085  

94,477  

63%

Recoverable VAT

 

 

 24,182  

29,799  

23%

Other current assets

 

 

 18,396  

18,322  

CIT prepayment

 

 

 5,493  

4,366  

(21)%

Payables

 

 

(112,642)  

(51,534)  

(54)%

Employee remuneration liabilities

 

 

(173)  

(147)  

(15)%

Income tax liabilities

 

 

(5,618)  

(977)  

(83)%

Other taxes and compulsory payments liabilities

 

 

(4,168)  

(10,711)  

157%

Other current liabilities

 

 

(14,349)  

(30,319)  

111%

Net working capital

 

 

 138,881  

223,537  

61%

1 Include the MAEK as of 31 December 2017

2 Excluding the MAEK due to the disposal from the Group.

 

The Group's net working capital remained positive during all periods under review. The Company regularly monitors the cash position of its subsidiaries and focuses on effectively collecting excess cash from such subsidiaries.

Table 32 summarises the Group's turnover of inventories, receivables and payables, and provides details of the Group's cash conversion cycle (in days), at 31 December 2017 and 2018:

Table 32. Turnover of inventories, receivables and payables and cash conversion cycle

(days)

 

 

20171

2018

Change

Inventories turnover

 

 

292

198

(32)%

Receivables turnover

 

 

70

79

13%

Payables turnover

 

 

208

60

(71)%

Cash conversion cycle

 

 

154

217

41%

1 For the comparison purpose the Inventories, Receivables and Payables of the MAEK were excluded in 2017. Also, in the consolidated statement of Profit and Loss, the MAEK was reclassified as discontinued operations as in 2017.

The increase in the cash conversion cycle in 2018 is largely due to increased sales volumes of finished goods, repayments of accounts payable in 2018, and the change in the Group structure (see section Company Assets Structure on page 22 for details).

The Group constantly monitors the uranium market and may pursue a strategy of increasing its inventories in unfavourable market conditions. The following table sets forth the components of the Group's inventories as at 31 December 2017 and 2018:

Table 33. Group inventories, year end, 2017 and 2018

(KZT millions)

 

 

2017

2018

Change

Finished goods and goods for resale

 

 

 140,533  

 130,157  

(7)%

Work-in-process

 

 

 17,563  

 19,768  

13%

Raw materials

 

 

 14,520  

 13,728  

(5)%

Spare parts

 

 

 819  

 720  

(12)%

Materials in processing

 

 

 762  

 1,226  

61%

Fuel

 

 

 889  

 1,875  

111%

Other materials

 

 

 2,842  

 5,459  

92%

Provision for obsolesce and write-down to net realizable value

(8,253)  

(2,672)  

68%

Total inventories

 

 

 169,675  

 170,261  

The Group's largest inventory item is finished goods and goods for resale, which primarily consist of U3O8. In line with its market-oriented strategy, the Group's inventory levels decreased in 2018 due to the increase of sales volumes including U3O8 and other goods sold by the Group. Consolidated inventory levels of U3O8 decreased by 13% whereas Finished goods and goods for resale in the table above decreased by 7%. The difference is largely because inventories in 2018 includes uranium purchased from JVs and associates, the cost of which was higher in 2018 compared to 2017 due to higher spot market prices and exchange rates in 2018.

The Company expects to maintain inventory levels of approximately six months of annual attributable production.

 Cash flows

The following cash flow discussion is based on, and should be read in conjunction with, the financial statements and related notes.

The following table provides the Group's consolidated cash flows for 2017 and 2018:

Table 34. Group consolidated cash flows, 2017‒2018

(KZT millions)

 

 

20171

2018

Cash flows from/(used in) operating activities1

 

 

 23,355  

58,327  

Cash flows from/(used in) investing activities

 

 

 215,575  

(40,279)

Cash flows (used in) financing activities

 

 

(74,881)  

(139,272)  

Net increase / (decrease) in cash and cash equivalents

 

 164,049  

(121,224)  

1 Includes income tax and interest paid.

Cash flows from operating activities

Cash flows generated from operating activities increased to KZT 58,327 million for 2018 from KZT 23,355 million for 2017. This change was primarily due to:

·      a KZT 120,952 million increase in cash receipts from customers in 2018. This increase was largely due to an increase in the Group's sales volumes and the change the Group structure (see section Company Assets Structure on page 22 for details).

·      a KZT 69,024 million increase in payments to suppliers for 2018. This increase was largely due to payments of accounts payable in 2018 which were greater than payments of accounts payable during 2017, and the change the Group structure (see section Company Assets Structure on page 22 for details).

Cash flows from investing activities

There was net cash used in investing activities in 2018 of KZT 40,279 million compared to net cash from investing activities of KZT 215,575 million in 2017.

In the prior year, investing cash flows were significantly affected by the receipt of KZT 173,719 million relating to a put option held by the Company, which it exercised.

Other changes in investing cash flows in 2018 are due to:

·      KZT 23,713 million decrease in dividends received from associates, JVs and other investments as a result of the change in the Group structure (see section Company Assets Structure on page 22 for details).

·      KZT 34,193 million payments for the acquisition of 40.05% shares in Energy Asia Limited and a 16.02% stake in the chartered/authorised capital of JV Kharasan-U LLP from Energy Asia Holdings (BVI) Limited. In the consolidated financial statements, it is presented as an acquisition of interest in controlled entities, net of cash acquired, in accordance with IFRS.

Cash flows from financing activities

Cash flows used in financing activities increased to KZT 139,272 million in 2018 from KZT 74,881 million for 2017. This change was primarily due to:

·      an increase of KZT 95,812 million in dividends paid to Samruk-Kazyna in 2018 compared 2017;

·      a KZT 86,324 million increase in cash used in repayment of loans and borrowings in 2018, due to early repayment for loans related to Astana Solar LLP, MK KazSilicon LLP and Kazakhstan Solar Silicon LLP, and the change in the Group structure (see section Company Assets Structure on page 22 for details). 

In 2018, there was a KZT 117,754 million, or 223%, increase in proceeds from loans and borrowings compared to the prior year. The increase was primarily attributable to short-term borrowings by the Group to finance the Group's payments for the increased share in Baiken-U LLP and Kharasan-U LLP, and working capital requirements.

Liquidity

The Group manages its liquidity requirements to ensure sufficient funds are available for operations and for settlement of financial obligations.

The Group ensures the availability of funds on demand in amounts sufficient to cover expected operating expenses using, among others, short-term as well as long-term corporate credit lines without collateral.

Table 35. Liquidity, year end, 2017 and 2018

(KZT millions)

 

 

2017

2018

Change

Cash and cash equivalents

 

 

239,936

128,819

(46)%

Current term deposit

 

 

8,472

205

(98)%

Total cash

 

 

248,408

129,024

(48)%

The Group's cash and cash equivalents as at 31 December 2017 and 2018 were KZT 239,936 million (includes cash receipt from put-option exercising) and KZT 128,819 million, respectively. The decrease as of 31 December 2018 is mainly caused by dividends paid Samruk-Kazyna in 2018 and scheduled repayment of debt.

The corporate credit lines are an additional liquidity source for the Company. At 31 December 2018, the Company with certain subsidiaries had total available revolving credit facilities of USD 302.5 million of which USD 222.5 million or 74% was undrawn at that date.

 

 

INDEBTEDNESS

The Company's financial liabilities comprise loans and guarantees issued for loans of affiliated companies. The debt portfolio is primarily in USD, which is its main revenue currency (99% for 2018). As a result, the Company has a natural economic hedge of USD/KZT foreign-currency risk without the use of derivative financial instruments

Table 36. Total Debt

(KZT millions)

 

 

2017

2018

Change

Loans, borrowings and finance lease liabilities

 

 

121,703

200,169

64%

Guarantees issued for loans of affiliated companies

 

 

14,732

13,935

(5)%

Total debt

 

 

136,435

214,104

57%

The following table summarises the Group's indebtedness as of December 31, 2017 and 2018:

Table 37. Total Group's indebtedness

(KZT millions)

 

 

2017

2018

Change

Non-current debt, including

 

 

 39,204  

 16,620  

(58)%

     Bank loans

 

 

 38,557  

 16,270  

(58)%

     Non-bank loans

 

 

 353

 ‒    

     Finance lease liabilities

 

 

 294  

 350  

19%

Current debt, including

 

 

 82,498  

 183,549  

122%

     Bank loans

 

 

 82,374  

 74,159

(10)%

     Non-bank loans

 

 

 ‒    

 35,726  

Issued bonds

 

 

73,535

100%

     Finance lease liabilities

 

 

 125  

 129  

3%

Total debt

 

 

 121,703  

 200,169  

64%

Total debt increased by 64% largely due to the consolidation of Inkai JV LLP's debt of KZT 35,085 million, and an increase in short-term loans to finance the Group's payments for the increased share in Baiken-U LLP and Kharasan-U LLP, and for working capital requirements.

On October 11, 2018, the Group issued bonds indexed to the US dollar in the amount of KZT 70,000 million with an annual rate of 4.6% to supplement working capital requirements in accordance with Kazakhstan legislation. Bonds to be redeemed in November 2019.

The following table summarises the Group's weighted average interest rate on bank loans as at 31 December 2017 and 2018:

Table 38. the Group's weighted average interest rate

Interest rate (%)

 

 

 

2017

2018

Fixed interest rate

 

 

 

6.29

5.61

Floating interest rate

 

 

 

3.47

4.05

The Group's credit facilities contain certain affirmative and negative covenants described in the annual financial statement.

Net debt and debt leverage ratio

The following table summarises the key ratios used by the Company's management to measure its financial stability as at 31 December 2017 and 2018:

Table 39. The key financial stability ratios

(KZT millions)

 

 

2017

2018

Change

Total debt

 

 

121,703

200,169

64%

Total cash

 

 

248,408

129,024

(48)%

Net debt

 

 

(126,705)

71,145

156%

Adjusted EBITDA

 

 

96,733

131,208

36%

Net debt / Adjusted EBITDA

 

 

(1.3)

0.54

The above indicators reflect a stable financial position. They indicate the creditworthiness of the Company, achieved through the generation of adequate financial resources and capital, and moderate debt.

 

GUIDANCE FOR 2019

 

Table 40. Guidance indicators

(exchange rate 370 KZT/1USD)

 

 

 

 

 

2019

Production volume (tU) (100% basis)1

 

 

 

 

 

22,750 - 22,800

Production volume (tU) (attributable basis)2

 

 

 

 

 

13,000 - 13,500

KAP/THK sales volume (tU)3

 

 

 

 

 

13,500 - 14,500

Group sales volume (tU)3

 

 

 

 

 

15,000 - 16,000

Total capital expenditures (KZT billions) (100% basis)4

 

 

 

 

 

85 - 95

Revenue - consolidated (KZT billions)

 

 

 

 

 

 485 - 505

   Revenue from Group U3O8 sales,

   included in consolidated revenue (KZT billions)

 

 

 

 

 

392 - 408

C1 cash cost (attributable basis) (USD/lb U3O8)

 

 

 

 

 

$11.00 - $12.00

All-in sustaining cash cost (attributable C1+capital cost) (USD/lb U3O8)

 

 

 

 

$15.00 - $16.00

1 Production volume (100% basis): Amounts represent the entirety of production of an entity in which the Company has an interest; it therefore disregards some portion of that production may be attributable to the Group's JV partners or other third-party shareholders.

2 Production volume (attributable basis): Amounts represent the portion of production of an entity in which the Company has an interest, which corresponds only to the size of such interest; it excludes the remaining portion attributable to the JV partners or other third-party shareholders.

3 Kazatomprom HQ/THK sales volume: includes only the consolidated sales of Kazatomprom HQ and THK. Intercompany transactions between KAP HQ and THK are not included.

4 Total capital expenditures (100% basis): includes only capital expenditures of the mining entities

* Note that the conversion of kgU to pounds U3O8 is 2.5998.

 

In 2019, Kazatomprom expects to remain consistent with its previously announced intention to flex down planned production volumes by 20% for 2018 through 2020 (versus consolidated planned production levels under subsoil use licences, which were increasing annually over that period). With the flex down, under the existing subsoil use licences, production is expected to total approximately 22,750 to 22,800 tU (100% basis) in 2019; without the reduction, production would have exceeded 28,500 tU (100% basis) in 2019.

Kazatomprom expects to continue following a market-centric approach to uranium production, rather than the previous production-focused strategy. By leveraging the in-situ recovery mining method, the Company can adjust production levels and respond to changes in uranium market conditions very rapidly and cost-effectively.

The guidance for sales remains consistent with Kazatomprom's market-centric strategy. Sales in excess of planned attributable production are expected to be primarily sourced from inventories, and from KAP subsidiaries under contracts and agreements with JV partners and other third parties.

The Company expects to maintain an inventory level of approximately six months of annual attributable production at the 2019 year-end.

 

 

 

 

 

 

 

 

 

SENSITIVITY ANALYSIS FOR 2019

The table below presents the correlation between the spot price and the U3O8 average sales price. This table is based on several key estimates and assumptions that are subject to risks and uncertainties outside the Group's control. These estimates are also based on assumptions regarding future business opportunities, which may change. This sensitivity analysis should be used only as a reference, and actual price changes may result in different values than those provided in the table below.

Table 41. Correlation between the spot price and the U3O8 average sales price

Nominal Spot Price (USD)

2019E

2020E

2021E

2022E

2023E

20

23

22

22

22

22

30

30

31

31

31

31

40

37

40

40

40

40

50

45

49

49

50

49

60

52

59

58

59

59

70

59 

68 

67 

68 

68 

Values are rounded to the nearest dollar. The sensitivity analysis above is based on the following key assumptions:

‒ Annual inflation at 2% in the US;

‒ Analysis is at 31 December 2018 and prepared for 2019-2023 on the basis of minimum annual sales of approximately 13.5 thousand tonnes of Uranium in form of U3O8, of which the volumes which are contracted as of 31 January 2019 will be sold per existing contract terms i.e. contracts with hybrid pricing mechanisms with a fixed price component (calculated in accordance with an agreed price formula) and / or combination of separate spot, mid-term and long-term prices, while the rest of the sales would be largely based on spot prices;

‒ U3O8 will be sold under short-term contracts negotiated directly with the customers and based on spot prices.

 

 

 

 

 

 

 

 

 

 

 

 

 

FORWARD-LOOKING STATEMENTS

This document contains statements that are considered to be 'forward-looking statements'. Terminology that describes or references the future - including, inter alia, words such as 'believes', 'according to preliminary estimates', 'expects', 'forecasts', 'intends', 'plans', 'suggests', 'will' or 'should' or, similar or comparable terminology, or references to discussions, plans, objectives, goals, future events or intentions - is used to denote forward-looking statements. These forward-looking statements include all statements that are not historical facts.

These statements include, without limitation, statements regarding intentions, opinions and announcements on the Company's expectations, concerning, among other things, the results of operations, financial state, liquidity, prospects, growth, potential acquisitions, strategies and sectors, in which the Company operates. In their nature, forward-looking statements involve risks and uncertainties because they relate to future events and circumstances that may or may not occur. Forward-looking statements do not guarantee future or actual performance.

The Company's financial position and liquidity, as well as the development of the country and industries in which the Company operates, may differ significantly from the options described herein or assumed pursuant to the forward-looking statements contained herein. The company does not plan and does not assume obligation to update any information regarding the industry or any forward-looking statements contained herein, whether as a result of obtaining new information or the occurrence of future events or any other circumstances. The Company makes no representations, provides no assurances and publishes no forecasts as to whether the outcomes described in such forward-looking statements will be achieved.

 

 

 

 

 

 

 

 

 

 

 

 

SUSTAINABLE DEVELOPMENT

 

PROGRAMME OF SUSTAINABLE DEVELOPMENT

Kazatomprom's programme of sustainable development in corporate and social responsibility for 2017‒2019 is aimed at creating the conditions for sustainable corporate development by: 102-11

§ Ensuring decent conditions and wages for Company employees;

§ Safeguarding the labour and social rights of Company employees;

§ Increasing the longevity and quality of life of Company employees, their families and the population of the regions in which the Company operates;

§ Reducing the Company's environmental impact;

§ Assisting in the sustainable development of the regions in which the Company operates;

§ Creating a favourable business climate, both within the Company and in those regions where it is present;

§ Ensuring effective interaction between Kazatomprom, its partners and state authorities. 

The programme includes the following measures, divided into three categories:

1.     SOCIAL MEASURES

§ Ensuring social stability in labour collectives;

§ Development of human resources;

§ Ensuring social calmness among the unions of companies being restructured;

§ Combatting corruption and fraud, dealing with corporate conflicts and conflicts of interest.

 

2.     OCCUPATIONAL HEALTH, SAFETY AND ENVIRONMENTAL PROTECTION MEASURES

·      Occupational health and safety;

·      Environmental protection;

·      Nuclear and radiation safety.

 

3.     MEASURES OF ECONOMIC EFFECT ON REGIONS OF OPERATION

·      Supporting the social and economic development of the regions of operation;

·      Procedures to ensure and oversee sustainable procurement practices.

 

SUSTAINABLE DEVELOPMENT INITIATIVES

The Management Board of Kazatomprom by its decision No. 53 dated March 20, 2018, approved the Materiality Matrix (only taking into account the survey of employees of Kazatomprom), the Programme for the implementation of sustainable development initiatives of Kazatomprom for 2018 as well as updated Stakeholder map.

According to the above documents, sustainable development initiatives were:

1.     Sustainable economic development (achievement of the target EVA indicator (Economic Value Added), meeting the targeted net consolidated income on the Group level, staying below the planned cost threshold of the uranium oxide production in subsidiaries);

2.     Increase of industrial safety (implementation of the target model for integrated security management, implementation of the Industrial Safety Behavioral Audit, introduction of the LTIFR index, increased reporting transparency);

3.     Environmental impact of the company's operations (maintaining of the established emissions limits below the threshold, development and introduction of scientifically-based standards of production waste generation per unit into operations);

4.     Production efficiency (energy saving and energy efficiency increase measures);

5.     The contribution of innovative scientific research into increase of natural uranium production processes (approval and implementation of the Kazatomprom R&D Plan);

6.     Human potential development (organization of training according to employees' individual development plans).

Information on the implementation of the above sustainable development initiatives is normally provided to the BoD's Committee on Industrial, Environmental, Radiation Safety, Labor Protection and Sustainable Development.

 

GOVERNANCE DIAGNOSTICS

 

In order to assess the implementation of the Corporate Governance Code principles in Kazatomprom, in 2017-2018, following the initiative of Samruk-Kazyna, the Company conducted a diagnostic of its corporate governance system. As part of this diagnostic, the implementation of the sustainable development principles and sustainable development systems of Kazatomprom were assessed. In addition, based on the results of the diagnostics of the corporate governance system conducted in 2017, Kazatomprom received a number of recommendations to improve internal processes (for the period 2018-2025), including internal processes in the field of sustainable development (consistency of economic, environmental and social goals for long-term sustainable development , implementation of a sustainable development system).

The recommendations of independent consultants aimed at corporate governance system improvement, including such under the "Sustainable Development" section are included in the Action Plans for 2018 and 2019. The relevant departments work on the implementation of these activities, including in the field of sustainable development.

 

 

SUSTAINABLE ECONOMIC DEVELOPMENT

 

CREATED AND DISTRIBUTED DIRECT ECONOMIC VALUE

Kazatomprom performs significant social and economic functions, ensuring the sustainable development of both the Company and the population in numerous areas of Kazakhstan.

The Company's high degree of economic effectiveness is attributable to its thorough planning of income and expenditures, overseen by the development planning and budgeting procedures of Samruk-Kazyna JSC's Corporate Standard for Strategic and Business Planning. The business development plan is formulated in consolidated form, to include five-year plans of subsidiaries and its implementation is monitored by the Company's Board of Directors as well as by Samruk-Kazyna JSC.

Table 42. Direct economic value created and distributed (KZT millions)* 201-1**

No.

Item

2018

2017*****

(recalculated)

Change

 

Direct economic value created

 

 

 

1

Revenue***

801,608

444,839

80%

 

Distributed economic value:

 

 

 

2

Operating costs****

(293,760)

(193,783)

52%

3

Salaries and wages

(41,833)

(39,386)

6%

4

Interest and dividend costs

(12,672)

(8,933)

42%

5

Taxes, excluding income tax

(23,559)

(11,275)

109%

6

Corporate income tax

(28,797)

(17,287)

67%

7

Investment in local society (social expenditures)

(730)

(609)

20%

8

Miscellaneous expenses

(19,991)

(34,412)

(42)%

 

Undistributed economic value

380,266

139,154

173%

 

* Ukraine, the US, the UK and Kazakhstan are members of the Extractive Industries Transparency Initiative (G4 mining and metals sector disclosures)

** Information from the Company's audited consolidated financial statement for 2018

***Revenue is calculated in accordance with GRI methodology and includes the sales revenue and all other Company revenues

**** Operating costs include the following items: cost of sales (except for salaries, wages and taxes), distribution costs, general and administrative costs (except for salaries, wages and taxes). 

***** Operations of MAEK-Kazatomprom LLP classified as discontinued

 

Detailed information on the financial and economic results of Company activities for 2018 can be found in the audited consolidated financial statement on the Company's corporate website:

https://www.kazatomprom.kz/en/investors/finansovaya_otchetnost/page-1

 

SCIENCE AND INNOVATION

Kazatomprom is a world-class innovator, focused on the scientific and technical development of its production methods. The Company consistently increases its financing of scientific and technical work in fields such as geology, geotechnology, natural-resource processing, nuclear fuel cycle (NFC) production, rare and rare-earth metal production and the legal protection of new-generation technologies.

The Company has a scientific and technical subdivision (Institute of High Technologies LLP), as do its subsidiaries and affiliates (CRL at UMP JSC, CRME at Volkovgeologiya JSC). There are more than 486 research and design staff in total, including eight doctors of science and 54 doctoral candidates.

In 2018, the Company, its subsidiaries and its affiliates boasted 101 research and development agreements worth KZT 3.417 billion. The Company filed three patent applications for inventions and received 14 protection documents for inventions. Employees of Kazatomprom put forward 1,697 rationalisation proposals, of which 1,564 were accepted and 977 have been implemented to date. The expected economic effect is more than KZT 2.393 billion.

To maintain its competitive edge in the world market, the Company has developed its own Research and Technological Activity Management policy. Kazatomprom's priority research areas are coordinated by four scientific hubs:

1.   Geology, geotechnology and mining and development - Volkovgeologiya, JSC;

2.   Extraction and processing of product solutions, concurrent REM extraction - IVT, LLP;

3.   High technologies of the NFC, RM production and processing - CRL of UMP, JSC;

4.   Knowledge management, commercialisation of intellectual property, general coordination of research and technological activity - UKN of NAC Kazatomprom, JSC.

In 2018, there was one meeting of Kazatomprom's Scientific and Technical Council and 12 meetings of the Specialised Scientific and Technical Councils of its priority research areas.

In accordance with the new policy, in 2018, the Company updated its policy on rationalisation activity.

On 20‒22 September 2018, the Company held an 'Innovation School' in Almaty on the theme of "prospects and technologies for diversifying the activities of NAC Kazatomprom JSC".

Also in 2018, as part of Kazatomprom's cooperation with Atomredmetzoloto JSC, there were mutual visits to mines and industrial sites, along with technical meetings to exchange experiences on uranium mining by the PSV method and on by-product extraction of useful associated components.

To commercialise the results of its scientific and technological activities, in 2018, Kazatomprom signed a licence agreement, granting JV Khorasan-U (Khorasan-U), LLP the right to use its patented invention for the underground leaching of metals through technological well systems (Patent RK No. 11745 of 2001) in exchange for an annual remuneration payment for the duration of the contract.

Research and development

Almost all of the Company's R&D work is aimed at improving and upgrading the production process. In 2018, the following technologies were developed and adopted: 

·      Ultrasound technology to boost the desorption of uranium.

·      The deposition of small crystals of uranium peroxide using flocculants made in Kazakhstan.

·      To optimise the flow of technological solutions, a simulator (version 3.0) was developed and integrated into the module of the "Mine" programme, with a view to designing the geo-technological field, the construction of wells and their operation. The program module was tested on the cells of the 'central' section of the Mynkuduk deposit. Thanks to the use of the simulator in the process of underground leaching, a 10% reduction in the consumption of sulphuric acid can be expected.

·      Low-acid leaching using cavitation-jet technologies in combination with special-purpose chemicals at the pilot testing phase is planned to be introduced in 2020.

Kazatomprom's scientific subdivisions are making significant contributions to the achievement of the Company's strategic goals, including increasing value added and producing high-tech Kazakh uranium products.

 

ECONOMIC EFFECT IN REGIONS OF OPERATION

The company pays close attention to supporting infrastructure projects in the regions in which it operates in order to promote their socio-economic development. 203-1

In February 2018, the Company donated a pre-school institution with 240 places to the Department of Education of Nur-Sultan City . The project was implemented under the auspices of the Memorandum of Mutual Cooperation between NAC Kazatomprom JSC and the Akimat of Nur-Sultan city, dated 17 March 2014. The total cost of the project was more than KZT 831 million. The facility has a total area is 4,602 m2 and the site of the school totals 0.9 ha.

In December 2018, as part of the framework of the Memorandum of Mutual Cooperation between Kazatomprom and the Water Resources Committee of the Ministry of Agriculture of the Republic of Kazakhstan, dated 15 August 2018, the Company transferred to the state the operating rights for KAZVODHOZ Shieli-Energoservice, together with more than KZT 523 million of financial resources to overhaul the transferred entities.

In 2018, the Group paid KZT 1,337 million under its subsoil use contracts for the social, economic and infrastructural development of the regions in which it operates:

Table 43. Transfers to the Turkistan regional budget, 2018

No.

Enterprise

Amount transferred

(KZT '000s)

1.

NAC Kazatomprom JSC

504,057

2.

Karatau LLP

45,206

3.

APPAK LLP

32,652

4.

JV Zarechnoye JSC

17,441

5.

JV Inkai LLP

11,220

6.

Volkovgeologiya JSC

4,200

7.

PE Ortalyk LLP

70,194

8.

JV UGHT LLP

83,493

       9.

JV Akbastau JSC

185,930

       10.

JV KATKO LLP

11,234

       11.

Kazatomprom-SaUran LLP

252

TOTAL:

965,879

 

Table 44. Transfers to the Kyzylorda regional budget, 2018

No.

Enterprise

Amount transferred

(KZT '000s)

1.

NAC Kazatomprom JSC

92,986

2.

Baiken-U LLP

37,119

3.

Khorasan-U LLP

171,112

4.

RU-6 LLP

2,000

5.

Semizbai-U LLP

23,272

TOTAL:

326,489

 

Table 45. Transfers to other regional budgets

No.

Enterprise

Amount transferred

(KZT '000s)

Akmola region

1.

Semizbai-U LLP

16,623

North Kazakhstan region

2.

Semizbai-U LLP

16,623

Almaty region

3.

MK Kaz Silicon LLP

1,758

East Kazakhstan region

4.

UMP JSC

7,457

Mangistau region

5.

NAC Kazatomprom JSC

1,869

TOTAL:

44,430

 

CHARITY AND SPONSORSHIP

In decision No. 126 of January 2016, the Board of Directors of Samruk-Kazyna JSC approved the Fund's Charity Policy and Charity Program.  

At present, all charitable activity of the Fund group is conducted by the Samruk-Kazyna Trust Social Projects Development Foundation, which selects projects of social importance on a competitive basis.

 PROCUREMENT

The Company ensures transparency of purchases and publishes its procurement regulations and plans, including its long-term procurement plans, as well as the legal and regulatory documents pertaining to tenders and results for information purposes on its website.

The Company is currently implementing a new procurement model with the following goals:

§ To improve purchasing efficiency by using best practices;

§ To ensure the monitoring and transparency of purchases;

§ To create and develop a qualified suppliers list; and

§ To reduce stock costs.

The new purchasing model will apply to Kazatomprom's corporate centre and all of its subsidiaries and affiliates.

The Company lends assistance in the negotiation of contracts for the purchase of goods, work and services between its affiliates and regional suppliers with a local content level of 79% to support domestic suppliers.

 

Under a project aimed at managing procurement by category in 2018, four new category-based procurement strategies (sulphuric acid, shipping and packaging containers, ion-exchange resin and hydrogen peroxide) were developed and seven strategies were implemented in one to four waves. For example, when selecting pump suppliers for the first time, the Company used a total cost of ownership (TCO) tool, with a total economic benefit of KZT 3.07 billion, above the planned figure of KZT 2.3 billion.

 

Kazakhstan's Subsoil Code generally requires subsoil users to comply with certain local content requirements, including the use of local suppliers and personnel. These requirements are usually set out in the subsoil use agreements to which the Company's subsidiaries and joint venture companies are party.

In 2002, the Government introduced a policy aimed at replacing imports and spurring the greater involvement, support and stimulus of local producers. This was taken a step further in 2009, when the Government made amendments to subsoil legislation, which were then reflected in the Subsoil Code and in related laws, to increase local content of goods, work and services purchased by state bodies, national companies and subsoil users. The Local Content Requirements introduced new criteria, such as using local employee wages as a percentage of payroll to calculate local content.

Table 46. Percentage of local-origin products, work and services purchased (%)

 

2018

2017

2016

Local-origin products, work and services purchased (as a percentage of total)

80%

80%

82%

 

Table 47 provides a breakdown of the percentage of local-origin purchases by Kazakhstani region. 204-1

Table 47. Local-origin purchases, by region, 2018 (%)

Region

Percentage of local origin in purchases (%)

Akmola region

98

Almaty region

67

Kyzylorda region

93

Mangistau region

83

South Kazakhstan

89

East Kazakhstan

78

Atyrau region

61

Zhambyl region

89

West Kazakhstan

10

Karaganda region

88

Kostanay region

53

Pavlodar region

89

Aktyubin region

11

North Kazakhstan

73

Nur-Sultan city

82

Almaty city

83

Total for Kazatomprom (in Republic of Kazakhstan)

80

 

 

 

SOCIAL RESPONSIBILITY

COMPANY STAFF

103-2

Kazatomprom's employees are its main asset; they foster its development and ensure it maintains its leading position in the world uranium market.

The Company's guiding document in the field of human-resources management is its HR Policy. Its objective is to achieve the Company's strategic goals by fostering effective individual and team work by qualified and motivated employees who share the Company's values.

Kazatomprom's HR Management Department monitors compliance annually, based on the Company's HR Policy, using the following performance indicators:

§ Increase in staff involvement;

§ Stabilisation of staff transfers and the prevention of staff turnover growth, except for activities related to the optimisation of the Company's management structure;

§ Increase in the share of employees who have completed training and further education;

§ Competitive recruitment; and

§ Human-resource and staff-cost planning efficiency.

In addition, the ideological principles and ethics of the Company's business culture, structure and development are governed by its Code of Corporate Ethics and Compliance, a collective agreement, and regulations on corporate rewards.

The Company adheres to principles, standards and regulations to safeguard the interests and rights of workers and strives to prevent all forms of discrimination and forced labour. It pays particular attention to safety in the workplace, to improving workers' social conditions and to equal opportunities for professional and personal growth.

Since 2012, the Company has been implementing a management succession programme to:

§ Ensure the succession of top Company management from a pool of candidates suited to key management and administrative positions;

§ Identify and develop employees who have significant potential to fill management and administrative roles;

§ Encourage Company staff to advance professionally and avail of development and career opportunities.

 

Management has objectively selected a pool of candidates with the greatest potential to operate at a higher level after appropriate training and practice.

As of the end of 2018, Kazatomprom's total headcount, including joint ventures and affiliates, was 20,507, down 18% from the previous year (25,020 people at end 2017 and 25,819 at end 2016). The reduction in headcount was due to the disposal of assets (MAEK LLP, KAES JSC and SARECO LLP). The majority of the work is executed by the Company's employees. Outsourcing (non-staff) is used to carry out works that are not of a permanent nature, based on the conclusion of a paid service agreements. 102-8

Table 48. Total number of staff and non-staff employees in the Republic of Kazakhstan as of end 2018  102-8

 

Number (persons)

Including

Men

Women

Total headcount

20,956

16,981

3,975

Headcount at the end of the reporting period (staff)

20,507

16,642

3,865

Workers on paid services agreements, (non-staff)

449

339

110

Note: The Company's main region of activity is Kazakhstan

At the end of 2018, the share of employees on paid services agreements was 2.1% of total headcount, while 95.4% of Group staff had open-ended employment contracts. 102-8

Table 49. Total headcount by employment agreement and gender, end 2018 102-8

 

Number (people)

 

Men

Women

Total headcount

20,507

16,642

3,865

Permanent employees

19,572

15,974

3,598

Temporary employees (fixed-term agreement)

935

668

267

 

The percentage of Group employees that were part time as of end 2018 was 0.1%. 102-8

 

Table 50. Total headcount by employment type, end 2018 102-8

 

Number (people)

 

Men

Women

Total headcount

20,507

16,642

3,865

    Full-time employment

20,488

16,629

3,859

    Part-time employment

19

13

6

A significant percentage of Kazatomprom's employees (about 66%) work in the South Kazakhstan region (including the city of Shymkent, 2.7%), where the country's main uranium deposits and, consequently, the Company's operations are located.

Table 51. Total headcount by region and gender

Indicator

Number (persons)

Including

Men

Women

Almaty

655

379

276

Nur-Sultan

939

518

421

Shymkent

526

306

220

West Kazakhstan

0

0

0

North Kazakhstan

1,198

940

258

South Kazakhstan

13,067

11,709

1,358

Central region

0

0

0

East Kazakhstan

4,107

2,781

1,326

Russian Federation

0

0

0

People's Republic of China

10

5

5

United States of America

2

2

0

Switzerland

3

2

1

Total

20,507

16,642

3,865

Kazatomprom's management positions and main staff categories reflect management's inclusive approach. Indicators of inclusivity, for example, on gender, age and minority-group affiliation, can be found the company's annual sustainable development report.

As of the end of 2018, 81% of the Group employees were men and 19% were women. Compared with the previous year, the number of men as a percentage of total employees increased slightly (from 80%). This gender ratio is very much down to the specific production activities of the nuclear industry. The average age of the Group employees was 40 years as of end 2018 - a figure that tends to remain virtually unchanged year on year.

Table 52. Structure of governing positions and staff by gender, nationality and age, end 2018 405-1

 

Indicator

Employees

Administrative staff

Production staff

Share

Governing positions

Share

Headcount

 

20,388*

2,131

18,257

100%

119

100%

Gender

Men

16,532

984

15,548

81%

110

92%

Women

3,856

1,147

2,709

19%

9

8%

 Minority group
(by nationality)

 

 

 

 

 

 

 

 

 

 

Kazakh

13,710

1,562

12,148

67%

92

77%

Russian

5,280

444

4,836

26%

17

14%

Other

1,398

125

1,273

7%

10

8%

Age groups

 

 

 

 

 

 

 

 

 

 

Under 30 years of age

3,544

372

3,172

17%

3

3%

From 30 to 50 years of age

11,470

1,372

10,098

56%

75

63%

Over 50 years of age

5 374

387

4 987

26%

41

34%

*excluding management

The share of Company employees covered by collective agreements in 2018 remained unchanged at 98%. 102-41

 

Table 53. Percentage of employees covered by collective agreements in 2018

 

Value

Headcount (end of period)

20,507

Total number of employees covered by collective agreements

20,119

Percentage of employees covered by collective agreements

98%

In 2018, the number of employees leaving the Company declined 10% from the previous year, indicating a higher level of social stability.

Table 54. Number of employees who left the Company in 2016‒2018, by gender 102-8

 

2018

2017

2016

Change
2018‒2017

Change

2017‒2016

Women

566

727

1,046

-22%

-30%

Men

2,418

2,604

3,109

-7%

-16%

Total

2,984

3,331

4,155

-10%

-20%

Out of the 2,984 people who left the Company in 2018, the largest proportion (43%) were men between the ages of 30 and 50. As Kazakhstan's uranium mining enterprises are largely located in its Southern region (including Shymkent), most employees who left the Company were in this region (63%).

Conversely, 2,378 employees joined the Company in 2018. Of these new staff, 51% were hired in the Southern region (including Shymkent).

Table 55. Number of Group employees hired in 2018, by region 401-1

Region

 

   Number

Share of new hires (%) 

Almaty

 

164

7

Nur-Sultan

 

306

13

Shymkent

 

112

5

West region

 

0

0

North region

 

289

12

South region

 

1,101

46

Central region

 

0

0

East region

 

404

17

Switzerland

 

2

0

Total

 

2,378

100

This information is based on information technology (IT) reports and official documentation from Group subsidiaries and affiliates, in line with the indicators of the Global Reporting Initiative (GRI) on social impact.

Business transformation projects - "Implementation of the target personnel management model", "Business processes automation" and "Job-matching"

Between November 2016 and June 2018, Kazatomprom implemented a target personnel management project (KAP-17) aimed at building HR functions using a process approach taking into account the value of target personnel to the Company's business. HR processes were implemented using the target personnel management model developed as part of the Company's business transformation programme. This involved updating policies and process tools, reviewing the functionality and developing the competencies of key users, and training process participants in line with best practices. The objective was to achieve the strategic goal of developing a corporate culture of an industry leader (part of Kazatomprom's development strategy for 2018‒2028). The transition to new personnel management processes was completed for both the Company and six pilot subsidiaries. In 2019‒2020, the project is scheduled to be replicated in the Group's affiliates.

In 2018, as part of the first way of a project to automate business processes, the Company's personnel administration, organisational management, attendance and payroll functions were moved to an automated system (baseline SAP HCM). By the end of 2019, as SAP HCM is rolled out more broadly, an employee HR self-service system is scheduled for phased launch. The new automated system will allow the combination of all personnel management processes into a single database, including comprehensive employee assessments, training and development, personnel records, organisational management, calculation of working time and wages, analytics and reporting.

As part of the transformation process, in 2017, the transition to Kazatomprom's target organisational structure was undertaken according to the job-matching recommendations of then sole shareholder Samruk-Kazyna JSC (an assessment of candidates' compliance with requirements for new positions, based on competencies, skills and work experience). The main prerequisites for the transition were:

·      updated development strategy;

·      a new operational model involving a divisional structure based on elements of the production chain, with a new organisational structure;

·      updated competency and skill requirements; and

·      the introduction of a post grading system.

In 2017, job matching was completed at the Corporate Centre and, in 2018, at DP Ortalyk LLP, RU-6 LLP, Kazatomprom-Sauran LLP, IVT LLP, UMP JSC, TTK LLP, Volkovgeology JSC. In 2019, the plan is to complete the move to job matching at the Company's uranium-mining enterprises. Job-matching has led to replacing 26% of the Corporate Centre employees and 25% of CEO and CEO-1 level employees at the above-mentioned subsidiaries. In 2018, the Corporate Centre embarked on preparatory work to revise organisational structures, strengthen qualification requirements and assess staff competencies to ensure a quality start to the job-matching process in the Company's uranium-mining affiliates.

In 2017 Kazatomprom started a project on Corporate culture development.

Within this project in 2017 the Company organized the following events: corporate culture diagnostics, that covered more than 17 thousand employees (77%), strategic session with СЕО, СЕО-1 from HQ, and General managers from subsidiaries, where the Company's corporate values were determined: SAFETY, RESPONSIBILITY, PROFESSIONALISM, DEVELOPMENT, TEAM.

The Roadmap of the Corporate Culture Project for 2018-2022 was formed in 2018. It includes the following main sections: values promotion, creation of a change agents team, updating the competence model, improving the performance assessment system, leadership training system, succession management and material and non-material motivation, leadership development programme, effective working environment development, employer brand development as well as development of the communication system.

In order to support its efforts in corporate culture development and corporate values promotion, Kazatomprom organized 63 events, 6 out of which were new practices (annual assessment, change agents, townhalls/corporate culture and values educations, toast master, open space and strategic session Vision zero), with more than 80% of the Group's personnel involved.

Staff training and development

A key area of Kazatomprom's human-resources focus is the professional development and training of its staff.

The Group has systematised the process of training, retraining and further education of employees. As part of its staff training programme, Group enterprises cooperate with 33 universities and 10 colleges of the Republic of Kazakhstan and neighbouring countries. Today, at the Company's expense, 335 students are being trained in industry-and region-specific specialties and professions; 158 of them are employees of Kazatomprom, its subsidiaries or affiliates, while 177 are not. In 2018, corporate expenditure on third-level education amounted to KZT 213.5 million.

Students enrolled at the Company's expense undertake practical work experience at the company (if they are not employees) and each student is assigned a mentor, who is an experienced member of staff. Mentors are also assigned to those taking part in Kazatomprom's internship programmes, including the Zhas-Orken internship programme, the Young Specialist programme, and other talent- and succession-related initiatives.

 In addition to educational training programmes, the Company, its subsidiaries and affiliates also pay close attention to employee development programmes, both professional, including the compulsory education required by legislation in the Republic of Kazakhstan, and corporate (leadership development, lean manufacturing, corporate culture, health and safety, etc.). 404-2

 

 

Table 56. Costs of employee training in 2018

Staff category

Number of people

Cost of training (KZT '000s)

Administrative and managerial staff

3,338

688,532

Production staff

23,444

1,023,970

Total

26,782

1,712,502

 

Table 57. Average annual training hours per employee, man hours 404-1

Staff category

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Total

32.5

36

31.2

-10%

15%

Top management

59.6

80

61.4

-25%

30%

Middle management

45.2

61

43.3

-26%

41%

Administrative staff

32.1

49

49.5

-35%

-1%

Production staff

31.1

33

28.9

-6%

14%

Reduction of training hours per employee is associated with the introduction of a corporate format training whereas the number of staff trained has increased, and the number of hours per a worker has decreased.

 

 

SOCIAL POLICY

Collective agreement and trade unions

Approximately 73% of the Group's employees are members of Public Association "Sectoral Union of Nuclear Industry Workers", which had 15,046 members as of 31 December 2018, all of which were Group employees. As of 31 December 2018, approximately 98% of the Group's employees were party to collective bargaining agreements in their companies, which provide for certain additional social benefits, such as the entitlement to compensation payments for certain categories of employee availing of prolonged statutory career breaks, such as mothers of three or more children under the age of 12, or single parents. The collective bargaining agreements of certain Group companies also provide benefits to retired employees. The Group's current collective agreement is valid for three years and subject to regular renewal. 102-41

The collective agreements of the Group's companies also require the Company to give employees and their representatives prior notification of any significant changes in corporate activity that might affect their working conditions. The minimum notification period is at least four weeks for most employees and at least two weeks for others. 402-1

The collective agreement of the Company also contains provisions that regulate the following:

§ Form of remuneration, in accordance with labour legislation;

§ Payment of material assistance to employees upon marriage, retirement, the birth of children and the death of family members, etc.;

§ Employee working time and time off;

§ Creating healthy and safe working conditions;

§ Organizing vocational training, retraining and advanced training for employees;

§ Guarantees and social protection for employees;

§ Rehabilitation and sanatorium-resort treatment and recreation for employees;

§ Compensation payments for employees required to retire;

§ Other issues identified by parties to the collective agreement.

Social policy, payments and benefits

Social benefits and payments are an integral part of Kazatomprom's remuneration system; they are provided for in the collective agreement and are guaranteed for all employees. There are also special conditions provided for, such as social benefits for employees who can no long work due to disability or age.

Under the collective agreement, the trade union is allocated at least 2.5% of the Company's annual salary pool. In 2018, that corresponded to around KZT 200 million.

In addition, funds are allocated annually for employee medical insurance; in 2018, this amounted to more than KZT 822 million.

Financial assistance is provided to employees requiring rehabilitation or treatment, in addition to payments on the birth of a child, on retirement, to families with disabled children under age of 18 years and to large families. There are also reward payments associated with employee work anniversaries.

The Company provides financial assistance to retired employees (of pension age), as well as charitable assistance to retirees and their families to commemorate professional holidays, on anniversaries, in the event of a retiree's death and for medical reasons.

Collective agreements of the Group's companies also contain measures of social support for employees, similar to the above or other measures of social support. Some Company entities provide benefits in excess of the norms guaranteed by the laws of the Republic of Kazakhstan.

There is no difference in benefits for employees in full or part-time employment. 401-2 

In addition, the following measures are taken to support employees made redundant by subsidiaries and affiliates:

§ Support with employment within the entities of the Group and outsourcing companies that provide services to the Group;

§ Various requalification programmes are implemented;

§ Compensation packages. 404-2

 

 

Remuneration system

The Company's remuneration system is aimed at motivating employees to produce quality and efficient work. In 2018, the wages of production workers increased 4% from 2017, to average KZT 244,543 per month.

 

Table 58. Average monthly salary of Kazatomprom's production staff (KZT)

Item

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Average monthly salary of production staff (KZT)

244,543

234,029

215,889

4%

10%

* The indicator is calculated as the Pay Fund of production personnel in accordance with the labor report (Stat. Report) / actual number of production workers

Table 59. Kazatomprom accrued salary pool (KZT million)*

Item

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Total wage pool

63,413

61,829

59,600

3%

4%

 

*Accrued wages, including all relevant taxes and deductions

 

The ratio of Kazatomprom's entry-level minimum wage, for all of its enterprises, to the legal minimum wage of the Republic of Kazakhstan is 1.04:1. 202-1

The Company does not discriminate between employees based on gender and pays men and women equally for their work.

Diagram 8. Ratio of basic salary of men to women, by employee category (KZT '000s) 405-2

 

Table 60. Ratio of standard wage of entry level employee to the established minimum wage in 2018 202-1

Indicator

Including

Men

Women

Minimum wage in the Republic of Kazakhstan (KZT)

28,284

28,284

Average wage of entry-level Group employee (KZT)*

29,360

29,360

Ratio

104%

104%

Note: * Base wage rate of an entry-level production employee

 

 

 

 

 

 

 

 

SOCIAL STABILITY

NAC Kazatomprom JSC has a well-balanced HR policy and strives to create a comfortable working environment to maintain social stability and bolster staff morale. 103-2

The Company has developed action plans to enhance social and working conditions at its enterprises, to ensure a positive psychological environment, improve wellbeing and safety, organise catering, provide financial incentives for employees, increase their qualifications, etc. The heads of Kazatomprom subsidiaries and affiliates are personally responsible for implementing the action plan.

The Centre for Social Interaction and Communications conducts research to determine the Company's social stability rating (index) annually to assess the level of workforce satisfaction and wellbeing, as well as staff involvement and the level of social development among the Group's enterprises.

In 2018, studies were conducted in 17 of Kazatomprom's enterprises and put its social stability rating (index) at 80%.

 

Diagram 9. Kazatomprom's social stability index/ratings, %

 

 

The result ranks the company 'above average' in terms of its level of social stability. Companies with such research results are seen as paying greater attention to social-development issues. The social climate and general mood of production personnel suggest a positive attitude and constructive approach to solving any problems that arise. The index of social stability shows some fluctuations in values. Changes within (+ -5%) within this study are permissible. In the long-term development, the Index value increased significantly from 66% in 2013 to 80% in 2018.

 

 

OCCUPATIONAL HEALTH AND SAFETY

Ensuring a safe work environment is the Company's main priority. In addition to strict compliance with all applicable laws, the Company takes a comprehensive approach to security, which includes international best practices in the field of labour protection and industrial safety. 403-1

In accordance with the labor legislation of the Republic of Kazakhstan, Production Safety Councils have been approved throughout the Company's enterprises, which include representatives of the employer and representatives of employees, including technical inspectors, on a parity basis. Production councils do not replace industrial safety services, but complement safety and labor protection, prevention of occupational injuries and occupational diseases, as well as organize inspections of working conditions and labor protection at workplaces with the help of technical labor inspectors. At the same time, the occupational safety and health council decisions are set to be binding on the employer and the employees. 403-1

In support of the International Social Security Association (ISSA) initiative to improve safety, health and welfare at work, the Company has registered as a member of the international Vision Zero project, reaffirming its commitment to zero injuries in the workplace.

Based on the results of diagnostics of the corporate governance system of Kazatomprom, it was recommended to develop a new process for identifying, assessing and managing workplace risks and managing production process safety (PSM) in accordance with the requirements of the Reference Model on industrial safety as well as to revise the identified risk of "industrial injuries" in the corporate risk map in terms of the risks causes and the effectiveness of preventive measures. In order to implement this recommendation, the Department of Industrial Safety of Kazatomprom has developed a new process - Behavioral audit, which monitors the behavior of workers during their production tasks, the organization and conditions of workplaces / sites, the technical condition of equipment, tools and equipment. devices, availability of all necessary internal documents (instructions, procedures, standards, etc.). The implementation of this process can have a positive effect on increasing the degree of security.

The company is constantly working to improve its safety culture and increase the level of informed compliance with industrial safety requirements by employees and leaders at all levels. In 2018, the Company channelled KZT 7.38 billion (KZT 300 million more than in 2017) to the implementation of measures to ensure it met legislative requirements on labour protection and industrial safety and to improve working conditions. Over the past five years, expenditure in these areas has shown steady growth. 403-7

Under the framework of Kazatomprom's business transformation programme, the KAP20 project to implement a target model for integrated security management has been implemented in the Company's subsidiaries and affiliates. ISO-14001 environmental management systems and OHSAS 18001 occupational health and safety management systems have also been introduced in its subsidiaries and affiliates. 102-12

 In 2018, in line with company policy, there were no industrial accidents, such as uncontrolled explosions, emissions of hazardous substances or destruction of buildings.

Nine road accidents (without injury) and 12 other accidents were registered, however, including one fatal accident at UMP JSC (the only fatal incident in the last three years). A tantalum production operator received an electrical injury from an electrical furnace which tragically led to his death. Based on the investigation it was determined that the main reason for the accident appears to have been a lack of risk assessment on working with hazardous energy sources. Following an investigation into the accident, a system to shut down dangerous power sources is being introduced at the Group's enterprises.

In addition, as an indication of the leadership and involvement of Company managers in ensuring occupational, environmental, industrial and radiation safety, it was decided that the occupational safety services of the Company's subsidiaries, joint ventures and affiliates should come under the direct supervision of top managers. 403-9

As part of efforts to further improve the Company's safety culture and to promote the application of international best practices in the field of industrial safety, special attention is being paid to the use of preventive measures, including identifying and responding to potentially dangerous situations.

To assess the effectiveness of labour protection measures, the Company uses as an indicator the lost time injury frequency rate (LTIFR), which measures the number of incidents leading to loss of working time per 1,000,000 hours.

Table 61. Injury rates 403-9

 

 

Rate

2018

2017

Change (%)

1

Number of accidents

12

7

71

2

LTIFR rate

0,31*

0,15

107

3

Fatal accidents

1

4

Road accidents

9

7

28

* 2018 LTIFR data excludes the amount of time worked by MAEK-Kazatomprom LLP staff for the 2H2018.

 

ENVIRONMENTAL RESPONSIBILITY

The management of Kazatomprom and its subsidiaries and affiliates believes that improving environmental indicators increases the Company's competitiveness. Kazatomprom strives to minimise the negative impact on the environment and ensure the stability of the ecosystems in those areas where environmentally hazardous production facilities are located. It does this by:

§ Improving the regulatory and technical base, developing and assisting in the adoption of technical regulations and standards;

§ Introducing environmental management systems in accordance with ISO 14000, with a view to continuous improvement in the area of environmental protection; 102-12

§ Creating a system of conditions and mechanisms to consider environmental aspects and mitigate environmental risks at all stages of production activity;

§ Preventing pollution and reducing environmental impact through the integration of state-of-the-art technologies; and

§ Ensuring the environmental and occupational safety compliance of the Company's staff and contractors in charge of work at Company facilities.

The Company's entities use an environmental management system, integrated Kazatomprom policy in HSE and provision of nuclear and radiology safety which are revised regularly to take into account changes in market conditions, production upgrades or new, relevant environmental requirements.

According to the results of Kazatomprom's corporate governance system diagnostics, it was recommended to develop a corporate plan / programme in order to improve the analysis and assessment of environmental aspects, which shall include a section on monitoring of the timely receipt of emission permits. In order to implement this recommendation, as part of the development, implementation, preparation for certification of the OHSAS 18001 and ISO 14001 management systems, the documentation on the occupational health and safety management system, including environmental management and risk management, is being developed and updated. This initiative will be continued in 2019.

Also in 2018, according to recommendations of independent consultants who performed diagnostics of the corporate governance system, the Company's risks have been revised and environmental risk with developed risk factors and preventive measures for them have been included in the draft risk register for 2019 (the risk register was approved by the decision of the Board of Directors of Kazatomprom No. 11/18 dated December 6, 2018).

In 2018, the total costs of environmental protection activities in the Company's nuclear operations increased to KZT 2,138.3 million, up KZT 127.3 million from 2017. Of this amount, KZT 1,124.6 million was directed to improving technological processes, including the reduction of unorganised emissions to the environment. KZT 51.03 million was spent on increasing the efficiency of existing dust and gas traps and water treatment plants, while KZT 124.1 million was spent on scientific and design work in environmental protection areas.

The Company's enterprises managed to achieve a reduction in key environmental impact indicators (gross emissions and discharges of pollutants) in 2018. Total gross emissions of pollutants for 2018 amounted to 1,866 tonnes, down 1,829 tonnes from 2017. Data for MAEK-Kazatomprom LLP are not taken into account here, because of the transfer to Samruk-Kazyna.

A significant reduction in the emission of harmful chemicals during the reporting period was down to environmental protection measures resulting from scheduled preventive maintenance of process equipment at the exhaust gas conversion and final absorption stages, which saw the replacement of filters and demister units.

The volume of pollutants discharged by the company as a whole decreased by 9.5% in 2018. The emissions of MAEK-Kazatomprom LLP for 2018 are not included in this figure.

However, some deficiencies and omissions were observed in the environment-related activities of the Company's subsidiaries and affiliates. Many entities fell short on analysing and assessing environmental aspects, failed to minimise the negative environmental impact of their activities or did not comply with the requirements of environmental laws. Overall, the penalties imposed on the Company's enterprises for non-compliance with environmental laws decreased and amounted to KZT 15.3 million in 2018, of which KZT 13.6 million represent fines imposed on UMZ JSC for operations at Karadzhal mine in 2018 and an enrichment plant in Kurchatov city, East Kazakhstan Region, during the first five months of the year 2016, without the required environmental permits. Non-financial sanctions have not been reported during this period. 307-1

 

WASTE MANAGEMENT

The Company's production activities produce many different types of waste, among them:

§ Solid and liquid radioactive waste;

§ Overburden rocks generated during the mining of fluorite copper-molybdenum ores;

§ Drilling mud from the drilling of the wells at the ISL field testing site;

§ Fluoric gypsum from the production of hydrofluoric acid;

§ Ashes and slag waste from the production of thermal energy;

§ Municipal waste;

§ Waste oil products;

§ Car tyres.

 Solid radioactive waste created during the production process occurs in:

§ Radioactive contaminated soil at sites where pregnant solutions are delivered through pipes;

§ Used ion-exchange resins removed from the production cycle;

§ Radioactive contaminated slurry from collecting tanks; and

§ Fragments of equipment and metal constructions removed from production.

These types of solid radioactive waste are characterised as 'low active' and deemed fourth or fifth grade, which indicates that they are the least hazardous solid radioactive waste. The Company's mining facilities dispose of solid radioactive waste in special disposal facilities certified by state ecological experts, in accordance with the regulations of Kazakhstan.

The Company's subsidiaries and affiliates manage industrial and radioactive waste in line with corporate standards set by the Company, namely, the Rules of Production and Consumption Waste Management at Enterprises of NAC Kazatomprom JSC and the Practical Guidelines for Management of Radioactive Waste Prior to Landfill.

In the reporting period, the Company's subsidiaries and affiliates performed an industrial environmental monitoring (IEM) exercise in accordance with environmental legislation. The IEM is carried out every quarter, with the involvement of certified and accredited contractors (laboratories). Kazatomprom's environmental impact in 2018 did not exceed established environmental quality limits.

In 2018, the Company carried out an account and inventory of the sources of generation, storage and landfill sites, the disposal and recycling of waste, production waste transferred to third parties for use, utilisation and recycling, and disposal on specially allotted sites.

In 2018, the Company's industrial sites generated 1,366,000 tonnes of waste.

Hazardous waste (38,401.54 kg) was transferred to specialized enterprises for disposal. Non-hazardous waste in the form of drill cuttings (1,163,195.76 kg) resulted from drilling of technological and exploration wells are housed in special sludge dumps and are reclaimed in accordance with the set procedures. Also, non-hazardous waste included municipal waste (2,490.49 kg).

Most of the produced hazardous waste was transferred on a contractual basis to specialized enterprises. Waste management methods were determined in accordance with the Environmental Code of the Republic of Kazakhstan. Waste emissions limits excess established by government agencies (1,812.9 thousand tons) is not recorded.

A detailed breakdown of the Company's waste by type can be found in Table 64:

 Table 62. Total volume of waste generated by Kazatomprom, by type (tonnes) 306-2

Waste type

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Industrial

1,253,500

797,100

443,600

57%

80%

Municipal

2,500

2,700

3,000

-7%

-10%

Solid radioactive

3,900

11,500

2,900

-66%

297%

Liquid radioactive

106,100

125,500

111,100

-15%

13%

Total

1,366,000

936,800

560,600

46%

67%

The 57% increase in industrial waste in 2018 compared with 2017 was caused by the sub-grade drilling of wells and the generation of overburden rocks at the Karadzhal fluorite ore deposit (EKR).

The Company's subsidiaries and affiliates posted the following shortfalls and omissions during the reporting period:

§ The uptrend in the accumulation of production and consumption waste persisted, while there was insufficient work carried out to utilise and recycle waste prior to disposal. Waste management systems needed improvement. Just over 1% of the total volume of generated waste was disposed of. The remaining waste was collected or buried.

§ A regulatory document governing the hazard-level determination and coding of drilled cuttings was unavailable, resulting in the violation of both environmental and tax laws.

It should be noted that the guidelines for hazard-level determination and the coding of drilled cuttings generated at the construction of process wells at uranium deposits, developed as part of the Company's plan of action for an integrated approach to the development of its waste-management system for 2016-2020, has been submitted to the state authorities for approval. Once approved, it will apply to all of the Company's uranium mining enterprises. The guidelines will enable problems regarding non-compliance with environmental and tax laws to be resolved.

DIRECT GREENHOUSE GAS EMISSIONS

Experts from both the Company and the Environmental Regulation and Control Committee of the Ministry of Energy of the Republic of Kazakhstan conduct continuous monitoring of atmospheric emissions at the Company's uranium production facilities.

Table 63. Overall greenhouse gas emissions, CO2 (carbon dioxide) equivalent, thousand tonnes 305-1

Indicator

2018

2017

2016

Change
2018‒2017

Change
2017‒2016

Direct greenhouse gas emissions (coverage area 1)

132.48*

3,929

3,767

-97%

4%

* Substantial decrease in greenhouse emissions is associated with disposal of MAEK Kazatomprom LLP

Carbon dioxide accounts for more than 97% of all greenhouse gas emissions and is, therefore, regulated. Accordingly, every year, prior to 1 April of the year following the reporting period, Company entities submit a greenhouse gas emission inventory report to the Ministry of Energy of the Republic of Kazakhstan. The national plan for the distribution of greenhouse gas emission quotas sets the limits for CO2 emissions. 

 

ENERGY EFFICIENCY

The specifics of the Company's production processes involve significant power consumption. Energy consumption has become one of the Company's biggest production costs. In addition, energy consumption and energy efficiency directly affect its environmental indicators. 302-1

The Company has been making vigorous efforts to increase its energy efficiency, particularly in three key areas:

§ The modernisation of production process;

§ The readjustment of equipment; and

§ By promoting changes in staff behaviour.

 

Table 64. Energy consumption, thousand GJ 302-1

Energy

2018

 2017

 2016

Change

2018‒2017

Change
2017‒2016

Thermal energy

11,551

11,775

11,435

-2%

3%

Electrical energy

5,766

5,936

6,042

-3%

-2%

Total energy consumption

17,317

17,711

17,477

-2%

-1%

 

The amount of electrical energy saved as a result of Company measures to reduce energy consumption and improve energy efficiency was 170,000 GJ in 2018. 

 

Table 65. Use of primary energy sources, GJ 302-1

Source type

2018

2017

2016

Change

2018-2017

Change
2017-2016

Non-renewable:

 

 

 

 

 

Coal

2,5 

2,6 

2,5 

-5%

5%

Natural gas

77,434

75,438 

75,837 

3%

-1%

Fuel (benzine, oil-fuel, diesel)

170

177 

180

-5%

-1%

Renewable:

 

 

 

 

 

Hydrogen*

44* 

112* 

30* 

-61%

273%

Note: *Hydrogen consumption is in tonnes

The Group's total consumption of fuel and energy resources in 2018 was 94,924,000 GJ. The total consumption figure excludes hydrogen consumption of 38.28 tonnes. The hydrogen is produced at the UMP JSC station and used for production purposes.

Kazatomprom's has an energy management system in place in all of its entities, as required by MS ISO 50001. The Company complies with Kazakh legislation governing the electric power industry and on energy saving and improvements in energy efficiency. Consequently, it continuously conducts energy audits to assess the potential for energy savings. After each energy audit, it develops strategies to save energy and improve energy efficiency. In line with Kazakh law and the Company's action plan for 2017‒2020, which seeks to implement its development strategy for 2015‒2025, the Company developed a plan to save energy and increase energy efficiency at its mining enterprises. The plan included:

§ Energy-saving measures;

§ Measures to speed up processes;

§ The introduction of effective new methods of repair and renewal;

§ A reduction in the consumption of reagents and materials; and

§ The reuse of materials and equipment.

The economic effect (fact) of these actions in 2018 was KZT 5,189 million. The Plan's forecast economic effect was KZT 3,550 million. Hence, the effectiveness ratio was 146%. In 2018, according to an analysis of Plan implementation by Kazatomprom's mining operations, planned operations were by and large completed.

 

WATER RESOURCES

A number of the Company's subsidiaries and affiliates carry out extraction activity and the discharge of water involved has an impact on sensitive water bodies, the largest of which is the Ulba River.  303-1

The 2018 figures do not include data for MAEK-Kazatomprom LLP, as the asset was transferred to Samruk-Kazyna. This led to a significant decrease in the reported volume of water drawn and discharged.

In some regions, Kazatomprom supplies water to the local population and to local industry.

Water is used in accordance with permits issued by authorised bodies for the protection of water resources. Enterprises keep strict control of all water drawn and recycled. The monitoring of wastewater quality is carried out by specialised, accredited laboratories.

The Company actively uses water in its operating activities. Water use is significant in both primary production and in the operation of desalination plants, where desalinated water is the end product.

The Company is also an active user of water in its production activities. It uses a considerable amount of water in its main production activities and in the operation of osmosis plants, through which demineralised water becomes a raw material for generating electricity that is supplied to the grid to meet the needs of the local population.

In 2018, the Company used more than 12.2 million m3 of water.

Table 66. Total water drawn, by source (thousand m3) 303-5

Source

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Surface water

951.1

1,200,372

1,249,917

-99.9%

-4%

Ground water

9,955.4

14,806

14 659

-33%

1%

Municipal and other supply systems

1,311.5

1,330

1 521

-1%

-13%

Total water drawn

12,217.95

1,216,508

1 266 097

-99%

-4%

 

Kazatomprom seeks to reduce the amount of water it draws for production. To this end, a number of enterprises now use closed water cycles. 303-2

 

Table 67. Total volume of reusable water (thousand m3) 303-2

Indicator

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Total volume of reusable water

19,840

20,447

19,774

-3%

3%

 

Table 68. Total water discharge volume by source (thousand m3)  303-3

Wastewater receiver, thousand m3

2018

2017

2016

Change 2018‒2017

Change 2017‒2016

Caspian sea

0

1,154,910

1,202,440

-100%

-4%

Ulba river

1,671

1,353

1,461

23%

-7%

Containment pond

3,167.5

1,663

1,307

90%

27%

Evaporation fields

410.9

1,279

1,281

-68%

-0.2%

Total

5,249.9

1,159,205

1,206,489

-99.5%

-4%

 

Contamination of ground water

The monitoring of ground water is the most important environmental activity in uranium mining by the ISR method. To monitor ground-water contamination, samples are taken from wells for analysis. To protect the ground water, the mining area is enclosed by a sanitary area that extends 500 meters from the ore zone. Furthermore, radionuclide contamination in water samples taken from monitoring wells may not exceed levels set by SERERS.

Except for the Ulba Facility, all of the Company's uranium mining operations are located in desert areas of Kazakhstan and are far removed from densely inhabited areas.

NUCLEAR SAFETY

Nuclear security measures are in place for all Company enterprises that carry out activities involving nuclear materials.

At present, UMP JSC possesses nuclear materials. The monitoring and supervision of nuclear fissile material (NFM) is the responsibility of the Chief Physicist's Department. In 2018, the Chief Physicist's Department carried out the following safety-related activities:

§ A regular nuclear-safety knowledge test to check the knowledge level of employees in the finished products storage area, uranium production and support departments of UMP JSC, which work with NFM.

§ Review and approval of the design, engineering, detail and process documentation on nuclear safety of UMP JSC subdivisions working with NFM;

§ In Q2 2018, an emergency response drill for staff and services in relation to a spontaneous chain reaction (SCR) signal by the emergency alarm system at all nuclear hazardous units of UMP JSC;

§ In November 2018, an inspection of the nuclear safety status of UMP JSC.

A nuclear materials inventory and nuclear safety inspection are carried out at the Group's enterprises on a regular basis to ensure nuclear safety. The absence of any faults and problems underscores the effectiveness of measures taken.

Radiation safety

In 2018, the Company carried out systematic process monitoring of the radiation environment in its workplaces, premises, production sites and monitored areas.

Radiation factors at the production site and in sanitary protection and residential zones remained unchanged and equal to the values for 2017. No radiation accidents and incidents occurred at the Company's enterprises in 2018. There were no recorded values above the annual radiation dose limits set the Sanitation and Hygiene Standards and Sanitary and Epidemiological Requirements for Radiation Safety (SHS SERRS), approved by Order of the acting Minister of National Economy of the Republic of Kazakhstan, No. 155, of 27 March 2015.

In 2018, measures were taken to improve the radiation environment, including repairs on rooms and equipment, the replacement of corroded or obsolete equipment, the repair and upgrade of ventilation systems, the removal of low-level radioactive waste to disposal areas, the purchase of new radiation monitoring instruments and radiation safety and protection training for staff. In 2018, 2,900 tonnes of low-level radioactive waste were removed from Kazatomprom enterprises to low-level radioactive waste disposal areas, 31 new radiation monitoring instruments were purchased and 464 employees completed radiation safety and protection training at licensed organisations.

The average dose of radiation to which Kazatomprom's staff were exposed in 2018 was 1.55 mSv per year, including the natural background radiation. Permissible level - 20 mSv per year. At the same time the level of such natural background radiation in areas where Company operates amounted 0.3-1.2 mSv per year. The average level in 2018 was 0.76 1.55 mSv per year after subtraction of the natural background radiation. For comparison purposes, the population is typically exposed to natural background radiation of 1-3 mSv per year.

In 2018, the maximum annual effective dose of group A staff at the Company's enterprises was 4.97 mSv per year, down 10% from the maximum dose recorded in 2017.

 

DEVELOPMENT PLANS

The group is working to adopt best practices in the fields of health, safety and the environment and will continue to consider these areas as issues of paramount importance in future.

To continually improve its HSE standards, the Company approved an environmental and social action plan (ESAP) aimed at reviewing the findings and recommendations of SRK Consulting (UK) Limited (SRK), which analysed the Group's assets in June 2018. This series of initiatives is aimed at bringing the Company's practices into full compliance with Good International Industry Practices (GIIP), in particular, with IFC Performance Standards, as well as with the Guidelines on Occupational Safety and Environmental Safety. The plan includes a wide range of protection measures relating to air, water, land, waste management, stakeholder participation, habitat review, land-cover restoration plans, etc.

The overall objective of the ESAP is to move the Group from merely ensuring regulatory compliance to taking proactive risk-based management of PB issues in accordance with international best practices in all aspects of the Group's activities over a five-year period.

The ESAP is based on the following key principles:

              Adoption of a risk-based and proactive management approach. The Group will move its focus on maintaining regulatory compliance to a risk-based approach that goes beyond compliance, in order to achieve an even higher level of environment, health and safety (EHSS) performance.

              Increases in headcount to support the timely implementation of the ESAP. The Company's Board of Directors has acknowledged the need for additional resources.

              Performance reporting and management review. The Company's health and safety team will coordinate, analyse and report to the Company's senior management and Board of Directors on implementation of the ESAP. In addition, senior management will review ESAP progress on at least a semi-annual basis.

The Board of Directors acknowledges the need for a paradigm shift and will consider the use of external expertise to help guide the process. Trainings and workshops for Company and subsidiary management will be used to facilitate the process.

 The following table sets out the principal steps envisaged by the ESAPs:

 

 

 

Table 69. Principal steps envisaged by the ESAPs

 

 

ESAP goal

 

Summary of actions

 

Outcome

 

 

 

 

Improved impact prediction and monitoring

The EHSS reviews identified that operations require greater understanding of the environmental and social context, while the impact assessment and monitoring undertaken is currently focused on regulatory compliance, rather than geared to a receptor-based approach. To address these gaps, the following actions are required:

Improved ability of operations to prove and ensure that they are not having impacts on receptors.

 

 

 

 

•      Further study of water resources, habitats and land use in the vicinity of the mines to identify impact receptors.

 

 

•      Refinements to impact predictions.

 

 

•      Definition of cumulative impacts.

 

 

•      Improvements in the monitoring and reporting of impacts.

 

 

 

 

Improved community stakeholder engagement

The EHSS review identified that the community stakeholder engagement and grievance management processes are currently not formally integrated into management systems and otherwise not fully aligned with GIIP. To address these gaps, the following actions are required:

Active engagement with communities, enhancing risk management and constructive relationships with surrounding communities.

 

 

 

 

•      Undertake social scans that define how people are using land and water around the mines.

 

 

•      Community stakeholders to be identified by means of a formal stakeholder identification and analysis exercise.

 

 

•      Stakeholder engagement plans geared to more active engagement.

 

 

•      Grievance procedures framed in the context of good international practices and documented.

 

 

•      Documentation of stakeholder engagement.

 

 

 

 

Improved control over low-level radioactive waste service providers

The EHSS review identified a need to pay more attention to low-level radioactive waste services, particularly services for the decontamination of metal low-level radioactive waste, as well as better understanding of their capacity to handle large quantities of radioactive waste at closure, including the process through which low-level radioactive waste is disposed of. To address these gaps the following actions are required:

Group enterprises will be able to prove that the radioactive waste services used are responsible.

 

Improvement of closure plans by better understanding of the capacity of radioactive waste facilities and metal decontamination services.

 

•      Where waste is sent to third-party waste facilities, enterprises must ensure appropriate service agreements are in place (incorporating liability transfer) and that they have evidence that the EHSS performance of these facilities is acceptable.

 

 

 

 

 

•      Group companies must also precisely estimate the quantities of radioactive waste that will be generated at closure and confirm that the available licensed waste facilities have capacity to receive such waste.

 

 

 

 

Improved closure planning

The estimated closure costs for the mines were found to be low during the EHSS review and were further reviewed and revised for the SRK report. SRK's EHSS review of non-mining assets also included an evaluation of the estimated closure liabilities, in line with GIIP (while under Kazakhstan law, an estimate of closure costs is only required for nuclear installations, which has a specific definition in the applicable regulation and does not apply to any of the Group's facilities, or subsoil use obligations). The EHSS review identified the need for the following improvements in closure planning:

The Group will regularly update its estimates with respect to both statutory closure liabilities (required by Kazakhstan legislation) and closure liabilities, in line with GIIP. The Group will then ensure sufficient funds are in place to cover closure and rehabilitation costs at the end of each respective asset's life.

 

 

 

 

•      Establishment of an internal closure planning group to regularly review liquidation programmes and cost estimates.

 

 

 

 

 

•      Update of closure plans and cost estimates on a regular basis.

 

 

 

 

 

•      Closure criteria to be agreed with regulatory authorities and other stakeholders and addressed in closure plans.

 

 

 

 

 

 

 

 

 

 

Health and safety and radiation safety

The EHSS review identified that use of personal protective equipment (PPE) was rigorous in most operations, but not all, while improvement to radiation protection practices were required. To address these gaps the following actions are required:

Further enhancement of safety performance.

 

 

 

 

•      Further promote adherence to requirements to use PPE at all operations.

 

 

 

 

 

•      Establish capacity to monitor urine samples of personnel where relevant.

 

 

 

 

 

•      Incorporate requirements of the IAEA Safety Guide No. SSG-27 not already covered in radiation management plans.

 

 

 

 

Increase the capacity of the corporate Industrial Safety Department

An increase of the ISD's headcount is required to meet the Group's current EHSS aspirations, handle the increasing volume of EHSS data being collected from the operations and implement the ESAP.

The Company's industrial safety team will be in a position to guide, monitor, audit and report on implementation of the action plan.

 

 

 

 

•      Increase the capacity of the Company's ISD team.

 

 

 

 

 

•      Bring in external expertise to assist with impact identification and training and mentoring of staff.

 

 

 

           

The Group also developed a set of key environmental performance indicators, to which the Group will strive, including for waste generation, waste emissions and discharge.

103-3

 

INTERACTION WITH THE STAKEHOLDERS

A prerequisite to the successful implementation of any project is to build a constructive system of relationships with stakeholders. Stakeholders are defined by the degree of their exposure to, or their opportunity to be exposed to, direct or indirect positive or negative effects of the implementation activities, which may influence the production processes, corporate governance or loyalty of the brand. The Company's key stakeholders are staff and trade unions, shareholders, suppliers, consumers, state and local government authorities, the mass media and local communities.

To organise effective, targeted interaction with the parties concerned, the impact the community groups have on the Company's operations and the impact the Company has on them have been evaluated on a 0 to 4 scale. 102-42

Figure 5. Map of Kazatomprom's stakeholders

 

 

Table 70. Stakeholders groups 102-40, 102-43, 102-44

Stakeholder

Stakeholder's interest in

the Company

Form of dialogue between stakeholders and

the Company

Degree

of

influence of the stakeholder on

the Company

(1 to 4)

Degree

of

influence of the Company

on the stakeholder,

1 to 4

1. Shareholders

•      Economic profit/consolidated net profit/economic performance

•      Free funds for development and dividends

•      Net asset value (NAV)

•      Corporate governance rating

•      Market share/market presence

•      Minimisation of emissions to the environment

•      Decisions of the general meeting of shareholders

•      Decisions of the Board of Directors

•      Joint working groups

•      Meetings, negotiations and more

•      Annual report

•      Questioning

•      Company internet resources

3.7

2.8

2. Partners

 

•      Market share/market presence

•      Specific production cost of U3O8 produced by the Company and all uranium mining subsidiaries and affiliates

•      Founding treaties;

•      Decisions of the general meeting of shareholders

•      Board decisions

•      Decisions of joint consultative and advisory bodies

•      Joint working groups

•      Joint checks

•      Meetings, negotiations

•      Correspondence on the activities of the subsidiaries and affiliates

•      Annual report

•      Questioning

•      Company internet resources

3.04

2.99

3. Creditors

•      Economic profit/consolidated net profit/economic performance

•      Free funds for development and dividends

•      Net asset value (NAV)

•      The practice of investment and procurement/ benefits from the implementation of category-based procurement strategies

•      Business correspondence

•      Regular analytical meetings, conversation

•      Publication of information about the Company in the media

•      Annual report

•      Company internet resources

2.94

2.33

4. Suppliers of goods, works and services

•      Free funds for development and dividends

•      The practice of investment and procurement/ benefits from the implementation of category-based procurement strategies

•      Energy/specific weighting of energy costs in the production cost of finished products

•      Customer feedback

•      Holding meetings, negotiations

•      Signing agreements, memoranda, agreements on strategic cooperation

•      Annual report

•      Company internet resources

2.55

3.08

5.     Customers

•      Market share/market presence

•      Product and service labelling

•      Marketing communications

•      Minimisation of emissions to the environment

•      Customer feedback

•      Meetings, negotiations

•      Agreements, memoranda, agreements on strategic cooperation

•      Annual report

•      Company internet resources

3.23

3.21

6. Subsidiaries and affiliates

•      Employment, relationship of employees and management, non-discrimination, level of satisfaction with the work of employees, as well as the work of Company-controlled services

•      Training and education

•      Enhance production safety culture

•      Market share/market presence

•      Product and service labelling

•      Decisions of the Company as a participant/shareholder of the subsidiaries and affiliates

•      Management hearings from subsidiaries and affiliate companies

•      Performance information/reports,

•      production, investment and social plans/ commitments

•      sent to the Company

•      Annual report

•      Questioning

•      Company internet resources

2.64

3.30

7. Management and personnel

•      Employment, relations between employees and management, non-discrimination, level of employee satisfaction with the work of Company-controlled services

•      Training and education

•      Improving the level of safety

•      Culture of production

 

•      Decisions of the Board, orders

•      Hardware/ manufacturing/

•      operational and other meetings

•      Reports on current activities

•      Inbound and outbound

•      correspondence

•      Verbal negotiation

•      Instructing on production

•      security

•      Surveys, questioning, testing

•      Company internet resources

•      Social networks

•      Hotline

•      Internal corporate communication channels

2.98

3.44

8. Public authorities

•      Minimisation of emissions to the environment

•      Compliance with requirements

•      Verification of compliance of the Company's subsidiaries and affiliates with the laws and regulations of the Republic of Kazakhstan

•      Reporting on the results of the Company's financial and economic activities

•      Providing information at the request of government agencies in various areas of the Company's activities

•      Development of proposals for amendments and additions to the Laws and regulatory acts of the Republic of Kazakhstan

Coordination of the subsoil use contract and state registration on the right of subsoil use

•      Licensing, checks on subsidiary and affiliate fulfilment of licence and contract obligations

•      Reports on subsidiary and affiliate fulfilment of licence and contract obligations

•      Annual report

•      Questioning

•      Company internet resources

2.93

1.93

9. Local executive authorities

•      Sponsorship and charitable assistance/indirect economic impacts

•      Compliance requirements

•      Amount of recycled water

•      Memoranda of cooperation between local executive bodies and the Company in order to support and develop the social sphere of the regions

•      General agreements between local executive bodies and the Company on social financing for the regions

•      Company internet resources

•      Social networks

•      Hotline

2.24

2.10

10. Labour union

•      Enhance production safety culture

•      Holding public hearings

•      Informing on current activities of subsidiaries and affiliates

•      Letters (complaints) to the Company

•      Company internet resources

•      Social networks

•      Hotline

1.83

2.47

11. Mass media

•      Creating a positive image of the Group

•      Company internet resources

•      Social networks

•      Annual report

•      Hotline

1.84

1.52

12. Public

organisations,

local communities

•      Enhance production safety culture

•      Amount of recycled water

•      Sponsorship and charitable assistance/ indirect economic impacts

•      Compliance with requirements

•      Minimisation of emissions to the environment

•      Training and education

 

•      Holding public hearings

•      Informing on current activities of subsidiaries and affiliates

•      Letters (complaints) to the Company

•      Company internet resources

•      Social networks

•      Hotline

2.02

2.52

 

Getting feedback

The Company builds dialogue with stakeholders on various aspects of its activities. Notably, to obtain information on their concerns and claims, the Company developed a mechanism for submitting and considering complaints and grievances, through a feedback function on the Company's external website, written request, or a telephone hot line. Company enterprises monitor and review complaints and grievances and submit reports to Kazatomprom's central office on a quarterly basis. After appropriate checks, each application is followed up in order to rectify any non-conformities or to give appropriate advice. 102-43

In 2018, 18 appeals were posted on the Company's corporate website at the CEO blog, including: 4 questions about the Company, 6 social questions, 6 questions about career, and 2 marked as "other matters". 4 questions were replied and published on the site. The remaining questions were processed in working order (answers were provided via e-mails and phone, etc.).

For regional groups with insufficient Internet skills (primarily local communities in remote areas), the Company holds 'doors-open days' and subsidiaries and affiliates allocate time for individuals to discuss their concerns. A schedule of meetings is published in local mass media. 102-43

In 2018, 24 complaints were received from employees of Kazatomprom entities via "hotline", including:

·      related to human-resource issues - 11 appeals;

·      ethical complaints - 6 appeals;

·      concerning purchasing - 5 appeals;

·      other issues - 2 appeals. 102-44

All complainants were given advice and explanations in relation to their concerns.

The following activities are held for employees to avoid repeated complaints and grievances and to improve working conditions:

§ Annual staff meetings with management of Kazatomprom's entities;

§ A forum on the internal website for discussing problematic issues;

§ Visiting hours for citizens to meet management at Kazatomprom's subsidiaries;

§ Hotline numbers are made available at production sites and shops as well as at the Kazatomprom website and websites of the Group's companies (emails, phone#, etc.);

§ All complaints and grievances are considered in a timely manner;

§ Corporate newsletters are published containing information relevant to every enterprise and team;

§ Managers hold monthly meetings with employees on personal matters;

§ Complaint and proposal boxes are installed in public places (foyers, canteens and dormitories, for example).             

 

 

CORPORATE GOVERNANCE AND ETHICS

Corporate governance rating

The Company is working to bring its corporate governance system in line with global best practices. Its corporate governance rating is assessed on an annual basis using methods developed by independent consultants and approved by the Company's shareholders. Efforts are currently underway to improve the corporate governance system, in line with the Activity Plan approved by the Company's Board of Directors:

In 2018, at the request of Samruk-Kazyna JSC, an independent consultant conducted a reassessment of NAC Kazatomprom JSC's corporate governance system. The assessment was based on the methodology of diagnosing the corporate governance system in legal entities, more than 50% of the voting shares of which are directly or indirectly owned by Samruk-Kazyna JSC. This methodology was approved by the decision of the Board of Samruk-Kazyna JSC on 26 September 2016 (No. 35/16).  The methodology assesses the effectiveness of the Board of Directors and the executive body, risk management, internal control and audit, the system of sustainable development, respect for shareholders' rights, transparency.

Based on the outcome of the assessment, NAC Kazatomprom JSC has put in place an action plan to improve its corporate governance system and regular reports on its implementation are provided to the Audit Committee and the Board of Directors of NAC Kazatomprom JSC.

The assessment showed that the Company's corporate governance rating had not changed. However, the independent consultant report showed that the efficiency of the Board of Directors and the executive body had improved, as had processes to ensure the transparency of Company activities. The corporate governance rating assigned as a result of the diagnostic assessment meets the Company's target for 2018 (a key performance indicator).

A plan of measures for the improving corporate governance system for 2019 was prepared and approved by the Audit Committee and the Board of Directors of Kazatomprom on 19 February 2019. 

 

CORPORATE GOVERNANCE STRUCTURE

102-18

The Company's corporate governance system ensures proper management and control of activities and is aimed at increasing long-term value and sustainable development. Good corporate governance is based on efficiency and transparency.

The main tasks of the Company's corporate governance system are to improve business transparency and to create and maintain effective long-term relationships with shareholders and all stakeholders. The system is based on the following principles:

§ Protection of rights and interests of shareholders;

§ Effective management of the Company and the effective functioning of the Board of Directors and Management Board;

§ Transparency and objectivity of NAC Kazatomprom JSC activities;

§ Legitimacy and ethics;

§ Effective dividends policy;

§ Effective human-resources policy;

§ Occupational health and safety;

§ Environmental protection;

§ Settlement of corporate disputes and conflicts of interest; and

§ Share of responsibility and duly execution by the management bodies and personnel of the Company.

The bodies of the Company's corporate governance system are:

§ Supreme body - General Meeting of Shareholders;

§ Supervisory body - the Board of Directors;

§ Executive body - the Management Board; and

§ The Internal Audit Service - which monitors and evaluates the Company's internal control and risk management systems .

 

 

Figure 6. Corporate governance structure of NAC Kazatomprom, JSC

 

 

CORPORATE GOVERNANCE CODE

Corporate governance code

The Company adopted its corporate governance code in 2015, based upon the corporate governance code of then sole shareholder Samruk-Kazyna. The aims of the code are to improve corporate governance practices, ensure transparency of governance, and underscore the Company's commitment to following the standards of good corporate governance.

The code was developed in line with the legislation of the Republic of Kazakhstan and taking on board corporate governance developments in Kazakhstan and around the world. The code establishes the principles that form the basis of the Company's corporate governance system.

Corporate governance is a complex, multi-layered system of relationships that is constantly evolving due to internal and external factors and influences. The Company's decision to apply high standards of corporate governance are, first and foremost, determined by its objectives to improve investment attractiveness and partner confidence. External factors that could influence Company development, such as changes in the macroeconomic environment, pose challenges to corporate governance. Hence, it is necessary to monitor external and internal changes and to analyse trends in global and national process development that may have an impact on standards of corporate governance.

Compliance with the highest standards of corporate governance and transparency are key to improving the Company's investment attractiveness and its operational efficiency . These, in turn, will inspire confidence among potential investors, help reduce the risks associated with inefficient use of resources, increase Company value and spread prosperity. The Company has ensured that its corporate governance system complies with the listing rules of the world's largest stock exchanges and the main principles of corporate governance agreed by the global economic community (for example, the corporate governance principles of the Organization for Economic Cooperation and Development).

Compliance with the corporate governance code

In line with Kazatomprom's corporate governance code, the Corporate Secretary Service  analysed the Company's compliance with the principles and provisions of the corporate governance code in 2019. According to the results of this analysis 87% of the provisions of the Code were observed in full, about 4 % of the provisions of the Code were partly observed, none of the applicable provisions were characterised as not observed and the remaining 9 % of the provisions of the Code were deemed inapplicable.

For more information on compliance of Kazatomprom with the corporate governance code for 2018 please follow this link to the relevant section on our website: https://www.kazatomprom.kz/en/investors/inie_otcheti_i_prezentatsii/page-1 

 

AIX corporate governance principles

The Astana International Exchange (AIX) has established general corporate governance principles for companies whose shares are listed on AIX. Kazatomprom's corporate governance code is consistent with these principles to a large extent. Its corporate governance code also contains certain provisions that ensure compliance with Samruk-Kazyna's objectives and forecasts. Any Group engagements in activities outside of its core business are subject to consideration and vetting by the Company's Board of Directors, which is chaired by an independent non-executive director and includes two more independent non-executive members. By the end of December 2019, Samruk-Kazyna intends to have updated the Company's corporate governance code based on international best practices.

Differences between the Company's corporate governance code and the provisions of the UK corporate governance code 

The main differences between the Company's corporate governance code and the provisions of the UK Corporate Governance Code are as follows:

·      In accordance with the provisions of the UK Corporate Governance Code, in the event that 20% or more of shareholders vote against the recommendations of the Board of Directors, on announcing the results of such a vote, the Company should explain what actions it intends to take to understand the reasons for the shareholders' vote. Updated information on shareholder opinions, as well as on measures taken, should be published no later than six months after the General Meeting of Shareholders. The Board of Directors should note the impact of feedback on decisions made in the general conclusions of the Company's annual report, in the explanatory notes to the proposed decisions of the General Meeting of Shareholders (if applicable).

-       The Company's corporate governance code obliges the Chair of the Board of Directors to build a constructive dialogue between members of the Board of Directors, major shareholders and the Company's executive body. At the same time, the Chair of the General Meeting of Shareholders should strive to ensure that shareholders receive answers to questions directly during the meeting. If the complexity of the questions does not allow for immediate answer, the person (s) to whom the question was addressed should provide a written answer as soon as possible after the conclusion of the General Meeting. In addition, major shareholders may hold meetings with the Chair and members of the Board of Directors to discuss development strategy issues, elect the head of the executive body and address other elements that affect growth in long-term value and the sustainable development of the organisation. Such meetings are pre-planned and held in accordance with approved procedures.

 

 

·      The UK Corporate Governance Code states that non-executive directors should play a major role in appointing and terminating the powers of the executive body. It also stipulates the need for meetings of non-executive directors without the participation of executive directors.

 

-       The Company's corporate governance code states that candidates for head of the Company must be approved by the President or the Presidential Administration of the Republic of Kazakhstan (if the company is included on a certain list, approved by Decree of the President of the Republic of Kazakhstan), the Board of Samruk-Kazyna JSC, the Nominations and Remuneration Committee of the Board of Directors of Samruk-Kazyna JSC and Chairman of the Board of Directors of Samruk-Kazyna JSC.

 

·      The UK Corporate Governance Code sets out the main responsibilities of the Company's Nominations and Remunerations and Audit Committees. It also cites the need to include a description of the main activities of these committees in the Company's annual report.

-       There is no such requirement in the Company's corporate governance code.

 

·      The UK Corporate Governance Code prohibits the Chair of the Board of Directors from being a member of the Audit Committee.

-       There is no such restriction in the Company's corporate governance code.

 

·      The UK Corporate Governance Code requires that semi-annual and annual financial statements reflect the position of the Company's Board of Directors on the acceptability of accounting approaches used in preparing the financial statements and reveal any significant doubts about the Company's ability to continue such work for 12 months from the date of approval of the financial statements.

-       The Company's corporate governance code does not require this.

 

·      The UK Corporate Governance Code prohibits the Chair of the Board of Directors from chairing the Nominations and Remunerations Committee. The Chair of the Board of Directors can only be a member of the Nominations and Remunerations Committee if they are an independent member of the Board of Directors.

-       There is no such restriction in the Company's corporate governance code.

 

·      Under the UK Corporate Governance Code, the Remuneration Committee is responsible for the appointment of remuneration consultants in respect of executive director pay. The views of the external consultant should be independent in evaluating the external recommendations of third parties and obtaining the views of executive directors and senior management.

-       There is no such provision in the Company's corporate governance code.

 

·      The UK Corporate Governance Code sets out a detailed and long-term remuneration system, including the need for long-term ownership of the Company's shares by its executive directors. There are also clarifications on the terms of contracts concluded with Company directors.

-       There are no such provisions in the Company's corporate governance code.

 

GENERAL MEETING OF SHAREHOLDERS

Samruk-Kazyna owns 85.08% of the Company's outstanding shares, while 14.92% of the shares are in free float. Shareholders operate in line with the competences stipulated by the Company Charter.

The key decisions taken by the General Meeting of Shareholders include:

§ Election and early removal of members to and from the Board of Directors of NAC Kazatomprom JSC;

§ Selection of an auditor for the consolidated and separate financial statements of NAC Kazatomprom, JSC;

§ Approval of the financial statements of NAC Kazatomprom, JSC;

§ Approval of dividends;

§ Approval of the Charter and Regulations governing the Board of Directors of NAC Kazatomprom, JSC and any amendments thereto. 

 

BOARD OF DIRECTORS

102-22

The Board of Directors is responsible for the general management of the Company's activities. It directs the Company's strategy and policy and has the authority to make decisions on all aspects of the Company's activities, except for those matters expressly reserved for the General Meeting of Shareholders under JSC law, the law governing the Sovereign Wealth Fund, other applicable laws and the Company's charter. The Company's Board of Directors operates in accordance with the principles set out in the Charter, the corporate governance code and the regulations governing the Board of Directors. The powers of the Board of Directors include, among other things:

§ Setting the Company's priority business objectives and approving the Company's strategy;

§ Approving the Company's development strategy, development plans and budget;

§ Appointing the members of the Management Board, the Internal Audit Service, the Compliance Service and Corporate Secretary;

§ Approving the terms for issuance of bonds and derivatives by the Company and the buyback of securities;

§ Making decisions on participation in the incorporation of other legal entities or ceasing participation in other legal entities by way of transfer (or receipt) of some or all assets (other than where such action requires approval pursuant to item (viii) of the General Shareholders' Meeting);

§ Approving transactions or series of interrelated transactions resulting in the acquisition or divestment of assets with the value of more than 10% of the total book value of the Company's assets;

§ Making decisions on the conclusion of major transactions and related party transactions where the Company has interest (other than transactions that fall under the responsibility of the General Meeting of Shareholders);

§ Approving purchases (divestments) by the Company of 10% or more of the shares in other legal entities;

§ Increases in the Company's liabilities that are equal to 10% or more of its equity capital;

§ Resolving any issues within the competence of the General Meeting of Shareholders in relation to stakes or interests of 10% or more that are owned by the Company;

§ Preliminary approval of updates or amendments to the Company Charter; and

§ Approving transactions with state authorities, government bodies, state-owned enterprises (i.e., legal entities in which the state owns 50% or more of the voting power) or legal entities affiliated with any of them, excluding (a) transactions with dependent legal entities and Company subsidiaries and (b) transactions documented using templated agreements, the forms of which are established by applicable law. Approval of such transactions requires the approval of the majority of independent directors.

Members of the Board of Directors are appointed by a resolution of the General Meeting of Shareholders. Members of the Board of Directors are elected for a term of up to three years. Members may be re-elected for a further period of up to three years where performance is satisfactory. Any term of appointment to the Board of Directors for a period longer than six consecutive years is subject to special consideration. An independent director cannot be elected to the Board of Directors for more than nine consecutive years, apart from exceptional cases. In such cases, elections should be held annually, with a detailed explanation of the reasoning behind the nomination of said candidate to the Board of Directors. 102-24

Individuals who are nominated (or recommended) for appointment to the Board of Directors as a representative of shareholders, or individuals who are neither a shareholder themselves nor appointed to represent the interests of shareholders, are eligible for election to the Board of Directors. The Board of Directors must have not less than six members, of whom at least 30% must be independent directors.

The Board of Directors operates in accordance with an annual workplan and meeting schedule based on the principles of rationality and effectiveness, but meet at least six times a year. If required, the Board of Directors may consider issues not included in the workplan.

COMPOSITION OF THE BOARD OF DIRECTORS 

The Board of Directors comprises seven members, including three Independent Directors. A description of the criteria for compliance with the standards of independence of members of the Board of Directors is set out in the Articles of Association and the Regulations on the Board of Directors, posted on the Company's website.

Jon Dudas, the Chairman of the Board of Directors of the Company, in March 2019 (after the publication of the annual financial statements and the opening of the trading period for the Company's insiders) acquired 2,000 GDRs of the Company. Relevant information has been disclosed and reported to the stock exchanges.

Other members of the Board of Directors of NAC Kazatomprom JSC hold no shares (equity interest) in the Company, its affiliates, the Company's suppliers or its competitors.

The Company's current Board of Directors was elected on 14 August 2018 for a three-year term and the terms of the current members of the Company's Board of Directors expire on 14 August 2021. The current Board of Directors has the following members:

Table 71. Board of Directors

 Name

 

Year of birth

 

Title

 

Member of the
Board since

 

Jon Dudas.............................................................................................................................................................................................................................

                 1959                        

Chairman of the Board of Directors (independent)......................................................................................................................................................

                   2015                          

Neil Longfellow....................................................................................................................................................................................................................

                 1958                        

Board Member (independent).......................................................................................................................................................................................

                   2017                          

Russell Banham....................................................................................................................................................................................................................

                 1954                        

Board Member (independent).......................................................................................................................................................................................

                   2018                          

Alik Aidarbayev...................................................................................................................................................................................................................

                 1963                        

Board Member..............................................................................................................................................................................................................

                   2018                          

Beybit Karymsakov.............................................................................................................................................................................................................

                 1962                        

Board Member..............................................................................................................................................................................................................

                   2018                          

Kanat Kudaibergen...............................................................................................................................................................................................................

                 1979                        

Board Member..............................................................................................................................................................................................................

                   2018                          

Galymzhan Pirmatov...........................................................................................................................................................................................................

                 1972                        

Board Member, Chief Executive Officer.......................................................................................................................................................................

                   2017                          

The business address of the directors is 17/12. YE-10 Street, Nur-Sultan, 010000, Kazakhstan.

Jon Dudas, Chairman, Independent Director. Mr. Dudas was born in 1959 and is a UK citizen. He is a registered professional mining engineer, having graduated from the University of the Witwatersrand, South Africa, with a Bachelor's degree in mining engineering and a Master's degree in mineral economics in 1984. Mr. Dudas also holds an MBA from Heriot-Watt University in Edinburgh. Mr. Dudas began his working career at Rand Mines Ltd in 1984 and has held a variety of senior managerial positions across a number of commodities and functions at companies such as Gencor Ltd and BHP Billiton, where he was CEO of the Aluminium division. Since 2012, Mr. Dudas has been working as an independent corporate adviser to multinational mining and professional service companies. An independent member of the Company's Board of Directors since 2015, Mr. Dudas was elected Chairman of the Board of Directors of Kazatomprom in August 2018. 

Neil Longfellow, Independent Director. Mr. Longfellow was born in 1958 and is UK citizen. He is a chartered electrical engineer and a Fellow of the Institute of Measurement and Control. Mr. Longfellow started his career in electrical engineering in the UK. In 1991, he joined British Nuclear Fuels Limited, working at the Sellafield nuclear reprocessing plant in West Cumbria, where he was Head of Reprocessing, before becoming Deputy Managing Director in 2007. In 2009, Mr. Longfellow joined Westinghouse Electric Company as Managing Director of Springfields Fuels Limited and Vice President of the European Fuel Business. In 2013, Mr. Longfellow joined Costain PLC as Director of Major Projects for the nuclear, oil and gas sectors in the UK. Since 2015, Mr. Longfellow has been an independent consultant to the international nuclear sector.

Russell Banham, Independent Director. Mr. Banham was born in 1954 and is an Australian citizen. He has a Bachelor of Commerce degree from the University of New South Wales, is a fellow of the Institute of Chartered Accountants Australia and New Zealand, and a graduate of the Australian Institute of Company Directors. He began his career as an auditor in 1974 in the Australian operations of Andersen; he was admitted into the worldwide partnership in 1988 and worked until 2002. From 2002 to 2007, Mr Banham was the Advisory Services Practice Leader of Ernst & Young in Brisbane, Australia. In 2007, he was appointed as the Audit Function Leader and Executive Committee member of Deloitte CIS, based in Almaty, Kazakhstan. In 2011-2014, Mr. Banham was Energy and Resources Industry Group Leader of Deloitte CIS, based in Moscow, Russia. Since 2014, he has worked as an independent director on the boards of a number of international companies.

Alik Aidarbayev, Member. Mr. Aidarbayev was born in 1963 and is a citizen of the Republic of Kazakhstan. Mr. Aidarbayev has a PhD in Engineering and is an honorary professor at Kanysh Satpayev National Technical University. He holds an MBA from the Russian Presidential Academy of National Economy and Public Administration in Moscow. Mr. Aidarbayev has held various management positions at Yuzhkazneftegaz, Kumkol-Lukoil (renamed Turgai Petroleum CJSC), Mangistaumunaigaz JSC and NC KazMunaiGas JSC. He was General Director of KazMunaiGas Exploration & Production JSC from 2011 to 2013, Governor of the Mangistau region from 2013 to 2017 and First Vice-Minister for Investment and Development of the Republic of Kazakhstan in 2017-2018. Since  April 2018, Mr. Aidarbayev served as Deputy Chairman of the Management Board of Samruk-Kazyna JSC. Since November 2018 Mr. Aidarbayev has served as the Chairman of the Management Board of NC KazMunayGas JSC

Beybit Karymsakov, Member. Mr. Karymsakov was born in 1962 and is a citizen of the Republic of Kazakhstan. He graduated from the Almaty Institute of National Economy with a degree in the organisation of mechanised processing of economic information and from Taraz State University with a law degree. Mr. Karymsakov has worked in the Tien-Shan cooperative as an accountant and head of the Kordai district finance department. In 2003-2015, Mr. Karymsakov held a senior position with the Almaty City tax authority. In August 2015, He was appointed Managing Director of National Company Astana EXPO-2017 JSC. Currently, Mr. Karymsakov is the Managing Director for Economics and Finance at Samruk-Kazyna JSC. He was elected as a member of the Board of Directors of Kazatomprom in April 2018.

Kanat Kudaibergen, Member. Mr. Kudaibergen was born in 1979 and is a citizen of the Republic of Kazakhstan. Mr. Kudaibergen holds an MBA in International Management from the Geneva Business School and an MBA in Mining Management from the NUST Moscow Institute of Steel and Alloys. Mr. Kudaibergen started his career in 2001 as a senior prosecutor's assistant at the Semirechenskaya transport prosecutor's office. In 2007-2016, Mr. Kudaibergen held various senior positions at Trading and Transportation Company LLP, including Lead Specialist of the Legal Department, Chief Manager - Head of the Legal Department, Deputy General Director, First Deputy General Director and Chief Executive Officer. In 2016-2018, he served as the General Director of Karatau LLP and Managing Director of Kazatomprom's uranium mining division. Since 23 April 2018, he has served as Chief Executive Officer of NMC Tau-Ken Samruk JSC.

Galymzhan Pirmatov, Member. For information on Mr. Pirmatov, please see the Management Board section.

 

CHANGES IN THE COMPOSITION OF THE BOARD OF DIRECTORS IN 2018

§ By the decision of the then sole shareholder, on 23 April 2018, the terms of Board Members Kuanysh Abdugaliyevich Bektemirov and Mazhit Abdykalikovich Turmagambetov were ended ahead of time. Beybit Yerkimbayevich Karymsakov and Ardak Makhmuduly Kasymbekov were appointed to the Board of Directors.

§ In June 2018, the term of the previous Board of Directors expired.

§ In August 2018, a new Board of Directors was appointed, with John Dudas as Chairman and Alik Serikovich Aidarbayev, Beibit Yerkimbayevich Karymsakov, Kanat Zhakypuly Kudaibergen, Russell Banham, Neil Longfellow and Galymzhan Olzhaevich Pirmatov as members.

 

ACTIVITY OF THE BOARD OF DIRECTORS

In 2018, the Board of Directors held 12 meetings (eight in person), at which 135 issues were considered. Fourteen internal and planning documents were approved and decisions were made to conclude 20 interested-party transactions. Also in 2018, the Board of Directors made important decisions to improve corporate governance, personnel policy, risk management and the Company's internal control systems as well as the Company's strategy.

The following issues, among other things, were considered during the reporting year:

§ Preliminary consideration of annual financial statements;

§ Appointment of new Board of NAC Kazatomprom JSC;

§ Appointment of the heads of executive bodies of subsidiaries and affiliates;

§ Preliminary approval of the transfer of Kazatomprom's stakes in the authorised capital of MAEK-Kazatomprom LLP and Kazakhstan Nuclear Power Plants LLP to Samruk-Kazyna JSC;

§ Approval of the roadmap for implementing the Company's environmental and social action plan;

§ Agreement on the placement of securities between NAC Kazatomprom JSC, Samruk-Kazyna JSC and the underwriting banks;

§ Approval of the action plan to improve the corporate governance system of NAC Kazatomprom JSC for 2018;

§ Other reports, work plans, key Company indicators, development programmes, etc.

Members' attendance, in person at Board of Directors meetings in 2018 averaged 92%. The following table shows the individual, in-person attendance records of members of the Board of Directors.

 

 

Table 72. Attendance at meetings of the Board of Directors in 2018

Members of the Board of Directors/Committee

Member attendance at meetings of the Board of Directors in 2018

8 February 2018

6 April 2018

24 April 2018

28 May 2018

28 June 2018

15 August 2018

29 August 2018

26 September 2018

19 October 2018

14 November 2018

6 December 2018

26 December 2018

%

 

J. Dudas (Chair)

+

+

+

+

+

+

+

+

+

+

+

+

100

A.S. Aidarbayev
(appointed 14 August 2018)

 

 

 

 

 

+

-

+

+

+

-

+

71

B.Y. Karymsakov

(appointed 23 April 2018)

 

 

+

+

+

+

+

+

-

+

+

+

90

K. Zh. Kudaibergen

(appointed 14 August 2018)

 

 

 

 

 

+

+

+

+

+

+

+

100

R. Banham

(appointed 14 August 2018)

 

 

 

 

 

+

+

+

+

+

+

+

100

N. Longfellow

+

+

+

+

+

+

+

+

+

+

+

+

100

G.O. Pirmatov

+

+

+

+

+

+

+

+

+

+

+

+

100

A.M. Kasymbekov

(appointed 23 April 2018, member until 29 June 2018)

 

 

+

+

+

 

 

 

 

 

 

 

100

A.U. Mamin

(member until 29 June 2018.)

+

+

+

+

+

 

 

 

 

 

 

 

100

Z.F. Arslanova

(member until 29 June 2018)

+

+

+

+

+

 

 

 

 

 

 

 

100

M.A. Turmagambetov

(member until 23 April 2018)

+

+

 

 

 

 

 

 

 

 

 

 

100

K.A. Bektemirov

(member until 23 April 2018)

+

-

 

 

 

 

 

 

 

 

 

 

50

 

 

ASSESSMENT OF THE ACTIVITY OF THE BOARD OF DIRECTORS

An independent assessment of the activity of the Board of Directors was conducted in 2018. Along with the analysis of Kazatomprom's corporate governance system undertaken by Samruk-Kazyna JSC in 2018, independent consultants evaluated the effectiveness of the Board of Directors, the committees of the Board of Directors, the chairman and the individual members of the Board of Directors, and the corporate secretary. The report on the result of the independent assessment Board of Directors' performance contains an analysis of activities for 2015, 2016 and 2017.

An indepen assessment of the activity of the Board of Directors is conducted once every three years. Self-assessment is conducted on an annual basis. The results of the assessment can trigger changes to the individual professional development plans of the Board members or provide a basis for recommendations regarding recruitment or replacement of directors.

102-28, 103-3

 

ENGAGEMENT OF INDEPENDENT DIRECTORS

The Company is guided by the requirements of the Law of the Republic of Kazakhstan on Joint Stock Companies, the Company's Articles of Association, and the Regulations on Selecting Independent Directors of Sovereign Wealth Fund Samruk-Kazyna JSC, which define the procedure for recruitment and selection of candidates on a competitive basis to the position of independent directors, as well as the rules for carrying out a preliminary qualification assessment of candidates by the Nominations and Remunerations Committee. 102-24

In accordance with the Company's corporate governance code, the Board established the independence of the directors and believes that John Dudas, Russell Banham and Neil Longfellow are independent in nature and in their decision-making. The Board of Directors has determined that there are no relationships or circumstances that have or could have a significant impact on the independent decisions of these directors.

COMMITTEES OF THE BOARD OF DIRECTORS

To create a platform for active discussion and detailed analysis of issues related to the management of the Company, four committees - the Audit Committee, the Committee on Strategic Planning and Investment, the Nominations and Remunerations Committee, and the Committee on the Environmental, Health and Safety - operate under the Board of Directors. 102-18

Committee activity is subject to relevant Company regulations, which stipulate that only independent directors may be appointed to the Audit Committee, and that independent directors should constitute a majority on other committees.

Audit Committee

The Audit Committee was formed as a consulting and advisory body of the Board of Directors and oversees the Company's financial reporting , internal control and risk management systems. The Audit Committee also monitors the Company's compliance with the provisions of its internal corporate governance documents. The Audit Committee operates for the benefit of the shareholders and works to assist the Board of Directors by:

(i)               Establishing an efficient control system on the Company's financial and economic activities (including completeness and authenticity of financial statements);

(ii)              Monitoring the reliability and efficiency of internal control and risk management, as well as the execution of corporate governance documents;

(iii)             Control over the independence of internal and external audits, as well as procedures for compliance with the laws of the Republic of Kazakhstan;

(iv)             Other matters as required by the Company Regulation on the Audit Committee of the Board of Directors.

 

The Audit Committee is accountable to the Board of Directors, in accordance with the authority granted to it by the Board of Directors and the Company's Regulation on the Audit Committee of the Board of Directors. The Company's Audit Committee includes the following members:

 

Table 73. Audit Committee members

Name

 

Year of birth

 

Other positions

 

Member of the
Committee since

 

Russell Banham....................................................................................................................................................................................................................

                   1954                          

Chairman of Committee, Independent Director.....

                         2018                                

Jon Dudas.............................................................................................................................................................................................................................

                   1959                          

Member of the Committee, Chairman of the Board of Directors, Independent Director.....

                         2016                                

Neil Longfellow....................................................................................................................................................................................................................

                   1958                          

Member of Committee, Independent Director.....

                         2017                                

 

In 2018, the Audit Committee held 11 in-person meetings at which key issues of the Company's business were discussed including:

§ The interim and annual financial statements including reports from the Company's external auditor;

§ Approval of the annual internal audit plan and review of the results of internal audit activities;

§ Reports on compliance programs;

§ The preparation of the Integrated Annual Report;

§ Review of the risk register, risk map and risk management activities. 

 

The composition of and attendance data for the Audit Committee were as follows:

Table 74. Composition of and attendance at meetings of the Audit Committee in 2018

Committee members

Member attendance at meetings of the Audit Committee of the Board of Directors in 2018

23 January 2018

5 February 2018

28 February 2018

15 March 2018

19 March 2018

27 March 2018

18 April 2018

31 May 2018

20 June 2018

25 September 2018

21 November 2018

 

%

 

R. Banham (Committee Chair, elected 15 August 2018)

 

 

 

 

 

 

 

 

 

+

+

100

J. Dudas

+

+

+

-

-

+

+

+

+

+

+

82

N. Longfellow

+

+

+

+

+

+

+

+

+

+

+

100

Z.F. Arslanova (member until 29 June 2018)

+

+

+

+

+

+

+

+

+

 

 

100

Strategic Planning and Investment Committee

The Strategic Planning and Investment Committee was formed as a consulting and advisory body to the Board of Directors. It provides recommendations that shape the direction and priority of Company activities, drafts development strategy, plans investment activity and determines the Company's innovation strategy. The Strategic Planning and Investment Committee operates for the benefit of Company shareholders and assists the Board of Directors by providing recommendations on:

(i)               The development of Company strategy, the evaluation of the efficiency of measures to implement the strategy, the means for achieving the goals of the strategy, internal Company documents related to the drafting of its strategy, strategic decisions to increase efficiency from a short- and long-term perspective, strategic decisions on M&A activities, and reorganisation procedures;

(ii)              Internal documents regulating Company investment activity, investment projects within in the framework of the Company's strategy, changes in accounting standards and legislation that could affect Company development, and approval of company's development master plan;

(iii)             Review and evaluation of investment and innovation initiatives at all stages of development.

The Strategic Planning and Investments Committee is accountable to the Board of Directors, in accordance with the authority granted to it by the Board of Directors and the Company's Regulation on the Strategic Planning and Investment Committee of the Board of Directors. The Company's Strategic Planning and Investment Committee includes the following members:

 

Table 75. Strategic Planning and Investment Committee

Name

 

Year of birth

 

Other positions

 

Member of the
Committee since

 

Jon Dudas..........................

                   1959                          

Chairman of Committee, Chairman of the Board of Directors, Independent Director.................................................

                         2016                                

Russell Banham..................

                   1954                          

Member of Committee Independent Director...............................................................................................................

                         2018                                

Neil Longfellow..................

                   1958                          

Member of Committee, Independent Director..............................................................................................................

                         2017                                

 

In 2018, the Committee on Strategic Planning and Investment held eight in-person meetings at which key issues of the Company's business were discussed:

§ Preliminary consideration of documents to be proposed to the Board of Directors containing information on the implementation of the Company's development strategy, the status of large-scale investment projects and achievement of target values of strategic key performance indicators (KPIs);

§ Preliminary consideration and approval of the action programme and activity plans for implementation of the Company's development strategy and an elaboration of the recommendations for achieving its goals;

§ A benchmarking analysis report on NAC Kazatomprom JSC with respect to other uranium mining companies;

§ Reports on the implementation of the Company's development strategy for 2015-2025 and issues related to achieving strategic KPIs in 2018.

The composition of and attendance data for the Committee on Strategic Planning and Investments were as follows:

Table 76. Composition of and attendance at meetings of the Committee on Strategic Planning and Investments in 2018

Committee members

Member attendance at meetings of the Committee on Strategic Planning and Investments of the Board of Directors in 2018

19 January 2018

27 March 2018

18 April 2018

24 April 2018

31 May 2018

20 June 2018

25 September 2018

20 November 2018

 

%

J. Dudas (Committee Chair)

+

+

+

+

+

+

+

+

100

Banham R.
(
elected 15 August 2018)

 

 

 

 

 

 

+

+

100

N. Longfellow

+

+

+

+

+

+

+

+

100

Z.F. Arslanova
(member until 29 June 2018)

+

+

+

+

+

+

 

 

100

T.B. Yerzhanov
(member until 29 June 2018)

+

+

+

+

+

+

 

 

100

Nominations and Remunerations Committee

The Nominations and Remunerations Committee was formed as a consulting and advisory body to the Board of Directors. It provides recommendations on the efficiency of the Company's personnel policy and evaluates the goals and results of activities of the Management Board and other employees appointed by the Board of Directors. The Nominations and Remunerations Committee operates for the benefit of the shareholders and assists the Board of Directors by providing recommendations on:

(i)               Attracting qualified specialists to the Board of Directors, the Management Board, the Company Secretary and other positions filled or coordinated by the Board of Directors in accordance with a Board-approved list;

 

(ii)              The formation of proposals for the Board of Directors on matters determining the remuneration of independent directors, members of the Management Board, the Company Secretary, in accordance with the goals, objectives, current status of the Company and the level of remuneration in similar companies, by type and scale of activity;

(iii)             The Company's personnel policy, the procedure for nominating members to the Board of Directors and Management Board, policies on evaluating the activities of the members of the Board of Directors and the Management Board, the Corporate Secretary, improving the qualifications of the members of the Board of Directors, and other matters as decided by the Board of Directors.

The Nominations and Remunerations Committee is accountable to the Board of Directors, in accordance with the authority granted to it by the Board of Directors and the Company's Regulation on the Remuneration and Appointment of the Board of Directors. The Company's Nominations and Remunerations Committee includes the following members:

 

Table 77. Nominations and Remunerations Committee

Name

 

Year of birth

 

Other positions

 

Member of the
Committee since

 

Jon Dudas.............................................................................................................................................................................................................................

                   1959                          

Chairman of Committee, Chairman of the Board of Directors, Independent Director...............................................................

                         2016                                

Russell Banham....................................................................................................................................................................................................................

                   1954                          

Member of Committee Independent Director............................................................................................................................

                         2018                                

Neil Longfellow....................................................................................................................................................................................................................

                   1958                          

Member of Committee, Independent Director...........................................................................................................................

                         2017                                

Nurlan Utenov......................................................................................................................................................................................................................

                   1972                          

Committee expert (no voting power).........................................................................................................................................

                         2018                                

 

In 2018, the Nominations and Remunerations Committee held 12 in-person meetings, at which key issues of the Company's business were discussed, including:

§ Consideration of key performance indicators of the executive officers of NAC Kazatomprom JSC;

§ Appointment of members of the Management Board of NAC Kazatomprom JSC;

§ Approval of the appointment of chief executive officers at certain subsidiaries and affiliates;

§ Plans for the succession of executive officers of NAC Kazatomprom JSC.

The composition of and attendance data for the Nominations and Remunerations Committee are as follows:

 

 

Table 78. Composition and attendance at meetings of the Nominations and Remunerations Committee in 2018

Committee members

Member attendance at meetings of the Nominations and Remunerations Committee of the Board of Directors in 2018

23 January 2018

20 February 2018

27 March 2018

17 April 2018

18 April 2018

24 April 2018

20 June 2018

28 June 2018

25 September 2018

17 October 2018

26 October 2018

20 11 2018

 

%

 

J. Dudas

(Committee Chair)

+

+

+

-

+

+

+

+

+

-

+

+

83

N. Longfellow

+

+

+

+

+

+

+

+

+

+

+

+

100

R. Banham (elected 15 August  2018)

 

 

 

 

 

 

 

 

+

+

+

+

100

N.K. Utenov (elected 15 August 2018)

 

 

 

 

 

 

 

 

+

+

+

+

100

Z.F. Arslanova (member until

29 June 2018)

+

+

+

+

+

+

+

-

 

 

 

 

88

K.A. Bektemirov (member until 23 April 2018)

-

-

-

-

-

 

 

 

 

 

 

 

0

Committee on the Environmental, Health and Safety  

The Committee on Environmental, Health and Safety was formed as a consulting and advisory body to the Board of Directors. It provides recommendations on improving the management system in the field of industrial, ecological and radiation safety, the efficiency of communication with subsidiaries for the coordination policy implementation related to labour and environmental safety, and the approval of the Company's programmes on sustainable development, including labour and environmental safety.

The Committee on Environmental, Health and Safety operates for the benefit of the shareholders and assists the Board of Directors by providing recommendations on development of integrated Company policy related to labour, environmental safety and radiation safety, as a part of the Company's sustainable development plan to minimise chemical and radiation impact, ensure environmental and personnel safety, improve production safety and automate technological processes, in addition to a preliminary review of social issues.

The Committee on Environmental, Health and Safety is accountable to the Board of Directors, in accordance with the authority granted to it by the Board of Directors and the Company's Regulation on the Committee on Environmental, Health and Safety of the Board of Directors. The Committee on Environmental, Health and Safety includes the following members:

Table 79. Committee on Environmental, Health and Safety

Name

 

Year of birth

 

Other positions

 

Member of the
Committee since

 

Neil Longfellow..................

                   1958                          

Chairman of Committee, Independent Director.........................................................................................................................

                         2017                                

Jon Dudas..........................

                   1959                          

Chairman of the Board of Directors, Independent Director.......................................................................................................

                         2016                                

Talgat Yerzhanov...............

                   1984                          

Committee expert (no voting power).........................................................................................................................................

                         2016                                

 

In 2018, the Committee on Environmental, Health and Safety held five in-person meetings at which key issues of the Company's business were discussed::

§ A report a corporate social accountability activities and the sustainable development of NAC Kazatomprom JSC;

§ A report on the provision of decent social and working conditions for Kazatomprom's production personnel;

§ Reports on work carried out to prevent industrial accidents at NAC Kazatomprom JSC. 

The composition of and attendance data for the Committee on Environmental, Health and Safety are as follows:

Table 80. Composition of and attendance at meetings of the Committee on Environmental, Health and Safety in 2018 

Committee members

Member attendance at meetings of the Committee on Environmental, Health and Safety of the Board of Directors in 2018

19 January 2018

15 March 2018

31 May 2018

25 September 2018

20 November 2018

 

%

 

N. Longfellow

(Committee Chair)

+

+

+

+

+

100

J. Dudas

+

-

+

+

+

80

Z.F. Arslanova
(member until 29 June 2018)

+

+

+

 

 

100

T.B. Yerzhanov
(named committee expert on 15 August 2018)

+

+

+

+

+

100

 

MANAGEMENT BOARD

The Management Board is the executive body of NAC Kazatomprom JSC.

The Management Board is responsible for the day-to-day management and administration of the Company and is controlled by the Board of Directors and the General Meeting of Shareholders. Activity of the Management Board of Company is determined by the principles described in the Charter, the Company's corporate governance code and regulations governing the Management Board. Among other things, the Management Board's responsibilities include the following:

(i)               Approving the Company's internal operational guidelines;

(ii)              Appointing heads of branch and representative office;

(iii)             Developing and implementing the Company's business strategy and budget;

(iv)             Making executive business decisions; and

(v)              Implementing resolutions adopted by the Board of Directors and the General Meeting of Shareholders.

Members of the Management Board may be representatives of shareholders, or Company employees who are not shareholder representatives, and are appointed and dismissed by the Board of Directors. The quantitative composition and term of office of the Management Board is determined by the Board of Directors. The Management Board should consist of not less than five people.

 

 

 

 

COMPOSITION OF THE MANAGEMENT BOARD

By resolution of the Board of Directors of NAC Kazatomprom JSC dated 8 February 2018 (minutes of meeting No. 1/18), the composition of the Management Board was set at six people, each with terms equal in length to the terms of the Management Board of NAC Kazatomprom JSC. The Management Board of NAC Kazatomprom JSC was elected as follows:

Table 81. Management Board of NAC Kazatomprom JSC

Name

 

Year of birth

 

Title

 

Year when joined
the Group

 

Galymzhan Pirmatov...........................................................................................................................................................................................................

                   1972                          

Chairman of the Management Board......................................................................................................................................................................

                          2009                                 

Marat Niyetbayev................................................................................................................................................................................................................

                   1956                          

Chief Director for Operations................................................................................................................................................................................

                          1998                                 

Baurzhan Ibrayev.................................................................................................................................................................................................................

                   1958                          

Chief Director on Nuclear Fuel Cycle
and Atomic Energy.................................................................................................................................................................................................

                          2001                                 

Meirzhan Yussupov.............................................................................................................................................................................................................

                   1979                          

Chief Director for Economics and Finance.............................................................................................................................................................

                          2010                                 

Riaz Rizvi.............................................................................................................................................................................................................................

                   1972                          

Chief Strategy and Marketing Officer
(Chief Commercial Officer)....................................................................................................................................................................................

                          2017                                 

Birzhan Duisembekov..........................................................................................................................................................................................................

                   1971                          

Chief Business Support Director...........................................................................................................................................................................

                          2017                                 

 

Galymzhan Pirmatov, Chairman of the Management Board. Mr. Pirmatov was born in 1972 and is a citizen of the Republic of Kazakhstan. He has degrees from the Novosibirsk State University, the Kazakhstan Institute of Management of Economics and Strategic Research (University of KIMEP), the Atkinson Graduate School of Management at Willamette University. His previous roles include Financial Director of JV Altyn-Tas and Director for Investment at AIG Silk Road Capital Management. In 2007, Mr. Pirmatov held the position of Managing director of Halyk Bank JSC. From 2007 to 2009 he was Vice-Minister of Economy and Budget Planning of the Republic of Kazakhstan. From 2009 to 2011 - Vice-President for Economics and Finance of NAC Kazatomprom JSC. From 2011 to 2015, he was President of Cameco Kazakhstan. Since December 2015, Mr. Pirmatov has been Deputy Chairman of the National Bank of Kazakhstan. Mr. Pirmatov has served as the Chairman of the Management Board of Kazatomprom since August 2017.

Marat Niyetbayev, Chief Director for Operations. Mr. Niyetbayev was born in 1956 and is a citizen of the Republic of Kazakhstan. Mr. Niyetbayev graduated from the Kazakh Polytechnic Institute with a bachelor's degree in the automation of metallurgical production. He is a doctoral candidate in the field of technical sciences. Mr. Niyetbayev began his career at Shymkent Lead Factory, starting as a fifth-grade smelter, rising to the position of General Director. Mr. Niyetbayev has held managerial positions at various major organisations. Mr. Niyetbayev has worked for Kazatomprom for 21 years, holding the positions of Mining Director of Kazatomprom and General Director of both Mining Company LLP and Ken Dala.kz JSC. Mr. Niyetbayev has also worked as head of the Kazakhstan Branch of Eurasia Energy Holdings LTD and as Vice President for Operations for Uranium One Inc.

Baurzhan Ibrayev, Chief Director of Nuclear Fuel Cycle and Atomic Energy. Mr. Ibrayev was born in 1958 and is a citizen of the Republic of Kazakhstan. He graduated from the Kazakh State University (S.M. Kirov). He holds a doctorate in physical and mathematical sciences and is National Academician of Natural Sciences of the Republic of Kazakhstan. Mr. Ibrayev started his career in 1983 as a junior researcher at the Institute of Nuclear Physics at the Academy of Sciences of the Kazakh SSR. He then worked as a senior lecturer, associate professor and head of the Department of Optics and Plasma-Physics  at Kazakh State University (Al-Farabi), latterly as Deputy Director of the Physics Department. In 1996, Mr. Ibrayev passed IAEA training at the Berlin Centre for Neutron Research (operating in the BER-2 reactor) and, in 1999, he became a director at the Scientific Research Institute of Experimental Theoretical Physics (SRI ETF). Since 2001, Mr. Ibrayev has headed up Kazatomprom's Company Mining Group No. 6, as well as its MAEK-Kazatomprom LLP, Mining Company LLP, Ken Dala.kz LLP and DP Ortalyk LLP subsidiaries.

 

Meirzhan Yussupov, Chief Director for Economics and Finance. Mr. Yussupov was born in 1979 and is a citizen of the Republic of Kazakhstan. He graduated from the Middle East Technical University with a degree in economics and management, the London School of Economics with a Master of Science in Economic Development Management (Department of Economics) and from Harvard University with a Master in Public Administration. Mr. Yussupov started his career as the deputy director of the Marketing and Internal Audit Department at Turkuaz Group. From 2003 to 2006, he worked at Demir Kazakhstan Bank JSC and held various positions at Samruk-Kazyna. In 2009-2010, Mr. Yussupov worked in public service, as a Deputy Director of the Investment Policy Department of the Ministry of Economy and Budget Planning of the Republic of Kazakhstan. In 2010, he took up the position of Director of the Department of Corporate Finance and Treasury for Kazatomprom. In 2015, Mr. Yussupov was appointed Chief Director of Economics and Finance at Kazatomprom.

Riaz El Hasan Sayed Rizvi, Chief Strategy and Marketing Officer (Chief Commercial Officer). Mr. Rizvi was born in 1972 and is a Dutch citizen. He holds a Bachelor of Science degree in business administration from Kings College, an MBA and Doctorandus in Business Administration from Nijenrode University. Mr. Rizvi started his career as Country Director of Uzbekistan in a multi-family office, then worked as Country Director for the Republic of Georgia and Project Officer for Bosnia and Herzegovina for the Independent Bureau for Humanitarian Issues. From 1999 to 2001, Mr. Rizvi was Head of Coal Origination for Enron Europe Limited. From 2001 to 2004, we held the position of Head of Origination for American Electric Power and, from 2004 to 2009, he was Co-Head of the Constellation Energy Commodities Group. Between 2009 and 2016, Mr. Rizvi served as CEO and Founder of NuCap Limited. Since March 2017, he has been Chief Strategy and Marketing Director of Kazatomprom.

Birzhan Duisembekov, Chief Business Support Director. Mr. Duisembekov was born in 1971 and is a citizen of the Republic of Kazakhstan. In 1993, he graduated from the Lenin Kazakh Polytechnic Institute in Almaty with a Bachelor's degree and mining engineer's qualification in technology and the general mechanisation of underground development of mineral deposits. In 2006, Mr. Duisembekov graduated from the Atyrau Oil and Gas Institute with a degree in economics. He began his career as a level 3 miner in the mine area of Almatymetrostroy Trust. Mr. Duisembekov has held executive positions at Uzenmunaigaz JSC, Embamunaigaz JSC, KazMunaiGas EP JSC, Kazyna Capital Management JSC, JV Kazgermunai LLP, AktauNefteService LLP, Offshore Oil Company KazMunaiTeniz JSC, in Samruk-Kazyna JSC Group companies and in Kazakhstan second-tier banks. Mr Duisembekov has worked for Kazatomprom since October 2017.

Beksultan Bekmuratov, Chief Transformation and IT Officer. Mr. Bekmuratov was born in 1986 and is a citizen of the Republic of Kazakhstan. In 2009, he graduated in engineering from the Russian State University of Oil and Gas. From 2011 to 2013, Mr. Bekmuratov held the position of Health and Safety Adviser at Shell. From 2014 to 2018, Mr. Bekmuratov worked as transformation project manager at Samruk-Kazyna. Since February 2018, Mr. Bekmuratov has been Chief Transformation and IT Officer at Kazatomprom.

 

Table 82. Member attendance at meetings of the Management Board of NAC Kazatomprom JSC

Member

Attendance

at meetings (no.)

%

Membership

during the reporting period

G.O. Pirmatov

28

76

1 January - 31 December 2018

B. Zh. Duisembekov

30

81

8 February - 31 December 2018

B.M. Ibrayev

34

92

1 January - 31 December 2018

M.A. Nietbayev

30

81

8 February - 31 December 2018

R. Rizvi

27

73

1 January - 31 December 2018

M.B. Yussupov

35

95

1 January - 31 December 2018

 

According to the Regulations on the Management Board of NAC Kazatomprom JSC, approved by resolution of the Company's Board of Directors No. 8/10 of 26 July 2010, the Management Board can make decisions in the following ways:

§ Voting in person (in presentia);

§ Absentee voting (in absentia); or

§ Combined voting.

 

 

ACTIVITY OF THE MANAGEMENT BOARD IN 2018

During the reporting period, the Management Board held 37 meetings, at which 320 issues were considered. It made and signed off on 822 decisions by way of 288 in-person and 534 absentee votes:

§ One hundred and twenty-two issues were submitted for consideration and approval of the Board of Directors of NAC Kazatomprom JSC in 2018. These included the approval of internal and planning documents, the conclusion of transactions in which the Company had an interest, decisions on the transfer of subsoil use rights, the acquisition or divestment of shares in the authorised capital of other legal entities, the approval of annual financial statements and the distribution of dividends. They also included Management Board reports on risk management, production safety, the execution of measures to improve the corporate governance system and the implementation of large investment projects, the conclusion of interested-party transactions (decisions on which were taken by the Board). Further decisions included approval of the business plan implementation report and the business plans itself, amendments to the Company's subsoil use contracts, approval of key performance indicators for the Chairman and members of the Board for 2018 and approval of the organisational structure of the Central Office, total number of employees, etc.

§ Decisions were taken on the conclusion of 110 transactions in which the Company had an interest, or in which the Company acted as a representative or intermediary of its affiliates. Decisions on the conclusion of transactions in which Kazatomprom had an interest were taken by the Board in accordance with (i) Article 21 of the Law of the Republic of Kazakhstan on the National Wealth Fund, dated 1 February 2012, No. 550 IV, (ii) paragraph 1 of Article 71 of the Law of the Republic of Kazakhstan, dated 13 May 2003, No. 415-II, on joint stock companies, and (iii) Clause 3 of the rules for concluding transactions between organisations belonging to Samruk-Kazyna Group, in respect of which the Law of the Republic of Kazakhstan "On Joint-Stock Companies" establishes special conditions approved by the decision of the Board of Directors of Samruk-Kazyna JSC on April 27 2009 18;

§ Sixty transactions were considered, as a result of which NAC Kazatomprom JSC divested and/or acquired property with a value of less than 10% of the total value of the Company's assets. Its conclusions were made in accordance with Clause 2 of Article 180 of the Law of the Republic of Kazakhstan on State Property.

§ Seventy-four decisions were taken on matters relating to the competence of the General Meeting of Shareholders (participants) of a legal entity, the shares (shares in the authorised capital) of which belonged to the Company, where NAC Kazatomprom JSC acted as the sole participant (DP ORTALYK, Kazatomprom-SaUran LLP, Institute of High Technologies LLP, Korgan-Kazatomprom LLP, RU-6 LLP, Astana Solar LLP, Kazakhstan Solar Silicon LLP, MK KazSilicon LLP, LLP KAP Technology, JSC TN KazakAtom AG, LLP MAEK-Kazatomprom, JSC KAES and LLP SARECO).

§ Board decisions were made on 262 issues to determine the position of the Company as a shareholder in legal entities in which NAC Kazatomprom JSC was not sole shareholder for the purposes of subsequent voting by authorised representatives at General Meetings of Shareholders. These included the activities of APPAK LLP, Semizbay-U LLP, Karatau LLP, JV Akbastau JSC, Zarechnoye JV JSC, KATKO JV LLP, Inkai JV LLP, Kyzylkum LLP , LLP JV Khorasan-U, LLP JV UGHK, LLP Baiken-U, LLP S P Budenovskoye, JSC UMZ, JSC IUEC, JSC ECC, JSC JV UKRTVS, LLP Uranenergo, JSC Volkovgeology, LLP SKZ-U, JSC Kaustik, LLP Trade and Transport Company, Kazatomprom-Damu LLP, Kyzyltu LLP and JV Betpak Dala LLP.

§ Fifty-two internal documents were approved. These included the Company's implementation plan and higher-level roadmap for 2018‒2028 development strategy; the Group's corporate tax policy, tax control regulations and tax risk processes; the information technology strategy for 2018‒2028; an update of the business transformation programme charter; data-management concepts; rules for candidate selection for heads of executive bodies of subsidiaries and affiliates and the creation of a committee for the selection of candidates for heads of subsidiary and dependent companies; instructions on the accounting of sulphuric acid for the preparation of reserves for uranium mining and the determination of a unified method for the accounting of sulphuric acid for acidification; provisions for the Investment Committee; and funding strategies for 2018-2028.

§ One hundred and forty-two decisions were taken on various issues, including an update of the limits on Group balance-sheet and off-balance-sheet obligations to second-tier banks and a revised list of second-tier banks with which deposits of free cash may be placed temporarily; approval of a list of managerial successors; approval of the Board's workplan for 2018; and the appointment of the Investment and Risk Management Committees.

 

 

 

Table 83. Number of issues considered by the Management Board in 2017‒2018

Indicator

2018

2017

Change

Number of in-person meetings

37

36

3%

Number of issues considered at meetings in person
(including issues considered that were not on the agenda)

288

254

13%

Number of issues considered at meetings in absentia

534

582

-8%

 

 

 

 

MANAGEMENT BOARD COMMITTEES

The following are Management Board Committees aimed at enhancing the effectiveness of resolutions made by the Management Board: 

Risk Management Committee

The Risk Management Committee is a key working body that considers and makes suggestions on the Company's risk management.

The main functions of the Risk Management Committee are as follows:

1.     The consideration and preliminary approval of drafts of internal and other documents on Company risk management (including policy and rules);

2.     The coordination of the interaction between structural subdivisions in relation to risk management;

3.     The consideration and approval of Company risk appetite and level of risk tolerance;

4.     The review and approval of limits for banks and the list of second-tier banks for temporary deposit of free funds (if necessary);

5.     The consideration and approval of the Company's risk register, including consolidated action plans for risk minimisation, and risk map;

6.     The consideration and approval of key risk indicators;

7.     The consideration and approval of risk matrices and controls;

8.     The preparation of proposals on the organisation and maintenance of an effective risk management system;

9.     The consideration and approval of risk owners on the basis of the risk register. 102-18

Investment Committee

The main purpose of the Investment Committee is to make recommendations and suggestions to improve the efficiency of the investment activities of the Company, its subsidiaries and affiliates.

The main functions of the Investment Committee are as follows:

1.       The approval of internal regulatory documents on investment activity;

2.       To consider, implement and make recommendations in accordance with established procedures:

-     on the investment initiatives of the Company, its subsidiaries and affiliates;

-     on the acquisition or sale by the Company or its subsidiaries and affiliates of shareholdings in other legal entities, the merger of subsidiaries and affiliates with third-party legal entities, and the creation of new legal entities for the purpose of implementing investment projects;

-     on organic growth projects;

-     on M&A projects;

-     on creating working groups for the implementation of investment projects; and

-     on other issues as required by the company's internal rules and practices.

3.       The issuance of recommendations on Company investment initiatives to be submitted for consideration to Samruk-Kazyna JSC. 102-18

Credit Committee

The main purpose of the Credit Committee is to implement the Company's credit policy in accordance with the requirements of Samruk-Kazyna JSC and to ensure the timely and qualitative adoption of resolutions on issues associated with the Company's granting of loans.

The main functions of the Credit Committee are as follows:

1.     The consideration and preparation of recommendations on loan applications, including an analysis of expert estimates of the actual and planned financial indicators on which approval is based, and the verification of mortgage security;

2.     The determination of the terms of the loans being granted, such as the amount, term, purpose, interest rate, security, repayment schedule for principal and interest, etc.;

3.     The consideration and decisions on the scheduled and unscheduled monitoring of credit activities;

4.     The consideration and preparation of recommendations on decisions related to loan restructuring and problem loans;

5.     Other questions related to credit activity of the Company. 102-18

 

Specialised Scientific and Technical Council

The Specialised Scientific and Technical Council (SSTC) is a key working body for implementing the Company's strategic approach to scientific, technical and innovative development.

The main functions of the SSTC are as follows:

1.      The formation, updating and implementation of the strategic approach to Kazatomprom's scientific, technical and innovative development;

2.      The application of scientific achievements and new technologies for the benefit of Kazatomprom, its subsidiaries and affiliates;

3.      The consideration and agreement of strategic plans for research and development and innovative work at Kazatomprom, its subsidiaries and affiliates;

4.      The updating and monitoring of the research, development and design work performed for Kazatomprom. 102-18

 

REMUNERATION OF DIRECTORS AND EXECUTIVES

In accordance with the Company's charter, the remuneration of the members of the Board of Directors is determined by the General Meeting of Shareholders, while the remuneration of the Chairman of the Management Board and the members of Management Board is determined by the Board of Directors.

In accordance with the law of the Republic of Kazakhstan on joint stock companies, by decision of the Company's General Meeting of Shareholders, independent members of the Board of Directors shall be remunerated and reimbursed expenses related to the execution of their functions.

The Company approved its rules of remuneration, bonuses and benefits for senior management on 28 June 2017 and these set out the procedure and terms of payment.

Total remuneration for the Management Board members and independent members of the Board of Directors of NAC Kazatomprom JSC in 2018 totalled to KZT 932,197,628 (before taxes).

 

STATEMENT OF RESPONSIBILITY OF MEMBERS OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD

In accordance with the Company's corporate governance code, the Board of Directors and the Management Board are responsible for the accuracy of the Company's annual report and financial statements.

According to the disclosure and transparency rules of the United Kingdom Financial Supervision Authority (Disclosure and Transparency Rules of the Handbook of the Financial Conduct Authority), each member of the Board of Directors confirms, based on the information he has, that:

·      The financial statements have been prepared in accordance with IFRS, provide a true and reliable reflection of the assets, liabilities, financial condition, results of the financial and economic activities of the Company and consolidated balance of the Company with its subsidiaries;

·      The management report includes accurate data on the development and indicators of financial and economic activities and the financial condition of the Company and its subsidiaries, as well as a description of the most important risks and uncertainties that they face.

As of the date of preparation of this integrated report, none of the members of the Board of Directors or the Management Board has, over the past five years:

·      had a criminal record for offenses related to fraud;

·      been a member of the administrative, managerial or supervisory bodies of any company or partner in any partnership at the time or in anticipation of the bankruptcy process, property management due to insolvency or liquidation; or

·      been subject to official public charges or sanctions by a government organisation or regulatory body (including a professional body) and has never been deprived of the right, upon a court order, to act as a member of the administrative, management or supervisory bodies of a company or to participate in the management of a company or doing her business.

EMPLOYMENT AGREEMENTS OF SENIOR MANAGEMENT

The company enters into fixed-term employment contracts with the Members of senior management for a fixed term. Under such agreements, members of the Company's top management receive bonuses or other forms of remuneration in addition to their regularly paid salary.

Each member of senior management signs an individual employment contract, the terms and conditions of which must fully comply with Kazakhstan legislation, including the Labour Code. These conditions usually include a five-day, 40-hour week, an eight-hour working day, an annual vacation of 30 calendar days, the Company's insurance against life and health hazards arising from the performance of its duties, and medical insurance.

CONFLICTS OF INTEREST

The Code of Ethics and Compliance of the Company, approved by a decision of the Board of Directors, defines the grounds for the occurrence of conflicts of interest, as well as procedures for their prevention. The Company's regulations on the resolution of corporate conflicts and conflicts of interest were approved by the Board of Directors on 10 March 2011. There are no actual or potential conflicts of interest between the obligations of the Members of the Board of Directors or the Management Board prior to joining the Company and the private interests or other duties of the Members.

The Code of Ethics and Compliance expressly prohibits the participation of members of the Board of Directors, the Management Board, as well as other employees of the Company in actions that may lead to a conflict of interest.

A similar practice is being introduced in the subsidiaries of the Company.

The Company is taking measures to raise the awareness of members of the Board of Directors, the Management Board, and other employees about the Company's policy for preventing conflicts of interest, including training, explanatory activities, and periodic testing of knowledge of the principles of ethics.

The company requires its suppliers to join the Kazatomprom Code of Suppliers and Contractors, which includes provisions for the prevention of conflicts of interest. An additional tool to minimize the risk of conflict of interest is the Anti-Corruption Clause, which is included in the Company's procurement contracts.

 

 

 

 

 

INTERNAL AUDIT SYSTEM

The Company has an Internal Audit Service, the independence of which is ensured by its functional subordination to the Board of Directors. Functional subordination includes the appointment of Internal Audit Service employees, the determination of remuneration, approval of policies/procedures for internal audit, the annual audit plan and financial budget.

The Internal Audit Service assesses and contributes to the improvement of the corporate governance, risk management and control processes of the Group organisations using a systematic, consistent and risk-oriented approach.

It applies International Internal Audit Standards in its activities and complies with the Code of Ethics for Internal Auditors.

In 2018, Internal Audit Service did not encounter any cases of obstruction of audit or interference with the activities of the Internal Audit Service by the Company's executive body.

All employees of the Internal Audit Service confirm annually their independence from the audited entities included in the annual audit plan approved by the Board of Directors.

Service performance results are regularly discussed and evaluated by the Audit Committee.

ORGANISATIONAL STRUCTURE OF THE COMPANY'S CORPORATE CENTRE 

The Company comprises a Corporate Centre with a clear functional structure. As part of its transformation programme, the Company plans to take a process management approach to its main activities in the future. KAP3

The organisational structure was formed by taking into account the target business processes necessary to implement the strategic goals and objectives of the Group in all key areas of its activities. The best practices of comparable companies of in the global uranium and nuclear industries were used, as were the legislative requirements of the Republic of Kazakhstan and the requirements of shareholders.

 

CORPORATE ETHICS

The Company recognises that transparent business, including combating corruption, is a necessary factor in dealing with stakeholders and building trustful internal corporate relationships. Thus, the social and economic environment in which the Company operates is improved by increasing the reliability and integrity of transactions, preventing corruption and providing reliable information for decision-making by stakeholders.

All employees of the Company are made familiar with the Code of Ethics and Compliance as a part of the hiring process, as well as any amendments to the Code. To confirm their familiarisation with the Code, every employee signs a familiarisation form. 102-16

Periodic testing of personnel is carried out to check their understanding of the provisions of the Code of Ethics and Compliance.

The Company is committed to high standards and principles of corporate ethics provided for by the Code of Ethics and Compliance and commits to:

§ Using and improving policies and practices that help to prevent bribery, extortion and the facilitation of remuneration and other corrupt practices, including the imposition of anti-corruption obligations on suppliers;

§ Counteracting the legalisation of illegally gained income;

§ Prevent conflicts of interest, including situations of joint employment of spouses and close relatives;

§ Prevent discrimination and other manifestations of ethical violations;

§ Ensuring compliance with the requirements of legislation, the Company charter, listing requirements, and the terms of international treaties and to establishing sanctions for their violation;

§ Ensure occupational safety and respect the environment;

§ Raising the awareness of personnel about the importance of compliance with the requirements of the law, encouraging employees to report incidents of violation of the Company's policies, rules and procedures;

§ Demonstrating that the level of remuneration of Company employees corresponds to the work performed and the level of qualification;

§ Fulfilling in a timely manner its contractual obligations, including the payment of taxes and other payments to the state budget;

§ Observing the principles of fair competition and using the criteria of ethical equality in the implementation of procurement policies and the conclusion of contracts, including compliance audit of counterparties; and

§ Ensuring transparency, openness and objectivity of decisions. 102-16

 

During 2018 the company appointed Birzhan Duisembekov, a Management Board member, responsible for internal communication of the approved ethics principles. The Code of Ethics and Compliance approved by Board of Direcors' resolution # 8/18 of 29.06.2018 is available on the corporate website. Furthermore, the information regarding the ethics principles has been circulated by management to all emplyees of the Group by e-mail. The Code of Ethics and Compliance has also been communicated to the subsidiaries and affiliates in which Kazatomprom owns 50% or more of the share capital.

Trainings on compliance were conducted in December of 2018 for members of the Management Board and in January of 2019 for the departments most prone to the compliance risks.

The Company has a Regulation on the settlement of corporate conflicts and conflicts of interest, approved by a decision of the Board of Directors, which determines the causes of corporate conflicts, conflicts of interests, procedures to prevent them, and also regulates the activities of the Company's bodies as part of conflict resolution activities.

The company controls the circulation and use of insider information, notifies stock exchanges of transactions made by insiders, helps to prevent insider transactions.

The company has a "hotline" for reporting ethics violations. The "hot line" is administered by an external supplier, which ensures the independence of accepting appeals for consideration, and enables confidential information, including anonymity of the appeal. The Company's actions aimed at preventing and suppressing violations of the laws of the Republic of Kazakhstan or the Company's internal regulatory documents are governed by a number of documents, the main of which is the Confidential Information Policy.

During 2018, 24 requests received via the hotline were considered.

The Company has an Anti-Corruption and Fraud Policy that defines the main activities of the Company and the general rules of conduct for anti-corruption officials and employees. Each employee signs an obligation to comply with the rules of anti-corruption legislation. 102-16

In the event of labour disputes and conflicts, certain issues are resolved in accordance with the labour legislation. Mediation is also used to resolve labour disputes.

 

OFFICE OF THE OMBUDSMAN

Since 2011, the Board of Directors has appointed a Company's Ombudsman.

In accordance with the Code of the Ombudsman, the basic functions of the Ombudsman include:

§ Providing and coordinating explanations to officials and employees of the Company on issues related to the requirements of the Code of Corporate Ethics and Compliance;

§ Consulting with officials and employees on the provisions of the Code of Corporate Ethics;

§ Collecting information on non-compliance with the provisions of the Code of Corporate Ethics, initiating procedures to consider disputes over the violation of the provisions of the Code of Corporate Ethics and participating in their settlement.

One of the duties of the Ombudsman is to submit to the Board of Directors an annual report on compliance with the requirements of the Code of Corporate Ethics.

In 2018, the Ombudsman investigated 17 complaints in relation to social and labour disputes and unethical behaviour.

On 8 February 2018, Bolat Abzhaparuly Zhylkyshiev, was appointed asOmbudsman of the Company by decision of the Board of Directors of NAC Kazatomprom JSC (No. 1/18).

Mr Zhylkyshiev graduated from the Kazakh Institute of Chemical Technology with a degree in the Organisation and Planning of Building Materials, specialising in mechanical engineering and construction materials.

He began his career as master of a brick factory, later becoming chief mechanic at Promstroimaterialy Trust, Shymkent.

He has subsequently worked as an instructor for the Dzerzhinsky District Party Committee, as Secretary of the Party Bureau of the Shymkent oils and fats factory, as Deputy Chairman of the Symkent City Executive Committee, head of the Dzerzhinsk regional administration of the city of Shymkent, the district administration of the rayon administration, akim of the city of Chimkent, akim of the South Kazakhstan region, a vice-president of NAC Kazatomprom JSC, deputy of the Senate Parliament of the Republic of Kazakhstan and as Advisor to the Chairman Board of NAC Kazatomprom, JSC.

 

RISK MANAGEMENT AND INTERNAL CONTROL

 

In 2010, the Company introduced a risk management system based on global best practices and the requirements of Samruk-Kazyna JSC. 102-11

The company is guided by the following international standards and practices in the field of risk management and internal control 102-12:

§ COSO internal control integrated model (2013)

A revised version of the 1992 document, COSO 2013 states that internal control is a process that depends on people at all levels of the organisation (not just senior management) and should be aimed at achieving the Company's business goals.

§ COSO enterprise risk management integrated model (2004, amended in 2017) (includes an integrated model and applied methods)

A conceptual model that focuses on various aspects of risk management, it considers internal control to be an essential component of risk management in any enterprise.

§ Standard ISO 31000:2018 risk management - principles and guidelines (2018)

A guide that defines the principles and approaches to the risk-management process. The standard establishes the fundamental principles and processes of risk management that apply to any type of organisation in the private or public sector.

§ Standard ISO 9001:2008 and ISO 9001:2015 quality management system

Standards that define approaches to quality management, including a process approach to managing risks that affect product quality.

§ Regulatory documents on risk management and internal control of Samruk-Kazyna, JSC.

 

RISK MANAGEMENT

The Company's activities involve various risks and, therefore, an effective risk-management system is a fundamental element of the Company's business and its development strategy. Accurate and timely identification, assessment, monitoring and response to risks allow an effective decision-making process at all levels of management and ensure the achievement of the Company's strategic goals and key performance indicators.

The Risk management Department is responsible for the Company's risk management. Key risk-management issues are first reviewed, approved or agreed by the Risk Management Committee, under the supervision of the Management Board. Separate structural units responsible for the organisation of risk management have been formed, or risk managers have been appointed in the Company's subsidiaries and affiliates. 

 

 

 

Figure 7. Structure of corporate risk management system

 

Detailed information on the structure, participants and responsibilities of members of the risk-management system is provided in the Company's risk management policy, which can be found on the corporate website.

Kazatomprom's risk culture is created through the involvement of all key departments and stakeholders, as well as the effective exchange of information in the risk-management process between the Board of Directors, the Management Board and the Company's divisions.

Corporate training in risk management and internal control is organised for heads of department and other employees with risk responsibility, in addition to an annual round-table discussion with employees responsible for enterprise risk management.

 

 

MAIN RISKS AND OPTIMISATION MEASURES

All identified risks are divided into five main categories, in line with the methodology of the COSO enterprise risk management integrated model: strategic, financial, operational, investment and legal.

The Company approves risk registers and maps of subsidiaries and affiliates on an annual basis. Kazatomprom's risk map is divided into zones of influence and likelihood. 

According to the Company risk register for 2018, there were 27 risks:

 

Figure 8. Main risk map of the Company as of 31 December 2018, based on the results of residual risk assessment

 

 

 

 

Table 83. Primary risks and risk management measures

 

 

 

С-2

Unauthorised strikes by employees and demonstrations by the local population at subsidiary and affiliate locations

•      Interaction with local executive bodies

•