Kazakhmys PLC
19 September 2006
Kazakhmys PLC
Results for six months ended 30 June 2006
Financial highlights
o Revenues up by 90% to $2,279.8 million following an 82% increase in the
average LME copper price for the period
o EBITDA excluding special items for the period up by 124% to $1,081.3
million
o Profit before taxation, finance items and negative goodwill up by 174% to
$984.5 million
o EPS based on Underlying Profit up by 124% to $1.32 per share
o Average realised copper price up 88% from $3,458 per tonne to $6,510 per
tonne, representing a 7% premium over the average LME copper price for the
period
o Free Cash Flow(3) up by 316% to $622.3 million, despite adverse working
capital movements of $197.0 million mainly within MKM
o Interim dividend declared of 12.8 US cents per share in respect of 2006
earnings
Key business developments
o Expansionary and new project capital expenditure up 91% to $95.4 million,
representing investment for organic growth
o Completion of the Zhaman-Aybat mine in the first quarter of 2006 ahead of
schedule
o Accelerating scoping study on the Boschekul mine with preparation scheduled
to commence later this year
o Strengthening of the Board with the appointment of David Munro as Strategy
Director and Philip Aiken as non-executive director
o YK Cha to stand down as Chief Executive with effect from 31 December 2006
after over ten years' service with the Group and continuing as a Special
Adviser to the Board
Financial highlights for six months ended 30 June 2006
------------------------------------------------------------------------------------------------------------------------
Six months Six months
$ million, unless stated ended 30 ended 30 June % change
June 2006 2005
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
Revenues 2,279.8 1,202.1 90%
Earnings:
EBITDA excluding special items (1) 1,081.3 482.8 124%
Profit before taxation, finance items and negative goodwill 984.5 359.5 174%
Underlying Profit (3) 619.3 236.7 162%
EPS:
Basic and diluted ($) 1.35 0.56 141%
Based on Underlying Profit (2) ($) 1.32 0.59 124%
Free Cash Flow ((3)) 622.3 149.5 316%
ROCE (3) (%) 27.7% 17.1% 62%
Cash cost of copper after by-product credits ((3)) ($/tonne) 563.1 869.4 (35%)
------------------------------------------------------------------------------------------------------------------------
Kazakhmys' Executive Chairman Vladimir Kim commented:
'Our strong 2006 earnings at the half year have already exceeded the full year
2005 earnings following a period of particularly buoyant commodity prices.
Despite the operational difficulties experienced at the beginning of the year,
these results demonstrate the resilience of our business. The interim dividend
of 12.8 US cents per share reflects our confidence in the business and the
continued strength in copper prices. We are also confident that the new
appointments to the Board will strengthen the leadership of Kazakhmys as we seek
to build a world-class metals and mining company. Finally, I would like to
express my gratitude to YK Cha, our Chief Executive, who has decided to stand
down at the end of this year in order to spend more time in his native Korea
although we are pleased that he will continue as a Special Adviser to the
Board.'
(1) Reconciliation of EBITDA excluding special items to profit before taxation,
finance items and negative goodwill is found in Note 4(a) to the interim
consolidated financial statements.
(2) Reconciliation of EPS based on Underlying Profit to basic and diluted EPS
is found in Note 9 to the interim consolidated financial statements.
(3) Refer to the Glossary on page 44 for the definition of these key financial
indicators.
CHAIRMAN'S STATEMENT
I am pleased to present Kazakhmys PLC's half year financial results for the six
months ended 30 June 2006.
The first six months of 2006 saw us achieve strong growth in both revenues and
profits, as we reaped the benefit of particularly attractive commodity prices.
Revenues rose by 90% to $2,279.8 million, and pre-tax profits increased by 166%
to $955.9 million. Our Earnings per share based on Underlying Profit for the
half year was higher than the 2005 full year figure.
We delivered this impressive performance despite adverse weather conditions in
the first two months of 2006. Overall, our copper cathode production from own
concentrate increased slightly compared to the same period in 2005. Copper
cathode production volumes improved in the second quarter, rising by 11%
compared to the first quarter as weather conditions improved. Our total copper
production of 187.9 thousand tonnes was down 6% from the first half of 2005,
primarily due to lower volumes of copper produced from purchased concentrate and
through tolling arrangements as a result of the Group's aim to reduce volumes of
purchased concentrate.
Output of by-products such as zinc and gold rose, in part, due to the higher
contribution from the Abyz and Artemyevskoe mines that produce ores with a
higher by-product content. In the first six months of 2006, our zinc production
volume increased by 17% from 29 to 34 thousand tonnes and our own gold
production increased by 15% from 47 to 54 thousand ounces.
We continue to see significant potential in terms of investment opportunities in
Kazakhstan, which offers an environment of both political stability and economic
growth. We are actively screening for opportunistic acquisitions that offer
benefits to our shareholders. Our healthy balance sheet and robust Free Cash
Flow of $622.3 million for the first six months of 2006 place us in a strong
position to achieve these goals.
We remain committed to our strategy of exploiting organic growth opportunities.
The feasibility studies on our Aktogay project continue as we consider further
the mining methodology and processing technologies. We expect to report the
outcome of our feasibility studies on this project in the next six to twelve
months. We are also launching, ahead of plan, a scoping study on the Boschekul
project located approximately 200 kilometres north-east of Astana, the capital
of Kazakhstan. The annual production from the Boschekul project is estimated to
be 20 million tonnes of ore.
Our commitment to organic growth through new projects and expansions at existing
operations is highlighted by a 91% increase in expansionary capital expenditure
from $50.0 million in the first half of 2005 to $95.4 million in the
corresponding period of 2006. Significant sums invested during the period
include the Zhaman-Aybat mine, the acid plant at the Balkhash complex and the
expansions at our Karagaily and Nurkazgan concentrators.
The interim dividend of 12.8 US cents per share announced today reflects our
confidence in the business, whilst taking account of growth opportunities.
We are in advanced stages of seeking regulatory approval for a secondary listing
on the Kazakhstan stock exchange, an objective we declared at the time of
Listing. This development will allow Kazakhstan investors to participate
directly in the continued growth of Kazakhmys and we expect this will make a
meaningful contribution to the development of Kazakhstan's capital markets.
Admission to the Kazakhstan stock exchange is expected to take place by the end
of the year.
I would also like to report several changes in our management structure.
Firstly, I would like to pay particular tribute to YK Cha who will be standing
down as Chief Executive with effect from 31 December 2006. Mr Cha has decided to
spend more time in his native Korea pursuing other business opportunities. Mr
Cha has been a key member of our management team since the mid-1990s. He
instigated a strong sales and marketing strategy, developing a keen insight into
the Chinese market and built deep relationships with Chinese end-users, which
made a significant contribution to Kazakhmys' success in sales and marketing. He
also played a significant role in the preparation and execution of our
successful London Listing last year and has made a great contribution to the
transformation of Kazakhmys PLC into a FTSE 100 company. Kazakhmys will continue
to benefit from Mr Cha's experience as he will serve as a Special Adviser to the
Board after the end of the year.
One of our non-executive directors, David Munro, has agreed to join our
executive management team as Strategy Director with effect from 1 October 2006.
David brings a wealth of mining and strategic development experience and we are
confident that his knowledge and skills will be important in shaping our
business going forward.
In line with our previous commitment, I am pleased to announce that Philip Aiken
has agreed to join the Kazakhmys PLC Board with effect from 1 November 2006.
There is no doubt that Philip's 35 years of industry experience, including
several senior roles at BHP Billiton, will be invaluable to the Board. Philip
will join the Audit, Remuneration and HSE committees. In addition, we are
looking to further deepen the Board's range and experience by appointing another
independent non-executive director in due course.
Looking forward, we believe the commodity price environment will continue to be
favourable for the mining community. Supply fundamentals remain tight as
uncertainty remains over production from a number of geographic regions. We see
copper prices staying above long-term historical averages for the remainder of
the year and into 2007. Over the full year, we continue to expect copper cathode
production volumes to be moderately higher compared to 2005.
In conclusion, I would like to thank all our employees who contributed so much
to Kazakhmys' strong performance in the first half of 2006 in spite of the
challenging operating environment at the start of the year. Their dedication is
an invaluable element in delivering on our commitments in the future.
REVIEW OF OPERATIONS
Highlights
o Extracted ore volumes slightly increased despite adverse weather
conditions, with marginally improved grades
o Copper cathode produced from our own concentrate increased from the first
to second quarter of 2006, totalling 169 thousand tonnes for the six months
compared to 167 thousand tonnes in the corresponding period of 2005
o Copper cathode production from purchased concentrate was 32% lower, down
from 25.6 to 17.5 thousand tonnes in line with the Group's plan to reduce
purchased concentrate volumes
o Output of by-products such as zinc, gold and silver rose, in particular
zinc which increased by 18% compared to the corresponding period of 2005
Copper
In the first half of 2006, the Group extracted 20,127 thousand tonnes of ore
with an average copper grade of 1.10%, an increase from 1.03% of the
corresponding period of 2005.
Copper cathode production over the first half of the year was 187.9 thousand
tonnes, a 6% decrease compared to the same period of 2005. This is primarily due
to lower volumes of copper produced from purchased concentrate and through
tolling arrangements as a result of the Group's plan to reduce volumes of
purchased concentrate.
In the first quarter of 2006, copper cathode production fell by 7%, compared to
the same period of 2005, to 89.1 thousand tonnes due to the disruptions early in
2006 when temperatures in some parts of Kazakhstan remained below minus 40(0)C
for nearly two weeks. Production volumes have improved in the second quarter,
and we produced 98.8 thousand tonnes of copper cathode, an 11% increase compared
to the first quarter.
In the first half of 2006, copper cathode produced from purchased concentrate
fell by 32% compared to the same period of 2005, in line with our aim to reduce
copper cathode production volumes from purchased concentrate. Purchased
concentrate will be gradually substituted by increasing the contribution from
the recently commissioned Abyz, Kosmurun and Nurkazgan mines. To accommodate
increasing ore volumes from these mines, concentrator capacity at the Karagaily
plant has been upgraded, increasing capacity by 50% to 1.5 million tonnes per
year.
Copper rod production increased significantly from 5.9 thousand tonnes in the
first half of 2005 to 14.3 thousand tonnes in the same period of 2006 due to
more favourable market conditions.
At the Zhezkazgan complex, extracted ore volumes were marginally higher with 2%
growth in the first half of 2006 compared to the first half of 2005. Copper
cathode production volumes were adversely affected by the scheduled maintenance
shutdown of the Zhezkazgan copper smelter.
Although extracted ore volumes at the Balkhash complex were down in the first
six months of 2006 compared to the first six months of 2005, both copper
concentrate and copper cathode production were up due to higher ore grades.
Compared to the first half of 2005, copper concentrate production increased from
91.8 thousand tonnes to 133.0 thousand tonnes and copper cathode production
excluding tolling rose from 75.2 thousand tonnes to 81.2 thousand tonnes.
East Region mines performed well, with higher copper grades from recently
completed mines generating an increase in copper concentrate production from
241.2 thousand tonnes in the first half of 2005 to 259.5 thousand tonnes in the
first half of 2006.
Mines at the recently established Karaganda complex performed without any
significant business interruptions, and the ramp-up at the recently completed
Abyz, Nurkazgan and Kosmurun mines has progressed smoothly. Ore extraction
volumes increased significantly from 455 thousand tonnes in the first six months
of 2005 to 1,473 thousand tonnes in the same period of 2006. Copper concentrate
production increased by 85% from 38.5 thousand tonnes to 71.2 thousand tonnes.
Zinc
The contribution from zinc-rich ores from the Artemyevskoe mine increased the
average zinc grade in the first half of 2006 to 4% compared with 3% in the same
period of 2005. Zinc metal production in the first half of 2006 stood at 33.8
thousand tonnes in comparison to 28.7 thousand tonnes of the first half of 2005,
an 18% increase. The ramp-up at the zinc plant was slightly slower in the second
quarter of 2006 due to technical problems with the coolers, which are currently
being rectified.
Precious Metals
In the first half of 2006, the Group produced 10.7 million ounces of silver, a
level comparable to the same period for the prior year. Out of the 10.7 million
ounces of refined silver produced, only 32 thousand ounces were produced under
tolling arrangements.
The Group also produced 77.7 thousand ounces of gold, 24% higher than the same
period in 2005. Out of the 77.7 thousand ounces of gold produced, 53.6 thousand
ounces were produced from our own concentrate (a 15% increase compared to the
first half of 2005). This increased gold production is the result of a larger
ore contribution from the Abyz and Artemyevskoe mines that produce ores with a
higher gold content. Gold production through tolling arrangements also increased
from 16 thousand ounces for the first half of 2005 to 24 thousand ounces in the
corresponding period of 2006.
MKM
For the first half of 2006, MKM total production was 135.3 thousand tonnes of
copper products. The wire products business unit, the main volume driver for the
period, produced 82.4 thousand tonnes, a 39% increase compared to the same
period of 2005. Out of the 82.4 thousand tonnes produced, wire rod represented
62.5 thousand tonnes and drawn wire 19.9 thousand tonnes compared to 43.8
thousand tonnes and 15.4 thousand tonnes, respectively, for the same period of
2005. Total flat products manufactured were comparable to the corresponding
period of 2005 and stood at 31.5 thousand tonnes, comprising 1.1 thousand tonnes
of pre-rolled products, 7.7 thousand tonnes of sheets and 22.7 thousand tonnes
of strips. MKM also produced 10.1 thousand tonnes of tubes and 11.3 thousand
tonnes of bars against 9.5 thousand tonnes and 10.8 thousand tonnes,
respectively, in the same period of 2005.
FINANCIAL REVIEW
Basis of preparation
The financial information set out on pages 14 to 35 has been prepared using
consistent accounting policies with those adopted in the financial statements
for the year ended 31 December 2005. The Group has changed the segmental
reporting presentation from that disclosed in the 2005 Annual Report. Whilst
corporate costs were not material during 2005, the increased size of the head
office following the Listing has resulted in the need to separate corporate
costs and balances from the Kazakh Mining segment. The revised segmental
reporting is consistent with the Group's internal management reporting
structure.
Summary of results
Buoyant commodity prices, particularly copper, seen throughout the first half of
the year have resulted in substantial increases in revenues and profit before
taxation of 90% and 166%, respectively, to $2,279.8 million and $955.9 million.
Whilst sales volumes of copper cathode and rod remained flat at 178 thousand
tonnes and adverse cost pressures were experienced in Kazakhstan, these factors
were more than compensated for by the higher prices seen across the Group's main
products.
A summary of the consolidated income statement is set out below:
Six months Six months
Summary Group income statement ended ended Change
30 June 2006 30 June 2005 %
$ million $ million
Revenues 2,279.8 1,202.1 90%
Operating costs excluding depreciation, depletion,
amortisation and special items (1,198.5) (719.3) 67%
-------- ---------
EBITDA excluding special items 1,081.3 482.8 124%
Special items:
Add/(less): write back/(off) of property, plant and 10.2 (0.3)
equipment
Less: loss on disposal of fixed assets (4.0) (10.6)
Less: depreciation, depletion and amortisation (103.0) (112.4)
-------- ---------
Profit before taxation, finance items and negative
goodwill 984.5 359.5 174%
Net finance expenses (including net foreign exchange
losses) (35.1) (0.5)
Recognition of negative goodwill 6.5 -
-------- ---------
Profit before taxation 955.9 359.0 166%
Income tax (317.0) (126.9)
-------- ---------
Profit for the period 638.9 232.1 175%
Minority interests (6.2) (6.0)
-------- ---------
Profit attributable to equity shareholders of the parent 632.7 226.1 180%
-------- ---------
-------- ---------
EPS - basic and diluted $1.35 $0.56 141%
-------- ---------
-------- ---------
EPS based on Underlying Profit $1.32 $0.59 124%
-------- ---------
-------- ---------
Following these results and in line with the Group's dividend policy, the
Directors have declared an interim dividend of 12.8 US cents per share.
The improved earnings have strongly benefited the Group's cash flows and net
liquid funds position, with the latter standing at $1,221.4 million as at 30
June 2006, rising to $1,514.4 million by 31 August 2006. The continued high
commodity prices and healthy funding position leaves the Group well placed to
pursue future organic growth and opportunistic acquisitions.
The definitions of our key financial indicators are shown in the Glossary and
these measures are set out below:
Six months ended Six months ended
Key financial indicators 30 June 2006 30 June 2005
EBITDA excluding special items ($ million) 1,081.3 482.8
EPS based on Underlying Profit ($) 1.32 0.59
Free Cash Flow ($ million) 622.3 149.5
Return on Capital Employed (%) 27.7% 17.1%
Cash cost of copper after by-product credits ($/tonne) 563.1 869.4
Income statement
Revenues
As the Kazakh Mining and MKM businesses are different in nature, the two
segments have been analysed separately. A summary of production and sales
volumes, and revenues by major categories of products for the half year ended 30
June 2006 and 2005 are set out below:
Production and sales Production Sales
volumes/revenues --------------------- --------------------------------------------
Six months Six months Six months Six months Six months Six months
ended ended ended ended ended ended
30 June 30 June 30 June 30 June 30 June 30 June
2006 2005 2006 2005 2006 2005
kt kt kt kt $ million $ million
Copper cathodes:
From own and purchased 187 193 163 173 1,060.2 595.5
concentrate
From tolling 1 7 1 7 5.7 15.3
Zinc:
Zinc metal 34 29 37 38 102.4 46.8
Zinc concentrate 154 109 81 8 59.1 1.6
Silver (koz) 10,692 10,638 10,835 10,963 117.8 77.2
Gold (koz):
From own production 54 47 47 33 28.2 14.2
From tolling 24 16 24 16 1.9 1.1
Copper rod 14 6 15 5 98.6 20.1
Other - - - - 47.0 19.8
-------- -------
Kazakh Mining 1,520.9 791.6
MKM 135 111 134 110 758.9 410.5
-------- -------
Total 2,279.8 1,202.1
======= ========
Revenues of the Kazakh Mining business increased from $791.6 million to $1,520.9
million, a 92% improvement against the prior period. The major contribution to
revenues remained copper cathodes which accounted for 70% of revenues. With
prices rising across all commodities, revenues from each of our main products
showed substantial increases.
Copper prices escalated significantly during April and May 2006 reaching $8,788
per tonne on 12 May 2006. The average market and realised prices for our main
products during the period are set out below:
Comparison of market and Six months ended 30 Six months ended 30
realised prices for main June 2006 June 2005
products ------------------- -----------------------
Average Average Average Average
market realised market realised
price price price price
Copper cathode ($/tonne) 6,070 6,510 3,328 3,458
Zinc metal ($/tonne) 2,762 2,767 1,294 1,231
Silver ($/oz) 10.95 10.87 7.06 7.04
Gold ($/oz) 590 600 427 430
The average realised prices for our main products do not differ significantly
from market prices with the exception of copper. In line with industry practice,
our sales agreements for copper cathodes provide for provisional pricing at the
time of delivery with the final price based on the market price for future
periods. With a higher proportion of our sales volumes in the second quarter
(62% for the second quarter compared to 38% for the first quarter), pricing
adjustments have generally been positive. Additionally, a premium over LME
prices is incorporated into our sales agreements.
Offsetting higher commodity prices, sales volumes for copper cathodes declined
compared to the prior period. Copper cathode production including tolling
decreased by 6% compared to the prior period. Given that 68% of sales were to
Europe, compared with 33% in the prior period, and the longer delivery time for
European sales, a sizeable time lag arises between production and sales
recognition for accounting purposes.
In addition, 14 thousand tonnes of copper cathodes were utilised in the
manufacture of copper rods, whose sales volumes increased by 200%, reflecting
improved customer demand in the Chinese market.
Sales volumes of zinc metal remained flat in line with production, although with
the realised price increasing by 125%, revenues increased by 119% to $102.4
million. Similarly, sales volumes of silver were largely unchanged from the
prior period reflecting flat production, but revenues increased by 53% to $117.8
million in line with the increase in realised prices. Sales volumes of gold
increased by 42% reflecting higher production volumes due to the Artemyevskoe
mine which was commissioned in March 2006.
Other revenues improved from $19.8 million to $47.0 million. These revenues
relate to the sales of surplus electricity, heating and coal, and minor
by-products arising from the copper cathode production process.
MKM's revenues increased by 85% to $758.9 million reflecting an increase in
sales volumes of 22%, but more significantly, higher copper prices that are
passed on to the customer in full. Of the $348.4 million increase in revenues,
$270.8 million resulted from the increase in copper prices. Wire rods and drawn
wire delivered the highest increase in sales volumes against the prior year,
with an increase of 39%. Together, these wire products account for 61% of MKM's
sales volumes.
Earnings
Profit before taxation, finance items and negative goodwill increased from
$359.5 million to $984.5 million, an increase of 174%, split between $973.1
million for the Kazakh Mining business, $30.0 million for MKM less $18.6 million
for unallocated corporate costs. A reconciliation of profit before taxation,
finance items and negative goodwill to EBITDA excluding special items by
business segment is set out below:
Six months Six months
ended ended
Reconciliation of EBITDA excluding
special items 30 June 2006 30 June 2005
$ million $ million
KAZAKH MINING
Profit before taxation, finance 973.1 347.2
items and negative goodwill
(Less)/add: (gain)/loss from special (6.6) 10.9
items
Add: depreciation, depletion and 92.3 102.0
amortisation
------- --------
EBITDA excluding special items 1,058.8 460.1
------- --------
Revenues 1,520.9 791.6
------- --------
EBITDA excluding special items 70% 58%
margin
------- --------
MKM
Profit before taxation, finance 30.0 15.6
items and negative goodwill
Less: gain from special items (0.1) -
Add: depreciation and amortisation 10.6 10.4
------- --------
EBITDA excluding special items 40.5 26.0
------- --------
Revenues 758.9 410.5
------- --------
EBITDA excluding special items 5% 6%
margin
------- --------
Unallocated corporate costs (18.0) (3.3)
excluding special items
------- --------
Total EBITDA excluding special items 1,081.3 482.8
======== ======
Kazakh Mining
The margin at the level of EBITDA, excluding special items for the Kazakh Mining
segment, increased substantially from 58% in the prior period to 70% in the
first half of 2006. The significant increase in copper prices seen since the
beginning of 2006 had the most favourable impact on margins. To a lesser extent,
margins also increased as the proportion of copper cathodes produced from
purchased concentrate reduced from 13% to 10%, primarily resulting from an
increase in mined ore and an improvement in mined ore grade from 1.03% to 1.10%.
However, the Kazakh Mining segment also experienced a number of adverse cost
pressures, in common with other companies in the mining industry. Employee
remuneration (production and administration) increased by 34% from the prior
period to $106 million due to rising prosperity within Kazakhstan and the
consequential wage pressures for the business, and a tightening market for
skilled labour across the natural resources sector within the CIS.
Although the copper content of purchased concentrate within the production
process decreased from 29 thousand tonnes to 19 thousand tonnes, rising copper
prices increased the cost of this input raw material from $78.2 million to $96.0
million, a 23% increase. In common with other mining companies, there was also
significant cost pressure from mining and processing consumables and fuel, which
increased by around 27% to $136.8 million.
In addition, the Kazakhstan tenge appreciated against the US dollar by 3%, with
the average exchange rate strengthening from 131.2 KZT/$ in the prior period to
127.1 KZT/$. As certain costs are denominated in US dollars,, the strengthening
of the Kazakhstan tenge resulted in higher costs for the Kazakh Mining business.
Selling and distribution costs increased by 77% to $24.5 million, reflecting a
greater proportion of sales to Europe and the resulting higher transportation
costs. Administration costs rose by 41% to $105.1 million, mainly reflecting
higher employee remuneration costs in Kazakhstan and additional compliance and
related costs following the Listing.
Depreciation, depletion and amortisation amounted to $92.3 million, a small
decrease from the prior period. Although capital expenditure increased during
2005 and 2006 compared to earlier years, additional depreciation of $16.0
million was expensed in the first half of 2005 relating to the commissioning of
the Balkhash zinc smelter.
The cash cost of copper after by-product credits amounted to $563.1 per tonne
compared to $869.4 per tonne in the prior period. The significant increases in
by-product revenues and the cost of purchased concentrate masked the underlying
cost of production of copper cathode from own mined ore as explained above.
MKM
Although EBITDA excluding special items rose from $26.0 million to $40.5
million, the increase was largely attributable to a reduction of cost of sales
of $27.5 million arising from increased stock valuation due to higher copper
prices. The effect of this increased stock valuation does not translate into
operating cash flows. Except for the effects of increased copper price on
purchased raw materials, cost of sales remained comparable with the prior
period.
With the increase in sales volumes of lower margin wire rods by 43%, the margin
at the level of EBITDA excluding special items decreased from 6% to 5%. The
continued production difficulties associated with the ContiM(c) equipment, which
existed at the time of acquisition in December 2004, also depressed margins.
Net finance items
Net finance costs were $35.1 million which contrasted with net finance costs of
$0.5 million during the prior period.
Included within net finance costs is a net foreign exchange loss of $63.8
million, which increased substantially from the prior year loss of $1.7 million
due to the strong appreciation of the Kazakhstan tenge against the US dollar
since the beginning of the year. Of the foreign exchange losses in the period,
$92.7 million were attributable to losses arising on the revaluation of US
dollar denominated deposits and trade receivable balances into Kazakhstan tenge
within Kazakhmys LLC.
Interest income increased from $10.0 million to $34.0 million, primarily as a
result of the utilisation of higher operating cash flows and of the Listing
funds. Following the repayment of short-term credit lines within Kazakhmys LLC
in early 2006, a minor amount of interest expense arose on the new loan facility
entered into by MKM, which stood at $184.5 million as at 30 June 2006.
Negative goodwill
Negative goodwill of $6.5 million arose during the period upon the acquisition
of ZhREK JSC, an electricity transmission company in Kazakhstan. The acquisition
of this business will assist in maintaining tighter cost control over the
transmission of electricity from our power plants to the operations.
Taxation
The effective tax rate for the period was 33.2% compared to a rate of 35.3% in
the prior period. The overall tax charge was $317.0 million, an increase of
$190.1 million compared to the prior period as a result of the significant
increase in earnings within the Kazakh Mining business.
Excess profits tax is levied in addition to corporate tax on the profits
attributable to certain subsoil contracts where the internal rate of return
exceeds 20%. For the period, excess profits tax of $25.3 million was charged to
earnings representing an incremental 2.6% to the effective tax rate.
Withholding taxes of $6.8 million were accrued during the period representing an
incremental 0.7% to the effective tax rate. These withholding taxes relate to
profits arising within Kazakhmys LLC which have either been, or will be,
remitted to the UK for dividend purposes.
The effective rate of taxation has decreased from the prior period principally
due to higher non-taxable income arising from the Balkhash zinc smelter for
which Kazakhmys LLC benefits from a tax holiday, and the rate of excess profits
tax and withholding taxes not having increased at the same proportion as
earnings.
The effective tax rate is expected to remain above the statutory Kazakhstan rate
of tax of 30% due to excess profits tax and the imposition of withholding taxes
on the remittance of earnings to the UK.
Minority interests
Capital contributions of $186.7 million were made by Kazakhmys PLC to Kazakhmys
LLC in the first quarter of 2006, and included subscribing to the rights of
minorities who did not participate in the initial capital contribution. As a
consequence, the Company's interest in Kazakhmys LLC increased from 98.68% as at
31 December 2005 to 99.08% as at 30 June 2006.
Despite the smaller interest held by minority shareholders in Kazakhmys LLC,
their attributable share of earnings and assets
increased slightly due to the higher earnings reported by Kazakhmys LLC in the
period.
Underlying Profit and earnings per share
A reconciliation of attributable profit to Underlying Profit is set out below:
Six months Six months
ended ended
Reconciliation to Underlying Profit 30 June 2006 30 June 2005 Change
$ million $ million %
Profit attributable to equity 632.7 226.1 180%
shareholders of the parent
Special items:
Recognition of negative goodwill (6.5) -
Write (back)/off of property, plant (10.2) 0.3
and equipment
Loss on disposal of fixed assets 4.0 10.6
Tax effect of special items (0.8) (0.2)
Minority interest effect of special 0.1 (0.1)
items
----- ---------
Underlying Profit 619.3 236.7 162%
===== =========
The increase in Underlying Profit of 162% principally reflects the favourable
impact of higher commodity prices on earnings.
Basic earnings per share rose from 56 US cents to 135 US cents, an increase of
141%. There is no difference between basic and diluted earnings per share
figures.
Earnings per share based on Underlying Profit was 132 US cents compared to 59 US
cents for the prior period, a rise of 124%. At the time of Listing, 58.4 million
shares were issued, and in the absence of other changes in issued share capital,
these newly issued shares have resulted in the weighted average number of shares
in issue increasing by 14%. If earnings per share based on Underlying Profit for
the prior period was determined using the actual number of shares in issue for
the current period, then earnings per share based on Underlying Profit would
have shown an increase from 51 US cents to 132 US cents, a 159% increase.
Dividends
The Directors have declared an interim dividend of 12.8 US cents per share in
respect of the 2006 financial year. This is in line with our dividend policy and
takes account of the growth requirements for the Group.
The Board intends to maintain a dividend policy which will take into account the
profitability of the business and underlying growth in earnings of the Group, as
well as its cash flows and growth requirements. The Directors will also ensure
that dividend cover is prudently maintained. Interim and final dividends will be
paid in the approximate proportions of one-third and two-thirds of the total
annual dividend, respectively.
Cash flows
A summary of cash flows is shown in the table below:
Six months ended Six months ended
Cash flow summary 30 June 2006 30 June 2005
$ million $ million
EBITDA 1,087.5 471.9
Recognition of negative goodwill (6.5) -
Write (back)/off of assets and impairment losses (5.7) 3.6
Loss on disposal of property, plant and equipment 4.0 10.6
Foreign exchange loss adjustment (14.4) (2.5)
Working capital movements (197.0) (31.4)
Interest paid (0.2) (7.1)
Income tax paid (169.2) (190.2)
------ --------
Net cash flows from operating activities 698.5 254.9
Sustaining capital expenditure (76.2) (105.4)
------ --------
Free Cash Flow 622.3 149.5
Expansionary and new project capital expenditure (95.4) (50.0)
Interest received 46.5 6.3
Acquisition of subsidiaries, net of cash acquired (2.0) -
Dividends paid (170.4) (54.9)
Other movements 0.6 2.5
------ --------
Cash flow movement in net liquid funds 401.6 53.4
====== ========
Cash flows from operating activities during the period were $698.5 million,
which compared to $254.9 million in the prior period. Despite adverse working
capital movements compared to the prior period, the impact of higher earnings
were seen in strong operating cash flows, and an increase in net liquid funds.
Adverse working capital movements were largely attributable to higher inventory
levels due to the impact of rising commodity prices, increased sales volumes
within MKM and the time lag between production and sales recognition as
described earlier. These factors together accounted for an adverse movement of
$179.2 million in working capital. Aside from these effects, working capital was
tightly controlled within both businesses. The difference between the working
capital movements across balance sheets, and those seen in the cash flow summary
are mainly attributable to the appreciation of the Kazakhstan tenge which is a
non-cash movement.
Income tax payments decreased by $21.0 million to $169.2 million. At the
beginning of a financial year in Kazakhstan, a schedule of tax payments to be
made during the course of the year is agreed with the tax authorities, and a
final payment is remitted with the submission of the tax return by March of the
following year. The payment schedule agreed for 2006 is at a similar level to
the amount of tax paid in respect of 2005. The reduction in tax payments for the
six month period results from a non-recurring amount of tax payable in
Kazakhstan in the first half of 2005 relating to acquisitions undertaken by
Kazakhmys LLC in previous years. Notwithstanding this effect, the overall amount
of tax payable for the year as a whole is expected to show a significant
increase compared to the prior year due to the higher earnings within the Kazakh
Mining business.
Capital expenditure in aggregate (including expenditure on intangible assets and
mine stripping costs) amounted to $171.6 million, split between $76.2 million
for sustaining capital expenditure and $95.4 million for expansionary and new
project capital expenditure. Significant items within the latter category
related to $19.6 million for the final construction costs of the Zhaman-Aybat
mine and $15.6 million for initial construction costs on the Aktogay project.
Consistent with the Group's commitment to its employees and local communities,
$12.9 million was invested in the construction of a new sports and social
complex in Satpayev, which is one of the most advanced in Kazakhstan.
Interest received increased by $40.2 million to $46.5 million reflecting the
higher net liquid funds position of the Group. Dividends paid during the period
by the Company of $168.3 million related to the payment of the final dividend of
36 US cents per share for the 2005 financial year.
Given the strong cash flows generated by the Kazakh Mining business, the short
term credit facilities were repaid early in the period. Financing for MKM, which
had previously been undertaken by way of intercompany loans from Kazakhmys LLC,
was provided by a new four year loan facility entered into with Deutsche Bank of
$250.0 million, of which $184.5 million had been drawn down as at 30 June 2006.
This facility carries an interest rate of Euribor +1.45%.
Balance sheet
Shareholders' funds were $3,346.3 million as at 30 June 2006, an increase of
$746.5 million compared with the balance as at 31 December 2005. The increase
reflected retained earnings for the period of $632.7 million, favourable
currency translation differences of $273.4 million and a gain arising from a
reduction in the minority interest of Kazakhmys LLC of $8.7 million offset by
the final 2005 dividend declared during the period of $168.3 million. The
currency translation differences were mainly attributable to the consolidation
of the results and balances of Kazakhmys LLC into US dollars, as the functional
currency of this company is the Kazakhstan tenge.
Property, plant and equipment increased by 17% to $1,988.3 million over the
period after the effect of depreciation was more than offset by capital
expenditure of $165.0 million and favourable currency translation differences of
$216.0 million. Disposals of property, plant and equipment were not material
during the period.
Net liquid funds increased from $829.5 million to $1,221.4 million on account of
the increased operating cash flows, with $146.8 million held as cash and
$1,259.2 million held in the form of deposits with varying maturities between
one and 12 months.
FINANCIAL HIGHLIGHTS
-------------------------------------------------------------------------------------------------
Six months ended 30 Six months Year ended 31
June 2006 ended 30 June 2005 December 2005
$ million $ million $ million
-------------------------------------------------------------------------------------------------
Group
Revenues 2,279.8 1,202.1 2,597.5
Profit before taxation, finance items and 984.5 359.5 842.5
negative goodwill
EBITDA excluding special items 1,081.3 482.8 1,073.5
EBITDA excluding special items margin (%) 47.4% 40.2% 41.3%
Net finance items and negative goodwill (28.6) (0.5) 5.6
Profit before taxation 955.9 359.0 848.1
Effective tax rate (%) 33.2% 35.3% 35.1%
Profit for the period 638.9 232.1 550.8
Equity minority interests (%) 1.0% 2.6% 2.2%
Profit attributable to equity shareholders 632.7 226.1 538.8
Underlying Profit 619.3 236.7 549.8
EPS:
Basic and Diluted ($) 1.35 0.56 1.29
EPS based on Underlying Profit ($) 1.32 0.59 1.31
Dividend per share (US cents) (1) 12.8 12.0 (2) 36.0
Return on Capital Employed (%) (3) 27.7% 17.1% 31.5%
Free Cash Flow 622.3 149.5 450.2
Net liquid funds 1,221.4 277.7 829.5
Cash cost of copper after by-products credits 563.1 869.4 997.2
($/tonne)
Kazakh Mining
Revenues 1,520.9 791.6 1,740.9
Profit before taxation, finance items and 973.1 347.2 840.3
negative goodwill
EBITDA excluding special items 1,058.8 460.1 1,053.7
EBITDA excluding special items margin (%) 69.6% 58.1% 60.5%
Net liquid funds 920.6 223.7 328.0
Cash cost of copper after by-product credits 563.1 869.4 997.2
($/tonne)
Average KZT/$ exchange rate 127.10 131.20 132.88
MKM
Revenues 758.9 410.5 856.6
Profit before taxation and finance items 30.0 15.6 21.8
EBITDA excluding special items 40.5 26.0 39.1
EBITDA excluding special items margin (%) 5.3% 6.3% 4.6%
Net liquid (debt)/funds (166.0) 25.3 (4.8)
Average Euro/$ exchange rate 0.81 0.78 0.80
-------------------------------------------------------------------------------------------------
(1) Dividend per share is based on the earnings for that period.
(2) Calculated based on the Company's dividend policy of interim and final
dividends being paid in the approximate proportion of one-third and two-thirds
of the total final annual dividend.
(3) Return on Capital Employed is calculated based on profit before taxation,
interest and negative goodwill for that period.
Interim consolidated income statement
for the six months ended 30 June 2006
Notes Six months Six months Year ended
$ million ended 30 June ended 30 June 31 December
2006 2005 2005
------------------------------------------------------------------------------------------------------------------------
Revenues 4 2,279.8 1,202.1 2,597.5
Cost of sales (1,153.4) (724.5) (1,506.6)
------------------------------------------------------------------------------------------------------------------------
1,126.4 477.6 1,090.9
Gross profit
Selling and distribution expenses (38.1) (27.6) (55.5)
Administrative expenses (116.1) (85.5) (185.3)
Other operating income 19.9 21.1 39.0
Other operating expenses (13.3) (22.5) (34.8)
Write back/(off) of assets and impairment losses 5 5.7 (3.6) (11.8)
------------------------------------------------------------------------------------------------------------------------
Profit before taxation, finance items and negative goodwill 984.5 359.5 842.5
Finance income 6 62.9 53.8 87.4
Finance costs 6 (98.0) (54.3) (81.8)
Recognition of negative goodwill 7 6.5 - -
------------------------------------------------------------------------------------------------------------------------
Profit before taxation 955.9 359.0 848.1
Income tax expense 8 (317.0) (126.9) (297.3)
------------------------------------------------------------------------------------------------------------------------
Profit for the period 638.9 232.1 550.8
------------------------------------------------------------------------------------------------------------------------
Attributable to:
Equity shareholders of the parent 632.7 226.1 538.8
Minority interests 6.2 6.0 12.0
------------------------------------------------------------------------------------------------------------------------
638.9 232.1 550.8
------------------------------------------------------------------------------------------------------------------------
Earnings per share attributable to equity shareholders of the
parent:
Basic and diluted 9 $1.35 $0.56 $1.29
EPS based on Underlying Profit 9 $1.32 $0.59 $1.31
------------------------------------------------------------------------------------------------------------------------
Interim consolidated balance sheet
as at 30 June 2006
$ million Notes As at As at As at
31 December
30 June 2006 30 June 2005 2005
------------------------------------------------------------------------------------------------------------------------
ASSETS
Non-current assets
Intangible assets 30.3 21.2 21.6
Tangible assets 2,040.8 1,620.4 1,743.1
------------------------------------------------------------------------------------------------------------------------
Property, plant and equipment 11 1,988.3 1,597.9 1,701.3
Mine stripping costs 52.5 22.5 41.8
------------------------------------------------------------------------------------------------------------------------
Investments 7.3 5.8 5.8
------------------------------------------------------------------------------------------------------------------------
2,078.4 1,647.4 1,770.5
------------------------------------------------------------------------------------------------------------------------
Current assets
Inventories 541.2 319.7 377.7
Prepayments and other current assets 79.4 96.8 41.5
Trade and other receivables 304.2 141.1 210.8
Investments 12 823.8 313.5 356.5
Restricted cash 2.9 2.9 1.0
Cash and cash equivalents 13 582.2 169.0 522.0
------------------------------------------------------------------------------------------------------------------------
2,333.7 1,043.0 1,509.5
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 4,412.1 2,690.4 3,280.0
------------------------------------------------------------------------------------------------------------------------
EQUITY AND LIABILITIES
Equity
Share capital 14 173.3 151.1 173.3
Share premium 14 503.4 - 503.4
Foreign currency translation reserve 14 421.3 129.9 147.9
Reserve fund 14 37.6 9.4 9.4
Retained earnings 2,210.7 1,563.1 1,765.8
------------------------------------------------------------------------------------------------------------------------
Equity attributable to shareholders of the parent 3,346.3 1,853.5 2,599.8
Minority interests 28.7 46.7 26.3
------------------------------------------------------------------------------------------------------------------------
Total equity 3,375.0 1,900.2 2,626.1
------------------------------------------------------------------------------------------------------------------------
Non-current liabilities
Deferred tax liability 280.2 232.7 260.9
Employee benefits 32.7 27.2 28.7
Provisions 55.4 41.1 44.5
Borrowings 15 184.5 44.5 -
------------------------------------------------------------------------------------------------------------------------
552.8 345.5 334.1
------------------------------------------------------------------------------------------------------------------------
Current liabilities
Provisions 3.7 11.2 1.4
Borrowings 0.1 160.3 49.0
Trade and other payables 193.1 163.3 158.7
Dividend payable 1.9 1.1 3.1
Income tax payable 285.5 108.8 107.6
------------------------------------------------------------------------------------------------------------------------
484.3 444.7 319.8
------------------------------------------------------------------------------------------------------------------------
Total liabilities 1,037.1 790.2 653.9
------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY AND LIABILITIES 4,412.1 2,690.4 3,280.0
------------------------------------------------------------------------------------------------------------------------
The interim consolidated financial statements were approved by the Board of
Directors on 18 September 2006.
Interim consolidated cash flow statement
for the six months ended 30 June 2006
$ million Notes Six months Six months Year ended
ended ended 31 December
30 June 2006 30 June 2005 2005
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Cash receipts from customers 2,340.4 1,209.6 2,529.4
Cash paid to employees and suppliers (1,472.5) (757.4) (1,561.5)
------------------------------------------------------------------------------------------------------------------------
Cash inflow before interest and tax paid 867.9 452.2 967.9
Interest paid (0.2) (7.1) (9.0)
Income tax paid (169.2) (190.2) (333.3)
------------------------------------------------------------------------------------------------------------------------
698.5 254.9 625.6
Net cash inflow from operating activities 16
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest received 46.5 6.3 17.3
Proceeds from disposal of property, plant and equipment 0.1 3.9 7.3
Purchase of property, plant and equipment (165.0) (144.6) (333.7)
Mine stripping costs (5.9) (7.0) (26.5)
Purchase of intangible assets (0.7) (3.8) (5.2)
Licence payments for subsoil contracts (0.9) (0.4) (0.9)
Proceeds from disposal of non-current investments 1.1 0.2 0.2
Acquisition of non-current investments (1.3) (1.2) (3.0)
Proceeds from disposal of available for sale securities 1.0 0.5 0.5
Acquisition of available for sale securities - (0.7) (1.0)
Investment in short term bank deposits, net (447.2) (56.8) (98.3)
Acquisition of subsidiaries, net of cash acquired (2.0) - -
Acquisition of Apro business - - (1.0)
------------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (574.3) (203.6) (444.3)
------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds on issue of shares by parent company - - 548.4
Proceeds from contribution to charter capital of subsidiary
by minority interests 1.6 - -
Transaction costs associated with issue of shares - - (57.2)
Receipt of funds from preference shares - - 0.1
Redemption of preference shares - - (0.1)
Proceeds from borrowings 167.0 326.0 525.6
Repayment of borrowings (41.4) (222.8) (580.3)
Dividends paid by the Company (168.3) - (109.9)
Dividends paid by subsidiary to former shareholders - (53.6) (53.6)
Dividends paid by subsidiary to minority interests (2.1) (1.3) (1.3)
------------------------------------------------------------------------------------------------------------------------
Net cash flows (used in)/from financing activities (43.2) 48.3 271.7
------------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 81.0 99.6 453.0
Cash and cash equivalents at the beginning of the period 522.0 74.1 74.1
Effect of exchange rate changes on cash and cash equivalents (20.8) (4.7) (5.1)
------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period 13 582.2 169.0 522.0
------------------------------------------------------------------------------------------------------------------------
Interim consolidated statement of changes in equity
for the six months ended 30 June 2006
Attributable to equity shareholders of the parent
---------------------------------------------------
$ million Note Share Share Foreign Reserve Retained Total Minority Total
capital premium currency fund earnings interests equity
translation
reserve
--------------------------------------------------------------------------------------------------------
At 31 December 2004 151.1 - 218.3 14.8 1,382.4 1,766.6 47.2 1,813.8
Profit for the six months - - - - 226.1 226.1 6.0 232.1
Transfer from reserve fund - - - (5.4) 5.4 - - -
Equity dividends paid by - - - - - - (2.9) (2.9)
subsidiary to minority
shareholders
Equity dividends paid by 10 - - - - (50.8) (50.8) (1.3) (52.1)
subsidiary prior to share
exchange transactions
Currency translation - - (88.4) - - (88.4) (2.3) (90.7)
differences
--------------------------------------------------------------------------------------------------------
At 30 June 2005 151.1 - 129.9 9.4 1,563.1 1,853.5 46.7 1,900.2
--------------------------------------------------------------------------------------------------------
At 31 December 2004 151.1 - 218.3 14.8 1,382.4 1,766.6 47.2 1,813.8
Profit for the year - - - - 538.8 538.8 12.0 550.8
Transfer from reserve fund - - - (5.4) 5.4 - - -
Shares issued pursuant to 1.9 32.5 - - - 34.4 (25.9) 8.5
Kinton Trade Limited
transaction
Shares issued pursuant to 20.3 528.1 - - - 548.4 - 548.4
Listing of the Company
Transaction costs associated - (57.2) - - - (57.2) - (57.2)
with issue of shares
Equity dividends paid by 10 - - - - (50.8) (50.8) (1.3) (52.1)
subsidiary prior to share
exchange transactions
Equity dividends paid by - - - - - - (5.3) (5.3)
subsidiary to minority
shareholders
Equity dividends paid by the 10 - - - - (110.0) (110.0) - (110.0)
Company
Currency translation - - (70.4) - - (70.4) (0.4) (70.8)
differences
--------------------------------------------------------------------------------------------------------
At 31 December 2005 173.3 503.4 147.9 9.4 1,765.8 2,599.8 26.3 2,626.1
Profit for the six months - - - - 632.7 632.7 6.2 638.9
Contribution to charter - - - - - - 1.6 1.6
capital of subsidiary by
minority shareholders
Transfer to reserve fund - - - 28.2 (28.2) - - -
Gain from dilution of - - - - 8.7 8.7 (8.7) -
minority interest in
subsidiary
Acquisition of minority 7 - - - - - - 0.9 0.9
interest in subsidiary
Equity dividends paid by - - - - - - (0.9) (0.9)
subsidiary to minority
shareholders
Equity dividends paid by the 10 - - - - (168.3) (168.3) - (168.3)
Company
Currency translation - - 273.4 - - 273.4 3.3 276.7
differences
--------------------------------------------------------------------------------------------------------
At 30 June 2006 173.3 503.4 421.3 37.6 2,210.7 3,346.3 28.7 3,375.0
--------------------------------------------------------------------------------------------------------
This information is provided by RNS
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