2007 Audited Results

RNS Number : 1910V

KazakhGold Group Ltd

23 May 2008

 



For immediate release

23 May 2008

2007 Audited Results

(Year to 31 December 2007)

2007 Highlights 

• Gold production - 232,060 ounces (+ 6.4 per cent)

• Revenue US$ 177 million (+ 61.7 per cent)

• EBITDA US$ 69.4 million (+ 64.4 per cent)

• Average gold price received US$700 per ounce, 25 per cent higher than 2006

• Preliminary JORC reclassification assessment confirms a world class asset base

• Production expansion projects well under way at all three principal mines

• New secondary milling circuit started at Aksu

• Acquisition of assets from Oxus Gold plc, balance of Romaltyn in Romania and Turkish gold-copper projects

• An experienced international senior management team recruited.

	2007 (year to 31 December)	2006 (year to 31 December)
	US$ '000	US$ '000
Revenue	176,996	109,433
Operating profit	56,837	33,078
Pre-tax profit	51,232	31,278
EBITDA	69,395	42,200
Earnings per share (US$) - basic and fully diluted	0.39	0.40
Net assets	782,478	654,761
Gold production	232,060	218,164
Kazakhaltyn direct cash production cost (US$ per contained oz)	262	228
Average achieved sales price (US$ per contained oz)	700	560

Commenting on KazakhGold Group Limited's 2007 results, Executive Chairman, Dr Kanat Assaubayev said:

'In 2007 the Group made further progress towards its vision of becoming Central Asia's leading gold mining company. This followed a year of intense corporate activity, investment in production expansion and the introduction of an experienced international management team, based at our operating headquarters in Stepnogorsk.'

Further Information:

Sanzhar Assaubayev

General Manager, London Office

KazakhGold Group Limited

Tel: [phone]

[e-mail] 

Issued by Citigate Dewe Rogerson ([phone])

Martin Jackson / George Cazenove

CHAIRMAN'S STATEMENT

KazakhGold Group is the leading gold producer in Kazakhstan, with long-life mines and what are estimated to be the country's largest gold reserves. The Group has an extensive expansion programme underway, which will help us raise gold production significantly, increase operational efficiency and reduce operating costs further, from a direct cash production cost of US$ 262 per ounce in 2007 to a target average direct cash production cost of US$ 210 per ounce over the next five years.

In 2007 the Group made further progress towards its vision of becoming Central Asia's leading gold mining company. This followed a year of intense corporate activity, investment in production expansion and the introduction of an experienced international management team, based at our operating headquarters in Stepnogorsk. 

Results and dividend

Gold production was 232,060 ounces in the 12 months to 31 December 2007. This was slightly above our expectations, and 6.4 per cent ahead of the previous year's production. This result was achieved despite unusually severe weather conditions in Northern Kazakhstan during the early part of 2007. 

Revenue for the period was US$ 177.0 million, an increase of 61.7 per cent on the previous year. Profit before tax rose by 63.8 per cent in 2007, to US$ 51.2 million. We achieved an average gold price of US$ 700 per ounce on our sales for the year, a 25 per cent increase on 2006. As an un-hedged gold producer, KazakhGold benefited from the strong gold price environment over the year - something we expect to continue through 2008. 

As we announced at the time of our IPO in 2005, the Board does not propose the payment of shareholder dividends until the Group's plant modernisation programme is completed, and production facilities reach their designed output capacity. Thereafter, and subject to KazakhGold's performance, we plan to begin paying dividends progressively. 

Realising potential

In November 2007 we announced a five-year growth plan, designed to achieve a target annual gold production of 1.0 million ounces by 2011. We aim to achieve this through realising the full potential of our current resources, selective acquisitions in Kazakhstan and elsewhere in Central Asia and significantly increased extraction and processing at our existing mines. 

Last year we took an important step towards raising our gold production. We awarded a contract to MAED Limited, an international engineering, construction and consultancy group, for the design and construction of new tailings re-treatment plants at Bestobe and Zholymbet. Each plant will be capable of treating 2.0 million tonnes of reclaimed tailings and recovering 100,000 ounces of gold annually. Both plants are due to be commissioned later this year. Construction of a similar re-treatment plant is due to start at Aksu later this year. The plants have been designed so that, with the subsequent addition of further equipment, they will form the nucleus of new, 4.0 million tonne per annum ore treatment plants, at each of our three principal mines in Northern Kazakhstan.

Achieving the full potential of our Kazakh assets is central to our business strategy, and this requires a thorough assessment of our asset base. In January 2007, Wardell Armstrong International (WAI) completed a preliminary reconciliation study of our FSU classified gold reserves and resources at Aksu, Bestobe and Zholymbet, to the widely respected Australian Joint Ore Reserves Committee (JORC) standard. The work confirmed a world-class asset base. In 2007 the main focus of our reserves and resources work was to replace resources of material mined in the year, and to improve the geological understanding of the resources adjacent to our current mining operations.

During the year we took the opportunity to acquire various assets from Oxus Gold plc that support our geographic presence in and around Central Asia. Investments included Oxus Gold's 50 per cent shareholding in Romaltyn Limited and 100 per cent of Norox Mining Company Limited, which owns 66.67 per cent of the Talas Gold Mining Company in Kyrgyzstan. We also acquired, from a subsidiary of Oxus Gold plc, a 25 per cent interest and an option to acquire a further interest in the Hatay joint venture project in Turkey. 

These acquisitions complement our Kazakh assets, bring additional geographic diversification and strengthen our position further in Romania. Importantly, they give us a presence in two emerging gold countries, Turkey and Kyrgyzstan. The Group now owns 100 per cent of Romaltyn in Romania, which is the most advanced of these projects. In consideration for these assets, the Group issued 3.5 million new ordinary shares, which were distributed to shareholders of Oxus Gold plc in July 2007. As a result, we welcomed some 1,200 new shareholders in KazakhGold. 

In 2007 the Group appointed JPMorgan Cazenove as joint broker and financial advisor, alongside ING Bank. JPMorgan Cazenove is currently advising us on a potential move of our GDR listing to the Main Market of the London Stock Exchange. Both firms are continuing to help us identify opportunities to participate in the consolidation of gold assets in Central Asia.

Governance and people

We have instituted a number of changes to the Board during the year. Darryl Norton and Sanzhar Assaubayev were appointed Executive Directors and William Trew joined us as a Non-Executive Director. In March 2007, I was appointed Executive Chairman, acknowledging the need for this role to include significant executive duties in Kazakhstan. As previously announced Peter Daresbury, previously Non-Executive Chairman of the Group and Stephen Oke, a Non-Executive Director, resigned from the Board. We are grateful to both for their invaluable support and guidance, especially during the Group's post-IPO development.

At a management level, Stephen Westhead, Geoff McLoughlin and Robert Hewitt were appointed as Group Chief Geologist, Group Chief Metallurgist and Chief Mining Engineer respectively. During 2007, we made eight further senior management appointments for different roles in operations, geology and capital projects. The Group now has a strong international management team, supported by the necessary local expertise.

Any period of change requires the support and understanding of employees and 2007 was no exception. Without the significant and ongoing contribution of all our people, the achievements of the year would not have been possible. 

Outlook

In 2008 we will focus on expanding the Group's reserves through exploration; reclassification of our resource base into the JORC standard; modernising our mining methods to increase ore extraction; and optimising our processing technologies. In order to expedite our accelerated investment plan, the Group is considering various financing options available to it, to progress its capital expenditure programme. KazakhGold will also actively seek to participate in the consolidation of the Central Asia region's gold assets, with the ultimate goal of growing our production.

Looking ahead, demand for gold remains firm. In part this is due to the investment attraction of gold at a time of continued volatility in the global credit, equity and commodity markets. It also reflects sustained jewellery buying from the Middle East and India. Meanwhile, on the supply side, global production of gold remains flat. This imbalance between demand and supply has helped the gold price reach record levels, since the 2007 year-end. It rose to US$ 850 per ounce in January 2008, its highest level since January 1980 and passed US$ 1,000 per ounce in March 2008. Overall, however, we expect the price of gold to remain firm throughout 2008.

The combined impact of KazakhGold's investment and development plans, its strong management team and supportive macroeconomic conditions, means I am confident that your Group will make further significant progress in 2008.

OPERATIONAL REVIEW

Production Summary for 12 months ended 31 December 2007
Mining
	Ore Mined	Grade	Gold Content
Aksu	2.034m tonnes	1.77g/t	116,153 ounces
Bestobe	2.135m tonnes	1.94g/t	133,513 ounces
Zholymbet	0.254m tonnes	5.19g/t	42,447 ounces
Totals	4.423m tonnes	2.05g/t	292,113 ounces
Processing
	Ore Treated	Grade	Gold Produced*
Aksu	1.546m tonnes	1.73g/t	84,590 ounces
Bestobe	1.547m tonnes	1.81g/t	104,907 ounces
Zholymbet	0.391m tonnes	3.44g/t	42,563 ounces
Totals	3.484m tonnes	1.96g/t	232,060 ounces

*Total gold produced includes a small amount of gold recovered from quartz ore and other sources.

Gold production for the year to 31 December 2007 was 232,060 ounces, a 6.4 per cent increase over the previous year. This result was achieved despite unusually severe winter conditions in Northern Kazakhstan.

During the year, 3.48 million tonnes of ore were treated (2006: 4.68 million tonnes). The average head grade of this ore was 1.96 g/t gold (2006: 1.92 g/t). The reduction in the overall recovery rate was largely due to a decline in recovery at the heap leach operations, which is addressed subsequently in this operational review.

Exploration and geology

The main focus of the Group's geological activity over the year was to update reserves and resources to reflect depletions of mined materials and also additional exploration. The latter being designed to improve the Group's geological understanding of the resources adjacent to its existing mining operations. Activity included an assessment of the available historical geological data and further entry into a database of both ongoing and historical FSU and Kazakh geological exploration data. Wardell Armstrong International (WAI) is currently reviewing the results of the work undertaken by the Group's in-house team. 

The Group has decided to utilise the Surpac® computer programme in order to allow three-dimensional modelling of its gold deposits. The subsequent resource estimation and reserve calculation can then be carried out according to JORC requirements. The first phase of training on Surpac was completed in 2007 and the programme is now being implemented. 

KazakhGold Reserves and Resources Statement (as at 1 January 2008*)

As at 1 January 2008	Ore (m tonnes)	Grade (g/tonne)	Gold (tonnes)	Gold (million oz)
Kazakh Reserves (B + C1)	158.80	2.68	426.17	13.70
Kazakh Resources (C2)	138.72	3.82	530.42	17.06
Kazakh Resources (P1)	235.84	2.80	895.72	28.80
Romania Reserves	10.00	0.84	8.40	0.26

* Unaudited

Under the Former Soviet Union (FSU) classification code of reserves and resources, the Group had a total of 13.7 million ounces of Kazakh-based gold reserves (B + C1) as at 1 January 2008. In addition, Kazakh-based gold resources amounted to 45.86 million ounces (C2 + P1). An additional 4.19 million ounces of resource potential has been estimated at the Group's assets in Romania. The resources exclude the exploration assets in Kazakhstan and Turkey as well as, subject to the granting of a production licence, the known resources at Jerooy in Kyrgyzstan. 

Over 2007 there was significant growth in the geological development and understanding of the Group's reserves and resources. At the three principal mines in Northern Kazakhstan, procedures were implemented that have shown improvement in grade control methods undertaken during the mining process.

International accredited analytical companies undertook an assessment of the Group's three main laboratories, during the year. As a result, all three laboratories will be upgraded in 2008 and a new exploration assay facility will be built, to enable rapid analysis of samples. In January of 2008, the laboratory at the office complex in east Kazakhstan attained ISO 17025 accreditation.

Reflecting the scale and importance of the Group's ongoing geological work, a number of international specialists have been appointed during the year, including Chief Geologist Stephen Westhead. All have relevant experience in areas such as open pit and underground mining/exploration and resource analysis.

A world-class asset base

An important part of the Group's growth strategy is the ongoing estimation of its asset base at Aksu, Bestobe and Zholymbet. WAI has been participating in this work, which entails the reclassification of reserves and resources to the more internationally accepted JORC standard. The preliminary results of this reconciliation study were made available by WAI in January 2007. They confirmed a world-class asset base, of long-term benefit to the Group, with significant potential for a resource classification upgrade. 

WAI's initial findings show Aksu, Bestobe and Zholymbet with in excess of 7.0 million ounces of gold likely to be classified as either Measured or Indicated. WAI estimates that a further 8.0 million ounces of gold are at the Inferred status, with a realistic likelihood of upgrading to the Indicated category or better. A significant proportion of this combined 15.0 million ounces lies within designated open pit zones at each of the deposits.

The Group also holds nearly 20.0 million ounces of gold at Aksu, Bestobe and Zholymbet which WAI designates as unclassified, due to the need to do further exploration and evaluation work. However, as with the Inferred category, it is likely that a significant proportion of this will eventually be classified as indicated or better. An additional 10.0 million ounces currently remain as FSU classified P1, until further drilling and sampling is carried out to facilitate conversion to the JORC standard.

Progress with exploration 

Exploration continued throughout 2007, with a significant amount of drilling and trenching completed. Three exploration core-drilling rigs were acquired from Atlas Copco, for deep drilling underground, and four short-hole exploration-drilling rigs were procured from Russia. The latter will be used for underground stope definition and the exploration of mineralised zones, adjacent to the main mining zones. Ongoing discussions are taking place with international contract drilling companies, regarding both surface (reverse circulation and core) and underground (core) drilling.

KazakhGold will continue to pursue exploration and evaluation work, to convert FSU/Kazakh classified reserves and resources to JORC, and to upgrade resources to reserves. This is primarily to provide the necessary gold ounces for mining, to meet the Group's five-year production growth strategy.

Five-year production growth strategy 

In November 2007 the Group outlined its five-year production growth strategy, to support the aim of becoming Central Asia's leading gold mining company. The strategy targets annual gold production of one million ounces by 2011 and has three distinct elements:

• Reclassification and growth of reserves: through conversion of reserves to the JORC  code; upgrading existing resources to reserves and selective value adding acquisitions in Kazakhstan and elsewhere in Central Asia
• A significant increase in extraction: from accelerated exploitation of existing resources; expansion of ore feed to deliver a processing capacity of 19.0 Mtpa by 2011 and enhanced economies of scale
• A focus on efficient processing technologies: primarily through high grade ore but supplemented by use of abundant low grade ore; shifting the mix to production of higher margin gold, and reducing mining and processing costs per ounce.

Ore processing 

Since May 2007 progress has been made upgrading all the metallurgical operations to enable increased production and improved efficiencies. The Aksu and Zholymbet secondary mill project is progressing to plan and the installation of the new mill at the Bestobe plant is currently at an advanced stage. 

Equipment to improve efficiency and reduce operating costs, such as the oxygen plants and cyanide control units, is due to be delivered to site in 2008 and is essential to the future operational strategy. Changes to the process flow sheet on the Bestobe heap leach have allowed stacking to continue during the winter months, with more consistent gold production anticipated as a result.

The test work and design of the new tailings re-treatment plants at Aksu and Zholymbet is complete and a significant portion of the equipment has been ordered. Detailed design work, resulting from structured hazard and operability analysis work, remains ongoing in 2008 and is essential to the smooth start-up of the plants. The design of the Elution plant, to support the carbon output of the new plants, is also being detailed ready for starting construction later this year.

To improve the reliability of the Group's ore processing, especially through the winter months, KazakhGold plans to increase the proportion of ore treated by the CIP process. New 4.0 Mtpa CIP/flotation plants will be constructed at each of the principal mines, to process oxide and sulphide ore. The main treatment sections of the tailings re-treatment plants will be designed so that, with the addition of further equipment, they will form the nucleus of new 4.0 Mtpa oxide ore treatment plants at each mine.

During 2007 KazakhGold awarded MAED, an international engineering, construction and consultancy group, the contract to design and construct new tailings re-treatment plants at Bestobe and Zholymbet. Construction began in 2007 and the plants are due to be commissioned before the end of 2008. Each plant will be capable of treating 2.0 million tonnes per annum (Mtpa) of reclaimed tailings, and of recovering over 100,000 ounces of gold annually. Construction of the third tailings re-treatment plant at Aksu will start in the second half of 2008.

The re-treatment of tailings will enable a significant increase in gold production. The new plants are due to be expanded to treat ore from open pit sources by 2010. In general, the plants will greatly increase the Group's ore treatment capacity, improve overall gold recovery and will reduce unit operating costs significantly. At Bestobe, the plant will operate on tailings until mid-2010, when it is scheduled to switch to treating open pit ore. Conversion to open pit ore will take place approximately one year later at the Zholymbet plant.

Since the award of the contract in 2007, the immediate objective has been to fast track the construction. Each plant will consist of two sections at separate locations - the tailings dam and processing plant sites. The tailings dam section will include a re-mining plant, where the re-claimed tailings material can be screened and re-pulped, for transport to the main treatment plant. This will comprise milling, classification and thickening sections, followed by a leach, carbon-in-leach in the case of Bestobe and a carbon-in-pulp (CIP) circuit. The leaching section will utilise oxygen shear technology (accelerating the kinetics of the gold dissolution reaction) to pre-condition the pulp prior to cyanide addition. Adsorption of the gold will be based on CIP/CIL technology.

Overall, the Group is confident that the plans currently being implemented will enable it to increase the amount of ore processed from 3.48 million tonnes in 2007 to around 19.0 million tonnes in 2011. This is consistent with achieving 1.0 million ounces of gold production in the same year.

During the year KazakhGold has focused significant effort on collecting high-grade ore from historic stopes underground, and the rich vein ore from the open pits. Increased levels of security and the selected mining of the open pit veins have ensured that this material is better exploited.

Cost competitiveness

The direct cash cost of gold production, by the Group's subsidiary Kazakhaltyn, was US$ 262 per ounce in 2007. This compares with US$ 228 in the previous year and reflects an increase in labour costs, fuel and consumable prices. 

Overall, however, KazakhGold benefits from a number of distinct cost advantages. These include the convenient location of its assets and the quality of its reserves, which are amenable to low-cost mining techniques. Costs are also contained through having on-site processing facilities, competitive labour and electricity pricing and modest royalty payments. Local currency stability is also an important factor in determining overall costs, especially as operating costs are largely denominated in Tenge.

OPERATING MINES

AKSU (Including Quartzite Hills)

Overview

The Aksu and adjacent Quartzite Hill mines are located in the Akmola region of Northern Kazakhstan, 18 kilometres north of the city of Stepnogorsk.

Exploration at Aksu began in 1929, when gold deposits of a quartz-vein mineralization type were discovered. There are currently eight operating shafts; four are dedicated to ventilation and as second outlets. One open pit is in operation near the Shaft 40 area. In addition, low-grade ore is processed from tailings in on-site tailings dams and waste dumps. 

Until 2005, all ore at Aksu was processed using the flotation method. Then, after extensive testing, both heap leach and CIP processing were introduced in 2005. The CIP facility at Aksu has the capacity to treat 1.0 million tonnes of ore annually.

2007 Production highlights

In the year to 31 December 2007 2.03 million tonnes of ore were mined at Aksu, with an average grade of 1.77 grammes of gold per tonne and a gold content of 116,153 ounces. During 2007, 1.55 million tonnes of ore were treated at Aksu 2007, resulting in the production of 84,590 ounces of gold.

Exploration and geology

Over the year, open pit geological mapping and sampling were carried out to define ore zones and verify drilling profiles. 52 air drill holes, representing a total of 1,050 metres, and 86 core drill holes of a total of 29,740 metres were drilled in three locations. The Group's exploration department and a Kazakh contract drilling company undertook the core drilling work.

Additional exploration, including down-the-hole (DTH) drilling of 18,000 metres, was undertaken during 2007. Based on the surface drilling exploration results from the Karyernaya zone, a report was submitted to the State Committee of Reserves (GKZ) showing the work carried out and the resulting resource/reserve calculations. The drill programme to evaluate the Vera zone is ongoing. Contract metallurgical test work on samples from the tailings facility is also continuing.

Underground mining

Over the past year skip hoisting was installed and commissioned at the No. 40 shaft. This has allowed an increase in underground production with mining grades achieved as planned. Surface refurbishment of the shaft infrastructure has also been completed, including the installation of a shaft heating system. Work is progressing on upgrading the underground infrastructure and equipment.

Refurbishment of two further underground operations (Quartzite Hills and the Vera zone), due to come into production in 2008, is progressing according to plan. This will ultimately increase the quantity of higher-grade ore to be fed to the plant.

Open pit mining

Mining during the winter months has continued despite the extreme winter temperatures experienced. This contributed to a decline in the quantity of ore mined in 2007, compared with the previous year.

Processing

CIP

Ore treated            429,344 tonnes

Head grade            2.73 g/t gold

Recovery rate            69.0 per cent

Gold production*        58,252 oz (1,812 kilograms)

* Includes gold received for high grade ore sales

During the year the management focused on operations at the plant, so that the existing equipment can reach its full potential. By the end of 2007, construction of the new secondary grinding circuit was nearing completion. The incorporation of two new mills is now complete and the plant's management is currently in the process of optimizing the new milling units.

Construction of a new oxygen plant was delayed, due to issues with the granting of permits. These issues have now been resolved, allowing construction to progress towards anticipated completion by June 2008. The plant will not only facilitate increased gold recovery but will also allow consumption of cyanide to be optimised.

Heap Leach

Ore treated            1,116,410 tonnes

Head grade            1.35 g/t gold

Recovery rate            54.0 per cent

Gold production        26,338 oz (819 kilograms)

Underperformance in recovery at the heap leach facility was addressed during the year, with the result that the crush size of the ore stacked was reduced from 15mm to 6mm. The plant was also reconfigured to achieve the smaller sizing. During the last quarter of 2007 the recovery was improving and moving to the targeted 60 per cent. Due to the smaller crush size, a reduction in the throughput resulted and so it is planned to add additional crushing capacity in 2008. 

BESTOBE

Overview

Located 80km northeast of Stepnogorsk, most of the exploration work at Bestobe was undertaken in the 1950s. Over 380 quartz veins have been identified at the mine of which some 285 are considered suitable for mining.

There are four underground mining locations; five shafts and one dedicated shaft is in operation, to comply with the second outlet legislation, in addition to various other small (dedicated) ventilation shafts. Currently, one open pit is operational. Low-grade ore is contained in on-site tailings dams and waste dumps. Until 2005, only underground mining and flotation processing were undertaken at Bestobe.

The original processing plant was constructed in 1932. Unlike the Aksu and Zholymbet deposits, a significant proportion of the gold can be recovered using gravity concentration. The plant currently treats both underground ore and some oxidised material, using gravity and flotation technologies. Gold recovered from the gravity circuit is amalgamated to produce sponge gold, whilst gold bearing flotation concentrate is also produced.

During 2007, construction began on a new 2.0 Mtpa capacity plant to treat the tailings produced from the flotation plant. The facility is due to be commissioned by the end of 2008.

2007 Production highlights

In the 12 months to 31 December 2007, 2.14 million tonnes of ore were mined. The average grade was 1.94 grammes of gold per tonne with a gold content of 133,513 ounces. 1.55 million tonnes of ore were treated at Bestobe during the year, with a grade of 1.81 g/t, resulting in gold production of 104,908 ounces.

Exploration and geology

In 2007 surface drilling comprised 38 core drill holes, with a total of 5,098 metres completed at the Central Zone, utilising a Kazakh drilling contractor. This programme targeted expansion of the existing open pit areas. In addition to the core drilling, down-the-hole drilling was carried out, to define the pit expansion limits. In total, 9,218 metres of drilling were completed relating to this work. 

On the recommendation of the State Committee of Reserves (GKZ), further drilling and trenching was carried out on the tailings area. Subsequently, a contractor completed metallurgical studies and the results were resubmitted to GKZ. During 2007, 113 metres of underground drilling and 4,719 cubic metres of trenching were completed.

Underground mining

As 2007 progressed, especially in the second half, the tonnage of ore from underground mining steadily increased, with the mining grades generally better than planned. Refurbishment of the surface infrastructure progressed well, with the majority of surface refurbishment at the West shaft having been completed. Vent shaft and heating refurbishment are currently in progress and will be finished by the end of summer 2008

Mining is due to commence on the Dalnaya ore body during the second half of the current year. Conversion to skip hoisting at the Novaya shaft will be investigated during 2008, with a view to increasing underground mining in 2009.

Open pit mining

Production began to improve in the third quarter, although volumes were then adversely impacted in the final quarter of 2007, by the extreme winter weather conditions that caused equipment failure.

Processing

Gravity/Flotation 

    Ore treated        94,224 tonnes

    Head grade        6.01 g/t gold

    Recovery rate        86.1 per cent

    Gold production*    57,335 oz (1,783 kilograms)

* Includes gold received for high grade ore sales

Throughput at the processing plant improved over the second half of the year, although the operational availability was limited due to equipment breakdowns and delays in sourcing spare parts, caused by their lack of availability. A considerable quantity of gold can be recovered from the Bestobe ore via gravity concentration. Kazakhaltyn is anticipating the removal of this gold in the primary process, before flotation. This will enable improved recoveries from the circuit, with the effort to date already delivering efficiency enhancements.

Construction of a new mill and a high efficient gravity concentration circuit has started at Bestobe. The mill foundations were almost complete by the end of 2007. The mill was wet commissioned in April 2008 and the plant is expected to be fully commissioned in the first half of 2008. Detailed design work for the second new mill is in the process of completion, following which the necessary equipment will be ordered.  

Work on a new carbon-in-leach (CIL) plant, to treat the tailings produced from the flotation plant, began in 2007. Site establishment and bulk earthworks have been completed, as has the equipping of a fabrication shop. This has enabled assembly works to continue throughout the winter period. The plant is scheduled for commissioning at the end of 2008.

Heap leach

Ore treated            1,452,945 tonnes

Head grade            1.81 g/t gold

Recovery rate        44.8 per cent

Gold production*        47,572 oz (1,479 kilograms)

* Includes gold received for high grade ore sales

The gold recovered from the heap leach facility was below target, and work is in hand to improve recovery to an achievable 60 per cent. The current crushing plant has been under pressure to increase the quantity of crushed ore. Due to this, the size of the stacked ore was not adequately controlled, resulting in reduced efficiency. It is planned to increase the processing capacity during 2008 by adding additional crushers and screens.

Stacking operations at the heap leach facility have been able to continue throughout the winter, due to operational modifications. The ore flow was modified to allow the screening out of the fine material and to enable a closely sized ore to be stacked, without requiring cement addition and agglomeration. The fine material produced was stockpiled, for subsequent processing in the spring of 2008. 

A second crushing plant will be installed to further increase production. This is expected to arrive at Bestobe by the third quarter of 2008. 

During 2007 improvements to the process and in particular the solution heating system have been introduced, to maximize gold recovery during the winter months.

ZHOLYMBET

Overview

Zholymbet is located 100km south of Stepnogorsk and saw most of the exploration work carried out in the 1930s. There are four underground mine operations and a dedicated ventilation shaft. Low-grade ore is contained in on-site tailings dams and waste dumps.

Until 2005 only underground mining and flotation processing were performed. The original processing plant was designed to treat sulphide ores using gravity and flotation technologies. As part of the Group's modernisation programme, the flotation sections were removed and the plant was modified to treat tailings. A newly constructed CIP plant began operations in 2005, with an annual throughput capacity of approximately 0.5 million tonnes of ore annually.

During 2007, construction began on a new 2.0 million tonnes per annum capacity plant to treat the tailings produced from the flotation plant. The facility is due to be commissioned by the end of 2008.

2007 Production highlights

In the 12 months to 31 December 2007, 0.254 million tonnes of ore were mined, with an average grade of 5.19 grammes of gold per tonne and a gold content of 42,447 ounces. 0.39 million tonnes of ore were treated at Zholymbet in 2007, with a grade of 3.44 g/t resulting in gold production of 42,561 ounces for the year.

Exploration and geology

A significant amount of trenching was carried out during 2007, to improve the definition of known zones of mineralisation and to extend the known zones along the strike of the mineralisation. A total of 13,470 cubic metres of trenching were completed during the year. This work will facilitate the planning of future drilling programmes. It was on this basis that the Group decided to investigate the utilisation of drill contractors, one with a reverse circulation (RC) capability and one with a core drilling ability, for the future drilling programme. The core drill contractor has been engaged and discussions are ongoing with the RC contractor. Core drilling is scheduled to start in mid 2008. 

Underground mining

Zholymbet has achieved its mining production targets consistently throughout the year. While production was slightly lower than planned, the mined grades were generally above expectations.

Refurbishment of the surface and underground infrastructure and equipment has been ongoing, with new trackless equipment scheduled for deployment in 2008. This will allow the opening up of additional ore reserves in the Dioritovaya zone.

Open pit mining

Open pit mining operations have continued throughout the year, to improve utilisation of the plant's operational capability.

Processing

CIP plant

Ore treated            390,582 tonnes

Head grade            3.44 g/t gold

Recovery rate            70.2 per cent

Gold production*        42,563 oz (1,324 kilograms)

* Includes gold received for high grade ore sales

Construction of the new secondary grinding circuit will be completed by the third quarter of 2008. Oxygen generation equipment is now on site to introduce oxygen via the shear reactors into the leach/CIP circuit. The construction of the building to house this equipment was delayed due to permit issues and was finally completed in April 2008. The plant will be commissioned in the first half of 2008.

As with Bestobe, 2007 saw the start of construction of the new CIP plant. The plant will enable treatment of the tailings produced from the flotation facility. Site establishment and bulk earthworks have been completed, as has the equipping of a fabrication shop. This will allow assembly works to continue throughout the winter period. The plant is expected to be operational by the end of 2008.

EXPLORATION AND DEVELOPMENT PROPERTIES 

Kazakhstan

KASKABULAKSKOE

Kaskabulakskoe (491 km2) is in Eastern Kazakhstan and was one of five licences awarded to Kazakhaltyn in December 2005. No gold was produced during 2007.

AKZHAL

A subsoil contract from the Kazakh Government has been awarded for this deposit. During 2007, 641 metres of air drilling and some 1,983 cubic metres of trenching were completed. Dry commissioning of a crusher plant was also concluded and stacking of ore started at the end of 2007. Due to severe winter conditions, irrigation of the stacked ore was delayed until 2008. Construction of an adsorption plant is progressing to plan and is due for completion during the third quarter of 2008.

BOLDYKOL & ZHANAN 

The Boldykol and Zhanan mines are in Eastern Kazakhstan and were acquired in 2005. The Group also obtained the corresponding mineral rights and other assets in Semipalatinsk and Ust-Kamenogorsk, including the office complex, laboratory and resin desorption plant. The assets were previously owned by JSC Altyn Tobe and were acquired from JSC Kazkommertsbank, through a tender process, following a loan default by Altyn Tobe. The State Commission on Reserves and Resources has approved the reserves and resources at these deposits.

SOUTHERN KARAULTUBE & KYZYLSORSKOE

Southern Karaultube (9.3 km2) and Kyzylsorskoe (60km2) are both located in the Akmola region of Northern Kazakhstan, near the Group's existing mining operations. They can both be explored and developed efficiently and were historically part of Kazakhaltyn, with the results of earlier exploration work from the 1980s still available.

Kyzylsorskoe is located between the Group's Aksu and Bestobe deposits. Gold veins occur above copper-molybdenum mineralisation, in both the bedrock and weathered overburden. Preliminary geological investigation comprising trenching and possible drilling will be used to verify the historical geological data, and define the zones for further evaluation work. No significant work was undertaken here during 2007.

PRIDOROJNOE 

Pridorojnoe (390 km2) is in Eastern Kazakhstan, close to the four deposits acquired by Kazakhaltyn in July 2005. Registration of the necessary legal documents was completed in 2006. No work was carried out in 2007, however it is planned to assess the deposit with a preliminary exploration programme that will be planned in 2008.

VASILEVSKYI

Rudnik Vasilevskyi LLP, a Kazakh company 100 per cent owned by Kazakhaltyn has the rights to the Vasilevskyi project in Eastern Kazakhstan, which is an exploration property with no current gold production. Resources have been explored to a depth of 150 metres in zones up to 20 metres wide, with the oxide zone extending to 20-25 metres in depth. Mineralisation is known to extend to a depth of 550 metres, based on previous exploration. There was no geological work undertaken during 2007.

ZONES 1 & 2 of AKSHATAU 

Zones 1 & 2 of the Akshatau MMC deposit (56.6 km2) are located in the Karaganda region of Central Kazakhstan. While no geological work was carried out in 2007, zones have been sampled during field mapping and assays up to 10g/tonne have been previously determined. In general, Zones 1 & 2 has ore with a gold content of 1.5-3.1g/tonne, and from 5-10g/tonne in iron-stained quartz zones.

Romania

ROMALTYN - the Group's next mine

Overview

In 2006 the Group made a successful joint bid with Oxus Gold plc, in open auction, for the Transgold plant and deposits in Romania. Romaltyn Limited, a 50-50 joint venture, was initially established to own and operate the assets with Oxus Gold plc. However, the Group subsequently had the opportunity to acquire Oxus Gold plc's share of the venture and completed this transaction in May 2007 (see the Financial Review of this report, for further details about the financing of this investment). 

The Romaltyn assets include a gold recovery plant able to treat 2.8 million tonnes of tailings and ore per annum. In addition there are some 8.5 million recoverable tonnes at the central tailings dump, 7.8 km from the plant. Several exploration tenements, including Sophia and June 11 also formed part of the acquisition.

Romaltyn has reserves of some 260,000 ounces at the Central Dam and a resource base of some 4.2 million ounces, according to the Romanian National Agency for Mineral Resources (NAMR).

In June 2007 NAMR approved the transfer of the exploration licences to Romaltyn Exploration and Romaltyn Mining, as well as the commencement of exploration work.

Exploration and geology

In 2007 exploration works were undertaken on both the Romaltyn Exploration tenements (75.11 km2) and the Romaltyn Mining tenements (78.52 km2), located North of Baia Mare, in Northern Romania.

Work on the Romaltyn Exploration tenements included 6.8km2 of reconnaissance mapping, including 3km2 of surveying. It also involved the collection of 30 reconnaissance samples for analysis and 485 further geochemical samples. Follow-up trenching amounted to 244 linear metres, from which 212 samples were taken. Technical geological reporting was made for each tenement.

The focus of activity at the Romaltyn Mining tenements, during 2007, included 2.0km2 of reconnaissance mapping. It also involved the collection of 21 reconnaissance samples for analysis, and a further 424 geochemical samples. Trenching of 81 linear metres was completed, from which 56 samples were taken.Core drilling was carried out at the June 11 property, within a Romaltyn Mining tenement, to assess the potential for open pit mining. Some 2.2km of road access and 23 drill holes were also completed, with a total of 3,382 metres drilled. Technical, geological and environmental reports were made for each tenement.

The mineralisation at Romaltyn's tenements is generally formed of free gold grains or gold disseminated in quartz (60-70 per cent) and oxidation minerals. There are also pyrite, chalcopyrite, blende and galena found below the oxidation area. The gold grades vary both by direction and inclination from 0.5 to 70 grammes per tonne.

Processing plant and future production

The design of the slurry and decant water cyanide detoxification plants is complete and approved by the authorities. Refurbishment of the plant is continuing.

Delays have been encountered with obtaining the integrated environment permit, necessary to start the plant. This has delayed reconstruction of the detoxification plants and production is not now expected to commence until early in 2009. In addition to resolving the permit issues, work in the current year will focus on the conversion of resources to reserves, to assist future mine planning.

Kyrgyzstan

In 2007, the Group acquired 100 per cent of Norox Mining Company Limited, which owns 66.67 per cent of the Talas Gold Mining Company. Oxus Gold plc had invested approximately US$ 63 million on the Jerooy gold project at Talas. This included the near complete construction of a processing plant and associated mining equipment. The Jerooy project is estimated to contain some 3.2 million ounces of gold classified as either: Measured, Indicated or Inferred according to JORC. A further 250,000 ounces are unclassified exploration results. 

The right to develop the project was the subject of a legal dispute between Oxus Gold plc and the Kyrgyz government. Oxus Gold plc had been seeking compensation from the Kyrgyz government for a loss of profits, arising from the cancellation of its mining license for the Jerooy project. The claim by Oxus Gold plc was withdrawn in May 2008. 

KazakhGold owns the plant and geological data at Jerooy. Although there is currently no certainty of success, the Directors are confident that the Group will eventually be granted a mining licence. If successful, it is anticipated that annual gold production of 180,000 ounces could be achieved within a year of starting production at Jerooy. Construction at the project will start once the Group has been granted a mining licence. Further information is provided in Note 32.

Turkey

In 2007 the Group acquired a 25 per cent interest in the Hatay joint venture copper project, in Turkey, which was previously owned by Oxus Gold plc's subsidiary Marakand Minerals Limited. The Group also acquired an option to increase its interest in the project. A programme to evaluate the historical data and carry out check drilling and trenching at the site will be undertaken in 2008. A geologist has been recruited to manage the project. The outcome of this work will determine the future plan with regard to applications for further exploration and mining permitting.

SALES

During the year 253,056 ounces of gold were sold, reflecting a reduction in the Group's inventory that includes the 2007 gold production of 232,060 ounces. The average gold price received on sales in 2007 was US$ 700 per ounce, 25 per cent higher than the previous year. The value of sales was US$ 177.0 million, 62 per cent ahead of 2006 and reflecting both the stronger gold price and increased sales volume. The Group's sales during the year were primarily to customers in the United Arab Emirates and Switzerland.

As part of its strategic focus and investment plans, KazakhGold will increasingly look to produce and sell higher-margin gold products, such as cathodic gold and gold doré. 

HEALTH, SAFETY & ENVIRONMENT

KazakhGold is committed to conducting its business activities in a manner that provides a safe and healthy workplace for all employees. Equally, the Group strives to limit the impact of its activities on the environment and the communities surrounding its operations. This commitment is backed by a policy designed to protect and develop employees, the community and the environment.

With large numbers of employees engaged at its facilities, KazakhGold regards their continuing health and safety as being of the utmost importance. All employees engaged in operations receive mandatory safety training, and are encouraged to pursue a healthy balanced lifestyle. Through its main operating subsidiary, Kazakhaltyn, the Group ensures compliance not only with Kazakh health and safety law but it also seeks to move towards best international practice. 

COMMUNITY AND EMPLOYEE SUPPORT 

Kazakhaltyn, the Group's main operating subsidiary, has been active in supporting a number of community and charitable activities in 2007. Direct charity and sponsor assistance payments of US$ 189,951 were made during the year. The beneficiaries included: children's homes and the fund for disabled children in Stepnogorsk; the social fund for the disabled in Astana and the Second World War veterans' fund.

The Group also provided more than US$ 3.0 million in other contributions, to various different programmes designed to provide social and welfare benefits to its employees and their families. 

  FINANCIAL REVIEW

Revenue

Revenue for the year to 31 December 2007 was US$ 177.0 million (2006: US$ 109.4 million), a 62 per cent increase on the previous year. This reflects both higher sales volume and gold prices. The average gold price achieved for sales in 2007 was US$ 700 per ounce (2006: US$ 560), 25 per cent above that achieved in 2006.

Over the year, the Group continued to benefit from its general policy of remaining an un-hedged gold producer. Further detail on the Group's financial risks is included in Note 33 of the financial statements.

Profit before tax for the year increased by 63.8 per cent to US$ 51.2 million (2006: US$ 31.3 million). Net profit for the year was US$ 19.4 million (2006: US$ 18.9 million) a 2.6 per cent increase on the previous year.

Earnings and dividends per share

Earnings per share for the year were US$ 0.39 (2006: US$ 0.40). Consistent with the statement made at the time of the Group's IPO in 2005, and as mentioned in the Chairman's Statement, the Group is not proposing the payment of any shareholder dividend for 2007.

Administrative expenses

Administrative expenses were US$ 23.0 million (2006: US$ 15.7 million). The increase in 2007 reflects the introduction of a new international management team; the opening of a new London office; and advisors' fees associated with various transactions during the year. It is anticipated that the higher rate of administrative expenses seen in 2007 will be more representative of future such expenses, given the ongoing development of the Group and its higher profile as a public company.

Tax expense

The Group incurred a tax expense of US$ 31.8 million for 2007 (2006: US$ 12.4 million). The increase in taxation reflects the higher level of profitability of the Group in 2007 and an increased level of expenses in 2007. These additional expenses were either accrued in a subsidiary with no taxable profits to offset, or were not allowable for tax purposes.

Share capital

In July 2007, KazakhGold issued 3,541,666 new ordinary shares to Oxus Gold plc in consideration for certain assets acquired from the company. This amounted to approximately 7.0 per cent of the enlarged share capital of KazakhGold, following the issue. Oxus Gold plc then converted these shares into KazakhGold Group Global Depositary Receipts (GDRs) and distributed them to its shareholders, in the form of a dividend. This further extended the Group's shareholder base.

Subsequently, in November 2007, Gold Lion Holdings Limited placed some 6.0 million secondary shares in KazakhGold, in the form of GDRs, at a price of US$ 26.50 per GDR. The share sale represented approximately 11.9 per cent of the issued share capital of KazakhGold. As a result, the free float in the company's shares increased to approximately 56 per cent, with Gold Lion Holdings Limited retaining approximately 44 per cent of KazakhGold following the placing. Gold Lion Holdings Limited is wholly-owned by RBC Trustees (CI) Limited as trustee of the ABM SK Trust. The latter is a Jersey discretionary trust whose sole named beneficiaries are members of the Assaubayev family, members of which are on the Board of KazakhGold.

Debt

The Group had outstanding debt of US$ 238.0 million as at 31 December 2007, compared with US$222.1 million at the previous year-end. This rise in debt reflects increases utilisation of leases and bank loans. 

Cash flow

The Group generated net cash of US$ 71.3 million from operating activities, this compares with cash absorbed by operating activities of US$ 57.5 million in 2006. The Group ended the year 2007 with net cash of US$ 160.3 million (2006: 204.7 million).

Post balance sheet events

In February 2008, the Group announced it is in discussions regarding the potential acquisition of certain gold mining assets. To date no written agreement has been reached. The Group intends to finance the acquisition of assets from a private placement of 2.3 million new ordinary shares in the form of Global Depositary Receipts, placed with institutional investors on 28 February 2008, at a price of US$ 23.0 per GDR.

KazakhGold Group Limited
Consolidated Income Statement - for the year ended 31 December 2007
	Year ended 31 December	Year ended 31 December
	2007	2006
	US$000	US$000
Revenue	176,996	109,433
Cost of sales	(88,236)	(54,692)
Gross profit	88,760	54,741
Other operating income	571	2,877
Distribution expenses	(3,509)	(4,148)
Administrative expenses	(23,004)	(15,692)
Other operating expenses	(5,981)	(4,700)
Profit from operations	56,837	33,078
Financial income	11,599	3,860
Financial expense	(17,204)	(5,660)
Net financing costs	(5,605)	(1,800)
Profit before tax	51,232	31,278
Taxation expense	(31,826)	(12,420)
Profit for the year attributable to equity shareholders	19,406	18,858
Basic and diluted earnings per share attributable to the equity shareholders of the parent during the year	US$0.39	US$0.40
All amounts relate to continuing operations.

KazakhGold Group Limited
Consolidated Balance Sheet - for the year ended 31 December 2007
	2007	2006
	US$000	US$000
Non-current assets
Property, plant and equipment	1,055,840	894,908
Intangible assets	54,777	1,807
Available for sale investments	164	-
Other financial assets	2	2
	1,110,783	896,717
Current assets
Inventories	21,766	21,571
Long-term inventory and ore stockpile	2,692	7,549
	24,458	29,120
Trade and other receivables	85,275	93,716
Investments at fair value through profit or loss	31,760	-
Cash and cash equivalents	160,285	204,752
	301,778	327,588
Total assets	1,412,561	1,224,305
Equity and liabilities
Share capital	9	8
Share premium	170,544	97,658
Capital contributions	510,000	510,000
Translation reserve	62,727	27,408
Retained earnings	39,198	19,687
Total equity	782,478	654,761
Non-current liabilities
Interest-bearing loans and borrowings	231,776	220,525
Provisions	7,910	401
Deferred tax liabilities	312,499	293,155
	552,185	514,081
Current liabilities
Interest-bearing loans and borrowings	6,228	1,564
Trade and other payables	43,207	48,211
Current tax payable	28,463	5,688
	77,898	55,463
Total liabilities	630,083	569,544
Total equity and liabilities	1,412,561	1,224,305

KazakhGold Group Limited
Consolidated Cash Flow Statement - for the year ended 31 December 2007
	2007	2006
	US$000	US$000
Cash flows from operating activities
Profit before tax for the year	51,232	31,278
Adjustments for:
Depreciation, depletion and amortisation	12,588	9,122
Foreign exchange gain	(167)	(296)
Finance expense	16,452	2,715
Finance income	(11,599)	(3,860)
Amortisation of bond issue costs	2,182	222
Provision against non-current financial asset	-	1,713
Loss on disposal of non-current assets	363	3,075
Equity-settled share-based payment expenses	105	115
Cash flows from operating activities before changes in working capital and provisions	71,126	44,084
Decrease/(increase) in trade and other receivables	9,532	(73,565)
Increase in inventories	(195)	(13,611)
Decrease/(increase) in long-term inventory	4,857	(5,567)
(Increase)/decrease in trade and other payables	(11,279)	37,363
Increase/(decrease) in provisions	54	(280)
Taxation paid	(2,753)	(1,810)
Cash (absorbed by)/generated from operating activities	71,342	(57,470)
Cash flows from investing activities
Transaction costs of acquisitions	(609)	-
Additions of property, plant and equipment	(80,577)	(40,310)
Proceeds from the disposal of non-current assets	679	1,349
Acquisition of financial assets	(29,117)	-
Financial income received	10,508	3,860
Net cash from investing activities	(99,116)	(35,101)
Cash flows from financing activities
Proceeds from the issue of senior loan notes and bonds	-	195,808
Proceeds from borrowings	6,800	-
Repayment of borrowings	(570)	(25,044)
Finance expense paid	(16,452)	(2,715)
Repayment of finance lease liabilities	(6,471)	(2,697)
Net cash from financing activities	(16,693)	165,352
Net (decrease)/increase in cash and cash equivalents	(44,467)	116,865
Cash and cash equivalents at 1 January	204,752	87,887
Cash and cash equivalents at 31 December	160,285	204,752

-End-

 

END

 

 

FR EADSDAELPEFE