Download - 2018...Capacity 5.6 Mt/yearCapacity 0.65 Mt/yearChrome ore 5.6 Mt Manganese ore 0.48 Mt PROCESSING 2018 Chrome product 4.2 Mt Manganese concentrate 0.15 Mt Capacity 0.65 Mt/yearOUR

2018Enabling Growth Creating

value

ANNUAL REPORT

KCR INVESTMENTS N.V.

ABOUT THE COMPANY ....................................2

MARKET OVERVIEW ..........................................8

STRATEGY OVERVIEW .....................................10

OVERVIEW OF OPERATIONAL RESULTS .......12

FINANCIAL REVIEW ........................................16

PRINCIPAL RISKS AND UNCERTAINTIES ......20

SUSTAINABLE DEVELOPMENT REVIEW .......24

CORPORATE GOVERNANCE ..........................28

DIRECTORS’ REPORT .......................................32

CONTENTS

FINANCIAL STATEMENTS ..............................34Consolidated Financial Statements .......................... 34

Consolidated Income Statement .......................... 34Consolidated Statement of Comprehensive Income ...................................................................... 35Consolidated Balance Sheet ................................. 36Consolidated Statement of Changes in Equity .. 38Consolidated Cash Flow Statement ..................... 39Notes to the Consolidated Financial Statements .............................................. 41

Company Financial Statements ................................ 68Statement of Comprehensive Income ................ 68Balance Sheet .......................................................... 69Statement of Changes in Equity .......................... 70Cash Flow Statement .............................................. 70Notes to the Company financial statement ....... 71

OTHER INFORMATION ...................................79Profit appropriation according to the Articles of Association.........................................79Independent auditor’s report .................................... 80

3KCR Investments N.V. Annual Report and Accounts 20182

ABOUT THE COMPANY

MARKET OVERVIEW

STRATEGY OVERVIEW

OVERVIEW OF OPERATIONAL RESULTS

FINANCIAL REVIEW

PRINCIPAL RISKS AND UNCERTAINTIES

SUSTAINABLE DEVELOPMENT REVIEW

CORPORATE GOVERNANCE

DIRECTOR’S REPORT

FINANCIAL STATEMENTS

3

KCR Investments N.V. (the ‘Company’) is a public limited liability company organised under the laws of the Kingdom of the Netherlands with a registered office and domicile at 55, Piet Heinkade, 1019 GM Amsterdam, the Netherlands. The Сompany was incorporated on 12 February 2018. The immediate parent of the Company is KCR Holding B.V., incorporated in the Kingdom of the Netherlands, and the ultimate parent of the Company is Eurasian Resources Group S.à r.l (‘ERG’), incorporated in the Grand Duchy of Luxembourg. The Company, together with its subsidiaries (the ‘Group’), is a leading natural resources group involved in the integrated mining and processing operations for chrome and manganese ores, as well as the production of ferroalloys. Its production assets are located in the Republic of Kazakhstan.

Be the best at what we do. Navigate global change whilst holding true to our values. Responsibly unlock the potential of the Earth and humanity, and ensure the prosperity of those who rely on us.

OUR MISSION

ABOUT THE COMPANY

1 The information represents effective ownership as of 31 December 2018.

Subsidiaries Country of incorporation Principal activity Ownership1

KCR International B.V. Netherlands Holding 100.00%

TNC Kazchrome JSC Kazakhstan Mining and processing 99.35%

Akzhar Chrome LLP Kazakhstan Slag recycling 99.35%

Donskaya Neftebaza JSC Kazakhstan Warehousing services 69.92%


ABOUT THE COMPANY

MARKET OVERVIEW

STRATEGY OVERVIEW


FINANCIAL REVIEW



ABOUT THE COMPANY ABOUT THE COMPANY


DIRECTOR’S REPORT


Key indicatorsFinancial indicators The Group’s revenue grew in 2018 by 1% compared with 2017 and by more than 38% compared with 2016 due to an increase in sales volumes of high-carbon ferrochrome, coupled with a rise in prices for ferrochrome.

Operational indicatorsThe main factors driving the growth in ferroalloy production are: the commissioning of Workshop No. 4 of the Aktobe Ferroalloy Plant: and optimisation of production efficiency. Sales volumes are in direct proportion with changes in the market situation and demand.

1,255

16 17 18

9214567

1,770

17116151

1,797

2,1832,153

1,559

17152

Medium/Low-carbon ferrochrome OthersHigh-carbon ferrochrome Silicon alloys

163

+38 % +1 %

16 17 18

Underlying EBITDA from continuing operations

817

1,156

1,026

16 17 18

122 158

203

Capital expenditures

16 17 181,502

4,862

1,625

5,592

1,742

5,639

Ferroalloys Сhrome ore Medium/Low-carbon ferrochrome Total ferroalloysHigh-carbon ferrochrome Silicon alloys

16 17 18

1,214

40175

1,429

1,278

66138

1,482

1,394

59138

1,591

+3,7 % +7,4 %+12,5 %

It is expected that in the next two years, the Group’s revenue will continue to grow as a result of projects to expand production capacity and increase metal recovery at all production stages, and of favourable ferrochrome market conditions driven by the continuous increase in stainless steel demand and a decline in current consolidated chrome supply.

CAPITAL EXPENDITURES, US$M

PRODUCTION, K TONNES SALES, K TONNES

UNDERLYING EBITDA FROM CONTINUING OPERATIONS, US$M

REVENUE, US$M

The main factors affecting EBITDA are:

growth in high carbon ferrochrome production;

increase in purchased materials prices (mainly for electrode paste, nut coke);

depreciation due to fixed assets commissioning;

foreign exchange gains resulting from the revaluation of receivables (due to the rise in the US dollar).

KCR Investments N.V. is a holding company and the main operating asset and business of the Company is TNC Kazchrome JSC (‘Kazchrome’). The business model is fully integrated into Kazchrome’s operating activity.

Kazchrome has one of the most diversified customer bases amongst the major ferrochrome producers. Kazchrome plays an important role in China’s “Belt and Road” Initiative (“BRI”) and is strategically located near its major customers, the world’s leading stainless steel producers in China, Japan and South Korea. Kazchrome’s ferroalloy products also reach customers in the U.S., Europe and the CIS.

Kazchrome has an integrated production chain ranging from the extraction and beneficiation of chrome ore at the Donskoy GOK Mining and Processing Plant and manganese ore at the Kazmarganets mine to the production of ferroalloys at the Aksu and Aktobe plants. The integrated nature of Kazchrome’s operations allows it to do

Business Modelharness synergies across its value chain, from extraction and raw material processing through to waste management. For more details on the operation of all enterprises in the production chain and movement of raw materials, see ‘Operating Assets’.

The Group is the world leader in the chrome market due to its unique resource base, owning as it does the world’s best chrome deposit with reserves for 30+years, this gives the Group a cost advantage production of high-carbon ferrochrome.

The continuing growth of the market for low-alloy steels associated with the industrialisation and development of niche technological sectors of developed markets provides opportunities for the development of ferroalloy production.

A developed client base allows the Group to occupy a leading position in the premium segments.

Implementation of projects to expand production capacity and increase metal recovery at all stages of the value chain allows the Group to increase production volumes and occupy a leading position in terms of production and supply of ferroalloys amongst global manufacturers.

Integration of the Group into ERG ensures stable supply of materials for production as well as energy resources and reducing agents through its own infrastructure and logistics.

A favourable tax regime in the Republic of Kazakhstan creates favourable conditions for doing business for subsoil users.

All activities of ERG are aimed at fulfilling its mission to:

Be the best at what it does.

Navigate global change whilst holding true to its values.

Responsibly unlock the potential of the Earth and humanity, and ensure the prosperity of those who rely on it.

Capacity

5.6 Mt/year

Capacity

0.65 Mt/year

Chrome ore

5.6 Mt

Manganese ore

0.48 Mt

PROCESSING 2018

Chrome product

4.2 Mt

Manganese concentrate

0.15 Mt

Capacity

0.65 Mt/year

OUR RESOURCES

CHROME ORE

MANGANESE ORE

221.7 Mt

01.

02.

03.

04.

1.9 Mt

FINANCIAL

We strive to maximise the use of all financial assets

HUMANOver 19,000 highly-qualified professional employees

PARTNERSHIPKazchrome has one of the most diversified customer bases amongst the major ferrochrome producers. The Company has established long-term cooperation with its partners, thus ensuring stable or growing sales volumes in the long run

Mining time – over 40 years

Total reserves and resources

Total reserves and resources

DONSKOY GOK

MINING 2018

MINING 2018 PROCESSING 2018

KAZMARGANETS MINING ENTERPRISE

NATURAL

HOW WE CREATE VALUE

Excellent resource base

IN CRHROME QUALITYAVERAGE CHROME CONTENT 50.0%No.

№

WORLD’S

OUR KEY ADVANTAGES

1

OPERATINGDonskoy GOK: • three operating mines (two underground mines and one

open pit mine)

• two chrome ore beneficiation plants

Kazmarganets Mining Enterprise: • one mine

Aktobe Ferroalloy Plant:• four workshops, including Workshop No. 4 (the new Aktobe

plant) - the world’s first large scale plant with closed DC furnaces

• electric power plant AktFP

Aksu Ferroalloy Plant: • four ferroalloy smelting shops, a slag recovery plant,

a furnace feed preparation shop and a sintering plant

Measured indicated resources 187.7 Mt

Inferred mineral resources 34.0 Mt

Measured indicated resources 1.1 Mt

Inferred mineral resources 0.8 Mt

Fully integrated production

Dedicated infrastructure and low production costs

Favourable tax treatment and mining legislation in Kazakhstan

OUR CONSUMERS

RESULTS

CAPITAL EXPENDITURES

203 US$M

UNDERLYING EBITDAFROM CONTINUING

OPERATIONS

1,026US$M

15 %

50 %

Kazchrome supplies its products to world’s major stainless steel producers:

12 OF THE WORLD’S TOP 20 PRODUCERS

Kazchrome’s largest customer provides approximately

Kazchrome’s five largest customers provide approximately

The electric power plant AktFP

External Supplier

Chrome sales volume in Russia

ERG subsidiariesERG Kazchrome’s assets

Semi-coke

Semi-coke

Ferrosilicochrome

Gas

Shubarkol Komir

AKTOBE FERROALLOY

PLANT

Capacity

0.74 Mt

AKSU PLANT

Capacity

1.1 Mt

OF THE COMPANY’S INCOME

OF THE COMPANY’S INCOME

CHROME ALLOY PRODUCER IN OUTPUT AND SUPPLY VOLUMENo.

WORLD’S

2

FERROALLOYS

1.7 Mt

HIGH-CARBON FERROCHROME

1.48 Mt

MEDIUM- AND LOW-CARBON FERROCHROME

0.06 Mt

SILICON ALLOYS

0.2 Mt

Electric power

Electric power

covers 33.6% of the plant demand

2,183US$M

REVENUE

1,797

171

163

52

High-carbon ferrochrome

Medium- and low-carbon ferrochrome

Silicon alloys

Other

EEC Power Plant

The Aluminium of Kazakhstan Power

Plant

Capacity

5.5 Mt/year


ABOUT THE COMPANY

MARKET OVERVIEW

STRATEGY OVERVIEW


FINANCIAL REVIEW



ABOUT THE COMPANY ABOUT THE COMPANY


DIRECTOR’S REPORT



MARKET OVERVIEW

KEY INDICATORS

MARKET OVERVIEW

STRATEGY OVERVIEW


FINANCIAL REVIEW





ABOUT THE COMPANYABOUT THE COMPANY

MARKET OVERVIEW

STRATEGY OVERVIEW


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DIRECTOR’S REPORT


Market Overview

2018 saw two trends: in H1, global synchronised economic growth, and in H2, the start of the disagreement between the U.S. and China, the rise in U.S. interest rates, the strengthening of the U.S. dollar and the signs of an economic slowdown in China and Europe. Commodity prices mirrored these trends, which persisted up to the middle of 2018, and then were downwardly adjusted. Despite this, average annual prices for metals produced by the Group saw a general increment year on year.

The threat of a full-scale trade war between the world’s two largest economies spurred concerns that this conflict may lead to an economic slowdown and the weakening of consumption trends.

Despite the negative effect of trade disputes with the U.S., in 2018 China continued to focus its efforts on environmental responsibility. Following the successful reduction of pollution levels in northern cities in the winter of 2017/18, plans were made to achieve the same results across the whole country over the 2018/19 heating season. However, the measures taken were not as effective due to the economic slowdown. Thus, production-related restrictions did not have as big an impact on industry and commodity prices as in the previous year.

Overview of ferrochrome and market ore demandFerrochrome is mostly used for the production of stainless steel. Analysts expect an increase in the demand for stainless steel to be driven by continued urbanisation and economic development in China, India and other developing countries. Demand for stainless steel is expected to grow by 3.6% per annum until 2030, resulting in an increase in demand for ferrochrome and chrome ore. According to one of the world’s leading consulting companies, the growth in chrome ore supply in the medium-term will be limited, and by 2020 the market will be undersupplied, causing the prices for chrome ore and ferrochrome to rise.

Overview of ferrochrome and market ore supplyKazakhstan ranks second in the world after South Africa in terms of chrome ore production volume, accounting for 16% of the market supply.

China is the world’s largest ferrochrome producer, accounting for 39% of the global ferrochrome production. However, Chinese ferrochrome producers depend on the import of chrome ore from third-party suppliers, as there are no domestic chrome reserves. The Group has no such challenge as it has an integrated source of chrome ore supply.

Geography of the distribution channels

China42 %

Japan25 %

Europe16 %

South Korea

7 %USA6 %

Others4 %

Macroeconomic Situation

IN 2018 THE GROUP SOLD A TOTAL OF 1,591 MT FERROALLOYS


STRATEGY OVERVIEW

ABOUT THE COMPANY

MARKET OVERVIEW

STRATEGY OVERVIEW


FINANCIAL REVIEW




DIRECTOR’S REPORT


Strategy Overview

The Group’s strategy is to remain the leader of the world ferroalloy industry, supplying the global market with high-quality chrome in accordance with the principles of efficiency and sustainable development, while generating positive free cash flow over the whole cycle.

To implement ERG’s leadership vision, the Group has determined its strategic priorities, the pursuance of which will enable it to build up competitive advantage in the key areas of its activity. The Group’s three key strategic goals include:

1. Ramping up production. In the near term, the expansion of the global ferrochrome market will be driven by the growing demand from major consuming countries. Being one of the leaders in the ferroalloy industry, the Group promptly responds to market trends and adjusts its production to reflect them, as the opportunities, which will be appearing in the global ferroalloy market in the next few years, require a proactive approach, the implementation of programmes to improve operating efficiency and the expansion of mining and production capacity.

2. Increasing efficiency. Jointly with world-class metals industry experts, the Group is developing and implementing large scale projects to improve operating efficiency and reduce costs at its enterprises.

3. Securing a sustainable level of resources and enhancement of expertise. The Group’s discovery, exploration and evaluation of new deposits are an all-year-round effort. The Group is working on various joint ventures, mergers and acquisitions. The system of internal training is being continuously improved, and a high level of personnel skills and productivity is being maintained.

To secure the consistent and successful development of the Group in accordance with the above-stated strategic priorities, a number of levers have been defined that will set the trends of the Group’s development and will enable the implementation of its long-term strategy:

Technological advantage. The Group is constantly working on the adoption of advanced technology with an emphasis on several applications, for example, data and IT infrastructure, condition-based maintenance and integrated geological modelling.

Improvement of skills. The Group is developing skills and a corporate culture in line with global industry best practice. The main areas of development include exploration works, inventory management, commercial activity, major project management, HR management, analytics and digitalization.

Sustainable development. The Group will be focusing on improving its sustainable development standards, especially those concerning health and safety, as well as environmental protection. In order to comply with international standards of sustainable development, the Group annually invests in programmes aimed at reducing emissions into the environment and landscaping adjacent areas, and supports the population of the communities where its enterprises are located through social support programmes.

Group’s Strategy

Optimization and growth initiativesCommitted Plans in ProgressThe following initiatives are at the commissioning stage, and have all necessary authorisations, unless stated otherwise.

Increase existing capacity Kazchrome 2.0

Kazchrome 2.0, a project targeted at expanding the existing production capacities, has been planned in response to forecasts of an undersupply in chrome ore. The purpose of its implementation is to meet the expected shortage in the chrome ore and ferrochrome market to emerge after 2020. Kazchrome 2.0 envisages a major expansion of Kazchrome’s whole value chain, including the 10th Anniversary Mine, additional processing facilities, and metallurgic facilities.

Expansion of 10th Anniversary MineOver the last 15 years, the Group has invested US$350 million in production capacity, and plans to make additional investments to expand the resource base.

Full-scale ramp-up of capacity at Aktobe Ferroalloy Plant Workshop No. 4 One of the main aims of commissioning Aktobe Ferroalloy Plant Workshop No.4 is the modernisation of the smelting process. The elimination of the sintering stage from the process will ensure a reduction in both current capital expenditures and operational expenses. Total investment in Workshop No.4 of Aktobe Ferroalloy Plant amounted to US$950 million.

Increase capacity for low-carbon ferrochrome production at Aksu Plant Workshop No. 4The reconstruction of the only furnace in Workshop No.4 of Aksu Ferroalloy Plant that will ensure additional production of low-carbon ferrochrome, is expected to begin in 2021 and to reach the design capacity level by 2023.

Increase capacity at Aksu Plant Workshop No. 6The project involving the reconstruction of four existing furnaces at Workshop No.6 of Aksu Ferroalloy Plant aims to further increase high-carbon ferrochrome production, while simultaneously reducing operational costs and extending the life of the workshop. Furnace reconstruction started in 2017, and the works are expected to be completed by 2024.



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Overview of Operational ResultsProducts, sales, markets and consumers

Reserves and resources

The Group produces high-quality ferroalloy products. Final consumers of the Group’s products include many of the largest stainless steel and refined alloy producers from China, Japan, South Korea, Europe and the United States.

The Group’s key products include high-carbon, medium-carbon and low-carbon ferrochrome with low impurity content. In 2018, the Group sold more than 1,394 Mt of high-carbon ferrochrome and about 200 k tonnes of other ferroalloys – a total of 1,591 Mt ferroalloys. In 2018, the share of high-carbon ferrochrome in total ferroalloy sales was 87.7%, and the share of revenue from the sale of high-carbon ferrochrome together with other types of ferroalloy products in the Group’s total revenue reached 97.7%.

59495930

474

1,394

k tonnes $US, m

16373

60 38 34

1,797

High-carbon ferrochrome

Refined ferrochrome (medium-carbon/low-carbon ferrochrome)

Ferrosilicochrome (FeSiCr)

Ferrosilicomanganese (FeSiMn)

Ferrosilicon (FeSi)

Chrome ore

SALES PROFILE IN 2018

Deposit Category Tonnage(Mt)

Average Cr2O3 ore

content (%)

Cr2O3 content

(Mt)

10th Anniversary Mine Proved and Probable Reserves 167.5 42.1 70.5

Measured Indicated Resources 175.2 50.4 88.2

Inferred Mineral Resources 34.0 47.9 16.3

Total Mineral Resources 209.1 50.0 104.5

Molodezhnaya Mine Proved and Probable Reserves 10.1 40.5 4.1


Inferred Mineral Resources - - -


Yuzhny Open Pit Mine Proved and Probable Reserves 2.3 43.2 1.0




Zapadny Proved and Probable Reserves 1.5 35.4 0.5




Geophysical VII Proved and Probable Reserves - - -




Total: Donskoy GOK Total Proved and Probable Reserves 179.9 42.0 75.6

Total Measured Indicated Resources 187.7 50.4 94.6

Total Inferred Resources 34.0 47.9 16.3


Manganese ore reserves and Mineral Resources Report: KazmarganetsDeposit Category Tonnage

(Mt)Mn

content(%)

Fe content

(%)

Mn content

(Mt)

Fe contetnt

(Mt)

Tur Mine Proved and Probable Reserves 1.1 24.4 8.9 0.2 0.1

Measured Indicated Resources 1.1 26.1 9.5 0.3 0.1

Inferred Mineral Resources 0.8 21.2 6.3 0.2 0.1

Total: Kazmarganets Total Mineral Resources 1.9 24.0 8.1 0.5 0.2

Mineral Resources and Reserves Report: Donskoy GOKDonskoy GOK’s resource base is the largest one in the industry and includes 221.7 Mt of unique quality chrome ore with average

chrome content of 50% and a low impurity level. Proved and Probable Ore Reserves have been stated at 179.9 Mt and will be sufficient to support the mine’s operation for more than 40 years at the current production level, securing a significant potential for further expansion.

The Group has several large deposits near Chromtau at the southern fringe of the Ural mountain chain. The main and largest deposits of the Group are shown on the next page.

Overview of subsoil use contractsThe Group has entered into subsoil use contracts with the Government of Kazakhstan. Subsoil use contracts are for extraction and exploration with expiration dates ranging between 2021 and 2041.

Note: The information presented in the table above is based on Competent Persons Report (CPR) under international standard of Joint Ore Reserves Committee (‘JORC’) prepared by SRK Consulting (UK) limited for 2017.

Mining Processing Metallurgy and smelting Mining and Processing

Donskoy GOK Aksu Plant Kazmarganets

2500 ktpa

High-grade ore, low-grade ore

10th Anniversary Mine

2300 ktpa

Medium-grade ore

Molodezhnaya mine

600 ktpa

Medium-grade, high-grade ore

Yuzhny Open Pit Mine

5500 ktpa

High-grade ore, concentrates, briquettes

DOF-1, FOOR

1100 ktpa

Ferrochrome, ferrosilico-chrome

Workshop No.1 of Aksu PlantWorkshop No.2 of Aksu PlantWorkshop No.4 of Aksu PlantWorkshop No.6 of Aksu Plant

200 ktpa

High-grade, low-grade ore, crushing and screening

Tur Mine

Electric power

Aktobe Plant

Gas power plantAktFP power plant135 MW

The Group’s resource base is the largest one in the industry

Workshop No.4 of Aktobe is the world’s largest plant

with closed DC furnaces.

The plant comprises four 72 MW furnaces and its

own infrastructure.

600 ktpa

Ferrochrome, ferrosilico-chrome

Workshop No.1 of Aktobe PlantWorkshop No.2 of Aktobe PlantWorkshop No.4 of Aktobe Plant

Aktobe plant


OVERVIEW OF OPERATIONAL RESULTS OVERVIEW OF OPERATIONAL RESULTS

ABOUT THE COMPANY

MARKET OVERVIEW

STRATEGY OVERVIEW


FINANCIAL REVIEW




DIRECTOR’S REPORT


Operating assets1

1 The information in above figure represents capacities based on 2017 capacity..


FINANCIAL REVIEW

ABOUT THE COMPANY

MARKET OVERVIEW

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Financial review Accounting Principles

Increase of ferroalloy sales as compared to 2016

11 %+

This review of the financial condition and results of operations is intended to understand and assess trends and significant changes associated with operating activities and the financial situation of the Group. The review was prepared using the Group’s audited Consolidated financial statements, in each case without significant adjustment, unless otherwise stated.

This financial information has been prepared in accordance with IFRS and the accounting policies applied in the preparation of the Consolidated financial statements for the years ended 31 December 2016, 2017 and 2018.

In April 2018, the Company through its subsidiary, KCR International B.V., acquired all ordinary shares in Kazchrome held by ENRC N.V., a subsidiary of ERG, for a cash consideration of US$6,029 million. The Company and KCR International B.V., did not meet a definition of a business under IFRS 3. Therefore, this transaction did not meet a definition of a business combination under IFRS 3, but represents a capital reorganisation of entities under common control by ERG, and does not represent substantive economic change.

The Consolidated financial statements are not the Group’s first consolidated financial statements to comply with IFRS, since the statements are a continuation of the Consolidated financial statements of Kazchrome, which prepared its consolidated IFRS financial statements for the year ended 31 December 2017 in accordance with IFRS. Accordingly, the Company does not apply IFRS 1 “First-time Adoption of International Financial Reporting Standards’’.

The functional currency of the Group is the US dollar (‘US$’). Audited financial statements for the year ended 31 December 2018 with the auditor’s report are presented on p. 80.

Income statementThe following is a brief analysis of the Consolidated income statement of the Group for 2016-2018:

In US$, m 2016 2017 2018

Continuing operations:

Revenue 1,559 2,153 2,183

Cost of sales (691) (940) (1,038)

Gross profit 868 1,213 1,145

Other operating income 16 8 41

Distribution costs (13) (17) (16)

General and administrative expenses (128) (151) (222)

Other operating expenses (15) (26) (17)

Operating profit 728 1,027 931

Finance income 344 337 224

Finance cost (286) (260) (519)

Profit before income tax 786 1,104 636

Income tax expense (163) (218) (101)

Profit for the year from continuing operations 623 886 535

Discontinued operations:

Gain/(Loss) for the year from the discontinued operations - 51 (483)

Profit for the year 623 937 52

The main factors that allow the Group to maintain the trend of gross profit growth include the increase in ferroalloy sales and the Group’s efforts to cut production costs through production intensification.

Over the past three years, the Group increased ferroalloy sales to 1,591 k tonnes in 2018 (an 11% rise on 2016 sales) by boosting production while maintaining margin levels through the implementation of initiatives to improve operational efficiency.

RevenueRevenue for 2017 increased to US$2,153 million as compared to US$1,559 million in 2016 (an increase of 38%), mainly as a result of an increase in the average realised price for high-carbon ferroalloys (+34,0%) in conjunction with an increase in sales (+5.2%).

The main factor affecting income is the growth in production and sales of high-carbon ferrochrome, the implementation of measures to improve production efficiency and the increase in production including the contribution from the Aktobe Plant Workshop No. 4.


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Cost of sales

General and administrative expenses

The cost of sales grew by US$98 million in 2018, up 10% on 2017, which was largely due to the increase in high-carbon ferrochrome production in 2018, and an increase in prices for materials (mainly for electrode paste, nut coke) amounting to US$60 million.

In 2017, the cost of sales increased by US$249 million, up 36% on 2016. This included US$41 million from the increase in production at Aktobe Ferroalloy Plant Workshop No. 4 from 114.7 kt to 238.3 k tonnes, and US$140 million from the increase in prices for reducing agents and electrodes; in addition, the prices for electricity and related services increased by US$50 million.

It is worth noting that the Group has an ongoing, permanent Operational Improvement Programme which includes cost-cutting measures, production intensification and resource and energy saving initiatives that are implemented annually. Data on the main items of the cost of sales are shown in the table below:

In $US, m 2016 2017 2018

Materials and components (including fuel and transport) 257 416 476

Electric power 148 198 197

Staff costs 102 119 126

Depreciation and amortisation 71 106 108

Mineral extraction tax 45 53 57

Other cost of sales 68 48 74

Total cost of sales 691 940 1,038

The Group’s general and administrative expenses increased by US$71 million (+47.0%) in 2018 compared to 2017 due to a number of different non-recurring individual social payments (+US$22 million), higher inter-company management fees (+US$8 million) and an increase in other general and administrative expenses (+US$25 million).

General and administrative expenses increased by US$23 million (+17.9%) in 2017 compared to 2016, partly as a result of an increase in sponsorship and charity costs (+US$27 million).

In US$, m 2016 2017 2018

Staff costs 23 22 24

Sponsorship and charitable donations 30 57 79

Taxes and duties 2 1 2

Depreciation and amortisation 5 5 5

Professional and other services - 9 22

Intercompany management fees 32 34 42

Other general and administrative expenses 36 23 48

Total general and administrative expenses 128 151 222

revenue amounted in 2018

Data on ferroalloys production, sales and revenue

In US$, m 2016 2017 2018

Ferroalloys production (k tonnes)

High-carbon FeCr 1,255 1,363 1,482

Medium and low-carbon FeCr 44 60 59

Si alloys and other ferroalloys 203 202 201

Total ferroalloys production 1,502 1,625 1,742

Ferroalloys sales (k tonnes)




Total ferroalloys sales 1,427 1,481 1,591

Average ferroalloys selling price (US$/tonne)


Medium and low-carbon FeCr 2,359 2,631 2,763

Si alloys and other ferroalloys 833 1,167 1,239

Revenue ($US, m)




Others 67 51 52

Total revenue 1,559 2,153 2,183

Increase of different non-recurring individual social payments

22US$ million

From 2016 to 2018, the Group invested US$483 million in the business, allocating US$239 million for development projects, US$231 million for maintenance projects and US$13 million for other projects.

The main items of development capital expenditures for the period from 2016 to 2018 include:

Continued investment in the project to expand the production capacity of the 10th Anniversary Mine (Stages 1 and 2), amounting to US$152 million (2016: US$40 million, 2017: US$57 million, 2018: US$55 million);

The increase in the production capacity of Aktobe Workshop No. 4, requiring an investment of US$40 million (2016: US$16 million, 2017: $5 million, 2018: $19 million);

Investment of US$50 million in Aksu Ferroalloy Plant Workshop No. 6 to increase its production capacity (2016: US$2 million, 2017: US$22 million, 2018: US$26 million);

Care and maintenance projects are aimed at equipment replacement, the renovation and modernisation of fixed assets, the maintenance of production infrastructure and the implementation of production IT systems. Other projects include research and development, health and safety, environmental protection, and social responsibility projects etc.

Capital Expenditures

A credit facility agreement for up to US$3,100 million was signed on 22 October 2018, between VTB Bank (PJSC) acting as the Lender, amongst others, and KCR International B.V. and Kazchrome acting as the Borrowers (VTB Facility). The proceeds under the VTB Facility were used for the refinancing of the Group’s debt and general corporate purposes.

Current DebtThe VTB Facility matures in 2023 and bears an interest rate in the range of 5.95%-6.70%. Refer to note 17 of the Consolidated financial statements.

+

In US$, m 2016 2017 2018

Development projects 62 73 104

Care and maintenance projects 59 82 90

Other projects 1 3 9

Total capital expenditures 122 158 203



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Principal risks and uncertainties

Risk Management System

Key Risks and their Management

The Group’s risk management system provides sufficient confidence in the achievement its strategic and operational goals. The risk management process covers key areas (strategic management, budgeting and investment activities) and all levels of the Group’s activities. All Group employees are involved in the risk management process and are responsible for effective mitigation of emerging risks. The risk management system includes clearly defined oversight functions at the Kazchrome level (Management Board and Board of Directors) and at the ERG

level (Board of Managers and Executive Committee), which are accompanied by supporting functions, including the Risk Management and Internal Control Function, Compliance Function and the Risk Management and Internal Audit Directorates at the ERG level. The Board of Managers approved a revised set of Group risk management documents in 2018, including the Risk Management Policy, Risk Management Manual and Guidelines, and Capital Project Risk Management Guide and Guidelines. The Group also developed an Internal Control methodology, including

an Internal Control Policy and Manual. Furthermore, the Group defined its risk appetite with respect to the following functional process areas: compliance, health and safety, human resources, information technology / information security, project management, procurement and security.

Deterioration of cash flow and profitability could adversely affect the Group’s ability to meet its existing financial obligations, including debt repayments;

Most of the Group’s production expenses are denominated in the Kazakhstani tenge and the U.S. dollar, while the majority of sales are denominated in the U.S. dollar alone;

The Group is exposed to the risk of an increase in interest costs caused by step- ups in facility agreements. Interest rates can also be affected by changes in exchange rates and inflation.

A substantial decline in/or volatility around commodity prices are highly sensitive risk factors for the mining industry. They could materially affect the Group’s operations and financial results, as well as the book value of its assets and cash flow forecasts.

KEY RISK

KEY RISK

RISK MANAGEMENT APPROACH


Seek, where possible, to manage the risk of exchange rate volatility by offsetting cash flows in the same currency;

Determine the risk associated with major foreign currency transactions as such transactions occur, and, if necessary, develop a hedging programme;

Maintain and regularly update detailed cash flow budgets and forecasts to deliver accurate insight in to Group’s liquidity requirements;

Require that all customers and financial counterparties undergo a review process;

Make allowances for the inflation factor in business planning.

Monitor market prices, global sales and internal inventory levels regularly;

Monitor trends and make regular forecasts of sales volumes and prices for each type of commodity of the Group;

Adjust output volumes and types to respond to market conditions;

Apply formula pricing to key sales contracts;

Hedge commodity prices.

FINANCIAL RISK

MARKET RISK

The failure of sophisticated technological processes, extreme weather conditions, power interruptions and non-compliance with operational procedures represent key risks that have the potential to result in serious safety incidents (including fatalities), environmental harm and business interruption;

The Group seeks to identify catastrophic operational risks (including pit flooding and the physical integrity of its pit slopes, tailing dams and underground mines etc) and implements effective controls that are monitored on an ongoing basis.

KEY RISK RISK MANAGEMENT APPROACH

Seek to identify and mitigate catastrophic operational risks (mine collapse, tailings dam collapse, mine flooding, collapse of the underground mine) and implement efficient control measures;

Employ independent third-party inspectors to carry out regular risk assessment at the Group;

Apply a risk-based maintenance programme on an ongoing basis;

Conclude property damage insurance contracts and business interruption insurance contracts and extend these annually.

PRODUCTION AND OPERATIONAL RISKS

Financial performance, operations, project implementation strategy and company image can be seriously affected by the occurrence of one or more key risks described below. Continuous risk management efforts include ongoing monitoring, risk mitigation actions and the development of contingency plans to ensure business continuity.


PRINCIPAL RISKS AND UNCERTAINTIES PRINCIPAL RISKS AND UNCERTAINTIES

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The Group continues to implement major capital projects. A failure to deliver such projects within planned timeframes, budgets and quality criteria could negatively affect profitability and the Group’s reputation in the long run.

Some of the Group’s assets are exposed to legal compliance risks in terms of :

Bribery and corruption prevention;

Sanctions;

Human rights;

Personal data protection;

Anti-money laundering and counter-financing of terrorism;

Fraud-prevention.

There are risks around:

The Group’s ability to attract and/or retain personnel with the necessary skills and experience to support its operations;

The outflow of qualified personnel from the countries and regions in which we operate.

The nature and location of the Group’s operations mean they have, in the absence of appropriate controls, the potential to undermine the physical wellbeing and health of employees, contractors and community members. The Group adheres to international and regional laws and regulations regarding safety and environmental protection.

KEY RISK

KEY RISK

KEY RISKKEY RISK



RISK MANAGEMENT APPROACHRISK MANAGEMENT APPROACH

Implement a transparent, stage-gate approach that integrates project risk management principles;

Consolidate and enhance capital project planning and execution via the dedicated ERG Capital Projects company;

Procure insurance policies for major capital projects (e.g. construction –all- risks insurance and delay in start-up insurance);

Enhance project due diligence in the mine planning process (including the input of third party experts).

Embed the Non-Admission of Violations principle in the Group’s policies, apply it at the management level and communicate it regularly to employees;

Operate a dedicated 24 hour hotline that is continuous, anonymous, confidential and operated by an third-party;

Provide training in ethics and compliance using Internet-based technology;

Provide a dedicated 24-hour hotline that is anonymous, confidential and operated by a third party;

Respond promptly to the enforcement of regulatory requirements and maintain an open dialogue with regulatory authorities.

Offer competitive remuneration packages, including salaries, bonuses and non-cash benefits;

Develop and implement personnel training and development programmes to maintain the pipeline of qualified personnel needed to support its business;

Apply enhanced recruitment procedures as well as implement measures to reduce staff turnover and promote employee development;

Work constantly to improve employee salaries and benefits. Also implement social programmes in the Group’s host regions, specifically aimed at improving the quality of life of employees and their families.

Apply OHSAS 18001 certified and/or aligned occupational health and safety management systems and standards including local safety regulations;

Develop and implement integrated security enhancement programmes. Security is a priority for the Group in its operating activities;

Apply workplace safety policies and standards;

Report all sustainable development indicators regularly to management.

PERSONNEL MANAGEMENT AND SOCIAL RISKS

CAPITAL PROJECT EXECUTION RISKS

HEALTH, SAFETY AND SECURITY RISKS

COMPLIANCE RISKS

Additional risks, yet unknown to the Group, and other risks that are not currently considered significant but could potentially have a major impact on its operations and financial results, may arise. Therefore, continuous risk management efforts are critical to support successful achievement of the Group’s goals.



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Health and safetyEnsuring the health and safety of people-including both employees and contractors-is a fundamental tenet of business. In line with ERG’s Health, Safety and Environment (HSE) Policy, the Group is committed to the continuous improvement of all working environments and achieving zero harm.

The Group is certified against OHSAS 18001: 2007.

Safety performance The Group regrets to report that there was one fatality during the year relating to a member from its contractor workforce. The Group would like to express its sincere condolences to the family affected by this tragic event.

The fatality was due to a fall from height during a maintenance operation. The incident was subject to comprehensive investigation, which identified appropriate prevention measures to strengthen controls across the following processes: permit to work, competency, job risk assessment, personal protective equipment and work supervision.

The frequency of injuries was 0.71 per million hours. Over the past three years, the Group has successfully maintained low work-related lost-time injury frequency rates (LTIFR) — below 28, which is the average for the past decade.

Sustainable development review

Sustainable development is about more than the responsible management of the Group’s environmental, social and governance impacts; it is also about achieving: True business sustainability - by ensuring the Group’s business is fit for the future and can generate long-term value;

Sustained and profitable growth that delivers ongoing benefits to stakeholders including employees, shareholders, customers, business partners, host countries and local communities.

Sustainable development is therefore integral to the Group’s business model and is increasingly integrated into core business processes. This is best demonstrated by the 2025 strategy, which is ultimately aimed at achieving business sustainability.

In 2018, ERG reached an important milestone by developing its 2025 Strategy, which has been approved by ERG’s Board of Managers. This integrated strategy- which is underpinned by well-defined strategic goals, key performance indicators (KPIs) and implementation levers - will help achieve the vision of being an international, sustainable, socially responsible and efficient natural resources company. The strategy will be cascaded throughout ERG and its group to ensure that it becomes a living reality for every manager and every worker, irrespective of location or role. This will be done through: The integration of the strategic goals into employees’ KPIs, thus directly influencing their remuneration;

Clear accountability for the delivery of strategic initiatives amongst senior managers;

A comprehensive, internal communications campaign; and

Dedicated strategy training.

Sustainable development means the responsible management of the Group’s environmental footprint, as well as social development and management. The Group perceives sustainable development as achieving the following: The sustainability of the business as a whole by ensuring the readiness of the Group’s culture, strategy, processes, technologies, competencies and decision-making to face future challenges and support long-term value creation;

Long-term sustainable growth that adds value and provides long-term benefits to stakeholders: shareholders, customers, business partners, host governments, employees, and, especially, to local communities.

Thus, sustainable development is an integral part of the enterprise business model and is being increasingly integrated into core business processes.

The Group’s approach to sustainable development

Environmental protectionThe Group’s activities, like those of other extractive and heavy industrial companies, can present a range of pollution risks that require proactive management.

The Group is certified to the ISO 14001 environmental management system standard and focuses on the detection, prevention and/or minimisation of such impacts..

In 2018, the Group’s operations were in full compliance with the applicable environmental regulations. Modernisation and expansion projects have successfully passed mandatory environmental reviews. No wildlife management areas, environmentally sensitive areas or cultural heritage sites are located near the Group’s entities. No major complaints against the Group’s enterprises have been received from regulators.

Energy and carbon managementThe Group’s energy producing operations are certified to the ISO 50001/EN 16001 energy management system standard.

In 2018, the Group’s energy consumption totalled 26,834 TJ (2017: 13,467 TJ), with 86.5% of direct energy (2017: 87.0%) sourced from coal. GHG emissions associated with our direct and indirect energy consumption totalled 1,112 k tonnes of CO2 equivalent (2017:4,439 k tonnes).

In 2018, with the support of an external consultancy, the Group completed the life cycle carbon footprint assessment for ferrochrome products. The outputs of this exercise will inform the Group’s efforts to produce ferrochrome in a more energy-efficient and less carbon-intensive way.


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The Group employed 19,237 people at the end of 2018 (the figure was 19,203 in 2017). Around 100% of staff are located in Kazakhstan. The Group places a high priority on diversity and equality within its workforce. Around 25% of all employees are women. The Group is encouraging more women to join ERG by providing a variety of appropriate professional and personal benefits.

The Group works constructively with the representatives of employees and respect their right to join unions and enter collective agreements. Most of the Group’s employees are trade union members and collective bargaining agreements are in place at the majority of operational entities.

EmployeesEmployee trainingThe Group focuses on embedding innovative ways of working throughout every level of the organisation, as well as the ongoing development of a corporate culture. In line with strategic priorities, the Group places particular emphasis on the development of employees’ strategic skills and competencies as well as high-potential individuals and leadership pipeline.

Employee benefitsThe Group provides a range of workplace benefits to employees. This, for example, includes:

Competitive base salaries and bonuses for the achievement of production targets;

Employee healthcare cover (in excess of what is required by law);

Additional support for retired employees and employees who have large families or children with disabilities;

Extended maternity leave for female employees (in excess of what is required by law);

Subsidised food at ERG canteens; Reimbursement of commuting costs.

These are in addition to the provision of sports facilities, cultural events and leisure activities and the maintenance of social infrastructure used by employees in operating regions.

In addition, as part of the Group’s efforts to provide a high quality working experience for employees, in partnership with financial institutions, it is implementing a worker housing programme. This will see the construction of housing in regions of operation which will be provided to employees on preferable terms. This housing includes the development of three large-scale, multi-storey accommodation buildings in the Pavlodar and Aktobe regions.

Community investment Community development is a major part of social responsibility. The Group places particular emphasis on improving the lives of employees and their families outside the workplace (i.e.as local community members) as well as on supporting broader socio-economic development in operating regions (including in line with the Group’s contractual obligations). The projects are implemented in partnership with regional authorities.

Initiatives in 2018 focused, for example, on road repairs; the construction, refurbishment and modernisation of residential areas, school buildings and kindergartens; sponsorships of local education institutions and regional orphanages; support for international and national sporting events; and the construction of sports facilities.

In 2018, community social investment contributions by the Group were around US$81 million. This includes contributions to a number of different non-recurring individual social development infrastructure projects at the national level in Kazakhstan – primarily related to education, cultural and recreation - amounting to US$59 million (2017: US$39 million).



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General Meeting of Shareholders of the CompanyStructure owning five or more per cent of the Company’s shares (as of 31 December 2018) are listed below:

Shareholder name Total number of owned shares

Type of share Percentage of owned shares in relation to placed shares of the Company

KCR Holding B.V. 100,000 ordinary 100%

Information about dividendsBasic earnings 31 December 2018 31 December 2017

Basic earnings per ordinary share from continuing operations US$5,229 US$8,860

The table below presents data on dividends paid in 2018.

Dividend period Total dividend Dividend per ordinary share

Approved by

2018 A cash dividend of US$133 million was paid. US$1,330 Written resolutions of the Company’s shareholders and management board dated 03.12.2018 and 14.12.2018, respectively.

Corporate Bodies

SHAREHOLDER BODY

MANAGEMENT BODY

GENERAL MEETING OF SHAREHOLDERS OF THE COMPANY

BOARD OF DIRECTORS

Directors Remuneration

Corporate governance

As of 31 December 2018, the Company had a Board of Directors consisting of two directors - ENRC Management (UK) Ltd (Director A) and ERG Management B.V. (Director B).

The Company’s sole shareholder is KCR Holding B.V., a private limited liability company incorporated under Dutch law. The Group has complied with the rules of corporate governance applicable to it, including those set out in its articles of association, as well as internal policies and applicable regulations.

The Group has adopted the view that the Dutch Corporate Governance Code (the ‘Code’) does not apply to the Company

Share capital and shareholdersAs of 31 December 2018:

Company securities Total Ordinary shares Preferred shares

Authorized shares 500,000 500,000 -

Issued shares 100,000 100,000 -

since the Code applies to companies whose registered offices are in the Netherlands and whose shares or depository receipts for shares, have been admitted to trading on a regulated market or a comparable system (see Preamble of the Code).

The Company is listed on the Astana International Exchange, but is shares are not publicly traded.

In October 2018, KCR International B.V. acquired ordinary and preferred shares in Kazchrome through a share offering. As a result, KCR International B.V. became the owner of Kazchrome.

Kazchrome’s corporate governance constitute the basis for all rules and recommendations contained in the Corporate Code adopted by the General Meeting of the Company on 13 March 2017.

The shareholder body of Kazchrome is the General Meeting of Shareholders and the management body is the Board of Directors.

The total number of the Company’s authorised ordinary shares is 500,000. As of 31 December 2018, 100,000 ordinary

shares, with a par value of €1 each, have been issued and fully paid up. The Company made a share premium reduction of US$2,136

million, in line with the decision of the Board of Directors, and the remaining share premium is US$3,893 million.

The amount of remuneration paid to Directors of the Company in 2018 was US$nil.

The Directors of the Company have no interests with respect to the Company’s equity capital and/or no interests in the

Company’s subsidiaries and affiliates. No transactions for the purchase or disposal of the Company’s shares were completed during the reporting year.

Arman YessenzhulovPresident of KazchromeMr. Yessenzhulov began his career in 1990th, his first position being as a smelter working in Smelting Shop No.2 at the Aktobe Ferroalloy Plant. Later, he was appointed Chief engineer moving to General Director of Serov Ferroalloy Plant. In 2014 and 2015 he was appointed First Vice President of Kazakhstan Aluminium Smelter JSC and President of Aluminium of Kazakhstan JSC, respectively. He has been President of Kazchrome since March 2018.

Azamat BektybayevVice President for Technical Development at Kazchrome Mr. Bektybayev has more than 30 years’ experience in the mining industry including ten years in management positions. He held the position of Head of Mining Operations Division from 2004 to 2014, when he was then appointed Deputy Chairman of Production.

Since 2018, he has served as Vice President for Technical Development at Kazchrome.

In practice, Director A and Director B are typically represented by: Serik DonbekbayevVice President for Financial and Economic Issues at KazchromeMr. Donbekbayev has more than 20 years’ experience working in economics, finance and business management positions at Kazchrome. He started his career in the Road Transport Department as Deputy Head of the Economic Planning Department.

Later, he was appointed Head of the Economic Department at Kazchrome, and in 2009 became Head of the Financial and Economic Department as well as Deputy Vice President for Financial and Economic Issues. Since May 2014, Serik has served as Kazchrome’s Vice President for Financial and Economic Issues.

Sergei PetukhovVice President for Technical Development and Repair at Kazchrome Mr. Petukhov has more than 25 years’ experience working in various maintenance-related positions. He joined ERG in 2017 as Director of Technical Development and Engineering for Repair and Maintenance at Eurasian Group LLP. In January 2018, he was appointed Vice President for Technical Development and Repair at Kazchrome.

Prior to his career at ERG, Mr. Petukhov worked as Head of the Metallurgical Equipment Repair Shop at SSM-Tyazhmash LLC and was later appointed Deputy Head of the Machine Building Centre at SSM-Tyazhmash LLC.

Isak BuitendagVice President for Production at KazchromeMr. Buitendag has more than 15 years’ experience working in various industrial management roles in Kazakhstan, Australia, the Netherlands and South Africa. He joined Kazchrome in 2018, having been appointed Vice President for Development.

Mr. Buitendag started his career in South Africa as Chief Operating Officer. Between 2010 and 2015, he held the following positions at Fortescue Metals Group: Operational Readiness Manager, Director for Safety, Healthcare and Environmental Protection, Acting Chief Operating Officer and Director of External Relations.

Venera MukhamedzhanovaVice President for Staff and Social Affairs at KazchromeMs. Mukhamedzhanova has more than 30 years’ experience of working in various roles at the Aktobe Ferroalloy Plant and Kazchrome. In 2003, she was first appointed Deputy of the Department for Labour Organisation and Motivation and then became Head of the Department for Labour Organisation and Motivation. In 2004, she was appointed Head of the Human Resources Department at Kazchrome.

In 2018, she became Kazchrome’s Vice President for Staff and Social Affairs.

Satzhan Temirgaliyev - Director B Mr. Temirgaliyev started his career as Head of the Department of Strategic Planning and Investment Analysis at ENRC. In 2013, he was appointed Deputy Chief Financial Officer of ERG.

In late 2014, Mr. Temirgaliyev joined Sokolov-Sarybai Mining Production Association JSC as Vice President of Economics, Finance and Business Transformation. In 2016, he was appointed Deputy Chairman of the Board for Finance of Eurasian Group LLP. In 2017, he held the post of First Deputy Chief Financial Officer of ERG and in the following year was appointed Chief Financial Officer of ERG.

Mr. Temirgaliyev holds a MBA degree from the University of Oxford.

Dmitry Melnikov - Director A Dr. Melnikov joined ERG in 2014 as an Executive Director of International Law and M&A, progressing to Chief Legal Officer in 2016. Since 2016, he has also been a member of ERG’s Executive Committee.

Prior to working at ERG, Dr. Melnikov spent almost 14 years at international law firm Cleary Gottlieb, where he specialised in M&A transactions, financing and integrated business support.

Dr. Melnikov studied jurisprudence and civil law at Lomonosov Moscow State University. He obtained a Candidate of Legal Sciences degree (Ph.D.) at the Russian State Institute of Intellectual Property (RGIIS).


CORPORATE GOVERNANCE CORPORATE GOVERNANCE

ABOUT THE COMPANY

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Board of Directors Key management team at Kazchrome

Directors’ report


DIRECTORS REPORT DIRECTORS REPORT

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DIRECTOR’S REPORT


IntroductionThe Directors present their consolidated report to the shareholder of the Company for the financial year ending 31 December 2018, as well as the Company’s audited financial statements for the period from 12 February 2018 to 31 December 2018 and audited Consolidated financial statements for the year ended 31 December 2018.

Review of business and principal activitiesThe principal activities of the Company are holding investments in subsidiaries on behalf of the Company shareholder, as well as financing these subsidiaries. The Directors do not foresee any significant future changes to the Company’s activity. The Company’s registration number at the Dutch Chamber of Commerce is 70882126. Refer to section 1 of the Annual report ‘About the Company’.KCR Holding B.V. is the immediate parent of the Company. The ultimate parent of the Company is ERG, a holding company of an international natural resources group. The Group is a leading natural resources group with integrated mining and processing of chrome and manganese ores, as well as production of ferroalloys. Its production assets are located in the Republic of Kazakhstan. In the year ending 31 December 2018, the Group recorded US$535 million in profits from its continuing operations. Refer to section 5 of the Annual report ‘Financial review’. The Group’s liquidity ratio (current assets / current liabilities) is 2.5, and the

solvency ratio (total liabilities / equity) is 2.9. These ratios do not give rise to concerns about the Group’s cash flow and financing needs. Refer to note 1 of the Consolidated financial statements.In April 2018, the Company purchased a subsidiary for a cash consideration of US$6,029 million. The decrease in cost of investment of US$2,116 million is a result of return of share premium by subsidiary during the year. The ordinary shareholding of 100% remained the same. In April 2018, the Company received a share premium contribution of US$6,029 million. During 2018, the Company returned share premium to its parent of US$2,136 million according to the decision of the Board of Directors. Refer to section 11 of the Annual report ‘Other information’.As at 31 December 2018, the Group’s total equity was US$1,189 million.

Going concernThe Directors’ judgement is required in estimating future cash flows and ensuring future compliance with the Group’s debt covenants. In 2018, the Directors assessed forecast levels of net debt, headroom on existing borrowing facilities and compliance with debt covenants. This analysis covered the period to 30 June 2020. The Directors concluded it was appropriate to adopt the going-concern basis in the preparation of financial statements. The Consolidated financial statements have therefore been prepared on a going concern basis in accordance with International Financial Reporting Standards (‘IFRS’), as

adopted by the European Union (‘EU’).The Consolidated financial statements have also been prepared under the historical cost convention as modified for the revaluation of certain assets and liabilities - as further explained in the respective accounting policies. Refer to note 1 of the Consolidated financial statements for going concern assessment.

Share capital KCR Investments N.V.The total number of the Company’s authorised ordinary shares is 500,000. As of 31 December 2018, 100,000 ordinary shares, with a par value of €1 each, have been issued and fully paid up. The Company made a share premium reduction of US$2,136 million in line with the decision of the Board of Directors and the remaining share premium is US$3,893 million. Share capital has been valued and calculated at the historical rate. Refer to section 8 of the Annual report ‘Corporate governance’ and note 16 of the Consolidated financial statements.

Principal risks, uncertainties, financial risk management and financial instrumentsThe Group’s principal risks and uncertainties are aligned with the principal risks of ERG and are not managed separately. Refer to section 6 of the Annual report ‘Principal risks and uncertainties’ and note 22 of the Consolidated financial statements on financial risk management, together with details of financial instruments.

Key risk categories

Category description Risk appetite

Strategic Risk

Risk relating to prospective earnings and capital availability arising from strategic changes in the business environment and from adverse strategic business decisions.

Low

Operational risk

Risk relating to current operational and financial performance (as well as capital availability) arising from inadequate or failed internal processes, people and systems or as a result of external events.

Low

Financial risk

Risk relating to the inability of the Group to access commercially viable external financing which could undermine its ability to carry out necessary operating and investment activities. Also, any deterioration in cash flow and profitability that could adversely affect the Group’s ability to meet its existing financial obligations, including debt repayments.

Low

Compliance risk

Risk resulting from legal/regulatory non-compliance in relation to: Bribery and corruption; International sanctions; Human rights; Personal data protection; Anti-money laundering and counter-financing of terrorism; Fraud-prevention.

Zero tolerance

Capital risk managementThe Group’s capital risks are aligned with the principal risks of ERG and are not managed separately. Directors are highly focused on maintaining liquidity and ensuring compliance with banking covenants, and are subject to related key performance indicators. Refer to note 6 ‘Principal risks and uncertainties’ of the Consolidated financial statements on capital risk management.

OutlookThe Group is a leading natural resource business involved in the integrated mining and processing of chrome and manganese ores, as well as the production of ferroalloys. Its production assets are located in the Republic of Kazakhstan. It is expected that the Group will continue to operate the existing assets and invest in their modernisation and potential expansion. Refer to section 1 ‘About the Company’ and section 3 ‘Strategy Overview’ of Annual report.

Key performance indicatorsGiven the nature of the Group’s business, key performance indicators are tracked regularly by the Group and integrated with the analysis performed by ERG and its subsidiaries. In future, these key performance indicators will be defined and managed by ERG to ensure the consistency of their development and reporting across the ERG subsidiaries. Refer to ‘Key indicators’ of the Annual report.

Subsequent eventsRefer to note 27 of the Consolidated financial statements.

EmployeesAs of 31 December 2018, the headcount of the Group was 19,237 people. Refer to section 7 of the Annual report ‘Sustainable Development Review’.

Research and developmentDuring the period, the Group undertook a range of research and development activities. The Group’s research and development centres, which are located at its production sites, develop and improve high-quality ferroalloy products.

SustainabilitySustainable development is considered an integral part of the Group’s business. Refer to ERG’s comprehensive Sustainable Development Report 2018.

Corporate governanceThe Group has complied with the rules of corporate governance applicable to it. The corporate governance of the Group is in compliance with material applicable laws. The Group publishes a corporate governance section within its Annual report. Refer to section 8 of the Annual report ‘Corporate Governance’.

Registered addressKCR Investments N.V.Piet Heinkade 551019 GM AmsterdamThe Netherlands

Registered address of ultimate holding companyEurasian Resources Group S.à r.l.9, rue Sainte Zithe L-2763 Luxembourg Luxembourg

DirectorsThe Directors in office during the period and up to the date of signing the financial statements are those listed below.

Director A – ENRC Management (UK) Limitedrepresented by Mr. Dmitry MelnikovDate: 20 June 2019

Director B – Eurasian Resources Group Management B.V.represented by Mr. Satzhan TemirgaliyevDate: 20 June 2019


FINANCIAL STATEMENTS FINANCIAL STATEMENTS

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Consolidated statement of comprehensive incomeIN MILLIONS OF US$

Years ended 31 December

Note 2018 2017

Profit for the year 52 937

Other comprehensive (expense)/income, net of income taxes:

Items that may be subsequently reclassified to profit or loss:

Currency translation differences (66) 9

Transfer of currency translation differences on disposal of subsidiaries and joint venture 486 –

Total comprehensive income for the year 472 946

Total comprehensive income/(expense) attributable to:

Owners of the Company 474 953

Non-controlling interests (2) (7)

Total comprehensive income for the year 472 946

Financial statementsConsolidated financial statements Consolidated income statementIN MILLIONS OF US$

Note


2018 2017

Continuing operations:

Revenue 4 2,183 2,153

Cost of sales 5 (1,038) (940)

Gross profit 1,145 1,213

Other operating income 6 41 8

Distribution costs (16) (17)

General and administrative expenses 7 (222) (151)

Other operating expense 6 (17) (26)

Operating profit 931 1,027

Finance income 8 224 337

Finance cost 9 (519) (260)

Profit before income tax 636 1,104

Income tax expense 10 (101) (218)

Profit for the year from the continuing operations 535 886

Discontinued operations:

(Loss)/profit for the year from the discontinued operations 11 (483) 51

Profit for the year 52 937

Profit/(loss) attributable to:

Owners of the Company 45 944

Non-controlling interests 7 (7)

Basic and diluted earnings per ordinary share from the continuing operations (US$ per share) 21 5,229 8,860

Basic and diluted earnings per ordinary share from the discontinued operations (US$ per share) 21 (4,779) 580



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Note

At 31 December

2018 2017 2016

Current liabilities

Borrowings 17 55 110 2,142

Trade and other payables 20 162 157 145

Dividends payable 16 8 3

Asset retirement obligations 18 3 3 1

Employee benefit obligations 19 1 1 2

Financial guarantees – 13 14

Other taxes payable 23 29 46

Total current liabilities 260 321 2,353

Total liabilities 3,468 2,528 2,533

Total liabilities and equity 2,279 5,344 5,372

These Consolidated financial statements and accompanying notes were authorised by the directors of the Company on 20 June 2019.

Consolidated balance sheetIN MILLIONS OF US$

Note

At 31 December

2018 2017 2016

Assets

Non-current assets

Property, plant and equipment 12 1,035 1,128 1,092

Intangible assets 5 9 13

Investment in joint venture 13 – 343 316

Other investments 23 23 23

Loans receivable 3 510 182 146

Deferred tax assets – 24 6

Other 55 33 30

Total non-current assets 1,628 1,742 1,626

Current assets

Inventories 14 297 270 210

Trade and other receivables 15 206 215 274

Income tax prepayments 5 5 1

Loans receivable 3 5 3,017 3,169

Cash and cash equivalents 138 95 92

Total current assets 651 3,602 3,746

Total assets 2,279 5,344 5,372

Equity

Share capital and share premium 16 3,893 – –

Reserves (8,163) (2,601) (2,610)

Retained earnings 3,079 5,363 5,388

Attributable to owners of the Company (1,191) 2,762 2,778

Non-controlling interests 2 54 61

Total equity (1,189) 2,816 2,839

Liabilities

Non-current liabilities

Borrowings 17 3,156 2,043 –

Deferred tax liabilities 8 23 34

Asset retirement obligations 18 23 24 19

Employee benefit obligations 19 16 16 17

Financial guarantees – 82 79

Other 5 19 31

Total non-current liabilities 3,208 2,207 180

Consolidated balance sheet (continued)IN MILLIONS OF US$





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Consolidated cash flow statementIN MILLIONS OF US$

Note


2018 2017

Cash flow from operating activities:

Profit before income tax from the continuing operations 636 1,104

(Loss)/profit before income tax from the discontinued operations (474) 38

Adjustments for:

Depreciation and amortisation 114 114

Employee benefits 2 –

Financial guarantees (85) 3

Provision for obsolete and slow-moving inventory 9 6

Provision for impairment of receivables 1 1

Share of profit after tax of joint venture 11 (28) (27)

Transfer of currency translation differences 11 486 –

Net operating foreign exchange (gain)/loss (22) 14

Finance income (169) (315)

Finance cost 542 225

Operating cash flow before working capital changes: 1,012 1,163

Changes in inventories (75) (68)

Changes in trade receivables and other current assets (42) 48

Changes in trade and other payables 18 (9)

Changes in other taxes payable (3) 6

Cash generated from operations: 910 1,140

Income tax paid (121) (268)

Employee benefits paid (2) (1)

Interest and other similar expenses paid (236) (126)

Interest received 174 261

Net cash from operating activities, including 725 1,006

Net cash from operating activities – discontinued operations 52 48

Cash flows from investing activities:

Purchase of property, plant and equipment (194) (141)

Purchase of intangible assets (1) –

Loans granted (1,291) (3,251)

Acquisition of subsidiaries 1 (6,029) –

Placement of bank deposits (1) –

Repayment of loans 3,639 3,372

Proceeds from sale of subsidiaries and joint venture 597 –

Other – 2

Net cash used in investing activities, including (3,280) (18)

Net cash used in investing activities – discontinued operations (2) (45)

Consolidated statement of changes in equityIN MILLIONS OF US$

Attributable to Owners of the Company

Share capital and share premium

Other reserves

Currency translation

reserveRetained earnings Total

Non-controlling

interestsTotal

equity

Balance at 1 January 2017 – 86 (2,696) 5,388 2,778 61 2,839

Profit for the year – – – 944 944 (7) 937

Other comprehensive (expense)/income – (1) 10 – 9 – 9

Total comprehensive (expense)/income – (1) 10 944 953 (7) 946

Dividends – – – (969) (969) – (969)

Balance at 31 December 2017 – 85 (2,686) 5,363 2,762 54 2,816

Impact of IFRS 9 (note 1) – – – 30 30 (1) 29

Balance at 1 January 2018 – 85 (2,686) 5,393 2,792 53 2,845

Profit for the year – – – 45 45 7 52

Other comprehensive income/(expense) – – 429 – 429 (9) 420

Total comprehensive income/(expense) – – 429 45 474 (2) 472

Issuance of new shares 6,029 – – – 6,029 – 6,029

Acquisition of subsidiaries1 – (6,030) 39 (51) (6,042) 13 (6,029)

Dividends – – – (2,306) (2,306) (12) (2,318)

Share premium reduction (2,136) – – – (2,136) – (2,136)

Disposal of subsidiaries - – – – – (49) (49)

Other changes in non–controlling interests - - - (2) (2) (1) (3)

Balance at 31 December 2018 3,893 (5,945) (2,218) 3,079 (1,191) 2 (1,189)

1 Accounting for acquisition of TNC Kazchrome JSC and its subsidiaries is disclosed in note 1.



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Note


2018 2017

Cash flows from financing activities:

Proceeds from borrowings 3,103 –

Proceeds from issuance of new shares 16 6,029 –

Repayment of borrowings (2,108) (33)

Payment of arrangement fees (4) (1)

Purchase of non-controlling interests (3) –

Dividends (2,307) (964)

Repayment of share premium to owners of the Company 16 (2,136) –

Net cash from/(used for) financing activities, including 2,574 (998)

Net cash from financing activities – discontinued operations – –

Effect of exchange rate changes on cash and cash equivalents 24 13

Net change in cash and cash equivalents, including 43 3

Net change in cash and cash equivalents – discontinued operations 50 3

Cash and cash equivalents at the beginning of the period, including 95 92

Cash and cash equivalents at the beginning of the period – discontinued operations 8 5

Cash and cash equivalents at the end of the period, including 138 95

Cash and cash equivalents at end of the period - discontinued operations – 8

Notes to the Consolidated Financial Statements

1. Basis of preparation and principal accounting policies

General informationKCR Investments N.V. (the ‘Company’) is a public limited liability company organised under the laws of the Kingdom of the Netherlands with a registered office and domicile at 55, Piet Heinkade, 1019 GM Amsterdam, the Netherlands. The Company was incorporated on 12 February 2018. The Consolidated financial statements as at and for the year ended 31 December 2018 comprise the Company and its subsidiaries (the ‘Group’).

The Company, together with its subsidiaries, is a leading natural resources group with integrated mining and processing of chrome and manganese ores, and production of ferroalloys. Production assets are located in the Republic of Kazakhstan.

The immediate parent of the Company is KCR Holding B.V., incorporated in the Kingdom of the Netherlands, and the ultimate parent is Eurasian Resources Group S.à r.l (‘ERG’), incorporated in the Grand Duchy of Luxembourg.

In June 2018, the Board of Managers of ERG approved a plan for the Group to sell its interests in ENRC Credit LLP, Molservice LLP, Lotos Aktobe LLP, Chromtau Brick Plant LLP and Shubarkol Komir JSC to subsidiary undertakings of ERG. In December 2018, interests in the above mentioned entities were sold.

Subsidiaries State of incorporation Principal activity Ownership

KCR International B.V. Netherlands Holding 100.00%

TNC Kazchrome JSC Kazakhstan Mining and processing 99.35%

Akzhar Chrome LLP Kazakhstan Slag recycling 99.35%

Donskaya neftebaza JSC KazakhstanWarehousing services and sales of combustive-lubricating materials 69.92%

The Consolidated financial statements have been prepared on a going concern basis in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’).

The Consolidated financial statements have also been prepared under the historical cost convention as modified for the revaluation of certain assets and liabilities as further explained in the respective accounting policies.

Going concernThese Consolidated financial statements were prepared in accordance with IFRS on a basis of going concern principle, which assumes realisation of assets and repayment of obligations in normal course of the business in the foreseeable future.

The Board of Managers of ERG has reviewed the liquidity available for the period until 30 June 2020. Throughout the period under review ERG and its subsidiaries generate sufficient cash flow to maintain a position above minimum working capital requirements. During 2018, commodity prices continued to improve considerably which has given ERG additional headroom when considering its liquidity.

On 27 June 2018, Standard & Poor’s upgraded ERG’s credit rating to B/B with positive outlook from B-/B with stable outlook. On 3 August 2018, Moody’s upgraded ERG’s credit rating to B2 with positive outlook from B3 with stable outlook.

ERG appreciates the dependence of liquidity on commodity prices in our key markets and ability to raise additional funding when required. To ensure adequate liquidity is available to meet contractual obligations, ERG ensures continuing focus on operational efficiency, working capital improvements, and allocation and spending of capital expenditures budget.

The Managers of ERG consider that ERG can access adequate resources to continue its business operations for the foreseeable future and that the preparation of these Consolidated financial statements under the going concern basis is appropriate and accordingly ERG will be able to realise its assets and discharge its liabilities in the normal course of business.

Though total liabilities exceeded total assets of the Group by US$1,189 million, current assets exceeded current liabilities of the Group by US$391 million as at 31 December 2018. Having regard to the Group’s existing and future working capital position, timing of settlement of debt facilities and projected profit from continuing operations, management conclude on the Group’s ability to continue as a going concern.

Based on ERG’s conclusion on its ability to continue as a going concern for the foreseeable future and forecasts of the future operational activities of the Group, the management of the Group considers that the Group has access to adequate resources to continue its operations in its current capacity for the foreseeable future and that the preparation of these Consolidated financial statements under a going concern basis is appropriate and accordingly it will be able to realise its assets and discharge its liabilities in the normal course of business.

Consolidated cash flow statement (continued)IN MILLIONS OF US$



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1. Basis of preparation and principal accounting policies (continued)

Accounting for acquisition of TNC Kazchrome JSC and its subsidiaries from ENRC N.V.In April 2018, the Company through its subsidiary, KCR International B.V., acquired all ordinary shares of TNC Kazchrome JSC held by ENRC N.V., a subsidiary undertaking of ERG, for a cash consideration of US$6,029 million. The Company and KCR International B.V. did not meet a definition of business under IFRS 3. Therefore, this transaction did not meet a definition of business combination under IFRS 3, but represents a capital reorganisation of entities under common control by ERG, and does not represent substantive economic change.

Carrying amounts derived from consolidated financial statements of TNC Kazchrome JSC have not been adjusted to fair values. No new goodwill arises under capital reorganisation accounting and the acquired assets and liabilities are brought in at the amounts at which they were recorded in consolidated financial statements of TNC Kazchrome JSC, except for the change in presentation currency from Kazakhstani Tenge to US Dollar. The resulting difference is recognised in Other reserves.

The equity structure of the Group presented in these Consolidated financial statements represent share capital and share premium of the Company from the date of its incorporation and other components of equity (retained earnings and other reserves) being those from the consolidated financial statements of TNC Kazchrome JSC. The resulting difference is recognised within Other reserves.

These Consolidated financial statements are not the Company’s first consolidated financial statements that comply with IFRS, since these Consolidated financial statements are a continuation of the consolidated financial statements of TNC Kazchrome JSC, which prepared its consolidated IFRS financial statements for the year ended 31 December 2017 in accordance with IFRS. Accordingly, the Company does not apply IFRS 1 ‘First-time Adoption of International Financial Reporting Standards’.

Changes in accounting policy and disclosuresThe accounting policies adopted are consistent with those described in the consolidated financial statements of TNC Kazchrome JSC for the year ended 31 December 2017, except for the adoption of IFRS 9 ‘Financial Instruments’ and IFRS 15 ‘Revenue from Contracts with Customers’ on 1 January 2018.

New standards adopted for 2018 IFRS 9 sets out the requirements for recognising and measuring financial assets, financial liabilities and certain contracts to buy or sell non-financial items. The standard facilitates use of hedge accounting. The adoption of IFRS 9 resulted in an increase of US$29 million in equity at 1 January 2018, representing the recognition of gain on debt modification of US$43 million as well as recognition of expected credit losses of loans given in amount of US$7 million, including tax effect in the amount of US$7 million.

IFRS 15 provides a single model of accounting for revenue arising from contracts with customers based on the identification and satisfaction of performance obligations and revenue from contracts with customers that is distinguished from other sources.

The adoption of IFRS 15 did not result in impact on equity at 1 January 2018.

Changes to IFRS not yet adoptedIFRS 16 ‘Leases’ (issued on 13 January 2016; endorsed by the EU with effective date of 1 January 2019). The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time, also obtaining financing.

Accordingly, IFRS 16 ‘Leases’ eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 ‘Leases’ and, instead, introduces a single lessee accounting model. Lessees will be required to recognise: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the income statement.

IFRS 16 ‘Leases’ substantially carries forward the lessor accounting requirements in IAS 17 ‘Leases’. Accordingly, a lessor continues to classify its leases as operating leases or finance leases, and to account for those two types of leases differently.

The Group envisages adopting the modified retrospective approach, through which the cumulative effect of the initial application is recognised at 1 January 2019 without any restatement of comparative information. The adoption of IFRS 16 ‘Leases’ is not expected to result in significant increase of borrowings and property, plant, and equipment.


Basis of consolidationThe Consolidated financial statements of the Group include the consolidation of the financial statements of the Company and its subsidiaries drawn up to 31 December 2018.

Subsidiaries are those entities, over which the Company has control. The Company controls an entity when the Company is exposed to, or has rights to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

Subsidiaries are consolidated from the date on which control is transferred to the Company (acquisition date) and are de-consolidated from the date that control ceases. The financial statements of subsidiaries are prepared for the same reporting year as the Group, using consistent accounting policies.

Functional and presentation currencyAll amounts in these financial statements are presented in millions of US$ unless otherwise stated. The functional currency of the Company and KCR International B.V. is US Dollar (‘US$’). The functional currency of other subsidiaries is Kazakhstani Tenge (‘KZT’).

Principal rate of exchange per 1.00 US Dollar as at 31 December 2018 is 384.20 KZT (2017: 332.33 KZT). Principal average rate per 1.00 US Dollar for the year ended 31 December 2018 is 344.71 KZT (2017: 326.00 KZT).

Discontinued operationsDiscontinued operations are a component of the Group that is either retired or classified as held for sale and: (a) it is a separate significant type of activity or geographical area of operations; (b) is part of a single, coordinated plan for the disposal of a single significant type of activity or geographical area of operations; or (c) is a subsidiary acquired solely for the purpose of resale. Gains and cash flows from discontinued operations, if any, are recorded separately from continuing operations; however, the presentation of comparative figures changes accordingly.

Segment reporting The management of the Group making operational decisions, is the person or group of individuals, who allocate resources and evaluate the performance of the operating segments of the Group. The Directors of the Company have been identified as the management of the Group. Management making operational decisions has determined the operating unit based on the reports used to make strategic decisions. The management making operational decisions identified one operating segment. When making decisions, the management evaluates the segment’s performance based on operating profit and pre-tax profit. The segment comprises extraction and sale of chrome ore, as well as production and sale of ferrochrome and other ferroalloys.

Earnings per share Earnings per share are determined by dividing the profit or loss attributable to the owners of the Group by the weighted average number of participating shares outstanding during the year. Information on earnings per share is disclosed in note 21.

Revenue recognitionA significant portion of production is sold under contracts of sale of goods. Revenue from contracts with customers is recognised when control of the goods (generally, upon delivery) or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services. Revenues are shown net of VAT and discounts. Certain of the commodities delivered to customers are provisionally priced at the date revenue is recognised. The prices are generally finalised within 3 months. Such adjustments to revenue are dealt with under IFRS 9 ‘Financial Instruments’ rather than IFRS 15 ‘Revenue’ and therefore the IFRS 15 ‘Revenue’ rules on variable consideration do not apply. Such adjustments therefore represent revenue from sources other than contracts with customers. In 2017 the Group applied requirements of IAS 18 ‘Revenue’. Revenue from sale of goods is recognised at a point in time.

Finance income and costFinance income comprises income from early discontinuation of financial guarantees, interest income on loans receivable and gain on modification of borrowings. Finance costs comprise interest expense on borrowings and loss on derecognition of financial assets.

Finance income and costs include foreign exchange gains and losses that relate mainly to loans receivable, borrowings, and term deposits (more than three months).

Interest income and expenses are recognised on a time proportion basis, using the effective interest method. All interest and other costs incurred in connection with borrowings are expensed as incurred as part of finance costs unless incurred on borrowings to finance the acquisition of a qualifying asset.



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1. Basis of preparation and principal accounting policies (continued)Borrowing costs to finance the acquisition of a qualifying asset are capitalised during the period of time that is required to complete and prepare the asset for its intended use. All borrowings are classified between specific borrowings and general borrowings for the purpose of capitalisation. Borrowing costs which relate to borrowings made specifically to fund the acquisition of a specific qualifying asset are fully capitalised during the period when this specific qualifying asset is being constructed. Borrowings which do not qualify as specific are defined as general borrowings.

Judgment is applied by management in determining whether general borrowings include or exclude borrowings used to finance specific assets that are non-qualifying assets. Management has determined that borrowings related to the acquisition of ERG itself at the time of ERG reorganisation and acquisition should be excluded from the general borrowings pool which is eligible for capitalisation. For general borrowings which are not excluded from the general borrowings pool, the capitalisation rate is used to determine the amount of borrowing costs eligible for capitalisation.

Income taxCurrent tax expense is the amount of tax estimated to be payable or recoverable in respect of the taxable income or loss for a period, as well as adjustments to estimates in respect of previous periods. It is calculated on the basis of the tax laws and rates enacted or substantively enacted at the balance sheet date.

Deferred tax represents the amount of income taxes payable or recoverable in future periods in respect of temporary differences, unused tax losses and unused tax credits. The deferred tax is recognised in respect of temporary differences between the tax bases of assets and liabilities and their carrying amounts in the Consolidated financial statements, subject to the exceptions below.

Deferred tax is not accounted for if it arises from the initial recognition of goodwill or the initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss.

Deferred tax assets are recognised for all deductible temporary differences, carried forward are unused tax credits and unused tax losses to the extent that it is probable that future taxable profit will be available against which the deductible temporary differences, carry forward of unused tax credits and unused tax losses can be utilised.

Deferred tax assets are reviewed at each balance sheet date and are reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax assets to be utilised.

Deferred tax is provided on temporary differences associated with investments in subsidiaries and interests in joint ventures, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is determined using tax rates and laws that have been enacted or substantively enacted at the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.

Deferred tax assets and liabilities are offset only if there is a legally enforceable right to offset the recognised amounts and the deferred tax assets and liabilities are intended to be settled either simultaneously or on a net basis.

Exploration and evaluationExploration for and evaluation of mineral resources include the search for mineral resources after the Group company has obtained legal rights to explore in a specific area, as well as the determination of the technical feasibility and commercial viability of extracting mineral resources. Exploration and evaluation expenditures related to an area of interest are written off as incurred until management concludes that it is probable that future costs will be recovered through successful development and exploitation of the area of interest, or alternatively through its sale, from which point they are carried forward as an asset in the Consolidated balance sheet and are included within the assets under construction component of property, plant and equipment at cost less impairment charges.

Capitalised costs include costs directly related to exploration and evaluation activities in the relevant area of interest.

General and administrative costs are allocated to an exploration or evaluation asset only to the extent that those costs can be related directly to operational activities in the relevant area of interest. All capitalised exploration and evaluation expenditure is assessed for impairment if facts and circumstances indicate that impairment may exist.

For the purpose of assessing impairment, the exploration and evaluation assets subject to testing are grouped with relevant existing cash-generating units of operating mines that are located in the same geographical region. Where the assets are not associated with a specific cash-generating unit, the recoverable amount is assessed for the specific exploration area. Any impairment loss is recognised as an expense in accordance with the policy on impairment of non-financial assets.

Identifiable exploration and evaluation assets acquired as part of a business combination are recognised as assets at their fair value at the date of acquisition.


Property, plant and equipmentProperty, plant and equipment is carried at cost less accumulated depreciation and any accumulated impairment loss. Cost includes the original purchase price of the asset, costs attributable to bringing the asset to its working condition for its intended use and estimated future cost of closure and restoration of the asset.

Depreciation is recorded over the useful life of the asset, or over the expected remaining life of the mine if shorter, as follows:

» buildings (including mining premises): 10 to 60 years on a straight-line basis;» mining assets (including mineral rights): on a units of production basis;» plant and equipment: 5 to 30 years on a straight-line basis;» motor vehicles: 5 to 30 years on a straight-line basis; and» land: not depreciated.

The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life.

Estimates of residual values and useful lives are reassessed annually, and any change in estimate is taken into account in the determination of future depreciation charges.

The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the asset as a whole, are depreciated individually, applying depreciation rates reflecting their anticipated useful lives. The cost of replacing major parts or components of property, plant and equipment items is capitalised and the replaced part is retired.

Subsequent costs are included in an asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repair and maintenance costs are charged to the Consolidated income statement in the period in which they are incurred.

Specialised spare parts and servicing equipment with a significant initial value and a useful life of more than one year are recognised as items of property, plant and equipment. Other spare parts and servicing-related equipment are recognised as inventories and accounted for in the Consolidated income statement on utilisation. Gains and losses on disposals are determined by comparing the proceeds with the carrying amount of the assets disposed of and are recognised in the Consolidated income statement.

Property, plant and equipment is tested for impairment if facts and circumstances indicate that impairment may exist, in accordance with the impairment policy below.

i) Mining assetsOnce a project has been established as commercially viable, capitalised expenditures are transferred from ‘exploration and evaluation’ to ‘mining assets’. In addition, mining assets include mineral rights, expenditure incurred to establish or expand production capacity, costs to conduct mining construction and mining capital works, as well as costs arising from mining preparation works during the development or mine reconstruction phase.

Development expenditure incurred by or on behalf of the Group is accumulated separately for each area of interest in which economically recoverable resources have been identified. Such expenditure comprises costs directly attributable to the construction of a mine and the related infrastructure, including the cost of materials, direct labour and an appropriate proportion of production overheads.

When further development expenditure is incurred in respect of a mining asset after the commencement of production, such expenditure is carried forward as part of the mining asset when it is probable that additional future economic benefits associated with the expenditure will flow to the Group. Otherwise such expenditure is recognised as a cost of production.

Once a project has been fully commissioned, depreciation is charged using the units of production method, based on proved and probable reserves, with separate calculations being made for each area of interest. The units of production basis results in a depreciation charge proportional to the depletion of proved and probable reserves.

Mining assets are included within the category ‘buildings and mining assets’ of property, plant and equipment.

ii) Assets under constructionAssets under construction are capitalised as a separate component of property, plant and equipment. Self-constructed assets include the cost of materials, direct labour and an appropriate proportion of allocated overheads. On completion, the cost of construction is transferred to the appropriate asset category. Assets under construction are not depreciated. Depreciation commences on the date when the assets are available for intended use.



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iii) Stripping costsStripping costs comprise the removal of overburden and other waste products from mines. Stripping costs incurred in the development of mines and open pits before the production commences are capitalised as part of the cost of constructing the mines and open pits, and depreciated using the unit of production method over the lives of the mines or open pits.

Stripping costs incurred during the production phase of operations are treated as a production cost that forms part of the cost of inventory.

ImpairmentThe carrying amounts of property, plant and equipment and all other non-financial assets are reviewed for impairment if facts and circumstances indicate that impairment may exist.

An intangible asset that has an indefinite useful life, such as goodwill, is tested for impairment annually and whenever there is an indication that the asset may be impaired.

The Group tests an asset or cash-generating unit (‘CGU’) for impairment by comparing its recoverable amount with its carrying amount. When an impairment review is undertaken, the recoverable amount is assessed by reference to the higher of ‘value in use’ and ‘fair value less costs of disposal’.

A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

Value in use is the net present value of expected future cash flows of the relevant CGU in its current condition. Value in use is determined by applying assumptions specific to the Group’s continued use of the asset or CGU and does not take into account future developments.

The estimates used for impairment reviews to determine value in use are based on detailed mine plans and operating budgets. Future cash flows are based on management’s best estimates of:

» quantities of the reserves and mineral resources for which there is a high degree of confidence of economic extraction;» future production levels;» future commodity prices; and» future cash costs of production, capital expenditure related to construction in progress and development projects that are not yet completed,

close down, restoration and environmental clean up.

Fair value less costs of disposal is the amount obtainable from the sale of an asset or CGU in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. Where there is no binding sale agreement or active market, fair value less costs of disposal is based on the best information available to reflect the amount that the Group could receive for the CGU in an arm’s length transaction.

If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to the Consolidated income statement so as to reduce the carrying amount in the Consolidated balance sheet to its recoverable amount. For assets excluding goodwill, a previously recognised impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment.

This reversal is recognised in the Consolidated income statement and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised in prior years.

Investments in joint venturesIn accordance with IFRS 11, investments in joint ventures are classified as joint operations or joint ventures, depending on the contractual rights and obligations of each investor. The organisation assessed the nature of its joint activities and determined them to be joint ventures.

The Company’s interests in joint ventures are accounted for using the equity method and are initially recognised at cost.

Dividends received from joint ventures reduce the carrying value of investments in joint ventures. Other post-acquisition changes in the Company’s share of the net assets of joint ventures are recognised as follows: (i) the Company’s share ofthe profit or loss of joint ventures is recorded in the Consolidated income statement for the year as a share in the results of joint ventures, (ii) the Company’s share of other comprehensive income is included in other comprehensive income and presented separately, (iii) changes in the Company’s ownership share in the carrying value of the net assets of joint ventures are recognised in profit or loss within Company’s share in the results of joint ventures.

When the Company’s share in the joint venture’s losses equals or exceeds its interest in the joint venture, including any other unsecured receivables, the Group does not recognise further losses unless it has incurred obligations or made payments on behalf of the joint venture. The Company’s share of the other comprehensive income or loss of the joint venture is recognised in the Consolidated financial statements of the Company as part of other comprehensive income.


Financial assets

ClassificationThe Group classifies its financial assets into the following measurement categories: financial assets at fair value through profit or loss, financial assets at fair value through other comprehensive income, and financial assets at amortised cost. The classification depends on the Group’s business model for managing financial assets and the contractual terms of the cash flows. Management determines the classification of its financial assets at initial recognition. In 2017 the requirements of IAS 39 ‘Financial instruments: Recognition and measurement’ were applied.

Non-derivative financial assetsThe Group classifies its non-derivative financial assets at amortised cost only if both of the following criteria are met: (a) the asset is held within a business model with the objective of collecting the contractual cash flows; and (b) the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal outstanding.

Financial assets at amortised cost include loans receivable, trade and other than provisionally priced receivables, and other financial assets that are held with the objective of collecting contractual cash flows. After initial measurement at fair value, the financial assets are measured at amortised cost using the effective interest rate (‘EIR’) method, less impairment. Amortised cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR.

The EIR amortisation is included in finance income in the Consolidated income statement. The losses arising from impairment are recognised in the Consolidated income statement .

Derivative financial assetsDerivative instruments (including instruments with embedded derivatives such as provisionally priced receivables) are measured at fair value through profit or loss, and are held for trading or designated as cash flow hedges of the change in cash flows to be received relating to highly probable forecast transactions.

The effective portion of a change in fair value of a derivative contract designated as a cash flow hedge is recognised in other comprehensive income until the hedged transaction occurs; any ineffective portion is recognised in the Consolidated income statement.

The amount in accumulated other comprehensive income is reclassified to income when the hedged transaction is recognised in the Consolidated income statement. Cost of hedging deferred in a separate reserve in equity is transferred to profit or loss only when the hedged transactions occurs.

Gains and losses on derivative contracts not qualifying and designated as hedges are recognised in the Consolidated income statement.

DerecognitionThe Group derecognises financial assets when: (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired; (ii) the Group has transferred substantially all the risks and rewards of ownership of the assets; or (iii) the Group has neither transferred nor retained substantially all risks and rewards of ownership but has not retained control.

Control is retained if the counterparty does not have the practical ability to sell the asset in its entirety to an unrelated third party without needing to impose additional restrictions on the sale.

ImpairmentThe Group assesses the expected credit losses associated with its financial assets carried at amortised cost. The impairment provisions for financial assets are based on assumptions about risk of default and expected loss rates. The Group uses judgement in making these assumptions and selecting the inputs to the impairment calculation. This judgement is based on the Group’s past history, existing market conditions as well as forward looking estimates at the end of each reporting period.

The Group applies the simplified approach to providing for expected credit losses, which permits the use of the lifetime expected loss provision for all trade receivables. In calculating the expected credit loss rates for trade receivables, the Group considers historical loss rates for each category of counterparties, and adjusts for forward looking macroeconomic data.

The accounts receivables have been divided in aging buckets and based on a historical analysis on defaults and recovery rates, a percentage for expected credit losses has been determined. The movement in the provision for impairment from the previous reporting period is recognised in the Consolidated income statement. Subsequent recoveries of the amounts previously written off are credited against general and administrative expenses in the Consolidated income statement.



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Impairment of loans receivableThe Group applies a three stage model for impairment, based on changes in credit quality since initial recognition. A financial instrument that is not credit-impaired on initial recognition is classified in Stage 1. Financial assets in Stage 1 have their expected credit losses (‘ECL’) measured at an amount equal to the portion of lifetime ECL that results from default events possible within the next 12 months or until contractual maturity, if shorter (“12 Months ECL”). If the Group identifies a significant increase in credit risk (“SICR”) since initial recognition, the asset is transferred to Stage 2 and its ECL is measured based on ECL on a lifetime basis, that is, up until contractual maturity. If the Group determines that a financial asset is credit-impaired, the asset is transferred to Stage 3 and its ECL is measured as a Lifetime ECL.

At 31 December 2018, loans receivable and trade receivables were classified as Stage 1.

InventoriesInventories are valued at the lower of cost and net realisable value. Cost of inventory is determined on a weighted average basis.

Cost includes all costs incurred in the normal course of business in bringing each product to its present location and condition. Cost for raw materials, consumable stores and other inventories is purchase price or extraction cost.

Cost for work in progress and finished goods is the cost of production, including the appropriate proportion of depreciation and overheads based on normal operating capacity, but excluding borrowing costs. Net realisable value is based on estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion and disposal.

Trade and other receivablesTrade and other receivables (other than provisionally priced receivables which are carried at fair value through profit or loss) are initially recorded at fair value and subsequently at amortized cost calculated using the effective interest method, less estimated provision for expected credit losses.

Cash and cash equivalentsCash and cash equivalents include cash in hand, deposits held at call with banks and other short-term highly liquid investments with maturities of three months or less.

Balances restricted from being exchanged or used to settle a liability for at least 12 months after the balance sheet date are included in other financial non-current assets, while balances restricted for more than three months but less than 12 months after the balance sheet date are included in trade and other receivables. Restricted balances are excluded from cash and cash equivalents in the Consolidated cash flow statement.

Financial liabilities

ClassificationThe Group classifies its financial liabilities into the following measurement categories: financial liabilities at fair value through profit or loss and other financial liabilities measured at amortised cost. Management determines the classification of its financial liabilities at initial recognition.

Non-derivative financial liabilitiesThe Group measures non-derivative financial liabilities at amortised cost. The non-derivative financial liabilities (including borrowings) are initially recorded at fair value less any directly attributable transaction costs. Borrowings are subsequently measured at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement.

Any difference between the proceeds net of transaction costs and the redemption value is recognised in the Consolidated income statement over the period of the borrowings using the effective interest method.

Where a loan is obtained at interest rates different from market rates, the loan is remeasured at origination to its fair value, which is calculated as future interest payments and principal repayments discounted at market interest rates for similar loans. The difference between the fair value of the loan at origination and its cost (fair value of the contribution to the borrower, net of transaction costs) represents an origination gain or loss.

The origination gain or loss is recorded in the Consolidated income statement within finance income/cost unless it qualifies for recognition as an asset, liability or a charge to equity in accordance with the substance of the arrangement. Subsequently, the carrying amount of the borrowings is adjusted for amortisation of the origination gain or loss and the amortisation is recorded as finance income/cost using the effective interest method.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.


Derivative financial liabilitiesDerivative instruments are measured at fair value through profit or loss, and are held for trading or designated as cash flow hedges of the change in cash flows to be received relating to highly probable forecast transactions.

Derivatives embedded within contracts that are not already required to be recognised at fair value, and that are not closely related to the host contract in terms of economic characteristics and risks, are separated from their host contract and recognised at fair value; associated gains and losses are recognised in the Consolidated income statement.

DerecognitionA financial liability is derecognised when the obligation under the liability is discharged, cancelled or expired.

Where there has been an exchange between an existing borrower and lender of debt instruments with substantially different terms, or there has been a substantial modification of the terms of an existing financial liability, this transaction is accounted for as an extinguishment of the original financial liability and the recognition of a new financial liability. A gain or loss from extinguishment of the original financial liability is recognised in profit or loss.

When an existing financial liability is replaced by another one from the same lender on not substantially different terms, or the terms of an existing liability are not substantially modified, such an exchange or modification is not treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the Consolidated income statement.

Trade and other payablesTrade and other payables are accrued when the counterparty performs its obligations under the contract and are carried at amortised cost using the effective interest method. The Group does not accrue interest on non-current prepayment accounted for as non-financial liabilities.

Provisions for liabilities and chargesProvisions for liabilities and charges are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognised as a part of finance cost.

Asset retirement obligations and other environmental provisionsAn obligation to incur asset retirement costs occurs when environmental disturbance is caused by exploration, evaluation, development or ongoing production. Costs are estimated on the basis of a formal closure plan and are subject to a regular review. The estimates are based on management’s interpretation of compliance with current environmental legislation in the country of operation.

Asset retirement costs arising from the installation of a plant and other site preparation work, discounted to their net present value, are provided when the obligation to incur such costs arises and are capitalised into the cost of the related asset.

These costs are charged against profits through depreciation of the asset and unwinding of the discount on the provision. Depreciation is included in operating costs while the unwinding of the discount is included as a finance cost. Changes in the measurement of a liability relating to the decommissioning or site rehabilitation of a plant and other site preparation work are added to, or deducted from, the cost of the related asset.

Financial guaranteesFinancial guarantees are contracts under which the Group is obligated to make payments to reimburse the guarantee holder for a loss that he suffered as a result of the inability of a particular debtor to repay its debt in a timely manner in accordance with the terms of the debt instrument.

Financial guarantees are initially recognized at fair value, which usually represents the amount of premium received, and are subsequently measured at amortized cost.

Financial guarantees are recognized by the Group at the time of receiving the premium or, in the case of guarantees without premiums (guarantees within the group), when the debtor receives borrowed funds from the funding organization.

When the Group issues guarantees without premiums or guarantees with a premium different from the market premium, the fair value is determined using valuation methods (for example, the market value of such instruments, interest rate differentials, etc.).



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1. Basis of preparation and principal accounting policies (continued)Losses on initial recognition of a liability under a financial guarantee are recognized in profit or loss for the year as part of finance costs. Amortization of the financial guarantee liability is accrued using the straight-line method during the guarantee period and the related income is recorded as part of finance income.

At the end of each reporting period, guarantees are assessed at the higher of (i) the unamortised balance of the amount recorded at initial recognition; and (ii) the amount of the allowance for losses on the guarantee determined using the model of expected credit losses.

Share capital and share premiumOrdinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of tax, from the proceeds on dividends.

DividendsDividends are recognized as liabilities and are deducted from the amount of capital at the end of the reporting period only if they were declared before the end of the reporting period.

Information about dividends is disclosed in the financial statements if they were recommended before the end of the reporting period, and also recommended or declared after the end of the reporting period, but before the date of approval of the consolidated financial statements for issue.

Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they have been approved before or on the balance sheet date. Dividends are disclosed when they have been proposed before the balance sheet date or when declared after the balance sheet date, but before the Consolidated financial statements are authorised for issue.

Employee benefitThe Group offers its employees remuneration payable upon termination of employment (lump-sum retirement benefits, material assistance to retirees) and other long-term employee benefits (providing material assistance to employees in the event of incapacity for work, on the occasion of anniversary and death) in accordance with the provisions of the collective agreement.

The right to receive remuneration payable upon termination of employment is usually granted depending on the remaining work period until retirement and whether the employee has a minimum length of service.

Compensations at the end of the Company’s business are non-funded defined benefit plans and are measured in accordance with the revised IAS 19 ‘Employee Benefits’. Actuarial and investment risks on unfunded defined benefit plans fall on the Group.

2. Critical accounting estimates and judgements in applying accounting policies

EstimatesThe preparation of these Consolidated financial statements requires the management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these Consolidated financial statements the significant judgements made by the management in applying the accounting policies and the key sources of estimation uncertainty were the following:

Ore reserve estimatesOre reserve estimates are calculated based on Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2012 (the ‘JORC code’) which requires the use of reasonable assumptions, including:

» future production estimates, including proved and probable reserves, resource estimates and committed expansions;» expected future commodity prices based on current market prices, forward prices and the Group’s assessment of the long-term average

prices; and» future cash costs of production, capital expenditure and rehabilitation obligations.

The Group’s ore reserves are based on its best estimate of product that can be economically and legally extracted from the relevant mining properties. Estimates are developed after taking into account a range of factors including quantities, ore grades, production techniques and recovery rates, forecast commodity prices and production costs. Estimates are normally supported by drilling samples and geological studies by independent mining engineering consultants. Significant judgement is required to generate an estimate based on the geological data available.

Ore reserve estimates may change from period to period. This may impact the Group’s financial results. Changes in these estimates may impact depreciation charges, impairment charges on individual assets and CGUs, and asset retirement obligation provisions.

2. Critical accounting estimates and judgements in applying accounting policies (continued)

Life of minesContracts for subsurface use expire between 2041 and 2074. The Group expects that the subsurface use contracts will be extended at nominal cost until the end of the lives of the related mines. Any changes in these assumptions may impact depreciation charges, impairment charges on individual assets and CGUs and asset retirement obligations, as these items have been measured using the assumption that the subsurface use contracts will be extended until the end of the mine life.

Impairment of loansImpairment of loans issued is determined based on expected credit losses. Estimation of the reserve requires the use of significant assumptions, including the probability of default, collection and timing of the expected recovery of future cash flows on loans. Changes in such assumptions may affect the recoverable amount or reserves for such assets. Management regularly reviews assumptions. Expected credit losses on loans issued were calculated based on the credit risk of companies with a comparable rating.

General purpose loansLoans that were not received to finance construction are general purpose loans. Management applies judgment in determining whether general purpose loans should include or exclude loans used to finance assets that do not meet the criteria for recognizing qualifying assets.

The management concluded that loans from Sberbank of Russia and VTB Bank (PJSC) (note 17) should be excluded from the category of general purpose loans subject to capitalisation, since borrowed funds were raised by the Group to refinance foreign loans previously received by the Group. Subsequently, the entire amount of funds received from Sberbank of Russia and VTB Bank was issued in the form of loans to subsidiaries of the Group. The Group did not capitalize the cost of this loan, since the funds were not used for financing of qualified assets.

Valuation of financial guaranteesThe fair value of financial guarantees issued by the Group without premiums is determined using valuation techniques. The Group applies its judgment to determine the fair value of the issued financial guarantees. The Group applies the interest rate differential and the credit swap method to determine the fair value of financial guarantees. The fair value of the financial guarantee liability is calculated as the net present value of the difference in interest rates or credit default swap multiplied by the guaranteed amount of the loan and discounted using the weighted average cost of debt.

For credit agreements in which the Group bears joint and several liability with other guarantors, the market commission is determined taking into account credit default swaps or interest rate differences, and is distributed among the guarantors. This represents management’s best assessment of the Group’s exposure to credit risk associated with guarantees issued.

Management considers it unlikely that the Group will be forced to repay guaranteed liabilities. This judgment is based on the assessment of the continuity of the Group’s operations, given in note 1. As a result, as at 31 December 2018 and 2017, financial guarantees were accounted for at unamortized balance of the amount recorded at initial recognition. The Group estimated reserves against expected credit losses on financial guarantees as at 31 December 2018. The amount of estimated reserves for expected credit losses did not exceed the book values of financial guarantees.

Going concernNote 1 provides details of going concern assessment for the Group.

Impairment of non-financial assetsThe Group reviews the carrying amounts of its property, plant and equipment to determine whether there is any indication that these assets are impaired. Based on the analysis of the internal and external factors, management determined there were no impairment indicators at the end of the reporting period.

TaxationThe Group is subject to the taxation requirements in the jurisdictions in which the Group operates. Significant judgement is required in determining the position for income taxes across these jurisdictions owing to the complexity of tax laws, frequent changes in tax laws and regulations, and the manner of their implementation. Judgement must also be exercised whilst interpreting the interaction between different taxes and interaction between tax rules of different jurisdictions.

Tax provisions are recognised in accordance with tax laws enacted or substantively enacted by the tax authorities in the jurisdictions in which the Group operates, and in accordance with requirements of the applicable accounting standards.

Note 10 contains information on current period tax charges, prior period adjustments, current and deferred tax assets and liabilities including, where appropriate, provisions against uncertain tax positions.



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2. Critical accounting estimates and judgements in applying accounting policies (continued)

Asset retirement obligationsProvision is made for asset retirement obligations when the related environmental disturbance takes place. Decommissioning and rehabilitation expenditure is largely expected to take place at the end of the respective mine lives.

The provision represents management’s best estimate of the costs that will be incurred based on legislative and regulatory requirements. Significant judgement is required as many of these costs will not crystallise until the end of the life of the mine.

Estimates are reviewed annually and based on management’s interpretation of compliance with current environmental legislation in the country of operation. Significant changes in environmental legislation, restoration techniques and estimates of contamination will result in changes to provisions from period to period.

As at 31 December 2018, the total book value of the provision for assets retirement obligations was US$26 million (2017: US$27 million) (note 18).

Functional currencyManagement exercised judgment in determining functional currency of the Company. Management concluded that the US dollar (‘US$’) is the functional currency of the Company. The functional currency for the Company is determined as US$ as this is based on the functional currency of the ultimate parent company.

3. Balances and Transactions with Related PartiesParent company: the Company’s immediate and ultimate parents are disclosed in note 1.

Entities under common control: subsidiary undertakings of ERG, except for Shubarkol Komir JSC.

Joint venture: Shubarkol Komir JSC, a subsidiary undertaking of ERG (refer to note 1).

Entities under control of Class B Managers: Class B Managers and all entities under their control are related parties of the Group as a result of Class B Managers’ indirect interests in the ordinary shares of ERG. Class B Managers of the Company are Mr. Alexander Machkevitch, Mr. Alijan Ibragimov, and Mr. Patokh Chodiev.

Government related entities: the government of the Republic of Kazakhstan and related entities are related parties of the Group as a result of the Government’s 40% shareholding in ERG.

At 31 December 2018 and 31 December 2017, the outstanding balances with related parties were as follows:

In millions of US$

ParentEntities under

common control

Entities under control of Class B

ManagersGovernment

related entities Joint venture

2018 2017 2018 2017 2018 2017 2018 2017 2018 2017

Assets:

Trade and other receivables – – 37 2 3 2 2 – – –

Other – – 2 7 7 6 – – – –

Loans receivable1 497 1,520 18 1,548 – – – – – 123

Cash and cash equivalents – – – – 85 48 – – – –

Liabilities:

Borrowings – – 122 – – – – 286 – –

Trade and other payables – – 26 21 1 – 2 4 – –

Financial guarantees – – – 89 – – – – – 6

3. Balances and Transactions with Related Parties (continued)The transactions with related parties for the years ended 31 December 2018 and 31 December 2017 were as follows:

ParentEntities under

common control

Entities under control of Class B

ManagersGovernment

related entities Joint venture

In millions of US$ 2018 2017 2018 2017 2018 2017 2018 2017 2018 2017

Revenue – – 126 3 – – 3 3 – –

Cost of sales – – (203) (209) (19) (10) (58) (44) (16) (17)

Other operating income – – 6 5 10 – – – – –

Other operating expense – – – (20) (1) – – (4) – –

General and administrative expenses – – (145) (51) (2) – (23) (33) – –

Finance income 8 147 240 212 14 3 – 2 22 18

Finance cost (14) (4) (64) (106) – (3) (43) (23) (31) (22)

Key management personnelKey management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group, directly or indirectly. Compensation for key management personnel amounted to US$3 million in 2018 including long-term benefits. (2017: US$3 million).

Directors’ remunerationThe remuneration paid to Directors in 2018 was US$nil.

4. RevenueGroup revenue from external customers by geographic locations:

In millions of US$


2018 2017

Europe 2,075 2,020

Eurasia 96 121

Kazakhstan 12 12

Total revenue 2,183 2,153

Revenue for the year ended 31 December 2018 includes US$58 million charge from sources other than from contracts with customers.

1 Loans receivable under ‘Parent’ category bear an interest rate of 5.97% per annum (2017: 7.78% per annum in US$ and 9.75% per annum in KZT) and a maturity of 5 years. Impairment provision amounted to US$8 million. Loans receivable under ‘Entities under common control’ category bear an interest rate of 5.96% per annum (2017: from 7.31% to 7.78% per annum in US$ and from 1% to 9.05% per annum in KZT) and a maturity of 4 years. Impairment provision amounted to US$1 million. As at 31 December 2018, the fair value of borrowings amounted to US$507 million (31 December 2017: US$3,174 million).



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5. Cost of sales

In millions of US$


2018 2017

Materials and components used (476) (416)

Power and energy (197) (198)

Staff costs (126) (119)

Depreciation and amortisation (108) (106)

Mineral extraction taxes (57) (53)

Other (74) (48)

Total cost of sales (1,038) (940)

6. Net other operating income/(expense)

In millions of US$


2018 2017

Foreign exchange gains 19 –

Insurance reimbursements 10 1

Other 12 7

Total other operating income 41 8

Foreign exchange losses – (14)


Other (16) (11)

Total other operating expense (17) (26)

Total net other operating income/(expense) 24 (18)

7. General and administrative expenses

In millions of US$


2018 2017

Sponsorship and donations (79) (57)

Management fees (42) (34)

Staff сosts (24) (22)

Professional and other services (22) (9)


Taxes and duties (2) (1)

Other (48) (23)

Total general and administrative expenses (222) (151) Contributions to a number of different non-recurring individual social development infrastructure projects at the national level in Kazakhstan amounted to US$59 million (2017: US$39 million), and primarily related to education, cultural and recreation projects.

8. Finance income

In millions of US$


2018 2017

Income from discontinuation of the financial guarantees 74 61

Interest income 68 245

Gain on modification of borrowings 67 –

Other 15 31

Total finance income 224 337

9. Finance costs

In millions of US$


2018 2017

Foreign exchange losses (214) –

Interest expense (167) (163)

Loss on redemption of borrowings (107) –

Other (32) (98)

Finance cost (520) (261)

Less: amounts capitalised on qualifying assets 1 1

Total finance cost (519) (260)

10. Income taxes

In millions of US$


2018 2017

Current income tax expense (118) (230)

Deferred income tax benefit 17 12

Total income tax expense from the continuing operations (101) (218)

Current income tax expense (2) (4)

Deferred income tax (expense)/benefit (7) 17

Total income tax (expense)/benefit from the discontinued operations (9) 13

Future tax charges are affected by changes to the applicable laws and regulations in the jurisdictions in which the Group operates. Given that TNC Kazchrome JSC had been subject to excess profit tax in Kazakhstan until 1 January 2018, income tax charges were also affected by product prices and profitability levels achieved on subsurface use contracts in Kazakhstan.

A reconciliation between the actual income tax expense and the expected income tax benefit for the year at the applicable tax rate of 20% in Kazakhstan, where the majority of the Group’s operations are located, is provided below:



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10. Income taxes (continued)

In millions of US$


2018 2017

Profit before income tax from the continuing operations 636 1,104

Profit before income tax from the discontinued operations 39 38

Notional tax charge at 20% from the continuing operations (127) (221)

Notional tax charge at 20% from the discontinued operations (8) (8)

Excess profit tax – (1)

Items non-deductible for tax purposes (1) (5)

Non-taxable share in income of joint venture 6 5

Net unrecognised tax losses (3) –

Corporate income tax exempt under investment contract 24 18

Items (non-deductible)/non-taxable under investment contract (2) 8

Prior period adjustments – current income tax 1 –

Prior period adjustments – deferred income tax – (1)

Income tax expense from the continuing operations (101) (218)

Income tax (expense)/benefit from the discontinued operations (9) 13

On the basis of the supplemental agreement to the investment contract, TNC Kazchrome JSC is entitled to exemption from corporate income tax on the profits received from the certain activities for ten consecutive years beginning in 2016. Based on the analysis performed, management considers this tax concession to be a tax credit under IAS 12 ‘Income tax’ and not an investment tax credit or a subsidy. As a result, for the year ended 31 December 2018 the income tax benefit in the amount of US$24 million (2017: US$18 million) and a deferred tax expense of US$2 million (2017: deferred tax benefit of US$8 million) were recognised.

In millions of US$

Accelerated capital

allowances

Provision for impairment of

inventories Other Total, includingDiscontinued

operations

At 1 January 2018 (28) 5 17 (6) 24

Disposal – – (15) (15) (15)

Credited/(charged) to profit 4 2 4 10 (7)

Exchange differences 3 (1) 1 3 (2)

At 31 December 2018 (21) 6 7 (8) –

Represented by:

Deferred tax liabilities (8) –Net deferred tax liabilities (8) –

At 1 January 2017 (36) – 9 (27) 6

Credited to profit 8 5 16 29 17

Exchange differences – – (1) (1) 1

At 31 December 2017 (28) 5 24 1 24

Impact of IFRS 9 (note 1) – – (7) (7) –

At 1 January 2018 (28) 5 17 (6) 24

Represented by:

Deferred tax assets 24 24

Deferred tax liabilities (30) –

Net deferred tax liabilities (6) 24

No deferred tax assets (2017: US$24 million) have been recognised on the basis of future taxable profit forecasts.The Group has unrecognised deferred tax assets in respect of tax losses of US$4 million (2017: US$1 million), related to losses which expire within 10 years.

11. Discontinued operationsInformation on discontinued operations is set out below:

In millions of US$


2018 2017

Revenue 10 9

Cost of sales (8) (7)

Gross profit 2 2

Distribution costs – (1)

General and administrative expenses (1) (1)

Net other operating income 3 –

Operating profit 4 –

Finance income 32 58

Finance costs (25) (47)

Share of profit after tax of joint venture 28 27

Profit before income tax 39 38

Income tax (expense)/benefit (9) 13

Profit for the year from the discontinued operations 30 51

Loss from disposal of subsidiaries and joint venture (513) –

(Loss)/profit for the year from the discontinued operations (483) 51

(Loss)/profit for the year attributable to: Owners of the Company (478) 58 Non-controlling interests (5) (7)

(Loss)/profit for the year (483) 51

Results of disposal of subsidiaries and joint venture is set out below:

In millions of US$

Year ended 31 December

2018

Consideration received (cash) 655

Carrying values disposed of:

Investment in joint venture 361

Loans receivable 294

Cash and cash equivalents 58

Deferred tax assets 15

Property, plant and equipment 4

Trade and other receivables 1

Inventories 2

Trade and other payables (1)

Financial guarantees (2)

Other (1)

Non-controlling interests (49)

Total net assets 682

Transfer of currency translation differences (486)

Loss from disposal of subsidiaries and joint venture (513)



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12. Property, Plant and Equipment

In millions of US$Freehold

land

Buildings and mining

assetsMachinery

and equipment OtherConstruction

in progress Total

Cost at 1 January 2017 16 516 719 52 317 1,620

Accumulated depreciation – (161) (340) (27) – (528)

Carrying value at 1 January 2017 16 355 379 25 317 1,092

Additions – 6 21 4 120 151

Transfers – 65 90 4 (158) 1

Transfers from inventories – – – – 1 1

Depreciation – (32) (79) (5) – (116)

Disposals – – (1) – – (1)

Cost at 31 December 2017 16 586 799 59 280 1,740


Carrying value at 31 December 2017 16 394 410 28 280 1,128

Additions – 2 26 7 155 190

Transfers – 3 40 3 (46) –

Transfers from inventories – – – – (5) (5)

Depreciation – (29) (83) (5) – (117)

Currency translation difference (2) (50) (53) (5) (46) (156)

Disposed of within disposal group:

Cost – (3) (4) (1) – (8)

Accumulated depreciation – 1 2 – – 3

Cost at 31 December 2018 14 506 733 56 338 1,647


Carrying value at 31 December 2018 14 318 338 27 338 1,035

Additions to assets under construction included US$1 million in capitalised borrowing costs (2017: US$1 million).

13. Investment in joint ventureThe changes in the carrying amount of the Group’s investment in joint venture are presented in the table below:

In millions of US$ 2018 2017

Carrying amount at 1 January 343 316

Share of profit after tax 28 27

Currency translation difference (10) –

Transfer to disposal group (361) –

Carrying amount at 31 December – 343

14. Inventories

At 31 December


Raw materials 186 152

Work-in-progress 62 45

Produced raw materials 52 50

Finished goods 28 43

Other inventory – 6

Less: write-down for obsolete and slow moving inventory (31) (26)

Total inventories 297 270

15. Trade and other receivables

At 31 December


Trade receivables 129 126

Other 1 1

Less: impairment provision – (1)

Total financial assets 130 126

VAT recoverable and other taxes receivable 43 49

Advances 33 40

Total non-financial assets 76 89

Total trade and other receivables 206 215

Trade receivables provisionally priced amounted to US$111 million at 31 December 2018 (2017: trade receivables provisionally priced were carried at amortised cost in accordance with IAS 39).

Impairment provision:

In millions of US$

At 31 December

2018 2017

Net amount Net amount

Current 18 109

Less than 3 months overdue 1 14

Between 3 to 6 months overdue – 3

Total past due 1 17

Total trade and other receivables (financial assets) 19 126



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16. Share capital and share premium

Number of shares

Share premium US$’000

At 31 December 2017 – –Share premium contribution 100,000 6,029

Share premium reduction – (2,136)

At 31 December 2018 100,000 3,893

The total number of authorised ordinary shares of the Company is 500,000. The issued share capital as at 31 December 2018 is 100,000 ordinary shares with a par value of EUR 1 each have been issued and fully paid up. The Company made a share premium reduction of US$2,136 million in line with the decision of the Board of Directors and the remaining share premium is US$3,893 million.

Dividends

Year ended 31 December 2018 Year ended 31 December 2017

US$ per share In millions of US$ US$ per share In millions of US$

Dividends 23,060 2,306 9,690 969

17. BorrowingsThe Group’s borrowings mature as follows:

In millions of US$

At 31 December

2018 2017

Less than 1 year 55 110

Between 1-5 years 3,156 2,043

Total borrowings 3,211 2,153

Refinancing of borrowingsDuring the second half of 2018, the Group engaged in a major refinancing of its debt portfolio with the aim to extend the average maturity and improve certain commercial terms. In the course of refinancing, the Group entered into a new facility agreement of US$3,100 million with VTB Bank (PJSC). In 2018, the facility bears an interest rate of 5.95% per annum. In October and November 2018 the aggregate of US$1,280 million was reassigned from VTB Bank (PJSC) to RCB Bank Ltd.

As a result of the refinancing TNC Kazchrome JSC repaid its portion of the outstanding debt up to US$3,014 million facility with VTB Bank (PJSC) and up to US$2,902 million facility with Sberbank of Russia and its outstanding debt under US$350 million facility with the Development Bank of Kazakhstan, as well as US$170 million and US$12 million facilities with a subsidiary bank of Sberbank of Russia.

As at 31 December 2018, the fair value of borrowings amounted to US$3,169 million (2017: US$2,188 million).


At 1 January 2,153 2,142

Cash movements 755 (160)

Non-cash movements 314 154

Fair value movements (8) 17

Exchange gains (3) –

At 31 December 3,211 2,153

18. Asset retirement obligationsThe Group has a legal obligation to complete landfill site restoration during mining operations and decommission its mining property after closure. The timing of decommissioning activity is subject to reassessment at the same time as the revision of the Group’s proved and probable reserves.

In millions of US$

At 31 December

2018 2017

Current provision for asset retirement obligations 3 3

Non-current provision for asset retirement obligations 23 24

Total provision for asset retirement obligations 26 27

Movements in asset retirement obligations are as follows:

In millions of US$Asset decommissioning

costsSite restoration

and re-vegetation Total

At 1 January 2017 10 10 20

Capitalisation 3 2 5

Unwinding of discount 1 1 2

At 1 January 2018 14 13 27

Capitalisation 1 1 2

Production costs – (2) (2)

Unwinding of discount 1 1 2

Utilisation – 1 1

Exchange differences (2) (2) (4)

At 31 December 2018 14 12 26

In accordance with its subsurface use contracts, the Group makes annual obligatory contributions to a deposit fund for the closure costs which will take effect upon exhaustion of the mineral deposits at the end of the respective mine lives.

The amount of the provision for asset retirement obligations is determined using the nominal prices effective at the reporting date and applying the forecasted rate of inflation for the expected period of the life of the mines. Uncertainties in estimating these costs include potential changes in regulatory requirements, decommissioning and reclamation alternatives, and the level of discount and inflation rates.

Principal assumptions made in the calculations of asset retirement obligations are presented below:

At 31 December

2018 2017

Discount rate 5.43-8.71% 7.44-9.99%

Inflation rate 5.10-6.30% 5.40-7.50%



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19. Employee benefit obligationsDefined benefit obligations relate to lump sum payments upon retirement and other payments to pensioners. Movements in the present value of defined benefit obligations are as follows:


Present value at 1 January 8 9

Interest cost 1 1

Benefits paid (1) –

Current service cost 1 –

Actuarial losses arising from changes in demographic assumptions – (2)

Exchange differences (2) –

Present value at 31 December 7 8

Other actuarial employee benefit obligations relate to non-pensioners and include lump sum payments for anniversaries, injuries and other financial aid. Movements in the present value of other actuarial employee benefit obligations are as follows:


Present value at 1 January 9 10

Interest cost 1 1

Benefits paid (1) (1)

Actuarial gains 1 (1)

Present value at 31 December 10 9

The current service cost, past service cost and actuarial gains for the year ended 31 December 2018 are recognised in cost of sales and general and administrative expenses in the amount of US$1 million (2017: US$1 million) and US$1 million (2017: US$l million), respectively.

At 31 December

2018 2017

Defined benefit

obligations

Other actuarial employee

benefit obligations

Defined benefit obligations

Other actuarial employee

benefit obligations

Discount rate 8.32% 8.32% 8.96% 8.96%

Future salary increase 8.00% 8.00% 8.00% 8.00%

Average labour turnover rate of personnel 7.36% 7.36% 6.74% 6.74%

The sensitivity of the defined benefit obligation to changes in the weighted principal assumptions is:

At 31 December 2018

Impact on defined benefit obligation

Change in assumptions Increase in assumptions Decrease in assumptions

Discount rate 3.0% Decrease by 15.70% Increase by 15.34%

Salary growth rate / minimum calculation index 3.0% Increase by 12.38% Decrease by 17.04%

Average labour turnover 3.0% Decrease by 8.81% Increase by 10.46%

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognised within the Consolidated balance sheet.

20. Trade and other payables

In millions of US$

At 31 December

2018 2017

Trade payables 127 113

Other 1 –

Total financial liabilities 128 113

Payables to employees 19 18

Advances received 11 13

Other 4 13

Total non-financial liabilities 34 44

Total trade and other payables 162 157

21. Profit per shareBasic earnings per share are calculated by dividing the profit or loss attributable to owners of the Company by the weighted average number of ordinary shares in issue during the year, excluding treasury shares. The Company has no dilutive potential ordinary shares; therefore, the diluted earnings per share equal the basic earnings per share.

Earnings per share from the continuing operations are calculated as follows:

In millions of US$


2018 2017

Profit for the year from the continuing operations attributable to ordinary shareholders 523 886

Weighted average number of ordinary shares in issue 100,000 100,000

Basic and diluted earnings per ordinary share from the continuing operations (US$ per share) 5,229 8,860

Earnings per share from the discontinued operations are calculated as follows:

In millions of US$


2018 2017

(Loss)/profit for the year from the discontinued operations attributable to ordinary shareholders (478) 58

Weighted average number of ordinary shares in issue 100,000 100,000

Basic and diluted earnings per ordinary share from the discontinued operations (US$ per share) (4,779) 580

Book value per ordinary share is calculated as follows:

In millions of US$


2018 2017

Assets 2,279 5,344

Intangible assets (5) (9)

Liabilities (3,468) (2,528)

Net assets per ordinary shares (1,194) 2,807

Number of ordinary shares in issue 100,000 100,000

Book value per ordinary share (US$ per share) (11,940) 28,070



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22. Financial risk managementThe Group’s activities expose it to a variety of financial risks: credit risk, liquidity risk, interest rate risk and commodity price risk. The Group’s overall risk management programme focuses on the unpredictability of financial markets and seeks to minimise potential adverse effects on the Group’s financial performance.

Credit riskCredit risk mainly arises on cash and cash equivalents, bank deposits, loans to related parties, as well as in respect of clients, including outstanding receivables and confirmed transactions. Banks and financial institutions are only accepted by highly rated institutions operating in the local market.

The Group has policies in place to ensure that sales of products and services are made to customers with a stable financial position and with an appropriate credit history. The carrying amounts of cash and cash equivalents, short-term bank deposits with a maturity of more than 3 months, loans issued and receivables (including receivables from related parties) net of provision for impairment represent the maximum amount of credit risk exposure.

As at 31 December 2018, the Group had four major trade debtors. As at 31 December 2018 the total amount of receivables from major debtors is US$118 million (2017: three major debtors – US$117 million), or 91.47% of the total trade receivables (2017: 92.86%). These receivables are short-term with a maturity period from 1 to 3 months, which is in compliance with the contractual payment terms. The major part of loans receivable is due from related parties. In respect of other balances there in no history of significant default of counterparties.

Although collection of receivables could be influenced by economic factors, management believes that there is no significant risk of loss to the Group beyond the provisions for impairment of receivables already recorded.

Liquidity riskThe Group’s principal sources of liquidity are: cash generated from operations and corporate credit lines. Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Fluctuations in commodity prices and overall economic uncertainty may have an adverse impact on forecasted cash flows as well as ability to access capital at reasonable pricing. The Group’s approach to managing liquidity is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions. This is achieved by close monitoring of the Group’s key financial resilience indicators including debt, cash generation by producing regular cash forecasts as well as securing adequate cash reserves or bank facilities for meeting future liabilities. Liquidity risk is currently identified and measured through various term forecast and stress forecasts. The Group’s going concern status is discussed further in note 1.

The following tables summarise the Group’s financial assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the tables are the contractual undiscounted cash flows, translated at balance sheet date exchange rates.

At 31 December 2018

In millions of US$ NoteCarrying amount

Total contractual

cash flows

Less than

1 year 1-2 years 2-3 years 3-4 years 4-5 yearsAfter

5 years

Borrowings 17 (3,211) (4,127) (443) (401) (387) (2,645) –

Trade and other payables 20 (128) (128) – – – – –

Other (3) (6) – – – – – (6)

Cash and cash equivalents 138 138 138 – – – – –

Trade and other receivables 15 130 130 130 – – – – –

Loans receivable 3 515 673 6 – – – 667 –

Net position (2,559) (3,320) (443) (401) (387) (1,978) (6)

22. Financial risk management (continued)

At 31 December 2017

In millions of US$ NoteCarrying amount

Total contractual cash flows

Less than

1 year 1-2 years 2-3 years 3-4 years 4-5 yearsAfter

5 years

Borrowings 17 (2,153) (2,882) (225) (288) (319) (286) (1,764) –

Trade and other payables 20 (113) (113) (113) – – – – –

Other (2) (2) – – – – – (2)

Cash and cash equivalents 95 95 95 – – – – –

Trade and other receivables 15 126 126 126 – – – – –

Loans receivable 3 3,199 3,251 3,038 171 9 9 8 16

Net position 1,152 475 2,921 (117) (310) (277) (1,756) 14

Foreign exchange riskThe table below summarises the Group’s exposure to changes in foreign exchange rates at the end of the reporting period:

In millions of US$ US$ EUR RUB

At 31 December 2018

Kazakhstani entities (KZT) (754) (29) (7)

Net monetary liability position (754) (29) (7)

At 31 December 2017

Kazakhstani entities (KZT) 1,018 (25) (3)

Net monetary asset/(liability) position 1,018 (25) (3)

As at 31 December 2018, based on the net monetary position as set out in the previous table, the sensitivity to a reasonable possible change in the US dollar exchange rate of the Group’s profit before tax is as follows: if the US dollar had strengthened/weakened by 20% against KZT with all other variables held constant, the recalculated profit before tax for the year would have been US$189 million higher and US$126 million lower (2017: US$163 million higher/million lower based on 20%), mainly as a result of foreign exchange gains / losses on translation of US dollar / Kazakhstani tenge denominated cash and cash equivalents, trade receivables and loans receivable, and foreign exchange losses/gains on translation of US dollar / Kazakhstani tenge denominated trade payables and borrowings.

Interest rate riskChanges in interest rates affect mainly loans and borrowings changing their fair value (debt liabilities with a fixed interest rate) or future cash flows thereon (debt liabilities with a floating interest rate). When attracting new loans or borrowings, management decides which interest rate – fixed or floating – will be most beneficial for the Group during the expected period until maturity based on its own judgement.

A change in a floating interest rate during the reporting period would not affect the profit or loss for the period since all attracted loans were received with a fixed interest rate. As at 31 December 2018, there was no significant impact of an interest rate risk on financial assets of the Group.

Assets and liabilities with a fixed interest rate expose the Group a risk of changes in the fair value of such assets.

Commodity price riskThe Group sells its products to third parties. The Group is exposed to price risk, since the selling prices for the finished goods depend on general and specific market fluctuations.

The Group is exposed to price risk, since the selling prices for the Group’s ferroalloys depend on changes in world prices, which in their turn depend on general and specific market fluctuations. The Group did not enter into hedging agreements with respect to its exposure to commodity price risk, since, according to the management’s forecasts, the trend of historically high prices for ferroalloys observed prior to the financial crisis, may resume.

The Group is exposed to price risk on equity securities in respect of investments owned by the Group and stated in consolidated balance sheet as investments in equity instruments. However, the Group has estimated that the risk is low, as these investments are investments in subsidiary undertakings of ERG that are not traded in an active market and ERG controls the expected cash flows associated with these investments.

Fluctuations in market prices for metals affect the fair value measurement of provisionally priced trade receivables.



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Capital risk managementThe Group’s objectives in capital management are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to achieve this overall objective, the Group’s capital management, among other things, aims to ensure compliance with financial covenants attached to its interest-bearing borrowings that form part of its capital structure (refer to ‘Going concern’ in note 1).

The Group considers the following balances as a part of its capital management:

In millions of US$

At 31 December

Note 2018 2017

Borrowings 17 3,211 2,153

Equity attributable to owners of the Company (1,191) 2,762

Total capital 2,020 4,915

Fair value of financial instruments

Fair value of financial instruments carried at amortised costThe fair value of financial instruments carried at amortised cost is based on expected cash flows discounted at prevailing interest rates for new instruments with similar credit risk and maturity.

The fair value of loans receivable and borrowings is level 2 measurement. The fair values of other financial assets and liabilities measured at amortised cost approximate their carrying values.

Fair value of financial instruments carried at fair valueIn determining fair value of financial instruments the Group uses its judgment to select a variety of methods and to verify assumptions that are mainly based on market conditions existing at each balance sheet date, as well as obtaining fair value measurements from other parties. As at 31 December 2018 and 31 December 2017, the Group did not hold financial instruments that are included in level 1 of the hierarchy. There were no transfers within level of hierarchy during the year.

Fair value of provisionally priced receivables is level 2 measurement derived from the forecasted quoted commodity prices.

Fair value of investments in equity instruments is level 3 measurement derived from discounted cash flow models using market based revenue as an unobservable input. Although the assumption is a subjective judgement, management believes that the use of acceptable possible alternatives to this assumption will not significantly affect the overall assessment of the instrument.

23. Auditor’s remunerationThe Company (including its subsidiaries) obtained the following services from the Company’s external auditor as set out below:

In millions of US$


2018 2017

Fees payable to the Company’s auditor for the audit of the Parent Company and Consolidated financial statements 0.5 –

Audit of the Company’s subsidiaries 0.5 0.5

All other non-audit services 0.3 0.4

Total 1.3 0.9

24. Commitments

Contractual capital obligationsAs of 31 December 2018, the Group had contractual obligations to purchase of property, plant and equipment in the amount US$102 million (2017: US$70 million).

25. ContingenciesAs at 31 December 2018, the Group had uncertainties in respect of the application and interpretation of the tax laws, including transfer pricing legislation in the Republic of Kazakhstan. The Group believes that additional tax assessment by tax authorities in relation to these contingent exposures is not probable, and the Group would be able to defend its position. Therefore, no material provisions were recorded in these Consolidated financial statements.

26. Reconciliation of non-GAAP measures

In millions of US$ Note


2018 2017

Profit for the year from the continuing operations 535 886

Adjustments for:

Finance cost 9 519 260

Depreciation and amortisation 114 114

Income tax expense 10 101 218

Professional fees and other exceptional litigation costs 3 1

Net operating foreign exchange (gain)/loss 6 (19) 14

Finance income 8 (224) (337)

Other (3) –

Underlying EBITDA – сontinuing operations 1,026 1,156

(Loss)/profit for the year from the discontinued operations (483) 51

Adjustments for:

Loss from disposal of subsidiaries and joint venture 11 513 –

Finance cost 11 25 47

Income tax expense/(benefit) 11 9 (13)

Net operating foreign exchange gain (3) –

Share of profit after tax of joint venture 11 (28) (27)

Finance income 11 (32) (58)

Underlying EBITDA – disсontinued operations 1 –

27. Events after the balance sheet dateIn June 2019 the Company declared a dividend in the amount of US$129 million.



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Company financial statementsStatement of Comprehensive IncomeIN MILLIONS OF US$

NotePeriod ended

31 December 2018

Finance income 5 6

Dividend income 6 153

Finance costs 7 (6)

Impairment of receivables 10 (8)

Profit before income tax 145

Income tax expense 8 -

Profit for the period 145

Total comprehensive income for the period 145

Total comprehensive income attributable to:Equity holders of the Company 145

The notes on page 71 to 78 are an integral part of the financial statements.

Balance SheetIN MILLIONS OF US$

Note As at 31 December 2018

Assets

Non-current assets

Investments in subsidiaries 9 3,913

Loans and other receivables 10 492

Total non-current assets 4,405

Current assets

Loans and other receivables 10 5

Total current assets 5

Total assets 4,410

Equity

Share capital and share premium 11 3,893

Retained earnings 12

Attributable to equity holders of the Company 3,905

Liabilities


Borrowings 13 500

Total non-current liabilities 500

Current liabilities

Borrowings 13 5

Total current liabilities 5

Total liabilities 505

Total liabilities and equity 4,410


These financial statements and accompanying notes were authorised by the board of directors of KCR Investments N.V. (the ‘Directors’) on 20 June 2019.





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Notes to the Financial Statements

1. Principal accounting policies

General informationKCR Investments N.V. (the ‘Company’) is a public limited liability company incorporated and registered under the laws of the Netherlands. The address of the Company’s registered office and domicile is Piet Heinkade 55, 1019 GM Amsterdam, The Netherlands. The Company’s registration number at the Chamber of Commerce is 70882126. The principal activities of the Company are holding investments in and financing of subsidiary undertakings of Eurasian Resources Group S.à r.l. (‘ERG S.à r.l.’).

Basis of preparationThese are the first financial statements of the Company and this is the first time when the Company prepares the financial statements in accordance with the International Financial Reporting Standards (“IFRS”), as adopted by the European Union (‘EU’). These financial statements cover the period from the date of incorporation 12 February 2018 to 31 December 2018.

The Company’s consolidated financial statements are a continuation of the consolidated financial statements of TNC Kazchrome JSC which prepared its consolidated financial statements for the year ended 31 December 2018 in accordance with IFRS. Accordingly, the Company’s consolidated financial statements cover the period 1 January 2018 to 31 December 2018.

The accounting policies used in preparing these financial statements are described below and are based on ‘IFRS’, as adopted by the European Union (‘EU’) and statutory provisions of Part 9 of Book 2 of the Netherlands Civil Code applicable to companies reporting under IFRS. These standards are subject to interpretations issued from time to time by the International Financial Reporting Standards Interpretations Committee (‘IFRS IC’).

These financial statements are also prepared under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value and by revaluation of financial instruments categorised at fair value through profit or loss.

The preparation of the financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also necessitates the Directors to exercise their judgement in the process of applying the Company’s accounting policies. Areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the financial statements are disclosed in note 2.

Functional and presentational currencyThe functional currency of the Company is the US Dollar (‘US$’). The functional currency for the Company is determined as US$ as this is based on the functional currency of the ultimate holding company.

All amounts in these financial statements are presented in millions of US$ unless otherwise stated.

Foreign currencyTransactions in currencies other than the functional currency are translated to the functional currency at the rate of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency rate of exchange ruling at the end of the reporting period. Exchange gains and losses on settlement of foreign currency transactions and the translation of monetary assets and liabilities are taken to the profit or loss.

Going concernThese financial statements were prepared in accordance with IFRS on a basis of going concern principle, which assumes realisation of assets and repayment of obligations in normal course of the business in the foreseeable future.

The board of managers of ERG S.à r.l. has reviewed the liquidity available for the period until 30 June 2020. Throughout the period under review ERG S.à r.l. and its subsidiaries generate sufficient cash flow to maintain a position above minimum working capital requirements. During 2018, commodity prices continued to improve considerably which has given ERG S.à r.l. additional headroom when considering its liquidity.

On 27 June 2018, Standard & Poor’s upgraded the ERG S.à r.l. credit rating to B/B with positive outlook from B-/B with stable outlook. On 3 August 2018, the Moody’s upgraded the ERG S.à r.l. credit rating to B2 with positive outlook from B3 with stable outlook.

ERG S.à r.l. appreciates the dependence of liquidity on commodity prices in our key markets and ability to raise additional funding when required. To ensure adequate liquidity is available to meet contractual obligations, ERG S.à r.l. ensures continuing focus on operational efficiency, working capital improvements, and allocation and spending of capital expenditures budget.

The board of managers of ERG S.à r.l. consider that ERG S.à r.l. can access adequate resources to continue its business operations for the foreseeable future and that the preparation of these financial statements under the going concern basis is appropriate and accordingly ERG S.à r.l. will be able to realise its assets and discharge its liabilities in the normal course of business.

Statement of Changes in EquityIN MILLIONS OF US$

Share capital and share premium

Retained earnings

Total Equity

Balance at 12 February 2018 - - -

Issuance of new shares 6,029 - 6,029

Share premium reduction (2,136) - (2,136)

Profit for the period - 145 145

Total comprehensive income for the period - 145 145

Dividends - (133) (133)

Balance as at 31 December 2018 3,893 12 3,905


Cash Flow StatementIN MILLIONS OF US$

NotePeriod ended

31 December 2018

Cash flow from operating activities

Profit before income tax for the period 145

Adjustments for:

Impairment of receivables from related parties 10 8

Dividend income 6 (153)

-

Dividends received 153

Net cash generated from operating activities 153

Cash flow from investing activities

Loans to related parties - granted (500)

Acquisition of subsidiary 9 (6,029)

Proceeds from capital distribution by subsidiary 2,116

Net cash used for investing activities (4,413)

Cash flow from financing activities

Dividends paid (133)

Borrowings from related parties - proceeds 500

Share premium reduction 11 (2,136)

Proceeds from issuance of new shares 11 6,029

Net cash generated from related parties - proceeds 4,260

Net changes in cash and cash equivalents -

Cash and cash equivalents at beginning of period -

Cash and cash equivalents at the end of period -

The notes on page 71 to 78 are an integral part Acquisition of the financial statements.



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2. Critical accounting estimates, assumptions and judgements in applying accounting policies (continued)

(a) Impairment of investmentsAn impairment exists when the carrying value of an asset or cash generating unit (CGU) exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal (FVLCD) calculation is based on available data from binding sales transactions in arm’s length transactions of similar assets or observable market prices less incremental costs for disposing of the asset. The value in use calculation is based primarily on a discounted cash flow (DCF) model. In some cases, an in situ value has been added to the DCF value. The cash flows are derived from the budget for the next five years and do not include restructuring activities that the Company is not yet committed to or significant future investments that will enhance the asset’s performance. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash-inflows and the growth rate used for extrapolation purposes.

The Company assesses at the end of each reporting period whether there is objective evidence that an investment, financial asset or group of financial assets is impaired. An asset or a group of assets is impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the asset or group of assets that can be reliably estimated.

» Commodity prices, which are based on internal forecasts by the management of the Group’s sales and marketing business as well as on forecasts by independent experts. The main sources for inputs into internal forecasts are Bloomberg, CRU, Wood Mackenzie, Platts and Metal Bulletin. These internal forecasts are comparable to the forecasts of industry market researchers;

» Long-term costs are set in line with current operational performance, as adjusted for future inflation rates in countries of operation and, where applicable, the expected movements in key input costs;

» Successful extraction, processing and sale of the reserves and resources in accordance with the quantities described in the report on Ore Reserves and Mineral Resources and companies’ long-term mining plans;

» Compliance with regulations in the area of licensing to ensure maintenance and retention of tenure and permits. The legal system and dispute resolution mechanisms in some countries may be uncertain so that we may be unable to enforce our understanding of our title, permits or other rights. Changes to the laws or their more stringent enforcement or restrictive interpretation could cause additional expenditure to be incurred or impose suspensions of licenses;

» A long-term US inflation rate average of 1.9% per annum and a long-term Kazakhstan inflation rate average of 5.1%, in line with external forecasts;

» In determining the discount rate to be applied to the future cash flows, the post-tax Weighted Average Cost of Capital (‘WACC’) was used, adjusted for the country risk premium for each CGU accordingly. The rate used was 8.75%;

» KZT/USD long term exchange rate used is KZT366.50/US$.

(b) Impairment of receivablesECL is based on the Company’s assessment taking into account CDS rates of comparative companies and the underlying estimated future cash flows of financial instruments.

3. Related parties

In millions of US$ Parent Subsidiaries Total

2018 2018 2018

Finance income 5 6 - 6

Dividend income 6 - 153 153

Finance costs 7 - (6) (6)

Non-current assets

Loans receivable 10 492 - 492

Current assets

Loans receivable 10 5 - 5


Borrowings 13 - (500) (500)

Current liabilities

Borrowings 13 - (5) (5)

1. Principal accounting policies (continued)Going concern (continiued)Based on ERG S.à r.l. conclusion on its ability to continue as a going concern for the foreseeable future and forecasts of the future operational activities of the Company, the management of the Company considers that the Company has access to adequate resources to continue its operations in its current capacity for the foreseeable future and that the preparation of these the financial statements under a going concern basis is appropriate and accordingly it will be able to realise its assets and discharge its liabilities in the normal course of business.

Other incomeOther income includes dividends received from subsidiaries. Dividend income is recognised in the profit or loss when the right to receive those dividends is established

Investments in subsidiariesInvestments in subsidiaries are stated at cost less any impairment.

Cash and cash equivalentsCash and cash equivalents comprise bank balances. All cash is at the free disposal of the Company.

Loans and other receivablesLoans and other receivables are recognised initially at fair value and subsequently carried at amortised cost using the effective interest method less provision for impairment.

ImpairmentThe Company recognises an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss, together with loan commitments and financial guarantee contracts. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL).

Share capital and share premiumOrdinary shares and share premium are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction from the proceeds.

Income taxFor corporate income tax purposes, the Company and other ERG S.à r.l. consolidated group (‘the Group’) companies form a fiscal unity. Pursuant to the Collection of State Taxes Act, these companies are severally and jointly liable for the tax payable by the combination.

In the financial statements of each Group company part of the fiscal unity, tax expenses are calculated on the basis of the commercial result realised by the company. The Company and Group companies settle these expenses through their intercompany (current) financial statements.

BorrowingsBorrowings are initially recorded at fair value less any directly attributable transaction costs. Borrowings are subsequently measures at amortised cost using the effective interest method. Amortised cost is calculated by taking into account any issue costs and any discount or premium on settlement.

Dividends Dividends are recognized as liabilities and are deducted from the amount of capital at the end of the reporting period only if they were declared before the end of the reporting period.

Information about dividends is disclosed in the financial statements if they were recommended before the end of the reporting period, and also recommended or declared after the end of the reporting period, but before the date of approval of the financial statements for issue.

Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they have been approved before or on the balance sheet date. Dividends are disclosed when they have been proposed before the balance sheet date or when declared after the balance sheet date, but before the financial statements are authorised for issue.

2. Critical accounting estimates, assumptions and judgements in applying accounting policiesIn the application of the Company’s accounting policies, which are described in note 1, the Directors make judgements, estimates and assumptions about carrying amounts of assets and liabilities that are not readily apparent from other sources. These estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.



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8. Income tax expense

In millions of US$ Period ended

31 December 2018

Tax charge reconciliation

Operating profit before income tax 145

Notional tax charge at 25% 36

Effects of:

Non-taxable income (38)

Non-deductible expenses 2

Income tax expense for the period -

The Company is individually subject to Dutch corporate taxation during the 2018 financial year. As at 31 December 2018, the Company has not recognised potential deferred tax assets in respect of tax losses on the basis of insufficient evidence of taxable profits being available against which the deferred tax may be utilised. The unrecognised deferred tax asset will be recognised in periods in which it becomes probable that losses will be utilised against taxable profits.

Based on Dutch corporate tax legislation, the 2018 corporate tax loss of the Company amounting to US$431 thousand is available for utilization until the end of the financial year 2027 (i.e. no expiration for a total of 9 consecutive financial years).

9. Investments in subsidiariesAs at 31 December 2018, investments in subsidiaries consisted of the following:

Investee

As at 31 December 2018

Country of of Principal Ownership Principal activities Ownership, %

KCR International B.V. Netherlands Holding company 100

Movements in the carrying value of the investments in subsidiary are set out in the following table:

In millions of US$ 2018

Carrying value at 12 February -

Contribution in cash acquisitions 6,029

Decrease (2,116)

As at 31 December 2018 3,913

In February 2018, the Company incorporated a subsidiary with a total of 100,000 ordinary shares with a par value of US$1 per share. The Company invested into a subsidiary for a total consideration of US$6,029 million.

In September – December 2018, a subsidiary of the Company repaid the share premium, which was deducted from the cost of investment for an amount of US$2,116 million. The ordinary shareholding of 100% remained the same. These proceeds were used by the Company to return its own share premium to its parent for the amount of US$2,136 million.

10. Loans and other receivables

In millions of US$ Note As at 31 December 2018

Non-current

Loans receivable from related parties 3 492

Total non-current receivables 492

Current

Loans receivable from related parties 3 5

Total current receivables 5

Total receivables 497

3. Related parties (continued)

ParentLoans receivable of US$497 million after an expected credit loss of US$8 million, bearing interest at 5.97% and are repayable on 20 September 2023 (with an automatic renewal clause after this date). The receivable balance is pledged as a security for the Group’s outstanding debt.

SubsidiariesBorrowings of US$505 million, bearing interest at 5.96% and are repayable on 20 September 2023 (with an automatic renewal clause after this date).In February 2018, the Company incorporated a subsidiary. Refer to note 9 for further details.

Directors’ remunerationThe remuneration paid to Directors in 2018 was US$nil.

Key management personnel remunerationKey management personnel (‘KMP’) are those persons having authority and responsibility for planning, directing and controlling the activities of the Company, directly or indirectly. For the period ending 31 December 2018, the allocation made, including amount paid by other Group companies under separate employment contract but not recharged, for KMP services provided to the Company was US$106 thousand.

Immediate parent entity and ultimate parent entityThe immediate parent entity of the Company is KCR Holding B.V. incorporated in the Netherlands.

The ultimate parent entity and controlling party is ERG S.à r.l. incorporated in Luxembourg.

4. Auditor’s feeThe audit fee payable for the audit of the consolidated and stand alone financial statements of the Company for 2018 amounted to US$109 thousand. Other fees from Dutch or foreign-based accounting firms were recognised in relation to the audit of the 2018 financial statements or other services amounted to US$312 thousand.

5. Finance income

In millions of US$ NotePeriod ended

31 December 2018

Interest income on loans to related parties 3 6

Total finance income 6

6. Dividend income

In millions of US$ NotePeriod ended 31 December 2018

Dividends received from related parties 3 153

Total dividend income 153

7. Finance costs

In millions of US$ NotePeriod ended

31 December 2018

Interest expense on loans from related parties 3 6

Total finance costs 6



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13. Borrowings (continued)Analysis of changes in borrowings is as follows:


At 12 February -

Cash movements 500

Other non-cash movements 5

As at 31 December 2018 505

14. Financial risk management Financial risk management is the responsibility of the Company and the Company’s ultimate parent entity, ERG S.à r.l.

Liquidity riskLiquidity risk is the risk that the company will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Company considers liquidity risk to be minimal because the Company has sufficient means to fulfil its obligations. The following table summarise the Company’s financial assets and liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table below are the contractual undiscounted cash flows.

Non-derivative financial assets and liabilities

In millions of US$

As at 31 December 2018

Carrying amount

Total contractual

undiscounted cash flows

Less than 1 year

Between 1 and 5 years After 5 years

Borrowings (505) (648) (5) (643) -

Loans and other receivables 497 648 5 643 -

Net position (8) - - - -

Credit riskCredit risk mainly arises on loans to related parties. The Company has internal policies in place, which insure that the intercompany positions are settled, according to the contractual arrangements.

In millions of US$ As at 31 December 2018

Loans and other receivables 497

Total maximum credit exposure 497

Capital risk managementCapital risk is managed at the ultimate parent entity level for Group companies. The Company’s objectives when managing capital are to safeguard the Company’s ability to continue as a going concern in order to provide returns to shareholders and benefits for other stakeholders through the optimization of the debt and equity balance.

The capital structure of the Company consists of non-current borrowings and equity.

Market riskThe Company’s activities expose it primarily to financial risks of changes in foreign currency exchange and interest rates risks.

Foreign currency riskThe Company’s foreign currency exposure arises from monetary items denominated in foreign currencies. These include cash and cash equivalents.

Interest rate riskThe Company does not have a material exposure to interest rate risk. Loans and receivables are fixed rate bearing.

10. Loans and other receivables (continued)Movements in the Company’s provision for impairment of loans and other receivables are as follows (a 12-month ECL):


As at 12 February -

Provision for charge 8

As at 31 December 2018 8

11. Share capital and share premium

Number of shares (issued and fully paid)

Share PremiumIn millions of US$

As at 12 February 2018 - -

Share premium contribution 100,000 6,029

Share premium reduction - (2,136)

As at 31 December 2018 100,000 3,893

The total number of authorised ordinary shares of the Company is 500,000. The issued share capital as at 31 December 2018 is 100,000 ordinary shares with a par value of EUR1 each and have been issued and fully paid up. The Company made a share premium reduction of US$2,136 million in line with the decision of the board of Directors and the remaining share premium is US$3,893 million.

DividendsFor the period ended 31 December 2018, a dividend of US$133 million (US$1,330 per share) was declared to shareholders.

12. Earnings per share

2018

Income attributable to KCR Investment N.V. shareholders 145,000,000

Average number of shares used as the basis for determining: 100,000

Basic earnings per share 1,450

Diluted earnings per share 1,450

Basic earnings per share and diluted earnings per share are calculated by dividing the income attributable to the Company for the period by the shares outstanding during the period.

13. Borrowings

In millions of US$ NoteAs at 31

December 2018

Non-current

Borrowings - related party 3 500

Total non-current borrowings 500

Current

Borrowings - related party 3 5

Total current borrowings 5

Total borrowings 505



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OTHER INFORMATION

Other InformationProfit appropriation according to the Articles of AssociationAccording to article 18 of the Articles of Association of the Company, the general meeting of shareholders may determine the allocation of profits accrued in a financial period, subject to limitations pursuant to the Articles of Association of the Company and subject to statutory limitations.

DirectorsThe Directors in office during the period and up to the date of signing the financial statements are those listed below:

ENRC Management (UK) Limited

Eurasian Resources Group Management B.V.


Fair valueAs at 31 December 2018, the Company did not hold financial instruments that are included in Level 1, 2 or 3 of the hierarchy.

The fair value of financial instruments carried at amortised cost are based upon expected cash flows discounted at prevailing interest rates for new instruments with similar credit risk and maturity.

The fair value of the financial instruments carried at amortised costs approximate their carrying amount.

15. Proposed appropriation of the 2018 result A proposal will be put to the general meeting of shareholders to add the US$12 million profit for the period to the retained earnings.

16. Subsequent eventsIn May 2019 a subsidiary of Company declared a dividend to the Company in the amount up to US$129 million. In June 2019 the Company declared a dividend in the amount of US$129 million




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PF2SHTWXADUW-792422970-64

PricewaterhouseCoopers Accountants N.V., Fascinatio Boulevard 350, 3065 WB Rotterdam, P.O. Box 8800, 3009 AV Rotterdam, the NetherlandsT: +31 (0) 88 792 00 10, F: +31 (0) 88 792 95 33, www.pwc.nl

‘PwC’ is the brand under which PricewaterhouseCoopers Accountants N.V. (Chamber of Commerce 34180285), PricewaterhouseCoopers Belastingadviseurs N.V. (Chamber of Commerce 34180284), PricewaterhouseCoopers Advisory N.V. (Chamber of Commerce 34180287), PricewaterhouseCoopers Compliance Services B.V. (Chamber of Commerce 51414406), PricewaterhouseCoopers Pensions, Actuarial & Insurance Services B.V. (Chamber of Commerce 54226368), PricewaterhouseCoopers B.V. (Chamber of Commerce 34180289) and other companies operate and provide services. These services are governed by General Terms and Conditions (‘algemene voorwaarden’), which include provisions regarding our liability. Purchases by these companies are governed by General Terms and Conditions of Purchase (‘algemene inkoopvoorwaarden’). At www.pwc.nl more detailed information on these companies is available, including these General Terms and Conditions and the General Terms and Conditions of Purchase, which have also been filed at the Amsterdam Chamber of Commerce.

Independent auditor’s reportFinanci al Statements31 December 20181 Januar y 2018KCR Investments N.V.Control eGoedkeurend31048672A003KVKKvk N ummer uit DB ( nog te doen)Create SBR Extensi on1.0Rotterdam20 June 2019

To: the general meeting of KCR Investments N.V.

Report on the financial statements 2018Our opinionIn our opinion, KCR Investments N.V.’s financial statements give a true and fair view of the financial position of the Company and the Group as at 31 December 2018, and of its result and its cash flows for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union (EU-IFRS) and with Part 9 of Book 2 of the Dutch Civil Code.

What we have auditedWe have audited the accompanying financial statements 2018 of KCR Investments N.V., Amsterdam (‘the Company’). The financial statements include the consolidated financial statements of KCR Investments N.V. together with its subsidiaries (‘the Group’) and the company financial statements.

The consolidated financial statements comprise:• the consolidated balance sheet as at 31 December 2018;• the following statements for year ended 2018: the consolidated income statement, consolidated

statement of comprehensive income, consolidated statement of changes in equity and consolidated cash flow statement; and

• the notes, comprising significant accounting policies and other explanatory information.

The company financial statements comprise:• the balance sheet as at 31 December 2018;• the following statements for the period from 12 February 2018 to 31 December 2018:

comprehensive income, statement of changes in equity and cash flow statement;• the notes, comprising the accounting policies applied and other explanatory information.

The financial reporting framework applied in the preparation of the financial statements is EU-IFRS and the relevant provisions of Part 9 of Book 2 of the Dutch Civil Code.

The basis for our opinionWe conducted our audit in accordance with Dutch law, including the Dutch Standards on Auditing. We have further described our responsibilities under those standards in the section ‘Our responsibilities for the audit of the financial statements’ of our report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

KCR Investments N.V. - PF2SHTWXADUW-792422970-64

Page 2 of 4

IndependenceWe are independent of KCR Investments N.V. in accordance with the ‘Verordening inzake de onafhankelijkheid van accountants bij assuranceopdrachten’ (ViO – Code of Ethics for Professional Accountants, a regulation with respect to independence) and other relevant independence requirements in the Netherlands. Furthermore, we have complied with the ‘Verordening gedrags- en beroepsregels accountants’ (VGBA – Code of Ethics for Professional Accountants, a regulation with respect to rules of professional conduct).

Report on the other information included in the annual reportIn addition to the financial statements and our auditor’s report thereon, the annual report contains other information that consists of:• the directors’ report;• the other information pursuant to Part 9 of Book 2 of the Dutch Civil Code.

Based on the procedures performed as set out below, we conclude that the other information:• is consistent with the financial statements and does not contain material misstatements;• contains the information that is required by Part 9 of Book 2 of the Dutch Civil Code.

We have read the other information. Based on our knowledge and understanding obtained in our audit of the financial statements or otherwise, we have considered whether the other information contains material misstatements.

By performing our procedures, we comply with the requirements of Part 9 of Book 2 of the Dutch Civil Code and the Dutch Standard 720. The scope of such procedures was substantially less than the scope of those performed in our audit of the financial statements.

The directors are responsible for the preparation of the other information, including the directors’ report and the other information in accordance with Part 9 of Book 2 of the Dutch Civil Code.

Responsibilities for the financial statements and the auditResponsibilities of the directorsThe directors are responsible for:• the preparation and fair presentation of the financial statements in accordance with EU-IFRS

and with Part 9 of Book 2 of the Dutch Civil Code; and for• such internal control as the directors determine is necessary to enable the preparation of the

financial statements that are free from material misstatement, whether due to fraud or error.

As part of the preparation of the financial statements, the directors are responsible for assessing the Company’s ability to continue as a going-concern. Based on the financial reporting frameworks mentioned, the directors should prepare the financial statements using the going-concern basis of accounting unless the directors either intend to liquidate the company or to cease operations, or haveno realistic alternative but to do so. The directors should disclose events and circumstances that may cast significant doubt on the Company’s ability to continue as a going-concern in the financial statements.


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Appendix to our auditor’s report on the financial statements 2018 of KCR Investments N.V.In addition to what is included in our auditor’s report, we have further set out in this appendix our responsibilities for the audit of the financial statements and explained what an audit involves.

The auditor’s responsibilities for the audit of the financial statementsWe have exercised professional judgement and have maintained professional scepticism throughout the audit in accordance with Dutch Standards on Auditing, ethical requirements and independence requirements. Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Our audit consisted, among other things of the following:• Identifying and assessing the risks of material misstatement of the financial statements, whether

due to fraud or error, designing and performing audit procedures responsive to those risks, and obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the intentional override of internal control.

• Obtaining an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control.

• Evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by the directors.

• Concluding on the appropriateness of the directors’ use of the going-concern basis of accounting and based on the audit evidence obtained, concluding whether a material uncertainty exists related to events and/or conditions that may cast significant doubt on the Company’s ability to continue as a going-concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report and are made in the context of our opinion on the financial statements as a whole. However, future events or conditions may cause the company to cease to continue as a going-concern.

• Evaluating the overall presentation, structure and content of the financial statements, including the disclosures, and evaluating whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

Considering our ultimate responsibility for the opinion on the consolidated financial statements, we are responsible for the direction, supervision and performance of the group audit. In this context, we have determined the nature and extent of the audit procedures for components of the Group to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole. Determining factors are the geographic structure of the Group, the significance and/or risk profile of group entities or activities, the accounting processes and controls, and the industry in which the Group operates. On this basis, we selected group entities for which an audit or review of financial information or specific balances was considered necessary.

We communicate with the directors regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.


Page 3 of 4

Our responsibilities for the audit of the financial statementsOur responsibility is to plan and perform an audit engagement in a manner that allows us to obtain sufficient and appropriate audit evidence to provide a basis for our opinion. Our audit opinion aims to provide reasonable assurance about whether the financial statements are free from material misstatement. Reasonable assurance is a high but not absolute level of assurance, which makes it possible that we may not detect all misstatements. Misstatements may arise due to fraud or error. They are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.

Materiality affects the nature, timing and extent of our audit procedures and the evaluation of the effect of identified misstatements on our opinion.

A more detailed description of our responsibilities is set out in the appendix to our report.

Rotterdam, 20 June 2019PricewaterhouseCoopers Accountants N.V.

Original has been signed by H. Laros RA