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Shubarkol Komir JSC
2018 Annual Report
28 June 2019
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CONTENTS 1. Message from the Management ................................................................................................................... 4
Message from the Chairman of the Board of Directors ............................................................................. 4
President's Address ......................................................................................................................................... 5
2. About the Company ........................................................................................................................................ 6
General Description ......................................................................................................................................... 6
Company Profile............................................................................................................................................... 6
Products and Markets ..................................................................................................................................... 7
Key Indicators ................................................................................................................................................... 8
3. Market Overview .............................................................................................................................................. 9
Macroeconomics .............................................................................................................................................. 9
Demand and Supply ........................................................................................................................................ 9
Prices ................................................................................................................................................................. 9
Mining in the Republic of Kazakhstan .......................................................................................................... 9
4. Strategy ........................................................................................................................................................... 11
5. Assets and Results ....................................................................................................................................... 12
Operation Model............................................................................................................................................. 12
Reserves and Resources ............................................................................................................................. 13
Mining and Processing .................................................................................................................................. 14
Sales ................................................................................................................................................................ 14
6. Financial Statement ...................................................................................................................................... 16
Reporting Principles ...................................................................................................................................... 16
Profits and Losses Report ............................................................................................................................ 16
Revenue .......................................................................................................................................................... 16
Cost of Sales .................................................................................................................................................. 17
General and Administrative Expenses ....................................................................................................... 17
Capital Expenditures ..................................................................................................................................... 18
7. Risk Management ......................................................................................................................................... 19
Risk Management System ........................................................................................................................... 19
Key Risks and their Management ............................................................................................................... 19
8. Sustainability Review .................................................................................................................................... 21
Staff Development ......................................................................................................................................... 21
Environmental Protection ............................................................................................................................. 21
Safety ............................................................................................................................................................... 22
Community Participation ............................................................................................................................... 23
9. Corporate Governance ................................................................................................................................. 24
Share Capital and Shareholders ................................................................................................................. 25
Subsidiaries of the Company ....................................................................................................................... 25
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Organisational Structure ............................................................................................................................... 26
Management Structure ................................................................................................................................. 26
Remuneration ................................................................................................................................................. 27
Dividend Information ..................................................................................................................................... 27
Report on the Company’s Compliance with the provisions of the Company's Corporate Governance Code................................................................................................................................................................. 27
Data Reliability Statement ............................................................................................................................ 27
10. Financial Statements .................................................................................................................................. 28
Report by Independent Auditor .................................................................................................................... 28
Consolidated Profit and Loss Report .......................................................................................................... 28
Consolidated Report on Total Profit ............................................................................................................ 28
Consolidated Accounting Balance .............................................................................................................. 28
Consolidated Statement on Cash Flows .................................................................................................... 28
Consolidated Statement of Changes in Equity ......................................................................................... 28
Notes on Consolidated Financial Statements ........................................................................................... 28
Annexes............................................................................................................................................................... 29
Annex 1: Board of Directors ......................................................................................................................... 29
Annex 2: Management Board ...................................................................................................................... 30
Annex 3: Glossary ......................................................................................................................................... 31
Annex 4: Contacts ......................................................................................................................................... 33
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1. MESSAGE FROM THE MANAGEMENT
MESSAGE FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS
Dear investors, partners and colleagues,
I am pleased to present the 2018 Annual Report of Shubarkol Komir JSC, which details both the main production and financial performance of the Company and the results of its sustainable development activities. The increase in demand for coal and semi-coke products in 2018, as well as their relatively high market price and stability (where the average price for coal was about 5,847.50 tenge), had a positive effect on the Company’s sales volumes and revenues. Production volumes in 2018 increased by 10.9% to 11.6 million tonnes (2017: 10.6 million tonnes). This was due to our increased fleet of dump trucks as well as the replacement of old excavators with new, more efficient ones. The principles of sustainable development are integrated into the Company’s business strategy and are reflected in its daily activities. The Company strives to minimise its negative impact on the environment, to ensure high standards of safety in the workplace and to build good relationships with all its stakeholders. The Company implements a number of projects aimed at supporting the local population and improving their living conditions. Every year, the Company invests in the development of infrastructure in the regions in which it operates, as well as supporting education, culture and sports. The Company also supports local employment through the expansion activities it has undertaken over the past few years. I am confident about the Company’s future. Its continued focus on short- and medium-term growth in supplying coal to large metallurgical companies, both in the Republic of Kazakhstan and abroad, will help the Company maintain a strong and competitive market position.
Shakhazhanov Serik Karimzhanovich
Chairman of the Board of Directors
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PRESIDENT'S ADDRESS
In 2018, Shubarkol Komir JSC continued to increase its production capacity and to focus its efforts on optimising its production processes and expanding its resource base. The Company’s revenue increased to 124.9 billion tenge in 2018 (2017: 88.3 billion tenge). This growth was driven by an increase in sales volumes and sale prices, as well as a rise in the usage of the Company’s infrastructure by third parties. Owing to the high-risk nature of the mining sector, the Company continues to reinforce the importance of protecting the health and safety of its workforce and of minimising the environmental impact of its operations. The Company’s achievements could not have been realised without the competency and commitment of its employees, who the Company considers to be its core asset. The Company continuously seeks to identify opportunities to improve its employees’ welfare. The total number of employees across the Company and its subsidiaries at the end of 2018 was 3,669 people. Staff turnover decreased to 12% in 2018, compared to 15% in 2017. I am happy to report that in 2018 there were no fatal accidents. The Company is committed to maintaining this record and ensuring it provides a safe and injury-free working environment across its operations. The Company has implemented a health, safety and environmental management system that complies with the international standard OHSAS 18001: 2007 for occupational health and safety, and the international standard ISO 14001: 2015 for environmental management. The Company regularly audits its quality management and health, safety and environmental management systems. The Company maintains the statutory ‘Declarations of Industrial Safety’ across its production sites, which are reviewed and certified by an external party. The Company continues to take measures to ensure its future success and has plans to increase production, optimisie efficiency and maximise revenue in 2019.
Andrey Aleksandrovich Safonov
President of Shubarkol Komir JSC
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2. ABOUT THE COMPANY
GENERAL DESCRIPTION
Shubarkol Komir JSC (the ‘Company’) and its subsidiaries are engaged in the extraction, processing and sale of coal and semi-coke, as well as haulage and shipping operations within and outside the Republic of Kazakhstan. The Company is integrated in the Eurasian Resources Group S.à.r.l (‘ERG’), a leading producer of natural resources with integrated mining, processing, energy, logistics and marketing operations. The Company operates the Shubarkol Mine, which was first developed in 1985. Since then, the Company has mined more than 164.7 million tonnes of coal.
Year Key milestone event Production volume, million tonnes
1985 Development of the Shubarkol Mine
1996 Establishment of Shubarkol Mine JSC
1999 - 0.84
2000 Integration of Shubarkol Mine JSC with the Eurasian Financial and Industrial Company
2000-2002 Investment of over one billion tenge for the development and improvement of the Shubarkol Mine
2002 Establishment of Shubarkol Komir JSC through a merger of Shubarkol Mine JSC and Shubarkol Loading and Transport Directorate OJSC
4.7
2016 - 8.7
2017 - 10.5
2018 Listing of Shubarkol Komir JSC’s ordinary and preferred shares on the Kazakhstan Stock Exchange JSC
11.6
COMPANY PROFILE
The Shubarkol Mine (the ‘mine’) is an asymmetrical trough, 15km long and 6.5km wide. It consists of two coal mines, the Central and Western mines, where mining takes place using an open-cast method. The mine is located in the Nura district of the Karaganda region. The closest major settlement is the city of Zhezkazgan, located 150 km south-west of the mine. The Karaganda-Zhezkazgan railway passes 110 km south of the field. The nearest train station is Kyzyl-Zhar.
The Company is equipped with an extensive fleet of mining excavators and dump trucks to aid the transportation of coal and overburden after controlled blasting processes are undertaken.
More information on the Company's production chain, including a description of the raw material transportation process, is provided in section 5.
1. The Company has achieved one of the highest levels of production amongst open-cast coal mining enterprises in the Commonwealth of Independent States (CIS).
2. The high quality and low ash content of Shubarkol coal provides consumers with several advantages: a. Lower quantities are needed, plus transportation and storage costs are reduced;
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b. Reduced quantities of ash and slag waste are produced, and therefore costs to transport and
store these are also reduced;
c. Reduced wear and tear of equipment;
d. Reduced emissions of harmful substances are released into the atmosphere.
PRODUCTS AND MARKETS Products
Coal
The Company produces a D-grade, high quality, and long-flame coal that has better environmental performance
compared to other coal types. It is characterised by a:
low ash content
high calorific value at its lowest burning temperature
The Company has very limited competition in Kazakhstan for D-grade coal.
The Company has three main D-grade coal products:
1) Low-ash coal: – this has an ash content of 7% and is produced by the selective development of coal seams.
It is mainly used for heating purposes by various industries and also for residential heating;
2) Coking coal: this has an ash content of 7% and a low iron oxide and aluminum content in the ash residue,
due to additional processing. It is used in the steel industry and in the production of technical silicon;
3) Thermal coal: this has an ash content of 10-16%. It is used by power plants for electricity generation and
used as an energy source by the cement industry.
Semi-coke
Semi-coke is a medium temperature coke that is produced by the Company’s semi-coke production plant. This
product is used mainly in the metallurgical industry as a reducing agent. The Company’s customers have noted
the competitive price of its products, as well as their high and stable quality.
Domestic market
Coal
The Company supplies coal to eleven out of Kazakhstan’s fourteen regions, including households in all major
cities.
Semi-coke
The Company supplies semi-coke to various metallurgical enterprises within Kazakhstan. These include:
JSC Sokolov-Sarbay Mining and Processing Production Association, the leading iron ore mining
company in Kazakhstan by production volume;
Aluminum of Kazakhstan, the only enterprise in the country to produce alumina (the raw material in the
production of aluminum);
TNC Kazchrome JSC, the world's leading producer of ferroalloys (in terms of the quality of its chrome
ore); as well as third-party manufacturers of non-ferrous metals.
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Export markets
The Company currently exports coal to markets in north-western Europe (Switzerland and Great Britain) and in
the CIS, including Kyrgyzstan, Uzbekistan, Belarus and the Ukraine. In 2018, pilot coal supplies were sent to
new and promising markets in Poland and China, with regular deliveries planned to begin in 2019. The main
ports for exporting the Company’s coal supplies are in the Baltic.
KEY INDICATORS
Unit of
measurement
Performance
2016 2017 2018
Operating Performance
Production
Coal
- mining ‘000 tonnes 8,672 10,455 11,598
- overburden ‘000 m3 25,835 30,082 31,386
Semi-coke ‘000 tonnes 190 206 186
Volume of sales
Coal ‘000 tonnes 8,235 10,062 11,144
Special coke ‘000 tonnes 207 193 188
Consolidated Financial Performance
Income ‘000 tenge 69,734,749 88,326,960 124,955,805
Capital expenditures 000 tenge 3,325,632 6,554,819 7,513,210
In 2018, revenue amounted to 125 billion tenge (an increase of 79% on 2016 and 41% on 2017). This growth
was driven by an increase in coal sales (by 2.9 million tonnes since 2016 and by 1.1 million tonnes since 2017),
and an increase in the price of coal and semi-coke.
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3. MARKET OVERVIEW
MACROECONOMICS
In 2018, global coal markets remained favourable for producers. The average annual quotation for the European benchmark API 21 in 2018 was US$92 / tonne, 10% higher than the average value in 2017 and 53% higher than the average value in 2016. Prices for Australian coal in the Asian market increased even more – by 22% to US$107 / tonne in 2018. Global demand for coal has remained high due to the continued development of Asian countries, rising industrialisation, as well as significant deviations from normal seasonal temperatures, with colder winters2 in Asia resulting in higher demand for heating. However, there were also occassional supply interruptions in 2018. China, the largest producer and consumer of coal in the world, struggled to increase production to meet domestic demand; only 3.55 billion tonnes of the planned 3.70 billion tonnes were mined. India had similar challenges in meeting demand, while Colombia, one of the largest exporters of coal, reduced its shipments due to heavy rainfall. Whilst overall global demand for coal remained high, coal demand in the European Union (EU) was slightly lower than demand in 2017, due to relatively warmer winters3. Nonetheless, coal exports to the EU in 2018 exceeded expectations. Due to falling demand in Europe and, conversely, growth in Asia, the gap in prices between these regions increased to US$15 / tonne in 2018, and continued to increase in early 2019.
DEMAND AND SUPPLY
Global demand for coal will continue to remain stable owing to its predominant use for electricity generation, where approximately 80% of coal is currently consumed. According to external analysis, global demand for coal will remain stable in the near future due to a growing demand for electricity in both deleveloping countries, as a result of increased industrilaisation – and in developed countries, as a result of the introduction of electric vehicles. However, the growing demand for electricity is not expected to lead to an increase in coal production as it will be counterbalanced by the increasing demand for renewable resources. The highest consumption of coal is in the industrially developed and developing markets of the Asia-Pacific region (which consumed 71.7% of world production in 2017), in particular China (50.7%) and India (11.4%). Other major consumers include North America (10.8%) and the CIS, including Russia and Kazakhstan (7.2%). In the medium term, coal production in the Russian Federation is expected to grow to meet demand in the Asia-Pacific region. The Russian Federation government has launched a programme to expand the Baikal-Amur and Trans-Siberian highways, as well as to construct new trans-shipment facilities in the Far East.
PRICES
In 2018, global coal prices were consistently high (US$ 92 / tonne on the basis of CIF ARA). There was a seasonal price reduction between the end of 2018 and beginning of 2019 due to relatively warmer winters in Europe, resulting in lower demand for heating.
MINING IN THE REPUBLIC OF KAZAKHSTAN
1 API 2 is the benchmark price reference for coal imported to northwest Europe and is based on the cost, insurance and freigh (CIF) delivery of thermal coal (6,000 kcal/kg NAR) at the Amsterdam-Rotterdam-Antwerp (ARA) area. 2 Compared to average historical temperatures for the winter season. 3 Compared to average historical temperatures for the winter season.
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In 2018, the Company was the third-largest coal producer in Kazakhstan. Of the 112.5 million tonnes of coal
mined in Kazkahstan, Shubarkol produced 11.6 million tonnes or 10.3% of the country’s coal production.
In 2018, coal production in the Republic of Kazakhstan , reached 112.5 million tonnes, an increase of 6% compared with 2017. The largest increase was in the extraction of D-grade coal (+3.2 million tonnes) as well as other thermal coal types (+2.6 million tonnes).
The increase in production was due partly to an increase in the supply of coal from a peer mining company in
the Republic of Kazakhstan, Bogatyr Komir Llc, to the Ekibastuz GRES-1 and 2 power plants which both saw a
rise in the demand for energy. It was also due to an increase in coal shipments from the Vostochny Coal Mine4
to Omsk Thermal Power Plants and ArcelorMitall Temirtau5.
The increase in D-grade coal production was mainly provided by the following companies: Karazhyra llc (+1.3
million tons), Shubarkol Komir JSC (+1.1 million tons) and Shubarkol Premium JSC (+0.9 million tons). The
growth in D-grade coal production is driven by growing demand in export markets: Russia is replacing expensive
grades of high-calorific coal with low-calorific D-grade coal, while supplies to European markets have grown due
to the partial shift in focus of their traditional suppliers towards premium Asian markets.
4 This mine is owned by one of ERG’s subsidiaries. 5 This is the largest steel and mining producer in Kazakhstan.
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4. STRATEGY The Company’s strategy is to provide coal to meet the municipal needs of the population of the Republic of
Kazakhstan, to increase sales volumes to premium markets and to high-end metallurgical companies, and to
further devleop its coal processing and export capabilities.
To implement this strategy, it is necessary to:
Improve business process integration with ERG; and
Maintain long-term business profitability.
The following initiatives are currently being assessed:
1. Increase annual production
The Company has plans to increase annual production of coal and semi-coke to at least 20 million
tonnes, and to identify new end-users including nearby power plants (after successful trial burning), high-
end metallurgical companies, and households in the Russian Federation.
2. Develop the internal and external railway infrastructure
The Company must consider the adequacy of the railway infrastructure that is required to support its
growth, and identify measures to improve it.
This includes the development of reliable forecasts of the volumes of freight traffic along the main routes
used to transport the Company’s coal; the implementation of plans to develop the Company’s two railway
stations, Shubarkol and Arkalyk; and the improvement of the Company’s communication and
coordination efforts with other users of Kazakhstan’s railway infrastructure.
3. Increase semi-coke production and upgrade existing semi-coke production facilities
The Company currently operates a semi-coke production plant that was commissioned in 2006. The
main consumers of this semi-coke are subsidiaries of ERG: TNC Kazchrome JSC (Workshops No. 1, 2
and 6 of the Aksu Ferroalloy Plant) and the Pavlodar Aluminum Plant, which is part of Aluminum of
Kazakhstan JSC.
The Company plans to construct a new semi-coke production plant with a capacity of up to 400,000
tonnes, as well as to upgrade the existing plant. This will help meet the increased demand for high quality
semi-coke at Workshop No. 4 of the Aktobe Ferroalloy Plant at TNK Kazchrome JSC, which is currently
undergoing facility upgrades.
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5. ASSETS AND RESULTS
OPERATION MODEL
Shubarkol Komir JSC
Open pit coal mining with a production capacity of 13 million tonnes of coal and semi-coke
Semi-coke Production Plant
Processing of coal into semi-coke
Coal Sorting Complex 1
Production of 25-100 mm coal fractions used in the production of semi-coke
Power Plants
Acquisition of electricity from third parties
Process Material Suppliers
Acquisition of explosives and blasting agents (for drilling and blasting operations) and acquisition of fuel and lubricant
Sales
Sale to third parties and other ERG companies
Aksu Ferroalloys Plant (for TNK Kazchrome JSC)
Aktobe Ferroalloys Plant (for TNK Kazchrome JSC)
Pavlodar Aluminum Plant (for Aluminum of Kazakhstan JSC)
Central Mine
Production capacity of 7 million tonnes
Western Mine
Production capacity 6 million tonnes
Coal Sorting Complex 2
Production of other coal fractions
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The Company’s railway infrastructure is a megacomplex that includes:
Three freight stations (Porodnaya, Central and Western);
A 188 km network of access roads which includes several connection and loading points;
Power supply devices, alarm systems, semi-automatic block signal transmission and other traffic control devices;
Non-mechanised marshaling yards, railway depots, and locomotive fleet;
Other supporting infrastructure that ensure the functioning of the complex, its devices and facilities. The access road network connects to the national railway infrastructure at two stations, Kyzylzhar and Shubarkol, which are operated by the national company ‘KTZh-Freight Transportation JSC’. The Company provides over 10 other companies with access to its railway infrastructure in the absence of alternative routes. This includes wagon delivery, removing services and shunting services. In 2018, income from these services amounted to 98.9 million tenge.
RESERVES AND RESOURCES
The total coal reserves suitable for open-cast mining at the Shubarkol Mine amount to 967.7 million tonnes (as
of 1 January 2018), with a mining and development period of up to 50 years.
Company’s Resource Base
Coal resource category Quality
Volume (million tonnes)
Ash content Ad (%)
Inherent moisture Ad (%)
Total moisture Ad (%)
Sulphur Ad (%)
Calorific value (kcal/kg)
Coal resources measured
Western Mine 298.7 11.1 6.0 15.3 0.40 5,250
Central Mine (incl. Eastern) 315.4 11.5 6.0 14.5 0.40 5,250
Total measured 614.1 11.3 6.0 14.9 0.40 5,250
Detected coal resources
Western Mine 150.5 11.1 6.0 15.3 0.40 5,250
Central Mine (incl. Eastern) 140.5 11.5 6.0 14.5 0.40 5,250
Total detected 291.0 11.3 6.0 14.9 0.40 5,250
Measured and detected resources
Western Mine 449.2 11.1 6.0 15.3 0.40 5,250
Central Mine (incl. Eastern) 455.9 11.5 6.0 14.5 0.40 5,250
Total measured and detected 905.1 11.3 6.0 14.9 0.40 5,250
Estimated coal resources
Western Mine 14.5 11.1 6.0 15.3 0.40 5,250
Central Mine (incl. Eastern) 48.2 11.5 6.0 14.5 0.40 5,250
Total estimated 62.7 11.4 6.0 14.7 0.40 5,250
Total coal resources
Western Mine 463.7 11.1 6.0 15.3 0.40 5,250
Central Mine (incl. Eastern) 504.1 11.5 6.0 14.5 0.40 5,250
Total 967.7 11.3 6.0 14.9 0.40 5,250 Source: Coal Resources Expert Report prepared by SRK Consulting (UK) Limited. Report is actual for January 1, 2018 Notes: Shubarkol Komir JSC prepares inventory reports for the State Reserves Committee in accordance with the local regulatory requirements of Kazakhstan. SRK company re-classified them as coal resources and reserves in accordance with the terms and definitions in the JORC Code (Australian Institute of Mining and Metallurgy). The JORC Code considers coal resources to be defined as material that has the potential for subsequent cost-effective excavation.
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MINING AND PROCESSING Coal mining
In 2018, the Company achieved its planned annual capacity of 12.79 million tonnes of coal per year. This is the
highest capacity ever produced at the Shubarkol Mine.
The mining technology involves:
using excavators to mine both overburden ledges and coal ledges (the latter either in bulk or selectively);
using dump trucks to transport coal and move rock (including the external and internal overburden).
During the production process, the Company also undertakes a re-excavation process for the materials
transported by the dump trucks.
In addition, a coal crushing and screening unit operates at the mine to ensure the required grades are produced to customer specifications.
Coal production
Coal Unit of measurement
2016 2017 2018 2019
(forecast)
Mining ‘000 tonnes 8,672 10,455 11,598 13,720
Overburden ‘000 m3 25,835 30,082 31,386 37,610
The increase in coal production in 2018 is due to upgrades to the Company’s equipment and due to expanding its fleet of dump trucks. Higher production capacities will help the Company expand into new markets and meet the rising demand for coal. Semi-coke production The Company was one of the first companies in Kazakhstan to undertake deep coal mining and processing when it commenced semi-coke production in 2006. The coke-chemical plant at Sary-Arka Special Coke LLP was built as part of a government programme to reduce imports and promote industrial innovation in Kazakhstan. Semi-coke production
Unit of measurement
2016 2017 2018 2019
(forecast)
Semi-coke ‘000 tonnes 190 206 186 210
The decline in semi-coke production in 2018 was due to cleaning of the circulating water supply pools, during which the plant was shut down for 35 days.
SALES
In 2018, the Company sold 11.1 million tonnes of high-calorific coal, an increase of 10% on 2017 sales. Of this,
supplies to the utility market grew by 13%, to the energy market by 15%, and to the export market by 8%. The
Company also produced more than 188 thousand tonnes of medium-temperature semi-coke.
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High-calorific coal sales by type of consumption, ‘000 tonnes
3 180 3 285 3 735 3 772
975 959 1 105 1 187
4 0805 817
6 3048 357
2016 2017 2018 2019
Бытовые нужды населения РК Энергетические предприятия РК Экспорт
10,06111,144
13,315
8,235
Export Energy companies Domestic population
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6. FINANCIAL STATEMENT
REPORTING PRINCIPLES
The following review presents the trends and major changes associated with the Company’s operating activities and financial performance. The review has been prepared based on the Company’s audited Consolidated financial statements. All financial data and considerations have been drawn up under International Financial Reporting Standards (IFRS) and in line with the accounting policies applied in the preparation of consolidated financial statements for the years ended 31 December 2016, 2017 and 2018. PricewaterhouseCoopers LLP (Kazakhstan) is the Company’s appointed auditor. Audited financial statements with the Auditor’s analysis are given on Section 10. All references to dollars in this report are to US dollars.
PROFITS AND LOSSES REPORT
The table below shows financial information related to the Company's results for 2016-2018:
‘000 tenge 2016 2017 2018 Income 69,734,749 88,326,960 124,955,805 Cost of sales (36,558,251) (47,197,500) (56,718,819) Recovery of impairment loss on fixed assets
20,768,493 - -
Gross profit 53,944,991 41,129,460 68,236 986 Other operating income 2,888,720 2,513,536 4,706,343 Sales costs (240,876) (193,499) (2,105,950) General and administrative expenses (9,234,953) (11,106,039) (14,176,622) Other operating expenses (1,536,235) (1,067,665) (941,542)
Operating profit 45,821,647 31,275,793 55,719,215 Financial income 17,304,312 26,089,770 36,354,143 Financial expenses (17,265,828) (21,755,724) (36,013,143) Investment impairment - (432,308) -
Profit before tax 45,860,131 35,177,531 56,060,215 Income tax expenses (14,120,719) (12,852,781) (9,369,956)
Profit for the year 31,739,412 22,324,750 46,690,259
REVENUE
‘000 tenge
2016 2017 2018
Sales of extracted coal 33,009,451 42,704,191 59,883,573
Operation of wagons and containers 23,064,619 27,352,050 43,700,931 Sales of coke and tar 5,780,405 6,124,697 7,223,344
Income / commission from the sale of purchased coke 2,211,734 5,144,510 5,384,523 Railway services (included in the price of coal) 3,120,561 3,514,327 4,409,135
Forwarding services 1,930,770 1,858,739 2,432,382 Wagon repair services 484,188 1,245,062 1,050,806
Other 133,021 383,384 871,111
Total revenue 69,734,749 88,326,960 124,955,805
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Revenue from product sales increased in 2018 relative to 2016 and 2017 by 79% and 41%, respectively. This increase is due to the growth in volume and prices of sales for finished products. The main share of income is from the sale of mined coal: 47.3% in 2016, 48.3% in 2017, and 50% in 2018.
COST OF SALES
‘000 tenge 2016 2017 2018 Depreciation of property, plant, equipment and intangible assets
6,967,347 9,947,094 11,546,515
Light running of wagons and containers 8,287,493 8,579,875 11,926,406 Materials 5,564,047 6,842,260 8,494,535 Payroll and related costs 6,125,921 6,735,605 9,238,648 Cost of coke purchased for resale 1,797,248 4,620,104 4,920,178 Repair and maintenance expenses 2,508,942 3,218,337 3,347,576 Electricity 977,607 892,150 891,183 Other taxes 1,236,780 700,978 344,277 Insurance 390,559 409,449 427,653 Security 265,332 224,491 428,056 Agency fees - - 173,424 Staff training 149,132 68,061 52,924 Provision for impairment of inventories 381,739 (335,349) 611,900 Changes in finished goods and work in progress 335,489 (387,580) (25,730)
Other 1,570,615 5,682,025 4,341,274
Total cost of sales 36,558,251 47,197,500 56,718,819
The cost of sales increased in 2018 relative to 2016 and 2017 by 55% and 20%, respectively. This growth is due to an increase in expenses for the light running of wagons and containers, payroll and related costs, as well as an increase in the cost of materials.
GENERAL AND ADMINISTRATIVE EXPENSES
‘000 tenge
2016 2017 2018
Payroll and related costs 3,407,054 3,445,515 3,831,313 Management fees 2,335,144 2,894,820 4,350,972 Sponsorship and other financial aid 1,397,047 1,190,635 1,228,885 Consulting and other professional services 564,035 908,510 2,044,886 Taxes other than income tax 125,250 624,463 202,450 Rent expenses 201,238 192,434 232,987 Depreciation of property, plant and equipment 121,519 142,996 743,277 Business travel and representation expenses 163,039 156,269 150,613 Fines and penalties 25,929 141,391 (51,401) Repair and maintenance expenses 118,169 65,192 76,503 Bank charges 41,169 45,595 48,859 Communication expenses 44,168 42,169 65,884 Agency agreement fees - 24,503 666,933 Decrease in provision of impairment of receivables (331,082) (45,501) 32,463 Other 1,022,274 1,277,048 551,998
Total general and administrative expenses 9,234,953 11,106,039 14,176,622
The Company's general and administrative expenses increased in 2018 compared to 2016 and 2017 by 54% and 28%, respectively. This was as a result of an increase in fees for management services, consulting and other professional services, and an increase in agency agreement fees.
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CAPITAL EXPENDITURES
From 2016 to 2018, the Company invested US$51.15 million; this was divided between US$5.07 million for development projects, US$40.49 million for maintenance projects; and US$5.59 million dollars for other projects.
US$ million 2016 2017 2018 Total
Development projects 1.84 1.65 1.58 5.07 New construction 0.58 0.00 0.47 1.05 Production expansion 1.26 1.65 1.11 4.02
Maintenance projects 7.40 17.12 15.98 40.49 Equipment replacement 0.20 6.38 7.66 14.23 Infrastructure development 3.95 1.22 1.83 7.00
Capitalised repair and maintenance costs 2.07 3.99 6.14 12.20
Reconstruction and upgrading 0.00 0.29 0.21 0.50
Implementation of production and management IT systems
1.18 5.24 0.14 6.56
Other projects 0.55 1.11 3.93 5.59
Total capital expenditures 9.79 19.88 21.49 51.15
The main capital expenditures for the period between 2016-2018 include:
The construction of a semi-coke oven gas cleaning system: The purpose of this project was to
recover and clean the gas from tar substances to avoid its release into the atmosphere. The project was
completed in 2016, at a capital expenditure of US$0.58 million.
Increase in production: The purpose of this project, which was initiated in 2015, was to increase coal
production to 10.3 million tonnes per year. Capital expenditure amounted to US$1.26 million in 2016,
US$1.18 million in 2017, and US$0.59 million in 2018.
Increase in production: The purpose of this project, which was initiated in 2017, was to increase coal
production to 11.44 million tonnes per year. Capital expenditure amounted to US$0.47 million in 2017
and US$0.51 million in 2018.
Construction of new semi-coke production plant with capacity of 350 thousand tonnes per year
and upgrade of existing plant: The purpose of this project was to increase production of medium-
temperature coke. Capital expenditures amounted to US$0.47 million in 2018.
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7. RISK MANAGEMENT
RISK MANAGEMENT SYSTEM
The Company’s risk management system provides the basis for the Company to achieve its strategic and operational objectives. The risk management process covers key areas (strategic management, budgeting and investment activities) and all levels of the Company’s activities. The Company’s 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 Company level (Management Board, Board of Directors) and at the ERG Group level (Board of Managers and the Executive Committee). The operational and control functions of risk management are organised in accordance with the following three levels of protection:
First level of protection: operational managers identify and manage risks. Each risk is owned by a specific manager who responds to and addresses the risk quickly and adequately.
Second level of protection: the continuous monitoring of the adequacy, effectiveness and efficiency of controls exercised by the first level of protection using the Company’s control services, e.g. risk management, internal control, compliance, quality management, safety, etc.
Third level of protection: the assessment of the effectiveness of corporate risk management through regular internal and/or external audit.
KEY RISKS AND THEIR MANAGEMENT Key Risks Risk Management Approach
Logistical Risks A potential shortage in high-sided wagons on
the rolling stock market, combined with a limitation in the capacity of the railway infrastructure and ports, may result in the Company’s inability to fulfil transport volume obligations in its customer agreements.
The implementation of a programme to
increase the share of wagons provided by ERG’s Logistics Division for the transportation of Shubarkol’s coal, and therefore reduce the Company’s reliance on Kazakhstan Temir Trans (KTT);
Ongoing efforts to reduce the logistics leg across certain supply routes;
Enhance the efficiency of the Company’s logistics infrastructure to improve the rate of wagon turnover and optimise the logistics processes.
Market Risks
This includes a potential decrease/volatility in coal prices and/or sales volumes, as a result of market volatility, which may affect the Company’s financial performance and cash flow.
Regular monitoring of market prices, global sales volumes and internal inventory levels;
Regular monitoring of market trends and the forecasting of sales volumes and prices;
Ongoing monitoring of the conditions of supply agreements to:
o optimise the logistics routes and sales volumes to enhance profitability;
o inform the Company’s price hedging approach.
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Financial Risks
Risks due to major fluctuations in inflation, devaluation and bank interest rates o The majority of the Company’s products
are sold in foreign currency, while a significant share of the Company’s payments to its suppliers and contractors are in tenge. The Company can therefore incur greater bank interest rate charges and foreign exchange charges.
Seek to manage, where possible, the risk of exchange rate volatility by offsetting cash flows in the same currency;
Develop an appropriate hedging programme if significant foreign currency transactions occur.
Production and Operational Risks
The mining industry is subject to extreme weather conditions. These can contribute to accidents and disasters that may result in death(s) and/or negative environmental impacts, as well as disruption to operations.
Carry out regular assessments of production risks, using third parties, and formulate and implement corrective action plans;
Review and renew property damage insurance contracts and business interruption insurance contracts on an annual basis.
Health, Safety and Security Risks
This includes industrial injuries, negative health impacts or any negative impact to environmentally important areas
Health, safety and security are a priority for the Company o The Company has undertaken
comprehensive improvement programmes across its operations, including the implementation and review of policies and safety standards on a regular basis;
Adherence to international and regional laws and regulations regarding safety and environmental protection.
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8. SUSTAINABILITY REVIEW The Company’s sustainable development objectives include ensuring:
The sustainability of the business as a whole;
The wellbeing of employees;
The wellbeing of local communities;
The efficient management of environmental impacts.
STAFF DEVELOPMENT
The Company is committed to supporting the wellbeing of its employees and their continued professional development. At the same time, the Company provides the conditions to ensure a decent standard of living for its employees through material and non-material incentives.
Staff profile 3,669 people Headcount at the end of the reporting period 41 years Average age of employees 7.7 years Average duration of service 12% Staff turnover In 2018, the Company implemented 64 training programmes at a cost of 260 million tenge. Of these, 11 were
seminars, summits and forums, and 53 were a combination of internal and external training programmes.
In 2018, the Company amended its internal policy on personnel evaluation. Staff assessments will be carried out based on the position and responsibilities held; this opens up additional opportunities for personnel development, as it allows the Company to identify and focus on weaknesses and gaps in staff knowledge. The comprehensive assessment of staff is aimed at evaluating the effectiveness of employees and assessing their potential. The Company works continually to increase wages. The average wage in 2018 increased 28% from the average
paid in 2016.
The Company’s primary trade union is a branch of the Public Coal Worker’s Union, which was founded in 1992.
As of 1 January 2019, the union consists of 2,792 people, including 2,699 active employees and 93 pensioners.
ENVIRONMENTAL PROTECTION
The Company complies with all legislative requirements for environmental protection. Any projects involving modernisation, reconstruction and expansion of production have successfully passed the mandatory statutory approvals and obtained the relevant permits. There are no nature reserves, main surface water bodies or other specially protected natural territories or objects of cultural heritage near the mine. In 2018, there were no significant complaints from regulatory authorities made against the Company in relation to its environmental management practices and impacts.
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The Company maintains a quality management system that has been certified to the ISO 9001:2015
international standard by the German company ‘TUV Thuringen’. In 2017, the Company successfully passed a
re-certification audit for the international standards ISO 9001: 2015, ISO 14001: 2015, and OHSAS 18001: 2007,
and it continues to align its operations with international best practice. In 2018, the first external observational
audit was successfully completed for these standards.
The Company actively participates in environmental protection initiatives, including:
Air quality monitoring and control (emissions cleaning, dust suppression and tree planting);
Water quality monitoring and control (waste water monitoring and treatment);
Waste management (on-time monitoring, waste re-use, sorting and reduction).
In addition, the Company analyses applicable environmental legislation and regulations to improve its compliance on an ongoing basis. Investments in environmental protection, tenge
2016 2017 2018
Protection of water resources 135,877,129
95,734,000 253,943,000
Air quality protection 142,841,989
93,985,000 8,770,000
Waste management 178,263
5,000 5,000
Land recultivation - - -
Other capital and operational expenditure 104,140,048 85,970,000 127,465
Total 383,037,429 275,694,000 262,845,465
SAFETY
Labour protection and industrial safety is one of the Company’s most important priorities. The Company complies with Kazakhstan’s labour protection and safety regulations and monitors compliance across its operations.
Production workers undergo compulsory training, which focuses on relevant health and safety issues related to the activities of workers and measures to prevent accidents.
Over the years, much work has been done to reduce injuries and improve safety at the mines. In 2018, we implemented a new system of behavioural safety audits. This, in combination with other initiatives, allowed the Company to realise zero work-related lost time injuries (LTI) in 2018 and a zero lost time injury frequency rate (LTIFR).
In 2019, the Company plans to implement several safety projects that include: introducing an industrial safety management system, installing in-vehicle monitoring systems, and improving the root cause analysis of hazards across the Company’s activities.
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Lost Time Injury Frequency Rate
COMMUNITY PARTICIPATION
The Company seeks to play an active part in the socio-economic development of local communities and in
maintaining good relationships with its neighbours. The Company has traditionally supported low-income
families in the Kyzylzhar settlement, as well as in the Nurinsky district, providing them with charitable assistance
in the form of free coal rations. In 2018, more than 4,329 tonnes of coal were donated to these families.
In addition, the Company actively participates in charitable events, including events aimed at supporting
orphanages, children without parental care, and large families.
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9. CORPORATE GOVERNANCE Corporate governance at the Company is based on the principles of justice, fairness, responsibility, transparency, professionalism and competence. An effective corporate governance structure assumes respect for the rights and interests of all persons interested in the Company’s activities, and contributes to the success of the Company, including the growth of its market value and the maintenance of financial stability and profitability. The Company’s corporate governance principles constitute the basis for all rules and recommendations contained in the Corporate Governance Code approved by the General Meeting of Shareholders of the Company on 27 December 2006. The fundamental principles of corporate governance are: 1) The protection of the rights and interests of shareholders.
The Company ensures the implementation of the basic rights of shareholders stipulated by the Law of the
Republic of Kazakhstan ‘On Joint Stock Companies’, and ensures the effective participation of shareholders in
making key decisions on corporate governance.
2) The effective management of the Company by the Board of Directors and the executive body.
The activity of the Board of Directors is based on the principle of maximum observance of the interests of
shareholders, as well as the general management of the Company’s activities, and is aimed at increasing the
market value of the Company.
The Board of Directors ensures the effective operation of the risk management system, and controls and
regulates corporate conflicts.
The activities of the Management Board are based on the principle of maximum respect for the interests of
shareholders and are fully accountable to the General Meeting of Shareholders and the Board of Directors of
the Company.
3) Transparent and objective disclosure of information about the activities of the Company
The Company discloses in a timely manner information on the main results, plans and prospects of its activity,
which can significantly affect the property and other rights of shareholders and investors; it also responds in full
and in a timely manner to shareholders' requests within the deadlines specified in the Company’s Charter.
4) Legality and ethics
The Company operates in strict accordance with the laws of the Republic of Kazakhstan, and with the generally
accepted principles of business ethics and with the Company’s internal documents; the latter are based on the
requirements of the legislation and the norms of corporate and business ethics.
5) An effective dividend policy
The Company’s dividend policy is carried out in strict accordance with current legislation in the Republic of
Kazakhstan.
6) An effective personnel policy
Corporate governance at the Company is based on the protection of the rights of employees as stipulated by
the Republic of Kazakhstan’s labour legislation. It aims to develop partnerships between the Company and its
employees to resolve social issues and regulate working conditions, as well as to maintain a favourable and
creative working environment, and help to improve the qualifications of the Company's employees.
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7) Environmental protection
The Company ensures a careful attitude to the environment in the course of its activities.
8) Corporate conflict resolution policy
In the event of conflict, within the Company or with third parties, participants seek to resolve this through
negotiation in order to ensure that both the rights of a shareholder and the Company’s reputation are protected.
If it is not possible to resolve corporate conflicts through negotiations, these should be resolved strictly in
accordance with the legislation of the Republic of Kazakhstan.
In 2018, five General Meetings of Shareholders of the Company and 54 sessions of the Board of Directors were held.
SHARE CAPITAL AND SHAREHOLDERS Share capital and information on all significant equity transactions As of 31 December 2018:
Information about the issue of securities
Total Number of ordinary shares
Number of preferred shares
Number of authorised shares 4,030,000 3,899,581 130,419
Number of shares offered 3,636,886 3,517,859 119,027
Number of shares repurchased by the Company
87 87 0
The nominal value of one share is 1,000 tenge.
In December 2018, the Company’s major shareholder, TNK Kazchrome JSC, sold their ordinary shares in the Company (1,758,886 shares, which amounted to 48.36% of the total shares offered by the Company). These were bought by SHK Eurasian Holding B.V.
The group of shareholders owning 5 or more percent of the Company's shares (as of 31 December 2018) are:
Shareholder name Total number of shares owned
Type of share
Percentage ratio of the number of shares owned to the total number of shared offered by Company
SHK Eurasian Holding B.V. 1,758,886 ordinary 48.36%
EEC JSC 1,758,886 ordinary 48.36%
SUBSIDIARIES OF THE COMPANY
Name Main activity Ownership share
Asmare B.V. Holding company 100.00
Research Engineering Center ERG LLP Research activities 100.00
ENRC Logistics LLP Logistics activities 99.76
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ORGANISATIONAL STRUCTURE
MANAGEMENT STRUCTURE Shareholder body General Meeting of Shareholders of the Company
Management body Board of Directors of the Company
Executive body Management Board of the Company
Board of Directors
Full name Current position
Serik Shakhazhanov
Chairman of the Management Board of Eurasian Group LLP
Daniyar Rakhmatullaev Deputy of the Chairman of the Management Board of Eurasian Group LLP for Finances
Andrey Safonov Member of the Board of Directors - President of the Company
Murat Murtazaev Member of the Board of Directors of the Company - Independent Director
Nurlan Ospanov
Member of the Board of Directors of the Company - Independent Director
Management Board
Full name Current position
Andrey Safonov President of Shubarkol Komir JSC
Rustam Ibrahimov First Vice-President of Shubarkol Komir JSC
Daniyar Abdykadyrov
Member of the Management Board - Vice President for Economics and Finance of the Company
Sergey Kim
Member of the Management Board - Vice-President for Technical Services of the Company
Darya Savina
Member of the Management Board - Head of the Legal Department of the Company
None of the members of the Board of Directors or the Management Board of the Company have interests in the authorised capital of Shubarkol or Shubarkol’s subsidiaries and affiliates.
Governing Body
Financial Unit
Tax Accounting, Accounting and
Reporting
Treasury Department
Budgeting and Analysis
HR Unit
Hiring and HR Administration
Education and Development
Social Projects and Sports
MRO Unit
Planning
Expertise and Reliability
Execution
Production Unit
Mining Production
Semi-coke and By-product Process
Production, Energy Services
Commercial Unit
Sales Management
Procurement, Inventory,
Warehouse Management
Investment Planning and Capital Construction
General Administrative Unit
Compliance, Risks, Internal Controls,
Legal Support
Ecology, PBIT, Mine Survey, IT
Operational Efficiency, Project Management, PR
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For detailed information about all members of the Board of Directors and Management Board of the Company, including positions held for the last three years, see Annex 1 (p.XX).
REMUNERATION
In 2018, the gross remuneration paid to members of the Board of Directors and to the Management Board was 14.1 million tenge and 322 million tenge respectively.
DIVIDEND INFORMATION
For the period 2016 to 2018 (based on the results of year-end 2015 to year-end 2017), dividends on ordinary shares of the Company were not accrued or paid. During this period, the Company paid dividends at the guaranteed amount of 50 tenge per preferred share, in accordance with the procedure established by the legislation of the Republic of Kazakhstan. The book value of one ordinary share at 31 December 2018 is 25,489 tenge (31 December 2017: 10,766 tenge). The book value of one preferred share at 31 December 2018 is 2,355 tenge (31 December 2017: 2,289 tenge). Basic earnings per share for 2018 amounted to 12.9 thousand tenge.
REPORT ON THE COMPANY’S COMPLIANCE WITH THE PROVISIONS OF THE COMPANY'S CORPORATE GOVERNANCE CODE
The Company is guided by the Corporate Governance Code, which is approved by the decision of the General Meeting of Shareholders of the Company, dated 27 December 2006.
The Company has developed and currently complies with the following internal documents (which have been approved by its authorised bodies):
Regulations of the Board of Directors;
Regulations of the Management Board;
Corporate Code of Conduct;
Policy on Compliance with Corporate Rules and Regulations by Agents;
Anti-Money Laundering Policy;
Anti-Bribery and Corruption Policy;
Anti-Fraud Policy;
Policy on Compliance with Anti-trust and Competition Laws;
Policy on Conflict of Interest;
Personal Data Protection Policy;
Gifts and Hospitality Policy;
Policy on Related Party Transactions;
International Economic Sanctions Compliance Policy;
Information Classification Policy;
Policy on Human Rights Observance;
Policy on CSR Projects and Sponsorship. The Company annually compiles a calendar of corporate events for the Company and follows it throughout the year.
DATA RELIABILITY STATEMENT In accordance with the Company’s Corporate Governance Code, the Board of Directors and the Management Board are responsible for the accuracy of the Company’s annual report and financial statements.
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10. FINANCIAL STATEMENTS
REPORT BY INDEPENDENT AUDITOR
CONSOLIDATED PROFIT AND LOSS REPORT
CONSOLIDATED REPORT ON TOTAL PROFIT
CONSOLIDATED ACCOUNTING BALANCE
CONSOLIDATED STATEMENT ON CASH FLOWS
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
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ANNEXES
ANNEX 1: BOARD OF DIRECTORS Full name (year of birth)
Positions held
Serik Shakhazhanov (born in 1977) Chairman of the Board of Directors of the Company
Chairman of the Management Board of Eurasian Group LLP from July 2017 to the present;
First Deputy Chairman of the Management Board of Eurasian Group LLP (Member of the Board) from March 2017 to July 2017;
Deputy Chairman of the Management Board for Strategy and Development of Eurasian Group LLP (Member of the Board) from December 2015 to March 2017
Daniyar Rakhmatullaev (born in 1985) Member of the Board of Directors of the Company
Deputy Chairman of the Management Board of Eurasian Group LLP for Finance from October 2018 to the present;
Director of the Financial Planning and Analysis Department of ERG Reporting Services LLP from October 2015 to October 2018;
Director of the Department of Economics of Eurasian Group LLP from July 2014 to October 2015
Andrey Safonov (born in 1978) Member of the Board of Directors of the Company
President of Shubarkol Komir JSC from April 2018 to the present;
Vice President for Production of Shubarkol Komir JSC from February 2017 to April 2018;
Chief Technical Manager for Safety and Labor Protection of Shubarkol Komir JSC from November 2016 to February 2017;
Director of Kacharsky Ore Administration of SSGPO JSC from August 2015 to October 2016.
Murat Murtazaev (born in 1952) Member of the Board of Directors of the Company - Independent Director
Independent Expert on Subsoil Use of the Ministry of Industry and Infrastructure Development of the Republic of Kazakhstan; Independent Coal and Uranium Expert of the Ministry of Energy of the Republic of Kazakhstan from 2014 to the present;
Satbayev Kazakh National Technical University, Chairman of the State Attestation Commission for the Bachelor of Mining Specialties, Chairperson of the State Examination Commission of candidates for magistracy and doctoral studies from November 2014 to 30.04.2018.
Nurlan Ospanov (born in 1960) Member of the Board of Directors of the Company - Independent Director
Director of Taza Alem Group KZ LLP from October 2010 to the present.
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ANNEX 2: MANAGEMENT BOARD
Full name (year of birth)
Positions held
Andrey Safonov (born in 1978) President of the Company
President of Shubarkol Komir JSC from April 2018 to the present;
Vice President for Production of Shubarkol Komir JSC from February 2017 to April 2018;
Chief Technical Manager for Safety and Labour Protection of Shubarkol Komir JSC from November 2016 to February 2017;
Director of Kacharsky Ore Administration of SSGPO JSC from August 2015 to October 2016
Rustam Ibrahimov (born in 1972) Member of the Management Board - First Vice President of the Company
Member of the Management Board - First Vice President of Shubarkol Komir JSC from May 2018 to the present;
Deputy General Director of the ERG Commercial Center LLP from September 2016 to May 2018;
Director of ERG Trading House LLP from August 2014 to September .2016
Daniyar Abdykadyrov (born in 1983) Member of the Management Board - Vice President for Economics and Finance of the Company
Member of the Management Board - Vice-President for Economics and Finance of Shubarkol Komir JSC from August 2012 to the present;
Vice President for Economics and Finance of Shubarkol Komir JSC from February 2017 to the present;
Vice President for Economics of Shubarkol Komir JSC from June 2012 – February 2017.
Sergey Kim (born in 1961) Member of the Management Board - Vice-President for Technical Services of the Company
Member of the Management Board - Vice-President for Maintenance and Repair of Shubarkol Komir JSC from August 2012 to the present;
Vice President for Maintenance and Repair of Shubarkol Komir JSC from February 2017 to the present;
Vice President for Technical Issues of Shubarkol Komir JSC from September 2008 to February 2017.
Darya Savina (born in 1983) Member of the Management Board - Head of the Legal Department of the Company
Member of the Management Board of Shubarkol Komir JSC from September 2015 to the present;
Head of Legal Department of Shubarkol Komir JSC from February 2017 to the present;
Head of Legal Department of Shubarkol Komir JSC from June 2015 to February 2017.
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ANNEX 3: GLOSSARY Abbreviations IFRS: International Financial Reporting Standards
ISO: International Organization for Standardization LTIFR: Lost Time Injury Frequency Rate OHSAS: Occupational Health and Safety Assessment Series Measurement units k: Kilo (thousand) km: Kilometres m3: Cubic metres
Definitions Affiliates – companies are considered affiliated when one company owns less than the majority interest in another company. Companies may also be affiliated when they are subsidiaries of a third company. Alumina – aluminium oxide (Al2O3), the raw material used in the production of aluminium. API 2 – the benchmark price reference for coal imported to northwest Europe and is based on the cost, insurance and freigh (CIF) delivery of thermal coal (6,000 kcal/kg NAR) at the Amsterdam-Rotterdam-Antwerp (ARA) area. Ash content – the incombustible residue created from a fuel’s (coal) mineral impurities after it undergoes complete combustion. It is one of the main parameters used to define coal quality. Chrome ore – A mineral assembly of iron-chromium oxide that is mined to produce steel through the production of ferrochrome, which is an iron-chromium alloy.
Coke – a hard and porous fuel produced by heating coal in the absence of oxygen. D-grade coal – A type of coal with a high content of volatile substances, low sulfur content and low ash content. D-grade coal has a bright shine and a high heat transfer (long flame). Dividend – a sum of money paid by the company to its shareholders. Dividend policy – a policy that dictates how the company structures its dividend payout to its shareholders and the frequency with which the dividends are paid. Ferroalloy – an alloy of iron and one or more other elements (chromium, silicon, manganese, titanium and others) used mainly in the production of steels and other alloys. Hedging – a strategy to offset the risk of adverse movement in the future price of an asset. High-grade coal – Coal with the high carbon count and energy content, and the fewest impurities (moisture, ash content and volatiles). Low-ash coal – a type coal with less than 10% ash content.
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Overburden – the soil and rock material covering coal seams at open cast mines, which needs to be removed to gain access to ore deposits. Quarry – an open-pit mine where different types of rock are extracted. Semi-coke – a medium temperature coke that is used mainly in the metallurgical industry as a reducing agent. Thermal coal – a type of coal mainly used for power generation.
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ANNEX 4: CONTACTS “Shubarkol Komir” KSC 18 Asfaltnaia str., Karaganda, Republic of Kazakhstan, 100004 Tel.: +7 7212 93 01 10 Fax: +7 7212 44 05 16 E-mail: [email protected]
Shubarkol komir JSC Consolidated Financial Statements for 2018
Shubarkol komir JSC Consolidated Statement of Profit and Loss and Other Comprehensive Income
The accompanying notes on pages 5 tо 40 are an integral part of these consolidated financial statements. 2
In thousands of Kazakhstani Tenge Note 2018 2017 Revenue 21 124,955,805 88,326,960 Cost of sales 22 (56,718,819) (47,197,500) Gross profit 68,236,986 41,129,460 Other operating income 23 4,706,343 2,513,536 Other operating expenses 24 (941,542) (1,067,665) Distribution costs (2,105,950) (193,499) General and administrative expenses 25 (14,176,622) (11,106,039) Operating profit 55,719,215 31,275,793 Finance income 26 36,354,143 26,089,770 Finance costs 27 (36,013,143) (21,755,724) Impairment of investments - (432,308) Profit before income tax 56,060,215 35,177,531 Income tax expense 28 (9,369,956) (12,852,781) Profit for the year 46,690,259 22,324,750 Other comprehensive income: Items that will not be reclassified to profit or loss: Remeasurements of post-employment benefit obligations 7,247 15,087 Income tax recorded directly in other comprehensive income 28 (197) (8,458) Effects of translation to presentation currency 294,049 52,081 Total other comprehensive income for the year 301,099 58,710 Total comprehensive income for the year 46,991,358 22,383,460 Basic earnings per share for the period 12.92 6.16
Shubarkol komir JSC Consolidated Statement of Changes in Equity
The accompanying notes on pages 5 tо 40 are an integral part of these consolidated financial statements. 3
In thousands of Kazakhstani Tenge Note Share
capital Additional
paid in capital Other
reserves Retained earnings
Total equity
Balance at 1 January 2017 9,540,291 188,565 916,181 7,551,553 18,196,590 Profit for the year - - - 22,324,750 22,324,750 Other comprehensive income for the year - - 58,710 - 58,710 Comprehensive income for the year - - 58,710 22,324,750 22,383,460 Write-off of preference share liabilities - - - 5,951 5,951 Write-off of provisions through retained
earnings of prior years - - (202,287) 202,287 - Balance at 31 December 2017 9,540,291 188,565 772,604 30,084,541 40,586,001 Adoption of IFRS 9 2 - - - 4,226,208 4,226,208 Balance at 1 January 2018 9,540,291 188,565 772,604 34,310,749 44,812,209 Profit for the year - - - 46,690,259 46,690,259 Other comprehensive income for the year - - 301,099 - 301,099 Comprehensive income for the year - - 301,099 46,690,259 46,991,358 Balance at 31 December 2018 9,540,291 188,565 1,073,703 81,001,008 91,803,567
Shubarkol komir JSC Consolidated Statement of Cash Flows
The accompanying notes on pages 5 tо 40 are an integral part of these consolidated financial statements. 4
In thousands of Kazakhstani Tenge Note 2018 2017
Cash from operating activities :
Profit before income tax 56,060,215 35,177,531
Adjustments for: Depreciation of property, plant and equipment and intangible assets 12,289,792 10,101,191 Reversal of loss from/(provision for) impairment of property, plant and equipment (515) 54,560
Loss from disposal of property, plant and equipment and intangible assets 83,409 247,407 Impairment of investments - 432,308 Provision for impairment of raw materials and supplies 10 611,900 77,046 Provision for the expected credit loss on trade and other receivables 32,463 45,501 Employee benefits 33,746 (65,118) Foreign exchange difference from operating activities (237,177) (28,812) Finance income 26 (36,354,143) (26,089,770) Finance costs 27 36,013,143 21,755,724 Other 1,020,659 (196,126) Operating cash flows before working capital changes 69,553,492 41,511,442 Decrease / (increase) in inventories 86,454 (1,924,565) Increase in trade and other receivables (2,756,010) (5,082,027) Increase in trade and other payables 3,456,037 12,641,635 Cash generated from operations: Employees benefits paid (41,692) (60,862) Income tax paid (13,656,175) (12,254,484) Interest received 6,436,309 6,379,752 Interest paid (11,438,283) (5,063,942) Net cash from operating activities 51,640,132 36,146,949 Cash flows from investing activities: Purchase of property, plant and equipment and intangible assets (7,459,980) (19,252,207) Purchase of share in associate - (432,308) Placement to restricted cash (812,435) (373,291) Loans issued (137,680,199) (93,009,770) Repayment of loans issued 87,704,473 84,704,707 Net cash used in investing activities (58,248,141) (28,362,869) Cash flows from financing activities: Borrowings received 116,416,100 15,000,000 Repayment of borrowings (99,509,015) (18,262,672) Dividends paid 14 (4,687) (11,052) Finance lease paid (2,268,727) (192,604) Net cash from / (used in) financing activities 14,633,671 (3,466,328) Effect of exchange rate changes on cash and cash equivalents - Net increase in cash and cash equivalents 8,025,662 4,317,752 Cash and cash equivalents at the beginning of the year 13 9,942,511 5,624,759 Cash and cash equivalents at the end of the year 13 17,968,173 9,942,511
Investing and financing transactions that did not require the use of cash and cash equivalents and were excluded from the cash flow statement include acquisition of property, plant and equipment through a finance lease in the amount of Tenge 20,412,852 thousand (Note 18) in 2018.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
5
1 The Group and its Operations
Background information. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) for the year ended 31 December 2018 for Shubarkol komir JSC and its subsidiaries (the “Group” or “Shubarkol komir”).
As of 31 December 2018, the shareholders of the Group exercising joint control are Eurasian Energy Corporation JSC and SHK EURASIAN HOLDING B.V. Eurasian Resources Group S.à r.l. (“ERG”) is the ultimate controlling entity.
As of 31 December 2017, the shareholders of the Group exercising joint control were Eurasian Energy Corporation JSC and TNC Kazchrome JSC. ERG was the ultimate controlling entity.
Principal activity. The Group’s principal activity is the extraction, processing and sale of coal, production and sale of coke, shipping and forwarding operations in the railway sector within and outside the Republic of Kazakhstan.
Subsurface use contracts. The Group concluded a number of subsurface use contracts with the Government of the Republic of Kazakhstan the terms of which are set out below:
Subsurface use contract Location Year of
execution Year of expiry
Extraction of coal Central and Eastern part of the Shubarkol
mine, Karaganda oblast 1999 2050
Extraction of coal Western part of the Shubarkol mine,
Karaganda oblast 1999 2021
Subsidiaries
Share (%) Parent company Country of incorporation
Principal activity 2018 2017
Asmare B.V. Shubarkol komir
JSC Netherlands holding company 100.00 100.00
Xinjiang Hengfa Xinlong International Trade Co
Asmare B.V. Peoples Republic ofChina
trading activity (sale of coke)
100.00 100.00
ERG Research and Development Engineering Center LLP
Shubarkol komir JSC
Kazakhstan scientific research activity
100.00 100.00
ENRC Logistics LLP Shubarkol komir JSC
Kazakhstan logistics 99.76 99.76
TransCom LLP ENRC Logistics LLP Kazakhstan logistics 100.00 100.00 TransRemVagon LLP ENRC Logistics LLP Kazakhstan wagon maintenance 100.00 100.00 RemPut LTD LLP ENRC Logistics LLP Kazakhstan development of
infrastructure of railway sector, shipping and forwarding operations
- 100.00
AktobePromTrans LLP ENRC Logistics LLP
Kazakhstan development of infrastructure of railway sector, shipping and forwarding operations
100.00 100.00
Bereke 2004 LLP TransCom LLP Kazakhstan services of railroad train maintenance
99.90 99.90
The accounting policy on acquisition of subsidiaries from entities under common control is disclosed in Note 2.
Registered address of the Group’s head office: 18, Asfaltnaya Street, Karaganda city, Karaganda region, Republic of Kazakhstan.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
6
2 Basis of Preparation and Significant Accounting Policies
Basis of preparation. The accounting policies used in preparing these consolidated financial statements are described below and are based on IFRS. These standards are subject to interpretations issued from time to time by the International Financial Reporting Standards Interpretation Committee (“IFRIC”). These consolidated financial statements are also prepared under historical cost convention, except for revaluation of certain assets and liabilities, as described in the corresponding accounting policies below.
The preparation of these consolidated financial statements in conformity with IFRS requires the use of certain critical accounting estimates and assumptions. It also requires management to exercise their judgment applying the Group’s accounting policies. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed in Note 3.
The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all the periods presented, except for new accounting pronouncements.
Going concern principle. These consolidated financial statements have been prepared in accordance with IFRS on a going concern basis, which assumes the realisation of assets and discharge of liabilities in the ordinary course of business within the foreseeable future.
The Board of Managers reviewed the level of liquidity available for the period until 30 June 2020. Throughout the period under review, ERG generates sufficient cash flow to maintain working capital position at above-minimum level. During 2018 commodity prices have improved considerably, which has given the ERG an additional headroom when considering its liquidity.
On 27 June 2018, Standard & Poor’s rating agency updated ERG’s rating from “B-/B” with stable outlook to “B/B” with positive forecast.
On 3 August 2018, Moody’s rating agency updated ERG’s credit rating from “B3” with stable outlook to “B2” with positive forecast.
Loan agreements of ERG include a number of different financial and non-financial covenants. As at 31 December 2018, ERG performed all covenants.
ERG assesses the dependence of liquidity on commodity prices in key markets and ability to raise additional financing, when required. To ensure adequate liquidity for the performance of contractual obligations, ERG constantly focuses on operational performance, improvement of working capital and allocation of capital expenditure budget.
The Board of Managers therefore 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 on a 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.
Based on ERG’s opinion regarding applicability of the going concern to its activities in the foreseeable future and forecasts of the future operating activities of the Group, management of the Group believes that the Group has access to sufficient resources to continue operating activities in the foreseeable future and that preparation of these consolidated financial statements on the continuity assumption is appropriate and, accordingly, the Group will be able to realise its assets and repay liabilities in the normal course of business
New Accounting Pronouncements
New standards adopted in 2018
IFRS 9 “Financial Instruments” set the requirements to recognition and measurement of financial assets, financial liabilities and certain purchase contracts for non-financial goods. The standard simplifies the application of hedge accounting.
Adoption of IFRS 9 resulted in the increase in equity by Tenge 4,226,208 thousand as at 1 January 2018, due to recognition of gain from modification of borrowings in the amount of Tenge 4,776,166 thousand net of deferred income tax benefit in the amount of Tenge 1,061,123 thousand and decrease in equity by Tenge 549,958 thousand which is recognition of expected credit losses on loans given.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
7
2 Basis of Preparation and Significant Accounting Policies (Continued)
Before 1 January 2018, the Group applied the following policies to accounting for financial instruments:
the effect of modifying the conditions of financial liabilities was reflected by a change in the effective rate and was charged to the profit or loss account over the remaining term of the liability;
investments in equity instruments were classified as available-for-sale investments and recognised at acquisition cost less impairment;
provision for impairment of loans receivable carried at amortised cost was recognised if there was objective evidence that the Group would not be able to receive the amounts due according to the original terms. The amount of provision was calculated as a difference between the asset’s carrying value and the present value of the expected future cash flows discounted at the original effective interest rate.
IFRS 15 “Contracts with customers” 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.
Adoption of IFRS 15 did not result in a material effect on equity as at 1 January 2018.
Amendments to IFRS that are not effective yet
IFRS 16 “Lease” 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 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 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 statement of profit or loss and other comprehensive income. IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17. 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 plans to use the modified retrospective method, as a result the cumulative effect from initial recognition will be recognised at 1 January 2019, without restatement of comparatives. It is expected that adoption of IFRS 16 “Lease” will result in recognition of the asset in the form of the right-of-use and relevant lease liability of Tenge 644,563 thousand.
Functional and presentation currency. All amounts in these consolidated financial statements are presented in Kazakhstani Tenge (“Tenge”), unless otherwise stated. The functional currency of the Group and its Kazakhstani subsidiaries is Tenge; the functional currency of Asmare B.V. is US Dollar; the functional currency of Xinjiang Hengfa Xinlong International Trade Co is Chinese yuan (CNY).
Foreign currency transactions. Monetary assets and liabilities held by the Group and denominated in foreign currencies at 31 December 2018 are translated into Tenge at the official exchange rate of the Kazakhstani Stock Exchange (“KASE”) at that date. On initial recognition, foreign currency transactions are accounted for at the exchange rate of the KASE prevailing at the date of the transaction. Subsequently, assets and liabilities of the Group denominated in foreign currency are restated on monthly basis at KASE rate as at the month end. Gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currency are recognised in profit or loss for the year.
At 31 December 2018, the official rate of exchange used for translating foreign currency balances was US dollar (USD) 1= KZT 384.2 (31 December 2017: US dollar 1= KZT 332.33). Exchange restrictions and currency controls exist relating to converting Tenge into other currencies. Tenge is not freely convertible in most countries outside of the Republic of Kazakhstan.
Consolidated financial statements. Subsidiaries are those investees, including structured entities that the Group controls. The Group has control over investees if:
has power to direct relevant activities of the investees that significantly affect their returns,
has exposure, or rights, to variable returns from its involvement with the investees, and
has the ability to use its power over the investees to affect the amount of investor’s returns.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
8
2 Basis of Preparation and Significant Accounting Policies (Continued)
The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity. For a right to be substantive, the holder must have practical ability to exercise that right when decisions about the direction of the relevant activities of the investee need to be made. The Group may have power over an investee even when it holds less than majority of voting power in an investee. In such a case, the Group assesses the size of its voting rights relative to the size and dispersion of holdings of the other vote holders to determine if it has de-facto power over the investee. Protective rights of other investors, such as those that relate to fundamental changes of investee’s activities or apply only in exceptional circumstances, do not prevent the Group from controlling an investee. Subsidiaries are consolidated from the date on which control is transferred to the Group (acquisition date) and are deconsolidated from the date on which control ceases.
Intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the cost cannot be recovered. The Group and all of its subsidiaries use uniform accounting policies consistent with the Group’s policies.
Property, plant and equipment. Property, plant and equipment is stated at cost or deemed cost less accumulated depreciation and impairment provisions. The cost of self-constructed assets includes the cost of materials, direct labour and an appropriate proportion of production overheads.
The individual significant parts of an item of property, plant and equipment (components), whose useful lives are different from the useful life of the given asset as a whole are depreciated individually, applying depreciation rates reflecting their anticipated useful lives. Cost of replacing major parts or components of property, plant and equipment items are capitalised and the replaced part is retired. Gains or losses on replaced parts’ write-off are recognised in profit and loss for the year.
Subsequent costs are included in the 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 repairs and maintenance costs are charged to profit or loss for the year.
Gains and losses on disposals determined by comparing proceeds with carrying amount are recognised in profit and loss for the year.
Mining assets are recorded at cost less accumulated depreciation and less any accumulated impairment losses. Expenditures, including evaluation costs, incurred to establish or expand production capacity, as well as to conduct works for mining-construction, and mine preparation during the period of establishing project capacity or during mine reconstruction, are capitalised to mining assets as part of buildings and constructions.
Depreciation. Land is not depreciated. The deemed cost of each item of property, plant and equipment is depreciated over its useful life to residual value. Each item’s estimated useful life has due regard to both its own physical life limitations and/or the present assessment of economically recoverable reserves of the mine property at which the item is located.
Depreciation is charged to profit or loss on a straight-line basis over the estimated useful life of the item of property, plant and equipment or under the unit of production method depending on the order of use of property, plant and equipment.
Mining assets are depreciated using the units-of-production method based on the estimated economically recoverable and feasible reserves to which they relate. If the estimated useful life of a particular asset is less than the corresponding useful life of the mine, then for such mining assets depreciation is calculated using the straight-line method or production method depending on the asset’s production characteristics.
Changes in estimates, which affect unit of production calculations, are accounted for prospectively.
The expected useful lives are provided in the table below.
Useful life (years) Buildings and constructions 10-60 Machinery and equipment 5-30 Motor vehicles 5-30 or unit-of-production method Other 2-30 Mining assets unit-of-production method
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
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2 Basis of Preparation and Significant Accounting Policies (Continued)
The residual value of an asset is the estimated amount that the Group would currently obtain from disposal of the asset less the estimated costs of disposal, if the asset were already of the age and in the condition expected at the end of its useful life. The residual value of an asset is nil if the Group expects to use the asset until the end of its physical life. The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at each reporting period.
Construction-in-progress is recognised at the historical cost. When construction-in-progress is completed, the assets are transferred to property, plant and equipment at their carrying amounts. Construction-in-progress is not depreciated until the asset is ready for its use.
Stripping costs. Stripping (i.e. overburden and other waste removal) costs as the result of development of the open-pit before production commences are capitalised as part of the cost of mining assets, and subsequently amortised using unit-of-production method over the lives of the open-pit. The stripping costs incurred subsequently during the production stage are included in cost of inventory to the extent that the benefit from the stripping activity is realised in the form of inventory produced.
In case if the benefit improves the access to the ore body in future, then the Group recognises the subsequent costs as a long-term asset - “stripping activity asset”.
The Group recognises stripping activity asset where the following criteria are met: it is probable that the future economic benefit (improved access to the ore body) associated with the
stripping activity will flow to the Group; the Group can identify the component of the ore body for which access has been improved; and the costs relating to the stripping activity associated with that component can be measured reliably.
The Group accounts for a stripping activity asset as an addition to, or as an enhancement of, an existing asset of which it forms part.
The Group initially measures the stripping activity asset at incurred costs that includes accumulated expenses directly incurred for the performance of stripping activity, which improves access to an identifiable component of coal body plus allocation of costs directly relating to overheads. After initial recognition, the stripping activity asset shall be accounted for at cost less depreciation and impairment losses in the same way as an existing asset, which it forms a part. The stripping activity asset is amortised using unit-of-production method proportionally to production volume.
When the costs of the stripping activity asset and the inventory produced are not separately identifiable, production stripping costs are allocated between the inventory produced (current stripping costs) and the stripping activity asset, the Group allocates costs on the basis of the stripping coefficient.
Intangible assets. Intangible assets, which are acquired by the Group and have finite useful lives, are recognised at cost less accumulated amortisation and impairment losses.
Impairment of non-financial assets. At the end of each reporting period, management assess whether indicators of impairment of fixed assets exist. The carrying amounts of property, plant and equipment and all other non-financial assets are reviewed for impairment if there is any indication that the carrying amounts may not be recoverable.
When a review for impairment is conducted, the recoverable amount is assessed by reference to the higher of: “value in use” (being the net present value of expected future cash flows of the relevant cash generating unit) and “fair value less costs to sell” (the amount obtainable from the sale of an asset or cash generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal). Where there is no binding sale and purchase agreement or active market, fair value less costs to sell is based on the best information available to reflect the amount the Group could receive for the cash-generating unit in an arm’s length transaction.
A cash-generating unit 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.
The estimates used for impairment reviews are based on detailed mine layouts and operating budgets, modified as appropriate to meet the requirements of IAS 36, Impairment of Assets. Future cash flows are based on:
estimates of the volumes of the reserves for which there is a high degree of confidence of economic extraction;
future production levels; future commodity prices (assuming the current market prices will revert to the Group’s assessment of
the long term average price, generally over a period of three to five years); and future costs of production, capital expenditures, assets retirement and land restoration.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
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2 Basis of Preparation and Significant Accounting Policies (Continued)
If the carrying amount of the asset exceeds its recoverable amount, the asset is impaired and an impairment loss is charged to profit and loss for the year so as to reduce the carrying amount in the consolidated balance sheet to its recoverable amount.
A previously recognised impairment loss is reversed if only, since the last recognition of impairment loss, changes were made in the accounting estimates used for determination of the asset’s recoverable value. This reversal is recognised in profit and loss for the year, and is limited to the carrying amount that would have been determined, net of depreciation, if no impairment loss was recognised in prior years.
Financial assets – classification and subsequent measurement. The Group classifies financial assets in the following measurement categories: fair value through profit or loss (“FVTPL”), fair value through other comprehensive income (“FVOCI”) and amortised cost (“AC”). The classification and subsequent measurement of debt financial assets depends on the Group’s business model for managing the related assets portfolio and the cash flow characteristics of the asset. Financial assets are classified on initial recognition. In 2017 the Group applied the requirements of IAS 39 “Financial Instruments: Recognition and Measurement”.
The Group classifies financial assets as carried at AC if only both of the following criteria are met: a) according to the business model the asset is held to collect the contractual cash flows; and b) contractual terms provide for solely payments of principal and interest.
Financial assets carried at AC include loans receivable, trade receivables, and other financial assets held to collect the contractual cash flows.
Financial assets other than investment in equity instruments are recognised initially at fair value and are subsequently carried at AC using the effective interest method and net of allowance for expected credit losses (“ECL”). 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 effective interest rate. The amortisation based on effective interest method is included in finance income in the statement of profit or loss. Impairment losses are charged to profit or loss for the period.
Trade and other receivables. Trade and other receivables are recognised initially at fair value and are subsequently carried at AC using the effective interest method, net of allowance for ECL.
Investments in equity instruments. Changes in the fair value of investments in equity instruments are included in profit or loss.
Financial assets impairment. The Group assesses, on a forward-looking basis, the ECL for financial instruments measured at AC. Provisions for impairment of financial assets are based on assumptions for risk of default and expected credit losses. The Group applies judgement in making such assumptions and choosing inputs for calculation of impairment provision. This judgement is built upon historical data of the Group given the market conditions, and forward-looking estimates that is available at the end of each reporting period. Financial assets measured at AC are presented in the statement of financial position net of the allowance for ECL.
Impairment of trade receivables. Credit loss allowance for trade receivables is recognised using a simplified approach based on the provision matrix which allows accrual of lifetime ECL allowance. The provision matrix is based on historical credit losses, adjusted to reflect forward-looking information on macroeconomic factors and updated at each reporting date. Trade receivables are grouped based on the days past due, and ECL are determined on the basis of historical analysis of default rates. Changes in ECL allowance are recorded in the statement of profit or loss. Subsequent recoveries of previously recognised ECL allowance are credited against general and administrative expenses in the statement of profit or loss.
Derecognition of financial assets. The Group derecognises financial assets when (i) the assets are redeemed or the rights to cash flows from the assets have otherwise expired or (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.
Inventories. Inventories are recorded at the lower of cost and net realisable value. Cost of inventory is determined on a weighted average basis. Coal is recognised as raw materials when extracted, and is valued at the average cost of extraction. The cost of finished goods and work in progress comprises raw material, direct labour, other direct costs and related production overheads (based on normal operating capacity) but excludes borrowing costs. Net realisable value is the estimated selling price in the ordinary course of business, less the cost of completion and selling expenses.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
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2 Basis of Preparation and Significant Accounting Policies (Continued)
Prepayments. Prepayments are recognised in the consolidated financial statements at cost less provision for impairment. Prepayments paid to suppliers for future supplies of property, plant and equipment are recognised within other non-current assets. Prepayments for future supplies of inventories are recognised within other current assets.
Foreign currency denominated prepayments for goods, property, plant and equipment and services represent non-monetary items, and accordingly, are stated at the exchange rate at the prepayment date, and are not subject to restatement at the reporting date. If there is an indication that the assets, goods or services relating to a prepayment will not be received, the carrying value of the prepayment is written down accordingly, and a corresponding impairment loss is recognised in profit or loss for the year.
Prepayments, related to provision of services of a carrier (railway tariffs). The amount of prepayment received by the Group from customers consists of two parts: prepayment for services of carrier (railway tariff) or another entity being a provider of services and prepayment of a commission for the operator services, earned by the Group acting as an agent for arrangement of shipment and services of an operator.
The cash prepaid by the customers for the railway tariff and transferred by the Group to the carrier or another entity being a provider of services are considered to be monetary items and are recorded in other receivables.
The cash prepaid in foreign currency by the customer as a commission for services provided by the Group on organisation of cargo shipment and operator’s services are regarded as non-monetary items and therefore are recorded at the exchange rate at the date of prepayment and are not subject to restatement at the end of the reporting period.
Prepayments due to the short-term nature are not subject to assessment for a significant financing component.
Cash and cash equivalents. Cash and cash equivalents include balances in bank accounts, cash in hand, deposits held at call with banks or mature within three months, and other short-term highly liquid investments with original maturity of less than three months.
Cash placed in banks for a period over three months, unless it is restricted, and is available and intended for early withdrawal, is also included into cash and cash equivalents. However, cash placed in banks for a period over three months in order to generate investment income, not intended for early withdrawal, is included into other current and non-current assets. Balances restricted from being used for more than three months are included in other current or non-current assets.
Term deposits. Term deposits include deposits with the maturity of more than three months. These deposits are classified as other current or non-current assets since management of the Group has an intention to hold the deposits for more than three months and does not intend to use them for short-term cash needs. Term deposits are carried at amortised cost using the effective interest method.
Share capital. Ordinary shares are classified as equity. Preference shares are compound financial instruments that contain both a liability and an equity component. The liability is initially recognised at its fair value by applying the market interest rate to the amount of mandatory annual dividends using a net present value formula for the period equal to the useful life of the mines estimated by management. The life of mines is used rather than perpetuity to estimate the liability component since the Group will not generate cash flows or profits beyond the life of the mines.
Subsequently, the liability is measured at amortised cost. Effects of changes in cash flow estimates on carrying amounts are recognised in the financial results. At initial recognition, the equity component is the residual, i.e. it is the proceeds received from the issuance of the preference shares less the fair value of the liability. The equity component of a preference share is not subsequently re-measured.
Dividends. Dividends, except for the mandatory annual dividends on preference shares, are recognised as a liability and deducted from equity at the reporting date only if they are declared before or on the reporting date. Mandatory annual dividends on preference shares are recognised as finance costs within profit or loss for the year.
Dividends are disclosed when they are proposed before the reporting date or proposed or declared after the reporting date but before the consolidated financial statements are authorised for issue.
Earnings per share. Earnings per share are determined by dividing the profit or loss attributable to owners of the Group by the weighted average number of shares outstanding during the reporting year.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
12
2 Basis of Preparation and Significant Accounting Policies (Continued)
Provisions for assets retirement obligations. Assets retirement obligations are recognised when it is probable that the costs would be incurred and those costs can be measured reliably. Assets retirement obligations include the costs of rehabilitation and costs of liquidation (demolition of buildings, constructions and infrastructure, dismantling of machinery and equipment, transportation of the residual materials, environmental clean-up, monitoring of wastes and land restoration).
Provision for the estimated costs of liquidation, rehabilitation and restoration are established and charged to the cost of property, plant and equipment in the reporting period when an obligation arises from the respective land disturbance in the course of mine development or environment pollution, based on the discounted value of estimated future costs.
Provisions for assets retirement obligations do not include any additional obligations, which are expected to arise from actual or future disturbances. The costs are estimated on the basis of a closure and restoration plan. The cost estimates are calculated annually during the course of the operations to reflect known developments, e.g. updated cost estimates and revised term estimated lives of operations, and are subject to formal reviews on regular basis.
The Group estimates its costs based on feasibility and engineering studies using current restoration standards and techniques for conducting restoration and retirement works.
The amortisation or unwinding of the discount applied in establishing the net present value of provisions is charged to profit and loss in each reporting period. The amortisation of the discount is disclosed as finance costs.
Other movements in the provisions for assets retirement obligations, resulting from new disturbance as a result of mine development, updated cost estimates, changes to the estimated term of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the useful lives of the assets to which they relate using the depreciation methods applied to those assets. Movements in the provisions for asset retirement obligations that relate to disturbance caused by the production phase are charged to profit and loss for the year.
Provisions for liabilities and legal claims. Provisions for settlement of liabilities and legal claims are accrued when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. Where there are a number of similar obligations, the probability 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 low. Provisions are measured at the present value of the expected expenses for settlement of an obligation at a pre-tax rate reflecting the current market estimates of the time value of money and risks inherent in this obligation. Increase in provisions is recognised as a part of finance costs. When the Group expects recovery of the provisions, e.g. under an insurance agreement, the recovered amount is recognised as an individual asset but only when the Group is absolutely confident of the recovery.
Operating leases. Where the Group is a lessee in a lease which does not transfer substantially all the risks and rewards incidental to ownership from the lessor to the Group, the total lease payments, including those on expected termination, are charged to profit and loss for the year on a straight-line basis over the period of the lease.
When assets are leased out under an operating lease, the lease payments receivable are recognised as rental income on a straight-line basis over the lease term.
Finance lease liabilities. Where the Group is a lessee in a lease which transferred substantially all the risks and rewards incidental to ownership to the Group, the assets leased are capitalised in property, plant and equipment at the commencement of the lease at the lower of the fair value of the leased asset and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of future finance charges, are included in finance lease liability in the balance sheet.
The interest cost is charged to profit or loss over the lease period using the effective interest method. The assets acquired under finance leases are depreciated over their useful life or the shorter lease term, if the Group is not reasonably certain that it will obtain ownership by the end of the lease term.
Classification of financial liabilities. The Group classifies financial liabilities in the following measurement categories: financial liabilities measured at FVTPL and financial liabilities carried at AC. Management classifies its financial liabilities at initial recognition.
Borrowings. Borrowings are recognised initially at fair value, net of transaction costs incurred and are subsequently carried at AC using the effective interest method.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
13
2 Basis of Preparation and Significant Accounting Policies (Continued)
Where a loan is obtained at interest rates different from market rates, the loan is measured at origination at its fair value, being 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, net of transaction costs and net proceeds from the loan, represents an origination gain/loss. The origination gain/loss is recognised in the statement of profit or loss and other comprehensive income within finance income/costs.
Subsequently, the carrying amount of the borrowings is adjusted for amortisation of the gains on origination and the effective interest rate credit is recorded as finance costs.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least twelve months after the end of reporting period.
Derecognition of financial liabilities. The Group ceases recognition of a financial liability when it is executed, or cancelled, or expired.
If an existing financial liability is replaced by another financial liability with the same creditor or if there has been a significant change in the terms of the existing financial liability, such substitution or change should be accounted for as a repayment of the original financial liability and recognition of a new financial liability.
The Group estimates the materiality of the change on the basis of qualitative and quantitative factors. If the existing financial liability is replaced by another financial liability with the same creditor on terms that are insignificantly different from the original ones, or if the changes in the terms of the existing liability are insignificant, such replacement or change is not accounted for as a repayment of the original financial liability and recognition of a new financial liability. The difference in the respective carrying amounts is charged to the profit or loss for the reporting period.
Financial guarantees. Financial guarantees are contracts that require the Group to make specified payments to reimburse the holder of the guarantee for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. Financial guarantees are initially recognised at their fair value, which is usually evidenced by the amount of fees received, and subsequently carried at amortised cost. Financial guarantees are recognised when a premium is paid or in case of premium-free guarantees (intra group guarantees) when the borrower receives the money from the financing entity.
When the Group issues a premium-free guarantee or a guarantee at a premium different from market premium, fair value is determined using valuation techniques (e.g. market prices of similar instruments, interest-rate differentials, etc.).
Losses at initial recognition of a financial guarantee liability are recognised in profit or loss for the year within finance costs. Financial guarantee liabilities are amortised on a straight line method basis over the life of the guarantees with respective income presented within finance income. At the end of each reporting period, the guarantees are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the obligation at the end of reporting period.
Trade and other payables. Trade and other payables are accrued when the counterparty performed its obligations under the contract. The Group recognises trade payables at fair value. Subsequently, trade payables are carried at amortised cost using the effective interest method. The Group does not accrue for interest on long-term advances received which are recorded as non-financial liabilities.
Advances received. Advances received are stated at actual amounts received from counterparties. Advances received are derecognised once the Group fulfils its contractual obligations in full by providing related goods or services.
Value added tax (“VAT”). VAT related to sales is payable to the tax authorities when goods are shipped or services are rendered. Purchase VAT can be offset against sales VAT upon the receipt of a tax invoice from a supplier. Tax legislation allows the settlement of VAT on a net basis. Accordingly, VAT related to sales and purchases unsettled at the end of the reporting period is stated on a net basis by each taxpayer.
Income tax. Income taxes have been provided for in the consolidated financial statements in accordance with Kazakhstani legislation enacted on the end of reporting period. The income tax charge comprises current (corporate and excess profit tax) and deferred taxes and is recognised in profit or loss for the year, except for taxes relating to transactions recognised in the same or a different reporting period within other comprehensive income or directly in equity.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
14
2 Basis of Preparation and Significant Accounting Policies (Continued)
Current tax is the amount expected to be paid to or recovered from the state budget in respect of taxable profits or losses for the current and prior periods. Taxable profits or losses are based on estimates if consolidated financial statements are authorised prior to filing relevant tax returns. Taxes other than on income are recorded within operating expenses. Deferred income tax is provided using the balance sheet liability method for tax loss carry forwards and temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. In accordance with the exception for initial recognition, the deferred income tax is not accounted for temporary differences arising from 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. The deferred tax assets and liabilities are netted only within each separate subsidiary included in the consolidated financial statements of the Group.
Deferred tax balances are measured at corporate income tax rate enacted at the end of the reporting period, which is expected to apply to the period when the temporary differences will reverse or the tax loss carry forwards will be utilised. Deferred tax assets for deductible temporary differences and tax loss carry forwards are recorded only to the extent that it is probable that future taxable profit will be available against which the deductions can be utilised.
Revenue recognition. Revenue from contracts with customers is recognised when control over goods or services (normally upon delivery) is transferred to a customer in the amount of consideration to which the Group expects to be entitled in exchange for transferring control over such goods or services. Revenue is recognised in the amount of transaction price, net of VAT and discounts. In 2017, the Group applied the requirements of IAS 18 “Revenue”.
Sales of services. The Group provides services under fixed-price contracts. Revenue from providing services is recognised in the accounting period in which the services are rendered. For fixed-price contracts, revenue is recognised based on the actual service provided to the end of the reporting period as a proportion of the total services to be provided because the customer receives and uses the benefits simultaneously.
Revenue from sales of coal extracted, coke and tar, and other revenue is recognised at a point in time. Revenue from operating wagons and containers, forwarding services, wagon repair services is recognised over time.
Segment reporting. Operating segments are reported in a manner consistent with the internal reporting provided to the Group’s chief operating decision maker. Reportable segments whose revenue, result or assets are ten percent or more of all the segments are reported separately.
Payroll expenses and related charges. The expenses for salaries, social tax, social insurance fund contributions, annual paid vacations and sick leaves, bonuses and benefits in kind are accrued as the respective services are provided by the Group’s employees.
In accordance with the legal requirements of the Republic of Kazakhstan, the Group withholds pension contributions from employees’ salary. In addition, in accordance with legislation, the Group at its own expense, is responsible for the payment of professional pension contributions for its employees engaged in operations with harmful (especially harmful) working conditions. The Group transfers the above pension contributions to the United Accumulation Pension Fund of Kazakhstan JSC. Upon retirement of employees, all pension payments are administered by the abovementioned united pension fund.
Employee benefits. The Group provides long-term employee benefits to employees at the end of employment (lump-sum payments at retirement, financial assistance) and other long-term employee benefits (financial aid for employees’ disability, significant anniversaries and funeral aid to the Group’s employees) as in accordance with the provisions of the Group’s collective agreements.
The entitlement to some benefits is usually conditional on the employee remaining employed until the retirement age and the completion of a minimum service period.
Post-employment benefit of the Group are unfunded defined benefit plans and are valued in accordance with IAS 19, Employee Benefits. In this case, actuarial and investment risks related to the unfunded defined benefit plans remain with the Group.
When measuring the obligation in respect of the unfunded defined benefit plans the Group determines the gross amount of payments due to employees for their services rendered in the current and prior periods; actuarial assumptions are developed at this stage. After that, the discounted value of the obligations in respect of the post-employment defined benefit plans is determined and current service cost is calculated using the projected credit unit method.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
15
2 Basis of Preparation and Significant Accounting Policies (Continued)
The Group recognises as part of its profit or loss:
current service cost; past service cost and any profit or loss, which originates from remeasurement of the plan obligations; and net amount of the interest related to the defined pension benefit plan obligation.
The Group recognises the actuarial gains or losses from the remeasurement of the net defined pension benefit plan obligation as part of other comprehensive income.
The entitlement to other long-term benefits is conditional on the completion of a minimum service period. The expected cost of these benefits is accrued over the period of employment using the same accounting methodology as used for the unfunded defined pension benefit plan. In respect of the other long-term employee benefits the Group recognises the current and past service cost, net interest expense for the net liability, actuarial gains and losses (remeasurement of the net liability) as part of Group’s profit or loss.
Actuarial gains and losses include both the impact of changes in actuarial assumptions and the effect of the past experience of differences between the actuarial assumptions and actual data. Actuarial assumptions include demographic assumptions (mortality rates, staff turnover, disability growth rates and early retirement rates) and financial assumptions (discount rate, future salary growth rates, and average labour turnover rates). The most significant assumptions used in accounting for defined benefit obligations and other long-term benefits are the discount rate and the mortality assumptions. The discount rate is used to determine the net present value of future liabilities and each year the unwinding of the discount on those liabilities is charged to profit or loss for the year as interest cost. The Group uses market yields on government bonds with similar terms as the discount rate. The future salary growth and staff turnover assumptions are used to project the future stream of benefit payments, which is then discounted to arrive at a net present value of liabilities.
These obligations are valued annually by independent qualified actuaries.
Finance income and finance costs. Finance income includes income related to unwinding of discount of present value, amortization of financial guarantees, interest income on deposits, loans issued and other investments. Financial costs include interest expenses on loans, expense on recognition of financial guarantees, interest expense from unwinding of the discount on provisions for mining asset retirement obligations, etc. Finance income and costs also include foreign exchange gains and losses relating to respective financial assets and liabilities.
Interest income/expense is recognised on the timing basis using the effective interest rate method. All interest and other expenses attributable to borrowings are recognised within finance costs unless such expenses are related to borrowings received to finance the construction of property, plant and equipment. In this case, such expenses are capitalised in the period required for construction of an asset and bringing it for intended use.
3 Critical Accounting Estimates and Judgments in Applying Accounting Policies
The Group makes estimates and assumptions that affect the reported amounts of assets and liabilities within the next financial period. Estimates and judgements are continually evaluated and are based on management’s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have significant effect on the amounts recognised in the consolidated financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial period include:
Going concern basis. Note 2 provides details of going concern assessment for the Group.
Impairment of loans receivable. Impairment of loans receivable is determined based on ECL. Measurement of allowance requires significant assumptions including probability of default, collectability, and terms of expected recovery of future cash flows on loans. Changes in such assumptions may have impact on recoverable value or provisions for such assets. Management reviews assumptions on a regular basis. Expected credit losses on loans receivable were calculated based on the credit risk of entities with comparable rating.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
16
3 Critical Accounting Estimates and Judgments in Applying Accounting Policies (Continued)
Fair value of financial guarantees. The fair values of premium-free financial guarantees issued by the Group are determined using valuation techniques. The Group applies its judgement in determining fair value of the financial guarantees issued. The Group applies interest rate differential and credit default swaps methods to determine the fair value of the financial guarantees. The fair value of the financial guarantee liability is calculated as the net present value of the interest rate differential or credit default swap rate multiplied by the guaranteed loan amount and discounted at the weighted average cost of Group’s debt. For loan facility agreements where the Group is liable jointly and severally with other guarantors the market commission determined with reference to credit default swaps or interest rate differential is apportioned between the guarantors. This represents management’s best estimate of the Group’s exposure to credit risk associated with the issued guarantees.
Management concluded that it is unlikely that the Group will be required to settle the guaranteed obligations (Note 17). This management’s judgment is based on the assessment of the Group’s going concern assessment provided in Note 2. The Group measured allowance for ECL on financial guarantees at 31 December 2018. The value of allowances for ECL did not exceed carrying amounts of financial guarantees.
Estimated useful lives of property, plant and equipment. The estimation of the useful lives of items of property, plant and equipment is a matter of judgment based on experience with similar assets. The future economic benefits embodied in the assets are consumed principally through use. However, other factors, such as technical or commercial obsolescence and wear and tear, often result in the diminution of the economic benefits embodied in the assets. Management assesses the remaining useful lives in accordance with the current technical conditions of the assets and estimated period during which the assets are expected to earn benefits for the Group. The following primary factors are considered: (a) expected usage of the assets; (b) expected physical wear and tear, which depends on operational factors and maintenance program; and (c) technical or commercial obsolescence arising from changes in market conditions.
Management reviews the appropriateness of assets useful economic lives at least annually; any changes could affect prospective depreciation rates and asset carrying values.
Impairment of non-current assets. At the end of each reporting period, management reviews property, plant and equipment to determine whether there is any indication of impairment. If any such characteristics exist, management estimates the recoverable amount, which is the higher of the fair value less costs to dispose and its value in use. Calculating the value in use requires the application of evaluation data and professional judgment from management, which are considered justified in the circumstances.
On the basis of internal and external factors review, management revealed no indications of asset impairment at the end of the reporting period.
Provision for assets retirement obligations. In accordance with the terms of the subsurface use contracts and environmental legislation, the Group has a legal obligation to repair damage caused to environment as a result of its operating activities and decommission its mining assets, and restore a landfill site after its closure. Provision is made based on net present values for site restoration and rehabilitation costs as the obligation arises from past mining activities.
The provision for assets retirement obligations is estimated based on the current environmental legislation in the Republic of Kazakhstan. The assets retirement obligations are estimated based on the Group’s interpretation of current environmental legislation in the Republic of Kazakhstan and the Group’s related program for liquidation of subsurface use consequences supported by the feasibility study and engineering researches in accordance with the existing restoration and retirement standards and techniques. As at 31 December 2018 the carrying amount of the provisions for assets retirement obligations was Tenge 1,030,795 thousand (2017: Tenge 681,985 thousand).
The estimates of assets retirement obligations are subject to potential changes in environmental regulatory requirements and the interpretation of the legislation. Mining assets retirement obligations are recognised when there is a probability of their occurrence and a possibility to measure their amounts reliably. According to the current environmental legislation, management believes that there are no significant retirement obligations except for those recognised in these consolidated financial statements.
Obligations on professional education and social sphere development under subsurface use contracts. In accordance with the subsurface use contracts, the Group has obligations to finance professional training programmes for the Kazakhstani personnel and social sphere development programmes. The Group’s management believes that even though the subsurface use contracts specify a minimal amount that has to be spent for social obligations, the funding of these projects is not substantially different from the funding of other costs and production and should therefore be recorded when incurred. Therefore, no liabilities for social and training obligations for future years were recognised in these consolidated financial statements as of 31 December 2018 and 31 December 2017.
Tax and transfer pricing legislation. Kazakhstani tax and transfer pricing legislation is subject to varying interpretations (Note 28).
Going concern principle. Note 2 provides details of going concern assessment for the Group.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
17
4 Employee Information
The average number of employees (including executive directors) employed by the Group during the year was:
2018 2017 Production 1,890 2,149 Auxiliary production 852 788 Administrative and other corporate functions 927 827 Total employees 3,669 3,764
Total staff costs (including executive directors) for the Group were:
In thousands of Kazakhstani Tenge 2018 2017 Salaries, other bonuses and related expenses 11,080,313 10,446,283 Social tax and social contributions 916,372 962,845 Post-employment benefits 109,763 140,015 Mandatory professional pension contributions 141,089 108,472 Mandatory social health insurance 122,489 40,282 Total staff costs 12,370,026 11,697,897
Key management personnel* compensation was:
In thousands of Kazakhstani Tenge 2018 2017 Wages, salaries and other short-term benefits 206,109 828,095 Total key management compensation 206,109 828,095
* Key management personnel are the persons with direct or indirect authority and responsibility for planning, coordination and control of the Group’s operations.
5 Balances and Transactions with Related Parties
For the purposes of these consolidated financial statements, parties are generally considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial and operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form.
The Group discloses balances and transactions with the following related parties:
Entities exercising joint control: Information on the investors exercising joint control over the Group is disclosed in Note 1.
Entities under common control: entities under control of ERG, except for SHK EURASIAN HOLDING B.V. and Eurasian Energy Corporation JSC.
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 Republic of Kazakhstan and related legal entities (hereinafter - “government entities”). The Republic of Kazakhstan is the Company’s related party due to its significant influence on ERG.
Joint ventures: Xingjiang Aismir Coking Coal Co. Ltd.
Key management: persons with direct or indirect authority and responsibility for planning, coordination and control of the Group’s and ERG’s operations.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
18
5 Balances and Transactions with Related Parties (Continued)
The nature of relations with those related parties with whom the Group entered into significant transactions or had significant balances outstanding at 31 December 2018 and 2017 is detailed below.
At 31 December 2018, the outstanding balances with related parties were as follows:
In thousands of Kazakhstani Tenge
Entities exercising joint
control Entities under
common control
Entities under control of Class
B Managers Government
related entities
Restricted cash - - 3,692,531 - Investments in equity instruments - - 439,756 - Trade and other receivables - 2,857,593 94,886 6,405,785 Prepayments - 72,968 - 481,188 Loans receivable - 167,330,920 - - Cash and cash equivalents - - 13,961,232 - Trade and other payables - - 10,862 - Advances received 57,964 8,064,523 79,413 477,768 Borrowings 32,031 8,343,829 2,420 8,911 Financial guarantees - 52,257,025 - -
At 31 December 2017, the outstanding balances with related parties were as follows:
In thousands of Kazakhstani Tenge
Entities exercising joint
control Entities under
common control
Entities under control of Class
B Managers Government
related entities
Restricted cash - - 2,916,399 - Investments in equity instruments - - 439,756 - Trade and other receivables 197,672 1,449,015 90,280 5,145,559 Prepayments - - 19,190 401,295 Loans receivable 1,200 98,588,003 - - Cash and cash equivalents - - 8,143,303 - Dividends payable - - 9,834 - Trade and other payables 3,557,989 3,914,366 42,018 136,365 Advances received 259,940 3,007,663 4,696 - Borrowings - 55,492,001 - - Financial guarantees 3,489,266 4,380,498 - -
The income and expense items with related parties for the year ended 31 December 2018 were as follows:
In thousands of Kazakhstani Tenge
Entities exercising joint
control
Entities under common
control
Entities under control of
Class B managers
Government related entities
Key management
Revenue 17,512,233 27,725,238 7,717 752,692 - Cost of sales (859) (667,902) (707,109) (11,012,824) - Other operating income 1,707,838 2,580,480 24,949 9,401 - Other operating expenses - (194,136) (15) (81,053) - General and administrative expenses (18,481) (7,429,562) (91,918) (64,556) (206,109) Finance income 3,505,597 47,447,258 4,200,195 - - Finance costs (479,362) (16,871,543) (2,571,914) - -
The income and expense items with related parties for the year ended 31 December 2017 were as follows:
In thousands of Kazakhstani Tenge
Entities exercising joint
control
Entities under common
control
Entities under control of
Class B Managers
Government related entities
Key management
Revenue 16,330,280 16,559,214 17,942 92,728 - Cost of sales (3,425) (77,707) (587,418) (8,661,379) - Other operating income 687,488 1,320,174 40,068 33,588 - Other operating expenses (236) (71,552) (16) (331,825) - General and administrative expenses (22,121) (5,739,529) (98,751) (239,388) (828,095) Finance income 448,547 35,529,966 2,282,042 - - Finance costs (928,590) (23,158,069) (2,415,698) - -
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
19
5 Balances and Transactions with Related Parties (Continued)
Entities exercising joint control and entities under common control. During 2018 and 2017, the Group mainly sold coal and provided operating and transport-forwarding services to these companies. Transactions were performed on an arm's length basis.
Entities under control of Class B Managers: balances and transactions with entities under control of founder shareholders mainly represent treasury transactions performed through a bank under the control of founder shareholders and insurance services.
Individually significant acquisitions of goods and services from entities under common control performed by the Group represent management services for the total amount of Tenge 4,744,008 thousand (2017: Tenge 3,208,926 thousand);
Government related entities: the Group performs transactions on purchase and sale of goods and services with government related entities. Such transactions are usually performed on an arm's length basis or based on tariffs established for all market participants. Transactions with the Government of the Republic of Kazakhstan also include tax transactions performed in accordance with tax legislation of the Republic of Kazakhstan.
Individually significant acquisitions of goods and services from government related entities performed by the Group represent railway services for the total amount of Tenge 10,764,773 thousand (2017: Tenge 7,588,787 thousand).
6 Segment Information
Chief Operating Decision Maker (the “CODM”) is the person or group of persons who allocates resources and assesses the performance for the Group’s operating segments. The CODM has been identified as the Group CEO.
The CODM determined operating segments based on the reports used for strategic decision making.
The Group is organised on the basis of two main business segments:
energy segment – includes extraction and sale of coal, and production and sale of semi-coke, coke; and logistics segment – includes provision of logistics services for ERG entities, and forwarding cargos for third
parties.
Transactions between segments are performed on an arm’s length basis similarly to transactions with third parties.
2018 in thousands of Kazakhstani Tenge Energy segment
Logistics segment
Intragroup eliminations Total
Revenue 77,192,162 47,763,643 - 124,955,805 Revenue within Group segments 64,865 2,462,301 (2,527,166) - Segment revenue 77,257,027 50,225,944 (2,527,166) 124,955,805 Operating profit of the segment 35,667,173 20,052,042 - 55,719,215 Finance income 36,354,143 Finance costs (36,013,143) Profit before tax 56,060,215 Income tax expense (9,369,956) Profit for the year 46,690,259
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
20
6 Segment Information (Continued)
2017 in thousands of Kazakhstani Tenge Energy segment
Logistics segment
Intragroup eliminations Total
Revenue 57,516,591 30,810,369 - 88,326,960 Revenue within Group segments 4,526 2,864,608 (2,869,134) - Segment revenue 57,521,117 33,674,977 (2,869,134) 88,326,960 Operating profit of the segment 24,057,490 7,218,303 - 31,275,793 Finance income 26,089,770 Finance costs (21,755,724) Impairment of investments (432,308) Profit before tax 35,177,531 Income tax expense (12,852,781) Profit for the year 22,324,750
in thousands of Kazakhstani Tenge 31 December 2018 31 December 2017
Assets Liabilities Assets Liabilities Energy segment 296,216,357 188,695,159 230,596,886 157,918,322 Logistics segment 127,418,276 56,358,815 98,496,904 42,901,150 Elimination (88,970,320) (2,193,228) (90,707,231) (3,018,914) Total 334,664,313 242,860,746 238,386,559 197,800,558
Geographic information
Revenues of the Group from external customers are as follows:
In thousands of Kazakhstani Tenge 2018 2017
Energy segment Logistics segment Energy segment Logistics segment Europe 22,973,209 - 12,230,200 - Eurasia 18,697,193 - 15,996,146 - Kazakhstan 35,586,625 50,225,944 29,294,771 33,674,977 Total revenue 77,257,027 50,225,944 57,521,117 33,674,977
Major customers
Energy segment includes two major customers, each of which generates 10% or more of the total revenues (2017: three major customers).
Logistics segment includes four major customers, each of which generates 10% or more of the total revenues (2017: four major customers).
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
21
7 Property, Plant and Equipment
In thousands of Kazakhstani Tenge
Land, buildings
and construc-
tions
Machinery and
equipment Motor
vehicles Mining assets Other
Construc-tion in
progress Total Cost at 1 January 2017 11,245,717 16,782,209 100,370,774 1,842,167 813,178 1,580,882 132,634,927 Accumulated depreciation (5,932,617) (9,584,479) (31,966,839) (269,635) (329,193) - (48,082,763) Carrying amount at 1 January 2017 5,313,100 7,197,730 68,403,935 1,572,532 483,985 1,580,882 84,552,164
Additions 57,851 1,274,098 18,582,450 - 12,144 4,207,681 24,134,224 Transfers 603,660 611,295 1,327,806 - 1,155 (2,543,916) - Changes in estimates 324,388 - - - - - 324,388 Effects of translation to presentation currency - 198 602 - - - 800
Reclassification (106,118) 642,732 (11,506) - (657,112) (4,465) (136,469) Depreciation (677,452) (1,789,451) (7,498,689) (39,170) (85,328) - (10,090,090) Impairment - - - - - (54,560) (54,560) Disposals (1,725) (154,624) (857,334) - - (174,791) (1,188,474) Accumulated depreciation on disposals 247 126,645 814,175 - - - 941,067
Reclassification of depreciation 25,040 (258,509) 11,617 - 342,128 - 120,276
Cost at 31 December 2017 12,123,773 19,155,908 123,873,690 1,842,167 169,365 3,010,831 160,175,734 Accumulated depreciation (6,584,782) (11,505,794) (43,100,634) (308,805) (72,393) - (61,572,408) Carrying amount at 31 December 2017 5,538,991 7,650,114 80,773,056 1,533,362 96,972 3,010,831 98,603,326
Additions 529,757 3,594,434 22,790,888 - - 3,774,562 30,689,641 Transfers 735,831 665,272 2,611,977 - 15,902 (4,028,982) - Changes in estimates 280,619 - - - - - 280,619 Effects of translation to presentation currency - 251 742 - - - 993
Reclassification - 3,485 988,076 - - (991,561) - Depreciation (717,695) (1,950,429) (9,068,380) (38,641) (11,797) - (11,786,942) Reversal of impairment - - - - - 515 515 Disposals - (145,428) (1,474,321) - (13,698) (20,517) (1,653,964) Accumulated depreciation on disposals
- 122,326 1,434,531 - 13,698 - 1,570,555
Reclassification of depreciation
4,234 (4,234) - - - - -
Other movements (109,987) 108,852 53 1 (80) (82,332) (83,493) Cost at 31 December 2018 13,669,980 23,384,301 148,792,152 1,842,167 171,489 1,662,516 189,522,605 Accumulated depreciation (7,408,230) (13,339,658) (50,735,530) (347,445) (70,492) - (71,901,355) Carrying amount at 31 December 2018 6,261,750 10,044,643 98,056,622 1,494,722 100,997 1,662,516 117,621,250
At 31 December 2018 the gross carrying amount of fully depreciated property, plant and equipment, which were still in use, was Tenge 12,826,600 thousand (2017: Tenge 9,035,613 thousand).
As at 31 December 2018 motor vehicles included assets under finance lease with the carrying amount of Tenge 34,213,569 thousand (2017: Tenge 14,445,382 thousand).
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
22
8 Investments in Equity Instruments
Company name Country of
incorporation Principal activity
31 December 2018 31 December 2017 Tenge
thousand Interest (%) Tenge
thousand Interest (%)
BTS LLP Kazakhstan
ERP system implementation and support 406,100 2.05% 406,100 2.05%
КТ ENRC Credit LLP Kazakhstan Crediting 33,656 0.027% 33,656 0.027%
Total investments in equity instruments 439,756 439,756
All investments in equity instruments are denominated in Tenge. Investments in these companies are recorded in the consolidated balance sheet at estimated fair value.
9 Other Non-Current Assets
In thousands of Kazakhstani Tenge 2018 2017 Restricted cash 3,670,785 2,858,349 Total financial non-current assets 3,670,785 2,858,349 Prepayments for property, plant and equipment and investments 1,120,326 5,191,755 Total other non-current assets 4,791,111 8,050,104
Restricted cash represents bank deposits for the creation of a special fund to cover the cost of site restoration and the decommissioning of the mining assets after its expected closure in accordance with the requirements of the subsurface use contracts with maturity in January 2022. The Group has no access to these funds. At 31 December 2018, all financial non-current assets are denominated in US Dollar (2017: all financial non-current assets are denominated in US Dollar).
10 Inventories
In thousands of Kazakhstani Tenge 2018 2017 Spare parts 2,116,043 2,127,416 Materials for resale 1,212,848 1,370,473 Raw materials and consumables 764,893 880,054 Finished goods 850,306 824,576 Fuel 422,825 353,557 Work in progress 14,607 22,686 Other materials 182,456 289,555 Provisions for impairment of raw materials and supplies (1,781,745) (1,386,502) Total inventories 3,782,233 4,481,815
Movements in the provision for impairment of inventories are as follows:
In thousands of Kazakhstani Tenge 2018 2017 Balance at 1 January (1,386,502) (1,463,548) Accrual of provision (611,900) (30,476) Write-off against provision 216,657 107,522 Balance at 31 December (1,781,745) (1,386,502)
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
23
11 Trade and Other Receivables
In thousands of Kazakhstani Tenge 2018 2017 Trade receivables 5,639,214 6,106,387 Other receivables 6,575,181 5,295,129 Minimum deposit level 131,415 83,623 Impairment provision (25,392) (210,989) Total financial trade and other receivables 12,320,418 11,274,150 Prepayments to suppliers and contractors 2,756,130 1,271,406 Prepayment for other taxes 859,239 265,371 Other receivables 911,672 537,135 Total trade and other receivables 16,847,459 13,348,062
The carrying amount of the Group’s financial assets included in trade and other receivables is denominated in the following currencies:
In thousands of Kazakhstani Tenge 2018 2017 Tenge 8,857,394 6,789,217 US Dollar 2,618,909 2,302,023 Chinese Yuan 462,276 615 Russian Rouble 381,280 2,182,295 Euro 559 - Total financial trade and other receivables 12,320,418 11,274,150
31 December
2018 31 December
2017
In thousands of Kazakhstani Tenge Gross carrying
amount ECLGross carrying
amount ECL Current 15,527,477 (3,238) 15,524,239 12,342,129 Less than 3 months overdue 1,266,193 (4,882) 1,261,311 986,626 3 to 6 months overdue 10,893 (377) 10,516 11,363 6 to 12 months overdue 57,685 (6,406) 51,279 7,944 Over 12 months overdue 568 (454) 114 - Total past due 1,335,339 (12,119) 1,323,220 1,005,933 Current and past due 16,862,816 (15,357) 16,847,459 13,348,062 Individually determined to be impaired 10,035 (10,035) - - Total individually determined to be impaired 10,035 (10,035) - - Total trade and other receivables – net 16,872,851 (25,392) 16,847,459 13,348,062
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
24
11 Trade and Other Receivables (Continued)
In thousands of Kazakhstani Tenge 2018 2017
Credit loss allowance at 1 January 210,989 272,177 Expense 32,463 128,020 Recovery/write-off (218,060) (189,208) Credit loss allowance at 31 December 25,392 210,989
The carrying amounts of the Group’s financial assets within trade and other receivables approximate their fair values due to the short-term nature of these instruments.
12 Loans Receivable
In thousands of Kazakhstani Tenge 2018 2017 Short-term portion of loans receivable 164,496,377 93,907,411 Long-term portion of loans receivable 7,779,514 5,979,125 Impairment provision for loans receivable (1,221,553) - Total loans receivable 171,054,338 99,886,536
In thousands of Kazakhstani Tenge
Carrying amount Fair value 2018 2017 2018 2017
Loans receivable 171,054,338 99,886,536 171,739,977 100,264,766
In thousands of Kazakhstani Tenge 2018 2017 US Dollar 170,556,935 99,403,550 Tenge 497,403 482,986 Total loans receivable 171,054,338 99,886,536
In 2018, parent company loans were provided at the rate of 7.31 percent per annum to 9.01 percent per annum in USD (2017: 7.11 percent per annum to 11 percent per annum in USD). In 2018, loans to entities under common control were provided at the rate of 5.29 percent per annum to 7.5 percent per annum in USD and 1% per annum in Tenge (2017: 7.5 percent per annum in USD and 1 percent per annum in Tenge).
In thousands of Kazakhstani Tenge 2018 Credit loss allowance at 1 January under IFRS 39 - Changes in accounting policy 682,876 Credit loss allowance at 1 January under IFRS 9 682,876 Loans receivable 1,103,346 Loans repaid (564,669) Credit loss allowance at 31 December 1,221,553
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
25
13 Cash and Cash Equivalents
In thousands of Kazakhstani Tenge 2018 2017 Universal bank deposits 14,641,934 7,098,772 Cash at bank in USD 1,359,154 171,444 Cash at bank in Chinese Yuan 1,318,352 1,242,733 Cash at bank in Russian Roubles 520,525 86,952 Cash at bank in Tenge 118,346 1,340,628 Cash at bank in Euro 6,542 - Cash on hand in Tenge 3,320 1,982
Total cash and cash equivalents 17,968,173 9,942,511
Universal deposits include following deposits at 31 December 2018 and 31 December 2017:
In thousands of Kazakhstani Tenge Currency Contractual interest rate
Effective interest rate 2018 2017
Eurasian Bank JSC
USD 2 2 9,274,006 6,217,799 RUR 10 10 - 86 KZT 9 9 4,321,161 776,519
VTB JSC
KZT 7 7.2 370,852 - USD 3 3 9,188 117 RUR 4 4.1 - 1,215 Sberbank of Russia SB JSC KZT 8 8 106,930 103,036
Industrial Bank of China
CNY 4 4 559,797 - Total universal bank deposits 14,641,934 7,098,772
14 Share Capital
31 December 2018 31 December 2017
In thousands of Kazakhstani Tenge Number of
shares Amount Number of
shares Amount Common shares (excluding treasury shares) 3,517,772 9,408,802 3,517,772 9,408,802 Preference shares 119,027 131,489 119,027 131,489 Total share capital 9,540,291 9,540,291
Outstanding common shares are fully paid. The preference shares do not participate the obligatory redemption by the Group (issuer) and participate in the dividends distribution. Preference shareholders have a priority over ordinary shareholders to receive dividends of the pre-determined guaranteed amount established by the charter and a part of the Group’s properties, in the case of liquidation.
Dividends on ordinary shares are not distributed until dividends on preference shares are paid in full.
The dividends on the preference shares in excess of the guaranteed amount are controllable but not contractual since such distributions can be avoided if the dividends on ordinary shares are not distributed. Therefore, the preference share represents the compound instrument which consists of equity and liability components.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
26
14 Share Capital (Continued)
Preference shares do not give the holder the right to participate in management of the Group except as follows:
general shareholders’ meeting considers an issue, which if solved would restrict the rights of the preference shareholder;
general shareholders’ meeting considers approval of amendments to the valuation methods for preference shares when they are repurchased by the Group on a unorganised market;
general shareholders’ meeting considers reorganisation or liquidation of the Group;
dividends on preference shares are not paid in full within three months from the expiry of the period fixed for their payment till the moment of payment.
According to the Kazakhstani legislation, distributable profits of the Group are limited by the amount of retained earnings recorded in the IFRS consolidated financial statements of the Group.
Dividends declared and paid during the year were as follows:
2018 2017
In thousands of Kazakhstani Tenge Common shares Preference
shares Common shares Preference
shares Dividends payable at 1 January - 84,029 - 89,130 Dividends declared during the year - 5,951 - 5,951 Dividends paid during the year - (4,687) - (11,052) Dividends payable at 31 December - 85,293 - 84,029
All dividends are declared and paid in Kazakhstani Tenge. During the years ended 31 December 2018 and 31 December 2017, dividends on preference shares at a guaranteed fixed amount of Tenge 50 per share were accrued as a part of non-current preference shares liabilities of Tenge 5,951 thousand.
15 Earnings per Share
Basic earnings per share are calculated by dividing the profit for the period attributable to owners of the Group by the weighted average number of ordinary shares in issue during the year.
Since the Group does not issue convertible financial instruments, the basic earnings per share equals the diluted earnings per share.
The table below presents information about profit and number of shares used to calculate the basic earnings per share.
In thousands of Kazakhstani Tenge 2018 2017 Total comprehensive income for the year 46,991,358 22,383,460 Accruals of dividends in terms of long-term liabilities on preferred shares 5,951 5,951 Total accruals for distribution to shareholders of the Group 46,997,309 22,389,411 Net profit attributable to ordinary shareholders 45,459,158 21,656,639 Weighted average number of ordinary shares in issue 3,517,772 3,517,772 Basic and diluted earnings per ordinary share (expressed in Tenge per share) 12.92 6.16
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
27
15 Earnings per Share (Continued)
Carrying amount of one ordinary share as at the reporting date is Tenge 25,489 (at 31 December 2017: Tenge 10,766). Carrying amount of one preference share as at the reporting date is Tenge 2,355 (at 31 December 2017: Tenge 2,289). Carrying amounts of ordinary and preference shares are calculated according to Annex 5.7 of the Listing Rules of Kazakhstani Stock Exchange.
In thousands of Kazakhstani Tenge 31 December 2018 31 December 2017 Assets 334,664,313 238,386,559 Intangible assets 2,113,830 2,581,056 Liabilities 242,860,746 197,800,558 Charter capital, preference shares 131,489 131,489 Net assets for ordinary shares 89,558,248 37,873,456 Number of ordinary shares (thousands) 3,517,772 3,517,772 Carrying amount of 1 ordinary share (in Tenge) 25,489 10,766
Carrying amount of preference share is calculated as follows:
In thousands of Kazakhstani Tenge 31 December 2018 31 December 2017 Liabilities on accrued but unpaid dividends 85,293 84,029 Charter capital, preference shares 131,489 131,489 Equity attributable to preference shareholders 216,782 215,518 Debt component of the first group preference shares, accounted for within liabilities 63,529 56,956 Number of preference shares (thousands) 119,027 119,027 Carrying amount of 1 preference share (in Tenge) 2,355 2,289
16 Borrowings
In thousands of Kazakhstani Tenge 2018 2017 US Dollar 115,241,439 86,326,847 Tenge 52,257,026 50,683,733 Total borrowings 167,498,465 137,010,580
VTB Bank (PJSC). In the second half of 2018, the Group repaid in full principal amount of USD 250,000 thousand to VTB Bank PJSC.
Sberbank of Russia PJSC. In the second half of 2018, the Group jointly with a range of ERG entities entered into a new loan agreement with Sberbank of Russia PJSC. Loan amount attributable to the Group was USD 300,000 thousand. According to the agreement, maturity for principal debt is set until September 2025. Interest rate on loan is 6.5 percent per annum.
Entities under common control. In May 2017, the credit facility agreement was entered into with an entity under common control for Tenge 15,000,000 thousand. The agreement was executed for 7 years. The interest rate is 1.0 percent per annum. Principal amount and interest are repaid on monthly basis.
As at 31 December 2018, the fair value of borrowings was Tenge 166,728,895 thousand (31 December 2017: Tenge 139,925,325 thousand).
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
28
16 Borrowings (Continued)
The table below sets out an analysis of the movements in the Group’s liabilities from financing activities. Cash movements of these liabilities are reported in financing and operating activities in the statement of cash flows:
Liabilities from financing activities (In thousands of Kazakhstani Tenge)
Borrowings Finance lease Financial guarantees
Dividends Total
Financial liabilities at
31 December 2017 137,010,580 12,192,275 6,793,144 140,985 156,136,984
Cash movements 5,468,802 (2,268,727) - (4,687) 3,195,388 Fair value movements (385,348) - - - (385,348) Foreign exchange
differences 13,329,414 508,046 - - 13,837,460 Other non-cash
movements 12,075,017 15,296,867 (4,050,580) 12,524 23,333,828
Financial liabilities at
31 December 2018 167,498,465 25,728,461 2,742,564 148,822 196,118,312
Liabilities from financing activities (In thousands of Kazakhstani Tenge)
Borrowings Finance lease Financial guarantees
Dividends Total
Financial liabilities at
31 December 2016 143,319,841
- 7,127,728 136,951 150,584,520
Cash movements (8,326,614) (192,604) - (11,052) (8,530,270) Fair value movements 1,009,624 - - - 1,009,624 Foreign exchange
differences (213,534) 149,833 - - (63,701) Other non-cash
movements 1,221,263 12,235,046 (334,584) 15,086 13,136,811
Financial liabilities at
31 December 2017 137,010,580 12,192,275 6,793,144 140,985 156,136,984
17 Financial Guarantees
Amount of the guaranteed liabilities
Company
31 December 2018
31 December 2017
Guarantee term
Entities under common control 30,849,096 976,123,367 2018-2025 Entities exercising joint control 622,009,811 820,865,137 2018-2025 Total 652,858,907 1,796,988,504
At 31 December 2018 and 31 December 2017, the carrying amount of financial guarantees is a non-amortised amount recorded at initial recognition.
Fair values of financial guarantees were estimated based on period remaining until maturity of guaranteed loan amounts, market rate of commission allocated between guarantors and discounted using the weighted average cost rate of the Group’s borrowings.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
29
18 Finance Lease
In 2017, the Group signed the finance lease agreement for supply of property, plant and equipment of Tenge 695,601 thousand. The agreement is signed for a 5-year period. The interest rate is 7 percent per annum. Principal amount is repaid annually, interest is paid on a monthly basis.
In 2017, the Group signed another finance lease agreement for supply of property, plant and equipment of Tenge 2,557,843 thousand. The agreement is signed for a 5-year period. The interest rate is 6.5 percent per annum. Principal amount is repaid annually, interest is paid on a monthly basis.
In 2017, the Group signed finance leases for supply of property, plant and equipment in the total amount of Tenge 32,105,743 thousand. The agreements are signed for 10 years. The interest rate is 10 percent per annum. Principal amount and interest are repaid on a monthly basis.
In thousands of Kazakhstani Tenge Due in 1 year Due between
1 and 5 years Due over 5
years Total
Total minimum lease payments at 31 December 2018 4,745,685 17,706,149 15,487,892 37,939,726
Less future finance charge (2,325,876) (7,047,415) (2,837,974) (12,211,265) Present value of minimum lease payments at
31 December 2018 2,419,809 10,658,734 12,649,918 25,728,461
In thousands of Kazakhstani Tenge Due in 1 year Due between
1 and 5 years Due over 5
years Total
Total minimum lease payments at 31 December 2017 2,281,462 8,695,203 6,978,385 17,955,050
Less future finance charge (1,085,810) (3,196,957) (1,480,008) (5,762,775) Present value of minimum lease payments at
31 December 2017 1,195,652 5,498,246 5,498,377 12,192,275
19 Provisions for Assets Retirement Obligations
The Group has a legal obligation to landfill site restoration during the mining operations and decommissioning of its mining property after its expected closure of assets. The breakdown of provisions for assets retirement obligations is detailed below:
In thousands of Kazakhstani Tenge Expected
closing date 31 December 2018 31 December 2017 Minefield Central and east parts of the Shubarkol mine 2050 710,117 468,872 Western part of the Shubarkol Mine 2050 302,998 201,525 Kuduk mine 2020 17,680 11,589 Total provisions for assets retirement obligations 1,030,795 681,986
In thousands of Kazakhstani Tenge
Carrying value at
31 December2018
Fair value at 31 December
2018
Carrying value at
31 December 2018
Fair value at 31 December
2018 Finance lease payables 25,728,461 26,443,848 12,192,275 12,533,577
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
30
19 Provisions for Assets Retirement Obligations (Continued)
Movements in provisions for assets retirement obligations are provided below:
In thousands of Kazakhstani Tenge Note 2018 2017 Carrying amount at 1 January 681,986 318,725 Changes in estimates charged to the increase in assets 7 280,618 324,388 Unwinding of the discount 28 68,191 38,873 Carrying amount at 31 December 1,030,795 681,986
The amount of the provisions for assets retirement obligations is determined using the nominal prices effective at the end of reporting period by applying the forecast rate of inflation for the expected period of the life of the mine and waste polygons, and discount rates at the end of reporting periods.
Principal assumptions used in the calculation of assets retirement obligations are presented below:
In percent 2018 2017 Discount rate 8.7 10.0 Inflation rate 5.1 5.4
The estimate of the discount rate is based on risk-free rates on government bonds. At 31 December 2018 the discount rate decreased from 10.0 percent down to 8.7 percent (2017: decreased from 12.2 percent down to 10.0 percent) due to respective changes in long-term risk-free rates on government bonds.
The Group transfers funds to finance mine site restoration activities to special bank deposit accounts (Note 8). In accordance with the subsurface use contracts, the amount transferred to the bank account should be equal to 2 percent and 0.1 percent of the annual production costs in Central and Western parts of the Shubarkol mine, respectively.
20 Trade and Other Payables
In thousands of Kazakhstani Tenge 2018 2017 Trade payables 235,016 338,811 Total long-term trade payables 235,016 338,811 Trade payables 9,309,624 8,664,826 Other payables 8,308,216 7,611,438 Total short-term trade and other payables 17,617,840 16,276,264 Total financial liabilities 17,852,856 16,615,075 Advances received 11,802,060 5,398,309 Other taxes payable 1,763,757 736,404 Unused vacation provisions 968,304 704,312 Payables to employees 568,469 543,334 Other payables and accrued expenses 317,086 357,980 Total non-financial liabilities 15,419,676 7,740,339 Total trade and other payables 33,272,532 24,355,414
Revenue of Tenge 5,398,309 thousand was recognised in the current reporting period for advances received at 1 January 2018.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
31
20 Trade and Other Payables (Continued)
Financial liabilities are denominated in the following currencies:
In thousands of Kazakhstani Tenge 2018 2017 Tenge 14,462,942 12,078,503 US Dollar 1,588,277 3,238,198 Russian Rouble 1,441,035 1,252,797 Chinese Yuan 352,027 45,577 Euro 8,575 - Total financial liabilities 17,852,856 16,615,075
21 Revenue
In thousands of Kazakhstani Tenge 2018 2017 Sales of extracted coal 59,883,573 42,704,191 Operation of wagons and containers 43,700,931 27,352,050 Sales of coke and tar 7,223,344 6,124,697 Revenue/ commission on sales of purchased coke 5,384,523 5,144,510 Railway services included into cost of coal 4,409,135 3,514,327 Forwarding services 2,432,382 1,858,739 Wagon repair services 1,050,806 1,245,062 Other 871,111 383,384 Total revenue 124,955,805 88,326,960
22 Cost of Sales
In thousands of Kazakhstani Tenge 2018 2017 Depreciation of property, plant and equipment and intangible assets 11,546,515 9,947,094 Light running of wagons and containers 11,926,406 8,579,875 Payroll and related costs 9,238,648 6,735,605 Materials 8,494,535 6,842,260 Cost of coke purchased for resale 4,920,178 4,620,104 Repair and maintenance expenses 3,347,576 3,218,337 Electricity 891,183 892,150 Security 428,056 224,491 Insurance 427,653 409,449 Other taxes 344,277 700,978 Agency fee 173,424 - Personnel education 52,924 68,061 Changes in finished goods and work in progress (25,730) (387,580) Accrual / (reversal) of provision for impairment of inventories 611,900 (335,349) Other 4,341,274 5,682,025 Total cost of sales 56,718,819 47,197,500
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
32
23 Other Operating Income
In thousands of Kazakhstani Tenge 2018 2017 Research services 3,361,321 1,311,197 Income from sale of metal scrap from handling and repairs of wagons 601,564 491,333 Foreign exchange gains less losses 1 237,177 28,812 Net gain from disposal of property, plant and equipment 121,517 115,503 Reusable materials /spare parts 32,987 17,400 Insurance compensation 15,741 29,168 Foreign exchange gain from operating activity (indexation) 7,003 - Other income 329,033 520,123 Total other operating income 4,706,343 2,513,536
1 Foreign exchange gain is presented on a net basis. Amounts of foreign exchange gain and loss on a gross basis for the year ended 31 December 2018, were Tenge 2,097,934 thousand and Tenge 1,860,757 thousand, respectively (31 December 2017: Tenge 4,470,267 thousand and Tenge 4,441,455 thousand, respectively).
24 Other Operating Expenses
In thousands of Kazakhstani Tenge 2018 2017 Region social development 200,747 180,226 Foreign exchange gain from operating activity (indexation) 171,260 - Business interruption expenses 114,073 - Research and development expenses 103,264 41,804 Catering - 67,043 Fines, penalties under contracts and extra-budgetary funds 73,516 58,877 Expenses on purchase of currency 56,110 7,688 Expenses on insured event 21,706 1,415 Inventory provision - 365,825 Other 200,866 344,787 Total other operating expenses 941,542 1,067,665
25 General and Administrative Expenses
In thousands of Kazakhstani Tenge 2018 2017 Management fees 4,350,972 2,894,820 Payroll and related costs 3,831,313 3,445,515 Consulting and other professional services 2,044,886 908,510 Sponsorship and other financial aid 1,228,885 1,190,635 Depreciation of property, plant and equipment and intangible assets 743,277 142,996 Agency agreement fees 666,933 24,503 Rent expenses 232,987 192,434 Taxes other than on income 202,450 624,463 Business travel and representation expenses 150,613 156,269 Repair and maintenance expenses 76,503 65,192 Communication expenses 65,884 42,169 Bank charges 48,859 45,595 Decrease in credit loss allowance for impairment of receivables 32,463 (45,501) Penalties and fine (51,401) 141,391 Other 551,998 1,277,048 Total general and administrative expenses 14,176,622 11,106,039
Contributions to a number of different non-recurring individual social development infrastructure projects at the national level in Kazakhstan amounted to nil (2017: Tenge 500,000 thousand), and primarily related to education, cultural and recreation projects.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
33
26 Finance Income
In thousands of Kazakhstani Tenge 2018 2017 Interest income on loans receivable 9,566,786 14,807,269 Foreign exchange gains less losses 1 9,057,262 6,779,429 Amortisation on financial instruments, discounting income 8,553,049 - Amortisation of financial guarantees 4,753,315 2,577,987 Profit from restructuring of borrowings 3,088,027 - Income from early derecognition of financial guarantees 984,925 1,598,172 Interest income on bank deposits 276,196 326,854 Foreign exchange gain (indexation) 38,052 - Income on initial recognition of loan received at non-market rate 25,278 59 Other finance income 11,253 - Total finance income 36,354,143 26,089,770
1 Foreign exchange gain is presented on a net basis. Amounts of foreign exchange gain and loss on a gross basis for the year ended 31 December 2018, were Tenge 36,474,003 thousand and Tenge 27,921,893 thousand, respectively.
27 Finance Costs
In thousands of Kazakhstani Tenge 2018 2017 Loss from early repayment of loans received 9,654,125 - Amortisation of income from discounting on initial recognition of borrowings 7,809,818 6,590,352 Interest expense on borrowings 7,744,112 7,022,937 Expenses on derecognition of loan received at non-market rate 3,672,456 2,415,243 Interest expense on finance lease liabilities 2,387,469 200,701 Costs on initial recognition and prolongation of financial guarantees 1,687,660 3,915,085 Amortisation of borrowing costs – other 1,132,888 - Expenses on credit loss allowance for loans receivable 538,677 - Indexation expense 516,096 - Provisions for assets retirement obligations: unwinding of discount 68,191 38,873 Employee benefits: unwinding of discount 60,058 76,741 Expense from change in fair value of condition for changing interest rate
depending on commodity price index (385,348) 1,009,624 Foreign exchange losses net 1 - 452,792 Other 1,126,941 33,376
Total finance costs 36,013,143 21,755,724
1 Foreign exchange gain is presented on a net basis. Amounts of foreign exchange gain and loss on a gross basis for the year ended 31 December 2017, were Tenge 21,297,574 thousand and Tenge 21,750,366 thousand, respectively.
28 Income Tax
In thousands of Kazakhstani Tenge 2018 2017 Current income tax expense 10,499,611 5,396,687 Current income tax expense – prior periods (182,330) 424,108 Current excess profit tax expense - 5,298,263 Current excess profit tax expense – prior periods (425,674) 932,522 Total current income tax expense 9,891,607 12,051,580 Deferred income tax expense / (benefit) (521,651) 1,746,615 Deferred excess profit tax benefit - (945,414) Total deferred income tax expense / (benefit) (521,651) 801,201 Income tax expense for the year 9,369,956 12,852,781
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
34
28 Income Tax (Continued)
Reconciliation between the expected and the actual taxation charge is provided below:
In thousands of Kazakhstani Tenge 2018 2017 Profit before tax 56,060,215 35,177,531 Theoretical tax charge at statutory rate of 20% (2017: 20 %) 11,212,043 7,035,506 Tax effect of items which are not deductible or not taxable for taxation purpose:
- current excess profit tax (425,674) 6,230,785 - deferred excess profit tax - (945,414) - current income tax – prior periods (182,330) 424,108 - deferred income tax – prior periods (864) - financial guarantees (810,117) (89,963) - sponsorship aid 22,549 253,856 - effect of different tax rates in other countries 19,543 (4,115) - profit and income not taxable according to legislation 13,428 - - social sphere maintenance (414,953) - - unrecognised tax loss 5 558 - other permanent differences (63,674) (52,540) Income tax expense for the year 9,369,956 12,852,781
Differences between IFRS and statutory taxation regulations in the Republic of Kazakhstan give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases for the purposes of income tax. The tax effect of the movements in these temporary differences is detailed below, and is recorded at the rate applicable to the period of assets realisation or liabilities settlement.
In thousands of Kazakhstani Tenge 31 December
2017
Adoption of IFRS 9
(adjustment of opening balance)
Charged to profit or
loss
Charged to other
compre-hensive income
31 December 2018
Tax effect of deductible temporary differences
Employee benefits payable (171,534) - (55,247) 197 (226,584) Trade and other payables (157,801) (19,984) 122,179 - (55,606) Provision for impairment of inventories (276,131) - (77,825) - (353,956) Loans receivable with discounted value - (112,934) (128,295) - (241,229) Other accruals (33,605) - (260,976) - (294,581)
Gross deferred income tax asset (639,071) (132,918) (400,164) 197 (1,171,956) Tax effect of deductible temporary
differences
Property, plant and equipment 8,659,471 - 1,286,992 - 9,946,463 Borrowings 2,336,968 1,194,041 (1,416,903) - 2,114,106 Provisions for assets retirement obligations 313,007 - 9,144 - 322,151 Provisions for reimbursement of historical costs 9,000 - (720) - 8,280 Gross deferred income tax liability 11,318,446 1,194,041 (121,487) - 12,391,000 Less: offsetting with deferred income tax asset (639,071) (132,918) (400,164) 197 (1,171,956) Recognised deferred income tax liability 10,679,375 1,061,123 (521,651) 197 11,219,044
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
35
28 Income Tax (Continued)
In thousands of Kazakhstani Tenge 31 December
2016 Charged to
profit or loss
Charged to other compre-
hensive income
31 December 2017
Tax effect of deductible temporary differences Employee benefits obligations (193,541) 13,549 8,458 (171,534) Trade and other payables (216,144) 58,343 - (157,801) Provision for impairment of inventories (320,156) 44,025 - (276,131) Loss from non-contractual activities (15,017) 15,017 - - Other accruals - (33,605) - (33,605) Gross deferred income tax asset (744,858) 97,329 8,458 (639,071)
Tax effect of deductible temporary differences Property, plant and equipment 8,451,842 207,629 - 8,659,471 Borrowings 1,717,089 619,879 - 2,336,968 Provisions for assets retirement obligations 380,916 (67,909) - 313,007 Provisions for reimbursement of historical costs 13,099 (4,099) - 9,000 Other accruals 51,628 (51,628) - - Gross deferred income tax liability 10,614,574 703,872 - 11,318,446 Less: offsetting with deferred income tax asset (744,858) 97,329 8,458 (639,071) Recognised deferred income tax liability 9,869,716 801,201 8,458 10,679,375
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income taxes relate to the same tax authority.
Offset amounts are presented below:
In thousands of Kazakhstani Tenge 2018 2017 Deferred income tax assets: - to be recovered after 12 months (527,576) (455,863) - to be recovered within 12 months (644,380) (183,208) Deferred income tax assets (1,171,956) (639,071) Deferred income tax liabilities: - to be recovered after 12 months 11,298,257 10,958,415 - to be recovered within 12 months 1,092,743 360,031 Deferred income tax liabilities 12,391,000 11,318,446 Recognised deferred income tax liability 11,219,044 10,679,375
29 Contingencies, Commitments and Operating Risks
Tax legislation. Kazakhstani legislation and tax practice is continuously developing, and therefore is subject to varying interpretations and frequent changes, which may be retrospective. In addition, the interpretation of tax legislation by tax authorities in relation to the transactions and activities of the Group may not coincide with the interpretation of the management. As a result, the Group’s transactions may be challenged by the tax authorities, and which can lead to occurrence of additional taxes, penalties and fines. Tax inspections are open for retrospective review by the Kazakh tax authorities for five years.
Despite the risk of challenging by Kazakhstani tax authorities the policies used by the Group, including those related to transfer pricing and excess profits tax (Note 2), management believes that it will be able to defend its position in case of disputes, and also notes that the amount of a potential claim by the tax authorities is not subject to reasonable assessment. Accordingly, as at 31 December 2018, the consolidated financial statements do not include provisions for potential tax liabilities (2017: no provisions recorded).
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
36
29 Contingencies, Commitments and Operating Risks (Continued)
Changes to tax legislation. Amendments made to the Tax Code effective from 1 January 2018 did not have a significant impact on the Group.
Transfer pricing. According to the transfer pricing law, international business transactions are subject to government control. This law prescribes Kazakhstani companies to maintain and, if required, to provide economic rationale and method of the determination of prices used in international business transactions, including existence of the documentation supporting the prices and price differentials applied. Additionally, price differentials cannot be applied to the international business transactions with companies registered in offshore countries. In case of deviation of transaction price from market price, tax authorities have the right to adjust taxable base and to impose additional taxes, fines and interest penalties.
The transfer pricing law in some areas lacks detailed clear-cut guidance as to how its rules should be applied in practice (for example, the form and content of documentation supporting the discounts), and determination of the Group’s tax liabilities within the context of the transfer pricing regulations requires an interpretation of transfer pricing law.
The Group conducts transactions subject to the state transfer pricing control. Sales of products to the Group’s cross-border customers are set at market prices based on the arm’s-length principle.
Environmental matters. Application of environmental regulations in the Republic of Kazakhstan is developing and the government authorities’ position is continually being reconsidered. The Group periodically evaluates its obligations under environmental regulations. As obligations are determined, they are recognised immediately in the consolidated financial statements. Potential liabilities, which might arise as a result of changes in existing regulations, civil litigation or legislation, cannot be estimated but could be material. In the current enforcement climate under existing legislation, management believes that there are no significant liabilities for environmental damage, apart from those already recognised in these consolidated financial statements.
The Gorup has implemented an integrated management system that includes: a quality management system ISO 9001, a system of environmental protection management system ISO 14001 and the health and labour safety management system OHSAS 18001.
In October 2018 a supervisory audit of the environmental management system, operational health and safety management system, and energy management system was carried out which confirmed their compliance with ISO 9001:2015, ISO 14001:2015, OHSAS 18001:2007.
On 1 January 2013, the Greenhouse Gas Trading System was established in the Republic of Kazakhstan. The Government of the Republic of Kazakhstan approved the National Plan for Distribution of GHG Quotas providing free of charge allocation of a limited number of quotas between such major operators (users of natural resources) whose aggregate carbon dioxide (СО2) emissions exceed 20 thousand tons per year. Under the environmental legislation, obtaining GHG quotas should be the direct obligation of users of natural resources. Should actual GHG emissions exceed the amount of quota issued, the Group shall obtain additional quota or purchase deficient quality of quotas at the exchange. During 2018 and 2017, actual emissions of greenhouse gases did not exceed quota given.
Provision for asset retirement and restoration obligations. Kazakhstani legal environment and practice is continuously evolving, which may result in varying interpretations and changes in the existing legislation, as well as introduction of the new laws and regulations. Management believes that sufficient provisions have been recorded in these consolidated financial statements with respect to assets retirement obligations arising from requirements of existing regulations and the Group’s operations. However, changes in the legislation or its interpretation, as well as changes in management’s judgement may require the Group to revise its estimates and create an additional provision for assets retirement obligations.
Legal proceedings. From time to time and in the normal course of business, claims against the Group are received. On the basis of its own estimates and both internal and external professional advice, the Group’s management believes that no material losses will be incurred in respect of these claims.
Work program compliance. In Kazakhstan, all subsurface reserves belong to the State represented by the Ministry of Industry and New Technologies of the Republic of Kazakhstan which issue exploration and production rights to legal entities. Subsurface use rights are not granted in perpetuity and any renewal must be agreed before the expiration of the relevant contract or license. These rights may be terminated by the Ministry if the Group does not meet its contractual liabilities.
According to the annual work program approved by the Ministry of Industry and New Technologies, the Company should achieve annual coal production level of 5,800-8,700 thousand tons from 2009 to 2050. In 2018, the Group produced 11,598 thousand tons (2017: 10,455 thousand tons).
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
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29 Contingencies, Commitments and Operating Risks (Continued)
Long-term sales contracts. In October 2011, the Group signed a long-term sales contract for the delivery of coal. Contract’s validity period lasts until the later of: (i) 31 December 2021, (ii) date, when common level of deliveries is achieved, (iii) later date agreed by parties.
Insurance. The insurance industry in the Republic of Kazakhstan is in a developing stage and many forms of insurance protection common in other parts of the word are not yet generally available in the Republic of Kazakhstan. The Group does not have full coverage for its plant facilities and losses caused by business interruptions. The Group has ensured against third party liabilities in respect of property or environmental damage arising from accidents on Group property or relating to Group operations. Until the Group obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on the Group’s operations and financial position.
Capital expenditure commitments. At 31 December 2018, the Group has contractual capital expenditure commitments on purchase of property, plant and equipment of Tenge 5,172,432 thousand (2017: Tenge 20,896,847 thousand).
The Group has already allocated the necessary resources in respect of these commitments. The Group’s management believes that future net income and funding will be sufficient to cover these and any similar commitments.
30 Financial Risk Management
Financial risk factors. The Group’s activities expose it to a variety of financial risks: credit risk, market risk (including foreign exchange risk), and liquidity 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.
(а) Credit risk
Financial assets, which potentially expose the Group to credit risk, consist mainly of loans receivable, restricted cash, trade and other financial receivables, loans issued, current deposits and cash and cash equivalents. Cash is placed with financial institutions, having minimum default risk as of the account opening date. In addition, the Group analyses external ratings of financial institutions.
The Group has policies in place to ensure that sales of products and services are made to customers with an appropriate credit history. The clients, which do not meet the solvency requirements of the Group, can enter into transactions with the Group only on the terms of prepayments. Loans are provided only to the Group’s related parties.
The Group has guaranteed the obligations of its related parties in the amount of Tenge 652,858,907 thousand (2017: Tenge 1,796,988,504 thousand) (Note 17), which also gives rise to its exposure to the credit risk.
(b) Market risk
Currency risk. Foreign exchange risk arises when future foreign currency inflows or recognised assets and liabilities are denominated in currency other than the Group’s and its subsidiaries’ functional currency.
The Group is exposed to currency risk on sales, purchases and loans receivable that are denominated in the currencies other than the respective functional currencies of the Group and its subsidiaries, primarily in US Dollars and Russian Roubles.
In respect of other monetary assets and liabilities denominated in foreign currencies, the Group ensures that its net exposure is kept to an acceptable level by buying or selling foreign currencies at spot rates when necessary to address short-term imbalances.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
38
30 Financial Risk Management (Continued)
The table below shows assets and liabilities balances denominated in foreign currencies, which are exposed to foreign currency risk.
In thousands of Kazakhstani Tenge US Dollar Russian Rouble Chinese Yuan Euro Total
2018 Financial assets denominated in foreign currency 187,488,977 617,696 2,340,425 7,101 190,454,199 Financial liabilities denominated in foreign currency (142,558,177) (1,441,035) (352,027) (8,575) (144,359,814) 2017 Financial assets denominated in foreign currency 108,094,933 2,270,548 1,243,348 - 111,608,829 Financial liabilities denominated in foreign currency (101,757,320) (1,252,797) (45,577) - (103,055,694)
At 31 December 2018, if the exchange rate of US Dollar to Tenge had increased/decreased by 20 percent with all other variables held constant, net profit for the year would have been Tenge 7,375,081 thousand higher/lower (2017: increased by 20 percent, net profit would have been Tenge 1,115,420 thousand higher/lower), mainly due to the foreign exchange gain/loss on translation of US Dollar denominated loans receivable, borrowings, and cash and cash equivalents.
Price risk. The Group does not enter into any contracts for purchase of goods other than those intended for use or sale, based on the expected needs of the Group, such contracts do not contemplate any net settlements.
Interest rate risk. Changes in interest rates affect mainly attracted 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.
Sensitivity to changes in interest rates is applicable not only to financial instruments with floating rates, but also to loans receivable and borrowings, recognised at fair value.
As at the reporting date, the effect from changes in interest rates with respect to the Group’s financial assets is not significant.
(c) Liquidity risk
Liquidity risk is defined as the risk that the Group will encounter difficulty meeting obligations associated with financial liabilities in due time. The Group’s approach to liquidity management is to ensure, as far as possible, the continuous and sufficient liquidity to meet the Group’s liabilities as they fall due (both under standard and non-standard situations), preventing unacceptable losses or the Group’s reputation damage risk.
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
39
30 Financial Risk Management (Continued)
The table below analyses the Group’s financial liabilities into relevant maturity groupings based on the remaining period at the reporting date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows (except for financial guarantees and preference shares, for which maturity was presented based on present value figures). Balances due within 12 months equal their carrying amounts as the impact of discounting is not significant.
In thousands of Kazakhstani Tenge Note Carrying value
Cash flows under
agreement 0-6
months 6-12
months 1-3 years Over
3 years At 31 December 2018 Borrowings 16 167,498,465 220,554,702 4,864,660 8,956,518 88,330,198 118,403,326 Finance lease 18 25,728,461 37,245,295 2,098,137 2,464,563 8,994,965 23,687,630 Trade payables 20 9,544,640 9,708,196 9,394,841 78,339 235,016 - Other payables 20 8,308,216 8,308,216 8,308,216 - - - Dividends payable 14 85,293 85,293 85,293 - - - Preference share liabilities 63,529 184,494 - 5,951 11,903 166,640
Total financial liabilities 211,228,604 276,086,196 24,751,147 11,505,371 97,572,082 142,257,596
At 31 December 2017 Borrowings 16 137,010,580 205,885,451 4,522,234 6,210,961 79,439,763 115,712,493 Finance lease 18 12,192,275 17,672,825 947,462 1,324,616 4,345,690 11,055,057 Trade payables 20 9,003,637 8,664,826 8,258,254 67,761 338,811 - Other payables 20 7,611,438 7,611,438 7,611,438 - - - Dividends payable 14 84,029 84,029 84,029 - - - Preference share liabilities 56,956 190,445 - 5,951 11,903 172,591 Total financial liabilities 165,958,915 240,109,014 21,423,417 7,609,289 84,136,167 126,940,141
The Group has also issued financial guarantees in respect of the debt facilities obtained by its related parties.
During 2018, all liabilities of the Group were executed in full on a timely basis according to the terms of signed agreements.
Capital risk management. The Group’s objectives when managing capital 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 maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders and return capital to shareholders or sell assets to reduce debt.
Within the framework of capital management, the Group takes into account the following amounts:
In thousands of Kazakhstani Tenge 2018 2017 Borrowings and finance lease 193,226,926 149,202,855 Equity attributable to the Group’s shareholders 91,803,567 40,586,001 Total equity 285,030,493 189,788,856
Shubarkol romir JSC Notes to the Consolidated Financial Statements – 31 December 2018
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31 Financial Instruments
Fair value of financial instruments carried at amortised cost
Fair value of financial instruments carried at amortised cost is based on estimated future cash flows expected to be received discounted at current interest rates for new instruments with similar credit risks and remaining maturities.
Fair value of loans receivables and borrowings is within Level 2 of the fair value hierarchy and is disclosed in Notes 12 and 16. Fair values of other financial assets and liabilities carried at amortised cost approximates their carrying amounts.
Fair value of financial instruments measured at fair value
The Group applies judgement in categorising financial instruments using the fair value hierarchy in order to choose different techniques and verify assumptions, which are mainly based on the market conditions at each reporting date, and fair value measurement of other parties. As at 31 December 2018 and 31 December 2017, the Group did not have financial instruments of Level 1. The Group did not make transfers between the hierarchy levels.
Fair value of financial instruments of level 2 are derived from standard option pricing models, discounted cash flow models using quoted prices, such as forward commodity prices.
The fair value of investments in equity instruments, related to level 3 measurement of the hierarchy, are derived based on discounted cash flow models. Significant immense assumptions relate to revenue based on the market conditions. Despite the assumptions being subjective estimate, management believes that potential alternatives related to this assumption do not have significant impact on overall assessment of the instrument.
32 Events after the balance sheet date
In March 2019, the Group received payments under a set of loans issued to entities under common control totaling USD 323,113 thousand.
In March 2019, the Group issued loan to the entity under common control in the amount of USD 333,889 thousand with the maturity in August 2019.
