OREANDA-NEWS. On 13 May 2009 Chelyabinsk Zinc Plant (LSE: CHZN, RTS, MICEX: CHZN), Russia’s largest producer of zinc and zinc alloys, announced its IFRS financial results for the full year ended December 31, 2008.

2008 HIGHLIGHTS

•       Revenue for the twelve months of 2008 totaled RUR 9,973 million compared to RUR 15,527 for the same period last year.

•       2008 EBITDA amounted RUR 10 million compared to EBITDA of RUR 3,680 million in 2007.

•       Net loss for twelve months of 2008 was RUR 3,523 million compared to RUR 1,914 million profit for the twelve months of 2007.

•       2008 net earnings have been affected by decrease of LME zinc prices, RUR 306 million exploration and evaluation assets written off based on the results of the evaluation of the reserves for the Amur deposit, RUR 1,973 impairment loss related to mining assets in Kazakhstan as a result of a review of the carrying values and estimated recoverable amounts of property, plant and equipment and non-cash accounting adjustment of RUR 779 million for goodwill.

Commenting 2008 financial results Mr. Moiseyev, Chairman of Chelyabinsk Zinc, said: “Global markets crisis has had a negative effect on our industry. In the last quarter of 2008, increased turmoil in the credit markets, sudden and rapid decline of zinc prices and global recession created a substantially more difficult business environment, that affected our operating performance. We expect that adverse economic conditions and their effect on the zinc industry will continue during 2009, therefore we adjusted our production concentrating on cost-cutting and liquidity management“.

2008 Consolidated financial results

 

2008

2007

Change

Revenue

(in millions of Russian RURles)

(%)

9 973

15 527

(36)

Gross (loss)/profit

(1 778)

3 862

N/A

Gross margin

N/A

25%

 

EBITDA

10

3 680

(100) N/A

EBITDA margin

-

24%

 

(Loss)/profit before income tax

(4 512)

2 628

 

Net (loss)/income

(3 523)

1 914

N/A

Net margin

N/A

12%

 

(1) EBITDA, for any relevant period, represents operating profit before depreciation and amortization. EBITDA is presented because CZP considers it an important supplemental measure of CZP’s operating performance and believes it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in CZP’s industry. EBITDA has limitations as an analytical tool, and it should not be considered in isolation, or as a substitute for analysis of CZP’s operating results as reported under IFRS. Some of these limitations are as follows:

•   EBITDA does not reflect the impact of financing costs, which are significant and could further increase if CZP incurs more debt, on CZP’s operating performance.

•   EBITDA does not reflect the impact of income taxes on CZP’s operating

performance.

•   EBITDA does not reflect the impact of depreciation and amortization on CZP’s operating performance. The assets of CZP’s business which are being depreciated and/or amortized will have to be replaced in the future and such depreciation and amortization expense may approximate the cost to replace these assets in the future. By excluding this expense from EBITDA, EBITDA does not reflect CZP’s future cash requirements for these replacements.

•   Other companies in CZP’s industry may calculate EBITDA differently or may use it for different purposes than CZP does, limiting its usefulness as a comparative measure.

CZP compensates for these limitations by relying primarily on its IFRS operating results and using EBITDA only supplementally. See CZP’s consolidated statements of income and consolidated statements of cash flows included in the current press release.

EBITDA is a measure of CZP’s operating performance that is not required by, or presented in accordance with, IFRS. EBITDA is not a measurement of CZP’s operating performance under IFRS and should not be considered as an alternative to profit for the year, operating profit or any other performance measures derived in accordance with IFRS or as an alternative to cash flow from operating activities or as a measure of CZP’s liquidity. In particular, EBITDA

should not be considered as a measure of discretionary cash available to CZP to invest in the growth of its business.

Production and Sales

January through December 2008, Chelyabinsk Zinc Plant (CZP) produced 150.0 th. tonnes of salable SHG zinc and zinc based alloys, an increase of 1.4% as compared to the same period of 2007 (147.9 th. tonnes). The Company was increasing production volumes within first 3 quarters of 2008 as compared to the same period of 2007: for the 9 months of 2008 production of salable zinc totaled 118.1 th. tonnes of SHG zinc and zinc based alloys, an increase of 8% as compared to the same period of 2007 (110.1 th. tonnes). In November-December CZP reduced production by c. 20% compared to January-October average monthly volumes as a respond to the decline in domestic consumption.

CZP’s subsidiary, Nova Zinc LLC, operator of Akzhal zinc and lead mine in Kazakhstan, produced 32.3 th. tonnes of zinc in zinc concentrate, an increase of 7.8% compared to the 2007 results (30.0 th. tonnnes). Lead in lead concentrate production increased by 20% to 5.7 th. tonnes (vs. 4,8 th tonnes in January – December of 2007).

CZP’s subsidiary, The Brock Metal Company Limited (the leading UK supplier of zinc and aluminum die-casting alloys) sold 25,470 tonnes of products January through December 2008, 14.6% less than for the same period of

2007 (29,823 tonnes).

Revenue

CZP’s revenue decreased by 36% to RUR 9,973 mln for the twelve months of

2008 as compared to the same period of last year (2007: RUR 15,527 mln). Decrease in revenue was mainly caused by LME zinc and lead prices fall. January through December 2008, the average zinc price on the LME decreased by 42,5 % to USD 1,870/tonne as compared to the 12 months of

2007 average LME price of USD 3,250/tonne. As major consuming markets have collapsed since summer 2008, LME zinc prices traded roughly between USD 1,800 and USD 1,1000 (for the first nine months of 2008 the average zinc price was USD 2,099/tonne, 4th quarter average LME zinc price – USD 1,185).

LME lead prices followed a similar pattern to zinc during 2008. LME lead average price for 2008 amounted USD 2,085, that was 20% less over the prior year average LME lead price of USD 2,595. The highest Cash Settlement Price of USD 3460 was recorded on 4 March and the lowest of USD 880 on 22 December (for the first nine months of 2008 the average lead price was USD 2,366/tonne, 4th quarter average LME lead price – USD 1,245).

These factors were partly compensated by consolidation of Brock Metal from June 29, 2007. Expansion of SHG zinc and zinc based alloys sales to the domestic market within January-October of 2008 as compared to the sales in 2007 had a positive effect on revenue as well (2008 domestic sales at the year end accounted 52% of total sales (by tonnage) compared to 49% in 2007)

Revenue structure

 

2008

2007

Change

 

(in millions of Russian RURles)

%

Zinc and zinc alloys

8 489

13 963

(39)

Lead concentrate

146

389

(62)

Other products

1 339

1 175

14

Total revenue

9 973

15 527

(36)

Revenue from sale of zinc and zinc alloys decreased by 39% to RUR 8,489 mln for the twelve months of 2008 (versus RUR 13,963 mln in 2007). The decrease was caused by LME average zinc prices decline in 2008 compared to 2007 average zinc prices.

CZP received RUR 146 mln revenue from sale of lead concentrate in 2008, 62% less then for the same period of 2007 due to decrease of the LME lead price and no sales of lead concentrate in 1H 2008. Sales of lead in lead concentrate totaled 4.0 th tonnes for twelve months of 2008, that is 26% less then in 2007 (5.5 th tonnes of lead in lead concentrate)

Revenue from CZP’s other products increased by 14% to RUR 1,040 mln in 12 months 2008 (12 months 2007: RUR 1,175 mln) as a result of consolidation of Brock Metal from June 29, 2007 and sulphuric acid price increase (2008 sulphuric acid average price– RUR 1,341 per tonne, 2007 -RUR 317 per tonne).

Cost of Sales

 

2008

2007

 

(in millions of Russian RURles)

Raw materials and consumables used

5 186

8 479

Utilities and fuel

1 386

1 173

Production overheads

254

165

Repairs and maintenance

485

441

Depreciation and amortisation

1 024

954

Staff cost

623

474

Change in work-in-progress

(151)

62

Change in finished goods

109

(204)

Inventory obsolescence provision

392

9

Precious metal revaluation

(23)

(28)

Cost of goods and material for resale

491

138

Total cost of sale

9 778

11 664

In 2008 cost of sales decreased by 16% to RUR 9,778 mln from RUR 11,664 mln for the same period of 2007.

Cost of materials and consumables used primarily comprises the cost of purchases of zinc concentrate, secondary raw materials and auxiliary materials used in the zinc production process. Despite 2008 production volumes remained practically at the level of 2007 and consolidation of Brock Metal, cost of material and consumables used decreased by 39% to RUR 5,186 mln (2007: RUR 8,479 mln) which is equal to 53% of the total cost of sales (2007: 73%), and was caused by decrease of LME zinc prices and prices for zinc raw materials.

Costs of utilities and fuel increased by 18% up to RUR 1,386 mln in January-December of 2008 (January-September, 2008: RUR 1,173 mln). This increase was primarily due to an increase in average tariffs for CZP to RUR 1.450 per kWh in 12 months 2008 as compared to the CZP tariff of RUR 1.266 per kWh in 12 months 2007.

Production overheads amounted RUR 254 mln by December 31, 2008 (RUR 165 mln in 2007). RUR 89 mln increase was caused by Brock Metal consolidation and increase in Nova Zinc production overheads caused by stripping operations growth.

Staff costs increased to RUR 623 mln for the twelve months of 2008, which is 32% more than for the same period of 2007 (RUR 474 mln), reflecting mainly the trend of average salary growth in Russia and Kazakhstan and consolidation of the staff costs of Brock Metal from 29 June 2007.

The cost of goods and materials for resale increased for more then three times to RUR 491 mln in 2008 (2007: RUR 138 mln) due to increased volumes of zinc purchased from RF Federal Agency for State Reserves.

Impairment of property, plant and equipment

As of 31 December 2008 RUR 1,973 impairment loss was recognized in relation to mining assets in Kazakhstan (Nova Zinc operator of Akzhal Mine) as a result of a review of the carrying values and estimated recoverable amounts of property, plant and equipment.

Distribution Costs

Distribution costs include primarily transportation costs and customs duties. For the twelve months of 2008 these costs decreased by 8% to RUR 359 mln (vs. RUR 390 mln for the twelve months of 2007). Such decrease was mainly caused by changes in zinc and by-products sales structure

General and Administrative Expenses

General and administrative expenses increased in 2008 by 13% to RUR 912 min from RUR 808 mln in 2007 as a result of consolidation of Brock Metal general and administrative from 29 June 2007.

Exploration and Evaluation Costs

CZP commissioned SRK Exploration Services Ltd to undertake a provisional JORC compliant resource estimation on data pertaining to the Chelyabinsk Zinc Project in Russia – Amur deposit. According to the SRK report the Project as it stands today and assuming that all inferred resources can be realized into ore reserve, is not economic. Based on the received results and on the sharp decline of zinc price CZP Board of Directors decided to cease development of the mine. As a result, exploration and evaluation assets amounting to RUR 306 mln have been written off in 2008.

Goodwill impairment

Goodwill is related to acquisition of 100% of shares in Nova Holding AG, company that owns Nova Zinc – operator of Akzhal Mine in Kazakhstan. As of 31 December 2008 impairment loss of RUR 779 mln was recognized in the income statement as a result of market zinc and lead price decrease that impacted goodwill impairment test.

Profit (loss)

Net loss for the 12 months of 2008 was RUR 3,523 mln compared to RUR 1,914 profit for the 12 months of 2007

Due to net loss on operations for the year ended 31 December 2008, Chelyabinsk Zinc has breached certain financial covenants under the terms of the Bayerische Hypo- and Vereinsbank and the consortium of CJSC UniCredit Bank, Moscow and VTB Bank (France) SA Loan Facility. Therefore these loans are classified as short-term.

In January 2009 CZP has signed an amendment to the Facility Agreement with Bayerische Hypo- und Vereinsbank AG, CJSC International Moscow Bank and VTB Bank (France) SA. The parties agreed to reduce repayments by 50% for the period beginning 1 January 2009 ending 30 June 2009 with an option to reduce payments in a similar manner for each of the three month periods ending 30 September and 31 December 2009. The interest rate in each period will increase from LIBOR + 2.5% to LIBOR + 5%.