OREANDA-NEWS. May 20, 2010. Chelyabinsk Zinc Plant (LSE, RTS, MICEX: CHZN), Russia's largest producer of zinc and zinc alloys, is pleased to announce its audited IFRS financial results for the year ended December 31, 2009.

2009 HIGHLIGHTS

. Chelyabinsk Zinc Plant’s (CZP) revenue for 2009 totaled RUB 10,167 million compared to RUB 9,973 million for the same period last year.

. 2009 EBITDA amounted RUB 2,070 million and was equal to 20% of revenue compared to EBITDA of RUB 10 million in 2008.

. Net profit for 2009 was RUB 643 million compared to a loss of RUB 3,523 million for 2008. The main reasons for this improvement are the decreased cost of sales and substantially lower one-off adjustments (asset write-downs and impairment charges) compared to the previous year.

2009 Consolidated financial results

 

2009

2008

Change

 

(in millions of Russian Roubles)

(%)

Revenue

10,167

9,973

2

Gross profit

2,178

(1,753)

N/A

Gross margin

21%

N/A

 

EBITDA

2,070

10

N/A

EBITDA margin

20%

0%

 

Profit/(loss) before income tax

891

(4,512)

N/A

Net income/(loss)

643

(3,523)

N/A

Net margin

6%

N/A

 

(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 CZPs operating performance and believes it is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in CZPs industry. EBITDA has limitations as an analytical tool, and it should not be considered in isolation, or as a substitute for the analysis of CZPs 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 can

further increase if CZP incurs more debt .     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 CZPs operating performance. The assets of CZPs 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 as a supplemental measure. Please refer to the consolidated statements of income and consolidated statements of cash flows of CZP 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 measure 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.

Reconciliation of EBITDA to net income for the periods indicated is as follows:

 

2009

2008

 

(in millions of Russian Roubles)

 

Profit/(loss) for the period

643

(3,523)

Add:

 

 

Depreciation and amortization

898

1,086

Finance income and costs, net

102

63

Foreign currency exchange loss/(gain), net

51

316

Income tax expense/(credit)

248

(990)

Goodwill impairment

-

779

Exploration and evaluation costs

58

306

Impairment of property, plant and equipment

70

1,973

EBITDA

2,070

10

Production and Sales

In 2009, CZP produced 119.9 thousand tonnes of salable SHG zinc and zinc based alloys; this is a decrease of 20% as compared to the same period of 2008 (150.0 thousand tonnes). CZP’s sales for the period were 119.8 thousand tonnes, which is 20% less than for the same period of 2008 (149.9 thousand tones). 64% (76.4 thousand tonnes) of zinc and zinc alloys was supplied to the domestic market. Export sales comprised 43.4 thousand tonnes or 36% of CZP’s total sales in 2009 (2008: domestic market – 77.2 thousand tonnes, export - 72.7 thousand tonnes of SHG zinc and zinc based alloys, accordingly).

In 2009, CZP’s subsidiary, Nova Zinc LLC, operator of the Akzhal zinc and lead ore mine in Kazakhstan, produced 34.8 thousand tonnes of zinc in zinc concentrate (2008: 32.3 thousand tonnes). The majority (84%) of zinc concentrate produced by Nova Zinc LLC has been supplied to the Chelyabinsk Zinc Plant. Lead in lead concentrate production for the period totaled 4.0 thousand tonnes.

CZP's subsidiary, The Brock Metal Company Limited (the leading UK supplier of zinc die-casting alloys), sold 22.2 thousand tonnes of products in 2009, 13% less than for the same period of 2008 (25.4 thousand tonnes).

Revenue

CZP's revenue increased by 2% to RUB 10,167 mln for 2009 as compared to the prior year (2008: RUB 9,973 mln).

In spite of the considerable decrease of zinc production and sales in 2009, CZP increased its revenue.

During the year there was a significant increase in the LME zinc price from USD 1,187 in January to USD 2,376 in December 2009. The LME average price for 1H 2009 was USD 1,322/tonne compared to USD 1,982/tonne for 2H 2009.

LME lead prices followed a similar pattern to zinc. The LME average lead price for 1H 2009 was USD 1,330/tonne and for 2H 2009 - USD 2,107/tonne.

Revenue structure

 

2009

2008

Change

 

(in millions of Russian Roubles)

(%)

Zinc and zinc alloys

8,126

8,486

(4)

Zinc concentrate

148

-

-

Lead concentrate

571

146

(N/A)

Other products

1,322

1,341

(2)

Total revenue

10,167

9,973

2

Revenue from the sale of zinc and zinc alloys decreased by only 4% to RUB 8,126 mln for 2009 (versus RUB 8,486 mln in 2008), although the reduction of zinc and zinc alloys production was 20%. The lower tonnage of sales was partially compensated by the devaluation of the Russian ruble and by the 35% increase of sales in 2H 2009 at considerably higher zinc prices as compared to 1H 2009.

CZP received RUB 571 mln of revenue from sale of lead concentrate in 2009 (2008: RUB 146). CZP's subsidiary Nova Zinc LLC in 2009 sold 5.7 thousand tonnes of lead in lead concentrate, an increase of 43% compared to the 2008 results (4.0 thousand tonnes). At the same time, CZP increased sales of lead in lead concentrate to 5.0 thousand tonnes (2008: 1 thousand tonnes).

Revenue from CZP’s other products decreased by 2 % to RUB 1,322 mln in 2009 (2008: RUB 1,341 mln).

Cost of Sales

 

2009

2008

 

(in millions of Russian Roubles)

Raw materials and consumables

 

 

used

4,262

5,187

Utilities and fuel

1,282

1,386

Production overheads

104

254

Mineral extraction tax

172

-

Repairs and maintenance

399

486

Depreciation and amortization

806

999

Staff cost

590

623

Change in work-in-progress

88

(151)

Change in finished goods

136

109

(Reversal of)/Inventory write-down

(395)

392

Precious metals revaluation

(21)

(23)

Cost of goods and material for resale

301

491

Physical inventory count adjustment

195

-

Total cost of sale

7,919

9,753

In 2009 cost of sales decreased by 19% to RUB 7,919 mln from RUB 9,753 mln in 2008.

The cost of materials and consumables used primarily comprises the cost of zinc concentrate, secondary raw materials and auxiliary materials used in the zinc production process. Due to production output drawdown and decrease of an average LME zinc price and hence prices for zinc raw materials in 2009 as compared to 2008, cost of materials and consumables used in production decreased by 18% to RUB 4,262 mln (2008: RUB 5,187 mln) which represents 54% of the total cost of sales (2008: 53%).

Costs of utilities and fuel decreased by 8% to RUB 1,282 mln in 2009 (2008: RUB 1,386 mln). This decrease was primarily due to a decrease in consumption of electricity at CZP's production facilities in Chelyabinsk, as a result of a decrease in overall production levels. At the same time in 2009 average electricity tariff for CZP increased to RUB 1.671 per kWh as compared to the CZP tariff of RUB 1.450 per kWh in 2008.

Production overheads were RUB 104 mln in 2009 (RUB 254 mln in 2008). The decrease of production overheads is mainly explained by the absence of outsourcing costs related to transportation of waste mined at Akzhal field in 2009.

Mineral extraction tax for amounted to RUB 172 mln (2008: RUB 0). According to the New Tax Code in Kazakhstan, starting from 1 January 2009, the royalty was replaced by the mineral extraction tax.

During the first half of 2009 CZP implemented cost cutting measures to minimize the impact of negative market environment that affected Company’s operating and financial performance. These measures included a decrease in labor costs - a decline in the overall number of CZP’s personnel and introduction of a 4-day working week for some staff. As a result, the Company saved RUB 33 mln, staff costs decreased to RUB 590 mln in 2009, which is 5% less than in 2008 (RUB 623 mln).

The cost of goods and materials for resale decreased to RUB 301 mln in 2009 (2008: RUB 491 mln). This is primarily due to decrease of volumes of zinc purchased from RF Federal Agency for State Reserves.

As a result of the stock-count held on 1 October 2009, a shortage of zinc concentrate and zinc cakes was identified. Management performed an analysis of the causes for the shortage and determined these reasons as transportation losses and inaccuracies inherent in bulk inventory surveying methods. The allowable margin of error for measurement of bulk materials constitutes 12% in accordance with the instruction on Keeping Survey Records of Mining Work Performed in Open Pits issued by Federal Mining and Industrial Inspectorate of Russia. In prior years’ stock-counts, no deviations of more than 12% were identified. Based on the Company’s policy, if a difference between the actual and recorded physical quantity of inventory exceeds this margin of error, shortage or surplus should be recorded in the accounting books in full amount, i.e. irrespective of the allowable margin of error. As a result, a loss in the amount of RUB 195 mln was recognized in 2009 statement of income.

Impairment of property, plant and equipment

Due to uncertainty about the completion of construction of crushing and sorting plant, construction-in-progress assets in Kazakhstan amounting to RUB 69,810 thousand were written off in 2009.

Distribution Costs

Distribution costs include primarily transportation costs and customs duties. In 2009 these costs increased by 9% to RUB 420 mln (vs. RUB 385 mln in 2008). Such increase was mainly caused by growth of transportation costs of sulphuric acid and lead concentrate to consumers.

General and Administrative Expenses

General and administrative expenses decreased in 2009 by 28% to RUB 656 mln from RUB 913 mln in 2008. The decrease was primarily due to the partial reversal of bad debt provision made in 2008 because of the bankruptcy of Tiumenergobank.

Exploration and Evaluation Costs

In June 2007 the Nova Zinc subsidiary started exploration and evaluation activities on the Eastern site of Akzhal field to exploit any mineral deposits within it through underground extraction. Exploration and evaluation expenses were capitalized as intangible assets. Management of the Group expects to resume exploration and evaluation activities on the Eastern site of Akzhal field in 2023. Due to uncertainty about the resumption of development works, exploration and evaluation assets amounting to RUB 54 mln were written off in 2009.

Borrowings

As of 31 December 2008, the current portion of long-term bank loans denominated in USD comprised two loans obtained from Bayerische Hypo- und Vereinsbank and the consortium of CJSC UniCredit Bank, Moscow and VTB Bank (France) SA to finance the acquisition of Nova Trading & Commerce AG shares, replenishing working capital and export financing.

During the second half of 2009 the Group repaid the loans to Bayerische Hypo- und Vereinsbank and the consortium of CJSC UniCredit Bank, Moscow and VTB Bank (France) SA using own funds and a new bank loan obtained from Gazprombank in the amount of USD 30 million (RUB 871 million). The Gazprombank loan was also repaid by the Group in full before the end of 2009.

Profit (loss)

Net profit for 2009 was RUB 643 mln compared to RUB 3,523 mln loss for 2008.