Business plan for the development of Kogadyr-6 deposit

Business plan forthe development of Kogadyr-6 deposit

November 2017

Business plan for the development of Kogadyr-6 deposit© 2017 Deloitte TCF, LLP 2

Project summary

Kogadyr-6 deposit

Project overview

The Project provides for the mining of gold ore at Kogadyr-6 deposit in Dzhambul Oblast and the increase of processing capacity through the construction of a gold recovery plant (GRP).

According to SRK Consulting (JORC methodology), reserves of Kogadyr-6 deposit amount to 34.9 tonnes of gold.

Project location

Kogadyr gold deposit is located 20 km north of Kyrgyzstan and 40 km north of Bishkek.

The nearest village of Kogadyr in Dzhambul Oblast is located 5 km northeast of the deposit. The administrative center is the city of Kordai with a population of about 27,000 people, which is located 22 km south of the deposit.

Project investment attractiveness

Index US$ thousands

Investment 111,362

Project NPV 163,521

IRR 53.9%

EBITDA return 42%

Payback period, years 3.5

Discounted payback period, years 3.9

Market factors

Gold consumption in the world is growing every year. Gold is used in alloys with other metals, as well as in the aviation, space and medical industries, in radio equipment and electronics. A significant portion of gold is used in jewelry and plays the role of main currency metal.

An industrial analysis shows domestic production can not meet the demand for gold.

Gold in Kazakhstan is mainly used for the replenishment of the country’s monetary reserves. Gold for this purpose is produced by three refineries using various refining technologies: Kazzinc in Ust-Kamenogorsk, Kazakhmys in Balkhash and state-owned plant Tau-Ken Altyn in Astana. The volume of refined gold in Kazakhstan grows annually by an average of 10%. Its volumes reached 31 tonnesin 2016. According to expert estimates, refining output may reach 80-90 tonnes by 2020.

Domestic refineries pursue an active marketing policy with competitive tariffs for subsoil users, which helped redirect supplies of gold-bearing rock from other destinations to Kazakhstan. The total annual production capacity of these refineries makes up 130 tonnes per year.

Low cost of production is achieved due to cheap raw materials (resources and raw materials account for 69% of total production costs). With an estimated gold reserves of 1,160 tonnes (1.8% of world reserves) and an ore grade of more than 6.3 g/t, Kazakhstan is ranked 10th in the world or 3rd in the CIS (after Russia and Uzbekistan).

General information and Project overview


Project overview and objective

Kogadyr-6 deposit

Details

Sector: Mining and smelting

Activities: Gold ore mining

Originator: Ordabasy Group

Product: Dore gold

Production process:

1. Mining

• open mining – development of oxidized zone;

• underground mining - development of underlying reserves (mine).

2. Production

• Processing of gold ores into Dore gold

3. Gold refinery

• Gold recovery (99.9%) from Dore gold

Project goals:

Create an effective integrated business to mine and sell gold in Kazakhstan;

Create a high-quality, export-oriented and competitive product through the use of advanced proven production technologies;

Develop huge export potential of Kazakhstan to make the country a respectable player in the world gold market, ensuring stable, large-scale supplies.

Overview

The Project provides for the mining of gold ore at Kogadyr-6 deposit in Dzhambul Oblast and the increase of processing capacity through the construction of a gold recovery plant (GRP).

The Energy Transmission Line-35 having a length of 12 km, a substation with a capacity of 2,500 kW, a crushing and agglomeration shop, a repair and mechanical shop have been currently commissioned at the deposit. A camp for a hundred residents has been built for employees.

One of the foundations for financial soundness of a state is the country’s reserves, which are mainly concentrated in central banks and where gold plays a vital role. There are about 33,426 tonnes of gold in the world, of which 10,786 tonnes are concentrated in the Eurozone countries, including the European Central Bank.

It is important to note that the demand for gold is currently growing in Kazakhstan and world prices for precious metals are rising. The main gold consumer in Kazakhstan is the National Bank, which over the last five years has been increasing its gold and foreign currency reserves, precious metals in particular.

According to preliminary data of the National Bank as of the end of May 2017, the gold portfolio amounted to about 275 tonnes. Participation of the National Bank in the gold market is recognised as a positive factor for domestic producers as gold production and supplies became continuous.

The project stipulates open mining of gold ore in the oxidized zone with the heap leaching to be used to process oxidized ores;

The business plan covers Project marketing, management and financial aspects.


Investment plan

Kogadyr-6 deposit

CAPEX and working capital investment for Kogadyr-6 deposit

Project implementation timeline for Kogadyr-6 deposit

Capital expenditures -US$ 103,700 thousand

Investment in working capital –US$ 7,662 thousand

Construction period Production period Sales period

Year 1 Year 3

Average growth rate – 22%

EBITDA return – 42%

Net profit return – 22%

Year 13

Index US$ thousands

Capital expenditures (Year 1 + Year 2 + Year 3) 103,700

Gold recovery plant 100,000

Buildings and structures 10,000

Machines and equipment 52,000

Others 38,000

Mining equipment 3,700

Investment in working capital 7,662

Total investment in fixed assets and working capital 111,362


General information about the Company, an owner of subsoil use rights

Kogadyr-6 deposit

Central Asia Gold Corp. (CAGC), a subsoil company, has been operating since 2013. CAGC is a part of Central Asia Gold Group. The company’s main activity is extraction of precious metals and other rare metals.

As a subsoil company, CAGC owns a subsurface use contract for Kogadyr(Southern Hub) gold deposit in Dzhambul Oblast.

Central Asia Gold Production (CAGP), a processing company, is an operator of the existing gold processing complex in Kordai district, Dzhambul Oblast. The company processes gold ore mined at Kogadyr deposit with subsequent production of Dore gold.

Central Asia Gold

Central Asia Gold ProductionCentral Asia Gold Corp.

100%

Deposits

Karakoz deposit

Southern Hub (Kogadyr) deposit

Kogadyr-5 Kogadyr-6 Kogadyr-7

Kogadyr-8 Kogadyr-9 Yuzhny

Kurchum deposit


Class TypeOre(Mt)

Au(g/t)

Contained Metal(koz Au)

Contained Metal(tones Au)

MeasuredTransition

Fresh

IndicatedTransition 4.1 0.91 120 3.7

Fresh 7.9 0.98 248 7.7

Subtotal Measured + Indicated

Transition 4.1 0.91 120 3.7

Fresh 7.9 0.98 248 7.7

InferredTransition 0.7 1.12 25 0.8

Fresh 17.7 1.28 730 22.7

Total Measured + Indicated + Inferred

Transition 4.8 0.94 145 4.5

Fresh 25.6 1.19 978 30.4

General information about deposit

Kogadyr-6 deposit

Resource evaluation

Status of gold ore and gold reserves of Kogadyr-6 deposit as of May 1, 2017

Kogadyr-6 is the only deposit among others where gold ore is mined.

Kurchum and Karakoz deposits were under exploration when we prepared the analysis. The latter was planned to be returned to the State due to unsatisfactory geologic exploration activities.

Gold ore at Kogadyr-6 deposit is produced through open mining. According to SRK Consulting’s report, the total gold reserves calculated based on JORCmethod amount to 34.9 tonnes with an average grade of 1.15 grams per tonneof ore.

The company currently produces Dore bullions at its own processing plant. In 2016, the company bought a new crushing unit, which is expected to increase the current production capacity of the enterprise.

In 2016, CAGP produced more than 2 thousand ounces of gold, which is almost 2 times higher than in the previous period. This increase is attributed to the test commissioning of the new crusher.

The company is currently works to transfer inferred reserves into the category of identified reserves.

According to approved data, reserves of gold ore and gold from Kogadyr-6 deposit are sufficient for more than 60 years.


Geographical and economic features of the region

Kogadyr-6 deposit

Local climate

The region is characterized by a variable climate with cold winters and hot, dry summers. Temperature in winter is -10°C, in summer it varies from 20°C to 30°C, sometimes reaching 40°C. The climate is mild in spring and autumn. Annual precipitation varies from 450 to 510 mm.

1

Kogadyr-6 deposit

Water sources

The source of utility and drinking water is a water well located in an industrial site. Furthermore, water is supplied by Kordai Su.

3

Energy supply and gas pipeline in the region

Electricity is generated by Emba Substation (110 kV). The deposit is located close to the Bukhara-Ural gas pipeline.

2

Human resources

The geographical proximity (25 km from the deposit) of the city of Kordaiwith a population of about 27,000 people excludes any difficulties with the employment of personnel.

6

Railway and motor transport

The deposit is located near the Turkestan-Siberian Railway (Turksib), which is used to transport ore and deliver materials and fuel for production purposes. Kogadyr-6 mine is located about 22 km north of the city of Kordai.

4

Production enterprises

Kenen-Atameken-2017, an agricultural production cooperative producing iron ore through open mining, and Aktas LLP, a company mining precious metals and ores of rare metals, are operating at Kogadyr deposit.

5

Kogadyr gold deposit is located 20 km north of Kyrgyzstan and 40 km north of Bishkek.

The nearest village of Kogadyr in Dzhambul Oblast is located 5 km northeast of the deposit. The administrative center is the city of Kordai with a population of about 27,000 people, which is located 22 km south of the deposit.

By the nature of mineralization and ore saturation, the deposit has two distinguishing areas: southern and northern.


Gold (product of the deposit)

Kogadyr-6 deposit

Dore gold is the final product of the deposit, which is sold to Tau-Ken AltynRefinery under the existing agreements.

Final product

Kogadyr-6 deposit

Gold ore at Kogadyr-6 deposit is produced through open mining. Gold grade is 1.15 g/t

Types of gold ores from given deposit

Grade of ore

Gold

Gold is the 11th chemical element in the periodic table. It is a yellow metal that does not interact with most acids and has a stable isotope. Gold is the basis of the international monetary system, but at the same time it is not used as a medium of exchange. Furthermore, gold is a non-consumable commodity stable to the influence of external factors.

All the gold mined at Kogadyr-6 deposit is a free gold or gold clusters.


Production process

Kogadyr-6 deposit

Technical process

Given that all deposits of the group have the same material composition and location of ore bodies, the extraction and processing methods are identical for all potential deposits of Kogadyr:

• open-pit mining is used to extract oxidized ores;

• heap leaching is used to process oxidized ores;

• construction of a flotation mill will help achieve a gold recovery rate of 90-95% after processing.

Receiving hopper

Flotation Mill

Concentrate Leaching Workshop

(pressure, biological leaching,sorption cyanidation,

pyro-metallurgical processing)

flotation concentrate

Ore Bedding Warehouse

ore of planned gradeis delivered directly to the Crushing&Agglomeration Shop

Crushing&Agglomeration Shop

Cr1

A C H

S

C

Cr1 - crusher OsbornCr2 - crusher OsbornC - conveyor

S - screenH - receiving hopperA - agglomerator

Cr2

Dore gold

Gold RefineryHeap leach pads (HLP)

Gold ores

Hydrometallurgical Shop

Development prospects


Production process

Kogadyr-6 deposit

Basic machineries and equipment for deposits

1

2 3

45

6

7

8

9

10

11

12

13

14

Basic machineries and equipment for Kogadyr-6 deposit

1. Receiving hopper

2. Plate feeder PP2 15/30

3. Crusher (Osborn Roller Bearing 3042)

4. Conveyors SMD 152-50

5. Screen (Osborn 6 x 20)

6. Crusher (Osborn 44 SBS)

7. Belt scales

8. Bin (cement dump)

9. Drum granulator OB-22-10

10. Solution feeding tank

11. Hopper

12. Stacker (ore stacker)

13. Ore stockpile

14. Control room

Production capacity

Ore extraction capacity:

The company’s production capacity is 300 thousand tonnesof ore per year with a gold grade of 80% in the alloy.

Kogadyr-6 deposit


State investment support

Jubilee deposit

State program - Productivity -2020:

• subsidies to cover costs for the development or examination of an investment project comprehensive plan;

• subsidies to pay a long-term leasing financing;

• innovation grants.

Business Road Map-2020:

• Fixed subsidies for 3 years at an annual rate of 7% of the loan/leasing interest rate;

• Noble (precious) metal production is recognised as a priority sector of the economy for potential program participants.

Source: Baiterek National Holding https://business.gov.kz/ru/

Reimbursement of 50% of costs for advertising of domestic products abroad:

• costs for direct participation in foreign exhibitions;

• development and publication of catalogues;

• support of a representative office, sales outlet, and warehouse abroad;

• costs for registration of trademarks and products abroad;

• costs for certification of products abroad.

Export 2020 Development and Promotion Programme. Compensation of 50% of costs associated with operations on foreign market:

• Arrangement of trade missions, participation in international exhibitions;

• Arrangement of unified national stand;

• Trainings on export activity, subcontracting;

• Promotion of domestic trademarks in foreign markets (goods and services).


State investment support

Jubilee deposit

Concessions for priority investment projects

Priority investment project is an investment project implemented by a newly established legal entity engaged in certain priority activities and stipulates investment of at least 2 million of monthly calculation indexes valid as of the date when an investment concession application was filed.

Priority investment projects are guaranteed stability in tax laws and laws governing the recruitment of foreign labour.

Type of concessions

Source: Kazakhstan Entrepreneurial Code dated October 29, 2015, No. 375-V

Concessions

Property tax (up to 8 years)

Tax exemption

Land plots and buildings

Grants

Equipment and its parts

Tax duties and import VAT - 0%

Land tax (up to 10 years)

Machinery and equipment

Raw materials

Corporate income tax

(up to 10 years)

Macroeconomic section


Doing Business 2017 rankings

Investment climate in Kazakhstan

Source: World Bank

CountryDoing Business

rankingRank change sine 2010

New Zealand 1 +1

Singapore 2 -1

Denmark 3 +3

… … ….

Japan 34 -19

Kazakhstan 35 +28

Romania 36 +19

… … …

Bulgaria 39 +5

Russia 40 +80

Hungary 41 +6

… … …

According to annual ranking on the ease of doing business conducted by the World Bank Group, Kazakhstan has taken the lead in the region of Europe and Central Asia for the second consecutive year in terms of the number of reforms undertaken to improve the conditions for small and medium-sized businesses.

Kazakhstan ranked 35th in the Doing Business global ranking takes the second position in the list of countries that demonstrated the highest number of improvements over the last year. Kazakhstan has undertaken reforms in seven of ten areas covered by the Doing Business survey: registering property, dealing with construction permits, getting electricity, protecting minority investors, trading across borders, enforcing contracts, and resolving insolvency.

The efforts of the Government on fundamental improvement of the business climate have contributed to Kazakhstan rising in the Doing Business ranking: measures were taken to improve the business environment and reduce the administrative pressure on business through reforming the current legislation, elaborating the regulatory approval system, simplifying the procedures for creating a business and optimizing governmental control and supervisory activities.

Doing Business index based on 2016 results



Market preconditions for the Project implementation

Source: Global Insight

Since independence, Kazakhstan has seen stable economic growth and an influx of foreign investment. State policy of updating economic structure, diversifying and ensuring competitiveness, together with a favourable investment climate and growth in demand for raw materials, have secured economic growth.

Slowdown of GDP growth in 2015-2016 was due to the fall in global oil prices. Oil exports are the main component in Kazakhstan GDP. According to Global Insight,total exports from Kazakhstan fell by 20% in this period.

Exports are expected to grow at an average of 9.8% per annum over the following five years. Growing exports and projected rise in oil prices are expected to push real GDP growth upward from 2017.

KZT devaluation and transition to a floating KZT exchange rate in 2015 also contributed to the slowdown of GDP growth. Still, it is expected that the budget revenues will increase due to exports of raw materials sold in US dollars as a result of KZT devaluation.

The new rate helps balance trade, gradually stimulates exports and puts pressure on consumerism, mostly imports such as vehicles, domestic appliances and others.

Devaluation will also help the development of domestic production in light industry and catering, as imports become more expensive.

Historical and forecast nominal GDP of Kazakhstan

Kazakhstan historical and forecast exports and imports

208 237 221 184 135 164 178 200 220 237

4.8

6.0

4.2

1.21.0

2.8

3.7 3.9 3.8

2.7

0

1

2

3

4

5

6

7

0

50

100

150

200

250

2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

US$ b

illions

Nominal GDP, US$ billions Real GDP growth, %

87

86

80

47

37

44

49

52

56

60

49

51

44

34

28

30

35

38

42

45

149 152

179

223

342320 323 324 323 324

0

50

100

150

200

250

300

350

0

10

20

30

40

50

60

70

80

90

2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

KZT/U

S$

US$ b

illions

Exports, US$ billions Imports, US$ billions Average KZT/US$ rate



Market preconditions for the Project implementation

Source: Global Insight, Economist Intelligence Unit

According to EIU, the average monthly salary in Kazakhstan in 2016 was US$ 402, showing a 29.5% decrease compared to the previous year.

Decrease in salaries denominated in dollars is largely due to KZT devaluation.

EIU analysts expect that the average salary will rise by 13% in 2017 (up to US$ 459 per month) and continue rising at a moderate rate of 5.4% per annum(2017−2021 CAGR).

Fall in global oil prices in 2015-2016 has led to significant slowdown in real GDP growth, falling exports and real income

Subject to increase in oil prices up to US$ 60-70 per barrel, the Kazakhstan economy is expected to go back to growth in the medium term.

According to Global Insight, 2017–2021 will see the annual GDP growth at 2.5–3.9%, recovering customer demand and other macroeconomic indicators.

The reason for the high dependence of the Kazakhstan economy on oil and gas revenues is insufficient diversification of the economy. OECD estimates that about 80% of foreign direct investment in Kazakhstan falls on the oil and gas industry. To strengthen the economy, it is necessary to develop various industries. In this regard, the government has initiated a number of programs aiming to support business development and attract investment.

Historical and forecast average monthly salaries in Kazakhstan

Conclusion

684 716 673 570 402 459 474 487 520 565

11.6

4.6

-6.0

-15.3

-29.5

14.2

3.3 2.76.8

8.7

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

0

100

200

300

400

500

600

700

800

2012 2013 2014 2015 2016 2017F 2018F 2019F 2020F 2021F

US$

Average monthly salary, US$ Growth, %

Marketing section


9.9

12.8

12.0

12.7

0 5 10 15

2015

2016

6 months of 2016

6 months of 2017

KZT mln/kg

Project market assumptions


With an estimated gold reserves of 1,160 tonnes (1.8% of world reserves) and an ore grade of more than 6.3 g/t, Kazakhstan is ranked 10th in the world or 3rd in the CIS (after Russia and Uzbekistan).

In 2013-2016, production of raw gold, semis or gold powder rose from 42.6 to 63.7 tonnes per year. Over the last 4 years, gold production grew by an average of 13% annually until 2016. In the first half of 2017, gold production increased by 17% compared to the same period last year.

Production (fine gold)

PricesDevelopment of Kogadyr-6 deposit

Sales market

Tau-Ken Altyn

23.226.7 26.9

31.0

0

10

20

30

40

2013 2014 2015 2016

tons

In 2015-2016, there was a 29% increase in prices for 1 kilogram of gold in Kazakhstan. Furthermore, in the first 6 months of 2017, the average price for 1 kilogram of gold was KZT 12.7 million as compared to KZT 12.0 million (6%) in the same period of 2016.

Over 35 out of more than 80 registered gold deposits are currently operating in Kazakhstan. The quality and grade of ore do not require substantial costs to process ore into raw materials suitable for refining (content of precious metals varies from 10 to 98%).

Kazakhstan is currently the only sales market for gold mining enterprises, where a gold refinery serves as a gold receiving center. Kazakhstan has three gold receiving plants, such as Kazakhmys Corporation, Kazzinc, Tau-Ken Altyn. The total annual production capacity of these refineries makes up 130 tonnes per year.


Gold reserves in Kazakhstan

Overview of gold industry in Kazakhstan

Source: Kazakhstan Statistics Committee

Kazakhstan is ranked 10th in the world for gold reserves, which is 1.8% of world reserves. The country’s estimated gold reserves amount to 1,160 tonnes with an ore grade of more than 6.3 g/t. Kazakhstan is ranked 3rd in the CIS, after Russia and Uzbekistan.

The industry is characterized by small and medium-sized deposits, low-grade ore and a significant proportion of refractory (sulfide) ores. Gold deposits are discovered practically in all oblasts of the country, but many of them are not developed due to small volumes. Major gold reserves in Kazakhstan are concentrated in 190 deposits (40% - in complex gold deposits, mostly pyrite deposits, and 60% - in gold deposits), of which only 75 deposits are currently developed commercially.

Given the current pace of development, gold reserves in Kazakhstan are sufficient for more than twenty years.

At least 60% of reserves are concentrated in ore veins and 38% are a part of polymetallic rocks. Most of the gold is currently extracted as a by-product in copper mining. According to various estimates, only 40% of gold deposits in Kazakhstan are economically viable. The country’s government increases production up to 50 tonnes per year, but the industry requires a capital investment of US$ 1.5-2.0 billion in mining and heap leaching technologies. Below is the list of the country’s largest deposits.

Deposit CompanyReserves

(thousand ounces)Resources

(thousand ounces)Status

Varvarinskoye Polimetal PJSC 1,300 3,100 production

Bakyrchik Ivanhoe Mines 5,760 8,800 development

Akbakay AK Altynalmas JSC 3,320 production

Zholymbet Polyus Zoloto (KazakhGold) 259 2,382 production

Aksu Polyus Zoloto (KazakhGold) 1,801 4,850 production

Bestobe Polyus Zoloto (KazakhGold) 834 1,595 production

Vasilkovskoye KazZinc 7,734 15,992 production

Maleevsky KazZinc 770 1,891 production

Ridder-Sokolny KazZinc 149 995 production

Tishinsky KazZinc 1,000 1,538 production

Kengir Central Asia Resources 127 exploration

Altyntas Central Asia Resources 600 exploration

Kepken Central Asia Resources 411 exploration

Uzboi Alhambra Resources 140 1,160 production

Sekisovskoye Hambledon Mining 116 1,927 production

Suzdal Severstal/NordGold 486 1,401 production

Central region (Abyz, Nurkazgan, Akbastau, Sayak, Shatyrkol) Kazakhmys plc 2,740 11,748 production

Eastern region

Kazakhmys plc 1,010 17,900 production(Nikolaev, Artemevo, Irtysh, Belousov, Orlov, Yubileino-Snegirkhinsky, Mizek, Mukur)


Gold production in Kazakhstan


Source: Kazakhstan State Revenue Committee

Production of gold (raw, semis and powder) in Kazakhstan

35% 26,076 kg+2.24%

31% 23,039 kg-2.87%

11% 8,234 kg+0.47%

3% 1,909 kg+0.40%

4% 2,807 kg-0.90%

2015

63,614 kg

2016

74,737 kg+17.5%

During the last five years, Kazakhstan is rapidly increasing gold production in the country.

The country’s National Bank replenishes its assets (precious metals), increasing the share of precious metals in its gold and foreign currency reserves like Russia, which is among top 10 gold producers.

The current favourable situation in the gold market makes production of refractory sulfide ores commercially viable given the cost of new equipment and existence of new biological leaching technologies. Gold production in Kazakhstan is increasing amid the development of major gold deposits.

Kazakhstan is among top 20 gold mining and producing countries. Gold is mined in Kazakhstan both at primary gold deposits and concurrently as a component of polymetallic raw materials in the production of non-ferrous metals;

Akmola (35%) and East-Kazakhstan Oblasts (31%) are leaders in the production of raw gold and gold powder;

The rest of production is distributed among Karaganda (11%), Kostanai (4%) and Dzhambul (3%) Oblasts;

In 2015-2016, gold production increased by 17.5% or 11,123 kg;

Output and growth of gold production (raw, semis and powder) in Kazakhstan, 2012-2016

39.9

42.6

50.3

63.6

74.6

8.3%6.6%

18.3%

26.4%

17.1%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0

10

20

30

40

50

60

70

80

2012 2013 2014 2015 2016

Total tonnes Annual growth


Gold production in Kazakhstan


Overall production of gold ore in Kazakhstan for 2013 - 6 months of 2017, thousands of tonnes

According to Kazakhstan Statistics Committee, overall gold production in Kazakhstan has been growing over the last five years. Production grows annually by an average of 13.5%. A total of 21.1 tonnes was produced for the first 6 months of 2017 as compared to 23.2 tonnes for the whole 2013. This means the same volume was produced just for 6 months in 2017 as for the whole 2013. This is due to the decision of the National Bank to increase the share of gold in its gold and foreign currency reserves. The National Bank’s portfolio amounted to 281 tonnes as of June 1, 2017. Since October 2012, the bank has increased its gold reserves by 167.5 tonnes.

Overall production of fine gold in Kazakhstan for 2013 - 2016, kg

In 2013-2016, the average production of gold ore in Kazakhstan amounted to 16 million tonnes per year. According to Kazakhstan Statistics Committee, overall production of gold ore is constantly growing. However, production slightly fell (4%) in 2014-2016. 2016 is marked by a maximum increase in the production of gold ore (19 million tonnes per year).

13,973

15,89715,215

19,049

8,897 8,733

5%

14%

-4%

25%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

0

5,000

10,000

15,000

20,000

25,000

2013 2014 2015 2016 6 m. 2016 6 m. 2017

Total tonnes Annual growth

2013

31.026.923.2 26.7 21.1 17.1

6 m. 2016 6 m. 20172014 2015 2016


Changes in average annual prices for gold in Kazakhstan


Gold prices are dependent both on the US interest rate and the dollar exchange rate. Strong US dollar usually leads to a fall in gold prices, depreciating this safe asset and making primary commodities more expensive for holders of other currencies. The interest rate affects the attractiveness of gold, increasing the opportunity cost of non-profit assets, such as precious metals.

Changes in average annual prices for gold in Kazakhstan for 2013 - 6 months of 2017, KZT thousands/kg

In Q3 2015-Q3 2016, there was a 53% increase in prices for 1 kilogram of gold in Kazakhstan. Furthermore, in the first 6 months of 2017, the average price for 1 kilogram of gold was KZT 12.7 million as compared to KZT 12.5 million (1.6%) in the same period of 2016.

7,9177,303

6,820 6,657 6,715

7,442 7,4437,020 7,049 6,946

7,399

9,785

11,416

12,531

13,85913,493

12,684 12,670

100

7885

77

97 10191 90 91 91

126

150

176186 183

159 163 166

0

50

100

150

200

250

300

350

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

QI 2013

QII 2013

QIII2013

QIV 2013

QI 2014

QII 2014

QIII 2014

QIV 2014

QI 2015

QII 2015

QIII 2015

QIV 2015

QI 2016

QII 2016

QIII 2016

QIV 2016

QI 2017

QII 2017

KZ

T thousands/

kg

Kazakhstan Gold spot price index


Analysis of historical prices and formation of gold prices


Prices for Dore, cathode, and bullion gold are based on gold quotations at the London Metal Exchange. The price for non-refined gold varies depending on the concentration of precious metals in bullions/concentrates.

As an exchange commodity, gold has its own standard code: XAU. Major stock exchanges are the London Metal Exchange and the New York Stock Exchange. The diagram shows historical prices for the last 10 years. The reference price for gold is defined by the London Bullion Market Association (LBMA) in US dollars per troy ounce (31.1035 grams). Since March 20, 2017, the reference price for gold bullion in London is determined by ICE’selectronic auction.

Forecasted prices for XAU are calculated based on technical analysis, cyclical price changes and a general trend in this market. The high volatility of this metal is expected in 2018-2022, since the market is now close to the equilibrium point with no obvious signs of any emerging trend.

Source: FX Group Ltd., CNBC

Formation of prices

As the research showed, raw gold is sold at a discount from gold quotations, as it requires further melting and processing. The size of the discount depends on the composition of alloy/concentrate.

0

500

1000

1500

2000

2500

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018*

2019*

2020*

2021*

2022*

2023*

2024*

2025*

2026*

2027*

2028*

2029*

2030*

OHLC (OPEN, HIGH, LOW, CLOSE) DIAGRAM OF HISTORICAL PRICES FOR GOLD SHARES IN US$


Kazakhstan gold imports and exports in 2016


Gold imports to Kazakhstan, 2016 Gold export from Kazakhstan, 2016

Source: Kazakhstan Statistics Committee, State Revenue Committee

In 2016, 1,054 kg of gold for US$ 39,679 thousand was imported to Kazakhstan. The United Arab Emirates (US$ 4,058 thousand/126 kg) and Russia (US$ 15,780 thousand/401 kg) are main gold suppliers to Kazakhstan. A small amount of gold was imported from France, Germany, Italy and Japan.

In 2016, Kazakhstan exported gold for a total of US$ 28,331 thousand (1,229 kg). The main countries importing Kazakh gold were Russia (US$ 14,144 thousand/487 kg) and Great Britain (US$ 22 thousand/128 kg).

Furthermore, in 2016 the country extracted 74.6 tonnes of gold, of which 37.7 tonnes were processed by refineries. The rest of gold ore is exported.

RussiaExports

US$ 14,144 thousand487 kg

ImportsUS$ 15,780 thousand

401 kg

ExportsUS$ 22,000128 kg

ImportsUS$ 4,058 thousand126 kg

* Import - export of raw gold, semis or powder gold

Great Britain

UAE


6,0

18

142,2

99

193,9

09

15,5

52

19,1

72

24,7

23

17,3

56

169

732

402

54 4,1

52

0 0 0 00 0 0 0

0

50,000

100,000

150,000

200,000

2013 2014 2015 2016

China Russia Kyrgyzstan Kazakhstan Mongolia Uzbekistan

89,9

29,7

62

65,5

97,5

26

78,9

76,9

75

63,9

84,7

21

Analysis of gold imports in neighboring countries


Gold imports by countries

Analysis of gold imports in countries neighboring Kazakhstan shows a great demand for gold in many countries, China in particular.

Source: UN COMTRADE Statistics

China imports up to 1,590 tonnes of gold annually. Russia reduced its purchases of gold since 2016.

Year China Russia Kyrgyzstan Kazakhstan Mongolia Uzbekistan

2013 1,891,000 1,300 268 8,440 0 0

2014 1,635,000 5,760 414 0 1 0

2015 2,082,903 6,111 379 2 0 0

2016 1,590,307 575 459 128 1 0

Gold imports (kg)

US$ t

housands


Export potential


In 2016, China was ranked second in the world for gold imports (15%) after Switzerland (25%);

The main supplier of gold in China is Switzerland, which accounted for 49% of the market or 778 tonnes in 2016;

Hong Kong is the second important player in the market, which accounts for 16% of all gold imports;

In addition to the population, industrial enterprises manufacturing gold-based products are main consumers of gold in China;

A strong demand is expected in the gold market of China, as well as all over the world. Given the proximity of our states, Kazakhstan can become a serious player in the Chinese market.

Kazakhstan is currently one of the main gold exporters in the Russian market (86%). However, this index is insignificant;

Belarus, Italy and many other countries are also among exporters. However, similar to Kazakhstan, their exports are insignificant;

Given the proximity of our states and loyal customs relations, in contrast to other countries, Kazakhstan has a huge potential for selling Kazakh gold in the Russian market.

RussiaChina

Gold imports to China, 2016 Gold imports to Russia, 2016

In 2016, gold imports amounted to 1,590 tonnes

1,590,307 kg 575 kg

* Import of raw gold, semis or powder gold

In 2016, gold imports amounted to 575 kg.


Switzerland49%

Hong Kong16%

South Africa13%

Australia10%

Others5%

USA4%

Singapore3%

Kazakhstan86%

Belorussia7%

Italy4%

Others3%


Turkey100%

Germany17%

Switzerland83%

Russia100%

France0%

Kazakhstan100%

Export potential


Similar to Kyrgyzstan, Uzbekistan is rich in gold ore resources and has its own production;

However, Uzbekistan doesn’t use its sale potential, and Kazakhstan can contribute to the development of the neighboring state through the export of necessary resources.

Mongolia

Uzbekistan

In 2016, gold imports amounted to US$ 4,690 (less than 1 kg).

US$ 4,690

In 2016, gold imports amounted to US$ 10,915 (less than 1 kg).

Like any other state, Mongolia needs resources, such as gold;

In 2016, gold was imported by Switzerland (83%) and Germany (17%);

The sale of gold by Kazakhstan, which is neighboring Mongolia, will significantly reduce the cost of gold for the Mongolian population.

US$ 10,915

Kyrgyzstan is rich in gold ore resources and has its own production;

However, Kyrgyzstan doesn’t use its sale potential due to a number of reasons, and Kazakhstan can contribute to the development of the neighboring state through the export of necessary resources.

Turkmenistan

Kyrgyzstan

In 2016, gold imports amounted to 459 kg.

459 kg

In 2016, gold imports amounted to US$ 798 (less than 1 kg).

In 2016, gold was imported to Turkmenistan only from Turkey;

Kazakhstan has a potential to export products to Turkmenistan given the relative proximity of our states.

US$ 798

* Import of raw gold, semis or powder gold



Changes in gold ore imports and exports in Kazakhstan


Gold ores are the main raw material for the production of Dore or cathode gold. The diagram above shows the imports increased by an average of 93% per year from 2010 to 2014. However, during this period 80% of ore was delivered from Kyrgyzstan due to its huge resources (3rd among the CIS countries), and relatively low prices for ore. In 2014-2016, there was decrease in imports, for which the main reason may be the decision of the Kyrgyz Government to replenish its gold reserves.

Changes in gold ore imports and exports in Kazakhstan, 2010-2016

Kazakhstan along with other CIS countries has a developed gold mining industry, sufficient reserves of gold ore and an excellent sale base, which enable the country to export small amounts of ore. In 2010-2014, ore exports from Kazakhstan increased by an average of 39% per year. This trend changed with the commissioning of state-owned refinery Tau-Ken Altyn on December 19, 2013. The decisive factor preventing gold ore exports from Kazakhstan is the Law on Precious Metals and Precious Stones signed by the President of Kazakhstan on January 14, 2016. The law specifies main concepts, ‘investment gold’ in particular, and encourages gold mining companies to process gold at domestic refineries and replenish the country’s national reserves.


Ore imports to Kazakhstan Ore exports from Kazakhstan

Import, tonnes Export, tonnes

0

31,918

104,168

84,277

139,255

54,728

22,856

9,691 11,397

23,488 24,78731,771

17,520

1,818

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

2010 2011 2012 2013 2014 2015 2016


Changes in gold ore imports and exports in Kazakhstan


Kazakhstan National Bank’s priority right of redemption

One of the foundations for financial soundness of a state is the country’s reserves, which are mainly concentrated in central banks and where gold plays a vital role. There are about 33,426 tonnes of gold in the world, of which 10,786 tonnes are concentrated in the Eurozone countries, including the European Central Bank. According to the World Gold Council, the world leaders in gold reserves are the USA (8,134 tonnes), Germany (3,377 tonnes), Italy (2,452 tonnes), France (2,436 tonnes), China (1,843 tonnes) and Russia (1,687 tonnes). The International Monetary Fund has 2,814 tonnes of gold.

According to preliminary data of the National Bank as of the end of May 2017, the gold portfolio amounted to about 275 tonnes.

In 2011 the National Bank of Kazakhstan was granted a priority right to purchase fine gold in order to replenish its assets denominated in precious metals. This assumes that all entities involved in the production of precious metals and persons, who have become owners of fine gold after processing (in other words, producers), should first offer gold to the National Bank, which in turn approves its purchases for the coming half-year based on the fine gold production and sales forecast. Furthermore, the priority right enables producers to supply fine gold to the National Bank with the prepayment for future supplies.

Since the exercise of the priority right, the National Bank has bought about 157 tonnes of fine gold from domestic producers. The priority right allows to accumulate gold as an asset within the country, while before the most of gold was exported from the country. Participation of the National Bank in the gold market is recognised a positive factor for domestic producers as gold production and supplies became continuous.


Given the specifics of the market and product, the only consumer of raw, cathode and bullion gold are refining enterprises, which in turn produce refined bullions or coins. Kazakhstan currently has three refineries that practice different refining methods to process gold and silver.

Convenient geographic location of refineries significantly reduces logistics costs for mining companies.

Potential suppliers and buyers

Refineries

In 2017, the National Bank of Kazakhstan announced a program to sell and repurchase gold weighted bullions for the population.

Gold bullions are sold through second-tier banks - Halyk Bank of Kazakhstan, Eurasian Bank and Tsesnabank. The initial stage of the program covers only four cities, where it is possible to buy and sell bullions. They are Astana, Almaty, Ust-Kamenogorsk and Atyrau. The main factor ensuring the liquidity of the gold bullions market is the possibility of their repurchase by second-tier banks with the payment on the same day.

Sale of bullions to the population

Tau-Ken Altyn (Astana)

KazZinc (Ust-Kamenogorsk)

Kazakhmys Corporation (Balkhash)

Sales market



Sales market


Gold Refinery

Tau-Ken Altyn (Astana)

Method: electrochemical method;

Production capacity: With the sufficient volume of raw materials, the production output of refined precious metals can reach 70 tonnes per year.Current output – 18 tonnes of gold.

Types of commodities containing precious metals:non-refined precious metals (including Dore bullions, cathode metals), zinc sediments; scrap jewellery

KazZinc (Ust-Kamenogorsk)

Method: chloride technology based on chlorazotic acid;

Production capacity:Over the last 5 years, KazZinc has increased capacity of its refinery up to 52 tonnes of gold.

Types of commodities containing precious metals:non-refined precious metals (including Dore bullions, cathode metals), zinc sediments; scrap jewellery; precious metal ores and concentrates; non-ferrous metal ores, concentrates and ashes, semi-finished non-ferrous products containing precious metals.

Kazakhmys Smelting (Balkhash)

Method:Miller method;

Production capacity:The estimated capacity of Kazakhmys’s refinery is about 50 tonnes of gold.

Types of commodities containing precious metals:non-refined precious metals (including Dore bullions, cathode metals), zinc sediments; scrap jewellery; precious metal ores and concentrates; non-ferrous metal ores, concentrates and ashes, semi-finished non-ferrous products containing precious metals.

Source: Adilet Information and Legal System


Environmental analysis


Largest deposits CompanyResources


Kazakhstan

Eastern region(Nikolaev, Artemevo, Irtysh, Belousov, Orlov, Yubileino-Snegirkhinsky, Mizek, Mukur)

Kazakhmys Corporation 17,900 Production

Vasilkovskoye KazZinc 15,992 Production

Central region(Abyz, Nurkazgan, Akbastau, Sayak, Shatyrkol)

Kazakhmys Corporation 11,748 Production

Bakyrchik Polimetal PJSC 8,800 Pending operation

AksuKazakhaltyn Mining and Metallurgical Company

4,850 Production

Akbakay AK Altynalmas JSC 3,320 Production

Varvarinskoye Polimetal PJSC 3,100 Production

ZholymbetKazakhaltyn Mining and Metallurgical Company

2,382 Production

Sekisovskoye Hambledon Mining 1,927 Production

Maleevsky KazZinc 1,891 Production

BestobeKazakhaltyn Mining and Metallurgical Company

1,595 Production

Tishinsky KazZinc 1,538 Production

Suzdal Severstal/NordGold 1,401 Production

Uzboi Alhambra Resources 1,160 Production

Ridder-Sokolny KazZinc 995 Production

Altyntas Central Asia Resources 600 Exploration

Kepken Central Asia Resources 411 Exploration

Kengir Central Asia Resources 127 Exploration

Over 35 out of more than 80 registered gold deposits are currently operating in Kazakhstan. They number is growing.


Environmental analysis


Given the large number of gold mining enterprises in Kazakhstan and neighboring countries, we can assume that refineries of the region are highly overloaded.

Kazakhstan has currently about 80 gold deposits. However, most of them are either at the preparatory stage or not operated at all.

Largest deposits CompanyResources


Russia

Natalkinskoye Polyus Zoloto 48,000 Pending operation

Sukhoy Log State-owned 33,000 Reserved

Nezhdaninskoye Polyus Zoloto 15,000 Pending operation

Olympiada Polyus Zoloto 12,000 Production

Blagodatnoye Polyus Zoloto 7,000 Pending operation

Kupol Kinkross Gold Corporation 1,684 Production

Uzbekistan

Muruntau Navoi Mining and Metallurgical Plant

176,370 Production

Kyrgyzstan

Kumtor Centerra 3,456 Production

Mongolia

Oyu-Tolgoi Turquoise Hill Resources 46,300 Production

China

Jinfeng - 5,467 Production

Baguamiao - 3,215 Production

Axi - 2,250 Production

Financial section


Financial data

Kogadyr-6 deposit

Main assumptions

Revenue forecast, US$ thousands

Index Year 3 Year 4 Year 5 Year 12 Year 13

Revenue, US$ thousands

179,374 175,924 179,822 208,332 212,532

EBITDA margin, % 49% 45% 44% 37% 37%

The forecast period is 13 years until 2030 given the terms of the current subsoil use contract.

However, it is possible to extend the contract for further development of the deposit.

All cash flows were expressed in nominal terms (i.e. inclusive of inflation) in US$, less VAT.

The expected project start date is January 2018. The Project will be implemented in two stages.

Stage one is the construction period, stipulating the construction and purchase, assembling and installation of necessary equipment. Construction will last for 36 months.

Stage two is the production period, which involves the mining and purchase of raw materials and their subsequent processing.

The average sales price of Dore gold in the domestic market is equivalent to the market price on the London Stock Exchange. Prices were indexed for forecast inflation in Kazakhstan.

The WACC is calculated using a CAPM and amounts to 13.27%.

The EBITDA margin of the Project varies between 35-49%.

In calculations we assume that the Project will receive a number of preferencesand investment subsidies to reimburse some costs for equipment acquisition.

Basic products

The main source of income is from the sale of Dore gold.

Production output in Year 3 will reach 134.8 thousand ounces of gold (99%) per year.

Source: Deloitte analysis


Cost of goods sold

Kogadyr-6 deposit

Production costs of the crushing and agglomeration shop (CAC) account for 8% of total costs;

The largest portion of costs accounts for auxiliary materials and spare parts (51%);

Furthermore, there are significant costs for cement, one tonne of which is required for 5 kg of ore.

Production costs of the gold recovery plant make up a large part of all costs - 61% in Year 3;

Processing capacity will be 3,000 thousand tonnes of ore;

Cost of processing in Year 3 will amount to US$ 17 per tonne of ore.

Mining costs are ranked second (31%) in the cost structure;

Major costs will account for mining services: ore (US$ 20,830 thousand) and overburden (US$ 4,202 thousand);

Costs also include environmental pollution payments and payments for the storage of overburden.

Cost structure, Year 3

Processing, thousands of

tonnes

Cost of processing, US$/t

Processing costs, US$ thousands

3,000 17 52,240

Gold recovery plant61%

Crushing and agglomeration

complex8%

Mining operations

31%

3,603

1,023

805

606

432

369

160

- 1,000 2,000 3,000 4,000

Spare parts

Cement

Others

Payroll

Oils and filters

Electricity

POL

US$ thousands

Mining services -

Ore79%

Mining services -

Overburden16%

Environmental

payments2%

Payroll2%

Others1%



Financial data

Kogadyr-6 deposit

Sales expenses and administrative costs in Year 3 will amount to US$ 6,028 thousand. Sales expenses account for 3% of the revenue for this period;

The majority of administrative costs is made up of payroll costs (68%).The average monthly salary per administrative member of staff is US$ 46,829.

Inventories

US$ 23,379 thousand

Accounts payable

US$ 7,014 thousand

Accounts receivable

US$ 14,743 thousand

Structure of sales expenses and administrative costs, Year 3 Fixed assets, Year 3

Buildings and structures account for 12% of the total fixed assets or US$ 9,420 thousand.

Machines and equipment account for 47% of the total fixed assets or US$ 37,669 thousand.

The remaining US$ 32,675 thousand is other expenses.

Working capital structure, Year 3

The main part of working capital will be made up of inventories.

Accounts payable will amount to US$ 7,014 thousand.

Machines and equipment

47%

Others41%

Buildings and structures

12%

Sales expenses87%

Payroll,68%

Office rental,15%

Others,17%

Administrative costs13%



Financing structure

Kogadyr-6 deposit

Loan repayment schedule, US$ thousands

Financing structure

Index Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Year 11 Year 12 Year 13

Principal repayment 7,783 7,783 7,783 7,783 7,783 7,783 7,783 7,783 7,783 7,783

Interest payments 4,670 4,203 3,736 3,269 2,802 2,335 1,868 1,401 934 467

Shareholder equity

Debt capital

30%

US$ 33,357 thousand

70%

US$ 77,833 thousand

Company and borrowed funds will be used to implement the Project.

The plan is for Company funds to account for 30% or US$ 33,357 thousand.

The remaining 70% of cash will be raised from creditors and will amount to US$ 77,833 thousand.

It is assumed that borrowed funds will begin to be repaid from the 4th operating year. The loan will be repaid in full in the 13th year.

The loan currency is US$, interest rate – 6% and repayment deadline – 10 years.

The table below shows the proposed repayment schedule for borrowed funds.



Financial forecasts

Kogadyr-6 deposit

Balance sheet, US$ thousands

Index Year 1 Year 2 Year 3 Year 4 … Year 12 Year 13

ASSETS

Short-term assets

Cash and equivalents 73,169 41,645 72,947 90,268 … 235,367 249,779

Accounts receivable (short-term) 5,277 4,503 14,743 14,460 … 17,123 17,468

Inventories 5,019 6,481 23,379 24,603 … 33,583 34,588

Total 83,464 52,629 111,069 129,331 … 286,073 301,835

Long-term assets

Property, Plant and Equipment 54,493 86,947 79,764 67,477 … 19,853 19,465

Total 54,493 86,947 79,764 67,477 … 19,853 19,465

Total assets 137,956 139,576 190,833 196,807 … 305,926 321,300

Equity and liabilities

Short-term liabilities

Financial liabilities 77,954 77,954 77,954 70,158 … 7,795 -

Accounts payable 2,633 1,944 7,014 7,381 … 10,075 10,376

Total 80,586 79,898 84,967 77,539 … 17,870 10,376

Equity

Authorised capital 45 597 45 597 45,597 45,597 … 45,597 45,597

Retained earnings (accumulated loss) 11 773 14 081 60,269 73,671 … 242,459 265,327

Total 57 370 59 678 105,866 119,268 … 288,056 310,924

Total equity and liabilities 137 956 139 576 190,833 196,807 … 305,926 321,300



Financial forecasts

Kogadyr-6 deposit

Profit and loss statement, US$ thousands


Revenue 47,202 54,786 179,374 175,924 … 208,332 212,532

Revenue growth rate n/a 16.07% 227.41% -1.92% … 2.00% 2.02%

COGS (excl. depreciation & amortization [D&A]) 22,659 24,582 85,938 90,438 … 123,450 127,143

Administrative costs (excl. D&A) 2,131 2,416 6,204 6,140 … 7,403 7,561

EBITDA 22,412 27,788 87,232 79,346 … 77,480 77,828

EBITDA margin 47.48% 50.72% 48.63% 45.10% … 37.19% 36.62%

Depreciation & Amortisation 7,696 17,546 24,376 26,488 … 19,708 20,357

EBIT 14,716 10,243 62,856 52,858 … 57,772 57,471

EBIT margin 31.18% 18.70% 35.04% 30.05% … 27.73% 27.04%

Financial expenses - - - 4,677 … 935.45 467.72

EBT 14,716 10,243 62,856 48,181 … 56,836 57,003

EBT margin 31.18% 18.70% 35.04% 27.39% … 27.28% 26.82%

Corporate income tax 2,943 2,049 12,571 9,636 … 11,367 11,401

Net income 11,773 8,194 50,285 38,545 … 45,469 45,602

Net income margin 24.94% 14.96% 28.03% 21.91% … 21.83% 21.46%

NOPAT 11,773 8,194 50,285 42,287 … 46,217 45,977



Financial forecasts

Kogadyr-6 deposit

Cash flow statement, US$ thousands


Net income 11,773 8,194 50,285 38,545 … 45,469 45,602

Depreciation and amortization 7,696 17,546 24,376 26,488 … 19,708 20,357

Working capital change -7,662 -1,377 -22,068 -573.33 … -1,035 -1,048

Cash flow from operations 11,806 24,362 52,592 64,459 … 64,142 64,911

Capital expenditures -50,000 -50,000 -17,193 -14,200 … -19,389 -19,969

Cash flow from investment activities -50,000 -50,000 -17,193 -14,200 … -19,389 -19,969

Equity injection 33,409 - - - … - -

Receiving loans 77,954 - - - … - -

Debt repayment - - - -7,795 … -7,795 -7,795

Dividends paid - -5,887 -4,097 -25,142 … -22,710 -22,734

Cash flow from financial activities 111,362 -5,887 -4,097 -32,938 … -30,506 -30,530

Net cash flow 73,169 -31,524 31,302 17,321 … 14,248 14,412

Cash at the beginning of the period - 73,169 41,645 72,947 … 221,119 235,367

Cash at the end of the period 73,169 41,645 72,947 90,268 … 235,367 249,779



Main earning yield

Kogadyr-6 deposit

Estimation of key investment indicators of the Project, US$ thousands


NOPAT 11,773 8,194 50,285 42,287 … 46,217 45,977

Depreciation and amortization 7,696 17,546 24,376 26,488 … 19,708 20,357

Capital expenditures 50,000 50,000 17,193 14,200 … 19,389 19,969

Working capital change 7,662 1,377 22,068 573.33 … 1,035 1,048

Free cash flow -38,194 -25,638 35,400 54,001 … 45,502 45,316

Discounted free cash flow -35,887 -21,267 25,925 34,916 … 10,859 9,547

Sum of discounted cash flows 163,521

Terminal period cash flow -

WACC 13.27%

Terminal period growth 2.79%

Terminal value discount factor 0.0535098

Terminal value -

Enterprise Value (EV, NPV) 163,521



Results

Kogadyr-6 deposit

Key Project investment data

Earning yield for the Project to develop Kogadyr-6 deposit and increase processing capacity through the construction of a gold recovery plant will be as follows:

The Project needs investment of US$ 111,191 thousand.

According to our calculations, the Net Present Value (NPV) of the Project amounts to US$ 139,460 thousand.

Conclusions

Gold is a soft and heavy metal, having a bright yellow to silvery white color. Gold has a metallic luster and is characterized by an exceptional chemical inertness, resistant to atmospheric corrosion.

Gold consumption in the world is growing every year. Gold is used in alloys with other metals, as well as in the aviation, space and medical industries, in radio equipment and electronics. A significant portion of gold is used in jewelry and plays the role of main currency metal.

An industrial analysis shows domestic production can not meet the demand for gold. Gold in Kazakhstan is mainly used for the replenishment of the country’s monetary reserves. Gold for this purpose is produced by three refineries using various refining technologies: Kazzinc in Ust-Kamenogorsk, Kazakhmys in Balkhash and state-owned plant Tau-Ken Altyn in Astana. The volume of refined gold in Kazakhstan grows annually by an average of 10%. Its volumes reached 31 tonnes in 2016. According to expert estimates, refining output may reach 80-90 tonnes by 2020.

Domestic refineries pursue an active marketing policy with competitive tariffs for subsoil users, which helped redirect supplies of gold-bearing rock from other destinations to Kazakhstan. The total annual production capacity of these refineries makes up 130 tonnes per year. The main gold consumer in Kazakhstan is the National Bank, which over the last five years has been increasing its gold and foreign currency reserves, precious metals in particular. Participation of the National Bank in the gold market is recognised as a positive factor for domestic producers as gold production and supplies became continuous.

Low cost of production is achieved due to cheap raw materials. Over 35 out of more than 80 registered gold deposits are currently operating in Kazakhstan. The quality and grade of ore do not require substantial costs to process ore into raw materials suitable for refining (content of precious metals varies from 10 to 98%).

This Project will help boost gold production in Kazakhstan.

Index Result, US$ thousands

Investment 111,362

Project NPV 163,521

IRR, % 53.9%

Payback period, years 3.5

Discounted payback period, years 3.9


SWOT analysis


Project SWOT analysis

Kogadyr-6 deposit

Strengths

Gold quality. Gold in the ore from the deposit does not require additional processing.

Sales market. The only sales market is Kazakhstan. This will help reduce transportation costs.

High demand for gold. The demand for gold in Kazakhstan has been growing for more than 5 years both from the National Bank and the population to replenish assets and from jewelry manufacturers.

Qualified staff. A lot of gold deposits is concentrated in this oblast. This makes it possible to employ experienced specialists from the nearby city of Kordai.

Weaknesses

Non-diversified income. The company’s main source of income is from the sale of gold, a strongly correlated metal. Therefore, revenues are not diversified. Changes in gold prices will directly affect the company’s operations.

Production. Mining is a capital-intensive industry.

Finances. Mining is a capital-intensive industry.

Innovation. Inert implementation and development of innovation technologies.

Opportunities

Available deposits. The company operates 8 deposits with a potential to continuously increase production capacity.

Political aspect. Kazakhstan increases its gold reserves, which gives an opportunity to increase production capacity with the support of the state.

Demand factors. Gold ore is geologically and technically available.

Market factors. Satisfaction of consumer demand.

Threats

Price. Price for gold is dependent on its supply in the market.

Long-term loans with a high interest rate.

Taxes. High taxes for gold mining enterprises.

Increase in the cost of the Project. Rise in prices for energy, gas, transport, etc.

Production risks. Risks associated with shutdown losses caused by various factors and mainly with the damage to fixed and working capital (equipment, raw materials, transport, etc.).

S W

O T


Abbreviations

bln billion

CAGR compound annual growth rate

CAPM Capital Asset Pricing Model

CIS Commonwealth of Independent States

CIT corporate income tax

CPA crop protection agents

D&A Depreciation & amortization

EBIT earnings before interest and taxes

EBITDA earnings before interest and taxes, depreciation and amortization

EIU Economist Intelligence Unit

F Forecast (in tables and figures)

g gram(mes)

GDP gross domestic product

GI Global Insight

IRR internal rate of return

JSC joint-stock company

kg kilogram(mes)

KZT Kazakhstan tenge

LLP limited liability partnership

mln Million

mm millimetre(s)

NPV net present value

OECD Organization for Economic Cooperation and Development

QI (II,III,IV) Quarter I (II,III,IV)

t tonne(s)

VAT value added tax

WACC weighted average cost of capital

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Business plan for the development of Kogadyr-6 deposit

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