52 2005 NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •200553The joint venture will enable the two leading mining companiesto cooperate in determining the resource potentialof Siberia and the Far East and exploration and development.This cooperation is aimed at:• development of a viable economic model of cooperationallowing to conduct geological and geodesic explorationof new mineral resources in Russia;• evaluation of economic perspectives of newly discoveredand known deposits which have a potential for explorationand significant capital investments;• development of best practices and application of up-todatescientific achievements to ensure profitable exploration,identification, evaluation and development of mineraldeposits by using the respective technical, financial,and entrepreneurial skills of MMC Norilsk Nickel and RioTinto.Within the framework of the JV, it is also planned to shareexpertise, as well as risks and costs associated with the developmentof natural sites of international significance. TheGroup's experience in exploration of Russian natural depositswill be supplemented by contemporary technical equipmentof Rio Tinto and its experience as a participant in the developmentof large reserves. The JV will allow to reduce the timeof exploration and preparation of the deposit to the developmentphase, as well as to use the best international practicein production. In addition, the JV will also impact extractionand production by strengthening the economic well-beingof the respective Russian regions.April 2006 was marked with another step made by the twocompanies towards closer cooperation – the creation ofa Joint Venture LLC RioNor Exploration which is engaged inexploration and project development. RioNor Exploration isa limited liability company registered in Russia. Its headquartersis located in Moscow. The main task of LLC RioNor Explorationis identification and study of attractive deposits with a viewto further create local operating companies engaged in explorationand production organization.Sales streamIn the export market the Group sells base and precious metalsthrough its regional distribution subsidiaries:• Norilsk Nickel Europe in Europe;• Metal Trade Overseas in Europe;• Norilsk Nickel USA in the US; and• Norilsk Nickel Asia in Asia.On 31 December 2004, the Group stopped sales of cobaltthrough the joint venture Norgem (joint venture of MMCNorilsk Nickel and Sogem) and since 2005 has been sellingcobalt products on its own.RAO Norilsk Nickel has a quota (expiring in 2008) for theexport of palladium. MMC Norilsk Nickel has a quota for theexport of platinum, expiring at the end of 2006. In the domesticmarket, gold, silver and platinum group metals are sold bythe Group's sales and marketing division located in the headquartersin Moscow.Procurement streamDuring 2005, Norilsk Nickel's procurement function catered tothe resource requirements of nine entities within the Group. Inaddition, it supplied the Taimyr Autonomous District and enterprisesof the Krasnoyarsk Region with petroleum products.No production downtime occurred in the reporting year due tothe procurement function. Savings amounted to approximatelyUSD 21 million.A large part of purchases was based on open tenders. A totalof 174 tenders were held. In many cases, goods were suppliedby manufacturers (a total of about USD 459.6 million, representingover 50% of all purchases in 2005).In the reporting year, the Group pursued a number of initiativesto improve the efficiency of the following procurement functions:• warehousing;• workplace catering;• supplying petroleum products to the Group's entities;• scrap metal processing.Support streamThe distanced position of the Norilsk industrial district andthe absence of operational production capacities supportingthe activities of the Group's mining stream, including for thepurpose of regular repairs, precondition the existence of special-purposeproduction assets in the near distance from theGroup's core businesses. These assets include:• entities engaged in production of products for current andcapital repairs of the fixed assets on the Taimyr Peninsula(mechanical plant, Stroykomplekt plant, TISMA plant);• research and development, as well as design and surveyingcompanies (mining research and development center,Norilskproject institute, JSC Gypronickel institute, designand research center);• telecommunications company (LLC Norilsktelecom);• non-profile service companies (the Taimyr Peninsula printingworks, LLC Torginvest, resort centers Valek and Yenisei,TPO Cultural Facilities of the Taimyr Peninsula, LLC Kolabyt);and• RAMAT-AVIV medical center (Nor-Med LTD, IsraÂl).As part of the ongoing reforms of the Group's managementstructure in 2005 the Group started to reorganize manufacturingenterprises, research and development and design andsurveying entities into subsidiaries.Maintenance streamIn 2005, maintenance stream within the Taimyr Peninsula consistedof three manufacturing entities: PO Norilskremont,Norilskshakhtservis Trust and MPO Norilskavtomatika.Maintenance stream of Kola MMC comprised of the followingunits: repairs shop, technical maintenance section and2 technical and repairs shops. The units of the maintenancestream perform all types of work connected with repairs ofthe Group's fixed production assets.In the course of management structure reforms in 2006 it isplanned to:• transfer all employees engaged in maintenance from productionunits into maintenance stream;• establish a maintenance directorate for comprehensive managementof maintenance activities;• establish a special-purpose subsidiary engaged in maintenanceon the basis of the maintenance directorate.Construction streamThe Group's construction stream in the reporting year includedtwo divisions of the Taimyr Peninsula – Constructiondepartment and Norilskshakhtstroy Trust on the basis of whichin 2005 the Group created the construction directorate ofthe Taimyr Peninsula and two divisions of Kola MMC – OJSCPechenegastroy and repairs shop.Construction stream entities of the Group are engaged incapital construction, reconstruction, technical re-equipment,and capital repairs of production and mining facilities.In the reporting year, the Group completed the reconstructionof the second flash smelter line at Nadezhda MetallurgicalPlant and undertook environmental initiatives at the CopperPlant. In the first quarter of 2006, the Group completedthe construction of vertical shaft No.7 of the Taimyrskiy mine,which is the deepest in Eurasia.Within the framework of the management structure reformsin 2006 on the basis of the Construction Department,Norilskshakhtstroy trust and Central Construction Laboratory,it is planned to create the Group's subsidiary LLC TaimyrConstruction Company.Security streamIn the reporting period, the Group's security stream included4 private security companies ("PSC"): PSC Nornick, PSCNornick-N, PSC Nornick-M, and PSC Nornick-K.In 2005, the Group proceeded with countermeasures aimedat fighting organized criminal groups stealing its products. Itshould be noted that fighting organized crime is the prerogativeof state authorities. According to the effective legislation,commercial security services and PSCs are limited inresources and means of fighting this type of crime.However, security services initiated more than 50 criminalproceedings based on identified thefts. The Belgium FederalPolice and Bavarian Prosecutor's Office are investigating legalizationand illegal sale of the precious metals stolen from theGroup's enterprises.In the reporting year, the Company for the first time introduceda new security system for production assets (refineries)of high risk based on the so-called "rotation" method.This method presupposes a selection of security guards fromvarious Russian regions excluding those where the Group'sentities are located. Implementation of this approach atSeveronickel Combined Plant has not only increased the efficiencyof fighting thefts of material and technical valuables,base and precious metals, but also has made a positive impacton labor discipline of the Group's staff.MMC NORILSK NICKEL NOT INCLUDINGGOLD MINING ASSETS (POLUS)8
54 2005 NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •200555Mining of oreOre was mined in the Taimyr and Kola Peninsulas in 2005 inaccordance with the mining plans developed in line with theProduction Development Strategy to 2015 approved by theBoard of Directors on 18 March 2003.Taimyr PeninsulaThe total ore mining output in the Taimyr Peninsula is 4.2%higher than the previous year. This includes:• 1.4% growth for rich ore (107,000 tonnes);• 5.3% growth for cuprous ore (195,000 tonnes); and• 9.2% growth for disseminated ore (302,000 tonnes).Oktyabrsky mine is the most productive mine in the TaimyrPeninsula, it accounted for 34% of the total mining outputand contributed 44% of nickel extraction, 61% of copperextraction and 51% of PGM extraction.Ore extraction by mine on the Taimyr Peninsulain 2003-2005(%)Kola PeninsulaDuring 2005, the Group continued to put into operation thefirst start-up set of facilities at the Severny-Gluboky mine,which allowed it to compensate for the reduction in ore productionin the Tsentralny open pit mines due to the plannedcurtailment of production because of the depletion of resourcesand increase the nickel grade of the ore from 0.67% to 0.69%and the copper grade – from 0.29% to 0.32%.Ore extraction by mines on the Kola Peninsulain 2003-2005(%)Ore mined and metal grades at the Group's mines(excluding Polus and Stillwater Mining Company)('000 tonnes or as noted)Type of ore 2005 2004 2003Taimyr PeninsulaOktyabrsky mine Rich 3,684 3,855 3,960Cuprous 1,214 1,055 896Disseminated 26 26 28Total 4,924 4,936 4,884Taimyrsky mine Rich 3,263 3,165 2,971Talnakh Mining Department (1) Rich 492 312 128Cuprous 2,456 2,420 2,419Disseminated 502 505 518Total 3,450 3,237 3,065Zapolyarny mine Disseminated 1,223 1,206 1,195Medvezhy Ruchey mine Disseminated 1,528 1,240 1,006Summary Rich 7,439 7,332 7,059Cuprous 3,670 3,475 3,315Disseminated 3,279 2,977 2,746Total ore mined 14,388 13,784 13,120Average metal grades(% or as noted)Nickel 1.70 1.74 1.73Copper 2.97 3.03 3.13PGM (g/tonne) 9.43 – –Kola PeninsulaTsentralny mine Disseminated 4,774 5,124 5,305Severny mine Disseminated 1,302 675 656Severny-Gluboky mine (2) Disseminated – 194 –Kaula-Kotselvaara mine Disseminated 726 699 657Summary Total ore mined 6,802 6,692 6,618MMC NORILSK NICKEL NOT INCLUDINGGOLD MINING ASSETS (POLUS)8Average metal grades(%)Nickel 0.69 0.67 0.66Copper 0.32 0.29 0.29Notes:(1) In 2003, Mayak, Skalistaya and Komsomolskaya mines were included in the Talnakh Mining Department.(2) In 2005, Severny-Gluboky mine was merged with Severny mine.Note:(1) In 2005, Severny-Gluboky mine was merged with Severny mine.Ore and metals extraction by mineson the Taimyr Peninsula in 2005(%)Ore and metals extraction by mineson the Kola Peninsula in 2005(%)
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