Untitled - PRIME Gold

100 2005 NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •2005101Cash operating costsIn 2005, cash operating costs increased by 20% and amountedto USD 233 million as opposed to USD 193 million in2004. In 2005 consumables and spares continued to accountfor the largest portion of cash operating costs (46% as comparedto 43% in 2004). At the same time, the share of laborcosts decreased from 33% in 2004 to 29% in 2005.The key reasons for the growth of cash operating costs in2005 included:• increase in prices for fuel, consumables and spares;• deterioration of mining and geological conditions at theOlimpiada deposit resulting in increased costs for extractionand processing of gold;• increase of the share of sulfide ores in total ore processedin 2005 by 4%; sulfide ore processing requires on averagetwo times more reagents and materials and three timesmore energy;• RUR appreciation against the USD and respective increaseof costs in US dollar terms; and• consolidation of cash operating costs of the acquired Yakutsubsidiaries for the fourth quarter of 2005 totaling USD13 million.Consumables and sparesDuring 2005, the cost of consumables and spares increasedby USD 25 million to USD 108 million. This increase is explainedmainly by the growth of fuel prices (7.7%) and chemical prices(7.4%) and increase of fuel and material consumption as aresult of deteriorating mining and geological conditions.LaborIn 2005, labor costs increased by USD 3 million up to USD 67million. This increase results from the consolidation of acquiredYakut subsidiaries and the growth of these costs in US dollarterms and as a result of the RUR appreciation against the USdollar.Mineral extraction tax and pollution taxThe mineral extraction tax and pollution tax increased fromUSD 26 million up to USD 30 million in 2005, which relatesmainly to the growth of gold prices by an average 10% ascompared to 2004.Amortization and depreciation of operating assetsDuring 2005, the amortization and depreciation charge onoperating assets remained virtually on the same level as in2004, amounting to USD 42 million despite the fact that averageannual depreciated value of property, plant and equipmentin 2005 was significantly higher than in 2004.The reason for this was the review and resulting increase ofthe useful lives of gold mining and smelting property, plantand equipment in 2005. Accordingly, the rate of depreciationon these property, plant and equipment decreased in 2005 ascompared to 2004 and so did the depreciation charge. UnderIFRS this change was reflected as change in accounting estimatesprospectively, without adjusting the prior year amount.Increase in gold inventoriesDuring 2005, the metal inventories increased by USD 9 millioncompared to USD 11 million mainly due to an increase in unrefinedgold balances in CJSC Polus at the end of December2005.Cost of gold production by Polus and itssubsidiaries(US dollars per ounce or as noted)2005 2004 2003Gold production('000 ounces) 1,038 1,085 832Unit cost of production 244 209 133Cash operating cost 206 175 107The amortization and depreciation of operating assets constituteda considerable component of the production cost in2005, amounting to USD 38 per ounce.In 2005, the cost of production per ounce of gold of thePolus group increased by USD 35 per ounce to USD 244 perounce and cash operating costs of the Polus group grew byUSD 31 per ounce to USD 206 per ounce.During 2005, the cost of production per ounce of gold byPolus grew for the following reasons:• consolidation of the operating results of the acquired Yakutcompanies with a higher gold production cost;• growth of consumables prices;• deterioration of mining and geological conditions at theOlimpiada deposit; and• RUR appreciation against USD.The table below demonstrates the cost of production perounce of gold and cash operating costs at Polus group for theyear ended 31 December 2005 by business units.(US dollars per ounce)Business unit Unit cost of Total cashproductioncostsPolus 196 159Lenzoloto 373 337Yakut companies 534 457Selling, general and administrativeexpensesDuring 2005, selling, general and administrative expenses("SG&A") of the group increased by USD 28 million (by 88%)to USD 60 million. The key growth factors for these expenseswere as follows:• growth of the cost of auditors', lawyers' and other professionalservices by USD 2.1 million (by 148%) in connectionwith the preparation for the spin-off of the gold miningassets from MMC Norilsk Nickel and creation of a separatecompany;• growth of transportation costs by USD 2.6 million (347%)as compared to 2004 on account of travel costs connectedwith the establishment of the holding;• growth of salary costs to USD 33.5 million by USD 13.8 million(70%) as compared to 2004. This growth is mainlyconnected with the start of active operations of the group'scorporate center and LLC Lenskaya Gold Mining Companyholding, as well as the consolidation of the SG&A expensesof the Yakut companies acquired by the group for a totalof USD 1.4 million; and• growth of tax payments by USD 1.4 million (by 41%) as comparedto 2004, mainly on account of property tax increasedue to the acquisition of property, plant and equipment.Other net operating expensesDuring 2005, the group's other operating expenses amountedto USD 25 million whereas in 2004 the group had USD10 million of other operating income. Thus, the net changeof operating results amounted to USD 35 million. The mainreasons for this were as follows:• recognition of the impairment of assets by USD 6 milliondue to the accrual of the asset decommissioning obligationsat Matrosov Mine (as the operation of property, plantand equipment was terminated and their recoverable amountwas equal to zero due to the liquidation of the mine, theobligation in the full amount of USD 6 million was expensed);• write-off of the construction-in-progress projects by Lenzolotototaling USD 5 million; and• accrual of the provision for tax risks of USD 2 million, predominantlyon account of the risk of partial non-recoveryof value added tax, as opposed to the reversal of the respectiveprovision in 2004 for USD 15 million.Net profit for the yearNet profit for the year increased from USD 10 million in 2004to USD 115 million in 2005.GOLD MINING ASSETS OF MMC NORILSK NICKEL(Polus)9