Untitled - PRIME Gold

10 2005 NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •200511LETTER FROM THE GENERAL DIRECTOR –CHAIRMAN OF THE MANAGEMENT BOARD4Dear Shareholders,We are pleased to inform you that in 2005 MMC NorilskNickel again demonstrated impressive growth. The marketcapitalization of the Group grew to USD 20 billion. The resultsof the past years represent clear evidence of the positivedevelopment dynamics of the Group.The increase in the Group's market capitalization resultedfrom the sustained strong demand for metals produced by theGroup and the successful achievement of strategic objectivesset by management.In 2005, we actively developed our existing production base,reduced costs, and improved reliability of energy supplies andtransportation links. We continued to mitigate the environmentalimpact of our operations. In 2005, the Group achieveda new, higher level of transparency and disclosure of its operations.••• Results for the year – financial growthDuring 2005, the situation in the base and precious metalsmarkets remained favorable. The decisive factors that influencedthe world prices for the main products of MMC Norilsk Nickellast year were:• continued growth in China;• situation in the metal markets of major developed economies;• increased impact on the metal markets of the operationsconducted by international investment trusts.As a result of a combination of the above-mentioned factorsthe average annual metal prices for almost all the Group'sproducts continued to grow. The average annual metal pricesincreased during 2005 from 2004 as follows: copper by 29%(USD 3,684 per tonne), nickel by 6% (USD 14,733 per tonne),and platinum by 6% (USD 897 per ounce). In 2005, nickel andcopper prices hit a many years high, and platinum prices hithistoric record.During 2005, revenues from metal sales, which totaled USD7,169 million, represented a 9% increase from 2004.Favorable situation in the metal markets, extension of thesales geography and focus on end-customers enabled theGroup to have a revenue increase for all metals of USD 578million, of which USD 489 million (85%) was for base metals,and USD 89 million (15%) for PGMs and gold.The main reason for revenue growth in 2005 was the increaseof the average annual sales prices for all metals sold by theGroup, except for palladium.Revenue from nickel sales increased by 3% from USD 3,564million in 2004 to USD 3,674 million in 2005. In 2005, thedecrease in the physical volume of nickel sales (not includingsales of refined metals purchased from third parties) by 2%(6,000 tonnes) to 244,000 tonnes as compared to 2004 wasoffset by an increase in the average annual nickel export priceby 3% – from USD 14,121 per tonne in 2004 to USD 14,560in 2005.During 2005, the physical volume of copper sales amountedto 450,000 tonnes, which nearly corresponds to the level ofsales in 2004. Due to a significant growth in average annualcopper export price of 30% – from USD 2,820 per tonne in2004 to USD 3,652 per tonne in 2005, the revenue from coppersales grew by 30% and reached USD 1,644 million in2005 as compared to USD 1,265 million in 2004.without Stillwater Mining Company decreased by 9% from USD725 million in 2004 to USD 661 million in 2005. In physicalterms, sales of palladium produced by the Group in Russiaamounted to 3,231,000 ounces in 2005. In 2005 StillwaterMining Company sold 933,000 ounces of palladium, including439,000 ounces of palladium received from the Group in2003.Until 2005 the information on the sales of PGM produced byNorilsk Nickel Group in Russia was subject to state secrecylegislation. As a result of changes in the legislation on statesecrecy made during 2005, the Norilsk Nickel Group is nowallowed to disclose both current information on PGM, andinformation on past periods beginning from 18 February 2004.Information on the periods before that date remains secret.Platinum sales increased by 22% from USD 706 million in2004 to USD 864 million in 2005. Sales of platinum producedby the Group in Russia increased by 27% from USD 539 millionin 2004 to USD 683 million in 2005. The increase isexplained mainly by the increase in the average annual platinumexport price. In physical terms, platinum sales amountedto 758,000 ounces in 2005. During 2005 platinum salesby Stillwater Mining Company amounted to 216,000 ounces.During 2005, the cost of sales grew by 2% from USD 2,938million in 2004 to USD 2,994 million in 2005. In 2005, cashoperating costs increased by 9% and amounted to USD 2,480million as opposed to USD 2,275 million in 2004. Key reasonsfor the growth of cash operating costs in 2005 included:• increase of cash operating costs by USD 44 million due toappreciation of the Russian ruble ("RUR") against the USdollar ("USD"), which amounted to 2% based on the averageannual exchange rate;• increase of the actual cash operating costs by USD 139 million;and• the increase of cash operating costs was offset by theamount of increase in revenue generated from the sale ofby-products of USD 22 million.Whereas revenues only grew by 9% in 2005 as compared to2004, profit for the year increased by 27% from USD 1,857million in 2004 to USD 2,352 million in 2005.••• DisclosuresAfter several years of joint focused work with the RussianGovernment, relevant changes were made to the law On StateSecret in March 2005 enabling MMC Norilsk Nickel to disclosethe reserves, production, sales and consumption of PGMs.Due to these amendments, the Group was able to disclosefor the first time the quarterly results of palladium and platinumproduction in 2005. In February 2006, for the first timein its history, MMC Norilsk Nickel disclosed information onPGM grades of the mineral resources and ore reserves developedby the Group prepared in accordance with the JORCCode by an independent international consultant. The dataon the metal grades of the ore reserves in the deposits presentevidence of a good competitive position and the longtermsufficiency of the Group's resource base.••• Management system reformIn 2005, the Group continued to create a management structuremeeting today's requirements of a large internationalcompany. The Group completed the first stage of the reform,having created industry streams and professional service functionsthat will be providing centralized services common to allindustry streams.The management structure reform will help to streamline theasset structure, assign specific managers to industry streamswith authority and personal responsibility for the particularresults, and improve the Group's overall management flexibility.The management hierarchy will be downsized and theindustry personnel will be refocused on profitability and costreduction. In accordance with the plan, the reform is to becompleted by 2010.••• Assignment of investmentcredit ratingTo improve our positions in the financial markets, reduce thecost of borrowings and enhance the financial policy flexibility,the Group was the first among Russian companies to obtainan investment grade credit rating – a long-term BBB– creditrating in foreign currency – from the international rating agencyFitch Ratings Limited in December 2005. In August 2005,Standard & Poor's raised the long-term credit rating of theGroup from BB to BB+. MMC Norilsk Nickel holds the leadingposition amongst Russian non-government public companiesby the total value of its credit ratings.LETTER FROM THE GENERAL DIRECTOR –CHAIRMAN OF THE MANAGEMENT BOARD34Palladium sales decreased by 9% from USD 1,005 million in2004 to USD 914 million in 2005. The main contributing factorfor the palladium sales decrease is the decline in the averageannual palladium export price from 2004. Palladium sales