Untitled - PRIME Gold

1562005NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •2005157MINING AND METALLURGICAL COMPANY NORILSK NICKELNOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005(US dollars million)MINING AND METALLURGICAL COMPANY NORILSK NICKELNOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005(US dollars million)42. COMMITMENTSCapital commitmentsThe Management Board has approved the following capitalexpenditure budget for the year ending 31 December 2006:Maintenance of property, plant and equipment 614Expansion of property, plant and equipment 205Total 8192006 budgeted capital expenditure allocated between:Contracted 416Not contracted 403Total 819Contracted obligations in respect of capital commitments forthe period after 2006 amount to approximately USD 14 million.Operating leasesThe land in the Russian Federation on which the Group's productionfacilities are located is owned by the State. The Groupleases land through operating lease agreements, which expirein various years through 2051. Future minimum lease paymentsdue under non-cancelable operating lease agreements at31 December 2005 are as follows:Due in one year 3Due in the second year 3Due thereafter 16Total 22Intergovernmental agreementwith NorwayIn 2001 an intergovernmental agreement between theGovernment of the Russian Federation and the Norway wassigned on the provision of technical assistance in the reconstructionproject for the metallurgical production facilities ofthe Pechenganickel combine, a branch of OJSC "KolskayaMining and Metallurgical Company".Total investment in reconstruction of production facilities isexpected to be USD 103 million, financed as follows:Grants from the Government of Norway 31Loan from Nordic Investment Bank 30Contribution by the Group 42Total 103As at 31 December 2005 the Group received USD 8 millionin grant from the Government of Norway (refer to note 20)and a loan from Nordic Investment Bank in the amount of USD0.5 million. The received cash was invested in the reconstructionof the equipment in accordance with the terms ofthe Grant Facility Agreement.Social commitmentsThe Group contributes to mandatory and voluntary social programsand maintains social assets in the locations where it hasits main operating facilities. The Group's social assets, as wellas local social programs, benefit the community at large andare not normally restricted to the Group's employees. Thesecontributions are expensed in the period in which they areincurred.The Group's commitments will be funded from its own cashresources and borrowings.43. CONTINGENCIESLitigationUnresolved tax litigation at 31 December 2005 amounted toapproximately USD 142 million (2004: USD 129 million).Management has assessed as possible the unfavourable outcometo the tax litigation.In addition, the Group has a large number of small claimsand litigation relating to sales and purchases of goods and servicesfrom suppliers. Management believes that none of theseclaims, individually or in aggregate, will have a material adverseimpact on the Group.Taxation contingenciesin the Russian FederationThe taxation system in the Russian Federation is at a relativelyearly stage of development, and is characterised by numeroustaxes, frequent changes and inconsistent enforcement atfederal, regional and local levels.The Government of the Russian Federation has commenceda revision of the Russian tax system and passed certain lawsimplementing tax reform. The new laws reduce the numberof taxes and overall tax burden on businesses and simplifytax litigation. However, these new tax laws continue to relyheavily on the interpretation of local tax officials and fail toaddress many existing problems. Many issues associated withpractical implication of new legislation are unclear and complicatethe Group's tax planning and related business decisions.In terms of Russian tax legislation, authorities have a periodof up to three years to re-open tax declarations for furtherinspection. Changes in the tax system that may be applied retrospectivelyby authorities could affect the Group's previouslysubmitted and assessed tax declarations.While management believes that it has adequately providedfor tax liabilities based on its interpretation of current andprevious legislation, the risk remains that tax authorities inthe Russian Federation could take differing positions withregard to interpretive issues. This uncertainty may expose theGroup to additional taxation, fines and penalties that couldbe significant.Management has assessed possible tax risks at 31 December2005 to be approximately USD 117 million (2004: USD 49 million).Environmental mattersThe Group is subject to extensive federal, state and local environmentalcontrols and regulations in the countries in whichit operates. The Group's operations involve the discharge ofmaterials and contaminants into the environment, the disturbanceof land that could potentially impact on flora andfauna, and give rise to other environmental concerns.The Group's management believes that its mining and productiontechnologies are in compliance with all current existingenvironmental legislation in the countries in which it operates.However, environmental laws and regulations continueto evolve. The Group is unable to predict the timing or extentto which those laws and regulations may change. Such change,if it occurs, may require that the Group modernise technologyto meet more stringent standards.The Group is obliged in terms of various laws, mining licensesand 'use of mineral rights' agreements to decommissionmine facilities on cessation of its mining operations and torestore and rehabilitate the environment. Management of theGroup regularly reassesses environmental obligations relatedto its operations. Estimates are based on management's understandingof current legal requirements and the term of licenseagreements. Should the requirements of applicable environmentallegislation change or be clarified, the Group may incuradditional environmental obligations.Russian Federation riskAs an emerging market, the Russian Federation does not possessa fully developed business and regulatory infrastructureincluding stable banking and judicial systems, which would generallyexist in a more mature market economy. The economyof the Russian Federation is characterised by a currency thatis not freely convertible outside of the country, currency controls,low liquidity levels for debt and equity markets, andcontinuing inflation. As a result operations in the RussianFederation involve risks that are not typically associated withthose in more developed markets.Stability and success of Russian economy and the Group'sbusiness mainly depends on the effectiveness of economicmeasures undertaken by the government as well as the developmentof legal and political systems.44. RISK MANAGEMENT ACTIVITIESIn the normal course of its operations, the Group is exposedto commodity price, currency, interest rate, operational, creditand liquidity risks. The Group has implemented a risk managementstructure and has adopted a series of risk managementand control procedures to facilitate the measurement,evaluation and control of these exposures and related riskmanagement activities.Risk management structureThe Group's treasury function is responsible for the managementof currency, liquidity, interest rate and credit risk. Withinthe treasury function, there is an independent risk managementunit, responsible for monitoring the treasury's adherenceto the Group's risk management policies.Commodity price risk is managed by the Sales Block of theGroup. An independent risk management unit exists withinthat function to control exposures and ensure they are in linewith policies set by management of the Sales Block and seniormanagement of the Group.Commodity price riskCommodity price risk is the risk that the Group's current orfuture earnings will be adversely impacted by changes in themarket prices of the Group's joint products, i.e. nickel, copper,palladium, platinum and gold.The Group is exposed to commodity price risk as a substantialpart of its metal sales revenues is derived from long-termcontracts with physical off-takers for known volumes of metals,but at prices that will be determined by reference to marketprices at the delivery date.For a certain portion of its metal sales revenues the Group managesits exposure to commodity price risk by entering intofixed price sales contracts and cap and floor arrangementsfor the sale of refined metal to physical off-takers.CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OF MMCNORILSK NICKEL FOR THE YEAR ENDED 31 DECEMBER 200513