Untitled - PRIME Gold

1882005NORILSK NICKEL • ANNUAL REPORT •NORILSK NICKEL • ANNUAL REPORT •2005189GOLD MINING COMPANY POLUSNOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005(US dollars thousand)GOLD MINING COMPANY POLUSNOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2005(US dollars thousand)tax legislation. 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.is not freely convertible outside of the country, currencycontrols, 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.Credit riskCredit risk is the risk that a counterparty may default or notmeet its obligations to the Group on a timely basis, leading tofinancial loss to the Group.In terms of Russian tax legislation, authorities have a periodof up to six years to re-open tax declarations for further inspection.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 2,968 thousand.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, disturbanceof land that could potentially impact on flora and fauna, andgive rise to other environmental concerns.The Group's management believes that its mining and productiontechnologies are in compliance with all current existingenvironmental legiclation 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 of environmental obligations forits operations. Estimations are based on management's understandingof the current legal requirements and the term of thelicense agreements. Should the requirements of applicableenvironmental legislation change or be clarified, the Group mayincur additional environmental obligations.Russian Federation riskAs an emerging market, the Russian Federation does notpossess a fully developed business and regulatory infrastructureincluding stable banking and judicial systems, which wouldgenerally exist in a more mature market economy. The economyof the Russian Federation is characterised by a currency thatStability and success of the Russian economy depends on theeffectiveness of the Government economic policies and thecontinued development of the legal and political systems.37. RISK MANAGEMENT ACTIVITIESIn the normal course of its operations, the Group is exposedto commodity price, currency, liquidity, interest rate and creditrisks. The Group has implemented a risk management structureand has adopted a series of risk management and control proceduresto facilitate the measurement, evaluation and controlof these exposures and related risk management activities.Commodity price riskCommodity price risk is the risk that the Group's current or futureearnings will be adversely impacted by changes in the marketprices of gold.The Group does not enter into any forward or hedging contractsor other financial instruments to offset its commodity price risk.Currency riskCurrency risk is the risk that the financial results of the Groupwill be adversely impacted by changes in exchange rates towhich the Group is exposed.The majority of the Group's revenues are denominated in USD,whereas the majority of the Group's expenditures are denominatedin RUR, accordingly, operating profits may be adverselyimpacted by appreciation of the RUR against the USD.The Group does not enter into foreign currency derivativetransactions to offset its currency risk.Liquidity riskLiquidity risk is the risk that the Group will not be able to settleall liabilities when they fall due.The Group's liquidity position is carefully monitored and managed.The Group makes use of a detailed budgeting and cash forecastingprocess to ensure that it has adequate cash available tomeet its payment obligations.Interest rate riskInterest rate risk is the risk that changes in interest rates willadversely impact the financial results of the Group.The Group does not enter into interest rate swap arrangementsto manage its interest rate risk.Although the Group sells a significant portion of its gold productionto a related party and has the only one other customer,the Group is not economically dependent on these customersbecause of the high level of liquidity in the gold commoditymarket in the Russian Federation. Payment terms with theGroup's customers are such that credit risk is minimal.38. FAIR VALUE OF FINANCIAL INSTRUMENTS2005 2004Carrying Fair Carrying Fairvalue value value valueInvestments in associates (refer to note 17) 326 326 9,357 9,357Investments in securities and other financialassets (refer to note 18) 2,234,000 2,234,000 397,317 397,317Advances to suppliers and other receivables(refer to note 20) 25,409 25,409 12,315 12,315Other assets (refer to note 21) 88,674 88,674 58,224 58,224Cash and cash equivalents (refer to note 22) 28,408 28,408 13,015 13,015Obligations under finance lease (refer to note 27) 6,869 6,869 4,828 4,828Contingent consideration for acquisition of subsidiaries 140,000 140,000 – –Other long-term liabilities (refer to note 28) 1,246 1,246 5,273 5,273Short-term borrowings (refer to note 29) 23,243 23,243 35,112 35,112Trade accounts and other payables (refer to note 30) 49,643 49,643 35,864 35,864Taxes payable (refer to note 31) 23,173 23,173 14,512 14,512The following methods and assumptions were used to estimatethe fair value for each class of financial instrument:Listed investments in securities are carried at their market values,whereas unlisted investments are carried at management'svaluation.Advances to suppliers and other receivables, other currentassets, cash and cash equivalents and trade and other payablesare recorded at their carrying values which approximate thefair values of these instruments as a result of their short-termduration.Interest rates on borrowings are market related. Consequentlythe carrying values of these financial instruments approximatetheir fair values.The fair value of lease obligations is estimated by discountingthe future contractual cash flows using the market interestrates available to the Group for other borrowings.Long-term taxes payable have been discounted using the discountrate applicable for borrowings.The fair values of financial instruments are estimates and donot necessarily reflect the cash amount had these instrumentsbeen liquidated at the date of valuation.CONSOLIDATED ANNUAL FINANCIAL STATEMENTS OFCJSC POLUS FOR THE YEAR ENDED 31 DECEMBER 200514