Summary Financials for 2009

The financial results for 2009 were dominated by the lower price of copper. Group revenue from continuing operations was $2,404 million, a reduction of 27% from the previous year and Group EBITDA (excluding special items) declined 21% to $1,634 million.

The average market price over the year was $5,164 per tonne, compared to $6,952 per tonne in the previous year. Our average realised price, of $5,024 per tonne, was lower than the average market price, because our production and sales were weighted to the first six months of the year.

Revenue in the Copper Division was $2,357 million, compared to $3,227 million in 2008, the reduction mainly being due to the lower copper price. EBITDA (excluding special items) in the Copper Division fell 36% to $1,027 million, as the decline in the copper price and sales volumes were only partially offset by a reduction in costs.

Revenue in the Power Division was $238 million. Sales at Ekibastuz GRES-1, on an annualised basis, were in line with the previous year. The increase in power tariffs matched the slight decline in power generated and the negative impact of the tenge devaluation.

At the start of 2009, we hedged 8.5 kt of copper sales per month for the year, around one third of our total output. The programme was put in place to protect some of our higher cost operations, and in particular to protect employment, in the event of prolonged weakness in the copper price.

The programme offset the negative impact of copper prices falling below $3,000 per tonne at the cost of sacrificing the upside when the price rose above $4,000 per tonne. Given the subsequent rise in the price of copper, a loss was incurred of $129 million. No similar transactions are in place for 2010 or beyond, as it remains our general policy to be an unhedged copper producer.

Costs in the Copper Division fell sharply in 2009. Costs were assisted by a sharp devaluation of the tenge to 150 kzt/$ in February 2009, lower input prices and targeted action to improve efficiency. By-product credits benefited from rising prices over the course of the year. These changes led to a decline in net costs from 116 US cents per pound in 2008 to 72 US cents per pound in 2009. This achievement was significantly ahead of our net cash cost target at the start of 2009, of between 90 and 120 US cents per pound.

In 2008 the Government of Kazakhstan implemented new legislation to change tax rates from 1 January 2009. The phasing in of these new rates has since been slowed down, which is covered further in the Financial Review. The new tax regime is relatively aggressive at lower metals prices, such as those seen in 2009. There have also been some further adverse tax impacts in the year, which have reduced EPS on Underlying Profit to $1.13 per share, compared to $2.27 per share in 2008.

The presentation of our reported financial numbers has changed significantly this year, which is dealt with more fully in the Financial Review section. Following the Board’s decision to dispose of MKM, it is now classified as an asset held for sale and its results are included under discontinued operations. Following the sale of 50% of Ekibastuz GRES-1 in February 2010, it will in future be treated as a joint venture. Under IFRS requirements, for 2009, this business is also classified as an asset held for sale and is included within discontinued operations. Ekibastuz GRES-1 remains an important part of our Group.

Copper Division output for 2009

At the start of 2009, with low copper prices and concerns over the economic outlook, we focused on controlling costs, protecting margins and maximising cashflow generation. Four high cost mines were suspended, which led to a 9% decline in ore output to 32,409 kt. Lower ore output combined with a reduction in grade, from 1.26% to 1.18%, created a 15% decrease in mined metal output.

The reduction in mined metal, however, was offset by pro-active, targeted actions such that the production of copper in own concentrate reduced by just 3% to 359 kt. These actions included improved productivity at continuing operations, the processing of stockpiled ore, the reprocessing of waste materials and higher recovery rates at the concentrators.

Production of copper cathode equivalent, our finished material, declined by 7% to 320 kt. This figure was ahead of the target of 300 kt, based on planned mine output, which we set at the beginning of 2009. The target was exceeded due to the management actions referred to previously. Sales of cathode equivalent were 341 kt, with additional volume coming from a reduction in inventory in the first half of the year. There was some rebuild of work in progress and inventory at the year end, which had been reduced to low levels during the year.

By-product output for 2009

From our copper mines, we also produce by-products of zinc, silver and gold. By-product output in 2009 exceeded 2008, as the reduction in by-product metals mined during the year was offset by significant contributions from the processing of stockpiled polymetallic ores, higher recovery rates at the concentrators and lower levels of work in progress.

Power Division output for 2009

Annual net power generated at Ekibastuz GRES-1 in 2009 fell 6.4% from 2008, but the recovery through the year was dramatic. The demand for electricity declined significantly at the end of 2008 and remained low at the beginning of 2009. A moderate improvement in demand started in April 2009 and the trend strengthened during the rest of the year, led by rising industrial output in Kazakhstan and Russia and some shutdowns at other generators.

There is a tight supply demand balance for power in Kazakhstan and the sector needs investment to meet growing future demand for electricity. The Government, recognising this need, increased the ceiling tariffs for the years 2009 to 2015, in order to raise cash flows and allow greater investment in the sector. The tariff at Ekibastuz GRES-1 was an average of 3.19 KZT/kWh in 2009, compared to 2.42 KZT/kWh in 2008. Domestic tariffs finished the year in line with the ceiling tariff of 3.60 KZT/kWh.

Kazakhmys Gold output for 2009 and outlook

As anticipated, there was a decrease in ore extraction and metal production in the Gold Division during 2009. Zhaima mine closed in September 2008, and the grade was lower at the continuing operations of Mizek and Mukur.

The new Bozymchak gold/copper project in Kyrgyzstan has moved to full development stage, following the allocation of $100 million funding by the China Development Bank and Samruk.

Bozymchak should move into production by the end of 2010 and has a potential annual output of 30 koz of gold and 7 kt of copper. Subject to completing various technicalities, it is likely that the assets within the Gold Division will be absorbed within the Copper Division.

Kazakhmys Petroleum

Kazakhmys Petroleum has continued its drilling and testing programme at the Eastern Akzhar exploration block in western Kazakhstan. Remedial work is being carried out at the first two deep wells in order to continue testing, which encountered some technical difficulties during 2009. The drilling of a third deep well is planned to be completed in the first half of 2010.

The results of 3D seismic data covering the northwestern part of the licensed area will be available in early 2010 and it is expected that these results will be used to identify prospective locations for future deep well drilling. By the end of 2010, sufficient data should have been collected from the wells to give a fuller economic evaluation of the field.

ENRC

Our 26% holding in ENRC PLC was worth $4,879 million at the end of 2009, compared to $1,600 million at the start of the year. The increase in value reflects the recovery in commodity markets. ENRC is principally involved in ferrochrome, iron ore and alumina. During the year, ENRC made further investments outside Central Asia including the purchase of Central African Mining and Exploration Company PLC, who have assets in Central and Southern Africa. These acquisitions potentially give ENRC greater exposure to base metals.

Funding

Over the course of the year we generated cash from operations including dividends received from ENRC PLC, before taxation and capital expenditure, of $1,084 million. In March 2009, we commenced capital repayments on our principal $2.1 billion five year debt facility, at the rate of $44 million per month. At the end of 2009, $1,662 million was outstanding on this facility and, after cash and cash equivalents, there was net debt of $689 million relating to continuing operations.

Interest on our principal facility is 1.25% over US$ LIBOR. In 2009, a portion of the interest payments were fixed via interest rate swaps to reduce volatility in our cash flows.

At the end of 2009, the Group was allocated up to $2.7 billion from a loan arranged between the China Development Bank and Samruk. The first utilisation under the facility was drawn on 17 March 2010 for $300 million. Interest is payable on funds drawn at a rate of 4.80% over US$ LIBOR. This facility has several attractions, being long term, flexible in drawing and at a competitive rate.

Outlook for Copper Division in 2010

Mined ore output should rise slightly in 2010, but this will be offset by a general decline in grades. Given that mined metal output will be at a similar level to 2009, we are setting the same target for output of just over 300 kt of copper cathode equivalent. There is some stockpiled material, but not at the scale of 2009.

The four suspended mines will not be brought back into production in 2010. The most significant of these is Akbastau, where we are intending to build a concentrator close to the mine, in order to reduce transportation costs and maximise the value of the ore reserve. With funding now available from our new facility, we are now carrying out preliminary economic studies.

Gross cash costs are likely to increase next year given rising input costs and lower grades. Inflation in Kazakhstan is currently just under 10%, which will put some pressure on domestic costs. The Kazakhstan tenge trades in a fixed band around the US dollar, which has recently been widened and could allow the currency to strengthen against the US dollar, again putting pressure on costs. There is unlikely to be further significant production of by-products from stockpiled material, so that the by-product credit will depend on mined metal and pricing.

Copper growth projects

The Group has two major copper growth projects, Aktogay and Bozshakol. These have both successfully completed their pre-feasibility stage. Both projects showed economic value on conservative pricing assumptions, with significant net present value at Bozshakol.

As mentioned last year, we delayed the move to feasibility stage until we had identified partners and external sources of funding for the projects. With the loan from the China Development Bank and Samruk, we now have committed funding for Bozshakol and the feasibility study commenced in January 2010. The study contractor is Aker Solutions. The feasibility study should be completed by the end of 2010, allowing the project to move into development in 2011 with first production of copper in concentrate by early 2014. Some items of large equipment are likely to be ordered towards the end of 2010. The total capital investment will be around $1.5 to $2 billion, but the feasibility study will define this figure more accurately.

The funding facility from the China Development Bank and Samruk will allow the consideration and potential development of other projects including the underground mine at Kosmurun, the new concentrator at Akbastau, the expansion of Zhomart and the development of the underground mine at Abyz.

We continue to look at funding alternatives for Aktogay and anticipate that progress will be achieved during the current financial year. At that point, the project will then move to feasibility study.

All of these future copper projects potentially represent over two-thirds of our current production. We are, therefore, in a position not only to replace the decline in our current production, but to significantly increase output in the medium term.

Kazakhmys Power Outlook for 2010 and future expansion

With the overhaul of Unit 5 in 2009, the plant now has a capacity of 2,470 MW. During 2010, Unit 3 will undergo a major overhaul and we will start the complete rehabilitation of Unit 8. Ekibastuz GRES-1 will see a significant change in capacity when Unit 8 is completed in 2013. If demand continues to be strong, then the refurbishment of one of the other two dormant units may be brought forward.

As mentioned above, tariffs averaged 3.19 KZT/kWh, including Russian sales, which were at a lower price than sales in Kazakhstan. The ceiling for domestic sales in 2010 is 4.68 KZT/kWh and it is anticipated that the price will reach that level over the course of the year for domestic sales, though some power will still be exported at a lower price.

Conclusion

In 2010, the cost environment is expected to be more challenging than in 2009 and we will need to maintain output while controlling costs. The receipt of the loan facility from Samruk and the China Development Bank has transformed our ability to pursue our growth projects and we are now in an excellent position to take forward some of the largest and lowest-risk copper projects that are currently available globally.