At the start of 2009 we were presented with a challenging environment. The instability in the global financial sector, which had begun in 2008, fed through to industrial activity with manufacturers uncertain about demand for their products and constrained by lack of funding. Reflecting the poor economic outlook, copper prices started 2009 at a depressed level of $3,071 per tonne, compared to their 2008 peak of $8,985 per tonne in July.
Against this background, the Board set two clear aims for 2009; to focus on efficiency and to conserve cash. These objectives were successfully achieved by operational management, so that despite a very challenging situation, the Group produced a very successful outcome.
Kazakhmys ended 2009 in a stronger position than it had started, toughened by the experience and with a full understanding of the importance of the value of production, rather than the volume.
Summary for 2009 financial year
At the end of 2008, we suspended four high cost operations and set a target to produce 300 kt of copper cathode equivalent in 2009. By making full use of stockpiled material and benefiting from previous capital investment, management exceeded this target and produced 320 kt. The emphasis on efficiency and conserving cash was also seen in unit costs, which were contained at 72 US cents per pound over the year, compared to the 116 US cents per pound reported in 2008.
Over the course of 2009, copper proved to be a resilient metal. Even in the worst periods, demand from our own customers remained steady. By the time of our half-yearly results, in August 2009, the copper price had recovered to $6,305 per tonne and finished the year at $7,346 per tonne. Demand for copper from China, one of our principal markets, was helped by a successful government stimulus package. The key role that copper plays in a wide range of applications, and the tightness of copper supply, also assisted its price recovery during 2009.
Our realised copper price was $5,024 per tonne in 2009 compared to $6,714 per tonne in 2008. The lower copper price impacted revenue from continuing operations, which was $2,404 million compared to $3,276 million in 2008. Additional tonnage from stockpiled material and lower costs both assisted profitability, although Group EBITDA declined to $1,634 million from $2,056 million in 2008 due to lower commodity prices.
Balance sheet and funding
The balance sheet has strengthened over the course of the year. Net cash was generated from operations of $820 million and, shortly after the year end, we completed the sale of 50% of Ekibastuz GRES-1 to Samruk for $681 million. These proceeds leave the Group with net debt of $689 million from continuing operations, excluding the Power Division and MKM. We also recently arranged a loan facility of up to $2.7 billion, which places the Group in a strong position to deliver its growth projects.
Strategy
Our long-term strategy remains the same as that set at our Listing in 2005 – to optimise the performance of our assets, deliver our growth projects and take advantage of natural resource opportunities in Central Asia.
In 2009, we focused on the first part of our strategy with considerable success, as seen in these results. In 2010, there is still much work to be done on optimising and improving our efficiency, and we are in a good position to deliver on the second part of our strategy, and move our growth projects forward. We will continue to evaluate other opportunities for acquisition and development, the third part of our strategy, as they become available.
Growth projects
The Group has two major growth projects at Aktogay and Bozshakol, where pre-feasibility studies were completed in 2009. There is also a series of mid-sized projects which we are planning. Once commissioned, all these projects should lead to a significant increase in copper output within the next four years.
Funding has now been established for Bozshakol, through our new loan facility, and the feasibility study should be completed by the end of 2010. The pre-feasibility study showed the project making attractive returns and Bozshakol should be able to move into first production by early 2014. The feasibility study for Aktogay will commence as soon as we secure funding for the project.
ENRC holding
We continue to be the largest shareholder in ENRC PLC, with a holding of 26%. ENRC is a major mining company, listed in London, but principally operating in Kazakhstan. ENRC has a different suite of metals from us, producing iron ore, aluminium and ferrochrome. We believe that this holding diversifies our earnings and presents us with strategic options.
Power division
At the end of 2009, we announced the sale of 50% of Ekibastuz GRES-1 to Samruk. When we purchased Ekibastuz GRES-1, we stated that we would bring in a partner and Samruk is well suited in many respects. Samruk will share the capital risk of investment, provide access to coal supplies and they have a sound understanding of the sector.
Output declined at the start of the year, with the economic downturn reducing demand for power. Demand recovered sharply during the year and in the future Ekibastuz GRES-1 will benefit from rising demand in Kazakhstan and Russia. Through our 50% ownership of Ekibastuz GRES-1, we have secured the necessary power supply for all our future growth projects.
Shared with our new partner, we will be investing around $1 billion over the next seven years to restore the power station to its original 4,000 MW capacity. In 2009, higher ceiling power tariffs were set by the Government for the next six years, which will allow Ekibastuz GRES-1 to produce the cash required for reinvestment and provide sufficient economic return to justify this level of investment.
MKM
MKM is a downstream copper fabricating business in Germany which we acquired in 2004, before our Listing. MKM is a well managed business, with modern technology and some market leading positions, but it has limited synergies with our main copper mining business. The Directors have, therefore, decided to dispose of the business and early stage discussions with a number of potential buyers are in progress.
Sales
Each year we contract between 80% and 90% of our anticipated sales of copper and these contracts are evenly divided between Europe and China. Kazakhstan is an ideal location for serving these two major markets and remains a strength for the Group. We have an established group of customers in both markets and the value of these relationships was apparent over the past year. I should like to thank our customers for their support and we look forward to growing with them.
Corporate responsibility
The success of the Group is principally due to the efforts of our employees and this has been particularly evident in 2009. I should like to thank them for their assistance in this challenging year.
See our corporate responsibility section of this report for further information. We continue to develop our reporting in the key areas of health and safety, environment and community. Kazakhmys has a strong commitment to support the local communities where we operate and this will be maintained. In 2009, we spent around $88 million on social investment, the largest programme of its kind in Kazakhstan. This expenditure included the completion of a major public college in Astana and our own second in-house training facility at Balkhash.
I regret to inform you that in 2009 there were 15 fatalities. This is the lowest level that there has been since Listing and there are some signs of actions in this area starting to have an impact, although the challenges remain substantial. The Board is committed to zero fatalities and will provide whatever investment in education or equipment is required.
The Board
During 2009, two non-executive Directors were appointed to the Board, Peter Hickson and Clinton Dines. Peter brings considerable experience of the power industry whilst Clinton has worked in the resource industry in China for 30 years. Our Board not only has an exceptional range of experience, but each of our non-executive Directors has worked in an area relevant to the Group. This breadth and depth of knowledge is of great assistance and I should like to thank them for their continued guidance over the past year.
Share Price and Dividends
The recovery of the copper price over 2009 and the success of our own actions led to a sharp rise in our share price, from 231 pence at the beginning of the year to 1,328 pence at the end. This 475% increase made Kazakhmys shares the strongest performer in the FTSE 100 index during 2009.
The dividend policy followed by the Board remains the same as that set at the time of Listing – to take into account the profitability of the business, as well as its cash flows and growth requirements. With the strengthening of the balance sheet and the recovery in cash flows, we believe that it is appropriate to reinstate a dividend payment. Accordingly, for the 2009 financial year, the Board is recommending a final dividend of 9.0 US cents per share.
Outlook
Demand for our products remains sound and our sales contracts for 2010 have been completed. We anticipate producing just over 300 kt of copper cathode equivalent, similar to the target for 2009, and the emphasis will remain on value and profitability rather than volume. We will continue to focus on managing costs and we anticipate making good progress on our growth projects in 2010. I look forward to reporting on these next year.