KPMG s Experience in the Metals & Mining Industry: Selected Highlights kpmg.ru

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1 KPMG IN RUSSIA AND THE CIS KPMG s Experience in the Metals & Mining Industry: Selected Highlights kpmg.ru

2 b KPMG s Experience in the Metals & Mining Industry: Selected Highlights

3 Contents Investment and financial activities Transaction services 3 Due diligence on alumina assets of a diversified industrial 3 Initial public offering of the world s largest aluminium holding 4 Our M&A and transactions support services 5 Restructuring 6 Debt restructuring of the world s largest aluminium holding 6 Development of a financial model for an East European metallurgical holding 7 Other projects related to investment and financing activities 8 Performance improvement Strategy 11 Development of a strategy for a Kazakhstan mining 11 Preparation of a feasibility study for construction of a gold processing plant 12 Performance improvement 13 Performance improvement for a metals holding through lean production principles 13 Cost optimisation and performance improvement for a metals holding 14 Other performance improvement projects 15 Accounting and corporate governance Accounting and corporate governance 17 Financial statement preparation guidance 17 Valuation 18 Valuation of preferred shares of a metals and mining for reflection in the financial statements 18 Valuation of property, plant and equipment for transaction cost allocation purposes 19 Internal audit 20 Assessment of the internal audit function at a mining industrial group 20 Risk management 21 Development of an internal control system for a metallurgical complex 21 Financial fraud investigation 22 Assessment of the legitimacy of a s financial activity 22 Other accounting and corporate governance projects 23 Audit, tax and legal services Audit services 25 Audit experience in the metals and mining sector 25 Tax consulting 26 Tax support for the acquisition of international assets 26 Legal services 27 Development of a long-term incentive programme 27 Other tax and legal services projects 28

4 d KPMG s Experience in the Metals & Mining Industry: Selected Highlights Foreword Lydia Petrashova Head of Metals & Mining KPMG in Russia and the CIS Since KPMG opened its first office in the CIS more than 20 years ago, one of our main areas of activity has been work with companies in the metals and mining sector. Initially, this primarily consisted of the provision of audit services, but over time we have also provided an ever-increasing range of advisory services, and as a result our professionals have accumulated a wealth of experience of working with firms in the industry. This brochure provides information on some of our most interesting engagements, and on the metals and mining team at KPMG in Russia and the CIS. Within our advisory practice, we have developed various key areas such as management consulting, transactions and restructuring consulting, and risk consulting. In total, KPMG in the CIS now employs more than 1,500 consultants in addition to its auditors. The main advantages offered by our professionals are their extensive practical experience and knowledge of the specifics of the CIS region, as well as their experience of working in other countries. We are always pleased to be of assistance.

5 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 1 KPMG s solutions throughout the business life cycle Project life cycle LEVEL OF ACTIVITY TIME Transactions Projects Operational excellence Compliance Market entry assessment Financing and M&A Tax structuring Due diligence Integration Project development Feasibilities Financing Tax structuring Project execution Operating model development Cost and tax optimisation Supply chain transformation Business intelligence Finance / IT / HR transformation External audit Enterprise risk management Internal assurance Tax compliance Sustainability р. 3, 5, 11, 12 р. 13, 14 р. 6, 7, 14 р. 3, 4, 5, 19, 26 Audit of financial statements Development of an internal control system, assessment of the internal audit function Financial statement preparation guidance, valuation of assets and liabilities for reflection in the financial statements Assessment of the legitimacy of the companies within a group and of the top-management р. 17, 18, 20, 21, 22, 25, 27

6 2 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Investment and financial activities

7 Transaction services KPMG s Experience in the Metals & Mining Industry: Selected Highlights 3 Due diligence on alumina assets of a diversified industrial Background By 2006, the process of establishing the world s largest aluminium holding had entered its final phase, and involved the merger of the aluminium and alumina assets of two Russian companies and a Swiss diversified industrial. In order to determine the value of the assets involved and to identify any risks related to their merger, each of the parties engaged independent financial advisors. One of the Russian companies requested that KPMG perform an independent financial and tax due diligence on the Swiss s alumina assets. Our tasks Our investigation was aimed at identifying any potential or unrecorded liabilities associated with tax or legal risks, pension programmes and any other circumstances at the. We also had to assess the s EBITDA for past periods for the existence of one-off and non-standard transactions, as these figures provided the starting point for the determination of the transaction value. The subjects of our research were located in Jamaica, Italy, Sweden and Ireland. In order to make the best use of our knowledge of the industry to meet the client s requirements, and to benefit from our knowledge of the local specifics such as tax legislation in the relevant jurisdictions, we formed a team of professionals based in both our CIS offices and in the countries where the relevant assets were located. Different standards for preparation of financial statements were applied in relation to the various assets, so we had the additional task of understanding and expressing the identified risks in accordance with IFRS, the standards used by the holding. We were given just four weeks for the whole project, which, given the wide geographical spread of the assets, was a very tight deadline. Results Despite the tight deadline, we managed to form separate teams for each asset, to engage specialists to analyse the areas requiring specific knowledge and, ultimately, to carry out the investigation. The results of our work were used successfully in the valuation of the assets and determining a fair transaction price. On 27 March 2007, the world s biggest aluminium was created. The key success factor for our part of the project was the availability of KPMG metals industry specialists and experts on legal issues and pension obligations. In addition, the uniform quality standards applied at all of KPMG s offices allowed us to minimise the time required to carry out the necessary research and prepare a consolidated report. Lydia Petrashova Olga Plevako

8 4 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Initial public offering of the world s largest aluminium holding Background In 2009 the management of the world s largest aluminium holding decided to list an additional 10% of its ordinary shares on the Hong Kong Stock Exchange (HKEx). The proceeds were to be used to pay off part of its restructured loans, which was one of the conditions for the restructuring of the holding s debt. No Russian had been listed in Hong Kong before, and therefore the holding faced additional challenges. Continuing our business relationship with the holding, the KPMG Capital Markets team was chosen as the consultant for this project. Our tasks The first listing of a Russian on the HKEx provided us with serious challenges, primarily related to studying the local legislation and specifics of the financial market in Asia. The HKEx requirements for issuers are extremely strict: even at the initial stage, the issue prospectus (the principal document of the being listed) must be presented in a more complete form than when listing on, for example, the London Stock Exchange, and the financial information contained within must be fully audited. This put us under tighter time constraints. Amongst our tasks as the designated accountant, we had to prepare an accountant s report and a confirmation letter. We were also required to prepare confirmation letters in relation to the forecast of revenue for 2009 and working capital for the following 12 months. This task required a detailed analysis of the s financial model and preparation of recommendations on its further development, as well as a sensitivity analysis of the model. The restructuring taking place in the and the general uncertainty in the global financial markets in 2009 resulted in additional requirements in relation to the disclosure of information in the issue prospectus. Results In January 2010, less than four months after the start of the project, the holding held a successful IPO on the HKEx and, in parallel, on France s Euronext. The sold 10.6% of its shares for a total of USD2.24 billion, enabling it to reduce its debts significantly. The holding s issue prospectus set a record for Hong Kong, with 1,141 pages. The preparation for and implementation of this project involved a number of participants aside from the itself: the KPMG team, legal and financial consultants and sponsor companies in all, 15 parties from Moscow, Hong Kong, Paris, the USA and the UK. This cooperation made it possible to complete this significant project within such a tight deadline. The key success factors for this project were the smooth teamwork of around 70 professionals, the close cooperation between auditors and consultants from KPMG s international offices, and our deep understanding of the processes of raising capital on the stock market. Olga Plevako

9 Transaction support KPMG s Experience in the Metals & Mining Industry: Selected Highlights 5 Our M&A and transaction support services Background Our Corporate Finance group includes a separate team of M&A experts dedicated to providing the full range of services in support of the acquisition or sale of a business. The key success factor here is comprehensive management of the process, which enables us to maintain control over the transaction, optimise its terms, and minimise the impact on the s day-to-day activities, as well as to limit the risk of unwanted disclosures. Sell-side support Our sell-side support work includes a wide range of services. The main services we provide include: Administration and advisory services: development of the timeframe for work, with a detailed allocation of duties and coordination of work of all participants at each stage; identification of potential buyers, assessment of their interest and subsequent cooperation with them; assistance in negotiations to obtain maximum value; continuous consultation and support throughout the project. Technical support: the drafting of a marketing presentation on the asset; preparation of an information memorandum for potential investors and a non-disclosure agreement; development of a financial model and its update when necessary; the establishment and support of an electronic data room; assistance in the preparation of other presentations for meetings with potential buyers. Factors contributing to the success of our advisory services provided to metals and mining companies include our indepth understanding of the sector and the access to all of the main investors available through our global corporate finance network, which enables us to quickly establish initial contact and identify interest in a transaction from international strategic and financial investors. Buy-side support Within our buy-side support projects, we also provide a wide range of services, both administrative and technical in nature. Our clients may be interested both in acquiring a specific asset and in obtaining a general understanding of the business being acquired, which affects the scope of services we provide. Accordingly, we provide assistance in determining the acquisition criteria, prepare lists of potential assets, and analyse the compliance of the acquisition target with the s strategy. Overall, as with sell-side support, we provide advice and technical assistance at each stage of the transaction, in order to make the acquisition process as easy as possible for our clients. Robert Vartevanian

10 6 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Restructuring Debt restructuring of the world s largest aluminium holding Background Throughout 2009, we assisted a syndicate of international banks in restructuring the debt owed by the world s largest aluminium holding. The sharp fall in aluminium prices around the end of 2008 had prevented the holding from meeting its loan obligations. The owed USD17 billion in total, the majority of which was due for payment in The needed 30 syndicated and bilateral loans to be comprehensively restructured. In all, apart from the holding itself, the negotiations involved 80 international banks, six of Russia s largest banks and the Russian government. The international creditors set up a coordination committee, which appointed KPMG as advisor on the financial restructuring of the holding. Our tasks As one might expect with such a large project, we were assigned an extensive range of tasks. During the lengthy negotiations on the restructuring terms, the banks primarily needed information on the s current position and whether it was meeting its obligations, plus a forecast of the s financial status in the coming 1-3 months. In order to provide this, we obtained cash flow statements for the last month and forecasts for the next month from the, analysed this information in detail, focussing on possible risks of the target figures not being met, and presented to the creditors our comments on the actual state of affairs at the. To develop a long-term restructuring plan, the creditors needed a long-term forecast of the s financial flows. To this end, we were asked to comment on the s financial model and its assumptions. In addition, the creditors hired consultants to advise on various technical issues, and KPMG coordinated their work. Based on our comments and reports, the creditors were able to develop their own independent cash flow forecast, which they subsequently used in reaching a decision on the restructuring. For future control over spending, the creditors needed a cash monitoring and control system. We developed such a system in the form of cash pooling and integrated reporting based on actual results, short- and long-term forecasts, and the s strategy. We also assisted in the preparation of the supporting documents for the restructuring process, which included developing the definitions of the financial covenants. Results The joint work of the banks, the itself, KPMG and the other consultants engaged resulted in a thorough restructuring plan being approved by all participants in the process, which assumed that the creditors loans would be repaid in full within a reasonable timeframe, at a mutually beneficial cost of lending. The key success factor here was the fact that we had a team of restructuring specialists familiar with both the Western banking system and Russian business, specialists with extensive experience of analysing metals companies, and specialists in financial modelling. We also involved other KPMG professionals in the project to perform specific tasks, including tax experts, valuation experts and business process optimisation experts. Andrei Mitrofanov

11 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 7 Development of a financial model for an East European metallurgical holding Background In 2010, an international bank faced a problem in relation to the repayment of a debt of USD89 million owed by a East European metallurgical holding. The companies of the holding are located in several East European countries and specialise in the production of zinc, lead and rolled steel products. The problems with repayment were primarily due to the fall in global prices for non-ferrous metals and metal products around the end of In total, the owed its creditor banks approximately USD240 million. In light of the above, the bank requested that KPMG assist in restructuring the debt. Our tasks KPMG s main task in the debt restructuring process was to develop a financial model: a tool for long-term forecasting of the holding s cash flows, enabling the creditors to analyse different development scenarios for the and choose the best debt restructuring option for all parties. As the holding includes a large number of operating segments, it was necessary to include all of the holding s assets in the model, including its mines; zinc, lead and rolled steel production plants; and trading houses. We were also asked to ensure that cash flows could be forecast not just for the holding as a whole, but also for its non-ferrous segment separately, as it was to companies in this segment that the main credit facilities had been extended and a separate debt restructuring scenario was being considered for them. In addition, the model had to allow analysis of scenarios involving the sale of various assets of the holding. At the same time, we were asked to include in the model around 10 investment projects being implemented by the holding at the time of the restructuring. Each of these projects had resulted in improvements to production processes at individual plants, and had led to efficiencies in production costs. Furthermore, some of these improvements concerned several companies at once. Amongst other things, the financial model had to allow the user full control over all of the investment projects, with the possibility of suspending or postponing any of them, and of choosing their source of finance. The financial model also had to include the numerous loans issued to the holding and to allow changes to be made to the method for calculating and paying interest on them, as well as settlement options for each loan, including the consolidation of several individual loans into a syndicated loan. Results KPMG s work resulted in the creation of a flexible financial forecasting tool allowing the creditors to analyse the s potential development under a wide range of scenarios. Our financial model served as the principal support tool in the debt restructuring negotiations. The key success factor here was the inclusion in the KPMG team of professionals from Bulgarian and Russian offices with extensive knowledge of the metals industry and significant experience of financial modelling and financial restructuring. Andrei Mitrofanov

12 8 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Other projects related to investment and financing activities A coordination committee of international banks A large Russian group (non-ferrous metals) Restructuring Restructuring KPMG provided advisory services to a committee of international creditors during the financial restructuring of a major international holding with assets in the metals, power, oil and other sectors KPMG provided advice to the group during its financial restructuring Kinross Gold A coordination committee of foreign banks A metals A large international holding Transaction Services Restructuring Restructuring Transaction Services Advisory services to Kinross Gold on the acquisition of two gold mining companies: Regionruda and Severnoye Zoloto Assistance to a committee of foreign investors in analysing the cash flow forecast and financial model of a Russian metals and mining (ferrous metallurgy) Independent analysis of the cash flow forecast, financial model and operating results of a Russian metals (ferrous metallurgy) for the purposes of negotiations with creditors Advisory services on the potential acquisition of an interest in a Russian iron ore SUEK Nord Gold VTB Capital Group Transaction Services Transaction Services Transaction Services Transaction Services KPMG provided advisory services to the on a potential GDR listing on the London Stock Exchange KPMG provided advisory services to the regarding a potential share listing on the London Stock Exchange Advisory services to VTB on project financing for mining assets of the Yenisei Industrial Company Due diligence on AO Madneuli and OOO Kvartsit

13 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 9 A large Russian metals MMK A large Russian metals A large Russian metals Transaction Services Transaction Services Transaction Services Transaction Services Assistance with the potential acquisition of a Russian ferrous metals producer Assistance to MMK in the acquisition of a 41.3% stake in OAO Belon, a major Russian producer of coal and its derivatives and a specialist in metals trading in Russia Assistance in the acquisition of one of Russia s leading producers of steel and aluminium structures Assistance in the acquisition of the USA s WVI Steel A large Russian metals A large Russian holding A large steel A Russian metals and mining Transaction Services Transaction Services Transaction Services Transaction Services Assistance in the acquisition of Carrington Wire Ltd Due diligence on a blast furnace equipment manufacturer (strategy aspect) Due diligence on a manufacturer of equipment for the steel industry (strategy aspect) Assessment of the assumptions underlying the business plan on raising finance for a metals and mining

14 10 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Performance improvement 2014 ZAO KPMG. All All rights reserved.

15 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 11 Strategy Development of a strategy for a Kazakhstan mining Background In 2009, the Kazakh government took a decision to create a national mining to manage mining assets in the country, promote the government s economic and strategic interests in the sector, introduce new technology and improve performance in mining and exploration projects. The is directly involved in the full business cycle, from mine development to the sale of mineral resources. One of the vital stages in setting up the, taking into account the scale of the objectives set for it, was the development of a strategy. To this effect, the management of the asked KPMG strategy experts to produce a 10- year development strategy. Our tasks The s strategic priorities were to be the exploration, production and refining of minerals; development of new value-added products; and the introduction of new technology. In addition, all of the s projects had to be cost-effective. In order to identify the priority raw materials for development, we needed to analyse the investment potential of Kazakhstan s metals and mining industry, covering a wide range of sub-sectors including coal, barytes, chromites, manganese, silver, tungsten, zinc, lead, iron, gold, cobalt, copper, bauxites and nickel. In the course of our strategic planning, we analysed the s strengths and weaknesses, as well as the opportunities provided by and the risks inherent to the Kazakhstan metals and mining industry. The strategy we developed had to contain performance indicators, an organisational structure, sources of financing for selected projects and, ultimately, a phased implementation plan. As often occurs, the project was made even more challenging by the tight two-month deadline, as well as the numerous bureaucratic procedures within both the and its parent. Results Our development strategy for the mining to 2020 was approved by the board of directors, and is now being successfully implemented. The key success factors here were KPMG s international strategy experience and our specific knowledge of the metals and mining industry, which we were able to apply effectively in our work. Sean Tiernan Alexey Nazarov Director

16 12 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Preparation of a feasibility study for construction of a gold processing plant Background A major non-ferrous metals producer planned to develop gold mining and production in a CIS country. Given the public and social importance of the project at the national level, the had to submit a feasibility study confirming that the project was technically feasible, environmentally safe and cost-effective for investors and the government. In addition to performing analysis of the economic aspects, we assisted our client as the organiser of all of the work involved in producing the feasibility study. Our tasks Our tasks included analysing the cost-effectiveness of the different construction options, including analysing the amount of investment required, the income potential and operating and logistics costs, as well as the risks related to each option. In addition, we coordinated the activities of the technical and environmental consultants involved in the development of the preliminary feasibility study. It was vital for our team to integrate the technological, environmental and economic aspects of the project effectively in order to meet the challenge successfully. The project had a very tight deadline (six weeks), requiring maximum commitment from the KPMG team and effective use of all available resources. We involved our colleagues from all around the world, including Australia, South Africa, the UK, Germany, Russia and the CIS. Results KPMG helped the to organise the preparation of the preliminary feasibility study, provided an independent opinion on the project s cost-effectiveness, and presented the project to key stakeholders (project managers, investors, and government bodies). The key success factor here was the effective coordination of the activities of the consultants in the various KPMG offices involved in the project, which ensured that the work was performed successfully within the extremely tight timeframe. Sean Tiernan Alexey Nazarov Director

17 Performance improvement KPMG s Experience in the Metals & Mining Industry: Selected Highlights 13 Performance improvement for a metals holding through lean production principles Background A s decision to improve its operating performance may be prompted by external factors, such as a fall in prices for its products or an increase in resource costs, or as a result of the s desire to make its production process as lean as possible. The concept of lean production was developed in post-war Japan by Toyota in response to a situation where there was an acute need for development of new types of technology and products at minimum cost. The key principle of lean production is a constant focus on reducing costs that do not add to the value of the product, such as expenses in relation to storage or defective products. In 2010 we were asked by the management of a vertically integrated holding with mining and steel assets in the CIS, Europe and the USA to develop a performance improvement programme based on lean production principles. Another important component of the strategic transformation of the business was to be a continuous improvement process. Our tasks The first thing we needed to do in order to accomplish the task set for us was to form a team containing diversified experience and knowledge. We invited into our working group representatives from the holding and the management who knew all the details of the business, and functional and industry experts from KPMG s international offices familiar with global best practice in this area. Our initial tasks included assessing whether the holding s existing strategic initiatives and management structure were appropriate for the transformation of the business. Next, we studied the s production cycle to identify processes or process chains where bottlenecks were limiting overall throughput. After this, we identified and assessed opportunities for improving the s performance, particularly through eliminating bottlenecks and optimising costs. The tight deadline and the complex process of gathering information on the performance indicators created additional difficulties for us. In order to obtain more complete information, we held a large number of interviews with key employees of the, and organised visits to its facilities. Results Our work resulted in the development of a three-year performance improvement programme. Our implementation plan included several stages elaborated in detail, specifying goals and key objectives and methods for achieving them. We also provided comments on each stage for management. The holding s management approved our optimisation programme and confirmed the implementation plan. We regard the practical implementation of our programme as the highest mark of approval for the work carried out by our team of professionals. Sean Tiernan

18 14 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Cost optimisation and performance improvement for a metals holding Background During the economic crisis of , Russia s largest metals holding experienced a drop in profitability at its plants, forcing it to cut costs and improve performance. At the same time, its management also expected these measures to make it more competitive in the market. KPMG s performance improvement team was asked to assist in this process. Our tasks We were given a comprehensive assignment: to increase the operating efficiency of the holding s plants through improving their operating, financial and economic processes. In order to perform this ambitious task we required a team with knowledge and experience relating to efficiency, a detailed understanding of the operating processes at the plants and the authority to make decisions, so we invited representatives of the plants and the management to join our team of specialists. We initially performed a detailed analysis of the business processes at the plants and studied the following areas: production, sales, procurement, inventory accounting and tracking, maintenance and repairs, and logistics. We then faced the task of identifying and assessing possible ways of cutting costs in these processes and developing an optimum operating model. To this end, we modelled and analysed different production modes at the plants, for each of which we forecast the financial results and assessed the associated risks. Our optimisation and modelling work also had to take into account the impact of the crisis conditions under which the was operating. Results The plan developed by our team allowed cost savings of 8-15%. We produced a detailed programme for implementation of the measures needed to realise these savings. The plan did not require significant investment, and most of the measures would take no longer than 2-3 months to implement. The programme of measures proposed by our team was approved by the holding s management in full. We then held training for the holding s staff, paying special attention to methodologies for further improvement and development of the achieved results. Sean Tiernan

19 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 15 Other performance improvement projects A large Russian non-ferrous metals producer Korund-Cyan A large Russian steel A vertically integrated with assets in the Ukraine Strategy Strategy Strategy Operational Efficiency Testing and assessment of business plan assumptions for a major integrated non-ferrous metals producer Development of a business plan and a market entry model for a cyanide producer Development of a business plan for a major Russian steel producer Analysing the s activities to identify cost saving and performance improvement opportunities An international vertically integrated metals Operational Efficiency Optimisation of corporate governance and information disclosure procedures A Russian coal Business Performance Services Development of a strategy for reducing transport costs A Russian metals holding Business Performance Services Sales optimisation and development of a price forecasting tool A Russian metals holding Business Performance Services Development of an organisational structure and business process optimisation for a scrap collection network A Russian mining A Russian coal A large Russian group of companies Global gold producer Business Performance Services Business Performance Services Business Performance Services Operational efficiency Analysis of the s activity to identify cost optimisation opportunities Headcount optimisation at head office Process optimisation and cost saving Optimisation of procurement in relation to Russian operations A large Russian copper producer Operational Efficiency Corporate center analysis and organisational structure development 2013

20 16 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Accounting and corporate governance

21 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 17 Financial statement preparation guidance Financial statement preparation guidance Background In 2008, the final stages of the restructuring of Russia s nuclear power sector saw all of the country s uranium producers, plus a number of joint ventures in the CIS and further abroad, consolidated under the management of a single holding. In 2010, after acquiring a controlling interest in a Canadian uranium, the Russian holding comprised 64 companies and was one of the world s leaders in uranium ore production. The very much needed to improve its system for consolidated IFRS financial statement preparation, and to automate this process as much as possible and bring its reporting procedure into line with the methodology used by its parent. To this end, the holding asked KPMG to provide guidance on improving the existing templates for the preparation of the consolidated financial statements and adapting them to the methodology used by its parent. Our tasks We were required to provide a stepby-step description of the procedure used in the preparation of the financial statements, specifying the level of detail required for correct consolidation, including information on the data source. Each step in this procedure also required a detailed analytical description. Our assignment was complicated by the fact that the group had a large number of subsidiaries around the world and was continuing to acquire new companies. This meant that we needed to develop special procedures for including new acquisitions into the unified reporting system, and to take into account throughout the project the specific features of accounting and operations of the companies located outside the Russian Federation. During the final stage, we were required to develop guidelines covering the preparation of consolidated financial statements, including all the necessary explanations and comments. Throughout the project we took into account management s desire to improve the quality of financial statement preparation and to automate the process as much as possible. Results Our successful performance of all of these tasks (step-by-step elaboration of the procedure, development of guidelines, assessment of the possibilities for automation, and general guidance) helped the holding to introduce an effective process for the preparation of consolidated financial statements in accordance with IFRS and with the methodology used by its parent. As a result, the introduced procedures have improved the s internal quality control system for financial information, making it more transparent. The key success factor here was the coordinated work of our team of professionals, who had both in-depth knowledge of IFRS and practical experience in the development and implementation of IFRS financial statement preparation processes. Irina Sukhotina

22 18 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Valuation Valuation of preferred shares of a metals and mining for reflection in the financial statements Background In 2008, one of the largest Russian metals and mining companies acquired a 100% interest in three companies located in the USA, specialising in coal mining. As a part of the compensation the Russian granted the sellers an option to acquire its preferred shares planned for listing. At the same time the Russian guaranteed the sellers that the preferred shares would be listed within a specified period of time, which would allow the sellers to realise the value of the shares they received as compensation. Before the preferred shares were issued and listed on the stock exchange in May 2010, their market value had not been established. Therefore, the asked KPMG to carry out an independent valuation of the shares so that a fair market value could be established for them and that this value could be correctly reflected in its consolidated US GAAP financial statements. Our tasks We faced the complex task of determining a fair value for the preferred shares at each reporting date up to when they were listed on the market. That value had to satisfy the strict requirements of US GAAP and the expectations of the transaction s participants. The choice of valuation method, even under US GAAP, is always one of the most important stages of our work, and the expert judgement and professionalism of our employees play a key role. In this case, the unique experience and knowledge of the KPMG team in carrying out valuations in accordance with US GAAP standards and within the framework of transactions involving participants in the US market proved invaluable. We considered several valuation options, including the current cost method and the option price method. However, as the shares were shortly to be listed on the market we concluded that the most suitable valuation method here would be the income method, weighted to take into account the probability of the income being received. Using this method, we analysed various return scenarios, for each of which we calculated the value of the shares. In the valuation we had to take into account the impact of factors such as the non-controlling interest and the lack of liquidity of the shares in the form of discounts to the value. Results The correctness and accuracy of our valuation of the preferred shares allowed a fair value for them to be reflected in the financial statements, as was confirmed by the s auditors. The key success factors here were the availability of a team of experts with extensive experience in valuation in accordance with US GAAP standards, and our individual approach to the specific assets in question. John Kallaway

23 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 19 Valuation of property, plant and equipment for transaction cost allocation purposes Background In 2007, a gold mining acquired another gold mining located in Kazakhstan. For transaction cost allocation purposes, the acquirer asked KPMG to perform an independent valuation so that the value of property, plant and equipment and intangible assets could be correctly reflected in its consolidated IFRS financial statements. Our tasks Our primary task was to determine a fair value of the property, plant and equipment and intangible assets as at the valuation date. To do this, we needed to determine the value of buildings, structures, machinery and equipment and other property. The property, plant and equipment of mining companies consists of mine shafts and specialised equipment (mine hoists, shaft sinking and tunnelling works, ventilation units, etc.). As the main start-up capital expenses for the mine had been incurred more than 20 years ago, and no exploration work had taken place at the mines since the 1990s, the main problem we faced in the valuation process was the selection of appropriate multiples to calculate the value of the vertical mine shafts. To make the calculation more accurate, we performed a comprehensive analysis of the construction costs for the vertical mine shafts, based on: A cost analysis of the development of such mines around the world The views of specialists from the Indexation of costs incurred in the past KPMG s previous experience in property, plant and equipment valuation for mining companies Results The acquirer s auditors confirmed that the chosen valuation approaches and methods were applied in compliance with IFRS. The key success factors were the availability of a team of experts with extensive experience of valuation according to IFRS standards, and our individual approach to the specific features of the shares in question. John Kallaway

24 20 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Internal audit Assessment of the internal audit function at a mining industrial group Background Today s economic realities and the increasingly strict requirements of legislation, regulators and other financial market participants, mean that companies are having to more widely apply corporate governance standards and, above all, to introduce an internal audit function. Companies engage external consultants to assess the effectiveness of their existing internal audit function and to suggest ways of improving it. In 2008 a Russian mining industrial group requested that KPMG audit the performance of its internal audit service and its compliance with the Standards for the Professional Practice of Internal Auditing, as a part of London Stock Exchange listing requirements. Our tasks Our initial task was to perform a comprehensive assessment of the internal audit service s current activities and its compliance with the s requirements, and to determine how both the internal auditors and management saw the future development of the function. We also had to study documents regulating the activity of the internal audit function and the audit committee. We then set about assessing the internal audit function s compliance with the basic principles of the Standards for the Professional Practice of Internal Auditing, such as the structure, soundness, and adequacy of the performance and documentation of audit procedures. Our entire approach to assessing the internal audit function s activity was based on K SPRint, a methodology developed by KPMG professionals to assess an internal audit function by determining how ready and able the latter is to make the necessary contribution to the achievement of the business s goals, and to identify areas for improvement. K SPRint also includes a database of regulatory standards and practical experience accumulated by KPMG. Overall, K SPRint is a practical tool that enables the evaluation of the internal audit function to be performed as effectively as possible, in terms of quality and time required, and to propose options for improvement. Results Our analysis of the suitability of the internal audit service to meet the organisation s needs based on its size and structure, and its compliance with management s requirements, identified a number of shortcomings. As a result, we formulated recommendations on how best they could be eliminated, and presented them to the for implementation. As a result of implementing our recommendations all of the major shortcomings we indentified were eliminated, which had a positive effect on the quality of the internal audit function at the group. Andrei Shvetsov

25 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 21 Risk management Development of an internal control system for a metallurgical complex Background In 2006, one of the world largest metallurgical complexes was considering listing on the New York Stock Exchange as a way of raising finance. The stringent requirements of the USA s Securities and Exchange Commission, including the Sarbanes-Oxley Act, stipulate that companies quoted on a US exchange must have an adequate internal control system for financial statement preparation that ensures full reliability of the financial information. The metallurgical complex asked KPMG for assistance in developing and implementing such an internal control model. During the project the KPMG team worked closely with the complex s external IT consultants in relation to the implementation of an Oracle automated internal control system. Our tasks Our initial task was to perform a comprehensive analysis and describe the complex s current business processes and the existing approach to compiling financial statements, and to identify risks of misstatement. This stage, and the project as a whole, was complicated by the s multilevel and multi-stage system of business processes, meaning that a high level of professionalism and commitment was required from us. Next, we set about devising an internal control system for financial statement preparation in accordance with the Sarbanes-Oxley Act, assessing the system s effectiveness and developing a plan of action to eliminate the shortcomings identified. Our overall task, bringing together all of the previous stages, was to create a common space for all interested parties to work in, allocating authority and integrating the internal control system with the processes of the complex s corporate information system. It was also necessary to coordinate our activities with the work of the independent IT consultants and ensure that the internal controls and risk management methods we developed were compatible with Oracle s functional capabilities. We paid special attention to training the complex s staff in the basic concepts, principles and methodologies of an effective internal control system. In performing our tasks, we followed the strict directives of the USA s Securities and Exchange Commission, the requirements of the Sarbanes-Oxley Act, leading risk assessment and control arrangement methodologies and, in particular, the COSO framework (named after its developer), the most authoritative internal control framework today. Results Our work resulted in an improved internal control system for the preparation of the financial statements of the complex, meeting the requirements of the regulators and the Sarbanes-Oxley Act. The effectively organised internal control system is helping to increase the level of trust in the financial statements issued by the, which is having a positive effect on assessments of the by financial market participants and is making the complex more competitive, and ensuring equal working conditions in Russia and abroad. Andrei Shvetsov

26 22 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Financial fraud investigation Assessment of the legitimacy of a s financial activity Background In 2010, a European manufacturing decided to merge its assets in Russia. However, management was aware from its previous experience in Russia that Russian companies often use business arrangements open to dispute by both tax and legal institutions in Russia. Thus, before merging these assets, the European shareholders needed to determine whether its subsidiaries were applying such practices, and, if so, how widespread these practices were, in order to assess and mitigate the associated risks at the reorganisation stage. To this end, the parent s management engaged KPMG s Russian Forensic team, explaining its choice saying: Although KPMG s services are more expensive than its competitors, we have entered into this project with them as it was absolutely clear that KPMG has an excellent understanding of the problems we have faced and that it has all the resources to resolve them. Our tasks We were assigned a complicated project involving detailed analysis of the business of five Russian companies. Our investigation covered most of the main business processes: procurement, sales, marketing, finance and logistics. Our task was to identify deals or transactions that could be contested by tax or law-enforcement agencies. During our work, we used not only physical research and analysis of accounting and financial documents, but also analysis of procedures and classified information concerning the transactions of the s business partners we had questions about. We uncovered a long list of issues. In particular, we identified import scams and dubious relationships with customs services, the use of methods of reducing the tax base, and transactions in which representatives of management had a personal interest as the owners of the buyer or supplier. Our investigation took five months, but the results have opened up extensive opportunities for the business. Results Our work resulted in the parent obtaining a clear picture of the ethics of the activities of its subsidiaries in Russia and being forearmed in relation to potential tax and legal risks. The identified issues strengthened the European shareholders intention to merge the assets into a single structure and to establish an effective control and monitoring function. Interestingly, the key success factor in this private investigation was open communication. A representative of the parent was constantly involved in our work, so none of the identified issues were unexpected for our client. The open discussion and acknowledgement of the issues enabled us to work together more effectively. Ivan Tyagoun

27 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 23 Other accounting and corporate governance projects REXAM Russia A large Russian steel A large producer of aluminium and alumina A large Russian oil services Risk Consulting Risk Consulting Risk Consulting Risk Consulting Work on improving the internal control system for the s operating and management processes Development of an internal control system for the preparation of financial statements in accordance with international standards Analysis of the corporate governance policy and the internal and corporate control system Development of a methodological framework for the internal audit; implementation stages; an internal audit charter; comparative analysis of software A large Russian oil An international oil services An international metals A large industrial Risk Consulting Risk Consulting Forensic Forensic Analysis of the internal control system; assessment of the performance of the control and audit departments; assessment of the effectiveness of control procedures Analysis and testing of internal controls for the following business processes: fixed assets, inventories, sales, procurement, salaries Analysis of the main business processes at the s international divisions to identify fraud risks FCPA analysis of the including data provision and analysis A large metals A large manufacturing A large mining A coal Forensic Forensic Forensic Forensic Investigation of losses of USD2 million suffered by the Russian division of a European industrial holding Financial investigations of the s business activities as part of an M&A transaction Analysis of the sale of a coal, at the request of the shareholders Investigation of cases of internal fraud related to the sale of products An industrial A Russian metals A large Russian coal group International group Forensic Forensic Business Performance Services Risk Consulting Analysis of the internal control system based on investigating the procurement, marketing and sales processes of a Russian subsidiary of an international industrial holding Additional financial investigation services as part of the annual audit of financial statements Development of a methodology for gathering data for the preparation of consolidated IFRS financial statements and a consolidated budget Fraud investigation in relation to CIS assets

28 24 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Audit, tax and legal services

29 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 25 Audit services Audit experience in the metals and mining sector Our team We have one of the leading audit teams in the market and we are the auditor for some of Russia s biggest companies, including ones specialising in metals and mining. Our audit clients include such companies as RUSAL, Norilsk Nickel, Magnitogorsk Iron and Steel Works, SUEK, and many more. Our global network of firms also has considerable experience in providing audit services for metals and mining companies. To make our work with metals and mining companies more effective and to share experience, KPMG has established a number of international best practice centres, one of which is in Moscow. Today, KPMG in Russia and the CIS employs more than 1,500 audit professionals in offices in Moscow, St. Petersburg, Yekaterinburg, Kazan, Krasnoyarsk, Nizhny Novgorod, Novosibirsk, Rostov-on-Don, Almaty, Astana, Atyrau, Bishkek, Kiev, Donetsk, Lviv, Yerevan, Tbilisi and Baku. Our experience Working with such companies has helped us to accumulate extensive experience of auditing financial statements, in compliance with the highest demands of both auditing standards and our clients. The knowledge we have gained of the business of major companies in this sector, and of the risks and difficulties they face, allows us to properly assess and effectively resolve the challenges of a wider range of clients, and to organise our own work more efficiently. In our work, we make use of the international intellectual capital of KPMG s global network of firms, successfully combining it with the practical experience of our Russian experts. Our successes In 2009 and 2010, the rating agency Expert RA and the magazines Dengi and Finans ranked KPMG Russia s number 1 audit firm and one of its leading providers of advisory services. Additionally, KPMG won various audit awards in 2010 and 2011: Audit Company of the Past 5 Years at the Financial Elite of Russia awards, Best Auditor at IPO Olympus 2010 and No. 1 Audit & Advisory firm in Russia according to the Expert Rating Agency list. We see this professional acknowledgement, and our long-term cooperation with our clients, not only as high recognition for our work but also as a stimulus for further development. Andrei Shvetsov No.1 Audit & Advisory Firm in Russia 2011 No.1 Audit Firm in Russia No.1 Audit Firm in Russia No.1 Audit Firm in Russia Audit Company of the Past 5 Years by Financial Elite of Russia Awards Best Reporting Accountant

30 26 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Tax consulting Tax support for the acquisition of international assets Background In December 2010, one of the world s leading uranium holding companies acquired 100% of an Australian uranium with assets located in Australia, Tanzania, Mozambique and Kenya. The estimated transaction value was over a billion dollars. At the same time, the holding signed an option agreement with its Canadian subsidiary to sell a 100% interest in the Australian to the Canadian at the acquisition price within a year. Such a complex transaction, involving several companies resident in different jurisdictions, required careful study of a wide range of different aspects and implications, which called for highly skilled consultants and experts. The holding s tender for tax support for the transaction was won by KPMG s International Taxation group. Our tasks Our primary task was to provide full tax support for the transaction on the holding s side. Most importantly, we had to develop taxeffective options for the acquisition of the and carry out a comparative analysis of them, specifying their advantages and disadvantages. For each option, we performed a comprehensive analysis of the tax implications and risks, taking into account the requirements of Russian tax law and the legislation of the jurisdictions where the assets were located. We also had to perform a comprehensive analysis of the tax implications and risks related to the option agreement, taking into account the specific features of Canadian tax law. In addition, we worked with the project lawyers on developing the tax aspects of the transaction documents. Close cooperation between KPMG s offices worldwide enabled us to involve colleagues from the countries where the assets being acquired were located. However, having such an international team spread around the world meant that we had to pay close attention to how the work was coordinated. Results In April 2011, the holding successfully completed the transaction to acquire a 100% interest in the Australian uranium. Today, the holding s management is in the process of developing and implementing the option agreement on the sale of this interest to its subsidiary, and our International Taxation group is providing advisory services. KPMG consultants also provide active support concerning ongoing tax issues in the jurisdictions where the acquired assets are located, including issues relating to the application of tax breaks for uranium mining in these jurisdictions. Naturally, the diversity of the participants and the complexity of the terms of the transaction make things more difficult for us. At the same time, however, they add to our knowledge and experience and make the project more interesting. Mikhail Orlov

31 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 27 Legal services Development of a long-term incentive programme Background A diversified metals holding planning to list on a global stock market needed to improve its corporate governance and develop options for long-term incentive programmes. These programmes, in addition to their principal objective of incentivising senior and middle management, had to comply with local legislation in the countries where the s subsidiaries were located, and with the stock exchange requirements. Each of the options considered required thorough analysis of the legal and tax aspects, and development of a detailed implementation plan. The holding s management asked KPMG s legal team to help with these challenges. Our tasks The incentive programmes included two main features: share options and phantom shares. Given the wide geographical spread of the subsidiaries, and the holding s flotation plans, there were quite a few combinations of such options: the options had to apply to the shares of Russian, Cypriot or Dutch companies, and these shares could be listed on stock exchanges in Moscow, London or Hong Kong. Our task was to analyse all of the possible options and combinations, determine the tax implications of introducing a particular option, and which local laws or aspects of civil law could influence the incentive programme. For example, in many jurisdictions we had to take into account requirements in relation to protecting the rights of minority shareholders. We also had to ensure that the programmes would comply with corporate governance principles and, in the event of a listing on the London or New York stock exchanges, the Sarbanes-Oxley Act. As an extension of the project, our team was given a new task: to develop a full set of implementation documents for a bonus programme at the holding s largest subsidiary. Results Our team analysed more than ten different potential long-term bonus and incentive programmes covering five jurisdictions. Our practical recommendations for implementing these programmes took into account different requirements depending on the s location, the nature of the business and stock exchange regulations. Today, the holding s subsidiaries entering the global market can be sure that the compliance of their bonus programmes with stock exchange or statutory requirements will not be questioned. All of the bonus programmes we worked on had to meet global industry best practice. For this reason, the global experience and knowledge accumulated by KPMG s legal professionals, along with our specialisation in working with metals and mining companies, proved invaluable. Irina Narysheva

32 28 KPMG s Experience in the Metals & Mining Industry: Selected Highlights Other tax and legal services projects A large gold mining A gold mining in Armenia A large metals A metals Tax Services Tax Services Tax Consulting Tax Structuring A comprehensive analysis of the current administrative, organisational and legal structure; development of recommendations for improving them Due diligence on a gold mining in Armenia in preparation for its sale to a major Russian private equity fund Preparation of documentation confirming that certain financial instruments are hedges for tax purposes Independent analysis of the cash flow position, financial model and operating results of a Russian metals A mining A large Russian metals group A large metals Russian copper producer Tax Consulting Tax Consulting HR Consulting Tax Consulting A comprehensive analysis of the method used to calculate mineral extraction tax (including partial estimation of the amount and value of reserves) Development of a structure for an international holding, including a financial and management structure Integrated services relating to structuring and documenting the s bonus policy Transfer pricing analysis

33 KPMG s Experience in the Metals & Mining Industry: Selected Highlights 29