KPMG's Experience in the Metals and Mining Industry: Selected Highlights

KPMG IN RUSSIA AND THE CIS

KPMG’s Experience in the Metals & Mining

Industry: Selected Highlights

kpmg.ru

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

© 2014 ZAO KPMG. All rights reserved. © 2014 ZAO KPMG. All rights reserved.

Investment and financial activities

Transaction services 3Due diligence on alumina assets of a diversified industrial company 3Initial public offering of the world’s largest aluminium holding 4

Our M&A and transactions support services 5

Restructuring 6Debt restructuring of the world’s largest aluminium holding 6Development of a financial model for an East European metallurgical holding 7Other projects related to investment and financing activities 8

Strategy 11Development of a strategy for a Kazakhstan mining company 11Preparation of a feasibility study for construction of a gold processing plant 12Performance improvement 13Performance improvement for a metals holding through lean production principles 13Cost optimisation and performance improvement for a metals holding company 14

Other performance improvement projects 15

Accounting and corporate governance 17

Financial statement preparation guidance 17

Valuation 18Valuation of preferred shares of a metals and mining company for reflection in the financial statements 18Valuation 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 22Assessment of the legitimacy of a company’s financial activity 22Other accounting and corporate governance projects 23

Audit services 25Audit experience in the metals and mining sector 25Tax consulting 26Tax support for the acquisition of international assets 26Legal services 27Development of a long-term incentive programme 27Other tax and legal services projects 28

Performance improvement

Accounting and corporate governance

Audit, tax and legal services

Contents

© 2014 ZAO KPMG. All rights reserved.

d | KPMG’s Experience in the Metals & Mining Industry: Selected Highlights


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.

Foreword

Lydia Petrashova

Head of Metals & Mining KPMG in Russia and the CIS

KPMG’s Experience in the Metals & Mining Industry: Selected Highlights | 1


Transactions

» Market entry assessment

» Financing and M&A

» Tax structuring

» Due diligence

» Integration

р. 3, 5, 11, 12

Projects

» Project development

» Feasibilities

» Financing

» Tax structuring

» Project execution

р. 13, 14

Operational excellence

» Operating model development

» Cost and tax optimisation

» Supply chain transformation

» Business intelligence

» Finance / IT / HR transformation

р. 6, 7, 14

Compliance

» External audit

» Enterprise risk management

» Internal assurance

» Tax compliance

» Sustainability

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

KPMG’s solutions throughout the business life cycle

TIME

LEVE

L OF A

CTIV

ITY

Project life cycle

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


Investment and financial activities © 2014 ZAO KPMG. All rights reserved.



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 company. 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 company’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 company. We also had to assess the company’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 company 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.

Transaction services

Due diligence on alumina assets of a diversified industrial company

Olga Plevako Partner

Lydia Petrashova Partner



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 company 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.

Initial public offering of the world’s largest aluminium holding

Our tasksThe first listing of a Russian company 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 company 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 company’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 company 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 company 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 company 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 Partner



• 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 in-depth 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.

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 company’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.

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 company’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.

Transaction support

Our M&A and transaction support services

Robert Vartevanian Partner



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 company owed USD17 billion in total, the majority of which was due for payment in 2009. The company 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.

ResultsThe joint work of the banks, the company 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.

RestructuringDebt restructuring of the world’s largest aluminium 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 company’s current position and whether it was meeting its obligations, plus a forecast of the company’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 company, 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 company.

To develop a long-term restructuring plan, the creditors needed a long-term forecast of the company’s financial flows. To this end, we were asked to comment on the company’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 company’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.

Andrei Mitrofanov Partner



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.

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 2008. In total, the company 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 company 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

Results

KPMG’s work resulted in the creation of a flexible financial forecasting tool allowing the creditors to analyse the company’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.

Development of a financial model for an East European metallurgical holding

Andrei Mitrofanov Partner



Other projects related to investment and financing activities

A coordination committee of

international banks

KPMG provided advisory services to a committee of

international creditors during the financial restructuring of a major

international holding company with assets in the metals, power, oil and

other sectors

2009-2010

Restructuring

A large Russian group

(non-ferrous metals)

KPMG provided advice to

the group during its financial restructuring

2009

Restructuring

Kinross Gold

Advisory services to Kinross Gold on the acquisition of two gold

mining companies: Regionruda and Severnoye Zoloto

2010

Transaction Services

A coordination committee of foreign

banks

Assistance to a committee of foreign investors in analysing the cash flow forecast and financial model of a Russian metals and

mining (ferrous metallurgy) company

2009

Restructuring

A metals company

Independent analysis of the cash flow forecast, financial model and

operating results of a Russian metals (ferrous metallurgy)

company for the purposes of negotiations with creditors

2009

Restructuring

A large international holding company

Advisory services on the potential

acquisition of an interest in a Russian iron ore company

2012


SUEK

KPMG provided advisory services

to the company on a potential GDR listing on the London Stock

Exchange

2010-2011


Nord Gold

KPMG provided advisory services

to the company regarding a potential share listing on the

London Stock Exchange

2010-2011


VTB

Advisory services to VTB on project financing for mining assets of the

Yenisei Industrial Company

2010


Capital Group

Due diligence on AO Madneuli and

OOO Kvartsit

2012



A large Russian metals company

Assistance with the potential

acquisition of a Russian ferrous metals producer

2008


MMK

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

2007



Assistance in the acquisition of one

of Russia’s leading producers of steel and aluminium structures

2008



Assistance in the acquisition of the

USA’s WVI Steel

2008



Assistance in the acquisition of Carrington Wire Ltd

2008


A large Russian holding company

Due diligence on a blast furnace equipment manufacturer

(strategy aspect)

2012


A large steel company

Due diligence on a manufacturer of equipment for the steel industry

(strategy aspect)

2010


A Russian metals and mining

company

Assessment of the assumptions underlying the business plan on raising finance for a metals and

mining company

2009





Our tasks

The company’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 company’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 company’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 company and its parent company.

Background

In 2009, the Kazakh government took a decision to create a national mining company 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 company 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 company, taking into account the scale of the objectives set for it, was the development of a strategy. To this effect, the management of the company asked KPMG strategy experts to produce a 10-year development strategy.

Results

Our development strategy for the mining company 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.

Strategy

Development of a strategy for a Kazakhstan mining company

Sean Tiernan Partner

Alexey Nazarov Director



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.

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 company 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.

Results

KPMG helped the company 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.

Preparation of a feasibility study for construction of a gold processing plant


Alexey Nazarov Director



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 company and the management company 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 company’s existing strategic initiatives and management structure were appropriate for the transformation of the business. Next, we studied the company’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 company’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 company, and organised visits to its facilities.

Background

A company’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 company’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 company 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.

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 company’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.


Performance improvement for a metals holding through lean production principles




Our tasks

We were given a comprehensive assignment: to increase the operating efficiency of the holding company’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 company 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 company was operating.

Background

During the economic crisis of 2008-2010, Russia’s largest metals holding company 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.

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 company’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.

Cost optimisation and performance improvement for a metals holding company




Other performance improvement projects

A large Russiannon-ferrous metals

producer

Testing and assessment of business plan assumptions for a major integrated non-ferrous

metals producer

2011

Strategy

Korund-Cyan

Development of a business plan and a market entry model for a

cyanide producer

2010

Strategy

A large Russian steel company

Development of a business plan for a major Russian steel producer

2009

Strategy

A vertically integrated company with assets in the

Ukraine

Analysing the company’s activities to identify cost saving and performance improvement

opportunities

2011

Operational Efficiency

An international vertically integrated

metals company

Optimisation of corporate governance and information

disclosure procedures

2007


A large Russian copper producer

Corporate center analysis and organisational structure

development

2013


A Russian metals holding company

Sales optimisation and development of a price forecasting

tool

2010

Business Performance Services

A Russian metals holding company

Development of an organisational structure and business process

optimisation for a scrap collection network

2008


A Russian mining company

Analysis of the company’s activity to identify cost optimisation

opportunities

2010


A Russian coal company

Headcount optimisation at head office

2008


A large Russian group of companies

Process optimisation and cost saving

2007


Global gold producer

Optimisation of procurement in relation to Russian operations

2013

Operational efficiency

A Russian coal company

Development of a strategy for reducing transport costs

2010




Our tasks

We were required to provide a step-by-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.

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 company. In 2010, after acquiring a controlling interest in a Canadian uranium company, the Russian holding company comprised 64 companies and was one of the world’s leaders in uranium ore production.

The company 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 company.

To this end, the holding company 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 company.

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 company to introduce an effective process for the preparation of consolidated financial statements in accordance with IFRS and with the methodology used by its parent company. As a result, the introduced procedures have improved the company’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.

Financial statement preparation guidanceFinancial statement preparation guidance

Irina Sukhotina Partner



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.

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 company granted the sellers an option to acquire its preferred shares planned for listing. At the same time the Russian company 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 company 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.

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 company’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.

ValuationValuation of preferred shares of a metals and mining company for reflection in the financial statements

John Kallaway Partner



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 company

• Indexation of costs incurred in the past

• KPMG’s previous experience in property, plant and equipment valuation for mining companies

Background

In 2007, a gold mining company acquired another gold mining company 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

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.

Valuation of property, plant and equipment for transaction cost allocation purposes

John Kallaway Partner



Our tasks

Our initial task was to perform a comprehensive assessment of the internal audit service’s current activities and its compliance with the company’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.

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.

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 company 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.

Assessment of the internal audit function at a mining industrial group

Internal audit

Andrei Shvetsov Partner




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.

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 company’s multi-level and multi-stage system of business processes, meaning that a high level of professionalism and commitment was required from us.

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 company, which is having a positive effect on assessments of the company by financial market participants and is making the complex more competitive, and ensuring equal working conditions in Russia and abroad.

Risk management

Development of an internal control system for a metallurgical complex



Our tasksWe 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 company’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 company 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.

Background

In 2010, a European manufacturing company 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 company’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.”

Results

Our work resulted in the parent company 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 company 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.

Financial fraud investigation

Assessment of the legitimacy of a company’s financial activity

Ivan Tyagoun Partner



Other accounting and corporate governance projects

REXAM Russia

Work on improving the internal control system for the company’s

operating and management processes

2009-2010

Risk Consulting

A large Russian steel company

Development of an internal control system for the preparation of

financial statements in accordance with international standards

2007

Risk Consulting

A large producer of aluminium and

alumina

Analysis of the corporate governance policy and the internal

and corporate control system

2009

Risk Consulting

A large Russian oil services company

Development of a methodological framework for the internal audit;

implementation stages; an internal audit charter; comparative analysis

of software

2009

Risk Consulting

A large Russian oil company

Analysis of the internal control system; assessment of the

performance of the control and audit departments;

assessment of the effectiveness of control procedures

2006

Risk Consulting

An internationaloil services company

Analysis and testing of internal controls for the following

business processes: fixed assets, inventories, sales, procurement,

salaries

2009

Risk Consulting

An international metals

company

Analysis of the main business processes at the company’s

international divisions to identify fraud risks

2009-2010

Forensic

A large industrial company

FCPA analysis of the company including data provision and

analysis

2009-2010

Forensic

A largemetals company

Investigation of losses of USD2 million suffered by the Russian division of a European industrial

holding company

2009-2010

Forensic

A large manufacturing

company

Financial investigations of the company’s business activities as

part of an M&A transaction

2009-2010

Forensic

A large mining company

Analysis of the sale of a coal company, at the request of the

shareholders

2009-2010

Forensic

A coal company

Investigation of cases of internal fraud related to the sale of

products

2009-2010

Forensic

An industrial company

Analysis of the internal control system based on investigating the procurement, marketing and sales processes of a Russian subsidiary

of an international industrial holding company

2009-2010

Forensic

A Russian metals company

Additional financial investigation services as part of the annual audit

of financial statements

2009-2010

Forensic

A large Russian coal group

Development of a methodology for gathering data for the preparation

of consolidated IFRS financial statements and a consolidated

budget

2007


International group

Fraud investigation in relation to CIS assets

2013

Risk Consulting



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 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 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.

Audit services

Audit experience in the metals and mining sector

No.1 Audit & Advisory

Firm in Russia

2009–2013

2011

No.1 Audit Firm in Russia

No.1 Audit Firm

in Russia

2009–2012

No.1 Audit Firm

in Russia

2009–2011

Audit Company of the Past 5 Years by Financial Elite of Russia Awards

2010

Best Reporting Accountant

2010




Our tasks

Our primary task was to provide full tax support for the transaction on the holding company’s side. Most importantly, we had to develop tax-effective options for the acquisition of the company 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.

Background

In December 2010, one of the world’s leading uranium holding companies acquired 100% of an Australian uranium company 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 company to the Canadian company 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 company’s tender for tax support for the transaction was won by KPMG’s International Taxation group.

Results

In April 2011, the holding company successfully completed the transaction to acquire a 100% interest in the Australian uranium company. Today, the holding company’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.

Tax consulting

Mikhail Orlov Partner

Tax support for the acquisition of international assets



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 company’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 company’s largest subsidiary.

Background

A diversified metals holding company 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 company’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 company’s management asked KPMG’s legal team to help with these challenges.

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 company’s location, the nature of the business and stock exchange regulations. Today, the holding company’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.

Legal services

Irina Narysheva Partner

Development of a long-term incentive programme



Other tax and legal services projects

A large gold mining company

A comprehensive analysis of the current administrative,

organisational and legal structure; development of recommendations

for improving them

2009

Tax Services

A gold mining company in Armenia

Due diligence on a gold mining company in Armenia in preparation

for its sale to a major Russian private equity fund

2009

Tax Services

A large metals company

Preparation of documentation confirming that certain financial instruments are hedges for tax

purposes

2009-2010

Tax Consulting

A metals company

Independent analysis of the cash flow position, financial model and

operating results of a Russian metals company

2009

Tax Structuring

A mining company

A comprehensive analysis of the method used to calculate mineral

extraction tax (including partial estimation of the amount and value

of reserves)

2007-2008

Tax Consulting

A large Russian metals group

Development of a structure for an international holding

company, including a financial and management structure

2009

Tax Consulting

A large metals company

Integrated services relating to structuring and documenting the

company’s bonus policy

2010

HR Consulting

Russian copper producer

Transfer pricing analysis

2013

Tax Consulting

Lydia PetrashovaHead of Metals and MiningHead of Transaction ServicesPartnerE: [email protected]

Olga PlevakoHead of Capital Markets GroupTransaction servicesPartnerE: [email protected]

Sean Tiernan CIS Head of AdvisoryPartnerE: [email protected]

Andrei MitrofanovHead of RestructuringPartnerE: [email protected]

Robert VartevanianTransactions & RestructuringPartnerE: [email protected]

Irina SukhotinaHead of Accounting Advisory ServicesPartnerE: [email protected]

Contacts

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

Legal services may not be offered to SEC registrant audit clients or where otherwise prohibited by law.

© 2014 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in Russia.

The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

Ivan TyagounHead of ForensicPartnerE: [email protected]

John KallawayHead of Corporate FinancePartnerE: [email protected] Andrei ShvetsovHead of Audit in Russia and the CISPartnerE: [email protected] Mikhail OrlovCIS Head of Tax and LegalPartnerE: [email protected] Irina NaryshevaHead of Legal Services PartnerE: [email protected]

T: + 7 (495) 937 44 77F: + 7 (495) 937 44 99

www.kpmg.ru

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KPMG's Experience in the Metals and Mining Industry: Selected Highlights

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