Kazatomprom S Regulatory News (KAP)

2018 INTEGRATED ANNUAL REPORT

NAC KAZATOMPROM

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TABLE OF CONTENTS

ABOUT THIS REPORT..

KEY FIGURES - 2018

2018 KEY EVENTS

STATEMENT OF THE CHAIR OF THE BOARD OF DIRECTORS

STATEMENT OF THE CHIEF EXECUTIVE OFFICER

BUSINESS MODEL

COMPANY DEVELOPMENT STRATEGY

BUSINESS TRANSFORMATION

LISTING INFORMATION

ABOUT KAZAKHSTAN

ABOUT THE COMPANY

ACTIVITY PROFILE

MAIN PRODUCTS

COMPANY HISTORY

COMPANY ASSET STRUCTURE

GEOGRAPHY AND TARGET MARKETS

ASSOCIATION MEMBERSHIP AND INTERNATIONAL COMPLIANCE

OPERATING AND FINANCIAL REVIEW

SIGNIFICANT FACTORS AFFECTING GROUP OPERATING RESULTS

KEY PERFORMANCE INDICATORS

CAPITAL EXPENDITURES REVIEW

RESERVES AND GEOLOGICAL SURVEYS

FINANCIAL ANALYSIS

LIQUIDITY AND CAPITAL RESOURCES

INDEBTEDNESS

GUIDANCE FOR 2019

SENSITIVITY ANALYSIS FOR 2019

FORWARD-LOOKING STATEMENTS

SUSTAINABLE DEVELOPMENT

PROGRAMME OF SUSTAINABLE DEVELOPMENT

SUSTAINABLE DEVELOPMENT INITIATIVES

GOVERNANCE DIAGNOSTICS

SUSTAINABLE ECONOMIC DEVELOPMENT

CREATED AND DISTRIBUTED DIRECT ECONOMIC VALUE

SCIENCE AND INNOVATION

ECONOMIC EFFECT IN REGIONS OF OPERATION

CHARITY AND SPONSORSHIP

PROCUREMENT

SOCIAL RESPONSIBILITY

COMPANY STAFF

SOCIAL POLICY

SOCIAL STABILITY

OCCUPATIONAL HEALTH AND SAFETY

ENVIRONMENTAL RESPONSIBILITY

WASTE MANAGEMENT

DIRECT GREENHOUSE GAS EMISSIONS

ENERGY EFFICIENCY

WATER RESOURCES

NUCLEAR SAFETY

DEVELOPMENT PLANS

INTERACTION WITH THE STAKEHOLDERS

CORPORATE GOVERNANCE AND ETHICS

CORPORATE GOVERNANCE STRUCTURE

CORPORATE GOVERNANCE CODE

GENERAL MEETING OF SHAREHOLDERS

BOARD OF DIRECTORS

COMPOSITION OF THE BOARD OF DIRECTORS

CHANGES IN THE COMPOSITION OF THE BOARD OF DIRECTORS IN 2018

ACTIVITY OF THE BOARD OF DIRECTORS

ASSESSMENT OF THE ACTIVITY OF THE BOARD OF DIRECTORS

ENGAGEMENT OF INDEPENDENT DIRECTORS

COMMITTEES OF THE BOARD OF DIRECTORS

MANAGEMENT BOARD

COMPOSITION OF THE MANAGEMENT BOARD

ACTIVITY OF THE MANAGEMENT BOARD IN 2018

MANAGEMENT BOARD COMMITTEES

REMUNERATION OF DIRECTORS AND EXECUTIVES

STATEMENT OF RESPONSIBILITY OF MEMBERS OF THE BOARD OF DIRECTORS AND THE MANAGEMENT BOARD

EMPLOYMENT AGREEMENTS OF SENIOR MANAGEMENT

CONFLICTS OF INTEREST

INTERNAL AUDIT SYSTEM

ORGANISATIONAL STRUCTURE OF THE COMPANY'S CORPORATE CENTRE

CORPORATE ETHICS

RISK MANAGEMENT AND INTERNAL CONTROL

INFORMATION ON TAXATION IN THE UNITED KINGDOM

EXTERNAL AUDIT

ABOUT THIS REPORT

PRINCIPLES FOR DEFINING REPORT CONTENT AND SUBJECT LIMITATIONS

ESSENTIAL SUBJECTS

STANDARDS AND GUIDELINES

EXTERNAL VERIFICATION

INFORMATION FOR SHAREHOLDERS

CONTACT INFORMATION

ANNEXES

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

INDEX OF GRI-COMPLIANT STANDARDS IN THIS REPORT

GENERAL DISCLOSURES

SPECIFIC DISCLOSURES

GLOSSARY

ABOUT THIS REPORT

The purpose of this Integrated Annual Report is to inform readers about the material aspects of the business of joint stock company (JSC) Kazatomprom (the Company), Kazakhstan's national atomic company. With this report, the Company aims to help investors and other stakeholders understand how it formulates its development strategy, manages its operations, achieves its financial performance, ensures the long-term sustainability of its business and develops value for stakeholders and interested parties. It addresses the following questions.

· What do the Company, its subsidiaries, associates and joint ventures do?

· In what environment does the Company operate?

· How will the Company's corporate-governance structure provide for value creation for stakeholders in the short, medium and long term?

· What is the Company's business model?

· What are the main risks and opportunities influencing the Company's ability to create value for stakeholders in the short, medium and long term, and how are these being managed?

· What are the Company's goals, aims and objectives, and how does it intend to achieve them?

· To what extent has the Company met its goals, aims and objectives for the reporting period, and what has been the effect on its valuation for stakeholders?

· What are the key challenges and uncertainties the Company is likely to face in pursuing its development strategy and what are the potential implications for its business model and future performance?

KEY FIGURES - 2018

102-7

Table 1. Key indicators - Production KAP2

Table 2. Finance

Table 3. Staff and social responsibility indicators

Table 4. Health and safety indicators

2018 KEY EVENTS

January

§ 10 January 2018: The termination of the activities of Ulba FtorComplex LLC is registered by order of the Department of Justice of Ust-Kamenogorsk, Department of Justice of East Kazakhstan region No. 41.

February

§ 8 February 2018: The Board of Directors of NAC Kazatomprom JSC approves a new development strategy for 2018-2028.

March

§ 2 March 2018: The "Kazatomprom Town Hall: In Lockstep with Time" is held in the city of Shymkent, during which Galymzhan Pirmatov, Chairman of the Board of NAC Kazatomprom JSC, presents NAC Kazatomprom JSC's strategic priorities for 2018-2028, in line with the new development strategy.

§ 7 March 2018: A Memorandum of Understanding is signed by NAC Kazatomprom JSC and a consortium of Japanese companies (EAHL) in Nur-Sultan (Astana), setting out the basic conditions for the parties' interaction with respect to Baiken-U LLP, Kyzylkum LLP and JV Kharasan-U LLP.

April

§ 4 April 2018: The termination of the activities of Geotechnoservice LLP is registered by Order of the Department of Justice of South Kazakhstan region No. 22.

June

§ 29 June 2018: NAC Kazatomprom JSC sells 100% of its shares in the authorised capital of KAES JSC to Samruk-Kazyna JSC.

§ Transition to the target model of personnel management was completed within the transformation programme. The project covers the corporate centre and 6 subsidiaries and affiliates.

July

§ 3 July 2018: NAC Kazatomprom JSC completes the sale of 100% of its shares in MAEK-Kazatomprom LLP to Samruk-Kazyna JSC.

§ 1 July 2018: In the corporate centre of NAC Kazatomprom JSC and Kazatomprom-SaUran LLP a single integrated SAP system was put into operation.

§ 31 July 2018: Transition to new strategic planning and performance management processes completed.

August

§ 29 August 2018: At an Extraordinary General Meeting of the shareholders in Ulba-Konversia LLP approves the voluntary liquidation of the legal entity. The liquidation committee also approves decisions on the procedure for and terms of liquidation.

September

§ 3 September 2018: NAC Kazatomprom JSC signs an agreement with EAHL, under which, and under a number of specific conditions, to buy 40.05% of Energy Asia (BVI) Limited (owner of 95% of shares in the authorised capital of Baiken-U LLP and 40% of shares in the authorised capital of Kyzylkum LLP) and 16.02% of shares in the authorised capital of JV Kharasan-U LLP.

§ 28 September 2018: NAC Kazatomprom JSC enters into an agreement to sell its 76% stake in the authorised capital of Kyzyltu LLP for KZT 3,834,000,000. The buyer is Stepnogorsk Mining-Chemical Complex LLP.

§ In September 2018, NAC Kazatomprom JSC became a Vision Zero partner.

§ Implementation of the SAP ERP project (enterprise resource management system) at TTK LLP was launched under the Transformation programme.

§ 24 September 2018: NAC Kazatomprom approved a Transformation programme roadmap for 2017-2018.

§ The Board of Directors of NAC Kazatomprom JSC approved the Code of Ethics and Compliance.

October

§ 12 October 2018: NAC Kazatomprom JSC signs an agreement to sell its 100% stake in the share capital of Sareco LLP. The buyer is NMC Tau-Ken Samruk JSC.

§ Transition to the target model of integrated security was completed within the transformation programme. The project covers the corporate centre and 6 subsidiaries and affiliates.

§ 15 October 2018: The integrated planning system has been put into commercial operation at the first-tier enterprises.

November

§ The Company listed its shares and global depository receipts (GDRs) on LSE and Astana International Exchange (AIX).

§ The first stage of automated processes implementation in accordance with the target IT management model within the transformation programme implementation plan has been completed.

December

§ 7 December 2018: the General Meeting of Shareholders of Kazatomprom-Damu LLP approves the voluntary liquidation of the legal entity.

§ 13 December 2018: NAC Kazatomprom JSC completes a transaction to acquire 40.05% of the shares of Energy Asia (BVI) Limited (EAL) and 16.02% of shares in the authorised capital of JV Kharasan-U LLP. Consequently, the Company's stake in Baiken-U LLP increases from 5% to 52.5% (5% direct participation and 47.5% indirectly through EAL), its stake in Kyzylkum LLP increases from 30% to 50% (30% direct participation and 20% indirectly through EAL) and its stake in JV Kharasan-U LLP increases from 33.98% to 50% (direct participation).

§ 21 December 2018: The termination of the activities of Betpak-Dala LLP is registered by Order of the Department of Justice of Turkestan Region No. 208.

§ 28 December 2018: Kazatomprom and Cameco Corporation entered into an Agreement under which Kazatomprom will receive by 2020 (upon receipt of necessary permits from state bodies) the right to use refining and uranium conversion technologies. This would allow Kazatomprom to proceed with assessment of the economic feasibility of such technologies application in the Republic of Kazakhstan, subject to favourable market conditions.

§ December 2018: The first 30 students -20 of whom are employees of the subsidiaries and affiliates of NAC Kazatomprom JSC and 10 of whom are undergraduates not associated with NAC Kazatomprom JSC and its enterprises - graduate from the Master's degree programmes of the International Scientific and Educational Centre of the Nuclear Industry, founded with KazNRTU named after scientist K.I. Satpaiev.

STATEMENT OF THE CHAIR OF THE BOARD OF DIRECTORS

102-14

Dear Shareholders,

2018 was an historic year for Kazatomprom and the Republic of Kazakhstan, due to our successful privatisation and dual listing on two international exchanges. Kazatomprom is the first national company to successfully place its shares simultaneously via initial public offering (IPO) on the Astana International Exchange (AIX) and the London Stock Exchange (LSE).

Kazatomprom's IPO was the first major milestone of the State Privatisation Programme adopted by the Government at the end of 2015 as part of the plan formulated by the First President of the Republic of Kazakhstan Nursultan Nazarbayev to reduce the state's share in the economy.

The company has entered a new phase of its corporate development. It now counts Kazakh investors and leading international investment funds amongst its shareholders. This means additional responsibility for Kazatomprom in terms of delivering transparency and corporate governance. Kazatomprom, as a public company, is committed to achieving the highest international standards of corporate governance.

Last year also saw approval of the new Kazatomprom development strategy for 2018‒2028. The strategic objectives for this period were developed based upon our vision - to be the partner of choice for the global nuclear fuel industry. The company will focus on its core business - the mining and processing of uranium and associated mineral resources - while continuing to optimise production, processing and sales volumes based on market conditions. It will also strengthen the marketing function and expand sales channels, apply best practices in its business activities and develop a corporate culture corresponding to its status as an industry leader. To guide the achievement of these strategic goals and objectives, the new Board of Directors includes three independent directors who are established professionals with deep international management experience in natural resources, as well as the uranium and nuclear industries.

In 2018, the International Atomic Energy Agency (IAEA) announced the selection of Kazatomprom as a supplier of low enriched uranium (LEU) to the IAEA LEU Bank. The Board of Directors of Kazatomprom believes its selection reflects the high level of trust the global community has in the company as a reliable and recognised supplier of uranium products.

Within the framework of improving health and safety across our business in 2018, Kazatomprom was one of the first national companies of the Republic of Kazakhstan to become an official participant in a global programme to promote the concept of 'zero injury' (Vision Zero), which prioritises the health, safety and wellbeing of our employees and contractors. The programme was developed by the International Social Security Association (ISSA) to help prevent industrial accidents and reduce occupational health risks.

The Board of Directors is confident in the long-term prospects of the industry and believes that nuclear energy as a carbon-free, stable source of electricity will remain an important and growing part of the global energy supply mix. The results we achieved in 2018 confirm the effectiveness of the strategy we have implemented to date and will ensure the company's sustainable development in the interests of all its shareholders.

Chair of the Board of Directors of NAC Kazatomprom JSC

Jon Dudas

STATEMENT OF THE CHIEF EXECUTIVE OFFICER

102-14

Dear Colleagues, Partners and Investors,

I am proud to present Kazatomprom's annual report for 2018. The achievements of the atomic holding company mirror the contribution it has made to the socio-economic development, preservation of the environment and wellbeing of the citizens of the Republic of Kazakhstan.

At the end of 2018, Kazatomprom placed 15% of its shares on the international markets and it was very well received by both domestic and foreign investors. The company's main shareholder, Samruk-Kazyna Sovereign Wealth Fund, received and transferred to the State's National Fund $450 million from the sale of its shares. Our successful IPO is both the result of a strong preparatory collaboration with Samruk-Kazyna in the lead up to the flotation and a sign of confidence from our new shareholders. Our ability to meet our obligations will build the company's reputation and this, along with market and operational factors, will be reflected in the value of our shares.

The company's mission, per our new development strategy, is to effectively and safely develop uranium deposits and components of the nuclear value chain to create long-term value for all of our stakeholders. Our planned operating activities will not start with an increase in production volumes, but an appropriate response to market conditions. Kazatomprom reduced its uranium production by about 8% from previously planned production levels in 2017 and will do so again, by 20%, between 2018 and 2020. Partially due to Kazatomprom's actions in 2018, global supply and demand for uranium products became more balanced.

As the world's largest uranium producer, we have been able to forge strong relationships with most of the world's leading uranium consumers with a view to supplying our natural uranium products to more regions, solidifying our customer base. Our main customers are nuclear power operators and our key export markets are China, Southeast Asia, North America, Europe and the Asia-Pacific region. In 2018, Kazatomprom produced a record amount of natural uranium, becoming not only the world's largest uranium producer, but also the world's largest seller.

As part of our efforts to expand our presence in all areas of the nuclear fuel cycle, Kazatomprom signed an agreement with Cameco Corporation in December 2018, which will allow us to use Cameco's refining and conversion technologies by 2020. If market conditions are favourable, this will enable us to explore the economic feasibility of using these technologies in the Republic of Kazakhstan.

Last year, we completed the acquisition of a 40.05% stake in Energy Asia (BVI) Limited and a 16.02% stake in the share capital of JV Kharasan-U from Energy Asia Holdings (BVI) Limited. The purchases brought Kazatomprom's shareholdings in Baiken-U LLP, Kyzylkum LLP and JV Kharasan-U LLP to 52.5%, 50% and 50%, respectively.

Kazatomprom applies best practices when it comes to health and safety and environmental protection, and these topics will remain of paramount importance to our team. In 2018, we adopted an environmental and social action plan to achieve full compliance with the best international industry practices, including IFC Performance Standards. We continue to support the socio-economic and infrastructural development of uranium mining regions, allocating funds for these purposes under our subsoil-use contracts. We also met all of our social-guarantee commitments in 2018 and further improved our corporate governance processes.

Kazatomprom's results in 2018 were entirely due to the efforts of the entire workforce - a close-knit and highly efficient team, working in line with our core values.

Our 2018 results confirm the effectiveness of our strategy and the importance of the priorities we identified. I am confident that in 2019, Kazatomprom will maintain its momentum and continue to strengthen its leading position in the global uranium market, achieving high production rates, maximising the efficiency of all business processes and increasing the long-term value of the company.

Galymzhan Pirmatov

Chief Executive Officer,

NAC Kazatomprom JSC

BUSINESS MODEL

КАP1

The Kazatomprom Group is the largest producer of natural uranium globally (in production volume terms), with priority access to one of the world's largest resource bases. According to UxC data, the Group's uranium production, including the output and refined products of its jointly controlled entities and attributable associates, for the year ended 31 December 2018 corresponded to approximately 23% of total global primary uranium production and around 40% of global in situ leach recovery (ISR) uranium production. 

Through its subsidiaries, jointly controlled entities and associates, the Group operates 26 deposits, grouped into 13 asset clusters, all of which are located in Kazakhstan. All of the Group's uranium deposits are suitable for ISR. The combination of cost-efficient ISR technology, which has a smaller environmental impact than other mining methods, and the Group's long-life mining asset base will allow it to remain amongst the highest-output and lowest-cost uranium producers globally, according to UxC data. The Group can draw on more than 40 years of ISR experience in Kazakhstan's uranium mining industry. In addition to being cost efficient and having a low environmental impact, ISR technology offers enhanced operational flexibility compared with conventional mining, improving the scalability of Group operations and allowing it to increase or decrease production quickly and cost efficiently in response to evolving market conditions.

The Company is Kazakhstan's national importer and exporter of uranium and its compounds, nuclear power-plant fuel, special equipment and technologies, as well as rare metals. Its status as the country's flagship operator gives the Company certain privileges. For example, it can access subsoil use agreements through direct negotiation with the Government, rather than through the tender process that would otherwise be required. This effectively gives the Company priority access to the high-quality and ISR-conducive deposits of natural uranium that are abundant in Kazakhstan.

The Group only produces uranium from deposits in Kazakhstan. According to UxC data, for the year ending 31 December 2018, Kazakhstan is one of the largest uranium producing countries which accounted for about 44% of global uranium production. The Group also possesses the largest uranium ore reserves of its competitors, according to UxC data. As of 31 December 2018, the Group's attributable proved and probable ore reserves contained 305,600 tonnes of UME; its attributable measured and indicated mineral resources (including those mineral resources modified to produce the ore reserves) contained 476,700 tonnes of UME, in accordance with the terms and definitions of the JORC Code.

As the Republic of Kazakhstan's national atomic company, the Company has partnered with most of the leading players in the global uranium mining industry. The Group has built 10 successful asset-level partnerships with Cameco, CGNPC, Kansai, Marubeni, Orano (formerly Areva), RosAtom and Sumitomo, as well as the Energy Asia consortium, demonstrating the prominence of the Group's asset base on a global scale. These collaborations have also given the Group access to its partners' technologies, at the same time allowing it to improve its technological and management know-how. For the years to 31 December 2017 and 31 December 2018, 60.4% and 49.1%, respectively, of the Group's attributable mined uranium stemmed from its joint-venture (JV) and associate participations.

The Group's primary customers are operators of nuclear power plants and the principal export markets for the Group's products are China, South and Eastern Asia, North America and Europe. The Group sells uranium products under long-term contracts, short-term contracts as well as on the spot market via its Switzerland-based trading subsidiary. The price of uranium accounts for a relatively small fraction of the overall cost of producing nuclear energy and most of the Group's customers tend to prioritise security of supply, which the Group is well positioned to provide on more favourable terms, thanks to its size and uranium production output.

While uranium mining is the predominant focus of its operations, the Group is also present (through its subsidiaries, JVs and associates) in most of the other stages of the 'front-end' nuclear fuel cycle, with the exception of uranium conversion. These stages include production of nuclear fuel components and uranium reconversion. The Group has access to production facilities for uranium enrichment. The Group produces uranium products, including natural uranium concentrate, uranium dioxide ceramic powder and fuel pellets, which are used in the manufacture of nuclear fuel assemblies, the fuel used by nuclear power stations to generate electricity. In addition, the Group is currently engaged in the construction of a fuel assembly plant for the Chinese market, which it expects to be operational by the end of 2019. Further, by the end of 2020 it is planned that the plant certification procedure by the technology provider (Framatome) will occur followed by commissioning of the first output. Commercial deliveries of fuel assemblies to China are scheduled to begin in 2021. The Group is well placed to develop a conversion facility, should conversion become economically attractive in future; besides that, the Group plans to secure access to the requisite conversion technologies.

In addition to its uranium operations, the Group is engaged in the manufacture of certain rare metal products, primarily tantalum and beryllium.

The Group has a stable financial position and positive cash flow from its operating activities. The Group expects to finance its operating activities and planned capital investments in existing production assets from its own funds and available debt financing facilities in the foreseeable future. At the same time, the Group shares a significant portion of the risk and cost of field development with joint-venture partners. The listing of Kazatomprom's shares on the Astana International Exchange (AIFC) and the London Stock Exchange, along with the availability of credit ratings, provide the Group with favourable conditions for accessing the capital markets.

Figure 1: NAC Kazatomprom JSC business model

COMPANY DEVELOPMENT STRATEGY

Kazatomprom's mission is to develop uranium deposits and the components of the uranium value chain, creating long-term value for all of the Company's stakeholders, in accordance with the principles of sustainable development.

Kazatomprom's vision is to become the preferred partner of the global nuclear industry. This vision allows the Company to operate in step with the priorities of its customers and partners in the industry.

In 2018, the Company adopted a new development strategy, focusing on five strategic objectives for 2018-2028:

• Focus on uranium mining as the main activity;

• Optimise production, processing and sales based on market conditions;

• Create value by enhancing the marketing function and expanding sales channels;

• Apply best practices in business activities;

• Develop a corporate ethics culture commensurate with an industry leader.

· Focus on mining operations as the core business. Kazatomprom's core business activity is uranium mining. The Company believes that mining - in particular, the ISR extraction method - is the most attractive segment of the nuclear-fuel value chain in terms of sustainable profitability and returns on capital. It further expects it to remain so for as long as current market fundamentals persist. The Company's access to ISR-conducive uranium deposits in Kazakhstan gives it a natural competitive advantage in ISR uranium mining. Accordingly, Kazatomprom intends to maintain its primary focus on its uranium mining operations, while retaining the option to expand its presence in other segments of the front-end cycle, such as conversion, as well as in its rare metals operations.

To streamline its operations, Kazatomprom has progressively disposed of a significant number of non-core assets, including- more than 30 non-core subsidiaries over the past five years. Most recently, these included MAEK, the utility company, which accounted for a material portion of the Group's revenue (but a small share of profit) in the periods under review. The Company aims to complete its non-core asset disposal programme by the end of 2019.

Kazatomprom has also increased its interest in a select number of uranium mining joint ventures. Most notably, as of 1 January 2018, it increased its equity stake in its joint venture with Cameco, JV Inkai LLP, from 40% to 60%, while in December 2018, it raised its equity stake in Baiken-U LLP, a joint venture with the Energy Asia Limited consortium, from 5.0% to 52.5% and increased its equity interest in JV Kharasan-U LLP, a joint venture with RosAtom and Marubeni Corporation, from around 34% to 50%.

Kazatomprom is currently engaged in the construction of a fuel assembly plant in Kazakhstan together with China General Nuclear (CGN). Expansion into new segments of the nuclear value chain could allow Kazatomprom to offer a broader range of products to its customers and capture additional margins. The Company may consider further strengthening its market position by selectively acquiring or investing in high-quality assets in the nuclear-fuel chain.

· Continue to pursue a market-centric approach to uranium production, optimizing production, processing and sales volumes based on market conditions.

In the past two years, Kazatomprom has substantially changed its strategic approach to become a market-centric, rather than a production-led operator. Crucially, this involves setting production targets based upon market and sales-volume forecasts, as well as adapting production plans to changing market conditions.

The Group's use of ISR technology allows it to respond to changes in uranium market conditions by ramping up or reducing its uranium production far more rapidly and cost effectively than most of its peers, which rely on conventional mining methods to develop non-ISR-amenable deposits. The Group's uranium deposits can be developed exclusively using ISR technology, giving it the flexibility to react rapidly to uranium market prices and adjust its production accordingly, without a meaningful impact on the per-unit cost of production.

For example, in the year ended 31 December 2017, the Group cut its uranium output by 8% from the previous year. In November 2017, it announced its intention to reduce its planned contractual obligations production volumes by 20% for 2018-2020. While the Company's production plans beyond 2020 currently envisage a return to 'pre-production-cut' levels, the Company enjoys full technical and legal flexibility to keep production at reduced levels if market conditions dictate, as long as any amendments to its subsoil-use agreements with the Government are approved.

· Continue to enhance sales and marketing capabilities and optimise the contracts portfolio.

Kazatomprom has strengthened a number of areas of its sales and marketing function over the past two years. Notably, it has created a new sales channel through its wholly owned subsidiary THK in Switzerland, allowing it to engage with new categories of customer, such as US-based utility companies, which prefer to purchase uranium on the spot market. THK has also enhanced the Company's analytical capability, enabling it to undertake arbitrage operations, and facilitating its expansion into the short-term/spot market, which requires significant operational flexibility. Moreover, Kazatomprom has expanded its physical sales presence in each of its main target regions and will continue to strengthen this sales network.

In addition, with the launch of THK's operations in 2017, Kazatomprom became able to offer complex sales-formula pricing terms to its customers. The Company plans to build on these capabilities and offer customers a wider range of pricing options than it could before, due to certain limitations of Kazakhstan's legislation.

The Company stopped its sales to uranium traders in 2016, in line with its strategy to bypass intermediaries and build direct relationships with customers that are contracting smaller amounts.

· Maintain global leadership in the uranium mining industry through operational excellence. 

Kazatomprom prides itself on being the world's leading uranium producer and seeks to build on this standing in future in terms of scale, operating efficiency and innovation. It intends to continue investing in the exploration and development of its reserve base to ensure sustainable low-cost production from its mines in the long term, while its current reserve base allows it to maintain current production levels for around 15 years.

The Company views its low production costs as a key competitive advantage and plans to work continuously on sustaining its attractive position on the global uranium-mining cost curve. Kazatomprom intends to achieve this by continuing to optimise its mining development plans and stringent cost controls. The Company takes a disciplined approach to production planning, focusing overwhelmingly on value and economic returns rather than maximizing production volumes.

Kazatomprom remains focused on the ongoing optimisation and digitalisation of its business processes and the further strengthening of its sales and marketing function. Kazatomprom continues to follow its Transformation Initiative for 2016 to 2025, aimed at increasing the transparency, efficiency and harmonisation of processes across the Company. 

· Develop an ethics culture commensurate with an industry leader and continue to improve health, labour and environmental policies in line with global best practices. 

Kazatomprom is committed to best health and safety practices and these will remain of paramount importance to the management team going forward. Kazatomprom strives to be an employer of choice in Kazakhstan. It aims to ensure that its facilities are a completely safe working environment and that they are not inflicting damage on Kazakhstan's natural ecosystem. Furthermore, the Company has signed up to the international Vision Zero movement to promote zero work-related injuries and is focused on maintaining a low lost time injury frequency rate and the lowest possible level of occupational accidents. In 2016-2017 Kazatomprom stepped up its investment in health and safety from KZT 5.1 billion in 2015 to more than KZT 7.1 billion in 2017 and will continue to increase this investment in the coming years.

· Another one of the Kazatomprom's strategic priorities is to ensure a balance between shareholder income and optimal capital structure. The Company runs high-margin and cash-generative operations with a relatively limited capital-expenditure profile for expansion and low leverage. Kazatomprom will, therefore, seek to pay dividends to its shareholders, while preserving a conservative balance-sheet structure that allows it to maintain a comfortable leverage level in case of adverse changes in commodity prices. The Company's dividend policy is to distribute no less than 75% of its free cash flow if the Company's leverage ratio is below or equal to 1.0x net debt/adjusted EBITDA and no less than 50% of its free cash flow if the ratio is above 1.0x and below 1.5x net debt/adjusted EBITDA.

Table 5. Review of Company development strategy implementation in 2018

BUSINESS TRANSFORMATION

KAP3

In 2015, the Company and 12 of its subsidiaries embarked on a transformation initiative, with a view to implementing the principles set out by its then sole shareholder, Samruk-Kazyna. The principal aims of the transformation initiative were to improve transparency and operational efficiency, as well as to standardize and harmonise business processes, based on Samruk-Kazyna's reference model. As part of the initiative, in 2016, the Company developed a portfolio of 24 projects on various aspects of Kazatomprom's operations, such as production, procurement, resource management, and business planning and modelling efficiency. By 2017, it had implemented seven of these projects, including:

• A category-based procurement management system, allowing the Group to optimise its approach to procurement and achieve short- and long-term benefits, using approved category-based strategies. Kazatomprom implemented this strategy in the fuel and lubricants category and the power category.

• An information security model, designed to improve information security and incident management processes based on a Security Information and Event Management (SIEM) class control and analysis system. This allowed Kazatomprom to avail of unified systems, as well as the services and risk-oriented approach offered by the system.

• A targeted risk-management model, enabling Kazatomprom to automate risk-management processes, such as a risks registry, report monitoring, visualisation and prediction. These capabilities improved the Company's risk-analysis capabilities and keep senior management appraised of pertinent risks, ensuring timely reaction.

· A sales and marketing model, designed to increase the Company's margins by improving its market perception, strengthening its sales and marketing capabilities, developing a better understanding of the strengths and weaknesses of both Kazatomprom and its competitors, and improving the Company's understanding of customer and potential customer needs.

In the first half of 2018, the Company's transformation programme was expanded by the inclusion of additional initiatives aligned with the master plan for implementing the Samruk-Kazyna's transformation programme for 2018-2021, approved by the Chairman of the Samruk-Kazyna Board on 14 May 2018.

Thus, in addition to the business-process reengineering initiative, in 2018, Kazatomprom's transformation programme included initiatives to:

· Digitise business processes;

· Simplify the legal structure;

· Transform human capital;

· Implement change management and a project management approach.

As part of the business-process reengineering initiative in 2018, the Company completed the following transformation initiative projects:

· A new model of personnel management, aimed at ensuring the Company's compliance with the best practices in human-resource management, strengthening staff engagement, accumulating and preserving knowledge within Kazatomprom and enhancing the role of Kazatomprom corporate culture;

· A new health and safety model, aimed at reducing the number of accidents at work by introducing the timely monitoring of potentially dangerous situations, by conducting behavioural safety audits at Kazatomprom facilities and by checking contractors for compliance with safety-monitoring requirements;

· A new model of strategic planning and performance management, aimed at creating a unified process of strategic planning and performance management, creating a clear hierarchy of goals with a specified relationship to key performance indicators (KPIs). Motivational KPIs were then set for Company executives, subsidiaries and associates, all focused on achieving the Company's strategic goals, so as to meet its shareholders' expectations in the strategic long and medium term.

A number of IT systems were introduced in 2018:

· In July 2018, the SAP Enterprise Resource Planning (ERP) system was put into commercial use in the Corporate Centre and Kazatomprom-SaUran LLP and, in December 2018, in the Trade and Transport Company LLP.

· In October 2018, the integrated planning system was put into operation in the Corporate Centre and four enterprises (RU-6 LLP, the Ortalyk LLP production company, APPAK LLP and Kazatomprom-SaUran LLP).

· In October 2018, the integrated planning system was put into commercial operation in the corporate centre and four enterprises (RU-6 LLP, Production Enterprise Ortalyk LLP, Appak LLP and Kazatomprom-SaUran LLP).

· In December 2018, the Digital Mine system was piloted at Kazatomprom-SaUran LLP.

· In December 2018, the IT service management (ITSM) system was launched in the Corporate Centre and in two Group enterprises (KAP Technology LLP and RU-6 LLP).

Based on the Transformation initiative projects implementation results the Company expects to gain economic benefits due to work efficiency increase.

Following the other initiative projects implementation in 2018a digitisation office was created, while seven subsidiaries and affiliates were removed from the structure. The company established a code of ethics and compliance with corporate values, along with a leadership development programme for 2019‒2020. Leadership-development modules were run for the CEO and CEO‒1 management levels. A company ethics analysis was conducted and a roadmap approved for corporate culture development in 2018‒2021.

As part of the plan to implement change management and a project approach, the change-management function was structured within the business transformation department. Professional requirements for employees in certain positions in the Corporate Centre and in subsidiaries were updated to reflect project-management competencies, and training was provided for the CEO, CEO‒1, CEO‒2 management levels on change and project management.

In 2019, the company plans to continue implementing the following key Transformation projects:

· SAP ERP replication in the Company's production facilities;

· An integrated planning system in production companies of the second wave; and

· Digital Mine replication in two mining facilities.

Under the digitisation framework, there are plans to diagnose business problems, to identify potential growth with the need for digitalisation, to develop a portfolio of projects of digitalisation and to start implementing them.

As part of the plan to transform people, the Company plans to continue its work on the development of a corporate ethics culture and to train at least 60% of management at CEO ‒1, ‒2 and ‒3 levels on the leadership development programme.

To implement change management and project management approach, the Company plans to adapt and approve change- and project-management standards, update change management competencies and incorporate the Corporate Centre and subsidiaries (included in the perimeter of the transformation) into the corporate model, training mid- and lower-level corporate managers in the Corporate Centre and subsidiaries on project and change management.

LISTING INFORMATION

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In November 2018, the Company listed its shares and global depositary receipts (GDRs) on the Astana International Exchange (AIX) and London Stock Exchange (LSE), respectively.

The successful placement occurred despite vulnerable market conditions characterised by high volatility. For example, in the second half of 2018 some 17 IPO transactions in the EMEA region were cancelled.

The Company's IPO attracted significant interest among investors evidenced by the existence of top-tier international investors amongst the Company's new shareholders.

Table 6. Share and GDR listings

There are a total 259,356,608 Kazatomprom shares in issue (including those represented by the GDRs), of which 14.92% are in free circulation and the remaining 85.08% are owned by the state-run Sovereign Wealth Fund Samruk-Kazyna. The shares and GDRs were listed in November 2018 in connection with the initial public offering (IPO) of Kazatomprom, priced at USD 11.60 per GDR, or the equivalent KZT 4,322.74 per common share, on the day of announcement. Consequently, at the time of the IPO, the Company's market value (capitalisation) was around USD 3 billion. The value of the placed shares (including those represented by the GDRs) was about USD 450 million.

ABOUT KAZAKHSTAN

Key facts

The Group's activities and assets are predominantly concentrated in Kazakhstan. Kazakhstan became an independent sovereign state in 1991 following the collapse of the USSR. Since then, the country has undergone large-scale changes, transitioning from a centralised command economy and embracing a market-based model of economic development. Kazakhstan is a unitary state with a presidential form of government. According to its constitution, the country is a democratic, secular, legal and social state, the highest values of which are the person, their life, rights and freedoms. The President of the Republic of Kazakhstan is the head of state, its highest official, who determines the main directions of domestic and foreign policy and represents Kazakhstan at home and abroad. 102-4

· The population is approximately 18.4 million people (as of 1 January 2019).

· The capital city is Nur-Sultan (previously Astana, renamed in March 2019), with a population of more than 1 million people.

· The largest city is Almaty, with a population of 2 million.

· The ethnic makeup of the population is one of the most multinational in the world: Kazakhs - 67.5%, Russians - 19.8%, Uzbeks - 3.2%, Ukrainians - 1.5%, Uigurs - 1.5%, Tatars - 1.1%, other - 5.6%).

· The ratio of urban to rural dwellers is about 58:42.

· The national currency is the tenge (₸), denoted internationally as KZT.

· As of 31 December 2018, the exchange rate was KZT 384.2per USD 1.

· Gross domestic product (GDP) per capita is USD 9,331 (2018).

· GDP growth in 2018 was 4.1%.

· The territory spans 2,724,900 square kilometres. It shares borders with the Russian Federation, China, Kyrgyzstan, Uzbekistan and Turkmenistan. Its land border stretches 13,200 km.

· Kazakhstan's main trading partners are the Russian Federation, China, the countries of the European Union and the Commonwealth of Independent States (CIS).

· Kazakhstan has 67% of the world's proven uranium reserves suitable for mining by the ISR method.

· According to World Bank and International Finance Corporation Doing Business Survey for 2019, Kazakhstan ranks 28th in the world for the ease of doing business, the best in its region.

· Kazakhstan is a founder member of the Eurasian Economic Union (EEU), which includes Russia, Belarus, Armenia and Kyrgyzstan.

· The volume of foreign investment in Kazakhstan since 1991 has totalled about USD 300 billion.

Republic of Kazakhstan credit ratings as of 31 December 2018

Moody's: Baa3 (Stable) - October 2018

S&P: ВВВ- (Stable) - September 2018

Fitch: BBB (Stable) - September 2018

The Republic of Kazakhstan is a huge country located in Central Asia, occupying an area roughly equivalent to ​​Western Europe. It has enormous mineral reserves and considerable potential for economic growth. Kazakhstan's resource base comprises more than 5,000 mineral deposit sites, the value of which is estimated in the tens of trillions of dollars. Of the 105 elements of the periodic table lying beneath the country's surface, 99 have been identified. Seventy deposits have been explored and more than 60 elements have been in production. Currently, there are 493 known deposits, containing 1,225 types of mineral raw material.

Table 7. Kazakhstan's mineral deposits by global ranking

Source: Committee of Geology and Subsoil Use of the Ministry of Investment and Development of the Republic of Kazakhstan, Statistical Review of British Petroleum.

Geological and economic assessments of the mineral reserves of Kazakhstan show coal, oil, copper, iron, lead, zinc, chromites, gold and manganese to have the greatest weight in terms of economic importance. Ores of ferrous and non-ferrous metals mined in Kazakhstan are exported to Japan, South Korea, the US, Canada, Russia, China and the EU.

Kazakhstan depends on neighbouring states for access to world markets; its main exports are uranium (all of the Group's uranium products are exported), oil, natural gas, steel, copper, ferroalloys, iron ore, aluminium, coal, plumb, zinc and wheat. Thus, good neighbourly relations are crucial to realizing export opportunities.

Kazakhstan is a country with a fast-growing economy and a long-term development plan. From 2005 to 2017, average GDP growth was about 9%. All national economic, social and international policy is implemented in accordance with the country's plan for sustainable long-term development. The main goal of the Government's Kazakhstan 2050 strategy is to join the world's 30 most developed countries by 2050.

Kazakhstan is committed to the principles of economic liberalisation. The national privatisation programme will have reduced the percentage of state participation in the economy by 2020. In the World Bank's Ease of Doing Business rankings for 2019, Kazakhstan came in top in the region, polling in 28th place globally, ahead of Russia (31st), Turkey (43rd), Kyrgyzstan (70th) and China (46th) and just a little behind Azerbaijan (25th).

Between 2005 and 2018, foreign direct investment in Kazakhstan exceeded USD 280 billion.

To develop the country's financial-services sector and improve the region's access to international capital markets, Kazakhstan has established a financial hub - the Astana International Financial Centre (AIFC) - with a special legal regime based on English law. The main AIFC strategic priorities are the development of the capital market, asset management, wealth management (private banking for high net worth individuals), financial technologies and Islamic finance. In 2018, the Astana International Exchange (AIX) came into operation and commenced trading with the placement of securities of NAC Kazatomprom JSC.

Sources: Statistics Committee of the Ministry of National Economy of the Republic of Kazakhstan, World Bank, World Trade Organization, BP Statistical Review, International Monetary Fund, Kazakh Invest.

ABOUT THE COMPANY

ACTIVITY PROFILE

§ Geological exploration

§ Natural uranium mining

§ Uranium products: natural uranium concentrate, ceramic-grade uranium dioxide powders and fuel pellets

§ Bulk concentrate of rare-earth metals

§ Beryllium, tantalum, niobium products

§ Science, social security and personnel training

MAIN PRODUCTS

Table 8: Main product characteristics

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COMPANY HISTORY

For more than 60 years, Kazakhstan has been a key global supplier of raw materials and components for nuclear fuel. Some of the entities that currently belong to Kazatomprom subsidiary Ulba Metallurgical Plant JSC (UMP) began operating in 1949 and have been involved in the production of uranium products since 1954. In 1996, JV Katco LLP and JV Inkai LLP (subsequently transferred to the Company) were launched as joint ventures with Areva (now Orano) and Cameco, respectively.

The Company was established in 1997 by decree of the President of the Republic of Kazakhstan, as the national operator of Kazakhstan's nuclear fuel industry. Since inception, the Company has adhered to the principles of the non-military use of atomic energy, supplying the produced uranium and uranium products only under the guaranty that a customer is not engaged in the utilisation of uranium or uranium products for military purposes. A brief history of the Company is provided below:

1997 The Company is established. Kazatomprom is the 13th largest uranium miner globally in volume terms. The Company buys a stake in JV Inkai LLP, a Group joint venture with Cameco.

2000 The Group becomes the world's sixth-largest producer of uranium in volume terms, according to the NEA, IAEA and Red Data Book. The Group launches tantalum and beryllium production, focused on peace-time production.

2002 The Group extends the reach of its uranium product sales to include the US and European markets. It also enters the Chinese and South Korean markets.

2003 The Group is now the world's second-largest producer of beryllium (29% of world production) and the fourth-largest producer of tantalum in volume terms.

2007 The Сompany is assigned a credit score for the first time.

2010 The Group becomes the world's largest uranium producer in volume terms, according to the NEA, IAEA and Red Data Book.

2012 The Group commissions a sulphuric acid plant with an annual capacity of 500,000 tonnes.

2013 Through equity participation, the Group gains access to the enrichment plants of Urals Integrated Electrochemical Plant JSC and the International Uranium Enrichment Centre (IUEC) with respective annual separation capacities of 2.5 million and 60,000 tonnes.

2015 The Group enters into a strategic agreement on commercial terms with CGNPC for the design and construction of a fuel assembly plant and the joint development of uranium deposits in Kazakhstan. UMP JSC takes over as operator of the bank of low enriched uranium in the Republic of Kazakhstan, established under the umbrella of the IAEA.

2016 The Group undertakes an asset restructuring programme.

2017 Trading Company Kazakatom AG (THK - Trade House Kazakatom AG), a new trading company established in Switzerland, begins operations.

2018 The Company lists its ordinary shares and global depository receipts (GDRs) on LSE and AIX.

The Company's Board of Directors adopted a new development strategy focusing on five key elements: (i) reorientation to the core area of focus; (ii) optimisation of production, processing and sales volumes based on market conditions; (iii) value creation by expanding sales and marketing; (iv) introducing advanced business processes; and (v) fostering the corporate culture of an industry leader.

COMPANY ASSET STRUCTURE

In this document, 'the Group' refers to the Company and its consolidated subsidiaries, i.e. the companies that the Group controls by having (i) the power to direct activities that significantly affect their returns, (ii) exposure or rights to variable returns from its involvement in those entities, and (iii) the ability to use its power over these entities to affect the level of Group returns. The existence and effect of substantive rights, including substantive potential voting rights, are considered when assessing whether the Group has power over another entity.

The Group, with its Associates and Joint Ventures ("JVs"), are collectively referred to as "the Holding".

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Main assets and corporate structure

The Holding's main assets are:

• Subsoil use contracts that grant Group subsidiaries mining rights in respect of 9 uranium deposits located in the Chu-Sarysu and Sirdariya regions, in which there were combined proven and probable ore reserves containing 234,000 tonnes of UME, as well as measured and estimated mineral resources containing 374,200 tonnes of UME as of 31 December 2018;

• Subsoil use contracts that grant joint ventures and associates of the Group mining rights in respect to 11 uranium deposits located in the Chu-Sarysu and Sirdariya regions, in which proven and probable ore reserves are registered on a 100% basis in the amount of 286,600 tonnes of UME and total mineral resources (including measured, estimated and pre-estimated mineral resources) in the amount of 365,800 tonnes of UME as of 31 December 2018;

• Thirteen uranium production companies, out of which 5 are subsidiaries (excluding Baiken-U LLP) and 8 JVs and associated companies of the Group;

• Ulba Metallurgical Plant JSC, a facility for  the production of uranium products and rare-earth metals, with an annual capacity of 3,728 tonnes of U3O8, 317 tonnes of UO2 powder made from UF6, 155 tonnes of UO2 powder made from scrap and 108 tonnes of fuel pellets, as well as 1,626.9 tonnes, 141.9 tonnes and 25.2 tonnes of products from the rare earth metals beryllium, tantalum and niobium, respectively;

• Uranium trading subsidiary, Trade House Kazakatom AG (THK), located in Zug, Switzerland; and

• Ancillary enterprises, including:

o two sulphuric acid production plans, with an aggregate annual production capacity of 680,000 tonnes;

o Volkovgeologia JSC - a company that conducts geological work and technological drilling; and

o A transport and logistics company serving the assets of the Group.

The following table lists the Group's subsidiaries, JVs, joint operations (JOs) and associates as of 31 December 2018. In all cases, the share is equal to the Group's voting rights, with the exception of Ulba Metallurgical Plant JSC and Volkovgeologia JSC, in which the Group has 100% voting rights.

Table 9: Holding's subsidiaries, JVs, JOs and associates (31 December 2018)

1 The Company transferred its rights and obligations under the subsoil use licences relating to Kanzhugan, Southern Moinkum, Eastern Mynkuduk and Uvanas deposits, along with the associated production assets to Kazatomprom-SaUran LLP and its rights and obligations under the subsoil use licences relating to the Southern and Northern Karamurun deposits, to RU-6 LLP, in November 2018. Rights and obligations under the subsoil use licence relating to Central Moinkum are planned to be transferred to Kazatomprom-SaUran LLP in 2019.

2 The Company increased its interest in JV Inkai LLP from 40% to 60% and started fully consolidating this entity in its financial statements with effect from 1 January 2018.

3 JV Akbastau JSC and Karatau LLP were classified as joint operations with effect from 1 January 2018.

4 On 13 December 2018, the Company completed the acquisition of 40.05% of the shares in EAL and a 16.02% stake in the issued capital of JV Kharasan-U LLP from Energy Asia Holdings (BVI) Limited.

As a result of these transactions, the Company increased its interests in Baiken-U LLP from 5% to 52.5% (direct ownership 5%, indirect ownership through Energy Asia (BVI) Limited 47.5%), its interest in JV Kyzylkum LLP from 30% to 50% (direct ownership 30%, indirect ownership through Energy Asia (BVI) Limited 20.0%) and in JV Kharasan-U from 33.98% to 50% (direct ownership).

5 The Company holds 100% (direct ownership) of Power System International Limited (PSIL) and 40.05% (direct ownership) of Energy Asia (BVI) Limited. PSIL holds 9.95% (direct ownership) of Energy Asia (BVI) Limited. Energy Asia (BVI) Limited holds 40% (direct ownership) of Kyzylkum LLP and 95% (direct ownership) of Baiken-U LLP.

6 These companies are third-level entities for the Company through interests in the subsidiaries, JVs and associates presented above these companies in the table.

The following assets are currently for sale or subject to restructuring:

Table 10: Assets for sale or subject to restructuring

7 The Company intends to dispose of its interests in Astana Solar LLP, MK KazSilicon LLP and Kazakhstan Solar Silicon LLP before the end of 2019.

8 The Company intends to dispose of its entire block of shares in Caustic JSC before the end of 2020.

GEOGRAPHY AND TARGET MARKETS

KAP4

The Company's mineral assets are located in four main administrative regions of Kazakhstan (Figure 2): the Kyzylorda Region (Shieli and Zhanakorgan districts), the Turkestan Region (Sozak and Otyrar districts), the North Kazakhstan Region (Ualikhanov district) and the Akmola region (Enbekshilder district) (Figure 2).

Figure 2: Location of mineral assets and mining and processing facilities

Uranium deposits in Kazakhstan are grouped into six uranium provinces (Figure 3).

Figure 3: Kazakhstan's uranium provinces and distribution of uranium reserves

With the exception of the Semyzbay field in Northern Kazakhstan, which is located in the North Kazakhstani and Akmola regions, the Company's fields are located in the south of Kazakhstan in the Shu-Sarysu (8) and Syrdarya (5) provinces. All mines are located in areas that are sparsely populated and have minimal vegetation cover. Natural vegetation in mine areas varies from desert to shrub and steppe. Only six mines are located within 10km of human settlements, all of them villages. In all regions, the climate is continental, with hot summers, harsh winters and little rainfall (300mm or less).

KAP2

The key factor affecting the Company's financial results is the sales price for uranium products, as the uranium segment accounted for 84% of consolidated revenues in 2018.

Although the average annual sales price of a uranium producer depends upon the structure of sales (in particular, the share of deliveries under long-term contracts and price formulae used in each contract), in the long term, the market price for uranium products is determined by the balance of supply and demand. Based on the opinion of industry experts, Kazatomprom expects that in the long term, nuclear power, as a stable source of meeting base-load electricity demand not associated with greenhouse gas emissions, will maintain and strengthen its position in the overall structure of growing energy production, which will ensure growth in demand for uranium energy products. This, in turn, will lead to a rise in prices for these products from current levels; prices have been depressed by declining demand for uranium following the accident at the Fukushima power station in 2011, against a backdrop of rising global uranium production in previous years. A detailed analysis of factors affecting the price of uranium products is provided in the 'industry overview' section of the Kazatomprom IPO Prospectus.

Figure 4: Spot prices for uranium, 2000-2018

Source: UxC

On the demand side of the uranium products market in 2018, multidirectional factors were at play. Consumer sentiment was dented by uncertainty surrounding the ongoing investigation under Section 232 of the United States Trade Expansion Act, which could limit the access of US operators of nuclear power plants to imported uranium if it were to lead to the introduction of quotas or customs duties. In terms of the prospects for introducing additional generating capacity, demand for construction during the year was affected, on the one hand, by the delay in the construction of a nuclear reactor in the United Arab Emirates and the slow pace of restarting Japan's reactors and, on the other, by a delay in plans to reduce the proportion of nuclear energy in France and popular opposition to plans to abandon nuclear power in Taiwan and South Korea. The persistence of an uncertain situation on the demand side led to low activity in the market for medium-term and long-term contracts: the long-term U3O8 price stagnated at around USD 30 per pound, with a small volume of purchases - just over 90 million pounds of U3O8 - significantly less than annual consumption.

On the supply side, an important factor was the reduction in supply and investment in the expansion of uranium production from the largest global producers, including Kazatomprom, as well as in supply from secondary sources. As a result, after a long period of market oversupply, in 2018, there was a shift towards market balance, or even a small deficit. As a result, in the spot market in 2018, there was an increase in price from USD 24 to almost USD 29 per pound of U3O8, with high trading volumes.

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Customers

The Group sells its products to more than 22 customers in 11 countries. In 2018, the Company's top three and top five uranium-product customers accounted for 45% and 62% of Group revenues, respectively.

In May 2018, the Company entered into a supply agreement with Yellow Cake plc, a long-term corporate buyer and holder of uranium, listed on LSE AIM. Under the agreement, the Company initially supplied 8.1 million pounds (or about 3,112 tonnes) of U3O8 worth USD 170 million and Yellow Cake will have the right to purchase additional U3O8 to a cap of USD 100 million annually from 2019 to 2027.

The Group estimates that there are around 70 end-users of uranium globally. The company is seeking to expand its client base and is negotiating with potential customers in Europe, North and South America and the Middle East.

The following table shows the geographical distribution of customers for the Group's uranium products by revenue for the calendar years 2015 to 2018.

Table 11: Group sales of uranium products by region, 2015‒2018 (%)

· Sales to other countries, to uranium funds and THK sales on the cash market

Realisation and marketing

In 2017, Kazatomprom established Trading House Kazakatom AG (THK), a subsidiary trading company based in Switzerland, to improve the Company's marketing function, strengthen its cooperation with partners, facilitate sales of uranium and uranium products in Kazakhstan and, more generally, increase the Company's global reach. THK's key activities are:

• The sale and purchase of uranium in the cash market with the aim of generating additional profit, thanks to THK's quick decision-making procedures;

• Assistance in creating additional liquidity in the spot uranium market and improving the reliability of the Kazatomprom portfolio of contracts for uranium mining; and

• Improving the global reach of the Company in the uranium market by offering a wider choice of pricing and contractual structures and providing additional market tools for Kazatomprom customers, such as offer kits and more flexible pricing structures.

Since its launch, THK has helped Kazatomprom to enjoy some tangible benefits in the uranium market. Notably, THK achieved additional spot sales on the cash market of more than USD 80 million for the year ended 31 December 2018. THK also acquired new customers for the Company during this period and concluded a number of long-term contracts for the supply of uranium (with the term of some contracts concluding in 2029).

The Company believes that, due to the scope of work and coverage of THK, the Company can more easily understand both sides of the global uranium market: the demand side, as the leading producer and seller of natural uranium, and the supply side. As a result, Kazatomprom can get a better sense of the market, improving its analytical capabilities and allowing management to make more informed decisions.

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Transportation of U3O8 is carried out in special 20-foot sealed containers and any such load is accompanied by security personnel until it reaches its destination. The Company insures risks associated with the transportation of uranium.

The Group delivers U3O8 and finished products to the following destinations for conversion or to end customers:

· Western countries. The Group transports U3O8 to companies such as ConverDyn (US), Cameco (Canada) and Comurhex (France) by rail to the port of St. Petersburg in Russia, then by sea to various ports in the US, Canada and Europe, then, finally, by rail or road to the processing facilities in question. In some cases, the Group enters into swap (exchange) agreements to reduce transportation costs. These can include the exchange of U3O8 with partners of the Group at the conversion facility. Please see the following section on 'realisation and sales' for more.

· China. When transporting materials to China, the Company delivers its cargo to the Alashankou railway station near the Kazakhstan-China border.

· Russia. When shipping to the Russian Federation - recipients include Angarsk Electrolysis and Chemical Combine OJSC (AECC)), Siberian Chemical Combine OJSC (SCC) and Chepetsk Mechanical Plant OJSC (Rosatom) - the Group delivers its cargo to the Sukhovskaia railway station for delivery to AECC in Angarsk, to the Tomsk-2 railway station for delivery to the Siberian Chemical Combine in the city of Seversk, and to the Glazov railway station for delivery to the base of the Chepetsk Mechanical Plant OJSC (Rosatom) in Glazov.

· India. The company delivers U3O8 to destinations in India by rail to the port in St. Petersburg, Russia, and then by sea to the port of Mumbai, India. From the port of Mumbai, the client organises their own transport to the destination.

The average cost of shipping products to specified destinations ranges from USD 0.5 to USD 3.0 per kilogram of U3O8.

As far as possible, the Group tries to enter into swap agreements to minimise delivery times (physical transportation of materials takes, on average, 100 days, while deliveries under swaps agreements take, on average, 25 days), transportation costs and the risks associated with transporting uranium products.

ASSOCIATION MEMBERSHIP AND INTERNATIONAL COMPLIANCE

Kazatomprom is an active member of a number of professional industrial nuclear power organisations:

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The Company strictly observes key agreements in relation to the peaceful use of nuclear energy to which the Republic of Kazakhstan is party: 102-12 103-2

Table 12. International agreements on the peaceful use of nuclear energy to which Kazakhstan is party

OPERATING AND FINANCIAL REVIEW

This Operating and Financial Review is intended to assist with understanding and assessment of trends and significant changes related to the operations and financial position of NAC Kazatomprom JSC ('the Company' or 'Kazatomprom'). This review is based on the audited consolidated financial statements of the Group, in each case without material adjustment, unless otherwise stated. It should be read in conjunction with those statements and the accompanying notes, in addition to the Kazatomprom Q4 2018 operations and trading update, and other Company reports. All financial data and discussions thereof are based upon the audited consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS), unless otherwise indicated.

SIGNIFICANT FACTORS AFFECTING GROUP OPERATING RESULTS

The significant factors affecting the Group's operating results for 2017 and 2018, which the Company expects to continue to affect the Group's operating results in future, include:

• The price received for the sale of natural uranium and changes in natural uranium product prices;

• Changes in the Group structure;

• The impact of changes in exchange rates;

• Taxation, including mineral extraction tax;

• The price and availability of sulphuric acid;

• The impact of changes in ore reserves estimates; and

• Transactions with JVs and associates.

Spot market prices for U3O8, the Group's main marketable product, have the most significant effect on Group revenue. The majority of Group revenue is derived from sales of U3O8 in the spot market and from contracts with price formulas referencing the spot price. In addition to spot prices, the Group's effective realised price depends on the proportion of contracts in the portfolio with a fixed price component in a given period. The average realised price for each period can, therefore, deviate from the prevailing spot-market price.

Table 13. Average spot-market and realised prices per pound of U3O8

 Source: Market prices per UxC LLC

In 2018, the Group completed several projects that resulted in a change in accounting treatment:

· The Group's shareholding in JV Inkai LLP increased from 40% to 60%, effective 1 January 2018, resulting in a change in accounting treatment from equity to full consolidation.

· Agreements were signed with Uranium One Inc., under which the Company and Uranium One Inc. have the obligation to purchase all of the output of JV Akbastau JSC and Karatau LLP on equitable terms, with financing of the joint arrangements in proportion to their shareholdings. As a result, the Group's investments in these two operations were reclassified as JOs in the consolidated financial statements and accounted for by recognizing the Group's direct right in joint assets, liabilities, income and expenses in proportion to its ownership, effective 1 January 2018. 

In accordance with IFRS, the Group assessed the fair values of the assets and liabilities acquired in the above business combinations of JV Inkai LLP, JV Akbastau JSC and Karatau LLP, resulting in a net gain of KZT 313.5 billion being recorded in the 2018 statement of profit and loss.

· In December 2018, the Company increased its interest in JV Kharasan-U LLP (from 34% to 50%), its effective interest in JV Kyzylkum LLP (from 30% to 50%) and its effective interest in Baiken-U LLP (from 5% to 52.5%). The company expects to fully consolidate the results of these operations, except for JV Kyzylkum LLP, once the agreements are finalised in 2019. The fair-value assessments of the assets and liabilities acquired in these transactions have yet to be completed and, accordingly, no gain or loss was recognised in 2018.

During the periods under review, the Group also disposed of seven non-core assets: 102-49

· In July 2018, the Company transferred its entire interest in MAEK-Kazatomprom LLP to its then sole shareholder, Samruk-Kazyna, resulting in the elimination of the Group's Energy segment. This transaction was cash neutral, as an amount equivalent to the sale proceeds was paid to Samruk-Kazyna as a dividend in 2018.

· That entity has a utilities business and owns a non-operating BN-350 nuclear reactor, which is currently being decommissioned. In accordance with the sale and purchase agreement, in relation to its period of ownership of MAEK-Kazatomprom LLP, the Group:

• is not exposed to any liabilities associated with the reactor, unless caused by the Group's gross negligence or intentional guilty actions; and

• may be responsible for financial and environmental liabilities that may be identified in future periods relating to the utilities business.

Management believes that the Group had no obligations under this agreement as of 31 December 2018 and, accordingly, no liability is recognised in the consolidated financial statements.

· In June 2018, the Company transferred its entire block of shares in Kazakhstan Nuclear Power Plants JSC to its then sole shareholder, Samruk-Kazyna. This transaction was also cash neutral.

· In December 2018, the Company entered into an advisory and consulting services agreement with Samruk-Kazyna in relation to MAEK-Kazatomprom LLP and Kazakhstan Nuclear Power Plants JSC. According to the agreement terms, the Company will provide consulting services with respect to all matters raised for Samruk-Kazyna's consideration in its capacity as a sole participant in MAEK-Kazatomprom LLP, including the approval of the implementation plan for a management reporting system and the formation of a supervisory board and management board. The services agreement will be effective until December 2021, or until MAEK is transferred by Samruk-Kazyna to the Government of Kazakhstan (whichever comes first).

· The agreement with respect to Kazakhstan Nuclear Power Plants JSC includes the same scope of the Company's services and is expected to remain effective until December 2021, or until a feasibility study for nuclear power-plant construction is completed and approved by the competent state authorities of the Republic of Kazakhstan (whichever comes first).

· In September 2018, the Company signed an agreement to sell its 76% interest in Kyzyltu LLP to the other shareholder, Stepnogorsk Mining and Chemical Plant LLP (SMCP), for KZT 3.8 billion. Currently, the Company is awaiting payment. Under the terms of the sale and purchase agreement, from 7 December 2018, the Company will charge SMCP an amount of 0.01% of the total sum per day until the payment is completed. Ownership rights will be transferred after the Company receives the full amount of the purchase price.

· In October 2018, the Company transferred its entire interest in Sareco LLP, a company engaged in the manufacture of an insignificant volume of rare earth metal products, to the national mining company, Tau-Ken Samruk JSC, a related entity of Samruk-Kazyna.

· In December 2018, Kazatomprom-Damu LLP began the dissolution of the legal entity following approval at the Annual General Meeting.

· JV Betpak Dala LLP was also dissolved as a legal entity. All necessary liquidation measures are in progress.

· In January 2019, the General Meeting of Shareholders approved the interim liquidation balance of ULBA Conversion LLP. The legal entity is expected to be dissolved by the end of 2019.

In total, the number of Group subsidiaries, JVs, JOs and associates decreased from 50 as of 31 December 2017 to 44 as of 31 December 2018.

In 2019, the Company expects to dispose of its entire interests in Astana Solar LLP, Kazakhstan Solar Silicon LLP and MK KazSilicon LLP, as well as its holdings in Shieli-Energoservice LLP, Taukent-Energoservice LLP and Uranenergo-PUL LLP. In 2020, it expects to dispose of its entire stake in Caustic JSC.

Fluctuations in the KZT/USD exchange rate can significantly affect the Group's consolidated operating results, primarily because:

· Uranium spot prices are typically quoted in USD, so most of the Group's sales contracts and consolidated revenues are denominated in USD. In 2017, 78% of Group revenue was denominated in USD; this rose to 87% in 2018. The increase was due to higher USD revenues from the uranium segment in 2018 than in 2017.

· A substantial portion of Group expenses, including most of its operating production expenses and more than two-thirds of its capital expenditure, are denominated in KZT. The main expenses not denominated in KZT relate to the purchase of industrial pumps used in ISR operations and resins used in processing uranium.

· Most of the Group's borrowings are denominated in foreign currencies. As of 31 December 2018, 99% of the Group's borrowings were denominated in USD.

As most of the Group's revenue is denominated in USD, while a significant share of its costs is in KZT, an appreciation of the USD against the KZT generally has a positive effect on the Group's financial performance. However, because the Group has significant outstanding USD-denominated liabilities, the positive effect of an appreciating USD may be fully or partially offset. In addition, although the Company purchases uranium and uranium products from its JVs and associates under KZT-denominated contracts, the prices are determined by reference to the prevailing spot-market prices of U3O8, which are in turn denominated in USD. Accordingly, a significant appreciation of USD would result in a corresponding increase in the KZT-denominated uranium purchase costs under such contracts.

Where possible, the Group attempts to mitigate the risks associated with exchange rates by matching the currency of its interest payments and financial liabilities with the currency of its cash flows. Through this matching, the Group is able to hedge without the use of derivatives. For monetary assets and liabilities denominated in currencies other than KZT, the Group attempts to keep its net exposure to an acceptable level by buying or selling such currencies at spot rates when necessary to address short-term imbalances.

In 2018, the KZT/USD exchange rate fluctuated between KZT 332.3 and KZT 384.2 per USD. The following table provides annual average rates and year-end closing KZT/USD exchange rates.

Table 14. Annual average and year-end closing rate for KZT/USD

1 The average rates are calculated as the average of the daily exchange rates on each calendar day.

Source: National Bank of Kazakhstan

Kazakhstan's MET is determined by applying a 29% tax charge to the taxable base related to mining production costs (based on a formula - see footnotes to Table 15). Taxable expenditures are made up of all direct expenditures associated with mining operations, including wellfield development depreciation charges and any other depreciation charges attributable to direct mining activities, but specifically exclude processing and general and administrative expenses. The MET is calculated separately for each subsoil use licence.

The resulting MET paid is therefore dependent upon the cost of mining operations.

Table 15. Summary of taxes accrued by the Group

1 Applicable rate: 20%; calculation: taxable income (based on tax reporting accounts) multiplied by corporate income tax rate.

2 Applicable rate: 18.5% for uranium cost in pregnant solution; calculation: the tax charge is a cost of mining and is based on a deemed 20% profit margin on certain expenditures, and a MET rate of 18.5%. The tax charge of 29% is determined by the following formula: (1 + 20%) × 18.5% ÷ (1 - (1 + 20%) × 18.5%).

3 Applicable rate: 10-60%. Abolished as of 1 January 2018 for subsoil use licences relating to solid mineral deposits, including uranium.

4 Includes property tax, land tax, transport tax, social tax, off-budgetary payments, VAT and PIT.

Total tax accrued, including corporate income tax, MET and other taxes, increased by 37% on the year to KZT 98,816 million in 2018, due to an increased tax base resulting from higher sales volumes and higher spot prices, as well as accounting changes related to the change in the Group structure (see section Company Asset structure on page 25 for details).

Extraction of uranium using the ISR mining method requires substantial amounts of sulphuric acid. If sulphuric acid is unavailable, it could impact the Group's uranium production schedule. Higher prices for sulphuric acid could adversely impact the Group's profits.

The Group's weighted average price of sulphuric acid increased slightly to KZT 21,557 per tonne in 2018 (from KZT 21,529 per tonne in 2017). On average in 2018, the price of sulphuric acid represented about 16% of the Group's uranium production cost.

The Group reviews its estimates of Ore Reserves and Mineral Resources on a regular basis. As a result, certain Ore Reserves and Mineral Resources may be reclassified in accordance with applicable standards. Such reclassifications may have an impact on the Group's financial statements. For example, if a reclassification results in a change to the Group's life of mine plans, there may be a corresponding impact on depreciation and amortisation expenses, impairment charges, as well as mine closure charges incurred at the end of mine life.

The Company purchases U3O8 from its subsidiaries, JVs and associates, principally at spot price with discounts, which can vary by operation. Purchased volumes generally correspond to the Company's interest in the respective selling entities.

The Group's Uranium segment revenue is primarily composed of two streams:

• The sale of U3O8 purchased from JVs and associates, and

• The sale of U3O8 produced by the Company and by its consolidated subsidiaries and JOs.

Cost of sales of purchased uranium is equal to the purchase price from JVs and associates (using equity accounting), which in most cases is the prevailing spot price with certain applicable discounts. The share of results of JVs and associates therefore represents a significant part of the Group's profits and should be considered accordingly in the assessment of the Group's financial results. In 2018, the weighted average discount on pounds purchased from operations was 4.2% of the prevailing spot price.

When uranium produced by the Company, consolidated subsidiaries and JOs, is sold, the cost of sales is predominantly represented at the cost of production. For those sales, the full mining margin is therefore captured in the consolidated results of the Group.

The following table provides the volumes purchased by the Company; these volumes were accounted for using the purchase price in the Company's cost of sales for the periods indicated:

Table 16. Volume of U3O8 purchased by the Company, 2017‒2018

1 Non-controlled investment is Baiken-U LLP, with 5% direct ownership by the Company.

The volume of U3O8 purchased from JVs, associates, and non-controlled investments that is accounted for in cost of sales using purchased price, totalled 4,669 tonnes in 2018, a decrease of 47% compared to 2017 mainly due to the change in the Group structure (see section Company Asset structure on page 25 for details). Note that total volumes of purchased uranium are higher since the Company and THK also buys from subsidiaries and third parties.

KEY PERFORMANCE INDICATORS

Table 17. Consolidated financial indicators

1 In 2017 the Group recognised a gain from the exercise of a put option of KZT 107.7 billion because of the difference between the consideration received and the carrying amount of the investments.

2 Adjusted EBITDA is calculated by excluding from EBITDA all items not related to the main business and having a one-time effect.

3 Adjusted Attributable EBITDA is calculated as an adjusted EBITDA less the share of the results in the net profit in JVs and associates plus the share of adjusted EBITDA of JVs and associates engaged in the uranium segment (except Budenovskoye JV LLP's EBITDA due to minor effect it has during each reporting period) less non-controlling share of adjusted EBITDA of Appak LLP and Inkai JV LLP less any changes in the unrealised gain in the Group.

4 Due to classification of operations of MAEK-Kazatomprom LLP as discontinued.

Consolidated revenues were KZT 436.6 billion in 2018, an increase of 58% compared with 2017, mainly due to an increase in sales of uranium products as a consequence of market-share growth and the change in Group structure (see section Company Asset structure on page 22 for details).

Operating profit was KZT 77.5 billion in 2018, an increase of 138% compared with 2017, mainly due to the rise in U3O8 sales volumes, the appreciation of the USD against the KZT, and higher average sales price.

Net profit for the year was KZT 380.3 billion, an increase of 173% compared to 2017. However, a significant portion of the year-over-year increase is associated with one-time effects of transactions in both years, especially the exercise of the put option in 2017 and the change in investment value resulting from the inclusion of JV Inkai LLP, Karatau LLP, JV Akbastau JSC in the consolidation (see section Company Asset structure on page 22 for details). The one-time effects of these transactions increased net income by KZT 107.7 billion and KZT 313.5 billion in 2017 and 2018 respectively. Adjusting for those effects, adjusted net profit was KZT 66.8 billion, an increase of 112% compared to 2017.

Adjusted EBITDA totalled KZT 131.3 billion in 2018, an increase of 36% from 2017, while adjusted attributable EBITDA was KZT 140.2 billion, an increase of 9% compared with 2017. The increases were mainly driven by the increase in operating profit and the change in Group structure (see section Company Asset structure on page 22 for details).

For similar reasons, operating cash flows totalled KZT 58.3 billion, an increase of 149% from 2017.

Table 18. Production and sales metrics

1 Group production volumes as U3O8 (attributable basis) are not equal to the volumes purchased by the Company and THK.

Production volumes of U3O8 on a 100% basis decreased by 7% at all uranium mining entities for 2018, compared to 2017. Production was reduced in accordance with the Company's decision that saw production at all operations reduce by 20% against subsoil-use licence volumes. Attributable production volumes were lower for the same reason.

Consolidated U3O8 sales volumes in 2018 totalled 16,647 tonnes, an increase of 65% compared to 2017. Consolidated sales in 2018 were favourably impacted by the sale of 3,112 tU to uranium fund Yellow Cake PLC following its initial public offering; the effect of the change in the Group structure; and transformation of the Group's marketing sales function that included the creation of THK, which resulted in the acquisition of new customers and higher direct contracting without the use of intermediaries.

Consolidated Group inventory of finished U3O8 products at 31 December 2018 amounted to 7,892 tU, which is 13% lower than at the end of 2017. At the HQ/THK level, inventory of finished U3O8 products was 7,353 tU, a decrease of 18% compared to 2017. The lower inventory levels are the result of an increase in sales volumes in 2018, as well as the Company's target to maintain an optimum inventory level of approximately six months of annual attributable production.

The average KZT sales price realised by the Group in 2018 was KZT 21,930 per kg (24.46 USD/lb), an increase of 8% compared to 2017 due to the increase of average spot price for uranium products and the appreciation of USD against KZT.

Table 19. Uranium segment financial metrics

1 Excludes liquidation funds and closure costs and includes expansion investments. In section Error! Reference source not found. total results includes liquidation funds and closure cost.

Consolidated U3O8 sales were KZT 365.1 billion in 2018, an increase of 79% compared to 2017, mainly due to an increase in sales of uranium products, reflecting market share growth and the change in the Group structure.

Attributable Cash Cost (C1) and All-In-Sustaining Costs (AISC) decreased by 4% and 6% respectively in 2018, compared to 2017. The decreases were primarily due to depreciation of KZT. It should be noted that despite of the 7% decrease in production volumes (see section Production and Sales metrics for details), the cost of production per unit in KZT changed insignificantly due to cost optimisation efforts to further position the Group's U3O8 unit production costs among the lowest in the industry.

Investment costs of mining companies (on 100% basis) totalled KZT 75.4 billion, a decrease of 7% compared to 2017, mainly due to the decrease of sustaining capital costs substantiated by the cost optimisation programme (see section Capital Expenditures Review for details).

Table 20. UMP segment

Increased consumer demand for beryllium and tantalum products in 2018 resulted in higher sales.

Sales of niobium in 2018 decreased compared to the prior year due to a reduction in quantity of orders for niobium alloying additives and for niobium-containing sublimates.

Table 21. UO2 power and fuel pellets

Sales of fuel pellets in 2018 increased to 84.3 tons, 12% higher than in 2017 due to increased amounts of tolling services according to customer agreements.

Sales volumes of ceramic powder in 2018 were unchanged compared to 2017.

The decline in sales volumes of dioxide from scraps is due to a reduction in scrap recycling.

Table 22. Other segments

1 All indicators include intra-group transactions (eliminations), for more details see the annual financial statements.

Other segments include services such as drilling, transportation of commodities and sulphuric acid, R&D and training which are provided to mining entities.

Total external revenue from other segments was 79.2 billion in 2018, which was similar to 2017. External revenue from the Other segments represented about 7% of the Group's total consolidated revenue in 2018, compared to about 14% in 2017. A decrease in the Other segments gross profit is mainly due to the change in the Group structure (see section Company Asset structure on page 22 for details).

CAPITAL EXPENDITURES REVIEW

The Group primarily incurs capital expenditures in relation to its subsidiaries engaged in the mining of natural uranium, as well as expenditures of a similar nature relating to its JVs and associates engaged in the mining of natural uranium. Such expenditures are comprised of the following key components:

• Well construction costs;

• Expansion costs, which typically include expansion of processing facilities, extension of services and transport routes to new wellfield areas, implementation of new systems and processes;

• Sustaining capital - largely reflecting recurring, infrastructure, maintenance and equipment replacement related costs which are assumed to cease three years prior to cessation of production;

• Liquidation-fund contributions and mine-closure costs, which are not included in the calculation of AISC

The following table provides the capital expenditures for the Group's subsidiaries, JVs and associates engaged in uranium mining for the periods indicated. Capital expenditure amounts shown were derived from stand-alone management information of certain entities within the Group on an unconsolidated basis, and they are therefore not comparable with or reconciled to the amounts of additions to property, plant and equipment as presented in the financial statements. Investors are strongly cautioned to not place undue reliance on capital expenditure information, as it represents unaudited unconsolidated financial information on an accounting basis which is not in compliance with IFRS:

Table 23. Group capital expenditure (KZT millions)

1 Well construction

2 Sustaining

3 Liquidation fund/closure

4 Includes expansion investments in amount of KZT 4.6 billion.

5 As of 31 December 2018, the share in Kharassan was 50%, in Baiken-U, 52.5%.

In order to achieve the planned levels of production, on an annual basis, the Group's mining companies assess the required level of wellfield and mining preparation based upon the availability of reserves. These costs relate to the capitalised costs of maintaining the sites, with the main component being wellfield construction.

Diagram 1. Wellfield construction and sustaining costs, 2018 in KZT millions

Table 24. Wellfield construction and sustaining costs

1 Excludes expansion investments of KZT 4.6 billion

Wellfield construction and sustaining costs for the 13 mining entities in 2018 amounted to KZT 70.8 billion, which is 13% lower than in 2017. The change was mainly due to the decrease of sustaining capital expenses related a cost optimisation program. A 3% rise in the cost of well construction is related to higher piping costs, higher pump prices combined with KZT depreciation.

Diagram 2. Production vs. increase in ready-to-mine reserves, tonnes

During 2018, 23,199 tU of reserves were added to production, down 11% from 2017. The increase in ready-to-mine reserves was smaller due to lower uranium production volumes in the mine plan in 2018 compared with 2017. The increase in ready-to-mine reserves is made according to the results of the GPR complex that included construction of technological wells on technological blocks, piping of technological wells and technological blocks, acidification of technological blocks. KAP4

The information presented in Table 25 reflects wellfield development depreciation (commonly known as PGR), property, plant and equipment, and depreciation and amortisation data for each mining asset as of 31 December 2018.

Table 25. Depreciation and amortisation, 31 December 2018

RESERVES AND GEOLOGICAL SURVEYS

Diagram 3. Reserves and resources, 31 December 2018, thousand tU

Mineral reserves of all mining assets as of 31 December 2018 (including annual depletion) totalled an estimated 520,600 tU, (100% basis, 305,600 tU attributable to the Company, or 59%). Total mineral resources (including reserves) were estimated at 740,000 tU (100% basis, 476,700 tU attributable to the Company). In comparison to the first half of 2018, as reported in the IPO prospectus, total resources increased by about 66,000 tU (100% basis, about 41,000 attributable).

The Company pays significant attention to the evaluation of prospective deposits and the projects portfolio, including exploration projects. In 2018, the Company was awarded uranium exploration contracts for site No. 2 and No. 3 of the Inkai deposit with duration of 4 years. According to the Report of the Competent Authority of the Ministry of Energy of the Republic of Kazakhstan, as of 1 July 2017, the mineral resources for sites No. 2 and 3 are 125,100 tonnes (of which 42,000 tonnes are on site No. 2, and 83,100 tonnes on site No.3). In 2019, the Company plans to start geological studies on site No.2 of the Inkai deposit.

FINANCIAL ANALYSIS

The table below shows financial information related to the consolidated results of the Group for 2017 and 2018:

Table 26: Key financial information, 2017‒2018

1 Includes the gain in amount of KZT 5 million from other investments.

² Due to classification of operations of MAEK-Kazatomprom LLP as discontinued.

Net profit of the Group in 2018 is significantly affected by the transactions related to change in the Group structure:

• a gain from increase of additional interest in JV Inkai LLP of KZT 95,929 million

• a gain from the change of classification of Karatau LLP and JV Akbastau JSC to joint operations of KZT 124,632 million and KZT 92,951 million, respectively

The components of revenue, cost of goods sold, general and administrative expenses, distribution costs, and other income and expenses are changed in 2018 compared to 2017 due to the change in the Group structure (see section Company Assets Structure on page 22 for details).

Diagram 4. Revenue by source (KZT millions)

The main factors influencing the change in revenue in 2018 compared to 2017 are presented in the graph below:

Diagram 5. Sources of changes in revenue (KZT millions)

Cost of sales totalled KZT 313,817 million in 2018, an increase of 49% compared to 2017. The increased is mainly due to higher uranium sales volumes in 2018 and the change in the Group structure (see section Company Assets Structure on page 22 for details).

The table below shows the Group's cost of sales for 2017 and 2018 by component:

Table 27. Cost of sales by component, 2017‒2018

The cost of materials and supplies was KZT 202,817 million in 2018, an increase of 41% from 2017. The increase was largely due to higher uranium sales volumes and the change in the Group structure.

Wages and salaries totalled KZT 24,024 million in 2018, an increase of 5% from 2017, mainly due to the change in the Group structure.

The cost of processing and other services was KZT 10,354 million in 2018, an increase of 105% from 2017, mainly as a result of higher costs associated with third-party services.

The other cost categories - including depreciation and amortisation, taxes and other expenses, and other - totalled KZT 76,622 million in 2018, an increase of 100% from 2017, mainly due to the consolidation of expenses attributable to JV Inkai LLP and an increase in sales of uranium products at Group level compared with products purchased from JVs and associates during 2018.

The main factors influencing the change in cost of sales in 2018 are presented in the graph below:

Diagram 6. Changes in cost of sales, 2018 vs. 2017 (KZT millions)

Table 28. Selling expenses, 2017‒2018

Selling expenses totalled KZT 10,530 million in 2018, an increase of 144% from 2017, mainly due to an increase in the costs of loading, transporting and storing (associated with higher uranium sales volumes) and the change in the Group structure.

Selling expenses related to sales of HQ/THK volumes increased by 123% on the year in 2018. This constituted 29% of the total increase in selling expenses; the remainder related to the change in the Group structure (see section Company Assets Structure on page 22 for details).

Table 29. General and administrative expenses, 2017‒2018

G&A expenses were primarily influenced by the change in the Group structure, including wages and salaries (KZT 17,809 million in 2018, 8% higher than 2017), rent expenses (1,166 million, 7% higher than 2017), and depreciation and amortisation (KZT 808 million, 16% higher than 2017).

The cost of consulting and information services was KZT 4,488 million in 2018, an increase of 42% from 2017, largely due to an increase in services purchased by the Company during 2018.

Other expenses totalled KZT 10,534 million in 2018, an increase of 21% from 2017. The increase was largely related to expenses on the construction of social facilities in the newly formed Turkestani region. Other expenses also includes maintenance and repairs, travel expenses, communication expenses, materials, taxes other than income tax, utility costs, corporate events, fines and penalties, and certain other expenses.

The share of results of associates and JVs in 2018 was KZT 18,042 million, a decrease of 59% from 2017. The decrease was mainly down to the change in Group structure (see section Company Assets Structure on page 22 for details). The increase in the average spot price in 2018 compared with 2017 positively impacted the operating results of the associates and JVs and their resulting contributions to the Group.

Diagram 7. Profit before tax and tax expense, 2017‒2018, KZT millions

Table 30. Profit before tax and tax expense, 2017‒2018

The Group's profit before tax was KZT 407,959 million in 2018, an increase of 165% from 2017. The increase was mainly due to the change in the Group structure and the resulting recognition of a KZT 313.5 billion profit related to the business combination, as well as higher uranium sales volumes in 2018.

The corporate tax rate applicable to the majority of the Group's profits was 20% in both 2018 and 2017. The Group's effective tax rates were 11% and 7% in 2017 and 2018, respectively. The effective tax rate differed from corporate income tax primarily due to certain elements of reported income not being recognised in tax accounting.

LIQUIDITY AND CAPITAL RESOURCES

Kazatomprom's management pays special attention to preserving financial stability in a constantly changing market environment. The Group's financial management policy is aimed at maintaining a strong capital base to support existing operations and business development.

The Group's liquidity requirements primarily relate to funding working capital, capital expenditures, service of debt, and payment of dividends. The Group has historically relied primarily on cash flow from operating activities, and to a smaller degree, external sources of financing, to fund its working capital and long-term capital requirements. It is expected that there will be no significant change in the sources of the Group's liquidity in the foreseeable future. As required, the Company will consider entering into project financing arrangements to fund certain investment projects. The Group also obtains capital for its operations through the formation of joint ventures with industry partners, and in the past, it has raised financing in the international debt capital markets.

The Company is the parent company for the Group, and in addition to revenue from its business operations, it receives dividends and other payments from its subsidiaries, JVs and associates, and other investments. In 2017 and 2018, the Group received dividends of KZT 36,486 million and KZT 12,773 million, respectively, from its JVs and Associates and other investments. The decrease in 2018 was primarily due to the change in the Group structure (see section Company Assets Structure on page 22 for details). The Company strives to use its voting power to maximise its dividend flow from subsidiaries, JVs and associates. Dividends received by the Company from investees domiciled in the Republic of Kazakhstan are exempt from dividend tax.

In 2018, the Company paid dividends in the amount of KZT 161,661 million to Samruk-Kazyna.

The table below provides the Group's working capital as at 31 December 2017 and 2018:

Table 31. Group working capital, year end, 2017 and 2018

1 Include the MAEK as of 31 December 2017

2 Excluding the MAEK due to the disposal from the Group.

The Group's net working capital remained positive during all periods under review. The Company regularly monitors the cash position of its subsidiaries and focuses on effectively collecting excess cash from such subsidiaries.

Table 32 summarises the Group's turnover of inventories, receivables and payables, and provides details of the Group's cash conversion cycle (in days), at 31 December 2017 and 2018:

Table 32. Turnover of inventories, receivables and payables and cash conversion cycle

1 For the comparison purpose the Inventories, Receivables and Payables of the MAEK were excluded in 2017. Also, in the consolidated statement of Profit and Loss, the MAEK was reclassified as discontinued operations as in 2017.

The increase in the cash conversion cycle in 2018 is largely due to increased sales volumes of finished goods, repayments of accounts payable in 2018, and the change in the Group structure (see section Company Assets Structure on page 22 for details).

The Group constantly monitors the uranium market and may pursue a strategy of increasing its inventories in unfavourable market conditions. The following table sets forth the components of the Group's inventories as at 31 December 2017 and 2018:

Table 33. Group inventories, year end, 2017 and 2018

The Group's largest inventory item is finished goods and goods for resale, which primarily consist of U3O8. In line with its market-oriented strategy, the Group's inventory levels decreased in 2018 due to the increase of sales volumes including U3O8 and other goods sold by the Group. Consolidated inventory levels of U3O8 decreased by 13% whereas Finished goods and goods for resale in the table above decreased by 7%. The difference is largely because inventories in 2018 includes uranium purchased from JVs and associates, the cost of which was higher in 2018 compared to 2017 due to higher spot market prices and exchange rates in 2018.

The Company expects to maintain inventory levels of approximately six months of annual attributable production.

The following cash flow discussion is based on, and should be read in conjunction with, the financial statements and related notes.

The following table provides the Group's consolidated cash flows for 2017 and 2018:

Table 34. Group consolidated cash flows, 2017‒2018

1 Includes income tax and interest paid.

Cash flows generated from operating activities increased to KZT 58,327 million for 2018 from KZT 23,355 million for 2017. This change was primarily due to:

· a KZT 120,952 million increase in cash receipts from customers in 2018. This increase was largely due to an increase in the Group's sales volumes and the change the Group structure (see section Company Assets Structure on page 22 for details).

· a KZT 69,024 million increase in payments to suppliers for 2018. This increase was largely due to payments of accounts payable in 2018 which were greater than payments of accounts payable during 2017, and the change the Group structure (see section Company Assets Structure on page 22 for details).

There was net cash used in investing activities in 2018 of KZT 40,279 million compared to net cash from investing activities of KZT 215,575 million in 2017.

In the prior year, investing cash flows were significantly affected by the receipt of KZT 173,719 million relating to a put option held by the Company, which it exercised.

Other changes in investing cash flows in 2018 are due to:

· KZT 23,713 million decrease in dividends received from associates, JVs and other investments as a result of the change in the Group structure (see section Company Assets Structure on page 22 for details).

· KZT 34,193 million payments for the acquisition of 40.05% shares in Energy Asia Limited and a 16.02% stake in the chartered/authorised capital of JV Kharasan-U LLP from Energy Asia Holdings (BVI) Limited. In the consolidated financial statements, it is presented as an acquisition of interest in controlled entities, net of cash acquired, in accordance with IFRS.

Cash flows used in financing activities increased to KZT 139,272 million in 2018 from KZT 74,881 million for 2017. This change was primarily due to:

· an increase of KZT 95,812 million in dividends paid to Samruk-Kazyna in 2018 compared 2017;

· a KZT 86,324 million increase in cash used in repayment of loans and borrowings in 2018, due to early repayment for loans related to Astana Solar LLP, MK KazSilicon LLP and Kazakhstan Solar Silicon LLP, and the change in the Group structure (see section Company Assets Structure on page 22 for details). 

In 2018, there was a KZT 117,754 million, or 223%, increase in proceeds from loans and borrowings compared to the prior year. The increase was primarily attributable to short-term borrowings by the Group to finance the Group's payments for the increased share in Baiken-U LLP and Kharasan-U LLP, and working capital requirements.

The Group manages its liquidity requirements to ensure sufficient funds are available for operations and for settlement of financial obligations.

The Group ensures the availability of funds on demand in amounts sufficient to cover expected operating expenses using, among others, short-term as well as long-term corporate credit lines without collateral.

Table 35. Liquidity, year end, 2017 and 2018

The Group's cash and cash equivalents as at 31 December 2017 and 2018 were KZT 239,936 million (includes cash receipt from put-option exercising) and KZT 128,819 million, respectively. The decrease as of 31 December 2018 is mainly caused by dividends paid Samruk-Kazyna in 2018 and scheduled repayment of debt.

The corporate credit lines are an additional liquidity source for the Company. At 31 December 2018, the Company with certain subsidiaries had total available revolving credit facilities of USD 302.5 million of which USD 222.5 million or 74% was undrawn at that date.

INDEBTEDNESS

The Company's financial liabilities comprise loans and guarantees issued for loans of affiliated companies. The debt portfolio is primarily in USD, which is its main revenue currency (99% for 2018). As a result, the Company has a natural economic hedge of USD/KZT foreign-currency risk without the use of derivative financial instruments.

Table 36. Total Debt

The following table summarises the Group's indebtedness as of December 31, 2017 and 2018:

Table 37. Total Group's indebtedness

Total debt increased by 64% largely due to the consolidation of Inkai JV LLP's debt of KZT 35,085 million, and an increase in short-term loans to finance the Group's payments for the increased share in Baiken-U LLP and Kharasan-U LLP, and for working capital requirements.

On October 11, 2018, the Group issued bonds indexed to the US dollar in the amount of KZT 70,000 million with an annual rate of 4.6% to supplement working capital requirements in accordance with Kazakhstan legislation. Bonds to be redeemed in November 2019.

The following table summarises the Group's weighted average interest rate on bank loans as at 31 December 2017 and 2018:

Table 38. the Group's weighted average interest rate

The Group's credit facilities contain certain affirmative and negative covenants described in the annual financial statement.

The following table summarises the key ratios used by the Company's management to measure its financial stability as at 31 December 2017 and 2018:

Table 39. The key financial stability ratios

The above indicators reflect a stable financial position. They indicate the creditworthiness of the Company, achieved through the generation of adequate financial resources and capital, and moderate debt.

GUIDANCE FOR 2019

Table 40. Guidance indicators