TAU.L Regulatory News (TAU)

25 Mar 2008 07:01

Tau Capital PLC25 March 2008 Tau Capital plc Preliminary Results Announcement Tau Capital plc ("Tau" or the "Company"), an investment company investing inboth public and private businesses that are established in, operating in or haveexposure to Kazakhstan and the surrounding regions, today announces its maidenresults since its admission to AIM on 9 May 2007 for the period ended 31December 2007. Highlights: •Successful admission to AIM raising US$250 million (before expenses) completed in May 2007 •Audited NAV as at 31 December 2007 of $0.95 (after deducting upfront costs relating to the admission of approximately $0.04 per share) •Approximately 80% of the capital raised invested, predominately in publicly listed securities •First private equity investment in Kazakhstan made in October 2007 •Well positioned to continue to invest in further opportunities that are expected to generate strong returns for its shareholders Further enquiries: Tau Capital plc Tel: +44 (0) 1624 681250Graham Smith / Cynthia Edwards Numis Securities Limited Tel: +44 (0) 207260 1000Nick Westlake / Alex Ham Chairman's Statement In my first statement as Chairman of Tau Capital plc, I am delighted to be able to report that in spite of the fact that a substantial part of the period since inception in May 2007 to the end of 2007 has been very challenging, the Company has made encouraging progress in the execution of its investment strategy. In May 2007, the Company floated on the Alternative Investment Market (AIM) of the London Stock Exchange on 9 May 2007, successfully placing 251 million ordinary shares at $1.00 per share and raising US$250 million, before issue costs. Upfront costs relating to the admission of the Company's ordinary shares to AIM, corresponding to approximately $0.04 per share, were deducted in calculating the monthly and end of year Net Asset Value (NAV). With this in mind, the audited NAV of $0.95 (please refer to Note 16 for further details) as at 31 December 2007 represents a sound performance by the Company over the period. During the same period and amidst a turbulent investment environment, the MSCI World index gained 0.63% while the Kazakh stock index, KASE, fell 1.05%. Since admission, the Company has committed approximately 80% of the capital raised, predominately in publicly-listed securities, and has taken a cautious approach to private equity opportunities in the expectation that the parameters for these deals will improve. It remains well positioned to continue to invest in further opportunities that are expected to generate strong returns for its shareholders. Philip LambertChairman March 2008 Investment Manager's Report The table below outlines the reported monthly NAV (net of fees and expenses) and performance of the Company since admission: Reported Monthly Net Asset Value (NAV) NAV 1 Month perf % 31 May 2007 $0.95 (4.53%) 30 June 2007 $0.97 1.19% 31 July 2007 $0.93 (3.25%) 31 August 2007 $0.92 (2.06%) 30 September 2007 $0.94 2.24% 31 October 2007 $0.99 6.08% 30 November 2007 $0.94 (5.15%) 31 December 2007 $0.96 * 2.45% * * Admission date: 9 May 2007 ** The audited NAV of the Company as at 31 December 2007 was $0.95. Please refer to Note 16 for further details. Public Equity The first few months following the Company's admission were focused on deploying the capital raised into public equities. Tau's public equity portfolio (the "Portfolio") can be characterised by two distinct segments: stocks listed on the Kazakh stock exchange, KASE, and stocks listed on international markets. The Kazakh listed stocks are dominated by banks in terms of liquidity and market capitalisation while the internationally listed stocks consist primarily of resource based companies. Over this initial period, we maintained a large exposure to metals and oil and gas companies while having a relatively low exposure to Kazakh banks. Performance of the Portfolio was primarily hampered by its exposure to Uranium stocks, whereby the spot Uranium price fell to $85 per pound by late August 2007 after reaching $135 per pound in June 2007. By the end of August 2007, the Portfolio was 80% invested. While bank stocks constitute close to 60% of the KASE index, the Portfolio held only around 14% of such stocks due to our concerns about the rapid loan growth of the banks and the extent of dependence on foreign borrowing. The sub prime scare in August crystallised our concerns. The Portfolio's large cash exposure also dampened the impact of Augusts' market correction. September and October 2007 both proved to be good months as financial marketswere buoyed by the response of the monetary authorities to the sub-primeproblem. However, Kazakh banks took a knock in October as the credit ratingagencies cut the sovereign rating. The stocks fell sharply but staged a dramaticrecovery once the central bank assured the market that it would take anynecessary action to support the Kazakh financial system. The rating agencies hadalso put the banks on a watch list and downgraded the major banks' debt ratingsat the end of October causing bank stocks to retreat to their earlier lows.Moreover, on 1 October 2007, the KASE introduced a new total return index. Theprevious measure was based on market capitalisation, resulting in new issuesaffecting index performance. The index is represented by twelve issues, mostlybanks with representation from KazMunaiGas and Kazakhtelecom. Global financial markets experienced another tumultuous month in November 2007.Concerns over the impact of the sub-prime crisis worsened as the major US banksannounced significant write downs of their asset base. These worries hurt globalmarkets and at one point the markets experienced significant declines, with theS&P 500 index down over 9% on the month, while the MSCI Emerging Markets indexfell by 11% over the same period. There was some respite in the markets however,as investors were encouraged by the expectation that the US Federal Reservewould cut interest rates at its next meeting. The Kazakh market was unable toescape worries over sub-prime, especially as it is dominated by financials. TheKASE finished the month down 5.2% in US dollar terms, while Tau's NAV fell by anequal amount. December proved to be a turbulent end to 2007. The markets remained concerned about the extent of the prospective slowdown in the US economy, coupled with rising inflationary pressures. The US Federal Reserve's 25bp rate cut on 11 December 2007 injected liquidity into the markets in a coordinated action with the European Central Bank; however, this did little to stem the decline in the equity markets. The MSCI World index fell 1.3% while the MSCI Emerging Markets index managed to deliver a small positive return of 0.4%. The Kazakhstan stock market had a better month in December, largely due to increased trading at the end of the month which pushed the index up 2.9% in US dollar terms. Of the KASE index's 12 constituents, six were negative. The Portfolio performed well in the midst of the market turbulence, gaining 2.5% in the month. Gold stocks contributed strongly, as did oil stocks. Although the Portfolio had limited exposure to financials relative to the local market exposure, it was not immune to their poor performance. Most metals, especially copper, were weaker on the back of concerns of a weaker demand environment; however, gold was seen as a safe haven and climbed from $783.50 troy oz on 1 December 2007 finish the year at $833.75 troy oz. The Kazakh metals producer ENRC, one of the biggest producers of ferrochrome in the world, made its debut on the UK main market in December 2007. The IPO, one of the largest on the UK exchange in 2007, raised over US$3 billion which implied a market capitalisation of over US$15 billion for ENRC. The stock price rose 16% on the first day, giving a genuine endorsement to the value of resource based assets in Kazakhstan. Our concerns of market volatility led us to reduce the market exposure of the Portfolio in the fourth quarter of 2007, leaving it predominantly exposed to stock specific risk. We introduced short positions in sector indices and some major stock indices at the end of November, and continued to increase these in the early part of December, giving us some comfort going into the normally thin Christmas trading period. Of the total Portfolio, around 20% was hedged and 20% held in cash at the end of December 2007. 2007 was a year in which the Kazakhstan financial markets hit their first real hurdle after some very good years. We anticipated some degree of correction with the Kazakh banks, as we felt they had over-extended their borrowings and valuations were unsustainable. The change in recent fortunes will be positive overall for the development of the Kazakh equity market. Firstly, Kazakh banks will need to adjust their business models and be more inventive with sourcing of funds locally. Secondly, Kazakh domestic companies have historically favoured debt financing and a much tighter financing environment should encourage them to raise equity instead. Financial markets have begun 2008 on a rather depressed note. Fears of a recession in the US and the consequences of global economic growth had a negative impact on the markets and at one stage during January 2008 major markets across the globe were down between 15-20%. The US Federal Reserve reacted with a sharp rate cut to stem the market turmoil and markets responded positively, retracing about half of the drop. During the first quarter of 2008, the Portfolio has been insulated to a degree with its short and cash position. Additionally, individual stock positions have held up reasonably well under the circumstances and portfolio volatility has been limited. Outlook - Public EquityIn terms of the Kazakhstan economy for 2008, we expect GDP growth of between 6% and 8%. This should be supported by the strong oil price and demand for basic materials - there is no indication that demand from China and India will decline in the near future. Inflation however, is a concern as PPI has been rising in recent months. The Kazakh government has recently announced a special working group with a mandate to introduce measures to stabilise the price of food and vegetable oil, which represents 38% of CPI. There is no indication that the Kazakh Central Bank will raise interest rates further from current levels. With an estimated combined $40 billion in Kazakhstan National Bank FX reserves and in the Kazakhstan National Fund (Future Generations fund), there is also strong support in case of any further fallout in the banking sector. On a risk-reward basis we believe Kazakhstan is well placed amongst other emerging markets. It has a strong resource base with a stable political environment and increasingly market-friendly regulation. Asset prices remain very favourable compared to other resource-based markets and there is still further potential for significant discoveries in the region. In the short-term we remain cautious about the overall market as major movements in global markets will impact Kazakh stocks. However, we will act on opportunities to build positions in companies at attractive prices. Our positive long-term view on the potential of the Kazakhstan and Central Asia investment environment remains unchanged. Private EquitySince admission, we have seen significant positive changes in the market for private equity deals in Kazakhstan driven by macroeconomic developments. In the second and third quarters of 2007, vendors demanded relatively high prices as we faced strong competition from the private equity funds sponsored by the Kazakh banks. As the credit crunch gathered pace in the fourth quarter, forcing local banks to withdraw from private equity activities and concentrate on active management of their existing credit portfolios, we came across more attractively priced investment opportunities. In October 2007, the Company made its first private equity investment in Kazakhstan. The Company acquired a substantial minority stake in DTV, an Almaty-based cable TV operator, funded in two tranches and structured as a shareholder loan. We believe that the cable TV market in Kazakhstan is poised for strong growth and consolidation as consumers migrate from analogue to digital service offerings and take up of broadband internet accelerates. DTV has a strong and energetic management team which, combined with a strong service offering, gives them the opportunity to become one of the market leaders. The proceeds from the investment were used to pay down existing debt, undertake an acquisition of an incumbent telecom operator in Western Kazakhstan, and to fund capital expenditures and operating expenses. The Company continues to actively look for additional acquisition opportunities. Outlook - Private EquityTau is well positioned to take advantage of the improved private equity environment in Kazakhstan, following the impact of the credit crunch. We are actively pursuing a number of private equity opportunities in the telecom, media and natural resources sectors. Our efforts are focused on core investment opportunities in Kazakhstan with potential add-on acquistions in Uzbekistan and Krygyzstan. Spencer House Compass Capital Limited March 2008 Staffing Alex Bezugly has been providing oversight and governance activities in relationto the Company's private equity investments under a consultancy arrangement withthe Investment Adviser, Spencer House Capital Management LLP (SHCM). He has beenproviding these services on a part time basis. Alex has recently relocated toMoscow, but continues to make his services available to the Company via SHCM.The Company anticipates that the number of private equity opportunities inKazakhstan and the surrounding region will increase in the coming months andSHCM has agreed with the Company to expand its private equity capacity. SHCM iscurrently seeking to recruit a permanent and full time private equity specialistto work closely with its Kazakhstan partners, Compass Asset Management Ltd.Until this hire is complete, Alex will continue to provide consultancy servicesto the Company via the Investment Adviser. Consolidated Income Statement for the period from 3 April 2007* to 31 December2007 Group 2007 Notes US$Investment incomeInterest income 2,392,119Dividend income 1,395,630Less: withholding tax (139,783)Net trading income 3 31,129 ----------Total operating income 3,679,095 ---------- ExpensesOperating expenses 8 (4,095,225) ----------Loss for the period (416,130) ---------- Earnings per Share 17 US$(0.00) Consolidated and Company Balance Sheets as at 31 December 2007 Group Company 2007 2007 Notes US$ US$AssetsCash and cash equivalents 7 257,890 -Amounts due from brokers 6 42,219,132 -Financial assets at fair value throughprofit or loss 3 221,348,495 -Investment in subsidiaries 18 - 239,592,423Interest receivable 325,665 -Dividends receivable 7,124 -Prepaid insurance 99,427 - ---------- ---------Total assets 264,257,733 239,592,423 ---------- --------- LiabilitiesFinancial liabilities at fair valuethrough profit or loss 3 (24,042,603) -Accounts payable and accrued expenses 8 (622,707) - ---------- ---------Total liabilities (24,665,310) - ---------- --------- ---------- ---------Total net assets 239,592,423 # 239,592,423 ========== ========= Shareholders' equityShare capital 5,002,179 5,002,179Share premium 235,006,374 235,006,374Retained deficit (416,130) (416,130) ---------- ---------Total shareholders' equity 239,592,423 239,592,423 ========== ========= Net asset value per share $0.95 $0.95 Consolidated and Company Statement of Changes in Equity for the period from 3April 2007* to 31 December 2007 Group 2007 2007 2007 2007 Share capital Share premium Retained Total deficit US$ US$ US$ US$ Balance at 3 April - - - -2007 Issue of ordinaryshares 5,002,179 245,997,821 - 251,000,000 Share issue costs - (10,991,447) - (10,991,447) Loss for the period - - (416,130) (416,130) -------- --------- ----------- ----------Balance at 31December 2007 5,002,179 235,006,374 (416,130) 239,592,423 ======== ========= =========== ========== Company 2007 2007 2007 2007 Share capital Share premium Retained Total deficit US$ US$ US$ US$ Balance at 3 April - - - -2007 Issue of ordinaryshares 5,002,179 245,997,821 - 251,000,000 Share issue costs - (10,991,447) - (10,991,447) Loss for the period - - (416,130) (416,130) -------- --------- ----------- ----------Balance at 31December 2007 5,002,179 235,006,374 (416,130) 239,592,423 ======== ========= =========== ========== *Date of incorporation. Consolidated and Company Cash Flow Statement for the period from 3 April 2007*to 31 December 2007 Group Company 2007 2007 US$ US$ Cash flows from operating activitiesLoss for the period (416,130) (416,130) Adjustments to reconcile decrease in netassets to net cash used in operatingactivitiesAmounts due from brokers (42,219,132) -Purchase of financial assets and settlementof financial liabilities (510,378,900) -Sale of financial assets and settlement offinancial liabilities 314,937,337 -Realised gain on investments (8,400,459) -Net change in unrealised loss on investments 6,536,130 416,130Increase in interest receivable (325,665) -Increase in dividends receivable (7,124) -Increase in prepaid insurance (99,427) -Increase in accounts payable and accruedexpenses 622,707 - ---------- ---------Net cash used in operating activities (239,750,663) - ---------- --------- Cash flows from investing activitiesSubscription for shares in subsidiaryundertakings - (240,008,553) ---------- --- ---------Net cash used in investing activities - (240,008,553) ---------- --- --------- Cash flows from financing activitiesGross proceeds from issue of ordinary shares 250,000,000 250,000,000Share issue costs (9,991,447) (9,991,447) ---------- ---------Net cash provided by financing activities 240,008,553 240,008,553 ---------- --------- Net increase in cash and cash equivalents 257,890 - Cash and cash equivalents at beginning of - -period ---------- ---------Cash and cash equivalents at end of period 257,890 # - ---------- --------- Supplementary disclosure of cash flowinformationDividends received 1,248,723 -Dividends paid - -Interest received 2,066,454 -Interest paid (16,665) - *Date of incorporation. Schedule of Investments as at 31 December 2007 % of Shares Investment name Fair value net assets Financial assets at fair value through profit or loss Equities - public Canada Gold Mining 1,372,500 Centerra Gold Inc. 17,257,949 7.20% Other 3,928,590 1.64% Metals Diversified 1,662,620 Uranium One Inc. 14,841,369 6.19% Other 5,598,480 2.34% Oil Exploration 941,730 0.39% ---------- --------- 42,568,118 17.76% Kazakhstan Commercial Banks (non-US) 41,135,437 17.18% Oil Exploration 960,000 KazMunaiGas Exploration Production 29,280,000 12.22% Paper and Related Products 8,320,000 3.47% Telecom Services 7,027,731 2.93% ---------- --------- 85,763,168 35.80% Ireland Oil Exploration 2,019,506 Dragon Oil Plc 13,889,227 5.80% ---------- --------- 13,889,227 5.80% Jersey Gold Mining 6,576,450 2.74% ---------- --------- 6,576,450 2.74% United Kingdom Investment Companies 11,927,478 4.98% Metals Diversified 15,105,783 6.30% Oil Exploration 13,240,615 5.53% ---------- --------- 40,273,876 16.81% United States of America Oil Exploration 2,496,215 BMB Munai Inc. 15,576,382 6.50% ---------- --------- 15,576,382 6.50% Equities - private Kazakhstan Telecom Services 3,776,000 1.58% ---------- --------- 3,776,000 1.58% ---------- ---------Total equities 208,423,221 86.99% ---------- --------- Money market instrument Kazakhstan Commercial Banks (non-US) 11,266,240 4.70% ---------- --------- 11,266,240 4.70% ---------- ---------Total money marketinstrument 11,266,240 4.70% ---------- --------- Options United States of America Gold Mining 717,511 0.30% Oil Exploration 120,000 0.05% ---------- --------- 837,511 0.35% ---------- ---------Total options 837,511 0.35% ---------- --------- Contracts for difference Europe Financials 458,257 0.19% ---------- --------- 458,257 0.19% United Kingdom Financials 363,266 0.15% ---------- --------- 363,266 0.15% ---------- ---------Total contractsfor difference 821,523 0.34% ---------- --------- ---------- ---------Total financialassets at fairvalue throughprofit or loss 221,348,495 92.38% ---------- --------- Financial liabilities at fair value through profit orloss Equities - public Malaysia Building Products (2,269,288) (0.95%) ---------- --------- (2,269,288) (0.95%) United States of America Financials (10,778,601) (4.49%) ---------- --------- (10,778,601) (4.49%) ---------- ---------Total equities (13,047,889) (5.44%) ---------- --------- Options United States of America Gold Mining (667,335) (0.28%) Oil Exploration (10,000,000) (4.17%) ---------- --------- (10,667,335) (4.45%) ---------- ---------Total options (10,667,335) (4.45%) ---------- --------- Contracts for difference Europe Financials (327,379) (0.14%) ---------- --------- (327,379) (0.14%) ---------- ---------Total contractsfor difference (327,379) (0.14%) ---------- --------- ---------- ---------Total financialliabilities atfair value throughprofit or loss (24,042,603) (10.03%) ---------- --------- Total financialassets andliabilities atfair value throughprofit or loss 197,305,892 82.35%Cash and cashequivalents 257,890 0.11%Other assets inexcess ofliabilities 42,028,641 17.54% ---------- ---------Total net assets 239,592,423 100.00% ========== ========= Notes to the Financial Statements 1. General Tau Capital plc (the "Company") is a closed-end investment fund incorporated anddomiciled in the Isle of Man on 3 April 2007 and registered with number 119384C.The Company was established to allow investors the opportunity to realisereturns through investing in both public and private businesses that areestablished in, operating in or have exposure to Kazakhstan. Although Kazakhstanfocused, the Company will also seek investment opportunities in the KyrgyzRepublic, Uzbekistan, Turkmenistan, Tajikistan and Russia (the "InvestmentCountries"). The Company is listed on the Alternative Investment Market of the London StockExchange. The Company has no employees. The Company's investments are held by an intermediate investment holdingcompany, Tau Cayman LP. Hereinafter, Tau Cayman LP and Tau Capital plc will bereferred to as the "Group". The Group intends to invest in public companies with substantial operatingassets in Kazakhstan or in the Investment Countries who have securities listedon the KASE or other stock exchanges or over-the-counter-markets. Theseinvestments may be in combination with additional debt or equity-relatedfinancings, and potentially in collaboration with other financial and/orstrategic investors. In addition, the Group aims to provide equity and equity-related investmentcapital to private companies operating in, or with business exposure toKazakhstan and further in the Investment Countries who are seeking capital forgrowth and development, consolidation or acquisition, or as a pre-initial publicoffering round of financing. Investments may also be made in special situationsif Spencer House Compass Capital Ltd (the "Investment Manager") considers theinvestment to be of a type in keeping with the aims of the Group. 2. Accounting Policies a) Statement of compliance The financial statements have been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS"), issued by the International AccountingStandards Board ("IASB"), interpretations issued by the International FinancialReporting Committee of the IASB and applicable legal and regulatory requirementsof the Isle of Man law and the AIM Rules of the London Stock Exchange. b) Basis of presentation The financial statements are presented in US dollars. The functional currency isthe Kazakhstan Tenge. This is the first period of operation for the Group and therefore nocomparatives are presented. In accordance with Section 3(5)(b)(iii) of the Isle of Man Companies Act 1982,no separate income statement has been presented for the Company. The amount ofthe Company's loss for the period recognised in the Consolidated IncomeStatement is US$416,130. The Balance Sheet presents assets and liabilities in decreasing order ofliquidity and does not distinguish between current and non-current items. All ofthe Group's assets and liabilities are held for the purpose of being traded orare expected to be realised within one year. All references to net assets throughout this document refer to net assetsattributable to holders of ordinary shares unless otherwise stated. c) Significant accounting estimates and judgements The preparation of financial statements in conformity with IFRS requires the useof certain critical accounting estimates and assumptions. It also requires theBoard of Directors to exercise its judgement in the process of applying theGroup's accounting policies. Key estimates, assumptions and judgements that havesignificant risk of causing material adjustment to the carrying amount of assetsand liabilities within the next financial year are outlined below: Fair value of financial instruments Where the fair value of financial assets and financial liabilities recorded onthe Balance Sheet cannot be derived from active markets, they are determinedusing a variety of valuation techniques that include the use of mathematicalmodels. The input to these models is taken from observable markets wherepossible, but where this is not feasible, a degree of judgement is required inestablishing fair values. The judgements include consideration of liquidity andmodel inputs such as correlation and volatility for longer dated derivatives.Changes in assumption about these factors could affect the reported fair valueof financial instruments d) Financial instruments i) Classification The Group designates its assets and liabilities into the category below inaccordance with IAS 39 "Financial instruments: Recognition and Measurement". Financial assets and liabilities at fair value through profit or loss The category of financial assets and liabilities at fair value through profit orloss is sub-divided into: Financial assets and liabilities held for trading: These include equities,contracts for difference, money market instruments, OTC options and privateequity investments. These instruments are acquired or incurred principally forthe purpose of generating a profit from short-term fluctuation in price.Derivatives are categorised as held for trading, as the Group does not designateany derivatives as hedges for hedge accounting purposes as described under IAS39. ii) Recognition All regular way purchases and sales of financial instruments are recognised onthe trade date, which is the date that the Group commits to purchase the asset.Regular way purchases or sales are purchases or sales of financial instrumentsthat require delivery of assets within the period generally established byregulation or convention in the market place. Realised gains and losses ondisposals of financial instruments are calculated using the first-in-first-out("FIFO") method. iii) Initial measurement Financial instruments categorised at fair value through profit or loss, arerecognised initially at fair value, with transaction costs for such instrumentsbeing recognised directly in the Income Statement. iv) Subsequent measurement After initial measurement, the Group measures financial instruments which areclassified as at fair value through profit or loss at their fair values. Fairvalue is the amount for which an asset could be exchanged, or a liabilitysettled, between knowledgeable, willing parties in an arm's length transaction.The fair value of financial instruments is based on their quoted market priceson a recognised exchange or sourced from a reputable broker/counterparty in thecase of non-exchange traded instruments at the balance sheet date without anydeduction for estimated future selling costs. Financial assets are priced attheir current bid prices, while financial liabilities are priced at theircurrent offer prices. iv) Subsequent measurement (continued) If a quoted market price is not available on a recognised stock exchange or froma reputable broker/counterparty, the fair value of the financial instruments maybe estimated by the Directors using valuation techniques, including use ofrecent arm's length market transactions, reference to the current fair value ofanother instrument that is substantially the same, discounted cash flowtechniques, option pricing models or any other valuation technique that providesa reliable estimate of prices obtained in actual market transactions. Unlisted investments are valued at the Directors' estimate of their fair valuein accordance with the requirements of IAS 39 and guidelines issued by theInternational Private Equity and Venture Capital Association. In estimating fairvalue for an investment, the Directors will apply a methodology that isappropriate in light of the nature, facts and circumstances of the investmentand its materiality in the context of the total investment portfolio and willuse reasonable assumptions and estimations. An appropriate methodology willincorporate available information about all factors that are likely materiallyto affect the fair value of the investment. Valuation methodologies will beapplied consistently from period to period, except where a change would resultin a more accurate estimate of the fair value of the investment, which may be upor down. When it proves impossible to obtain a market price, the Directors decide tovalue investments at fair value. The Directors will use their discretion andawareness of market conditions to evaluate the fair value of such investments. v) De-recognition The Group de-recognises a financial asset when the contractual rights to thecash flows from the financial asset expire or it transfers the financial assetand the transfer qualifies for de-recognition in accordance with IAS 39. The Group derecognises a financial liability when the obligation specified inthe contract is discharged, cancelled or expires. An analysis of the fair value of financial instruments is set out in Note 5. e) Interest income and expense Interest income and interest expense are recognised on an accruals basis, usingthe effective interest method, in line with contractual terms. Interest isaccrued on a daily basis. f) Dividend income and expense Dividend income and expense are recognised in the Income Statement on the dateson which the relevant securities are listed as "ex-dividend". Dividend income isshown gross of any non-recoverable withholding taxes, which is disclosedseparately in the Income Statement, and net of any tax credits. g) Expenses All expenses, including performance fees and management fees, are recognised inthe Income Statement on an accruals basis. h) Offsetting financial instruments Financial assets and liabilities are offset and the net amount reported in theBalance Sheet when there is a legally enforceable right to offset the recognisedamounts and there is an intention to settle on a net basis, or realise the assetand settle the liability simultaneously. i) Foreign currency translation i) Functional and presentation currency Items included in the Group's financial statements are measured and presentedusing the currency of the primary economic environment in which it operates (the"functional currency"). This is the Kazakhstan Tenge, which reflects the Group'sprimary activity of investing in Kazakhstan securities and derivatives. The Group has adopted the US dollar as its presentation currency (the"presentation currency"). The Group's results and financial position aretranslated from its functional currency to its presentation currency, asfollows: a) assets and liabilities, including net assets attributable to holders ofordinary shares, are translated at the closing rate at each balance sheet date;and b) income and expenses are translated at the rates prevailing on the transactiondates. ii) Foreign currency transactions Monetary assets and liabilities and financial instruments categorised as at fairvalue through profit or loss, denominated in currencies other than the US dollarare translated into US dollars at the closing rates of exchange at each periodend. Transactions during the period, including purchases and sales ofsecurities, income and expenses are translated at the rate of exchangeprevailing on the date of the transaction. Foreign currency transaction gainsand losses are included in the Income Statement. j) Cash and cash equivalents Cash and cash equivalents comprise of cash balances with a maturity date of upto three months. They are short-term, highly liquid investments that are readilyconvertible to known amounts of cash and which are subject to insignificantchanges in value and are held for the purpose of meeting short-term cashcommitments rather than for investment or other purposes. k) Amounts due from brokers Amounts due from and to brokers represent receivables for securities sold andpayables for securities purchased that have been contracted for but not yetsettled or delivered on the Balance Sheet date, respectively. l) Taxation The Group is resident for tax purposes in the Isle of Man and will be subject toIsle of Man corporate income tax at the current rate of 0%. The Group is exempt from all forms of taxation in the Cayman Islands, includingincome, capital gains and withholding taxes. The Group is exempt from all forms of taxation in the Netherlands, includingincome, capital gains and withholding taxes. m) Share capital The Group's founder shares are classified as equity in accordance with theGroup's Articles of Association. n) Basis of consolidation The consolidated financial statements incorporate the financial statements ofthe Group and entities controlled by the Group (its subsidiaries and subsidiaryundertakings). Control is achieved where the Group has the power to govern thefinancial and operating policies of a portfolio company so as to obtain benefitsfrom its activities. The financial statements of subsidiaries are included inthe consolidated financial statements from the date that control commences untilthe date control ceases. The financial statements of the subsidiaries areprepared for the same reporting period as the parent company, using consistentaccounting policies. All intra-group balances, income and expenses andunrealised gains and losses resulting from intra-group transactions areeliminated in full. o) Segment reporting A business segment is a group of assets and operations engaged in providingproducts or services that are subject to risks and returns that are differentfrom those of other business segments. A geographical segment is engaged inproviding products or services within a particular economic environment that aresubject to risks and returns that are different from those of segments operatingin other economic environments. The investment strategy of the Group is focused on entities that operate in orhave an exposure to Kazakhstan. Accordingly, the Directors are of the opinionthat the Group is engaged in a single segment of business being investmentbusiness in one geographical area being Kazakhstan. p) Share-based payments Equity-settled share-based payments to employees and others providing similarservices are measured at the fair value of the equity instruments at the grantdate. The cost of equity-settled transactions is recognised, together with acorresponding increase in equity, from the date that they are issued. Theequity-settled transactions were fully vested on the date of their issue. For cash-settled share-based payments, a liability equal to the portion of thegoods or services received is recognised at the current fair value determined ateach Balance Sheet date. 3. Financials Instruments at Fair Value through Profit or Loss US$Held for trading:Public equities 204,647,221Private equity 3,776,000Money market instrument 11,266,240Derivatives: options 837,511Derivatives: contracts for difference 821,523 -----------Total financial assets at fair value through profit or loss 221,348,495 ----------- US$Held for trading:Public equities (13,047,889)Derivatives: options (10,667,335)Derivatives: contracts for difference (327,379) -----------Total financial liabilities at fair value through profit or loss (24,042,603) ----------- Net changes in fair value of financial assets and liabilitiesthrough profit or lossNet realised gain on investments and foreign exchange 6,628,706Net unrealised loss on investments and foreign exchange (6,597,577) -----------Total gains 31,129 ----------- 4. Derivative Contracts Typically, derivative contracts serve as components of the Group's investmentstrategy and are utilised primarily to structure and hedge investments toenhance performance and reduce risk to the Group (the Group does not designateany derivatives as hedges for hedge accounting purposes as described under IAS39). The derivative contracts that the Group holds or issues areover-the-counter ("OTC") options and contracts for differences ("CFDs"). The Group records its derivative activities on a mark-to-market basis. Fairvalues are determined by using quoted market prices. For OTC contracts, theGroup enters into master netting agreements with its counterparties, therefore,assets represent the Group's unrealised gains less unrealised losses for OTCcontracts in which the Group has a master netting agreement. Similarly,liabilities represent net amounts owed to counterparties on OTC contracts. A breakdown of the fair value of the derivatives held as at 31 December 2007 canbe found in Note 3 to the financial statements above. The primary difference in the risk associated with OTC contracts andexchange-traded contracts is credit risk. The Group has credit risk from OTCcontracts when two conditions are present (i) the OTC contracts have unrealisedgains, net of any collateral and (ii) the counterparty to the contract defaults.The credit risk related to exchange-traded contracts is minimal because theexchange ensures that their contracts are always honoured. The Group purchases or sells put and call options through the OTC markets.Options purchased by the Group provide the Group with the opportunity topurchase (call options) or sell (put options) the underlying asset at anagreed-upon value either on or before the expiration of the option. The Group isexposed to credit risk on purchased options only to the extent of their carryingamount, which is their fair value. Options written by the Group provide the purchaser of the option the opportunityto purchase from or sell to the Group the underlying asset at an agreed-uponvalue either on or before the expiration of the option. Premiums received fromwriting options are marked to market in accordance with Note 2 and the resultinggains or losses are recorded in the Income Statement. CFDs represent agreements that obligate two parties to exchange cash flows atspecified intervals based upon or calculated by reference to changes inspecified prices or rates for a specified amount of an underlying asset orotherwise deemed notional amount. The payment flows are usually netted againsteach other, with the difference being paid by one party to the other. Thereforeamounts required for the future satisfaction of the CFD may be greater or lessthan the amount recorded. The ultimate gain or loss depends upon the prices atwhich the underlying financial instruments of the CFD is valued at the CFD'ssettlement date and is included in the Income Statement. 5. Fair Value of Financial Instruments The following table shows an analysis of financial instruments recorded at fairvalue, between those whose fair value is based on quoted market prices, thoseinvolving valuation techniques where all the model inputs are observable in themarket and those where the valuation technique involves the use of non-marketobservable inputs. Valuation Techniques Market observable Non-market Quoted observable observable market price inputs Inputs Total US$ US$ US$ US$ Financial assets - Held for trading 216,734,984 837,511 3,776,000 221,348,495 Financialliabilities - Held for trading (13,375,268) (10,667,335) - (24,042,603) --------- ----------- ---------- ---------- 203,359,716 (9,829,824) 3,776,000 197,305,892 --------- ----------- ---------- ---------- Financial instruments included in each category are as follows for whichaccounting policies can be found in Note 2 to the Financial Statements: Quoted market price: Public equities, money market instruments and contractsfor differenceMarket observable inputs: OptionsNon-market observable inputs: Private Equities 6. Amounts Due from Brokers US$ Cash held with broker 42,219,132 ---------- 42,219,132 ---------- 7. Cash and cash equivalents US$ Cash 257,890 ---------- 257,890 ---------- 8. Fees and Expenses Management Fees The Investment Manager is entitled to receive from the Group a management feeequal to 2% per annum of the net asset value of the Group. The Group paid thefirst management fee on the business day following admission (pro rata) to coverthe period from admission to 31 December 2007. Thereafter the Group will pay themanagement fee semi-annually in advance. In addition to the above, the Group bears the third party and otherout-of-pocket expenses reasonably incurred in the performance of the duties ofthe Investment Manager, provided that, the amount of the expenses shall notexceed the annual cap of US$500,000. The investment management fee for the period was US$3,120,798 of which US$Nilwas outstanding as at 31 December 2007. Performance Fees The Investment Manager is also entitled to receive a performance fee if the netasset value of the Group as at 31 December in the relevant year is greater thanor equal to the Group's high water mark. No performance fees were earned for the period ended 31 December 2007. Administrator and Sub-Administrator fees The Administrator is entitled to receive a fixed fee of £6,250 each calendarquarter. The Sub-Administrator is entitled to receive a monthly fee for the provision ofadministration and accounting services of US$3,000 plus an additional fee at thefollowing rates: (a) 0.08% of the first US$100 million of average net assets; (b) 0.06% of the next US$100 million of average net assets; (c) 0.04% of the next US$100 million of average net assets; and (d) 0.03% of the average net assets in excess of US$300 million. The Sub-Administrator is also entitled to receive a monthly fee for its tradesupport and middle office services at the following rates: (a) 0.06% of the first US$100 million of average net assets; (b) 0.04% of the next US$100 million of average net assets; and (c) 0.03% of the average net assets in excess of US$200 million. Fees paid to the Administrator and Sub-Administrator for the period ended 31December 2007 were US$31,108 and US$197,139, respectively. Directors' remuneration The Directors are entitled to receive by way of fees for their services asDirectors, such sum as the Board may determine (not exceeding £400,000 per annumor such other sum as the Group in General Meeting shall determine). EachDirector is entitled to be repaid all reasonable travelling, hotel and otherexpenses properly incurred by him in the performance of his duties as aDirector. The Director's remuneration expense for the period amounted to US$65,206 ofwhich US$Nil was outstanding as at 31 December 2007. 8. Fees and Expenses (continued) Operating expenses The Group meets all its own costs and expenses including the costs and expensesof advisors, consultants and other agents engaged on its behalf, commissions,banking fees, legal expenses, auditors, listing costs and the costs ofdistribution of reports and accounts and similar documentation to shareholders.Costs incurred by the Group in connection with the placing were met by theGroup. The following table shows the breakdown of accounts payable and accrued expensesas at 31 December 2007: Accounts payable & accrued expenses------------------------------------- US$ Administration fees payable (78,294)Dividends payable (57,163)Audit fees payable (32,603)Other accounts payable and accrued expenses (454,647) ----------- (622,707) ----------- The following table shows the breakdown of operating expenses incurred for theperiod ended 31 December 2007: Operating expenses-------------------- US$ Management fees (3,120,798)Administration fees (228,247)Directors' remuneration expense (65,206)Dividend expense (57,163)Audit fees (32,603)Interest expense (16,665)Other operating expenses (574,543) ----------- (4,095,225) ----------- 9. Share Capital The authorised share capital of the Group is £3,502,000 comprising 350,200,000ordinary shares of £0.01 each. The shares issued during the period were asfollows: Shares Balance at the beginning of the period -Issue of ordinary shares during the period 251,000,002Redemption of ordinary shares during the period - -----------Balance at the end of the period 251,000,002 ----------- 10. Related Party Transactions Richard Horlick, a Director of the Group as listed on page 1, is the CEO andfounding partner of Spencer House Capital Management, LLP. Almas Chukin, a Director of the Group as listed on page 1, is the chairman ofCompass Asset Management Ltd. Philip Scales, a Director of the Group as listed on page 1, is the managingdirector of IOMA Fund and Investment Management Ltd. Details of Director's remuneration can be found in Note 8. As at 31 December 2007 Philip Lambert and Robert Brown, III each held 500,000ordinary shares. These shares were granted in consideration for the provision ofservices pursuant to their letters of appointment as Non-executive Directors. As at 31 December 2007, Richard Horlick held 5,000,000 ordinary shares. As at 31 December 2007, both Spencer House Capital Management, LLP and CompassAsset Management Ltd held one founder share each. 11. Financial Instruments and Associated Risks Introduction Risk is inherent in the Group's activities but is managed through a process ofongoing identification, measurement and monitoring, subject to risk limits andother controls. The process of risk management is critical to the Group'scontinuing profitability. The Group is exposed to market risk (which includescurrency risk, interest rate risk and other price risk), credit risk andliquidity risk arising from the financial instruments it holds. Risk management structure The Board of Directors is ultimately responsible for identifying and controllingrisks. However, it is the Investment Manager who manages and monitors risks onan ongoing basis. Risk measurement and reporting system The Group's risks are measured using a method which reflects both the expectedloss likely to arise in normal circumstances and unexpected losses, which are anestimate of the ultimate actual loss based on statistical models. The modelmakes use of the probabilities derived from historical experience, adjusted toreflect the economic environment. Monitoring and controlling risks is primarily performed based on limitsestablished by the Board. These limits reflect the business strategy and marketenvironment of the Group as well as the level of risk that the Group is willingto accept. In addition, the Group monitors and measures the overall risk bearingcapacity in relation to the aggregate risk exposure across all risk types andactivities. Risk mitigation The Group has investment guidelines that set out its overall businessstrategies, its tolerance for risk and its general risk management philosophyand have established processes to monitor and control economic hedgingtransactions in a timely and accurate manner. The Group uses derivatives andother instruments for trading purposes and in connection with its riskmanagement activities. Excessive risk concentration Concentration arises when a number of counterparties are engaged in similarbusiness activities, or activities in the same geographic region, or havesimilar economic features that would cause their ability to meet contractualobligations to be similarly affected by changes in economic, political or otherconditions. Concentration indicates the relative sensitivity of the Group'sperformance to developments affecting a particular industry or geographicallocation. In order to avoid excessive concentration of risk, the Group's policies andprocedures include specific guidelines to focus on maintaining a diversifiedportfolio. Identified concentration of credit risks are controlled and managedaccordingly. Market risk Market risk is the risk that the fair value or future cash flows of a financialinstrument will fluctuate because of changes in market prices and includesinterest rate risk, foreign currency risk and "other price risks", such asequity and commodity risk. The Group's strategy on the management of investment risk is driven by itsinvestment objective as outlined in Note 1 to the financial statements. Detailsof the Group's financial instruments outstanding at the Balance Sheet date canbe seen in the Schedule of Investments on pages 13 to 15 Equity price risk Equity price risk is the risk that the fair values of equities decrease as theresult of changes in the levels of equity indices and the value of individualstocks. The trading equity price risk exposure arises from the Group'sinvestment portfolio. The Group manages this risk by investing on differentstock exchanges. Price movements are influenced by, among other things, changing supply anddemand relationships, monetary and exchange control programs, policies ofgovernments, political and economic events, and policies and emotions of themarketplace. The Investment Manager considers the asset allocation of the portfolio in orderto minimise the risks associated whilst achieving the Group's investmentobjectives. The Group maintains a diversified portfolio both in terms of thenumber of positions, their geographic location (as detailed in the Schedule ofInvestments on pages 13 to 15) and industry sector (as below). Financial Financial sssets at liabilities at fair value fair value through through profit or loss profit or loss US$ US$Building products - (2,269,289)Commercial banks (non US) 52,401,678 -Gold mining 28,480,500 (667,335)Financials 821,523 (11,105,979)Investment companies 11,927,478 -Metals diversified 35,545,631 -Oil exploration 73,047,954 (10,000,000)Paper and related products 8,320,000 -Telecom services 10,803,731 - ------------- ------------ 221,348,495 (24,042,603) ------------- ------------ Equity price risk (continued) The Investment Manager manages market positions on a daily basis and seeks tomitigate this risk by applying the following restrictions to the portfolio ofinvestments: (i) the Group acquires only minority stakes in public investments; (ii) where the Group secures a substantial minority stake or a controlling stake in a private company, it obtains appropriate board representation; (iii) the Group will not invest more than 15% of the net asset value of the Group in a single company or single affiliated group of companies; and (iv) the Group will not invest more than 30% of the net asset value of the Group in any one sector. The Group's overall market positions are monitored on a quarterly basis by theBoard of Directors during Board meetings. Given the market volatility since the end of the period, the Group was wellinsulated to the overall market gyrations. With 20% of the portfolio in cash andanother 20% in short exposures we believe this helped reduce the impact ofmarket volatility on the Groups financial assets since the end of the period. Management's best estimate of the effect on net assets and profit due to areasonably possible change in significant equity indices, with all othervariables held constant is as follows: Market Indices Change in equity price Effect on profit & net assets US$ FT-AIM (AXX) 0.1% increase 40,274Toronto (SPTSX) 4.0% increase 1,702,725KZKAK 9.0% increase 7,718,685 (In practice the actual trading results may differ from this change and thedifference could be material). Currency risk Currency risk is the risk that the value of a financial instrument willfluctuate due to changes in foreign exchange rates. The Group invests in assets denominated in currencies other than itspresentation currency, the US dollar. Consequently, the Group is exposed torisks that the exchange rate of the US dollar, relative to other currencies, maychange in a manner which has an adverse effect on the reported value of thatportion of the Group's assets which is denominated in currencies other than theUS dollar. The Group's currency risk is managed on a daily basis by the Investment Managerthrough a review of the portfolio. The Group's overall currency risk ismonitored on a quarterly basis by the Board of Directors during Board meetings. Currency risk At 31 December 2007 the Group's exposure to foreign currency was as follows: Financial Financial Cash & cash Other Other assets liabilities equivalents assets liabilites Total US$ US$ US$ US$ US$ US$ Canadian 36,969,638 - - 7,124 - 36,976,762DollarEuro 458,257 (327,379) - 64,969 - 195,847Kazakhstan 41,802,529 - - 15,808 - 41,818,337Tenge Pound 54,526,369 (2,269,289) 5,604,608 - 57,861,688SterlingUS Dollar 87,591,702 (21,445,935) 257,890 36,958,840 (622,707) 102,739,790 -------- --------- --------- -------- ------- -------- 221,348,495 (24,042,603) 257,890 42,651,348 (622,707) 239,592,423 -------- --------- --------- -------- ------- -------- The analysis below discloses management's best estimate of the effect of areasonably possible movement in currency rates against the US dollar, with allother variables held constant on the income statement (due to the fair value ofcurrency sensitive trading monetary assets and liabilities) and net assets (dueto the change in fair value of currency swaps and forward foreign exchangecontracts). A negative amount in the table reflects a potential net reduction inincome statement or net assets, while a positive amount reflects a net potentialincrease. Financial Financial Other Effect on Effect on % Change assets liabilities assets net assets profit US$ US$ US$ US$ US$ Canadian 8% increase (2,957,571) - (570) (2,958,141) (2,958,141)DollarEuro 10% increase (45,826) 32,738 (6,497) (19,585) (19,585)KazakhstanTenge 7% increase (2,926,177) - (1,107) (2,927,284) (2,927,284)Pound 5% increase (2,726,318) 113,464 (280,230) (2,893,084) (2,893,084)Sterling -------- ------- -------- --------- -------- (8,655,892) 146,202 (288,404) (8,798,094) (8,798,094) -------- ------- -------- --------- -------- (In practice the actual trading results may differ from this change and thedifference could be material.) Interest rate risk The majority of the Group's financial assets and liabilities are non-interestbearing. As a result, the Group is not subject to significant amounts of riskdue to fluctuations in the prevailing levels of market interest rates. Anyexcess cash and cash equivalents are invested at short-term market interestrates. The Group's interest rate risk is managed on a daily basis by the InvestmentManager and is monitored on a quarterly basis by the Board of Directors duringboard meetings. Liquidity Risk Kazakhstan and the Investment Countries have less liquid and developedsecurities markets than the United States of America and Western Europe. Thepublic equities which are listed on KASE or a stock market in the InvestmentCountries may be less liquid and may carry a higher risk than an investment inshares listed on markets in the United States of America and Western Europe. Given that organised securities markets in Kazakhstan and the investmentcountries have been established relatively recently, the procedures forsettlement, clearing and registration of securities transactions may be subjectto legal uncertainties, technical difficulties and delays. Although significantdevelopments have occurred in recent years, the sophisticated legal andregulatory frameworks necessary for the efficient functioning of modern capitalmarkets have yet to be fully developed in Kazakhstan and the InvestmentCountries. In particular, legal protections against market manipulation andinsider trading are less well developed in Kazakhstan and the InvestmentCountries, and less strictly enforced, than in the United States of America andWestern European countries, and existing laws and regulations may be appliedinconsistently with consequent irregularities in enforcement. In addition, lessinformation relating to the proposed target entities and certain of theinvestments may be publicly available to investors in securities issued orguaranteed by such entities than is available to investors in entities organisedin the United States of America or Western European countries. The Group's liquidity is managed on a daily basis by the Investment Manager. Theobjective of the Group is to establish portfolio positions on the merits of theinvestment case for the stock. The Investment Manager takes care to note theliquidity of a company before investing. The Investment Manager buildssignificant positions where it sees significant upside potential, sometimes incases where there is limited liquidity, believing that the liquidity willimprove as the market perceives better value in the company. The portfolio has aspread of investments in both semi-liquid and very liquid companies whichdiversifies its exposure across sectors and markets. The table below analyses the Group's financial liabilities as at 31 December2007 into relevant maturity groupings based on the remaining period at theBalance Sheet date to the contractual maturity date. The amounts in the tableare the contractual undiscounted cash flows. Balances due within 12 months equaltheir carrying balances as the impact of discounting is not significant. Less than 1-6 Payable 1 month months on demand US$ US$ US$ Financial liabilities at fair valuethrough profit or loss - (10,667,335) (13,375,268)Accounts payable and other expenses (590,104) (32,603) - --------- --------- --------- (590,104) (10,699,938) (13,375,268) --------- --------- --------- Credit Risk Credit risk is the risk that a counterparty to a financial instrument will failto discharge an obligation or commitment that it has entered into with theGroup. It is the Group's policy to enter into financial instruments with a rangeof reputable counterparties. Therefore, the Group does not expect to incurmaterial credit losses on its financial instruments. Financial assets, which potentially expose the Group to credit risk, consistsprincipally of cash due from brokers. The Group's cash balances are primarilywith high credit quality, well-established financial institutions. The extent ofthe Group's exposure to credit risk in respect of these financial assetsapproximates their carrying value as recorded in the Group's Balance Sheet. With respect to derivative financial instruments, credit risk arises from thepotential failure of counterparties to meet their obligations under the contractor arrangement. The Group invests in financial assets which are principally equity in nature andlisted. All transactions in listed securities are settled/paid for upon deliveryusing approved brokers. The risk of default is considered minimal, as deliveryof securities sold is only made once the broker has received payment. Payment ismade on purchase once the securities have been received by the broker. The tradewill fail if either party fails to meet its obligation. Transactions are only concluded with counterparties which have an investmentgrade as rated by a well known rating agency. All publicly held assets are heldunder a Prime Brokerage relationship with either Morgan Stanley & CoInternational plc, operating as a subsidiary of Morgan Stanley Plc, orSubsidiary Bank HSBC Kazakhstan Joint Stock Company operating as a subsidiary ofHSBC Plc. At 31 December 2007 the brokers had the following ratings: Standard & Poors Moody's FitchMorgan Stanley Plc AA- Aa3 AA-HSBC Plc AA- Aa2 AA The following table shows the value of net assets held with each Prime Broker asat 31 December 2007: Financial Financial Amounts due assets liabilities from brokers US$ US$ US$ Morgan Stanley International Plc 175,769,966 (24,042,603) 42,218,167Subsidiary Bank HSBC KazakhstanJoint Stock Company 41,802,529 - 965 ---------- ---------- ---------- 217,572,495 (24,042,603) 42,219,132 ---------- ---------- ---------- The Group may be adversely impacted by an increase in its credit exposurerelated to investing, financing and other activities. The Group is exposed tothe potential for credit-related losses that can occur as a result of anindividual, counterparty or issuer being unable or unwilling to honour itscontractual obligations. These credit exposures exist within financingrelationships, commitments, derivatives and other transactions. These exposuresmay arise, for example, from a decline in the financial condition of acounterparty, from entering into derivative contracts under which counterpartieshave obligations to make payments to us, from a decrease in the value ofsecurities of third parties that the Group holds as collateral, or fromextending credit through guarantees or other arrangements. As the Group's creditexposure increases, it could have an adverse effect on the Group's business andprofitability if material unexpected credit losses occur. The Investment Manager manages the Group's credit risk through regularmonitoring of the counterparty's creditworthiness, with particular reference toratings checks, third party research and the counterparty's reputation in themarket. The Group's credit risk is monitored on a quarterly basis by the Boardof Directors. 12. Exchange Rates The following exchange rates were used to translate assets and liabilities intoUS Dollars at 31 December 2007: Canadian Dollar 1.013223Euro 1.462052Kazakhstan Tenge 0.008284Pound Sterling 1.990604 13. Distributions Subject to the provisions of the Articles, the Group may by ordinary resolution,declare that out of profits available for distribution, in accordance with Isleof Man law, dividends be paid to members according to their respective rightsand interests in the profits of the Group. However, no dividend shall exceed theamount recommended by the Board. There is no fixed date on which an entitlementto dividend arises. No dividends were paid during the period ended 31 December 2007. 14. Soft Commissions During the period, the Investment Manager and connected persons have not enteredinto soft commission arrangements with brokers in respect of which certain goodsand services used to support investment decision making were received. 15. Commitments and Contingent Liabilities As at 31 December 2007, the Group did not have any significant commitments orcontingent liabilities. 16. Valuation of the Group The Net Asset Value of the Group as at 31 December 2007, as reported at thetime, differs from the financial statements. In accordance with IAS 39, longpositions in the financial statements are valued at bid prices and shortpositions at offer prices. US$ Net Asset Value for trading purposes 241,720,127Adjustment to last traded prices (2,127,704) ----------Net Asset Value per financial statements 239,592,423 ---------- Reported Net Asset Value per share $0.96Adjusted Net Asset Value per share $0.95 17. Earnings per Share Basic earnings per share is calculated by dividing the net profit or lossattributable to shareholders by the weighted average number of ordinary shareoutstanding during the period. Net loss attributable to shareholders US$(413,160) Weighted average number of ordinary shares is issue 251,000,002 Basic Earnings per Share US$(0.00) There is no difference between the fully diluted earnings per share and basicearnings per share. 18. Investments in Subsidiaries The subsidiaries of Tau Capital plc are recorded at cost less any diminution invalue in the accounts of the Company. Name Country Principal investment Proportion of of incorporation activity ownership interest Tau Cayman Limited Cayman Islands Business administration 100%Tau Capital (PublicInvestments) Limited Cayman Islands Investment holding 100%Tau Cayman LP Cayman Islands Investment holding 100%Tau SPV 1 Cooperatief The Netherlands Investment holding 100%Tau SPV 3 Cooperatief The Netherlands Investment holding 100% 19. Off Balance Sheet Risk Securities sold short and options written represent obligations of the Group todeliver the specified security at the contracted price, and thereby create aliability to repurchase the security in the market at prevailing prices.Accordingly, these securities may result in off Balance Sheet risk as theGroup's satisfaction of the obligations may exceed the amount recognised in theBalance Sheet. 20. Changes in Accounting Standards The following are the standards, amendments and interpretations issued duringthe period which are not effective at the reporting date: IAS 1 "Presentation of Financial Statements" is effective for accounting periodsbeginning on or after 1 January 2009 with early application permitted. Thestandard will replace IAS 1 Presentation of Financial Statements (revised in2003) as amended in 2005. The main objective of revising IAS 1 is to aggregateinformation in the financial statements on the basis of shared characteristics.The revision is intended to improve users' ability to analyse and compare theinformation given in financial statements. The Group will consider theimplications of IAS 1 and will apply IAS 1 from 1 January 2009 (or early ifappropriate). IFRS 8 "Operating Segments" was issued in November 2006 and is effective forannual periods beginning on or after 1 January 2009. IFRS 8 requires entities todisclose segment information based on the information reviewed by the entity'schief operating decision maker. The Group has determined that the operatingsegments disclosed in IFRS 8 will be the same as the business segments disclosedunder IAS 14. The impact of this standard on the other segment disclosures isstill to be determined. As this is a disclosure standard, it will have no impacton the financial position of financial performance of the Group when implementedin 2009. IAS 27 "Consolidated and Separate Financial Statements" issued in January 2008will supersede IAS 27 "Consolidated and Separate Financial Statements" (revisedin 2003). IAS 27 is effective for accounting periods beginning on or after 1July 2009 with early adoption permitted. The main change from the previousversion is the reduction of alternatives in accounting for subsidiaries inconsolidated financial statements and in accounting for investments in theseparate financial statements of a parent, venturer or investor. The Group willconsider the implications of IAS 27 and apply from 1 July 2009, if deemedapplicable at the time. IFRS 2 "Share-Based Payment - Vesting Conditions and Cancellations" issued on 17January 2008 will supercede IFRS 2 "Share-Based Payment - Vesting Conditions andCancellations" (revised in 2003). IFRS 2 is effective for accounting periodsbeginning on or after 1 January 2009 with early adoption permitted. Theamendment clarifies that vesting conditions are service conditions andperformance conditions only. It also specifies that all cancellations, whetherby the entity or by other parties, should receive the same accounting treatment.The Group will consider the implications of IFRS 2 and apply from 1 January2009, if deemed applicable at the time. 21. Share-Based Payments Philip Lambert and Robert Brown, III were each granted 500,000 ordinary sharesin consideration for the provision of services pursuant to their letters ofappointment as Non-executive Directors. The following share-based payment arrangement was in existence with NumisSecurities Limited, the Company's Nominated Adviser and Broker, at 31 December2007. This arrangement was conditional upon admission of the ordinary sharecapital of the Company to the Alternative Investment Market operated by theLondon Stock Exchange Fair value atOptions Number Grant date Expiry date Exercise price grant date US$ US$ Issued 3 May 2,510,000 03/05/2007 03/05/2012 1.00 0.952007 In accordance with the terms of the share-based arrangement, options issuedduring the period ended 31 December 2007, vest at the date of their issue. 22. Events After the Balance Sheet Date There were no material events after the Balance Sheet date, which have amaterial bearing on the understanding of these financial statements. 23. Approval of Financial Statements The Annual Report and financial statements were approved by the Directors on 25March 2008. This information is provided by RNS The company news service from the London Stock Exchange