Dedication across the board
Annual Report 2012

Consolidated Financial Statements

27. Financial risk management objectives and policies

The group's principal financial liabilities comprise the 2015 Notes, the 2019 Notes, payables to Government of Kazakhstan, trade payables and other current liabilities. The main purpose of these financial liabilities is to finance the development of the Chinarevskoye oil and gas condensate field and its operations. The Group's financial assets consist of trade and other receivables, short-term investments  and cash and cash equivalents. 

The main risks arising from the Group's financial instruments are interest rate risk, foreign exchange risk, liquidity risk, and credit risk. The Group's management reviews and agrees policies for managing each of these risks which are summarized below.   

Interest rate risk

The Group is not exposed to interest rate risk in 2012 and 2011 as the Group had no floating-rate borrowings as of December 31, 2012 and 2011.

Foreign currency risk

As a significant portion of the Group's operation is the Kazakhstani Tenge denominated, the Group's statement of financial position can be affected significantly by movements in the US dollar / Tenge exchange rates. The Group mitigates the effect of its structural currency exposure by borrowing in US dollars and denominating sales in US dollars. 

The following table demonstrates the sensitivity to a reasonably possible change in the US dollars exchange rate, with all other variables held constant, of the Group's profit before tax (due to changes in the fair value of monetary assets and liabilities).

  Change in
Tenge to US$
exchange rate
Effect on profit
before tax
     
2012    
US dollar thousand +1.57% (235)
US dollar thousand +1.57% (235)
     
2011    
US dollar thousand +10.72% (2,341)
US dollar thousand -10.72% 2.341


Liquidity risk

Liquidity risk is the risk that the Group will encounter difficulty in raising funds to meet commitments associated with its financial liabilities. Liquidity risk may result from an inability to sell a financial asset quickly at close to its fair value.

Liquidity requirements are monitored on a regular basis and management ensures that sufficient funds are available to meet any commitments as they arise.

The table below summarizes the maturity profile of the Group's financial liabilities at December 31, 2012 and 2011 based on contractual undiscounted payments:  

Year ended
December 31, 2012
On demand Less than
3 months
3-12 months 1-5 years More than
5 years
Total
             
             
Borrowings - 740 51,873 277,531 639,800 969,944
Trade payables 59,855 - - - - 59,855
Other current liabilities 10,437 - - - - 10,437
Due to Government of Kazakhstan   258 773 4,124 13,402 18,557
  70,292 998 52,646 281,655 653,202 1,058,793
             
Year ended
December 31, 2011
           
Borrowings - 746 49,504 600,750 - 651,000
Trade payables 81,914 - - - - 81,914
Other current liabilities 8,361 - - - - 8,361
Due to Government of Kazakhstan - 258 773 4,124 14,433 19,588
  90,275 1,004 50,277 604,874 14,433 760,863


Credit risk

Financial instruments, which potentially subject the Group to credit risk, consist primarily of accounts receivable and cash in banks. The maximum exposure to credit risk is represented by the carrying amount of each financial asset. The Group considers that its maximum exposure is reflected by the amount of trade accounts receivable and advances paid.

The Group places its Tenge denominated cash with Sberbank, which has a credit rating of Baa1 (stable) from Moody's rating agency and its US dollar denominated cash with BNP Paribas with a credit rating of A2 (stable) and ING with a credit rating of A2 (negative) from Moody's rating agency at December 31, 2012. The Group does not guarantee obligations of other parties.

The Group sells its products and makes advance payments only to recognized, creditworthy third parties. In addition, receivable balances are monitored on an ongoing basis with the result that the Group's exposure to bad debts and recoverability of prepayments made is not significant and thus risk of credit default is low.

Fair values of financial instruments

Fair value is defined as the amount at which an instrument could be exchanged in a current transaction between knowledgeable willing parties according to arm's length conditions, other than in a forced or liquidation sale. As no readily available market exists for a large part of the Group's financial instruments, judgment is needed to arrive at a fair value, based on current economic conditions and the specific risks attributable to the instrument.

The fair value of borrowings has been calculated by discounting the expected future cash flows at prevailing interest rates. The Group's borrowings are at market rates of interest specific to those instruments and as such are stated at fair value. The Group's derivative is valued with a reference to a quoted market price in an active market. The fair value of other financial assets has been calculated using market interest rates.

Management believes that the Group's carrying value of financial assets and liabilities consisting of cash and cash equivalents, trade accounts receivable, trade and other payables are not significantly different from their fair values at December 31, 2012 and 2011.