Financial Performance

Astana, 2nd March 2012. JSC KazMunaiGas Exploration Production released its consolidated financial statements for the year ended December 31, 2011

• Revenues increased by 19% to 708bn Tenge (US$4,832m) compared to 2010 on higher Brent and domestic prices offset by reduced export volumes. Average Brent price in 2011 increased by 41% to US$111 per barrel from US$79 per barrel in 2010.

• Net profit in 2011 amounted to 209bn Tenge (US$1,425m)1 and earnings per share – 2,950 Tenge (US$3.4 per GDR), a decrease of 11% and 9%, respectively, compared to 2010.

• The main factors that had a negative impact on KMG EP’s results were production and export decline due to the illegal strike that took place in May-August 2011 and introduction of export duty in 2010 and doubling of its rate in 2011.

Oil sales

The Company’s export sales and domestic sales volumes from the Uzenmunaigas and Embamunaigas production facilities in 2011 were 5,758 thousand tonnes (116kbopd) and 1,898 thousand tonnes (38kbopd), respectively.

The Company’s share in the production volumes from KGM, CCEL and PKI amounted to 4,442 thousand tonnes of crude oil (91kbopd), which is 78 thousand tonnes or 2% less than in 2010 in line with production plans of these companies.

The Company’s share in the sales volumes from KGM, CCEL and PKI was 4,848 thousand tonnes of crude oil (100kbopd), including 3,795 thousand tonnes (78kbopd) or 78% supplied to export markets. PKI sales volumes include sales of refined products produced from crude oil purchased under swap arrangements with third parties.

Valuation

According to Kazakhstan Stock Exchange market, I used Consolidated Statement of Financial position and Consolidated Income Statement which was prepared by Ernst and Young Company in years 2008-2009

http://www.kase.kz/files/emitters/KMGZ/kmgzf6m6_2009_cons_e.pdf

WACC Calculation:

Weighted Average Cost of Capital the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By taking a weighted average, it shows how much interest the company has to pay for every marginal dollar in our situation in KZT it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation.

This is the formula in calculating KMG’s WACC: WACC= Wd*Rd*(1-T) + We*Re

The first determines the cost of equity (Re) for the bank using Capital Asset Pricing Model:

Re=rf+ β(rm-rf),

Re is the cost of equity, β is beta ,rm is the required return of the market, rf is the risk free rate and (Km - Krf) is the market risk premium.

Cost of Equity
Risk-free rate	6,35%
Beta	1
Equity risk premium	7,5%
Cost of Equity: Re=rf+b(rm-rf)	7,5%
https://docs.google.com/viewer?a=v&q=cache:VnBGnE2ipnQJ:centralasia.rencap.com/download.asp?id%3D10572+valuation+risk+free+rate+for+kazmunaigas&hl=ru&gl=kz&pid=bl&srcid=ADGEEShi_ZBAdIEfp8BLJ05Odgdpp-jG7LrV53yScgY_I5flncXT8_3rIOMM8f6QjNM7Au0n2TYvYKrP4AxqN1gL9e39sjeEjXcaaXTeAA6Bxx0NNTHxcoUcqb-1-1akd1mEz8ZSlXP_&sig=AHIEtbTBnlBI7MVRlWWAfWJl3dRuqUwMCw

I examined the cost of debt (Rd) which in this case is the yield to maturity (YTM) on the bonds. My calculations for KMG's yield to maturity based on the given data showed that Rd= 14.30%

Cost of Debt
Current Price	27.50
Maturity(2008-2015)	8
Coupon	8.3%
Cost of Debt: Rd: PV=275;N=8;PMT=83;FV=1000	38.32%
https://docs.google.com/viewer?a=v&q=cache:VnBGnE2ipnQJ:centralasia.rencap.com/download.asp?id%3D10572+valuation+risk+free+rate+for+kazmunaigas&hl=ru&gl=kz&pid=bl&srcid=ADGEEShi_ZBAdIEfp8BLJ05Odgdpp-jG7LrV53yScgY_I5flncXT8_3rIOMM8f6QjNM7Au0n2TYvYKrP4AxqN1gL9e39sjeEjXcaaXTeAA6Bxx0NNTHxcoUcqb-1-1akd1mEz8ZSlXP_&sig=AHIEtbTBnlBI7MVRlWWAfWJl3dRuqUwMCw

Coupon rate – 8.3% per annum. Coupon is paid annually. 8 year grace period of annual payments. KMG bank – 2008-2015.

According of KASE information target price to find market value of equity is 1,117,412,334,848.88. Min price is 12,515.95 + max price 19,361.63, then divided by 2.

Market Value of Equity
Target price: avg: (12,515.95+19,361.63)/2	15,938.79
Number of shares	70,106,472
MV of Equity	1,117,412,334,848.88
http://www.kase.kz/en/shares/show/RDGZ

According of information in 2008 Balance sheet of KMG bank

Market Value of Debt
Short-term borrowing-loans and notes payable	464,817,712
Current portion of Long-term debt	0
Long-term debt	0
MV of Debt	464,817,712
http://www.kase.kz/files/emitters/KMGZ/kmgzf6m6_2009_cons_e.pdf

Target Capital Structure
Total Market Value: V=D+E	1,117,877,152,560.88
Debt to Total Capitalization Wd	0.041%
Equity to Total Capitalization We	99.959%

Tax
Corporate tax	20,00%
Income tax	10,00%
Sales tax	12,00%
Tax	42,00%
http://www.taxrates.cc/html/kazakhstan-tax-rates.html

WACC= Re*We + Rd*(1-T)*Wd

WACC=7.51%

Finding WACC now I valuate Discounted Cash Flow

Disadvantages of IPO

There are several disadvantages to completing an initial public offering, namely:

• Significant legal, accounting and marketing costs

• Ongoing requirement to disclose financial and business information

• Meaningful time, effort and attention required of senior management

• Risk that required funding will not be raised

• Public dissemination of information which may be useful to competitors, suppliers and customers.