Varyag Resources AB (publ)

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Annual Report 2006

Varyag Resources AB (publ)

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ÅRsRedoVisning 2006 | VARyAg ResouRces AB (puBl)

contents

1 Shareholder information 3 2006 in brief

4 Words from the Chairman 5 Message from the CEO

7 Words from the Investment Manager 8 Aims and strategy

9 Organisation and legal structure 9 Taiga Capital Ltd

11 Investment Advisory Committee 12 Development in Russia

13 Operational development 14 Portfolio companies 17 Share capital and ownership

18 Board of Directors, Management and

Investment Management

21 Directors’ Report 23 Income statements 24 Balance sheets

25 Changes in shareholders’ equity 26 Cash flow statement

27 Accounting principles

29 Notes

32 Audit report

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AnnuAl RepoRt 2006 | VARyAg ResouRces Ab (publ)

shareholder information

Annual general Meeting 1 June 2007

The Annual General Meeting of shareholders in Varyag Resources AB (publ) will be held at 3 p.m. on Friday 1 June 2007, at Forum, the premises of Salén Konferens & Matsalar, Norrlandsgatan 15, Stockholm.

participation

To be entitled to participate in the business of the Annual General Meeting, shareholders shall be registered in the share register maintained by VPC AB (Swedish Securities Register Centre) no later than 25 May 2007 and notify their intention to attend the Annual General Meeting by 4 p.m. on 28 May 2007.

notification

Notification of participation may be made:

By post to Varyag Resources AB (publ), Biblioteksgatan 6, SE-111 46 Stockholm By e-mail to info@varyag.se

By telephone to +46-8 771 85 00

Notification should include name, personal identification number (corporate registration number), address, daytime telephone number.

trustee-registered shares

Shareholders whose shares are held in the name of a trustee must temporarily re-register the shares in their own name to be entitled to participate in and exercise their voting rights at the Meeting. Such registration must be completed not later than 25 May 2007. This means that the shareholder must request such registration in ample time prior to this date.

Dividend

The Board of Directors proposes that no dividend be paid for the 2006 financial year.

Financial information

Interim report for period

ending 30 June 2007 30 August 2007

Interim report for period ending

30 September 2007 29 November 2007

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2006 in brief

• Varyag Resources was listed on the First North list of the Stockholm Stock Exchange on 7 August 2006.

• A public offering to subscribe for shares provided the company with SEK 441 million before issue expenses and SEK 425.5 million after issue expenses.

• Acquisition of 40 per cent of the shares in the Russian forestry companies PIK 89, Tuba-Les and Tuba-Lesprom for USD 10.9 million.

• The company has concluded an agreement for the investment of USD 9.7 million in the development of three aggregate deposits in Belamorsk.

events after the close of the period

• Following the close of the period, an agreement has been made to acquire a 50 per cent ownership in a terminal for loading of sawlogs to rail.

• Michail Zadornov, former Minister of Finance of the Russian Federation and currently Chairman & CEO of Vneshtorgbank24, has been appointed a member of the advisory committee.

• Agreement concerning the acquisition of the Bogouchanski sawmill, Krasnoyarsk.

• Acquisitions of receivables and shares in coalmining company ZAO PKF Unal.

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Words from the chairman

The economic trend for Russia remains favourable. In the past seven years, the country has shown GDP growth of 7 per cent annually, equal to a doubling in ten years, with an increase of 6.8 per cent in 2006. With GDP exceeding USD 1,000 billion, the Russian economy is ranked among the ten largest in the world. Continued GDP growth of 6–7 per cent annually is expected during the years immediately ahead.

In 2006, real wages rose 12 per cent, which means that wages in the Russian Federation now average USD 450 per month. Although the income gap remains high, the number of poor people is declining steadily.

Other macro-economic factors are also favourable. The currency reserve and stabilisation fund jointly total USD 450 billion, giving Russia one of the strongest currency positions in the world, ranking second after China. Foreign debt amounts to less than 10 per cent. Inflation was 9 per cent in 2006 and is expected to be slightly lower this year. The ruble is appreciating against the USD and has been convertible since 1 July 2007.

Russia, which suffered from capital migration throughout the 1990s, now has a large inflow of capital from the income it receives from oil and gas, and also because foreign investments in the country are rising. The so-called net private sector inflow was USD 42 billion in 2006, compared with USD 16 billion in 2006 and outflow of USD 8 billion in 2004.

Headed by Finance Minister Kudrin and supported by President Putin, a rigid finance and fiscal policy is being pursued. The government recently forced a stringent three-year budget through the Duma, which includes a ceiling on expenditure that limits the scope for populist changes in the years ahead.

Russia is undoubtedly facing major structural problems.

These include neglected infrastructural investments, monopo- listic tendencies in business and industry, with a strong domi- nance for the state-owned companies, difficulties in transfer- ring resources from the energy sector to other sectors and in stimulating the growth of small and midsized companies, bureaucracy and corruption in the public sector and ambigu- ous application of regulations. Among the political leaders, there is awareness about these and other fundamental issues – such as demographic and national health problems – and actions are being taken, albeit on a fragmented and individual basis, to deal with them now that Russia has greater and better resources.

At the political level, all interest is being focused on the imminent elections, to the Duma in December 2007 and to the Presidency in March 2008. The parties that are loyal to the government are expected to achieve a continued majority of the Duma, to which the threshold for election has been raised to 7 per cent. Through this and other measures, serious obstacles have been put in the way of opposition parties becoming active in Russia.

Speculations concerning whether President Putin would want or be able to manipulate the Russian constitution in

order to be re-elected for a third period have received a defini- tively negative response from Putin himself, who in his annual address to the nation on April 26 stated that a new president will be making this address next year.

The fact that Putin will step down from the presidency next year does not mean that a new political course may be expected in Russia. All indications suggest that the next Russian president will be elected from among the current politicians, ones who are closest to Putin and share his basic views, namely to use state leadership to create a politically and economically strong Russia that must be taken into account by the sur- rounding world. These presidential candidates can ride on the fact that Putin and the policy he represents enjoys the support of 80 per cent of the Russian population. At the same time, Putin has clearly stated that after he steps down, he will remain in the political arena in one position or another and contribute to the continuity of the current policies.

Ahead of the parliamentary and presidential elections, a number of repressive measures have been taken by the current political leadership with the aim of retaining what it calls stability in the country and avoiding political surprises, such as those that have occurred in Ukraine and Georgia. Several of these measures have roused warranted criticism from outside Russia. Once the presidential election has been held and a new president has formed an administration in 2008, a calmer trend may be expected in Russia in terms of domestic policy.

In terms of foreign policy, Russia, not least through President Putin as a person, have adopted a much firmer approach and have criticised the active security and defence policies being pursued by the US in both areas neighbouring on Russia and with respect to Iraq, Kosovo and the placement of defence missiles in Central Europe. There are also differ- ences of opinion between the EU and Russia on a number of issues. However, it would be completely wrong to talk about a return to Cold War conditions. It is more a matter of an adap- tation of super power relations and of international politics in general to the new situation that has arisen in the shape of Russia’s new-found strength following the period of decline noted in the 1990s, the economic growth shown by China, India and other non-European countries and the emergence of new problems and the threats resulting from globalisation.

The prospects for Varyag Resources, which invests in small unlisted Russian companies in the commodities sector, appear bright. Profit potential in the Russian forestry sector is considerable, with high demand for Russian forest raw materi- als. Our investments in companies that produce aggregates are benefiting from the prioritised Russian road-building programme. Investments in the Russian coal and gas market for domestic use could benefit from the planned increases in domestic energy prices, from the current highly subsidised level to a level that exceeds mining and production costs.

Sven Hirdman Chairman

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Message from the ceo

Dear shareholders

Varyag completed its first year of operations in 2006. The public offering was implemented during the summer, which was a turbulent period for stock markets, and the company’s share was registered of trading on the Stockholm Stock Exchange’s First North list in August. The fact that it was possible to implement both the share issue and the listing during a period when virtually all other IPOs in Europe had been can- celled or postponed until a future date is evidence that the stock market appreciates the company’s business concept. An investment in Varyag provides exposure to the Russian private equity market, which is otherwise unaccessible to most players in the stock market. During the initial months of the company’s operations, we established the structure required of a publicly listed company. We are aware that this structure results in costs and we take great pains to be cost-effective, without foregoing the need to satisfy the requirements placed on a listed company. We also completed the company’s first four investments. Varyag acquired shareholdings in three forestry companies and decided to implement an investment in an aggregates company.

A prerequisite for being able to invest in Russia is access to Russian management expertise. As a result of a management agreement with Taiga Capital Ltd, Varyag capitalises on the wealth of knowledge, expertise and experience of Russian business conditions that the members of this management team possess.

Engaging in corporate transactions in Russia is far from uncomplicated. Due diligence investigations can be a challenge, because of the absence of reliable information about the target company. Experience is required, in order to understand the structure of a group of companies with transactions between related parties. Understanding of tax-related aspects and possible implications for future operations is also important. The time consumed implementing a transaction is much longer than normal. The integrity and quality of the companies’ managements and the ability to exercise control over such managements are key factors for success. Our Russian management team is active in a market that they understand well in terms of its faults and deficiencies. While this does not guarantee that all transactions will be successful, it is a prerequisite for ensuring that they do not fail.

Varyag’s objective is to be fully invested within 18–24 months of the completion of the share issue. Our assessment is that we are positioned well to achieve this aim. Our strategy is to invest primarily in the area of natural resources, because the enormous natural resources found in Russia, combined with good access to reasonably priced energy, provide a long- term competitive edge. We shall also invest in sectors that have a fragmented structure and that are also characterised by increasing domestic and global demand. We would also be

interested in companies with neglected investment requirements and insufficient capital to implement expansion plans.

A cornerstone in our strategy is having a local Russian partner involved in the investments we make, since it is important to have insights into local conditions and relationships with authorities.

We have completed investments in what is intended to be the core of the group of forestry companies that we plan to list on the stock market in a few years’ time. Russia has approximately one fourth of the world’s forest reserves. Eventually, all the forestry companies with international ambitions will have a presence in this market. Russia is also well positioned in relation to the large and growing markets in the Far East.

The Russian economy continued to develop well in 2006.

The country has a budget surplus, a positive balance of current payments and substantial currency reserves. Inflation continues to decline and the country has healthy growth, at about 7 per cent. This creates conditions for investments – and investments are needed. While it may be said that Russia has a high educational standard, the same claim cannot be made for its infrastructure. Railways and harbours are reasonable, but the country’s road network risks inhibiting Russia’s development. Accordingly, we have decided to make a significant investment in three aggregates deposits in Karelia. Through this investment, we will become owners of a company that delivers aggregates and gravel that can be used for the build- out of the Russian road network and in the growing construction sector.

Following fiscal year-end, we have taken the initial steps towards an investment in the coal sector. Global consumption of coal is growing at more than twice the rate of oil consumption. Yet again, the major markets for coal are found in the Far East. South Korea is the world’s largest coal importer. China is expected to move from being a net exporter of coal to a net importer in the years ahead. Environmentally compatible tech- nologies, so-called clean coal processing, are being developed and are expected to have a major impact in the long term.

The first year of Varyag’s operations marks the beginning of long-term work to generate a favourable return for our shareholders. Our goal is to be able to exit from our investments after three to four years. Market conditions will deter- mine the exact timing of what will be the best return for the shareholders.

I would like to thank our shareholders for the confidence they have shown by investing in Varyag. Our approach to our mission is characterised by humility and responsibility. I would also like to thank our hard-working management team in Russia. During 2007, we will expand our operation by engaging in more investments.

Torbjörn Gunnarsson Chief Executive Officer

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Words from the Investment Manager

In general, the Management Company is very happy with the investments over the course of the past 5 months and beyond into 2007. At this stage, we are approaching the point where the Company will be fully invested and we hope to achieve this well within the stated time frame. At the outset, the Manage- ment Company was excited about the outlook for all of the sectors that we were investing into, as time goes on it is clear that this optimism was well placed. The prices of certain forest products have grown by more than 30 per cent since we entered this sector and the demand for aggregates in Russia is enormous and supply is struggling to keep up with demand, as a result prices are growing rapidly. Similarly, we continue to believe that Russian coal assets will be revalued as soon as the market fully appreciates that rising domestic gas prices will have a knock on effect on coal prices inside Russia. The key challenge in Russia continues to be project implementation, identifying reliable co-investors and managers is the hardest task that we face. This process always includes some disap- pointments, but generally we have been very happy with the support and assistance of our Russian co-investors, we believe that without strong local partners it would impossible to achieve the positive dynamics that we have seen in all of our businesses. In addition, the Russian business environment requires that investors have good relations with Regional and Federal Government, with support from the Company’s Chair- man, Vladimir Gaidamakin has been able to cement our position in the regions where. We have found regional govern- ments to be fully supportive of our initiatives and they are working actively to facilitate the investment environment.

Competition is strengthening in all of our sectors and we believe that by the end of next year most of the remaining attractive assets in our target sectors will enjoy backing from institutional investors such as Varyag. We have now evaluated most of the players in our target sectors and are happy with the transactions that we have executed. The most disappoint- ing sector has been the coal sector for us, we have had to walk away from two deals after months of work, however we are now present in this sector via our investment in ZAO PFK Unal. This project carries significant legal risks and there are still a number of steps to go before there is enough clarity to allow us to really recapitalize this company, however we believe that we can achieve that clarity and that Unal requests a uniquely low cost way into the sector. We intend to expand our investment in the coal sector and hope to enter into at least one early stage project before the end of 2007.

We will now be partially shifting our attention away from acquisitions towards beginning the long process of preparing some of the companies that we acquired for exit. This process will involve a lot of painstaking legal and financial work, but is clearly a precondition for achieving exits at a premium valua- tion.

Aleksandr Williams Investment Manager

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Aims and strategy

business concept

Varyag Resources shall invest, actively manage and exit investments mainly in unlisted natural resources companies in Russia and the rest of the CIS.

overall objective

Varyag Resources’ overall objective is to provide its shareholders with an attractive total return.

Financial and operational targets

• The majority of capital raised from the share issue in august 2006 shall be invested within 18 to 24 months in accordance with the investment strategy.

• Primarily to finance investments with equity although leverage may be used from time to time.

• Exit investments within three to four years from the initial investment.

Dividend policy

Over time, Varyag Resources will distribute capital gains achieved after performance fees, taxes and other costs, although always considering the Group’s investment prospects, liquidity and financial position in general. Dividends may be made in the form of distribution, redemption or repur- chase of shares.

strategy

• Investments will primarily be made within the natural resources sector in Russia and the other CIS countries in companies with a defined resource endowment, existing operations, strong management and ready access to infrastructure. However, it will be possible in the future to invest in other sectors if deemed attractive for the shareholders.

• Investments will not be made unless the Group believes that they will generate an IRR of 30 per cent per annum.

• Investments will mainly be financed with equity, although leverage may be used when appropriate.

• The Group may not have an exposure exceeding 20 per cent of the value of its gross assets in a single investment. There are however no limitations on ownership share or size in other respects.

• Investments will primarily made in unlisted companies, but the Group will be able to invest up to 30 per cent of the value of its gross assets in the securities of listed, but illiquid shares when it is deemed possible to achieve an IRR of at least 30 per cent.

• The Group will not seek to assume full ownership control over its investments, but will rather seek to co-operate with existing owners and management in order to achieve mutu- ally agreed targets in terms of expanding the business through capital expenditure and/or acquisitions.

• The aim is to exit investments through stock market list- ings, while alternative exit routes, including selling investments to industrial or financial investors also will be considered. Investments will only be made in companies, which can readily achieve the scale necessary to become a listed company within a reasonable timeframe.

• Through a management agreement with Taiga Capital Ltd, the Group has a team of investment managers based in Russia. This provides necessary experience, knowledge and competencies concerning Russian business conditions.

• The Group’s cash shall be managed with limited risk and generate a satisfactory return, secure short and long term capital sourcing and maintain flexibility and secure the manoeuvrability to make investments.

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organisation and legal structure

Varyag Resources AB is the Group’s Parent Company, with its registered office in Stockholm. In addition to the Parent Company, the Group consists of the subsidiary Varyag Capital (Cyprus) Ltd with its registered office in Nicosia, Cyprus, and Varyag Finance GmbH with its registered office in Zug, Switzerland. Operations began on 1 August 2006 and the company has been listed on the First North list of the Stockholm Stock Exchange since 7 August 2006. Investments in Russia are owned via the wholly owned subsidiary Varyag Capital (Cyprus) Ltd. Varyag Capital (Cyprus) Ltd has concluded a management agreement with Taiga Capital Ltd, which manages the company’s investments. The management agreement extends for a period of seven years from 31 July 2006.

Investment decisions are made by Varyag Capital (Cyprus) Ltd on the basis of proposals made by the Management Company and advice from the Investment Advisory Committee; see below.

legal structure, 31 December 2006

Varyag Capital (Cyprus) Ltd Cyprus Varyag Resources AB

Sweden

100%

Investments

Advisory Investment Committee Varyag Finance Gmbh

Switzerland

Taiga Capital Ltd

Investments Investments

taiga capital ltd

The Management Company, Taiga Capital Ltd, operates from Moscow and is owned by Aleksandr Williams. The Manage- ment Company intends to manage and develop the Group’s investments to the best of its ability and to provide the Group with advice and recommendations regarding investments and exits. Taiga Capital provides management and advisory services to Varyag Resources in accordance with the management agreement with Varyag Capital (Cyprus) Ltd. The services provided by the Management Company pursuant to the Manage- ment Agreement include the following:

• Analysing the market, economic and political conditions and trends in Russia and other CIS countries;

• Identifying and evaluating investment opportunities;

• Presenting investment opportunities to Varyag Resources for approval;

• Negotiating and structuring investments;

• Appointment of other professional advisors;

• Assuming board positions in Investee Companies;

• Managing of and developing the Investments;

• Seek exit opportunities;

• Coordinating collection of financial returns due to the Company such as dividends or any proceeds received from Investments;

• Coordinating the preparation of accounts and the calcula- tion of the net assets value of the Investments for approval by the Board and auditors according to the Company’s accounting principles.

The Management Agreement is valid for a period of seven years. The Agreement may be extended following this period based on agreement between the Management Company and Varyag.

AleksAnDR WIllIAMs

Aleksandr Williams, born in 1968, manages the Management Company’s operations. Williams has more than thirteen years experience of asset management, corporate finance and advisory activities in Russia and the rest of the CIS. Aleksandr has been a full-time resident in Moscow since 1993 and was previously responsible for Vostok Nafta’s operations in Russia.

Williams’ responsibilities included handling trade sales, corporate actions, buy-side research, tax planning and daily management of Vostok’s Russian entities. Aleksandr has handled trade sales and offmarket transactions with every major Russian oil company including, LUKoil, YUKOS, KazMunaiGaz, the government of Bashkiria, the government of Yakutia and CNPC. During six years at PricewaterhouseCoopers, Williams worked closely with Russian management teams as a management consultant to introduce financial forecasting and cash- flow-based project evaluation to Russian corporations, particularly with LUKoil. Aleksandr has a degree in theoretical physics from the University of St. Andrews and a Master of Business Administration from the City University Business School (London). He was employed by Hagströmer & Qviberg AB between the period November 1997 to October 1999, stationed in Moscow, mainly in the field of corporate finance.

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Investment Advisory committee

InVestMent ADVIsoRy coMMIttee

The Group has an Investment Advisory Committee consisting of three members. All investment and divestment proposals from the Management Company are reviewed by the Invest- ment Advisory Committee, with the aim of receiving advice and recommendations. Accordingly, the Investment Advisory Committee is a key resource in connection with Varyag’s con- siderations ahead of investments and exits. The following is a brief presentation of the members of the Investment Advisory Committee during 2006.

yeVgenI yAsIn, Moscow, born 1934. Yevgeni Yasin is Research Director at the Higher School of Economics in Moscow. In addition, he is the Director of the Expert Group which provides macroeconomic policy advice to the Russian Government.

Yasin was Minister of the Economy of the Russian Federation between 1994–1997 and Minister without Portfolio in the Russian Government 1997–1998, responsible for economic issues. Furthermore, he is head of the “Liberal Mission” non- governmental organisation. Yasin is one of the key architects of the Russian reform process.

Education: Graduate of the economics faculty of the Mos- cow State University (Lomonosov), submitted a doctorate the- sis in 1968 and named professor of economics in 1979.

seRgeI VAsIlIeV, born 1957 Sergei Vasiliev is senator and represents the St. Petersburg area in the Federation Council, He is Chairman of the Federation Council’s committee on the Securities Market. Prior to being appointed a senator, Mr. Vasiliev held a number of important posts in the Russian Government, in particular he was Deputy Minister of the Economy between 1994 and 1997. Sergei Vasiliev was a key architect of reforms in today’s Russia and formed part of the core team that designed and implemented Russia’s transfor- mation to a market economy.

Education: Doctor of economics and graduate of the Leningrad finance economics institute N.A.Voznesenskovo (1979).

AlexAnDeR JAMes steWARt, London, born 1950. Alexander James Stewart has over 20 years of capital markets experience with an emphasis on emerging markets. Stewart has been involved in both equity sales and research. He has held a number of important positions in leading investment banks working out of the City of London. Stewart’s previous responsibilities included Head of Equities at RZB, Head of Equities at Banco do Brasil and Head of Emerging Market Equity Sales and Deutsche Morgan Grenfell. He is currently Head of Insti- tutional Research at Eden Financial, a specialist firm providing independent research to institutional investors.

Education: Stewart is a graduate of Oriel College, Oxford.

chAnges In the InVestMent ADVIsoRy coMMIttee sInce yeAR-enD

Michail Zadornov, former Minister of Finance of the Russian Federation and currently Chairman & CEO of Vneshtorgbank24, has been appointed a member of the advisory committee.

Yegenij Yasin resigned from the Committee at year-end.

MIchAIl ZADoRnoV

Michael Zadornov is currently President of VTB24 (ZAO), a subsidiary of Vneshtorgbank focused on serving retail banking customers and small businesses. Zadornov held a number of important positions in Government of the RF, including: from November 1997 to May 1999 – Minister of Finance of the Russian Federation, in May 1999 he was appointed the First Deputy Prime Minister of the Russian Federation, June–

October 1999 M. Zadornov was Special Representative of the President of the RF on International Finance Institutions Relations being in position of the First Deputy Prime Minister, he was also appointed Special Adviser of the President of the Sberbank of the RF in October 1999. In 1997 Zadornov was a Member of the Board of the Sberbank of the RF and acted as Deputy Chairman of the Sberbank’s Supervisory Board.

Zadornov was first elected to the State Duma on the 12th December 1993 and was a deputy of the State Duma of the Federal Assembly of Russia of the 1st & 2nd convocations in 1994–1997 as well as Head of the Committee on Budget, Taxes, Banks & Finance. In December 1999 Mr. Zadornov was elected to the State Duma of the Federal Assembly of Russia of the 3rd convocation & appointed Deputy Head of Committee of the State Duma on Budget & Taxes, in December 2003 he was elected to the State Duma of the Federal Assembly of Russia of the 4th convocation and appointed the Chairman of Subcommittee on Monetary Policy, Exchange and Capital Control, Activities of the Central Bank of the Russia Federation.

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2

The Russian economy is continuing to display high growth.

The GDP growth rate was approximately 6.8 per cent in 2006.

Assuming stable political development in the country, growth of the same magnitude is expected during the years immediately ahead. Russia has a large current account surplus and a substantial budget surplus, as a result of high oil prices and its regressive oil tax. The federal government had a budget surplus corresponding to 7.5 per cent of GDP in 2006. The current account surplus amounted to some USD 100 billion for 2006. Currency reserves totalled USD 300 billion at the end of 2006. In addition, as at February 2007, the government had accumulated a further USD 100 billion in oil and stabilisation reserves. Household consumption rose by about 10 per cent.

In terms of both producer and consumer prices, inflation levels continue to decline and consumer price inflation was 9 per cent for full-year 2006.

Oil and gas are the principal key factors underlying the country’s economic growth, although the importance of private consumption has increased. The country’s economic policy is dependent on the trend of energy prices, which affect the budget and major investment projects. The foremost risks to the economic trend consist of changes in the political development ahead of the 2008 presidential election, as well as a significant and protracted decline in oil prices. The presidential election should not result in any change in Russia’s stabilisation policy. However, the Russian constitution entails that Putin is precluded from being elected for a third period during the presidential election in 2008. Regardless of Putin’s succes- sor, the stabilisation policy is expected to continue.

% increase year to date

6 8 10 12 14 16 18 20 22 24 26

Nov 2006 Sep 2006 Jul 2006 May 2006 Mar 2006 Jan 2006 Nov 2005 Sep 2005 Jul 2005 May 2005 Mar 20

05 Jan 2005

%

PPI inflation CPI inflation

Development in Russia

Source: Rosstat

Year to date inflation – CPI and PPI (Jan 2005 to Dec 2006)

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operational development

Since the operations were established, a number of investments in the natural resources sector have been evaluated.

These have primarily pertained to the forest, coal and aggregates areas. During the autumn, the company invested in three forest products companies and an aggregates project.

Forest products

After many years of flat to declining prices, the price of forest products (sawlogs and sawnwood) finally started to rise, which began in September 2006 and continued into 2007.

In global terms, the market for forest products has been extremely weak in North America on the back of a marked slowdown in housing activity. For the purposes of the portfolio companies, we believe that the Chinese and Japanese markets are very much more relevant for price setting. The Chinese economy continues to grow at rates of around 9 per cent and although it is showing signs of overheating in selected sectors there is no reason to expect a rapid slowdown. Similarly the Japanese economy is showing reasonable signs of growth, with annualised GDP growth of 4.8 per cent in the fourth quarter of 2006. As a result of these positive developments in Asian markets and the rapid domestic expansion inside Russia, the price of forest products has grown rapidly in recent months.

The assessment of our portfolio companies is that stocks in Japan and in Eastern Russian ports are very low and several buyers are willing to increase prices and pre-pay in order to secure supply. In these conditions, we believe that there is scope for further price increases.

The Russian Government enacted a new Forest Code at the end of 2006 which, among other implications, meant that the responsibility for government supervision of forests was trans- ferred from the Federal Forestry Agency to regional agencies.

What has been more important has been the new export tax policy, which has been designed to essentially eliminate the export of sawlogs from Russia. The government recently announced a new export tax regime, which will increase the export duty up to a maximum of EUR 50 per cubic meter from April 2009. Such a duty would effectively make the export of sawlogs uneconomic, given that the ex-mill price is currently some USD 70 per m³. The intention is that this new duty regime will provide a stimulus to invest in sawmilling inside Russia.

Another important development has been the introduction of Rail Terminals in the Irkutsk Region, an initiative that has been designed so that only a limited number of companies are allowed access to railway wagons to transport sawlogs to export markets. The initiative has been advertised as helping to control illegal logging, however in reality it is being used as a means to extract profits from smaller harvesting companies by those companies who have enough political influence to achieve the status of a Rail Terminal. The legality of this regime is being challenged in the Russian courts since it has no legis- lative basis. However, to counter this new situation, Varyag has decided to acquire a 50 per cent share in a rail terminal for USD 0.37 million.

Forestry

The Company acquired a 40 per cent interest in three Russian companies; PIK 89, Tuba-Les and Tuba-Lesprom, all of which are located in Ust-Ilimsk in the Irkutsk region. Their combined annual allowable cut (AAC) amounts to 1,086,000 cubic metres per year and the annual harvest for 2007 is expected to be about 700,000 cubic metres. By means of these acquisitions, about half of the asset base deemed appropriate for a market listing has been gained.

These forestry companies are taking steps to increase the degree of mechanisation in the harvesting operations by buy- ing new harvesting equipment and increasing the volume of sawnwood. There is substantial synergy between the companies and the Management Company has appointed a steering group to identify and implement measures to expand operations and raise the level of processing. The international brand, Angara, will be the joint brand for wood products and timber. Previously, the operations were based mainly on man- ual harvesting. To raise the harvest level within the framework of the licences, harvesters at a value of some USD 3 million have been acquired. These have now been delivered and are being used in production.

USD per m3 (excl railway wagon)

% 100 110 120 130 140 150 160 170 180 190 200

Jan 2007 Dec 2006 Nov 2006 Oct 2006 Sep 2006 Aug 2006 Jul 2006

Source: PIK-2005 management estimates

Sawnwood prices (less railroad charge) 2006–2007

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portfolio companies

pIk-89

A 40 per cent shareholding was acquired for some USD 8.1 million. Vostok Nafta owns 40 per cent and Russian partners own 20 per cent of the remaining shares. Turnover for 2006 amounted to some USD 26 million. PIK-89 is expected to comprise the core of a forestry group. The company is one of the largest dedicated harvesting and sawmill companies in the Irkutsk region. Its leases cover an area of 345,000 hectares.

The forest holdings are favourably located with an average distance of 90 km to the sawmills, which have direct connections to the rail network. PIK-89 is permitted to cut 629,000 cubic metres of roundwood annually. Annual harvesting is some- what more than 400,000 cubic metres. Using its own sawmills, the company produces about 100,000 cubic metres of sawn timber products as well as 1,800 square metres of finger- joined products along with glulam beams. Some 90 per cent of output is exported, primarily to Japan, China and the Middle East. Since acquiring this stake, PIK-89 has received delivery of a new Timberjack harvesting and forwarding complex which became operational in November 2006. PIK-89 will expand its sawmilling operations during 2007 through the expansion of its sawnwood sorting line and the acquisition of further kilns, as well as acquiring more log transporting equipment to serve its harvesting business. These acquisitions will be financed through operating cash flow and an increase in debt.

tuba-les

A 40 per cent shareholding was acquired for approximately USD 2.1 million. Vostok Nafta owns 40 per cent and Russian partners own 20 per cent of the remaining shares. Turnover for 2006 amounted to some USD 2.2 million. The company is an integrated harvesting and sawmilling operation, and the leases at its disposal cover an area of 120,000 hectares. Tuba- Les is licensed to fell some 242,000 cubic meters of roundwood, while actual harvesting volumes are about 185,000 cubic metres. The company’s sawmill produces some 22,000 cubic metres of sawnwood. Logistically, the forest holdings are favourably located with an average distance of some 50 km to the sawmill. Since becoming a shareholder of the company, Tuba-Les has taken delivery of a new Timberjack harvesting and forwarding complex, which was also delivered in Novem- ber 2006.

tuba-lesprom

Varyag acquired a 40 per cent shareholding for some USD 0.7 million. Vostok Nafta owns 40 per cent and the Russian partner owns 20 per cent of the remaining shares. Turnover for 2006 amounted to some USD 1 million. The company holds a licence to a forest area with an annual allowable cut of 139,000 cubic metres with a lease area of slightly over 70,000 hectares.

Actual harvest volumes are currently 109,000 cubic metres.

Saw timber is currently sold primarily to China and Japan. The company will be merged with Tuba-Les during 2007 as the company’s operations have already been fully integrated into Tuba-Les.

AggRegAtes

In November 2006, Varyag committed to invest USD 2.958 million in a newly created Cyprus company called Russian Gravel Co., with our Russian partners contributing licences to three aggregate deposits and a 25 per cent interest in an operating quarry called Zalatukha. As a result of this transaction Varyag will acquire a 51 per cent of the shares of Russian Gravel Co. In addition to investing in equity, Varyag has committed to providing a USD 6.742 million convertible loan facility to Russian Gravel Co. The loan will be converted upon a number of events, including an exit of the project. In the event that the loan is converted upon its fourth anniversary, Varyag will increase its equity interest in Russian Gravel Co. to just over 77 per cent. The remaining shares are owned by local Russian partners.

The funds invested will be used to finance the development of three aggregates reserves near Belamorsk in Karelia. The company in Cyprus has a number of fully owned Russian subsidiaries, which hold the licences to develop three aggregate deposits, which contain a combined reserve base of 152 million tonnes of aggregates under Russian reserve classification standards. When fully developed, the company is expected to attain annual output of some 1.5 million tonnes of aggregates.

Whilst the Cyprus company was being incorporated, Varyag provided an interim loan to a Russian company, Belomorski Karrier. This loan will be refunded from the proceeds received when a convertible loan is issued by Russian Gravel Co. once the process of incorporation of Russian Gravel Co. is complete, at which point Belomorski Karrier will become a wholly owned subsidiary of Russian Gravel Co. This investment will provide exposure to Russia’s rapidly expanding construction industry. From the logistics viewpoint, the deposits are very attractively located with access to both the railway and the Belomorsk canals. Russian aggregates consumption is currently about 150 million tonnes annually. The approved federal road construction programme decided on in Russia is expected to increase demand for this material by about 65 per cent. The exit horizon for this investment is when the initial production capacity is achieved, which is expected to occur during 2008. At this time, it will be possible to decide on further expansion or possibly an exit depending on market conditions.

Since making this investment, the Russian partners conducted a tender for a suitable equipment supplier for crushing and mining. The procurement process resulted in Metso signing an equipment supply contract in January 2007. It is expected that the mining equipment will be installed and operational by the end of August 2007.

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AnnuAl RepoRt 2006 | VARyAg ResouRces Ab (publ) AcquIsItIons AFteR the bAlAnce-sheet DAte

An agreement has been reached to acquire a 50 per cent ownership of a rail terminal for loading of logs to rail. The terminal is located by Ust-Ilimsk and handles essentially all rail ship- ments around Ust-Ilimsk. The holding will be acquired for the sum of USD 0.37 million and includes a commitment to invest a further USD 0.5 million. The regional government has decided that only approved terminals have the right to order railway wagons for exporting sawlogs. This new regulation has been imposed as part of a campaign against illegal export of logs.

Varyag Resources has entered into two agreements regarding the acquisition of 80 per cent and subsequently 20 per cent of the share capital of OOO “Bogouchanski LPK” from two Russian individuals for a total consideration of RR 84 million.

The Company’s main asset is a sawmilling production facility located in the Bogouchan region of Krasnoyarsk. The facility is located on Southern bank of the Angara river. The production facility was built by a Russian-Dutch joint venture in 1992 and has an intended capacity of some 50,000 m³ of kiln dried sawnwood. The facility has been inoperative since 2000. Varyag’s Investment Manager (Taiga Capital Limited) has identified a local partner who intends to acquire 25 per cent of the share capital. The local partner together with the company’s management will be responsible for reanimating the facility. Much of the Company’s current equipment needs to be repaired or replaced. The budget for this work is provisionally some USD 8.5 million in equity financing. The final amount of equity fund- ing will be determined once a definitive investment plan has been established. It is intended to increase the facility’s production capacity up to 100,000 m³ of kiln-dried sawnwood and to start production in the fourth quarter of 2007.

Varyag has acquired receivables and equity in the coalmining company ZAO PFK Unal for a combined amount of RR 29.3 million. The acquisitions will provide Varyag with a dominant position on the company’s creditor committee. The company has a mining licence with 49 million tonnes of ABC1 thermal coal reserves, of which 28 million tonnes are esti- mated as being currently recoverable. The company operates the Yeniseiski mine in the town of Chernogorsk in the Republic of Khakasia, Siberia. The company is not in full compliance with the terms of the mining licence and has received a Notice of Non-compliance requiring that the company take remedial action before July 2007. The company is currently in the final stages of bankruptcy and is now under external receivership and is being managed by an external administrator who reports to the company’s creditors. The creditors have effective control of the company. At the end of the bankruptcy process, the company’s assets will be sold at auction and the win- ning bidder is expected to inherit the Company’s mining

licence which runs through until 2013. It is Varyag Resources’

intention to participate in the planned equipment auction. In addition to acquiring a significant portion of the creditors’

receivables, Varyag Resources will provide a loan of up to RR 15 million in order to fund working capital and the mainte- nance of the mining operations. These amounts will be repaid from the proceeds of the fixed asset auction. The company was previously a leading underground coal mine during Soviet times and previously produced 1 million tonnes of thermal coal per annum with an average calorific quality of 5,000 kcal/kg.

The company’s underground mining operations are carried out at a depth of some 127 meters. The mine has a Russian safety level of 1, which is the lowest risk level in terms of gas accumulation. The mine has been out of operation since Feb- ruary 2006 following a localised fire, and the company has subsequently been getting further into debt. The company and its shareholders and creditors are parties to some nine lawsuits, these claims are currently being heard in various Russian courts.

In the event that Varyag Resources succeeds in acquiring the company’s assets at auction and in being rewarded the company’s mining licence, Varyag intends to provide development capital to reanimate the mining operations. The mine is expected to achieve 1 million tonnes of annual production.

This investment is subject to several risks, any of which could lead to a total loss of the amount invested. However, the initial capital commitment to acquire certain creditors, fund working capital and take steps to address licence non-compliance is relatively limited. Significant capital will only subsequently be provided in the event that Varyag is able to acquire the Compa- ny’s assets at auction. This project will be carried out together with ZAO Trans-Nafta on a 50-50 basis. Accordingly Varyag’s exposure will be limited to some USD 1.7 million up to the planned fixed asset auction. Although this investment carries significant risks, the upside potential is commensurately large.

geneRAl

On a continuous basis, various projects are evaluated in the commodities sector. Varyag is regarded as well positioned in terms of its target of being fully invested within 18-24 months of its initial listing in August 2006. There is favourable potential to complete acquisitions at attractive levels in the natural resources sector. Investments frequently need to be consolidated and co-ordinated to attain economies of scale, and capital injected to ensure growth and expansion. To prepare and create the conditions for attractive prices in exit situations, part of the value growth is attained through creating legal and financial transparency. Transparency also creates the conditions for financing with external capital.

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share capital and ownership

The Varyag share was listed on the First North list of the Stock- holm Stock Exchange on 7 August 2006. Trading is conducted under the ticker designation VARY and a trading lot comprises 100 shares. The share price at listing was SEK 50.

The public offering and subsequent new share issue in August 2006 raised the company’ share capital by SEK 88,188,000 to SEK 88,688,000 and the number of shares out- standing to 8,868,800.

The turnover rate for the share during 2006 was approximately 120 per cent. The average daily turnover during the year was 40,000 shares, corresponding to approximately SEK 2 million. The average difference between the bid price and the selling price was about 1 per cent.

At the close of the period, the share price for Varyag Resources was SEK 57.25 kronor and market capitalisation was approximately SEK 508 million. The number of shareholders was 1,979.

CHAnGeS in SHAre CApiTAl

Transaction Year

Change in number of shares

Total number of shares

Change in share capital, SEK

Total share capital, SEK

The company’s formation 2005 1,000 1,000 100,000 100,000

Share split 2006 9,000 10,000 – 100,000

New share issue¹⁾ 2006 40,000 50,000 400,000 500,000

New share issue²⁾ 2006 8,818,800 8,868,800 88,188,000 88,688,000

1) New share issue to a company in the HQ Group.

2) New share issue after a public offering to subscribe for shares.

MAJoR shAReholDeRs As oF 31 DeceMbeR 2006 AccoRDIng to Vpc

Shareholder Number Percentage

Skrindan AB 885,000 9.98

Staffan Rasjö 800,000 9.02

HQ Rysslandsfond 789,900 8.91

Fonden Zenit 589,000 6.64

Dunross & Co 400,000 4.51

CS SEC (Europé) Ltd 369,000 4.16

EFG Private Bank SA 280,000 3.16

Perj Förvaltnings AB AB 200,000 2.26

Euroclear Bank S.A/N.V 181,800 2.05

Johan Rapp 134,000 1.51

Other 4,240,100 47.81

8,868,800 100.00

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board of Directors, management and auditors

sVen hIRDMAn

Chairman of the Board since 2006 Bromma, born in 1939

Served in the Swedish foreign services from 1963 to 2004, most recently as Sweden’s ambassador in Moscow from 1994 to 2004 with concurrent accreditation in other CIS countries. Slavic scholar with M.A. and B.A. from Uppsala University.

Performed his military service in 1958–59 at the Swedish Army’s Interpreters College in Uppsala.

Currently works as a business consultant and lecturer with a focus on Russia and international politics. Also serves as an introducer for foreign emissaries at the Swedish Ministry of Foreign Affairs, a member of the Advisory Board for Mint 2 and an advisor on foreign affairs for Oriflame.

Shareholding in Varyag Resources AB: 2,400 shares.

AgnetA DRebeR Board Member since 2006 Stockholm, born in 1946

B.A. in Russian and English and M.B.A. from Stockholm School of Economics. Since 2002, has been CEO of Livsmedelsföretagen, an industry and employers association for the Swedish food and drink industry. Board member of Fritt Näringsliv, the Ohlin Institute, Länsförsäkringar Stockholm, the Swedish Emergency Management Agency’s Industry Policy Council, Institutet för livsmedel och Bioteknik AB and the Swedish Nutrition Founda- tion, and deputy member of the Swedish Press Council and the Board of Governors of the Stock- holm School of Economics.

thoMAs kRIshAn Board Member since 2006 Stockholm, born in 1968

M.B.A. from Uppsala University. Board member of Payer AB, Gamefederation AB, Lateo AB and Krishnan Investment AB.

Shareholding in Varyag Resources AB: 20,000 shares.

board of Directors

pIA RuDengRen Board Member since 2006 Stockholm, born in 1965

M.B.A. from the Stockholm School of Economics.

Chairman of Q-Med AB and Board member of BioPhausia AB and Zodiak Television AB.

JohAn ungeR Board Member since 2006 Stocksund born in 1961

M.B.A. from Uppsala University. Board member of BioPhausia AB, ALM Equity AB and DGCOne AB.

toRbJÖRn gunnARsson Board Member since 2006,

Chief Executive Officer (CEO) of Varyag Resources AB Stockholm, born in 1959

M.B.A. from Stockholm School of Economics.

Board Member of G Gunnarsson Fastighets AB, Mandator and Södra Hotellet AB.

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senior executives

toRbJÖRn gunnARsson Board Member since 2006,

Chief Executive Officer (CEO) of Varyag Resources AB Stockholm, born in 1959

See last page.

gÖstA lunDgRen CFO until April 2007 Stockholm, born 1955

Insourced consultant to position of Chief Financial Officer until 2006. M.B.A. and B.A. from Uppsala University. Board Member and partner in Skön- heten Sweden KB, Musikalproduction JCS KB, Sound of Music i Sverige KB, Mineralvattenprojekt i Åstorp AB and own companies.

nADJA boRIsoVA CFO as of April 2007 Stockholm, born 1968

Graduate in business administration, Certified Accountant from the ACCA (Chartered Association of Certified Accountants in the UK) and engineering graduate from the St. Petersburg Technical Univer- sity.

Investment Manager – taiga capital limited

AleksAnDR WIllIAMs

CEO and owner of the Management Company Moscow, born 1968

Aleksandr Williams has more than thirteen years experience of asset management, corporate finance and advisory activities in Russia and the rest of CIS. Has been a full-time resident in Moscow since 1993. For the past four years, has managed Vostok Nafta’s activities in Russia in his capacity as General Director and authorised signatory for all of Vostok Nafta’s Russian entities which hold some USD 2,200 million in Russian securities.

Responsibilities included handling trade sales, corporate actions, buy-side research, tax planning and daily management of Vostok’s Russian entities.

Has handled trade sales and off-market transactions with every major Russian oil company including, LUKoil, YUKOS, KazMunaiGaz, the government of Bashkiria, the government of Yakutia and CNPC. These transactions had a total deal value of some USD 250 million (USD 170 million net to Vostok) generating an IRR of 57 per cent. The corporate actions have included the largest-ever minority shareholder action in Russia (covering Russia, BVI and Belgium) against Megionneftegaz and its majority shareholder NGK Slavneft. The action was instrumental in achieving a buy-out offer for all minority shareholders. During six years at PricewaterhouseCoopers, Aleksandr worked closely with Russian management teams as a management consultant to introduce financial forecasting and cash-flow-based project evaluation to Russian corporations, particularly with LUKoil.

An active member of the Russia-OECD Corporate Governance roundtable and has a degree in theoretical physics from the University of St. Andrews and a Master of Business Administration from the City University Business School (London).

Employed by Hagströmer & Qviberg AB between November 1997 and October 1999, where he was stationed in Moscow and was mainly active in corporate finance.

Holding in Varyag Resources: 66,000 shares.

VlADIMIR gAIDAMAkA Partner of the Management Company Moscow, born 1956

Has extensive experienced and has worked at senior levels both in government and in the commer- cial sector. Spent much of his working career in the oil & gas industry and in the forestry sector and brings a broad contact network in these sectors.

Currently retained as a consultant to one of Vostok Nafta’s Russian entities. In this role, he has handled federal and regional government relations. Has been instrumental in obtaining access to senior political and business figures in Russia and his role in the Management Company will be to generate various business deals and transactions. Previous roles include acting as an Advisor to Federation Council on which he represented Bashkiria. Prior to this, acted as Chief Specialist of Gosnab (SSSR), a state company which formerly was responsible for all planning and procurement for the Soviet Union’s forestry and chemicals industries.

Vladimir was also a director of RMNNTK, the centre of analysis of oil & gas exploration and development.

Alexey VAnyAn Financial Analyst

After receiving a degree in Mathematics and Business Administration from the University of Waterloo, Canada in 2003, Alexey worked as a consultant and project manager for CentreInvest Group, Molten Group and MID Consulting in Moscow on projects in the oil and gas, electricity and forestry sectors, where he concentrated on company restructuring, strategic and financial planning. Alexey joined Taiga Capital in July 2006.

JonAthAn WIggIn Financial Analyst

After completing a joint honours degree in Russian and Italian at Oxford University in 2002, Jonathan embarked on a successful career as founder/director of two London-based companies with operations throughout the former Soviet Republics and also in China. He is a fluent Russian speaker with a wide network of contacts in Taiga’s geographical areas of operation, where he has spent significant periods of time over several years. Jonathan joined Taiga Capital in April 2007.

seRgey IVAnysh Lawyer

Sergey has more than ten years’ professional experience as a legal consultant specialising in civil law and in particular contract and company law. He is responsible for the legal structure of share purchase contracts and provides legal support to all investment projects. Sergey received his Law degree from the University of the Russian Academy of Educa- tion in 1999 and joined Taiga Capital in April 2006.

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2 Directors’ report

group

geneRAl InFoRMAtIon About the opeRAtIon

Varyag Resources shall invest, actively manage and exit investments mainly in unlisted natural resources companies in Russia and the rest of the CIS.

Varyag Resources AB is the Group’s Parent Company, with its registered office in Stockholm. In addition to the Parent Company, the Group consists of the subsidiary Varyag Capital (Cyprus) Ltd with its registered office in Nicosia, Cyprus, and Varyag Finance GmbH with its registered office in Zug, Switzerland. Operations began on 1 August 2006 and the company was listed on the First North list of the Stockholm Stock Exchange on 7 August 2006. Investments in Russia are owned via the newly started wholly owned subsidiary Varyag Capital (Cyprus) Ltd. Varyag Resources has concluded a management agreement with Taiga Capital Ltd, which manages the company’s investments. The management agreement extends for a period of seven years from 31 July 2006.

eARnIngs

The Group did not conduct any operations during the first six months of the year. The Group was established during the year and thus no comparative data are provided.

Operating profit/loss

The operating loss totalled SEK 8,288,000 for the full year.

Operating expenses consist primarily of management service expenses in Russia amounting to SEK 4,644,000 and person- nel expenses of SEK 1,377,000.

Financial income

Interest income amounted to SEK 4,828,000 for the full year.

Unrealised exchange-rate losses amounted to SEK 9,042,000, of which approximately half had been recovered up to the reporting date for the year-end report. The exchange-rate losses had no impact on cash flow.

Tax and earnings after tax

The loss after tax for the year was SEK 12,502,000. The Group has no tax expenses. The tax receivable for accrued loss carry- forwards is not reported.

cAsh FloW AnD FInAncIAl posItIon

Cash flow amounted to SEK 325,046,000. July 2006 marked the completion of an offering to subscribe for shares that provided the company with SEK 440,940,000 before issue expenses. The subscription price was SEK 50 per share.

The new share issue provided the company with SEK 425,470,687 after share issue expenses.

Financing is currently conducted using shareholders’ equity.

Reported shareholders’ equity at the close of the period was SEK 412,991,000, which corresponds to SEK 46.43 per share and an equity/assets ratio of 99.5 per cent. Cash and cash equivalents on the balance-sheet date totalled SEK 316,100,000.

poRtFolIo coMpAnIes

In October, 40 per cent of the shares in three Russian forest products companies in Ust Ilimsk – PIK-89, Tuba-Les and Tuba-Lesprom – were acquired for a total of USD 10.9 million.

These companies are associated companies in the Group and would normally have been reported in accordance with the equity method. The companies’ financial statements and

reporting are currently being converted from reports required by fiscal authorities to accounts that comply with generally acceptable accounting practices. The companies also need to strengthen their control and follow-up procedures. Since the financial accounts for 2006 do not fully comply with generally acceptable accounting practices, the investment has been reported at acquisition value in the consolidated balance sheet at 31 December 2006. Customary impairment tests of the investments have been performed, which did not give rise to any need to adjust the original acquisition values.

In November, an agreement was reached concerning the acquisition of 51 per cent of the shares in a newly formed Cyprus-based company, Russian Gravel Co, which was established to finance the development of three reserves of aggregates near Belamorsk in Karelia. The investment will total USD 9.7 million in shares and convertible debentures. The formation of this company was ongoing on the balance-sheet date.

In December, a bridging loan of USD 2.1 million was granted to the Russian company, Belamorski Karrier, for investment in equipment. The loan will be repaid from the proceeds from the convertible loan that Varyag will issue to the Cyprus-based company when the formation of the company is complete, whereby Belamorski Karrier will become a wholly owned subsidiary of Russian Gravel Co.

The bridging loan is reported among other current receivables on the balance-sheet date.

sIgnIFIcAnt RIsks AnD unceRtAInty FActoRs Risk factors

Varyag Resource’s operations, financial position and earnings may be affected by a number of risk factors. One risk factor that may be considered significant is associated with the actual business focus of investing in unlisted companies in Russia and the rest of CIS.

The risk factors deserving attention include: Country spe- cific risks, political risks, liquidity risks, borrowing risks, development risks, counterparty risks, acquisition and exit risks, taxation risks, foreign currency and exchange rates risks, risks associated with the Management Company and the corporate governance risk. For further information, reference is made to the issue prospectus.

FInAnce polIcy – cuRRency RIsk

As a measure to safeguard the company’s investment capacity, the Board has decided that funds intended for investment shall be placed in a basket of currencies comprising 30–35 per cent EUR, 35–50 per cent USD and 0-30 per cent RUB. When an investment decision is made, an amount corresponding to the payment price is hedged in the currency in which payment is to be made. On the closing date, USD 9,734,000 was hedged for forthcoming approved investments. On the balance-sheet date, the exchange-rate change on this exposure in relation to SEK was reported as a deferred expense amounting to SEK 4,521,000. Currency exposure in completed investments will not be hedged. The company’s currency exposure with regard to annual management fees and Parent Company expenses is in SEK.

parent company

Operations comprise Group-wide functions, and the ownership of the Group’s subsidiaries. The result before tax amounted to a loss of SEK 7,385,000. The loss includes unrealised exchange-rate losses of SEK 9,028,000.

Varyag Resources AB (publ)

Annual Report 2006