Loss on Changes in Fair Value of Derivative Financial Instrument

In February 2010, TMK issued U.S.$413 million 5.25% convertible bonds due 2015 convertible into TMK’s GDRs. The bonds are convertible into GDRs at a conversion price of U.S.$23.075 per GDR. The convertible bonds represent a combined financial instrument containing two components: (i) a bond liability and (ii) an embedded derivative representing a conversion option in foreign currency combined with an issuer call. In accordance with IFRS, TMK recognised a bond liability of U.S.$368 million (net of transaction costs of U.S.$9 million) and the liability under embedded conversion option of U.S.$35 million at the initial recognition date.

As of 31 December 2010, the bond liability and the liability under the embedded conversion option were U.S.$378 million and U.S.$48 million, respectively. In 2010, TMK recorded a loss on changes in the fair value of the derivative financial instrument of U.S.$12 million. However for the purpose of management’s discussion and analysis the net profit for the period was adjusted so that it does not reflect gains or losses on the changes in fair value of the derivative financial instrument See “Issuance of Convertible Eurobonds”.

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