Edgar Filing: CHAPARRAL RESOURCES INC

FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended June 30, 2005.

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________.

Commission File Number: 0 - 7261

CHAPARRAL RESOURCES, INC.
-------------------------
(Exact Name of Registrant as Specified in Its Charter)

Delaware 84-0630863
------------------------------- ------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)

2 Gannett Drive, Suite 418
White Plains, New York 10604
----------------------------
(Address of Principal Executive Offices)

Registrant's telephone number, including area code: (866) 559-3822

Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.

YES |X| NO |_|

Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

YES |_| NO |X|

As of August 10, 2005 the Registrant had 38,209,502 shares of its common
stock, par value $0.0001 per share, issued and outstanding.

CHAPARRAL RESOURCES, INC.
FORM 10-Q
JUNE 30, 2005
TABLE OF CONTENTS

PAGE
----

PART I. FINANCIAL INFORMATION

Item l. Financial Statements

Consolidated Condensed Balance Sheets as of June
30, 2005 and December 31, 2004 1

Consolidated Condensed Statements of Operations for
the Three Months Ended June 30, 2005 and 2004 and
Consolidated Condensed Statements of Operations for
the Six Months Ended June 30, 2005 and 2004 3

Consolidated Condensed Statements of Cash Flows for
the Six Months Ended June 30, 2005 and 2004 4

Notes to Consolidated Condensed Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14

Item 3. Quantitative and Qualitative Disclosures About Market Risk 19

Item 4. Controls and Procedures 20

PART II. OTHER INFORMATION

Item 6. Exhibits 21

Signatures 22

Part I - Financial Information

Item 1 - Financial Statements

Chaparral Resources, Inc.
Consolidated Condensed Balance Sheets

June 30, December 31,
2005 2004
(Unaudited)
--------- ---------

$ 000 $ 000
Assets

Current assets:
Cash and cash equivalents 34,604 9,611
Accounts receivable:
Oil sales receivable 6,731 316
VAT receivable 5,358 2,212
Other receivables from affiliates 2 1,002
Prepaid expenses 4,043 3,472
Current portion of deferred financing charges 1,229 --
Crude oil inventory 1,121 36
--------- ---------
Total current assets 53,088 16,649

Deferred financing charges 571 --
Materials and supplies 6,675 5,238
Other 420 336
Property, plant and equipment:
Oil and gas properties, full cost 165,717 153,001
Other property, plant and equipment 11,287 10,974
--------- ---------
177,004 163,975
Less - accumulated depreciation, depletion and amortization (73,997) (62,495)
--------- ---------
Property, plant and equipment, net 103,007 101,480
--------- ---------

Total assets 163,761 123,703
========= =========

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Condensed Balance Sheets (continued)

June 30, December 31,
2005 2004
(Unaudited)
--------- ---------
$ 000 $ 000
Liabilities and Stockholders' equity

Current liabilities:
Accounts payable 9,107 8,540
Advances received -- 387
Prepaid sales -- 6,590
Accrued liabilities:
Accrued compensation 226 241
Accrued interest payable 553 713
Other accrued liabilities 3,415 1,822
Current income tax liability 4,326 2,052
Current portion of loans payable 30,222 19,778
--------- ---------
Total current liabilities 47,849 40,123

Accrued production bonus 341 299
Loans payable 25,778 12,000
Deferred tax liability 3,276 3,258
Minority interest 19,961 12,099
Asset retirement obligation 1,427 1,232

Stockholders' equity:
Common stock - authorized, 100,000,000
shares of $0.0001 par value; issued and outstanding,
38,209,502 shares as of June 30, 2005 and
December 31, 2004 4 4
Capital in excess of par value 107,226 107,226
Preferred stock - 1,000,000 shares authorized, 925,000 shares
undesignated. Issued and outstanding - none -- --
Accumulated deficit (42,101) (52,538)
--------- ---------
Total Stockholders' equity 65,129 54,692

--------- ---------
Total liabilities and Stockholders' equity 163,761 123,703
========= =========

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Condensed Statements of Operations (Unaudited)

For the Three Months Ended For the Six Months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
$000 (except share data) $000 (except share data)

Revenue 33,160 17,471 57,487 33,080

Costs and expenses:
Transportation costs 4,056 3,067 7,544 6,220
Operating expenses 3,568 1,688 7,393 3,899
Marketing fee 136 39 258 39
Depreciation and depletion 5,829 4,150 10,847 8,536
Management fee 200 25 393 100
Advisory fee -- 100 -- 100
Accretion expense 38 22 74 47
General and administrative 1,625 2,109 3,046 3,757
----------- ----------- ----------- -----------
Total costs and expenses 15,452 11,200 29,555 22,698
----------- ----------- ----------- -----------

Income from operations 17,708 6,271 27,932 10,382

Other income/(expense):
Interest income 57 10 143 55
Interest expense (1,056) (1,265) (2,281) (2,499)
Currency exchange gain/(loss) 9 (77) 17 (157)
Minority interest (5,040) (1,757) (7,862) (2,823)
Loss on disposition of assets (1) -- (1) --
----------- ----------- ----------- -----------
Income before income taxes 11,677 3,182 17,948 4,958

Income tax expense (5,075) (1,882) (7,511) (3,024)
----------- ----------- ----------- -----------
Net income available to common Stockholders 6,602 1,300 10,437 1,934
=========== =========== =========== ===========

Basic earnings per share:
Net income per share $ 0.17 $ 0.03 $ 0.27 $ 0.05
Weighted average number of shares
outstanding (basic) 38,209,502 38,209,502 38,209,502 38,209,502

Diluted earnings per share:
Net income per share $ 0.17 $ 0.03 $ 0.27 $ 0.05
Weighted average number of shares
outstanding (diluted) 39,500,312 38,209,502 39,327,414 38,209,502

See accompanying notes.

Chaparral Resources, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)

For the Six Months Ended
------------------------
June 30, June 30,
2005 2004
-------- --------
$ 000 $ 000
Cash flows from operating activities

Net income 10,437 1,934

Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation, depletion and amortization 10,847 8,536
Deferred income taxes 18 1,955
Accretion expense 74 47
Amortization of note discount 222 227
Currency exchange (gain)/loss (17) 157
Loss on disposition of assets 1 --
Minority interest 7,862 2,823

Changes in assets and liabilities:
(Increase)/decrease in:
Accounts receivable (8,561) (2,654)
Prepaid expenses (571) 830
Crude oil inventory (406) 103
Increase/(decrease) in:
Accounts payable and accrued liabilities 2,250 2,306
Accrued interest payable (160) (80)
Other liabilities (6,548) 71

-------- --------
Net cash provided by operating activities 15,448 16,255
-------- --------

Cash flows from investing activities

Additions to property, plant and equipment (339) (1,130)
Capital expenditures on oil and gas properties (12,595) (15,517)
Materials and supplies inventory (1,437) --
Other long-term assets -- (911)
-------- --------
Net cash used by investing activities (14,371) (17,558)
-------- --------

Chaparral Resources, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited) (continued)

For the Six Months Ended
------------------------
June 30, June 30,
2005 2004
-------- --------
$ 000 $ 000
Cash flows from financing activities

Proceeds from loans 37,000 4,000
Payments on loans (13,000) (4,000)
Other long-term assets (84) --
-------- --------
Net cash provided by financing activities 23,916 --
-------- --------

Net increase/(decrease) in cash and cash equivalents 24,993 (1,303)
Cash and cash equivalents at beginning of period 9,611 2,639
-------- --------
Cash and cash equivalents at end of period 34,604 1,336
======== ========

Supplemental cash flow disclosure

Interest paid 2,220 2,302
Income taxes paid 5,068 1,645

Supplemental schedule of non-cash investing and
financing activities

Non-cash additions to oil and gas properties 121 175

See accompanying notes.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)

1. General

Chaparral Resources, Inc. ("Chaparral") was incorporated in the state of
Colorado on January 13, 1972, principally to engage in the exploration,
development and production of oil and gas properties. Chaparral focuses
substantially all of its efforts on the development of the Karakuduk Field, an
oil field located in the Central Asian Republic of Kazakhstan. In 1999,
Chaparral reincorporated from Colorado to Delaware.

The consolidated financial statements include the accounts of Chaparral and its
greater than 50% owned subsidiaries, Closed Type JSC Karakudukmunay ("KKM"),
Central Asian Petroleum (Guernsey) Limited ("CAP-G"), Korporatsiya Mangistau
Terra International ("MTI"), Road Runner Services Company ("RRSC"), Chaparral
Acquisition Corporation ("CAC"), and Central Asian Petroleum, Inc. ("CAP-D").
Chaparral owns 80% of the common stock of CAP-G directly and 20% indirectly
through CAP-D. Hereinafter, Chaparral and its subsidiaries are collectively
referred to as the "Company." All significant inter-company transactions have
been eliminated.

As of June 30, 2005, Chaparral owns a 60% interest in KKM, a Kazakhstan Joint
Stock Company of Closed Type. KKM was formed to engage in the exploration,
development, and production of oil and gas properties in the Republic of
Kazakhstan. KKM's only significant investment is in the Karakuduk Field, an
onshore oil field in the Mangistau region of the Republic of Kazakhstan. On
August 30, 1995, KKM entered into an agreement with the Ministry of Oil and Gas
Industry for Exploration, Development and Production of Oil in the Karakuduk Oil
Field in the Mangistau Region of the Republic of Kazakhstan (the "Agreement").
KKM's rights and obligations regarding the exploration, development, and
production of underlying hydrocarbons in the Karakuduk Field are determined by
the Agreement.

KKM's rights to the Karakuduk Field may be terminated under certain conditions
specified in the Agreement. The term of the Agreement is 25 years commencing
from the date of KKM's registration. The Agreement can be extended to a date
agreed between the Ministry of Energy and Mineral Resources and KKM as long as
production of petroleum and/or gas is continued in the Karakuduk Field.

KKM is owned jointly by CAP-G (50%), MTI (10%) and Nelson Resources Limited
("Nelson") (40%). Nelson bought its 40% share in December 2004 from KazMunayGas
JSC ("KMG"), the national petroleum company of Kazakhstan, owned by the
government of the Republic of Kazakhstan. Since May 2004, Nelson has owned
approximately 60% of the outstanding common stock of Chaparral.

Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States have been condensed or omitted. Reference should be made to
the relevant notes to the Company's financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2004.

The unaudited information furnished herein was taken from the books and records
of the Company. However, such information reflects all adjustments which are, in
the opinion of management, normal recurring adjustments necessary for the fair
statement of the results for the interim periods presented. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future interim period or for the year.

Use of Estimates

Application of generally accepted accounting principles requires the use of
estimates, judgments and assumptions that affect the reported amounts of assets
and liabilities as of the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The determination of proved oil and gas reserve quantities and the
application of the full cost method of accounting for exploration and production
activities requires management to make numerous estimates and judgments.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

2. Recent Accounting Pronouncements

In November 2004, the FASB issued SFAS 151, Inventory Costs, an Amendment of APB
Opinion No. 43, Chapter 4. SFAS 151 clarifies the accounting treatment for
various inventory costs and overhead allocations and is effective for inventory
costs incurred after July 1, 2005. It is not expected to have a material impact
on the Company's financial statements when adopted.

In December 2004, the FASB issued SFAS 153, Exchanges of Non-monetary Assets, an
Amendment of APB Opinion No. 29. SFAS 153 specifies the criteria required to
record a non-monetary asset exchange using carryover basis and is effective for
non-monetary asset exchanges occurring after July 1, 2005. It is not expected to
have a material impact on the Company's financial statements when adopted.

In December 2004, the FASB issued SFAS 123 (revised 2004) ("SFAS 123R"), Share
Based Payments. SFAS 123R requires that the cost from all share-based payment
transactions, including stock options, be recognized in the financial statements
at fair value and is effective for public companies in the first interim period
after June 15, 2005. It is not expected to have a material impact on the
Company's financial statements.

3. Prepaid Expenses

The breakdown of Prepaid Expenses is as follows:

$000
---------------------
June 30, December 31,
Description 2005 2004
----------- ---- ----

Prepaid transportation costs 1,986 1,151
Advanced payments for materials and supplies 1,130 1,461
Prepaid insurance 670 568
Other prepaid expenses 257 292
----- -----
Total prepaid expenses 4,043 3,472
===== =====

Prepaid transportation costs represent prepayments of export tariffs to CJSC
KazTransOil ("KTO"), a 100% subsidiary of KMG, necessary to sell oil on the
export market, which is expensed in the period the related oil revenue is
recognized. Advanced payments for materials and supplies represent prepayments
for general materials and supplies to be used in the development of the
Karakuduk Field.

4. Asset Retirement Obligation

FASB No. 143 requires entities to record the fair value of the liability for
asset retirement obligations (ARO) in the period in which the liability is
incurred, if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived asset.

Since 1995, the core business of the Company has been the development of the
Karakuduk Field. The Company has developed an asset that is capable of
producing, processing and transporting crude oil to export markets. The field
still requires up to possibly 80 new wells, but the oil processing and
transportation infrastructure, apart from the obligatory gathering lines and up
to four more gathering stations, are in place. However, further infrastructure
development is planned to increase profitability of the operation, utilize gas
and to maximise oil and produced fluid processing. The Company is legally
required under the Agreement to restore the field to its original condition.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

4. Asset Retirement Obligation (continued)

The following table shows movements in the Company's asset retirement obligation
liability:

$000
------------------
June 30, June 30,
2005 2004
---- ----

Asset retirement obligation at beginning of period 1,232 804
Accretion expense 74 47
Additional provision for new wells 121 175
----- -----
Asset retirement obligation at end of period 1,427 1,026
===== =====

5. Change in Control

In May 2004, Nelson purchased from Central Asian Industrial Holdings, N.V.
("CAIH") 22,925,701 shares of Chaparral, representing approximately 60% of
Chaparral's issued and outstanding common stock. As part of the transaction, a
Stock Purchase Warrant exercisable for 3,076,923 shares of the Company's common
stock originally issued to CAIH, and a promissory note of the Company payable to
CAIH, with a principal amount of $4 million (see Note 6), were transferred by
CAIH to Nelson. The total purchase price was $23.9 million.

6. Loans

The Note
--------

In May 2002, the Company received a total equity and debt capital infusion of
$45 million, which was partially utilized to repay a substantial portion of the
Company's loan agreement with Shell Capital, Inc. (the "Shell Capital Loan").
The Company received a total investment of $12 million from CAIH, including $8
million in exchange for 22,925,701 shares, or approximately 60%, of the
Company's outstanding common stock, and $4 million in exchange for a three year
note bearing interest at 12% per annum (the "Note"). Along with the Note, CAIH
received a warrant to purchase 3,076,923 shares of the Company's common stock at
$1.30 per share (the "Warrant"). Additionally, Kazkommertsbank, an affiliate of
CAIH, provided KKM with a credit facility totaling $33 million (the "KKM Credit
Facility"), consisting of $28 million that was used to repay a portion of the
Shell Capital Loan and $5 million that was made available for KKM's working
capital requirements. The Company paid CAIH $1.79 million as a related
restructuring fee.

The Note was recorded net of a $2.47 million discount, based on the fair market
value of the Warrant issued in conjunction with the Note. The discount was
amortized using the effective interest rate over the original life of the Note.
The principal balance of the Note was originally due on May 10, 2005 and accrued
interest is payable quarterly. On March 24, 2005, Chaparral and CAP-G signed a
Promissory Note Amendment Agreement pursuant to which a $1 million prepayment of
the Note was made on March 31, 2005 and the maturity of the remaining balance of
the Note was extended to May 10, 2006 (see further discussion below).

In June 2002, the Company prepaid $2 million of the $4 million outstanding
principal balance of the Note. As a result, the Company recognized an
extraordinary loss on the early extinguishment of debt of $1.22 million from the
write-off of 50% of the unamortized discount on the Note. The extraordinary loss
was netted against the extraordinary gain from the restructuring of the Shell
Capital Loan. In March 2004, the Company re-borrowed the $2 million.

In May 2004, the CAIH shares, the Warrant and the Note were purchased by Nelson.
On March 24, 2005, Chaparral and CAP-G signed a Promissory Note Amendment
Agreement with Nelson. This provided for a prepayment of $1 million of the $4
million due to be repaid to Nelson on May 10, 2005 under the existing $4 million
loan note and the replacement of the existing loan note with a new loan note for

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

6. Loans (continued)

$3 million on substantially similar terms, but with an increase in the interest
rate from 12% to 14% from May 10, 2005 and an extension of the maturity date of
one year to May 10, 2006. On March 31, 2005 the $1 million prepayment was made,
the existing loan note was cancelled and the new loan note was signed. See Item
2 paragraph 1, General Liquidity Considerations.

KKM Credit Facility
-------------------

As mentioned above, in May 2002, KKM established the KKM Credit Facility, a
five-year, $33 million credit line with Kazkommertsbank. The KKM Credit Facility
consisted of a $30 million non-revolving line and a $3 million revolving line,
both of which were fully borrowed by KKM in May 2002. The Company recognized
$2.22 million and $1.71 million of interest expense on the KKM Credit Facility
for the six months ended June 30, 2004 and 2005 respectively.

The non-revolving portion of the KKM Credit Facility accrued simple interest at
an annual rate of 14% and was repayable over a five-year period with final
maturity in May 2007. Accrued interest was payable quarterly, beginning in
December 2002, and KKM began making quarterly principal repayments in May 2003.
As of June 30, 2005, the Company had repaid $14 million in principal.

The revolving portion of the KKM Credit Facility accrued simple interest at an
annual rate of 14%. The revolver was loaned to KKM for short-term periods up to
one year, but KKM had the right to re-borrow the funds through May 2006 with
final repayment due in May 2007. On December 30, 2003, Kazkommertsbank increased
the revolving portion of the KKM Credit Facility from $3 million to $5 million.
On the same date, KKM borrowed the additional $2 million to finance ongoing
operations. The additional $2 million accrued interest at 14%. As at June 30,
2005, there was an outstanding balance of $5 million on the revolving portion of
the loan, $3 million maturing on August 9, 2005 and $2 million maturing on
August 17, 2005. Accrued interest on the revolving loan was payable at maturity.

The original KKM Credit Facility included repayment terms of three years and
four years for the non-revolving and revolving portions, respectively, with an
option to extend the final maturity date for repayment of the entire KKM Credit
Facility to five years. KKM exercised the option as of May 2002.

On July 1, 2005, the total outstanding principal of $21 million of the KKM
Credit Facility, together with outstanding interest, was repaid, and was
classified as current as at June 30, 2005. The BNP/KBC Credit Facility (see
below) provided the funds for this repayment.

BNP/KBC Credit Facility
-----------------------

On March 24, 2005, KKM signed a $40 million Structured Crude Oil Pre-export
Credit Facility Agreement with BNP Paribas (Suisse) SA ("BNP") and KBC Bank N.V.
(the "BNP/KBC Credit Facility"). On June 30, 2005, $32 million was drawn down
from this facility. For six months from 30 June, 2005 the facility is a
revolving credit, after which the amount outstanding becomes a term loan
repayable in 36 equal monthly installments commencing on December 30, 2005. The
purpose of the loan is to refinance the KKM Credit Facility, fund future
development costs and fund fees related to the facility.

Each year the lenders may propose, but are under no obligation to do so, an
extension of the facility by one year, for an agreed fee, and/or an increase of
the facility amount for an agreed fee. Each month during the term loan period,
KKM may make full or partial prepayments of the facility at no extra cost.
Partial prepayments must be for amounts of $2 million or more.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

6. Loans (continued)

The interest rate applicable under the facility is LIBOR plus 3.25% in the first
year and LIBOR plus 4.00% thereafter. Interest is payable monthly. Fees payable
by KKM include a 1.75% arrangement fee, a 1.65% p.a. commitment fee on the
unused commitment during the revolving credit period, $100,000 for the lenders'
legal costs and $15,000 per quarter in advance for agency and technical bank
fees. A total of $0.8 million has been accrued for the arrangement fee and legal
costs which will be amortized over the life of the facility.

As part of the BNP/KBC Credit Facility conditions, an Offtake Agreement was
signed in June 2005 with Vitol Central Asia S.A. ("Vitol") whereby KKM is
obligated to sell to Vitol, and Vitol is obligated to buy, all of KKM's crude
oil production available for export at international market prices for five
years from July 1, 2005, with step-in rights in favor of the lenders. In
accordance with the BNP/KBC Credit Facility conditions, accounts receivable from
Vitol are pledged as collateral for the loan. In addition, a performance and
financial guarantee was issued by Nelson (the "Nelson Guarantee") in support of
all amounts owing by KKM under the BNP/KBC Credit Facility. Under a separate
agreement, in consideration for issuing the Nelson Guarantee, KKM will pay
Nelson, annually in advance, a fee of 2.5% p.a. on the facility amount of $40
million for the first six months and on the daily principal amount of the loan
outstanding during the term period. An amount of $1.0 million, which was paid in
July for the estimated first years guarantee fee, has been accrued in June and
will be amortized over twelve months.

A further condition of the BNP/KBC Credit Facility is that KKM enter into a
Crude Oil Hedging Agreement before the end of August 2005. Nelson has already
entered into such a hedging agreement with BNP, and both Nelson and KKM intend
that this agreement will be transferred, at cost, to KKM in August 2005. Under
this agreement, Nelson has the option each month, from April 2005 to December
2005, to require BNP to pay it an amount per barrel of specified monthly amounts
of crude oil equivalent to the excess of $33.00 per barrel over the monthly
average for that month of dated Brent. The crude oil amounts specified are
75,000 barrels per calendar month during the second quarter of 2005, 160,000
barrels per calendar month during the third quarter of 2005 and 170,000 barrels
per calendar month during the last quarter of 2005. Nelson paid BNP $267,300 as
consideration, equivalent to $0.22 per barrel.

KKM is subject to certain pledges, covenants, and other restrictions under the
BNP/KBC Credit Facility, including, but not limited to, the following:

(i) KKM has signed an Offtake Agreement for 100% of its export production,
with step-in rights in favor of the lenders;
(ii) Nelson has provided a written guarantee to the lenders that it will
repay the BNP/KBC Credit Facility in the event KKM fails to do so;
(iii)KKM may not incur additional indebtedness or pledge its assets to
another party without the written consent of the lenders;
(iv) Subordination of existing loans, including inter-company, and any
additional loans;
(v) KKM may not pay dividends without the written consent of the lenders;
and
(vi) Nelson to maintain a controlling interest in KKM.

The BNP/KBC Credit Facility stipulates certain events of default, including, but
not limited to, KKM's inability to meet the terms of the BNP/KBC Credit Facility
and the Offtake Agreement, default by KKM or Nelson under any other agreements
and material litigation involving Nelson or KKM. If an event of default does
occur and is not waived by the lenders, they can require KKM to immediately
repay the full amount outstanding under the facility and may enforce the Nelson
Guarantee and their step-in rights under the Offtake Agreement.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

6. Loans (continued)

The maturity schedule of the Company's indebtedness as of June 30, 2005, which
reflects the repayment on July 1, 2005 of all of the $21 million principal to
Kazkommertsbank, is as follows:

Date Principal Amount Due
---- --------------------
$000

2005 21,889
2006 13,667
2007 10,667
2008 9,777
--------------------
Total principal due 56,000
====================

Balances as of June 30, 2005 under the different facilities are as follows:

Principal Amount Due
--------------------
$000

BNP/KBC Credit Facility 32,000
KKM Credit Facility (non - revolving) 16,000
KKM Credit Facility (revolving) 5,000
The Note 3,000
--------------------
Total principal due 56,000
====================

The loans are shown in the balance sheet net of the loan discount, which was nil
at June 30, 2005 and $222,000 at December 31, 2004.

7. Income Taxes

Income tax expense as reported relates entirely to foreign income taxes provided
on the Company's operations within the Republic of Kazakhstan. KKM's principal
agreement with the government of the Republic of Kazakhstan for the exploration,
development and production of oil in the Karakuduk Field specifies the income
taxes and other taxes applicable to KKM, which is subject to the tax laws of the
Republic of Kazakhstan. The Company has used the best estimates available to
determine its current and deferred tax liabilities within Kazakhstan.

8. Capital Commitments

On December 31, 2004, the Company's contract with KazMunayGas-Drilling ("KMGD"),
an affiliate of KMG, for one development drilling rig currently operating in the
Karakuduk Field, expired. The same rig is now contracted through Oil and Gas
Drilling and Exploration of Kracow ("OGEC") for a one year term to December 31,
2005. The minimum payments under the drilling contract with OGEC for 2005 are
$4.50 million. The Company's other drilling and operations related contracts can
either be cancelled within 30 days or are on a call-off (as required) basis.

The Company has no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
Field.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

9. Related Party Transactions

In August 2004, the Company approved a two-year agreement with Nelson to provide
corporate administrative services and financial advisory services (the "Service
Agreement") to support its business activities. The Service Agreement is
effective as of June 1, 2004 and can be terminated upon 30 days written notice
by either party. In consideration for these services Nelson will receive a fixed
monthly fee of $20,000 for administrative services and $25,000 for financial
advisory services (the "Management Fee"). As part of the Service Agreement,
Nelson is also required to provide personnel to cover Chaparral's executive and
managerial needs. The cost of executive and managerial personnel will be
allocated on the basis of the cost of personnel involved and on the percentage
of time actually spent by such personnel on matters related to Chaparral, as
mutually agreed by the parties from time to time. In addition, Nelson will use
its greater buying power to obtain more favorable rates for goods and services,
including insurance coverage, for Chaparral. These expenditures will be passed
to Chaparral at cost with a ten percent mark-up. For the six months to June 30,
2005, the Company has booked $444,000 for the Management Fee, the executive and
managerial cost, insurance coverage and the mark-up under the Service Agreement.

In June 2004, KKM entered into a three year agency agreement with Nelson (the
"Marketing Agreement"), whereby Nelson becomes the duly authorized, exclusive
agent for the purpose of marketing crude oil, and is empowered to represent the
interests of KKM in relations with governmental authorities and commercial
organizations and also enter into contracts and agreements and any other
documents necessary for and related to the marketing of crude oil. The Marketing
Agreement is effective as of June 1, 2004 and can be terminated upon 90 days
written notice by either party. As consideration for the services provided under
the Marketing Agreement, KKM shall pay Nelson a fixed fee of $20,000 per month
and a variable fee of five US cents per barrel of total production in a
reporting calendar month, if the amount of supplies to the local market in that
month is more than 10% of the total amount of production, or eight US cents per
barrel of total production in a reporting calendar month, if the amount of
supplies to the local market in that month is less than 10% of the total amount
of production (the "Marketing Fee"). For the period ending June 30, 2005,
$258,000 was accrued under the Marketing Agreement.

In 2003, the Company approved a one-year agreement with OJSC Kazkommerts
Securities ("KKS"), an affiliate of Kazkommertsbank. The agreement was effective
as of January 7, 2003 and provided for KKS to assist the Company's senior
management with financial advisory and investment banking services. In
consideration for these services KKS received a monthly fee of $25,000 (the
"Advisory Fee"). The agreement with KKS was cancelled as of April 30, 2004.

Kazkommerts Policy, an affiliate of Kazkommertsbank, is the major insurer of
KKM's oil and gas activities.

KKM has a contract to transport 100% of its oil sales through the pipeline owned
and operated by KTO, a wholly owned subsidiary of KMG, the 40% minority
shareholder in KKM until December 2004. The rates for transportation are in
accordance with those approved by the government of the Republic of Kazakhstan.
Currently, the use of the KTO pipeline system is the only viable method of
exporting KKM's production. As KTO notifies KKM of the export sales allocated to
KKM on a monthly basis, KTO controls transportation of export sales.

KKM makes a prepayment for crude transportation costs based upon the allocation
of export sales received from the Ministry of Energy and Mineral Resources of
the Republic of Kazakhstan. This prepayment includes pipeline costs charged by
the operators of the pipeline systems outside Kazakhstan and is dependent upon
the point of sale of KKM's exports. For the six months ended June 30, 2005, KKM
incurred $7.1 million for transportation costs with KTO. As of June 30, 2005,
KKM had a prepayment balance of $2.0 million with KTO in respect of sales to be
made in July 2005. Comparably, for the six months ended June 30, 2004, KKM
incurred $6.2 million for transportation costs with KTO. As of December 31,
2004, KKM had a prepayment balance of $1.2 million with KTO in respect of sales
that were not completed until January 2005.

KTO charges KKM for associated costs of oil storage within their pipeline
system, sales commission, customs clearance fees in respect of export sales and
for water through the Volga Water pipeline. Amounts recognized for these
services during the six months ended June 30, 2005 and 2004 were $179,000 and
$72,000, respectively.

Chaparral Resources, Inc.
Notes to Consolidated Condensed Financial Statements (Unaudited)
(continued)

9. Related Party Transactions (continued)

The total amounts of the transactions with the above related companies for the
six months ended June 30, 2005 and 2004 are as follows:

$000
---------------
2005 2004
------ ------

Nelson 717 139
KKS -- 100
Kazkommerts Policy 247 356
KTO 7,237 6,189
KMGD -- 2,657

Accounts payable balance to affiliates as at June 30, 2005 and December 31, 2004
are as follows:

$000
----------------
2005 2004
------ ------

Nelson 143 --
Kazkommerts Policy -- 195
KTO 91 8
KMGD -- 371
------ ------
234 574
====== ======

The loans with Kazkommertsbank and Nelson are disclosed in Note 6.

10. Contingencies

Taxation
--------

The existing legislation with regard to taxation in the Republic of Kazakhstan
is constantly evolving as the Government manages the transition from a command
to a market economy. Tax and other laws applicable to the Company are not always
clearly written and their interpretation is often subject to the opinions of the
local or main State Tax Service. Instances of inconsistent opinions between
local, regional and national tax authorities are not unusual.

Basis of Accounting
-------------------

KKM maintains its statutory books and records in accordance with U.S. generally
accepted accounting principles and calculates taxable income or loss using the
existing Kazakh tax legislation in effect on August 30, 1995, the date the
Agreement was signed. The Company considers these accounting methods correct
under the terms of the Agreement. The Republic of Kazakhstan currently requires
companies to comply with Kazakh accounting regulations and to calculate tax
profits or losses in accordance with these regulations as well as the prevailing
tax law.

Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations

1. Liquidity and Capital Resources

General Liquidity Considerations
--------------------------------

Going Concern
-------------

Our financial statements have been presented on the basis that the Company is a
going concern, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. Until recently, Chaparral had a
working capital deficiency. In addition, we have experienced limitations in
obtaining 100% export quota for the sale of our hydrocarbons. Previously these
conditions raised substantial doubt about our ability to continue as a going
concern. However, due to recently completed refinancing of the Company's debt
(see below), we now expect to be able to meet all expenditure and cash flow
requirements through the next twelve months.

Chaparral has been successful in 2004 in stabilizing the export sales/local
market deliveries ratio which had significantly improved from 2002 to 2003. For
the year ended December 31, 2004, Chaparral sold approximately 2,758,000 barrels
of its current year production, of which approximately 2,544,000 barrels, or 92%
(2003: 2,591,000 barrels, 96%), have been sold at world market prices and
214,000 barrels, or 8% (2003: 103,000 barrels, 4%), have been sold at domestic
market prices. During the first half of 2005, exports accounted for 93% of total
sales.

On March 24, 2005, KKM signed a $40 million Structured Crude Oil Pre-export
Credit Facility Agreement with BNP Paribas (Suisse) S.A. and KBC Bank N.V. (the
"BNP/KBC Credit Facility"). On June 30, 2005, $32 million of funds from this
facility were drawn down. On July 1, 2005, the total outstanding principal of
$21 million of the KKM Credit Facility, together with outstanding interest, was
repaid. See Item 1 Note 6 for further details of the BNP/KBC Credit Facility. In
addition, on March 24, 2005, Chaparral and CAP-G signed a Promissory Note
Amendment Agreement with Nelson (the "Amendment Agreement"). This provided for a
prepayment of $1 million of the $4 million due to be repaid to Nelson on May 10,
2005 under the existing $4 million loan note and the replacement of the existing
loan note with a new loan note for $3 million on substantially similar terms,
but with an increase in the interest rate from 12% to 14% from May 10, 2005 and
an extension of the maturity date of one year to May 10, 2006. On March 31, 2005
the $1 million prepayment was made, the existing loan note was cancelled and the
new loan note was signed. See Item 1 Note 6. The BNP/KBC Credit Facility and
Amendment Agreement significantly improve the Company's financial position,
enabling it to meet all its current financial obligations and continue with
field development.

Liquidity and Capital Resources
-------------------------------

We are presently engaged in the development of the Karakuduk Field, which
requires substantial cash expenditures for drilling, well completions,
workovers, oil storage and processing facilities, pipelines, gathering systems,
water injection facilities, plant and equipment (pumps, transformer sub-stations
etc.), a rail loading facility and gas utilization. We have invested
approximately $165 million in the development of the Karakuduk Field and have
drilled 60 new wells and re-completed 13 of the pre-existing wells at the field
by June 30, 2005. Total capital expenditures for the first half of 2005 were
approximately $13 million. Capital expenditures are estimated to be at least
$100 million from 2005 through 2009, including the drilling of approximately 70
more wells over this period. We anticipate 2005 capital expenditures of
approximately $46 million.

We expect to finance the continued development of the Karakuduk Field primarily
through cash flows from the sale of crude oil. During the second quarter of
2005, KKM sold approximately 794,000 barrels of crude oil for $33 million,
compared to 679,000 barrels for $24 million in the first quarter of 2005. As
mentioned above, KKM has recently secured $40 million of new funding with which
it has re-financed the loans provided by Kazkommertsbank. Current daily oil
production is in excess of 11,500 barrels per day.

During 2005, KKM expects to further increase production by drilling new wells,
converting at least 15 more wells to artificial lift, converting three more
wells to water injection wells, adding four new water injection wells to the
injection fund and by continuing with hydraulic fracturing work in selected

wells. Work on the utilization of associated gas produced from the field will
continue throughout the year. Also, in the second half of 2005, KKM expects to
commence the construction of a rail loading facility near the field so that by
the second half of 2006 KKM will be able to transport crude oil by rail to
Aktau. This is expected to result in significantly higher netbacks.

In addition, our short and long-term liquidity is impacted by local oil sales
obligations imposed on oil and gas producers within Kazakhstan to supply local
energy needs, and our ability to obtain export quota necessary to sell our crude
oil production on the international market. Under the terms of the Agreement, we
have a right to export, and receive export quota for, 100% of the production
from the Karakuduk Field. The domestic market does not permit world market
prices to be obtained, resulting in, on average, $19 lower cash flow per barrel
in the first half of 2005. Furthermore, the Government has not allocated
sufficient export quota to allow us to sell all of our available crude oil
production on the world market. We are taking steps to reduce our local market
obligations and to obtain an export quota that will enable us to sell all of our
crude oil production on the export market. The Company has determined that it is
no longer in its the best interests to pursue arbitration proceedings in
Switzerland for the breach of the Agreement by the Government of Kazakhstan,
instead we intend to seek an amicable resolution of this matter. If the matter
cannot be resolved in a satisfactory manner, we have, however, reserved our
right to commence formal arbitration proceedings pursuant to our contractual
arrangements with the Government.

No assurances can be provided, however, that an amicable resolution will be
reached, or that if arbitration is instituted, it will be successful or that if
successful, Chaparral will be able to enforce the award in Kazakhstan, or that
we will be able to export 100% or a significant portion of production or that we
will be able to obtain additional cash flow from operations to meet working
capital requirements in the future.

During the first half of 2005 the Company continued with the development of the
Karakuduk Field. As of June 30, 2005 the total field well count had risen to 72
compared to 66 on December 31, 2004. The producing well count at the field as of
June 30, 2005 was 52 wells compared to 45 at the end of 2004. One producing well
was converted to an injection well.

Production for the first half of 2005 was 1.73 million barrels, equivalent to
9,555 barrels of oil per day ("bopd"), compared to 1.43 million barrels, or
7,867 bopd, in the first half of 2004, an increase of 21%. The Company sold
178,500 tonnes to export markets (93% of total sales) and 14,000 tonnes locally
during the first half of 2005, compared with 156,000 tonnes exported (88% of
total sales) and 21,000 tonnes to the local market in the first half of 2004.

Drilling activity continued in the second quarter. The "closed circulation
system", whereby waste drill cuttings and fluids are collected and taken to a
specially prepared pit near the field, was fully implemented. The Company
drilled 3.6 wells (11,409m)in the second quarter of 2005 compared to 2.8 wells
(8,624m) in the first quarter of the year.

In July, production rose to an average of just over 11,500 bopd.

The Company will continue with the development of the Karakuduk Field throughout
the remainder of 2005. One drilling rig and two workover rigs will operate at
the field. The Company forecasts that up to 16 wells will be drilled, including
two horizontal wells, the first such wells to be drilled at Karakuduk. Phase 2
of the gas utilization project commenced in May. The gas pipeline from km 15 to
the Transfer Pumping Station is approximately 50% complete. The Company will
also continue with its water injection programme, and the 2006 hydraulic
fracturing program that includes 6 wells is due to commence in August.

We expect KKM's production to reach a level of just over 12,000 bopd by the end
of the year.

Capital Commitments and Other Contingencies
-------------------------------------------

On December 31, 2004, the Company's contract with KMGD, an affiliate of KMG, for
one development drilling rig currently operating in the Karakuduk Field,
expired. The same rig is now contracted through Oil and Gas Drilling and
Exploration of Kracow ("OGEC") for a one year term to December 31, 2005. The
minimum payments under the drilling contract with OGEC for 2005 are $4.50
million. The Company's other drilling and operations related contracts can
either be cancelled within 30 days or are on a call-off (as required) basis.

The Company has no other significant commitments other than those incurred
during the normal performance of the work program to develop the Karakuduk
Field.

Our operations may be subject to other regulations by the government of the
Republic of Kazakhstan or other regulatory bodies responsible for the area in
which the Karakuduk Field is located. In addition to taxation, customs
declarations and environmental controls, regulations may govern such things as
drilling permits and production rates. Drilling permits could become difficult
to obtain or prohibitively expensive. Production rates could be set so low that
they would make production unprofitable. These regulations may substantially
increase the costs of doing business and may prevent or delay the starting or
continuation of any given development project.

All regulations are subject to future changes by legislative and administrative
action and by judicial decisions. Such changes could adversely affect the
petroleum industry in general and us in particular. It is impossible to predict
the effect that any current or future proposals or changes in existing laws or
regulations may have on our operations.

2. Results of Operations

Results of Operations for the Three Months Ended June 30, 2005 Compared to the
Three Months Ended June 30, 2004
------------------------------------------------------------------------------

Our operations for the three months ended June 30, 2005 resulted in a net income
of $6.60 million compared to a net income of $1.30 million for the three months
ended June 30, 2004. The $5.30 million increase in our net income is primarily a
result of higher crude prices and higher sales volumes.

Revenues. Revenues were $33.16 million for the second quarter of 2005 compared
with $17.47 million for the second quarter of 2004. The $15.69 million increase
is the result of higher crude prices and sales volumes achieved during the
second quarter of 2005 as compared to the same period of 2004. During the second
quarter of 2005, we sold approximately 793,500 barrels of crude oil, recognizing
$33.16 million in revenue, or $41.79 per barrel after quality differential
losses. Comparably, we sold approximately 666,000 barrels of crude oil,
recognizing $17.47 million in revenue, or $26.24 per barrel, during the second
quarter of 2004. The result is a positive price variance of $12.34 million and a
positive volume variance of $3.35 million.

Transportation and Operating Expenses. Transportation costs for the second
quarter of 2005 were $4.06 million, or $5.11 per barrel, and operating costs
associated with sales were $3.57 million, or $4.50 per barrel. Comparatively,
transportation costs for the second quarter of 2004 were $3.07 million, or $4.61
per barrel, and operating costs associated with sales were $1.69 million, or
$2.54 per barrel. The increase in transportation cost per barrel during the
second quarter of 2005 is the result of higher tariffs imposed on the Company.
The main reason for the increase in operating cost per barrel is changes in cost
allocation procedures resulting in a lower percentage of field expenditures
being capitalized.

Depreciation and Depletion. Depreciation and depletion expense was $5.83 million
for the second quarter of 2005 compared with $4.15 million for the second
quarter of 2004. The $1.68 million increase is the result of higher sales
volumes and a higher effective depletion rate which is due to a proportionately
higher increase in future capital costs associated with increased reserves.
During the second quarter of 2005, the Company recognized a total depletion
expense of $5.64 million or $5.93 per barrel produced, compared to $4.00 million
or $5.50 per barrel produced for the second quarter of 2004.

Estimates of our proved oil and gas reserves are prepared by an independent
engineering company in accordance with guidelines established by the Securities
and Exchange Commission ("SEC"). Those guidelines require that reserve estimates
be prepared under existing economic and operating conditions with no provisions
for increases in commodity prices, except by contractual arrangement. Estimation
of oil and gas reserve quantities is inherently difficult and is subject to
numerous uncertainties. Such uncertainties include the projection of future
rates of production, export allocation, and the timing of development
expenditures. The accuracy of the estimates depends on the quality of available

geological and geophysical data and requires interpretation and judgment.
Estimates may be revised either upward or downward by results of future
drilling, testing or production. In addition, estimates of volumes considered to
be commercially recoverable fluctuate with changes in commodity prices and
operating costs. Our estimates of reserves are expected to change as additional
information becomes available. A material change in the estimated volumes of
reserves could have an impact on the depletion rate calculation and the
financial statements.

Interest Expense. Interest expense was $1.06 million for the second quarter of
2005 compared to $1.27 million for the second quarter of 2004. The decrease is
primarily a result of $0.28 million lower interest under the KKM Credit Facility
due to reduction in principal outstanding.

General and Administrative Expense. General and administrative costs decreased
from $2.11 million for the three months ended June 30, 2004 to $1.63 million for
the three months ended June 30, 2005. The decrease of $0.48 million is primarily
due to accrued severance costs for former executives in the second quarter of
2004, reductions in expatriate staff numbers and lower salaries and wages,
partially offset by an accrual of $0.57 million for Kazakh withholding tax
payable on management fees charged by CAP-G to KKM for the period January 2004
to June 2005. This withholding tax liability has only recently arisen due to
changes in KKM's income tax returns.

Income Tax Expense. Income tax expense increased from $1.88 million for the
three months ended June 30, 2004 to $5.08 million for the three months ended
June 30, 2005, representing 59% and 43% respectively of pre-tax income. The tax
charge has increased as income has increased. The effective tax rate has
decreased largely because Chaparral parent company administrative costs, which
are not deductible against KKM's Kazakh taxable income, are smaller relative to
pre-tax income as KKM's profits rise.

Results of Operations for the Six Months Ended June 30, 2005 Compared to the Six
Months Ended June 30, 2004
--------------------------------------------------------------------------------

Our operations for the six months ended June 30, 2005 resulted in a net income
of $10.44 million compared to a net income of $1.93 million for the six months
ended June 30, 2004. The $8.51 million increase in our net income is primarily a
result of higher crude prices.

Revenues. Revenues were $57.49 million for the first half of 2005 compared with
$33.08 million for the first half of 2004. The $24.41 million increase is the
result of higher crude prices and sales volumes achieved during the first half
of 2005 as compared to the same period of 2004. During the first half of 2005,
we sold approximately 1,472,500 barrels of crude oil, recognizing $57.49 million
in revenue, or $39.04 per barrel after quality differential losses. Comparably,
we sold approximately 1,354,000 barrels of crude oil, recognizing $33.08 million
in revenue, or $24.42 per barrel, for the first half of 2004. The result is a
positive price variance of $21.52 million and a positive volume variance of
$2.89 million.

Transportation and Operating Expenses. Transportation costs for the first half
of 2005 were $7.54 million, or $5.12 per barrel, and operating costs associated
with sales were $7.39 million, or $5.02 per barrel. Comparatively,
transportation costs for the first half of 2004 were $6.22 million, or $4.59 per
barrel, and operating costs associated with sales were $3.90 million, or $2.88
per barrel. The increase in transportation cost per barrel during the first half
of 2005 is the result of higher tariffs imposed on the Company. The main reason
for the increase in operating cost per barrel is changes in cost allocation
procedures resulting in a lower percentage of field expenditures being
capitalized.

Depreciation and Depletion. Depreciation and depletion expense was $10.85
million for the first half of 2005 compared with $8.54 million for the first
half of 2004. The $2.31 million increase is the result of higher sales volumes
and a higher effective depletion rate which is due to a proportionately higher
increase in future capital costs associated with increased reserves. During the
first half of 2005, the Company recognized a total depletion expense of $10.47
million or $6.05 per barrel produced, compared to $8.23 million or $5.74 per
barrel produced for the first half of 2004.

numerous uncertainties. Such uncertainties include the projection of future
rates of production, export allocation, and the timing of development
expenditures. The accuracy of the estimates depends on the quality of available
geological and geophysical data and requires interpretation and judgment.
Estimates may be revised either upward or downward by results of future
drilling, testing or production. In addition, estimates of volumes considered to
be commercially recoverable fluctuate with changes in commodity prices and
operating costs. Our estimates of reserves are expected to change as additional
information becomes available. A material change in the estimated volumes of
reserves could have an impact on the depletion rate calculation and the
financial statements.

Interest Expense. Interest expense was $2.28 million for the first half of 2005
compared to $2.50 million for the first half of 2004. Interest charges under the
KKM Credit Facility were $0.62 million lower due to reduction in principal
outstanding, but this was partially offset by no interest being capitalized in
the first half of 2005 compared to $0.26 million in the first half of 2004.

General and Administrative Expense. General and administrative costs decreased
from $3.76 million for the six months ended June 30, 2004 to $3.05 million for
the six months ended June 30, 2005. The decrease of $0.71 million is primarily
due to accrued severance costs for former executives in the first half of 2004,
reductions in expatriate staff numbers and lower salaries and wages, partially
offset by an accrual of $0.57 million for Kazakh withholding tax payable on
management fees charged by CAP-G to KKM for the period January 2004 to June
2005. This withholding tax liability has only recently arisen due to changes in
KKM's income tax returns.

Income Tax Expense. Income tax expense increased from $3.02 million for the six
months ended June 30, 2004 to $7.51 million for the six months ended June 30,
2005, representing 61% and 42% respectively of pre-tax income. The tax charge
has increased as income has increased. The effective tax rate has decreased
largely because Chaparral parent company administrative costs, which are not
deductible against KKM's Kazakh taxable income, are smaller relative to pre-tax
income as KKM's profits rise.

3. Commodity Prices for Oil and Gas

Our revenues, profitability, growth and value are highly dependent upon the
price of oil. Market conditions make it difficult to estimate prices of oil or
the impact of inflation on such prices. Oil prices have been volatile, and it is
likely they will continue to fluctuate in the future. Various factors beyond our
control affect prices for oil, including supplies of oil available worldwide and
in Kazakhstan, the ability of OPEC to agree to maintain oil prices and
production controls, political instability or armed conflict in Kazakhstan or
other oil producing regions, the price of foreign imports, the level of consumer
demand, the price and availability of alternative fuels, the availability of
transportation routes and pipeline capacity, and changes in applicable laws and
regulations.

4. Inflation and Exchange Rates

We cannot control prices received from our oil sales and to the extent we are
unable to pass on increases in operating costs, we may be affected by inflation.
The devaluation of the Tenge, the currency of the Republic of Kazakhstan, can
significantly decrease the value of the monetary assets that we hold in
Kazakhstan as well as our assets in that country that are based on the Tenge.
KKM retains the majority of its cash and cash equivalents in U.S. dollars, but
KKM's statutory tax basis in its assets, tax loss carry-forwards, and VAT
receivables are all denominated in Tenge and subject to the effects of
devaluation. Local tax laws allow basis adjustments to offset the impact of
inflation on statutory tax basis assets, but there is no assurance that any
adjustments will be sufficient to offset the effects of inflation in whole or in
part. If not, KKM may be subject to much higher income tax liabilities within
Kazakhstan due to inflation or devaluation of the local currency. Additionally,
devaluation may create uncertainty with respect to the future business climate
in Kazakhstan and to our investment in that country. As of June 30, 2005, the
exchange rate was 135.26 Tenge per U.S. dollar compared to 130.00 as of December
31, 2004.

5. Critical Accounting Policies

The preparation of the Company's consolidated financial statements requires
management to make estimates, assumptions and judgments that affect the
Company's assets, liabilities, revenues and expenses and disclosure of
contingent assets and liabilities. Management bases these estimates and

assumptions on historical data and trends, current fact patterns, expectations
and other sources of information it believes are reasonable. Actual results may
differ from these estimates under different conditions. For a full description
of the Company's critical accounting policies, see Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations in the
Company's 2004 Annual Report on Form 10-K.

6. Special Note Regarding Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements." Forward-looking statements relate to future events
or our future financial performance. In some cases, you can identify
forward-looking statements by terminology such as "may," "will," "should,"
"expects," "plans," "estimates," "believes," "predicts," "potential," "likely,"
or "continue," or by the negative of such terms or comparable terminology.
Forward-looking statements are predictions based on current expectations that
involve a number of risks and uncertainties. Actual events may differ
materially. In evaluating forward-looking statements, you should consider
various factors, including the risks discussed above. These factors may cause
our actual results to differ materially from any forward-looking statement.

Although we believe that these statements are reasonable, we cannot guarantee
future results, levels of activity, performance or achievements, and you are
encouraged to exercise caution in considering such forward-looking statements.
Unless otherwise required by law, we are not under any duty to update any of the
forward-looking statements after the date of this Quarterly Report on Form 10-Q
to conform these statements to actual results.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Foreign Currency

The functional currency is the U.S. dollar. All transactions arising in
currencies other than U.S. dollars, including assets, liabilities, revenue,
expenses, gains, or losses are measured and recorded in U.S. dollars using the
exchange rate in effect on the date of the transaction.

Cash and other monetary assets held and liabilities denominated in currencies
other than U.S. dollars are translated at exchange rates prevailing as of the
balance sheet date (135.26 and 130.00 Tenge per U.S. dollar as of June 30, 2005
and December 31, 2004, respectively). Non-monetary assets and liabilities
denominated in currencies other than U.S. dollars have been translated at the
estimated historical exchange rate prevailing on the date of the transaction.
Exchange gains and losses arising from translation of non-U.S. dollar amounts at
the balance sheet date are recognized as an increase or decrease in income for
the period. See Item 2 section 4 for discussion on inflation and exchange rate
risks.

The Tenge is not a convertible currency outside of the Republic of Kazakhstan.
The translation of Tenge denominated assets and liabilities in these financial
statements does not indicate Chaparral could realize or settle these assets and
liabilities in U.S. dollars.

Commodity Prices for Oil

In addition, under the terms of our Agreement with the government of the
Republic of Kazakhstan, the Company has the right to export, and receive export
quota for, 100% of the production from the Karakuduk Field. However, oil

producers within Kazakhstan are required to supply a portion of their crude oil
production to the local market to meet domestic energy needs. Local market oil
prices are significantly lower than prices obtainable on the export market. For
the six months ended June 30, 2005, the Company sold 102,000 barrels of crude
oil, or 7% of its total oil sales, to the local market, compared to 161,000
barrels, or 12%, during the six months ended June 30, 2004. During the first
half of 2005, local market prices obtained by the Company were, on average, $19
per barrel below export market prices, net of transportation costs. We have
attempted, in accordance with the Agreement, to effect the 100% export of all
hydrocarbons produced from the Karakuduk Field, through discussions with the
government of the Republic of Kazakhstan. We plan to continue to work with the
government to increase our export quota and minimize or eliminate future local
sales requirements. In addition, we entered into an agency agreement with Nelson
to assist in reducing our local market obligation (see Note 9 to the interim
financial statements presented in Item 1). However, no assurances can be
provided that we will be able to export a higher portion of our production and
that our cash flow from operations will be sufficient to meet working capital
requirements in the future.

Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in the periodic reports we
file with the SEC is recorded, processed, summarized and reported within the
time periods specified in the rules of the SEC. The Company carried out an
evaluation as of June 30, 2005, under the supervision and the participation of
our management, including our chief executive officer and chief financial
officer, of the design and operation of these disclosure controls and procedures
pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934.
Based upon that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are effective in
timely alerting them to material information required to be included in our
periodic SEC filings.

Changes in Internal Controls over Financial Reporting

As a result of the evaluation referred to in the preceding paragraph, there were
no changes that materially affected or are reasonably likely to materially
affect our internal control over financial reporting during the quarter ended
June 30, 2005.

Part II- Other Information

Item 6 - Exhibits

*10.1 Guarantee Fee Agreement, dated April 19, 2005, between
Closed Type JSC Karakudukmunay and Nelson Resources Limited.

*31.1 CEO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

*31.2 CFO Certification pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.

*32.1 CEO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

*32.2 CFO Certification pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.

* Filed herewith.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

Dated: August 10, 2005

Chaparral Resources, Inc.

By: /s/ Simon Gill
--------------------------------------
Simon Gill
Chief Executive Officer

By: /s/ Nigel Penney
---------------------------------------
Nigel Penney
VP Finance and Chief Financial Officer
(Principal Financial and Accounting
Officer)