Annual Results for the year ended 31 December 2010

Transcription

1 Annual Results for the year ended 31 December 2010 Petropavlovsk PLC ("Petropavlovsk" or the "Company", or together with its subsidiaries the Group ) today issues its audited annual results for the period ended 31 December 2010 (the Period ). FINANCIAL SUMMARY YE 31 Dec 2010 YE 31 Dec 2009 Change Gold produced (oz) 506, ,800 4% Gold sold (oz) 445, ,215 2% Group average gold price received US$1,253/Oz US$975/Oz 29% Cash costs of hard rock mines US$558/Oz US$303/Oz 84% Cash costs of alluvial production US$862/Oz US$769/Oz 12% Group Revenue (US$m) % Underlying EBITDA (US$m) (before exceptional items, excluding IRC) Underlying EBITDA (US$m) (before exceptional items, including IRC) (5%) (10%) Earnings per share (basic)(us$) (89%) Net Debt (US$m) (171) (19) (152) Interim Dividend paid (57%) Final Dividend proposed 0.07 n/a n/a NOTES

2 Underlying EBITDA is the profit for the period before financial income, financial expenses, foreign exchange gains and losses, fair value changes, taxation, depreciation, amortisation and impairment. Reconciliation of profit for the year and underlying EBITDA is set out in note 39 to the financial statements below. Total attributable gold production, as stated throughout this document, is comprised of 100% of production from the Group s subsidiaries and the relevant share of production from joint ventures and other investments. Figures for the comparative period are restated accordingly. The Group has held a c.1.1% interest in Rusoro Mining Ltd since March 2009; no attributable ounces are included in the Group figures. The Company s direct and indirect interest in JSC Pokrovskiy mine (the holder of the Group s Pokrovskiy and Pioneer interests) is 98.61%. In July 2010, the Group increased its total holding in CJSC ZRK Omchak to 90% after the acquisition of 32.5% and 7.5% of the issued capital of the Omchak from OJSC Susumanzoloto and OJSC Shkolnoye respectively. Accordingly, Omchak has become a subsidiary of the Group and production from Omchak for H is 100% attributable to Group. Production from Omchak for H and for 2009 was 50% attributable to the Group. Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly gold produced in the year consists of gold recovered during the period and adjusted for the movement in gold still in the circuit. Group s Total Cash Costs have been calculated inclusive of costs of stripping, 2009 Group s Total Cash Costs have been restated with the same calculation. FINANCIAL HIGHLIGHTS Group revenue of US$612 million - increased by 30% from US$472 million in 2009 due to a 1.7% increase in ounces of gold sold and a 29% increase in the average realised gold sales price; Group total cash costs for hard-rock assets of US$558/oz represent a 84% increase compared to 2009, principally due to a 55% decrease in mined and processed grades at Pioneer; Total cash costs per tonne of ore mined and processed at Pioneer decreased by 43% due to increased capacities and economies of scale; Total cash costs for alluvial production were at US$862oz; the share of alluvial production in the Group s total gold output amounted to 16% in 2010 compared to 11% in 2009; The Group s average realised gold price increased by 29% from US$975/oz in 2009 to US$1,253/oz in 2010; Underlying EBITDA before exceptional items for the Period was US$205 million, a 10% decrease on 2009; 2

3 Earnings per share of US$0.11 were down 89% versus the 2009 figure, impacted by the increase in production costs and US$25.7 million of exceptional items; On 30 March 2011, the Board of Directors resolved to recommend a final dividend of 0.07 per share which is expected to result in an aggregate payment of 13.2 million. Subject to shareholder approval at the Annual General Meeting on 19 May 2011, the final dividend is proposed to be paid on 28 July 2011 to the shareholders on the register at the close of business on 1 July 2011; Net debt as at 31 December 2010 was US$171.1 million. RESERVES AND RESOURCES There was a significant uplift in the Group s JORC Code (2004) compliant Mineral Resources and Ore Reserves; Proven and Probable Ore Reserves have increased by 36% to 9.1Moz compared to 6.7Moz reported in March 2010; Total Mineral Resources increased by 96% from 11.8Moz of gold at an average grade of 1.23g/t Au in 300Mt of mineralised material to an estimated 23.1Moz of gold at an average grade of 0.98g/t Au in 732Mt of mineralised material; Of the estimated 23.1Moz Measured and Indicated Mineral Resources increased by 55% to 12.8Moz (inclusive of resources modified to produce the Ore Reserves) compared to estimates reported in March 2010, and a further 10.3Moz of Inferred Mineral Resources were identified; The increase in reserves and resources was achieved despite depletion of c.485,200oz of reserves as a result of 2010 production; The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2010 at its principal assets, predominantly at Malomir and Pioneer, as well as an evaluation of Proven and Probable Ore Reserves at Petropavlovskoye in the Yamal Region; The Mineral Resources and Ore Reserves update has been prepared by the Group in conjunction with external experts and independently audited by mining consultants Wardell Armstrong International ( WAI ). Both 2010 and 2011 estimates were completed using a US$1,000/oz long-term gold price; In addition, the Group holds reserves and resources of its alluvial projects, which are classified in accordance with the Russian Classification System. 3

4 OPERATIONAL AND DEVELOPMENT HIGHLIGHTS Total attributable gold production for 2010 amounted to 506,800oz, representing an increase of 4% compared with attributable gold production in 2009 (486,800oz); The successful commissioning of a third milling line at Pioneer plant has increased the total processing capacity of the mine to 5.7Mtpa (including the heap-leach) and underpinned a strong performance that yielded 230,900oz in 2010 despite a more than threefold decrease in the head grades achieved; Delays in the delivery of key 15m 3 excavator equipment together with adverse weather caused disruption to the Pioneer mining schedule resulting in the processing of lower than scheduled grades of ore reducing production for the year; The Malomir mine was commissioned on schedule in August 2010 and ramped up smoothly to its design capacity, despite the logistical challenges of operating in a different part of the Amur region; The second milling facility at Malomir remains on schedule for commissioning in H and the second stage of mine development to process refractory ore is also on track for commissioning in 2012; Construction work at Albyn is advancing as planned with commissioning expected to take place during Q4 2011; A full feasibility study has been commissioned on establishing a pressure oxidation facility ( POX ) at Pokrovskiy to process flotation concentrate from Malomir and Pioneer. The detailed results of the feasibility study are expected to be announced in Q CORPORATE HIGHLIGHTS The successful listing of the Group s former Non-Precious Metals Division ( IRC ) on the Stock Exchange of Hong Kong Limited raised gross proceeds of c.us$240 million; The balance sheet was strengthened by the issue of low-cost US$380 million 4% per annum guaranteed convertible bonds due 2015 in February 2010; In December 2010 a subsidiary of IRC entered into a US$340 million project finance arrangement with the International and Commercial Bank of China Limited ( ICBC ), and a US$400 million Engineering, Procurement and Construction Contract ( EPC ) was signed with the China National Electric Engineering Company, Limited ( CNEEC ) 1 ; 1 In January 2011, the China National Electric Equipment Corporation, a major Chinese state-owned enterprise, was re-named the China National Electric Engineering Company, Limited 4

5 During Q a strategic review of the business was conducted by the Board. As a result of this review, three additional Executive Directors were appointed in January 2011: Dr Alya Samokhvalova as Strategic Director, Mr Andrey Maruta as Finance Director, Russia, and Mr Martin Smith as Technical Director; The Board established two new committees in January 2011: the Strategic Committee to formulate annual and long-term budgets, set production forecasts, and monitor the Group's performance against these targets, and the Technical Committee, to aid the Strategic Committee by providing a technical analysis of the Group's budgets, forecasts and investment plans; In January 2011, Dr Graham Birch assumed the role of Senior Non-Executive Director; Mr Peter Hill-Wood, a Non-Executive Director at Petropavlovsk, is to retire from his role at the Company s Annual General Meeting on 19 May PRODUCTION PLAN AND OUTLOOK The Group's attributable gold production for 2011 is currently estimated to be 600,000oz, representing an increase of c.18% over total attributable gold production for Group sale volumes in 2011 are also expected to exceed 600,000oz; In accordance with the Group s communications policy, the estimate of 600,000oz excludes any additional production that may be derived from Malomir s expansion, due in H2 2011, and the commissioning of the Albyn mine, due to take place during Q The Group s management has no reason to believe that commissioning and ramp up will not run as scheduled; It is expected that the Group's production will, as usual, be weighted towards the second half of the year due to an anticipated increase in attributable alluvial production, coupled with increased production from heap leach operations, both of which are seasonal, and to the substantial backlog of stripping works initially scheduled for 2010 that are now due to take place in H1 2011; It is the Company's intention to continue to update the market on the Group's anticipated full-year production plans on a quarterly basis, or if additional material information comes to light. 5

6 2010 EXPLORATION HIGHLIGHTS AND LICENCE ACQUISITIONS Pioneer - A series of new, parallel ore zones with non-refractory mineralisation to the north-west of Bakhmut have been identified; Pokrovskiy and Flanks - A 24% increase in reserves allows for prolonging of the life of the main pit at Pokrovskiy. Continued encouraging exploration at Pokrovka-2 has identified additional ore adjacent to the previously identified ore body; Malomir - In-fill drilling on the Sukhonyr ore body allowed an upgrade from the previously identified Inferred resources into the Measured and Indicated category expanding the proposed open pit reserves; - Exploration on the Magnetitovaya zone, located in the eastern part of the Malomir licence area, identified two ore bodies. Further exploration continues; - Drilling has commenced to explore the possibility of a bridge zone between the Malomir and Ozhidaemoye deposits; Albyn - In-fill drilling completed in 2010 allowed better definition of the high grade zones and improved the average grade of the project resources and reserves; Krasnoyarsk region - Combined Indicated and Inferred Mineral Resources (in accordance with the JORC Code (2004)) have been identified at the Visokoe deposit, infill drilling is on-going to upgrade current resources to the Measured and Indicated category; - An Inferred Mineral resource of 542,000oz has been estimated for the Olenka ore bodies which are located 70km north from Visokoe; - A Pre-Feasibility study is being prepared for Visokoe. New licences in the Amur region - The new Alkagan-Adamovskaya licence (472.8km 2 in size) surrounding Pioneer s initial licence area has been acquired; - Exploration at Bakhmut NE has already identified additional zones of mineralisation; - The highly prospective Kharginskoye licence south-east of the Albyn deposit has been acquired. 6

7 IRC HIGHLIGHTS IRC was listed on the Stock Exchange of Hong Kong Limited in October 2010, raising gross proceeds of c.us$240 million. During 2010, a subsidiary of IRC entered into a US$340 million project finance arrangement with ICBC, and a US$400 million EPC was signed with CNEEC; A threefold increase in Ore Reserves in accordance with the JORC Code (2004) was announced in March 2011; Kuranakh was commissioned in May 2010, with a formal commissioning ceremony undertaken by the Russian President, Dmitry Medvedev in July 2010; Profitable sales of iron ore concentrate from Kuranakh are ongoing; Development of the K&S iron ore concentrate production facility is on-track for commissioning in 2013; K&S is designed to comprise a 10Mtpa mining operation at two open pits and is expected to yield 3.2Mtpa of 65% iron ore concentrate. The EPC contract is intended to bring K&S into commercial production in The first thousand tonnes of ore were mined at the K&S for testing purposes. The results of these tests have been satisfactory, with negligible impurities found. Petropavlovsk is an indirect 65.6% shareholder in IRC. IRC is a producer and developer of industrial commodities, with operations in north eastern China and the Far East of Russia. IRC is listed on the Stock Exchange of Hong Kong Limited Further information about IRC, and the IRC 2010 Annual Report, may be found at the IRC website, CHAIRMAN S STATEMENT AND CHIEF EXECUTIVE OFFICER S REPORT 2010 marked a transitional phase for the Group; a year of both challenges and achievements, as it evolves into a world-class multi-mine operator. Achievements We ended the year with total gold production of 506,800oz, a 4% increase on The growth in production is partly attributable to increased capacity at Pioneer and the launch of our latest project, Malomir. Together with Pokrovskiy and Omchak, these assets formed the core of Petropavlovsk s producing gold mining operations in Although this was a record for us, the 2010 production figure was significantly below our initial production forecast range due to operational challenges, some of which were beyond our control, as outlined below, and the hurdle of moving to a seamless multi-mine operation. Whilst we faced a number of challenges, these should be kept in perspective. Total gold revenue advanced to US$557.9 million, a 31% increase on 2009 figures, supported by a continued strong momentum in the gold price. Whilst the full-year production 7

8 figure is lower than the target we initially set, it is still another consecutive annual production increase. As a vertically integrated mining business, a significant part of what we have accomplished has been planned and executed in-house. Several achievements are worthy of particular mention this year. The commissioning of a third milling line at our flagship Pioneer mine, on schedule, has transformed the site into a significant bulk-tonnage operation, capable of processing in excess of 5 million tonnes of ore annually and representing an 80% increase in the throughput capacity of the plant. During 2010, 19.6 million m 3 of material was moved at Pioneer (up 116% on FY 2009), 3.9 million tonnes of ore were mined (up 203% on FY 2009) and 3.9 million tonnes were milled (up 263% on FY 2009). In addition to the substantial expansion of capacity at Pioneer, in August 2010, our Malomir mine and plant were launched, with the new plant achieving a capacity of 55,000 tonnes per month shortly after commissioning. This was a remarkable achievement, given the remote location of the asset and the infrastructure challenges it presented. Malomir s first line began operating in August 2010, with work on the second phase of the plant continuing in parallel. Commissioning of the second line is scheduled for the second half of We are proud to have delivered both of these gold projects on schedule and look forward to their contribution in years to come. Looking ahead, we endeavour to replicate our success in commissioning further quality assets with the planned launch of our fourth mine, Albyn, in the fourth quarter of We are pleased to report that the Group s former Non-Precious Metals Division, IRC, was listed on the Stock Exchange of Hong Kong Limited in October 2010, raising c.us$240 million. IRC is fully funded for near-term growth including bringing K&S into production in K&S is designed to comprise a 10Mtpa mining operation at two open pits and is expected to yield 3.2Mtpa of c.65% iron ore concentrate. The Kuranakh site was commissioned in May 2010 and formally opened by the President of Russia, Dmitry Medvedev, in July Commercial sales from Kuranakh began in September 2010 and are now ongoing on a regular basis. Costs Group total cash costs for hard rock deposits in 2010 were US558/oz, with total cash costs at alluvial projects amounting to US$862/oz. The increase in costs at hard rock operations was mainly due to the processing of lower grades, Rouble inflation and fluctuations in Rouble to US Dollar exchange rate. Compared to 2009, electricity costs increased by 16%, the cost of chemical reagents increased in the range between 7% and 19%, the cost of diesel increased by 12% and consumables prices increased by up to 3%, due to Rouble inflation. Wages increased by 6%. The effects of Rouble price inflation were increased by the appreciation of the Rouble against the US Dollar by 5%, with the average exchange rate for the year going from 32 Roubles per US Dollar in 2009 to 30.4 Roubles per US Dollar in It is worth noting that total cash costs per tonne of ore processed at Pioneer decreased by 44% due to increased capacities and economies of scale. 8

9 New licence acquisitions As an organically grown producer, the acquisition of prospective new licences and subsequent exploration of these is a key focus in our strategy. During 2010, the Group acquired new licences covering an area totalling c. 3,279km 2 in the Amur, Krasnoyarsk, Irkutsk and Yamal regions, as well as the EAO. We look forward to exploring these prospective assets in due course. Reserves and Resources We continued to actively build our gold reserves and resources base during 2010, with Proven and Probable Ore Reserves increasing by 36% and Mineral Resources by 96%. In accordance with the JORC Code (2004), Petropavlovsk now has 9.1Moz of Proven and Probable Reserves (compared to 6.7Moz in 2010), 12.8Moz of Measured and Indicated Resources (compared to 8.2Moz in 2010) and 10.3Moz of Inferred Resources (compared to 3.7Moz in 2010). The additional reserves and resources are attributable to both exploration works at existing sites as well as value generating acquisitions. As in the past, future exploration will continue to be a key driver of our strategy and an effective way to convert quality reserves and resources into cost-effective gold ounces. Challenges As an extensive expansion programme progressed through 2010, the Group tackled a number of operational challenges. At Pokrovskiy, stabilisation of the southern pit wall impacted, albeit not significantly, on our production capability. Nevertheless, during 2010, 6.2 million m 3 of material were moved at the site (up 114% on 2009), 1.7 million tonnes of ore were mined (down 10% on 2009 as Pokrovskiy is a maturing asset) and 1.7 million tonnes were milled (down 1% on 2009). Delays in the delivery of key 15m 3 excavator equipment in combination with adverse weather, including extreme cold and subsequent flooding at the Pioneer mine, caused disruption to the mining schedule. This meant that the increased capacity of the plant was used to process lower grades of ore than scheduled, resulting in reduced production for the year. Nonetheless, it is worth remembering that the underlying gold deposits are still there to be excavated and sold to the market with the price increasing by 29% in the last year. Production at the newly commissioned Malomir mine was lower than we originally envisaged due to the complicated structure of the upper levels of the Quartzitovoye ore body, surrounded by lower grade material, resulting in lower than expected grades being processed through the mill. These challenges resulted in a revision to our 2010 production estimates, as we took a more conservative stance. Management restructuring and new committees Following a strategic review, we were pleased to welcome the appointment of three experienced executives to the Board. Dr. Alfiya (Alya) Samokhalova joined as Strategic Director, Mr Andrey Maruta as Finance Director, Russia, and Mr Martin Smith as Technical Director. Each of these individuals brings with them a deep understanding of the Company and its operations. The Board looks forward to drawing on their valuable expertise and detailed knowledge in helping Petropavlovsk to achieve its objectives as it continues in its 9

10 evolution as a major gold producer. Additionally, Mr Peter Hill-Wood relinquished his position as Senior Independent Non-Executive Director and Dr. Graham Birch has assumed this role. Two new committees have been created alongside the new Board appointments. The Strategic Committee is tasked with formulating long-term strategy and performance monitoring, while the Technical Committee oversees budgeting and forecasting. Working together, the efforts of the two committees are designed to generate additional confidence in future production and budget estimates. Corporate highlights In February 2010, the Group took advantage of comparatively low market interest rates by issuing US$380 million 4% guaranteed convertible bonds which mature in February The funds received have strengthened our balance sheet and were mostly invested in prospective exploration and development work in order to deliver future production growth. In August 2010, the Group increased its total holding in CJSC ZRK Omchak, predominantly an alluvial operation, to 90%. Accordingly, this asset became a subsidiary, having formerly been a joint venture, and Petropavlovsk now consolidates all of Omchak s production. In October 2010, the Group s Non-Precious Metals Division, IRC, was listed on the Stock Exchange of Hong Kong Limited, raising gross proceeds of c. US$240 million. IRC Limited s IPO was a commercial opportunity that helped us to realise the value of our non-precious metals operations and to partially spin-off the division, leaving us to concentrate on our core business of gold exploration, development and production, while retaining an interest of 65.6% in IRC Limited. In December 2010, a subsidiary of IRC Limited entered into a US$340m loan facility with the ICBC. The loan will be used towards funding the construction of IRC s mining operations at K&S with production commencing in In the same month, IRC also entered into a contract with CNEEC, a major Chinese state-owned contractor, for the design and construction of mining and processing operations at K&S, including a processing plant that will produce iron ore concentrate. Share price performance and dividend Petropavlovsk s share price appreciated by 11.5% between 1 January and 31 December 2010, which we believe to be a fair performance given the operational challenges we tackled. However, our share price is subject to market risks and past performance cannot be relied on as a guide to future performance. Paying a dividend, in our view, is the hallmark of a strong and confident business. We are certain that the long term fundamentals of the Group are robust and we wish to reward shareholders as the business prospers and develops, striking a balance between returning profit to shareholders and reinvesting capital back into the business. We are pleased that on 30 March 2011, the Board of Directors resolved to recommend a final dividend of 0.07 per share which is expected to result in the aggregate payment of 13.2 million. Subject to shareholder approval at the Annual General Meeting on 19 May 2011, the final dividend is proposed to be paid on 28 July 2011 to the shareholders on the register at the close of business on 1 July

11 Presidential visit In July 2010, we were delighted to welcome the Russian President Dmitry Medvedev, who honoured the Group with a visit to our metallurgical test plant in Blagoveschensk in the Amur region. During his visit, the President took part in a ceremony to celebrate the launch of the newly commissioned line at Pioneer and the processing facility at Kuranakh. The gold market The gold price reached new nominal highs in Having started the year at US$1,088, and with an intra-day high of US$1,431 in December, the precious metal closed the year at US$1,406, an increase of 29% over 2009 prices. The rise in the price of gold has been underpinned by the precious metal s appeal as an alternative monetary asset, as a hedge against inflation, sovereign risk and weaker currencies and also as a store of value during times of uncertainty. Aside from investment demand, gold also continued to benefit from purchases by central banks as well as renewed demand in the jewellery, industrial and retail sectors. Amidst fiscal imbalances and quantitative easing polices introduced by central banks to stimulate economic recovery, there are reasons to consider that gold may find further momentum in With this in mind, it is worth noting that, in real terms, the gold price is well below its all-time high of US$2,399 (January 1980). As an unhedged gold producer, Petropavlovsk is well positioned to take advantage of further strength in the gold price going forward. The road ahead 2010 was a transitional year for the Group, its employees and shareholders. The Group continues to evolve from a small-scale business into a multi-mine operation and this evolution has naturally presented some challenges. But with challenges come opportunities and the progress we made during 2010 has allowed us to build on our strong foundations, positioning the Group to deliver sustainable production growth in 2011 and beyond. This year s accomplishments have positioned the Group for its next phase of development and growth and we believe that our prospects remain encouraging. In particular, our producing investment in iron ore, through IRC, gives us great confidence. As we look to the future and continue to execute our strategy we will be guided by Conservatism in our forecasts, greater Consistency in our operations, as well as ensuring Contingency plans are in place, and that investor s will continue to benefit from frequent and transparent Communications. Since we founded this business in 1994, our vision has always been to build Russia s Far East mining champion. More than 2.7 million ounces of gold later and as one of Russia s top three gold producers, our vision continues to stand strong was an eventful year for the Group, a period during which we encountered numerous challenges, but also delivered record gold production, record revenues, new mines, a strong balance sheet and significant additions to our reserves and resources. 11

12 Our people Human capital is the most important aspect of every successful business. On behalf of the Board of Directors, we wish to express our gratitude to the Group employees, who continue to work with tireless commitment and enthusiasm, driving our ambitions forward. As he steps down as a Director we would like to record our special thanks to Mr Peter Hill- Wood. He joined us in 2003 and has been with us through ups and downs since then and his sound common sense, his enthusiasm and his encouragement have been of great assistance to us both. Being at various times, Chairman of the Audit Committee and Senior Non-Executive Director was very different from his day job as Chairman of Arsenal Football Club but, in spite of this, we have benefited hugely from his active participation and instinctive feel for the right way of doing things. We will miss him very much. Peter Hambro, Chairman Pavel Maslovskiy, Chief Executive Officer There will be a presentation of the above-mentioned highlights today at 10:00. A webcast of the presentation will be available on the Group s website The presentation will be followed by a question and answer session. The dial in-details to access the conference call in listen-only mode or to ask a question are as follows: In the UK: Elsewhere: +44 (0) Conference ID: To access the conference call state Petropavlovsk and Annual Results 2010 as the name of the presentation. The Company s Annual Report and Accounts for the year ended 31 December 2010 will be published on the Company s website in due course. ENQUIRIES Petropavlovsk PLC Dr. Alya Samokhvalova Rachel Tuft Merlin David Simonson Fiona Crosswell +44 (0) (0)

13 Reserves and Resources (in accordance with the JORC Code (2004)) The Group maintains its commitment to report its Mineral Resources and Ore Reserves in accordance with the JORC Code (2004). The Russian System for reporting reserves and resources remains in use within the Russian legal environment forming the basis of the Group s accountability to the Russian state whilst the Group s reporting on reserves and resources to investor audiences is carried out in accordance with the JORC Code (2004). An independent mineral consultant, Group in-house specialists and external advisers cooperated to set up an internal system for reporting reserves and resources in accordance with the JORC Code (2004). The results were audited by Wardell Armstrong International Ltd ( WAI ) and form part of a Mineral Expert s Report, which has been prepared by WAI. The Executive Summary of this report will be available on the Company s website at later today. A summary of the Group s gold Ore Reserves and Mineral Resources as at 1 January 2011 in accordance with the guidelines of the JORC Code (2004) is shown below. This summary is based on the annual review prepared by WAI as part of the Group s annual reporting procedure. The estimates were completed following an extensive exploration programme conducted by the Group during Summary of Mineral Resources in accordance with the JORC Code (2004) for hard rock gold assets Category Tonnage Grade Gold (kt) (g/t) (Moz) Measured 63, Indicated 304, Measured & Indicated 367, Inferred 364, Notes Mineral Resources are reported inclusive of Ore Reserves Contained Gold represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery Numbers may not add up due to rounding 13

14 Summary of Ore Reserves in accordance with the JORC Code (2004) for hard-rock gold assets Category Tonnage (Kt) Grade (g/t) Gold (Moz) Proven 43, Probable 199, Proven & Probable 242, Notes Numbers may not add up due to rounding Proven and Probable Ore Reserves in accordance with the guidelines of the JORC Code (2004) increased by 36%, from 6.7Moz of gold at an average grade of 1.26g/t Au in 164Mt of ore to 9.1Moz of gold at an average grade of 1.17g/t Au in 243Mt of ore. The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2010 at its principal assets, predominantly at Malomir and Pioneer, as well as evaluation of Proven and Probable Ore Reserves for Petropavlovskoye in the Yamal Region (Northern Russia). Both 2010 and 2011 estimates were completed using a long-term gold price of US$1,000/oz. Total Mineral Resources have increased by 96%, from 11.8Moz of gold at an average grade of 1.23g/t Au, in 300Mt of mineralised material to 23.1Moz of gold at an average grade of 0.98g/t Au, in 732Mt of mineralised material. Of the 23.1Moz, 12.8Moz are Measured and Indicated and 10.3Moz are Inferred Mineral Resources. The reported uplift in Ore Reserves and Mineral Resources has been achieved notwithstanding depletion of c.490koz of gold through production at Pokrovskiy, Pioneer and Malomir mines during

15 Breakdown of Mineral Resources in accordance with the JORC Code (2004) for hard rock assets Grade Contained Deposit Category Tonnage (kt) (g/t Au) Metal (Moz) AMUR REGION ASSETS Pokrovskiy Pioneer Malomir Albyn Tokur KRASNOYARSK REGION ASSETS Visokoe (Krasnoyarsk) Olenka Measured 5, Indicated 29, Measured+Indicated 34, Inferred 10, Measured 28, Indicated 70, Measured+Indicated 99, Inferred 53, Measured 12, Indicated 143, Measured+Indicated 155, Inferred 216, Measured Indicated 17, Measured+Indicated 18, Inferred 9, Measured 11, Indicated 16, Measured+Indicated 28, Inferred 10, Measured - - Indicated 14, Measured+Indicated 14, Inferred 43, Measured - - Indicated - - Measured+Indicated - - Inferred 11, YAMAL REGION ASSETS Measured 3, Petropavlovskoye Indicated 12, Measured+Indicated 16, Inferred 6, CHITA REGION ASSETS Measured Verhne-Aliinskoe Indicated Measured+Indicated Inferred 3, Notes Mineral Resources are reported inclusive of Ore Reserves Contained Gold represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery Numbers may not add up due to rounding 15

16 Precious Metals Group: Summary of Ore Reserves by asset Deposit Pokrovskiy (Amur) Pioneer (Amur) Malomir (Amur) Albyn (Amur) Tokur (Amur) Petropavlovskoe (Yamal) Notes Numbers may not add up due to rounding Category Tonnage (kt) Grade (g/t Au) Contained Metal (Moz) Proven 4, Probable 21, Proven+Probable 26, Proven 21, Probable 46, Proven+Probable 67, Proven 11, Probable 105, Proven+Probable 117, Proven Probable 15, Proven+Probable 16, Proven 2, Probable 2, Proven+Probable 4, Proven 2, Probable 7, Proven+Probable 10, The Proven and Probable Ore Reserves estimated by WAI following the guidelines of the JORC Code (2004) and using a US$1,000/oz long-term gold price as of 1 January 2011 are 243Mt of ore containing 9.1Moz of gold at an average grade of 1.17g/t Au (economic cut-off grade g/t Au depending on the deposit). This includes 4.6Mt at an average grade of 0.72g/t within ore stockpiles at the Group s active operations. The proposed open pits will require 1,340Mt of waste to be removed in order to access the ore body at a stripping ratio of 5.6t/t. A further 0.4Moz of contained gold in Inferred Mineral Resource exists within the optimised pit shells. In addition to the Ore Reserves and Mineral Resources estimated in accordance with the JORC Code (2004), the Group also holds significant alluvial gold reserves and resources classified in accordance with the Russian Classification System. A summary of the alluvial resources and reserves is presented below: 16

17 Alluvial Reserves (in accordance with the Russian Classification System) Category Volume (000 m 3 ) Grade (g/m 3 Au) Contained Metal (Moz) B 1, C 1 46, B+C 1 47, C 2 3, Total B+C 1 +C 2 51, Alluvial Resources (in accordance with the Russian Classification System) Category Volume (000 m 3 ) Grade (g/m 3 Au) Contained Metal (Moz) B 5, C 1 74, B+C 1 80, C 2 9, Total B+C 1 +C 2 90, Notes: (1) Alluvial resources are reported inclusive of alluvial ore reserves; (2) Ore reserves include only on-balance material for open cut and dredge extraction; resources include the ore reserves, off-balance material for open pit and dredge extraction as well as on-balance and off-balance material considered for potential underground mining; (3) As per the Russian Classification System, ore reserves are reported at in-situ grade and tonnage, however it has been demonstrated that the material remains economically viable after application of the reasonably assumed or estimated modifying factors such as mining dilution and recovery; (4) In July 2010, the Group increased its total holding in ZAO ZRK Omchak to 90%. Accordingly, Omchak became a subsidiary of the Group and production from the assets held by Omchak from H onwards is 100% attributable to the Group. Production from Omchak for H and for FY 2009 was 50% attributable to the Group. 17

18 OPERATIONS AND DEVELOPMENT REPORT POKROVSKIY During 2010, Pokrovskiy produced 144,900oz of gold, reaching the upper end of the Group s 2010 production forecast for Pokrovskiy for the year (135,000oz 145,000oz). This can be attributed to the mining and processing of reserve grades that were higher than predicted. During the first half of the year, the majority of production at Pokrovskiy came from lower grade ore bodies at the Pokrovka-1 and Pokrovka-2 deposits (the Ozernoye and Olegovskoye ore bodies respectively). This allowed the Group to focus on extensive stripping works in the main Pokrovskiy pit in order to access higher grade material of g/t Au, which was processed during the second half of the year in accordance with the Group s mine plan. These stripping works also allowed the Group to successfully stabilise the southern wall of the main Pokrovskiy pit, which experienced movement towards the end of The Proven and Probable Ore Reserves estimated by WAI at Pokrovskiy under the guidelines of the JORC Code (2004) using a gold price of US$1,000/oz, are 26.5Mt of ore at an average grade of 0.92g/t Au (economic COG of 0.3g/t Au) containing 0.8Moz of gold. This includes 4.4Mt of reserves at stockpiles at an average grade of 0.63g/t Au and the remaining open pit reserves at both the Pokrovka-1 and Pokrovka-2 areas. Ore extraction will require 87.6Mt of waste to be removed to access the ore body at a stripping ratio of 3.95t/t. A significant further Inferred Mineral Resource exists within the deposit. Costs Total cash costs at Pokrovskiy for 2010 were US$564/oz. This increase compared to the 2009 figures was in line with the Group s expectations and was attributable to the processing of lower grades combined with the fluctuation of the Rouble/Dollar exchange rates and increased prices for diesel, electricity and other consumables. Outlook Total production from Pokrovskiy for 2011 is expected to be c. 96,200oz. The life of the main open pit, previously expected to be exhausted by the end of 2012, has now been prolonged as the result of identification of the additional ore reserves. Nevertheless, production will gradually shift to the Pokrovskiy Flanks, from where it is currently estimated to continue for many years. Exploration is continuing on other parts of the Pokrovskiy licence area which may result in the discovery of additional resources providing a possible further extension to the life of the mine. By 2013, the Group is planning to install a POX facility at the Pokrovskiy site to process flotation concentrate from Malomir and Pioneer. A full feasibility study has been commissioned with detailed results of the study to be announced in Q The focus of exploration works in 2011 within the Pokrovskiy licence area is to define ore reserves of previously identified resources of refractory ore which will be suitable for treatment at the future POX plant. PIONEER Mining at Pioneer is conducted using open-pit methods and ore is currently being extracted from four pits. The complete fleet of mining excavators includes five 15m 3 and one 16m 3 bucket capacity excavators which are working on-site. 18

19 During 2010, Pioneer produced 230,900oz of gold (with 98,500oz produced in Q4 2010), representing 45.5% of the Group s total production for the year. In April 2010, the Group commissioned a third milling line at Pioneer, four months earlier than originally planned. This new line increased the overall annual processing capacity of the plant by c.79% to 5.0Mtpa. Metallurgical recovery rates were 84% for the year. The increase in the plant s capacity, together with the increased tonnage of stripping works, significantly enlarged the amount of mining works at Pioneer in 2010 with the total amount of material moved increasing by 116%. The mining schedule was disrupted by the delayed delivery of three 15m 3 excavators, which were ordered in good time but arrived several months later than their original stipulated delivery date. Mining was further affected by extreme adverse weather conditions with consistent extreme temperatures below C. This resulted in key mining equipment being unable to function, and subsequent minor flooding of the pit during Q These factors caused a delay in waste stripping works, particularly at the Andreevskaya ore body, preventing timely access to the higher grade ores. As a result, the Group was unable to fulfil Pioneer s original 2010 production plan of 375,000oz to 420,000oz. The lower grade material from the pit and stockpiles was treated resulting in the 2.1g/t average head grades processed through the mill during the year. These were 30% lower than originally forecast. Ore at Pioneer is processed at the on-site 5.0Mtpa RIP plant, which consists of three processing lines: one 5.5m x 1.8m SAG mill, one 3.2m x 5.4m ball mill and a sorption and desorption circuit with 200m 3 tanks, and two larger processing lines consisting of two 7.5m x 2.5m SAG mills, four 4.0 m x 6.0m ball mills and a sorption and desorption circuit with 450m 3 tanks. The Group is planning to commission a flotation unit at the plant in 2013/14 to process refractory ores simultaneously with direct cyanidation leaching and to ship the resultant flotation concentrate to the POX plant that will be constructed at the nearby Pokrovskiy mine for further processing and recovery of gold. During 2010, trial heap-leach operations were carried out at Pioneer to process material with a grade lower than 0.8g/t Au, recovering a total of 3,800oz of gold. The Ore Reserves at Pioneer are based on the Measured and Indicated Mineral Resources independently audited by WAI that have been economically optimised using a gold price of US$1,000/oz. The Pioneer mine now consists of five main open pits: Yuzhnaya, Promezhutochnaya, Bakhmut, Andreevskaya and north-east Bakhmut with four being actively mined this year. The north-east Bakhmut pit was commissioned in 2010 and contributed considerably to the production numbers for the year. The total Pioneer Proven and Probable Ore Reserves are estimated at 67.3Mt of ore at an average grade of 1.20g/t Au containing 2.6Moz of gold. Ore extraction will require that 318.2Mt of waste is removed to access the ore bodies at an average stripping ratio of 4.7t/t. The previously reported management restructuring at Pioneer has now been completed and the Board believes this has greatly strengthened operational efficiency. 19

20 Costs Total cash costs at Pioneer for 2010 were US$565/oz. This increase on 2009 was in line with the Group s expectations and is mainly due to the processing of lower grade material combined with the change in Rouble/Dollar exchange rates and increased prices for diesel, electricity and other consumables. During 2011, the Group expects mining costs to reduce due to the full utilisation of new, more efficient mining equipment and increased capacity of the processing plant. Total cash costs per tonne of ore processed at Pioneer decreased by 44% due to increased capacities and economies of scale. Outlook In light of the disrupted 2010 mining operations which created a backlog of stripping works, and the successful results of exploration works defining additional new reserves, the Group has reviewed its mining schedule for Pioneer. The new schedule estimates that c.323,500oz of gold will be produced in Some high grade material which was originally scheduled for 2011 processing will now be treated in MALOMIR The 0.7Mtpa RIP plant for the processing of non-refractory ores at Malomir was commissioned in August The plant consists of a 5.5m x 1.8m SAG mill, two 3.2m x 5.4m ball mills and a sorption and desorption circuit with 200m 3 tanks. The plant was commissioned on schedule, despite the logistical challenges it posed to the Group due to the distance from other current operations (670km from Pokrovskiy) and from the Group s regional headquarters in Blagoveschensk. Mining at Malomir is conducted by open-pit methods and is currently extracting ore from a single pit at the Quartzitovoye deposit. Work at Malomir from 2009 to 2010 focused on the Quartzitovoye deposit s ore bodies, which contain ore at higher grades and with lower sulphides than the main Malomir deposit. In particular, the focus has been on the preparation of ore body no.55, which is currently being mined and processed as a feed for a new RIP plant. Following its commissioning in August 2010, the Malomir plant ramped up smoothly to its design capacity, producing a total of 36,400oz of gold. This production was lower than the Group s original 2010 production target for Malomir of 68,000oz to 100,000oz due to dilution at the upper part of the ore body - a higher grade ore body core scheduled for processing was narrower and more complex in shape than predicted during exploration and resulted in it being mined together with the surrounding lower grade material. Problems have been encountered in the grade control process as definition of boundaries at a cut-off grade of 0.8g/t has proved to be difficult to achieve. This resulted in lower than expected head grades at the mill (5.4g/t versus the anticipated 12.2g/t). A review of mining works allowed the Group to reduce dilution, resulting in mining operations continuing steadily and with the average grade through the mill increasing to 8.6g/t in December 2010 and meeting the Company s expectations. Despite the lower than expected head grade, the Malomir plant has been operating consistently since being commissioned, achieving high gold recovery rates. 20

21 The Ore Reserves at Malomir are based on an updated Mineral Resources estimate that incorporates significant results from in-fill drilling which have been economically optimised by WAI using a gold price of US$1,000/oz. The Malomir deposit consists of the main extensive ore body also referred to as Malomir Central, and two other deposits, Quartzitovoye and Ozhidaemoye. This gives combined Proven and Probable Ore Reserves of Mt at an average grade of 1.09g/t Au. This includes 241kt of ore at an average grade of 2.40g/t Au at the stockpiles. Ore extraction will require that Mt of waste is removed to access the ore bodies. Costs Total cash costs at Malomir for 2010 were US$473/oz. Costs were adversely affected by expected project start-up costs and are expected to decrease during the course of 2011 when the plant should be working at full capacity. Outlook Total gold production from Malomir for 2011 is expected to be c.93,300oz. The commissioning in August 2010 of the 0.7Mtpa RIP plant at Malomir for the processing of non-refractory ores represents the first stage of Malomir development. The Group is also planning the commissioning of a second processing line consisting of a 7.5m x 2.8m SAG mill and two 4m x 6m ball mills during the second half of It is currently anticipated that milling and crushing facilities will be further expanded during 2012, resulting in the plant reaching a total capacity of 5.7Mtpa by During the second half of 2012 a flotation circuit will be installed at the plant to treat the refractory ore from the Malomir and Ozhidaemoye ore bodies producing flotation concentrate. This will subsequently be transported to the Pokrovskiy mine site where the Group is installing a POX facility to process and recover gold from flotation concentrates. This gradual introduction of processing lines allows the simultaneous processing of refractory and non-refractory ores. Exploration work to identify further non-refractory reserves at Malomir is ongoing. POX Plant As a result of internal studies conducted during 2010, the Group is planning to install a pressure oxidation (POX) and hydro-metallurgical plant processing facility ( POX plant ) at Pokrovskiy to process flotation concentrate. It is envisaged that this will centralise the processing of refractory concentrates anticipated to be produced at Pioneer and Malomir. As part of this development plan, in Q the Group commissioned Outotec Oy to design the POX plant at Pokrovskiy and flotation concentrators at Malomir and Pioneer. This design has now been finalised and is being reviewed by the Group. The design envisages the installation of six 60m 3 autoclaves, with two vessels for the processing of Pioneer concentrate and four for the processing of concentrate from Malomir. The total POX plant capacity will be c.600kt of concentrate a year. 21

22 The design is based on extensive metallurgical tests completed by the Group s research and development centres, Irgiredmet and Gidrometallurgiya. In conjunction with Outotec, the Group plans to conduct further tests on larger bulk samples at its pilot test plant in Blagoveschensk (Amur region) during the summer. The pilot test plant was commissioned by the Group in 2009 in order to test gold recovery processes under conditions approximating real production. The Group installed a POX facility at the plant in The Group s engineering institute, PHM Engineering, is drawing up construction plans in accordance with the Russian Technical Regulations which will form the basis for the permitting procedure. In order to facilitate the project s efficient development, Petropavlovsk intends to enter into an agreement with Outotec which will outline both parties' respective responsibilities and roles. The Group anticipates that Outotec will be responsible for the design, procurement and commissioning of the plants, whereas the Group will complete the construction work using its in-house services. On-site preparation work at Pokrovskiy has begun. Flotation plants at Malomir and Pioneer together with a hydrometallurgical circuit at Pokrovskiy will start processing refractory ores in the beginning of ALBYN Mining at Albyn is planned to be conducted by open-pit methods. The Group is planning to treat ore from Albyn at an on-site 4.0Mtpa RIP plant using direct cyanidation technology. The first of two RIP processing lines at Albyn is expected to be commissioned in the fourth quarter of This will consist of one 7.5m x 2.5m SAG mill, two 4.0m x 6.0m ball mills and a sorption and desorption circuit with 200m 3 tanks. Upon ramp-up, which the Group anticipates will be finalised by the beginning of 2012, the total plant capacity for this first processing line is expected to be 2.0Mtpa. The development of Albyn is currently on schedule and on budget due to the significant volume of work conducted during This work included the construction of on-site accommodation, temporary fuel storage and machinery maintenance facilities as well as the construction of project infrastructure including a second power line and on-site roads. Work has been conducted to prepare the site for the start of mining operations. In addition to this construction work, the Group placed key orders for processing and mining equipment during These orders were placed earlier than previously planned to make allowances for any possible delays, as experienced at Pioneer in The Ore Reserves at Albyn are based on the independently audited geological resource estimates that have been economically optimised using a gold price of US$1,000/oz by WAI. WAI estimated combined Proven and Probable Ore Reserves of 16.7 Mt at an average grade of 2.01 g/t Au. Development of the open pit will require 365.4Mt of waste to be removed in order to access the ore bodies with an average stripping ratio of 21.8 t/t. 22