I | STRATEGIC REPORT I | STRATEGIC REPORT

Maintenance and expansion Mission of the raw materials base ALROSA will continue investing in focused geological exploration in promising regions and Strategy of and , which, according to estimates of the Company, have the highest potential for finding new profitable deposits. ALROSA will also improve effectiveness of development of the existing producing deposits.

Improvement of performance

ALROSA pays great attention to innovation development and use of new technologies aimed at improvement of the operating efficiency and, as a consequence, profitability of the business. The Company actively optimizes its cost structure at all stages of production. The measures taken by the Group include procurement optimization, application of standards to improve labor productivity, introduction of integrated management reporting, and reduction of the inventory turnover rate.

Compliance with high standards of environmental and industrial safety, social responsibility and corporate governance in the regions where the Company operates

ALROSA traditionally carries out a series of activities aimed at supporting the per- sonnel and creating conditions for professional development of specialists, ensuring safe working conditions and compliance with performance environmental standards. The Company will continue to provide socially orientated services in the regions 20 where it operates by creating jobs, paying taxes, fees and dividends to the budgets 21 of constituent entities of the Russian Federation. ALROSA will also continue to assist the Government of Yakutia in fulfilling its obligations with regard to financing of social infrastructure facilities and social services.

Consolidation of the status of the leader of the rough industry with a flawless reputation among customers

ALROSA takes successive steps aimed at expanding the loyal and reliable customer base and establishing its reputation as a customer-oriented business partner. The Group will continue its efforts to liberalize and improve the rough diamond sales Mission regulations. The Company also intends to actively promote the ALROSA brand and boost the he global diamond industry leader that persistently implements long-term Company’s influence in the rough diamond industry through active participation in T interests of shareholders thanks to efficient use of the mineral resource base. international organizations.

Strategy updating Strategic priorities LROSA Group continued acting in compliance with the goals and trends defined in Focus on diamond mining A the strategy approved in 2013. The Long-term Development Program of ALROSA Group until 2023 was created based on the strategy. Successful implementation ALROSA focuses its efforts on its core business — exploration and mining of rough of the Program will make it possible for ALROSA Group to consolidate the leading , which is the most attractive segment of the rough diamond industry with position on the rough diamond market and ensure sustainable long-term production the highest operating margin, and on the disposal of a number of non-core assets. and revenue growth as well as an increase in the shareholder value. No changes in Income from the sale of non-core assets will be invested in core activities and reduce the Long-Term Development Program of ALROSA Group until 2023 were made in the debt of the Company. the reporting period.

ALROSA ANNUAL REPORT 2016 ALROSA ANNUAL REPORT 2016 I | STRATEGIC REPORT I | STRATEGIC REPORT

Policy objectives accomplishment In 2016, in pursuance of the directive of the Government of the Russian Federation3, 3 the KPI system was amended to supplement the list of indicators with an integral Dated March 3, 2016 No. 1472п-П13. In 2016, ALROSA Group continued implementing the strategy through the following key indicator of the efficiency of innovation activities of PJSC ALROSA developed in 4 initiatives: accordance with the recommendations of the Government of the Russian Federation4 Dated and the approved minutes of the Interdepartmental Working Group meeting on the November 7, 2015 Initiative Achievement status implementation of innovation development priorities of the presidium of the Presi- No. ДМ-П36-7563.

Implementation of an investment • Ensuring the increase of the Group’s rough diamond reserves dential Council of the Russian Federation for Economic Modernization and Innovation 5 approach to planning, monitoring in 2016 in the amount of 58.4 mn carats Development of Russia5. Minutes dated and evaluation of the efficiency of • PJSC ALROSA obtained the right to exploration and production December 17, 2015 geological exploration, which will of rough diamonds at deep horizons of the Yubileynaya pipe The respective additions/amendments to the Regulations on Remuneration to the No. АД-П36-247пр. maintain the geological exploration • Obtaining the rights to geological survey, exploration and mining budget at the optimal level of rough diamonds at the section “Lyaseger-Yuryakh Creek, the left President of PJSC ALROSA and the Regulations on Remuneration to Members of the tributary of the Mayat river” by JSC Almazy Anabara Executive Committee of PJSC ALROSA, taking into account the supplemented KPI • Extending the license of PJSC ALROSA for geological survey of Nizhne-Nakynsky area list, were approved by the Supervisory Board in August 2016. • Implementing the program for the development of Verkhne- Munskoye deposit in terms of preparation of the feasibility report on permanent exploration conditions

Improvement of operational effi- • Implementation of the program to improve operational efficiency Key performance indicators ciency: cost management, including and reduce costs is continued implementation of resource-saving technologies, modernization of the Indicator UoM 2014 2015 2016 % of the plan technical base, informatization and other initiatives, as well as increas- plan actual ing labor productivity Financial and economic indicators Rough diamond product sales • Development of a system for annual adjustment of the rough Market return per share % 46.2 -14.3 >∆ MICEX6 49.9 – optimization: improvement of the diamonds supply to long-term customers on the basis of their product portfolio, sorting automa- purchasing activity assessment Dividend flow growth mn RUB 2,013 5,450 >0 53,4207 – tion, new pricing policy, stock level • Launch of a specific diamond marketing program within the scope Adjusted EBITDA profitability % 45.3 52.8 52.1 55.6 106.7% reduction of the Diamond Producers Association • Optimization of the corporate sales management model Return on equity (ROE) % -11.3 22.3 57.7 65.3 113.2%

Non-core assets: release of funds • Updating the Non-core Assets Disposal Program Net profit bn RUB -16.8 32.2 113.6 133.5 117.5% by disposal of non-core assets and • Reorganization of the residential and public utility division and Industry-specific indicators optimization of social activities diamond cutting and polishing division of PJSC ALROSA Revenue from sales of core mn USD 5,045 3,554 4,350 4,514 103.8% 22 Operational model: implementation • Further optimization of the Company’s corporate governance products 23 of an advanced company manage- model Rough diamond production mn ment model • Approval of the Memorandum of Further Implementation of the 36.2 38.3 37.0 37.4 101.0% Corporate Governance Code Recommendations into the Company’s carats operations Share of the cost of sales in % 48.0 41.5 40.6 40.9 100.7% the sales revenue Technology and R&D: development • Updating the Innovation Development and Technological Update of/search for new technologies for Program of PJSC ALROSA for 2016-2023 Integral KPI of the innovative % - - 100 99.5 99.5% the development of reserves on the • 37 scientific and technical developments are implemented and activity verge of economic feasibility, as used, 17 documents of title for utility models and inventions are well as modernization and technical obtained Bonus cancellation reasons re-equipment with account of Lost Time Injury Frequency coeffi- 0.06 0.08 ≤ 0.1 0.08 – unified technical policies Rate (LTIFR) cient Net debt/EBITDA coeffi- ALROSA marketing and brand: • ALROSA’s representative became head of the World Diamond 1.9 1.7 ≤ 2.0 0.6 – increasing the industry influence Council cient and status of the ALROSA Group’s • PJSC ALROSA joined the Responsible Jewellery Council (RJC) 6 global image Relative change in the By the end of the year 2016, target values of the key performance indicators of operation market return per PJSC ALROSA share is ahead set by the shareholders of ALROSA Group were achieved. of the relative annual Fulfilling the Key Performance Indicators The KPI system of ALROSA Group fully meets the requirements of the “Guidelines MICEX index growth (in case of MICEX on application of key performance indicators by public corporations, state-owned index growth) and The system of key performance indicators (KPI) of ALROSA Group was developed and companies, state unitary enterprises and business entities with more than fifty percent less than the relative annual MICEX approved by the Supervisory Board of PJSC ALROSA in December 2014 in pursuance of the registered capital owned by the Russian Federation or a constituent entity of index fall (in case of of the instructions of the President and the Government of the Russian Federation. the Russian Federation” developed by the Ministry of Economic Development of the MICEX index fall).

The main purpose of introducing the KPIs was to translate the long-term plans and Russian Federation. 7 strategies of ALROSA Group into specific indicators. Such indicators make it possible Value of the indicator to appraise the current status, form a basis for taking managerial decisions, as well was calculated based on RUB 65.8 bn dividend as to develop a motivational system linking interests of individual employees, the forecast, which is 50% Group and its shareholders. of the total net profit of ALROSA Group for In 2015, the key performance indicators of ALROSA Group were integrated into the 2016 calculated on the effective system of motivation for the managers establishing direct dependence of basis of consolidated financial statements the amount of remuneration of sole and collective executive bodies of the Company prepared in accordance on achieving the KPI targets approved by its shareholders. with IFRS.

ALROSA ANNUAL REPORT 2016 ALROSA ANNUAL REPORT 2016