Polyus Gold International Limited (incorporated with limited liability under the laws of Jersey with the registered company number 91264) as issuer of US$750,000,000 5.625 per cent. Guaranteed Notes due 2020 unconditionally and irrevocably guaranteed by Closed Joint-Stock Company “Gold-Mining Company “Polyus” (a closed joint-stock company incorporated under the Laws of the Russian Federation)
Issue price of Notes: 100 per cent.
Polyus Gold International Limited (the “Issuer” or the “Company”) incorporated with limited liability under the laws of Jersey with registered company number 91264 is issuing US$750,000,000 aggregate principal amount of 5.625 per cent. guaranteed notes due 2020 (the “Notes”). The Notes shall be unconditionally and irrevocably guaranteed (the “Guarantee”) by Closed Joint-Stock Company “Gold-Mining Company “Polyus” (the “Guarantor” or “CJSC Polyus”). Interest on the Notes will accrue from 29 April 2013 at a rate of 5.625 per cent. per annum of their outstanding principal amount payable semi-annually in arrear on 29 April and 29 October of each year, commencing on 29 October 2013. Unless previously redeemed or cancelled the Notes will be redeemed at their principal amount on 29 April 2020. The Notes will be subject to, and have the benefit of a trust deed between BNY Mellon Corporate Trustee Services Limited as trustee for the holders of the Notes (the “Trustee”), the Issuer and the Guarantor to be dated 29 April 2013 (the “Trust Deed”). The Notes will be unsecured and unsubordinated obligations of the Issuer and will rank equally in right of payment with the Issuer’s existing and future unsecured and unsubordinated obligations. The Guarantee will be an unsecured and unsubordinated debt obligation of the Guarantor and will rank equally in right of payment with all existing and future unsecured and unsubordinated obligations of the Guarantor. Payments on the Notes will be made without deduction or withholding for taxes imposed by the United Kingdom, Jersey or the Russian Federation to the extent described in “Terms and Conditions of the Notes” herein. The Notes may be redeemed by the Issuer in whole but not in part at 100 per cent. of their principal amount, plus accrued and unpaid interest, if the Issuer becomes obliged to pay certain additional amounts and otherwise as described under “Terms and Conditions of the Notes – Redemption and Purchase – Redemption for Tax Reasons”. Unless previously redeemed or purchased and cancelled, the Notes will be redeemed at their principal amount on 29 April 2020. An investment in the Notes involves certain risks. Prospective Investors should have regard to the factors described under the section headed “Risk Factors” beginning on page 8. Information contained in this prospectus (the “Prospectus”) is not an offer, or an invitation to make offers, sell, purchase, exchange or transfer any securities in Russia, and does not constitute an advertisement or offering of any securities in Russia. The Notes have not been and will not be registered in Russia or admitted to public placement and/or public circulation in Russia and are not intended for “placement” or “circulation” in Russia except as permitted by Russian law. The Prospectus has been approved by the Central Bank of Ireland (the “CBI”) as competent authority under Directive 2003/71/EC (the “Prospectus Directive”). The CBI only approves this Prospectus as meeting the requirements imposed under Irish and European Union law pursuant to the Prospectus Directive. Application has been made to the Irish Stock Exchange for the Notes to be admitted to the official list and trading on its regulated market (the “Main Securities Market”). The Main Securities Market is a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments. There is no assurance that such listing will be granted or maintained and that a trading market in the Notes will develop or be maintained. The Notes and the Guarantee (the “Securities”) have not been and will not be registered under the United States Securities Act of 1933 (the “Securities Act”) and, subject to certain exceptions, may not be offered or sold within the United States. The Securities are being offered and sold by J.P. Morgan Securities plc., Société Générale and VTB Capital plc. (the “Joint Lead Managers”) outside the United States in reliance on Regulation S under the Securities Act (“Regulation S”) and within the United States to “qualified institutional buyers” (“QIBs”) in reliance on Rule 144A under the Securities Act (“Rule 144A”). Prospective purchasers are hereby notified that sellers of the Securities may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. The Securities have not been approved or disapproved by the U.S. Securities and Exchange Commission, any State securities commission in the United States or any other U.S. regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Securities or the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States. For a description of these and certain further restrictions, see “Subscription and Sale” and “Transfer Restrictions”. The Securities that are being offered and sold in accordance with Regulation S (the “Regulation S Notes”) will initially be represented by beneficial interests in an unrestricted global note (the “Regulation S Global Note”) in registered form, without interest coupons attached, which will be registered in the name of a nominee for and will be deposited with a common depositary for Euroclear Bank SA/NV (“Euroclear”) and Clearstream Banking, société anonyme (“Clearstream, Luxembourg”) on or about 29 April 2013 (the “Closing Date”). Securities which are offered and sold in reliance on Rule 144A will initially be represented by beneficial interests in a restricted global note (the “Rule 144A Global Note” and, together with the Regulation S Global Note, the “Global Notes”) in registered form, without interest coupons attached, which will be deposited on or about the Closing Date with a custodian for, and registered in the name of Cede & Co. as nominee for, The Depository Trust Company (“DTC”). Beneficial interests in the Global Notes will be shown on, and transfers thereof will be effected only through, records maintained by DTC, Euroclear and Clearstream, Luxembourg and their account holders. Definitive notes in respect of beneficial interests in the Regulation S Global Note and the Rule 144A Global Note (“Regulation S Definitive Notes” and “Rule 144A Definitive Notes”, respectively, and together, the “Definitive Notes”) will not be issued except as described under “Summary of Provisions relating to the Notes while in Global Form”. A copy of this Prospectus has been delivered to the Jersey Registrar of Companies in accordance with Article 5 of the Companies (General Provisions) (Jersey) Order 2002, and the Jersey Registrar of Companies has given, and has not withdrawn, consent to its circulation. The Jersey Financial Services Commission has given, and has not withdrawn, its consent under Article 4 of the Control of Borrowing (Jersey) Order 1958 to the issue of Notes by the Company. The Jersey Financial Services Commission has also given, and has not withdrawn, its consent under Article 8 of the Control of Borrowing (Jersey) Order 1958 to the circulation of this Prospectus in Jersey by the Guarantor. It must be distinctly understood that, in giving these consents, neither the Registrar of Companies nor the Jersey Financial Services Commission takes any responsibility for the financial soundness of the Company or the Guarantor or for the correctness of any statements made, or opinions expressed, with regard to either of them. The Jersey Financial Services Commission is protected by the Control of Borrowing (Jersey) Law 1947, as amended, against any liability arising from the discharge of its functions under that law. Nothing in this document or anything communicated to the holders or potential holders of Notes by or on behalf of the Company or the Guarantor is intended to constitute, or should be construed as, advice on the merits of the subscription for or purchase of Notes or the exercise of any rights attached thereto for the purposes of the Financial Services (Jersey) Law 1998. Joint Lead Managers J.P. MORGAN Société Générale Corporate & Investment Banking VTB CAPITAL Prospectus dated 25 April 2013 IMPORTANT INFORMATION ABOUT THIS PROSPECTUS
This Prospectus comprises a prospectus for the purposes of the Prospectus Directive and for the purpose of giving information with regard to the Issuer, and its consolidated direct and indirect subsidiaries and affiliates (including the Guarantor) taken as a whole (the “Group”) and the Securities, which, according to the particular nature of the Issuer, the Guarantor, the Group and the Securities, is necessary to enable investors to make an informed assessment of the assets and liabilities, financial position, profits and losses and prospects of the Issuer, the Guarantor and the Group, and the rights attaching to the Securities. The Issuer and the Guarantor each accept responsibility for the information contained in this Prospectus. To the best of the knowledge of the Issuer and the Guarantor (each of which has taken all reasonable care to ensure that such is the case), the information contained in this Prospectus is true and accurate in all material respects and is in accordance with the facts and does not omit anything likely to affect the import of such information or which would make misleading any statement in this prospectus, whether of facts or opinion. No person has been authorised to give any information or to make any representation other than those contained in this Prospectus and any information or representation not so contained must not be relied upon as having been authorised by or on behalf of the Issuer, the Guarantor, the Trustee or the Joint Lead Managers. The information contained in the Prospectus is current as of the date hereof. The delivery of this Prospectus at any time does not imply that the information contained in it is correct as at any time subsequent to its date. Neither the delivery of this Prospectus nor the offering, sale or delivery of any Note shall in any circumstances create any implication that there has been no adverse change, or any event reasonably likely to involve any adverse change, in the condition (financial or otherwise) of the Issuer or the Guarantor since the date of this Prospectus. No representation, warranty or undertaking, express or implied, is made and no responsibility is accepted by the Joint Lead Managers or the Trustee as to the accuracy or completeness of the information contained in this Prospectus or any other information supplied in connection with the Securities. Each person receiving this Prospectus acknowledges that such person has not relied on any of the Joint Lead Managers or the Trustee in connection with its investigation of the accuracy of such information or its investment decision and each person must rely on its own examination of the Issuer, the Guarantor and the Group and the merits and risks involved in investing in the Securities. To the fullest extent permitted by law, none of the Joint Lead Managers accepts any responsibility whatsoever for the contents of this prospectus or for any other statement made or purported to be made by it, or on its behalf, in connection with the Issuer, the Guarantor, the Group or the Securities. Each of the Joint Lead Managers accordingly disclaims all and any liability whether arising in tort, contract or otherwise which it might otherwise have in respect of this Prospectus or any such statement. We reserve the right to withdraw this offering of Securities at any time, and we and Joint Lead Managers reserve the right to reject any commitment to subscribe for the Securities in the whole or in part and to allot you less than the full amount subscribed by you. For a more complete description of restrictions on offers, sales and transfers, see “Subscription and Sale” and “Transfer Restrictions”. This Prospectus does not constitute an offer to sell or an invitation to subscribe for or purchase, by or on behalf of the Issuer, the Guarantor, any Joint Lead Manager or any other person, any of the Securities in any jurisdiction in which such offer or invitation is not authorised or to any person to whom it is unlawful to make such an offer or invitation. The distribution of this Prospectus and the offer and sale of the Securities in certain jurisdictions is restricted by law. Persons into whose possession this Prospectus or any of the Securities are delivered are required to inform themselves about and to observe any such restrictions. Each prospective purchaser of the Securities must comply with all applicable laws and regulations in force in any jurisdiction in which it purchases, offers or sells the Securities or possesses or distributes this Prospectus. In addition, each prospective purchaser must obtain any consent, approval or permission required under the regulations in force in any jurisdiction to which it is subject or in which it purchases, offers or sells the Securities. Neither the Issuer nor the Guarantor shall have any responsibility for obtaining such consent, approval or permission. In particular there are restrictions on the distribution of this Prospectus and the offer or sale of Securities in the United States and the United Kingdom. For a description of these further
i restrictions on offers and sales of the Securities and distribution of this Prospectus, see “Subscription and Sale”. The contents of the Issuer’s and the Guarantor’s websites do not form any part of this Prospectus. Any investment in Securities does not have the status of a bank deposit and is not within the scope of the deposit protection scheme operated by the CBI. The Issuer and the Guarantor are not and will not be regulated by the CBI as a result of issuing the Securities.
Stabilisation In connection with the issue of the Notes, VTB Capital plc. (the “Stabilising Manager”) (or persons acting on behalf of the Stabilising Manager) may over-allot Notes or effect transactions with a view to supporting the market price of the Notes at a level higher than that which might otherwise prevail. However, there is no assurance that the Stabilising Manager (or persons acting on behalf of the Stabilising Manager) will undertake stabilisation action. Any stabilisation action may begin on or after the date on which adequate public disclosure of the terms of the offer of the Notes is made and, if begun, may be ended at any time, but it must end no later than the earlier of 30 days after the issue date of the Notes and 60 days after the date of the allotment of the Notes. Any stabilisation action or over-allotment must be conducted in accordance with all applicable laws and rules.
Ratings The Notes are expected to be rated “BBB-” by Fitch Ratings Ltd. (“Fitch”) and “BB+” by Standard & Poor’s Credit Market Services Europe Limited (“Standard & Poor’s” and, together with Fitch the “Rating Agencies”). A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Fitch Ratings Ltd is established in the European Union (“EU”) and is registered under the Regulation (EC) No. 1060/2009, as amended (the “CRA Regulation”). As such, Fitch is included in the list of credit rating agencies published by the European Securities and Markets Authority (“ESMA”) on its website in accordance with the CRA Regulation. Standard and Poor’s is established in the European Union and is registered under the CRA Regulation. As such, Standard and Poor’s is included in the list of credit rating agencies published by ESMA on its website in accordance with the CRA Regulation.
AVAILABLE INFORMATION Each of the Issuer and the Guarantor have agreed that, so long as any Securities are “restricted securities” within the meaning of Rule 144(a)(3) of the Securities Act, the Issuer and the Guarantor will, during any period in which it is neither subject to Section 13 or 15(d) of the US Securities Exchange Act of 1934, as amended (the “Exchange Act”) nor exempt from reporting under the Exchange Act pursuant to Rule 12g3-2(b) thereunder, make available to any holder or beneficial owner of any such restricted securities, or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
This Prospectus is being furnished by the Issuer and the Guarantor in connection with an offering exempt from the registration requirements of the Securities Act solely for the purpose of enabling a prospective investor to consider the acquisition of the Securities described herein. The information contained in this Prospectus has been provided by the Issuer, the Guarantor and other sources identified herein. Any reproduction or distribution of this Prospectus, in whole or in part, in the United States and any disclosure of its contents or use of any information herein in the United States for any purpose, other than considering an investment by the recipient in the Securities offered hereby, is prohibited. Each potential investor in the Securities, by accepting delivery of this Prospectus, agrees to the foregoing.
NOTICE TO U.S. INVESTORS THE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION IN THE UNITED STATES OR ANY OTHER REGULATORY AUTHORITY IN THE UNITED
ii STATES NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON OR ENDORSED THE MERITS OF THE SECURITIES OR THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENCE IN THE UNITED STATES.
THE SECURITIES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES ACT, AND SUBJECT TO CERTAIN EXCEPTIONS, MAY NOT BE OFFERED OR SOLD WITHIN THE UNITED STATES. THE SECURITIES ARE BEING OFFERED AND SOLD OUTSIDE THE UNITED STATES IN RELIANCE ON REGULATION S AND BY THE JOINT LEAD MANAGERS THROUGH THEIR RESPECTIVE REGISTERED BROKER-DEALER AFFILIATES INSIDE THE UNITED STATES TO QUALIFIED INSTITUTIONAL BUYERS WITHIN THE MEANING OF RULE 144A (“QIBs”) IN RELIANCE ON THE EXEMPTION FROM REGISTRATION PROVIDED BY RULE 144A (SEE “SUBSCRIPTION AND SALE”). PROSPECTIVE PURCHASERS ARE HEREBY NOTIFIED THAT SELLERS OF ANY RULE 144A NOTE MAY BE RELYING UPON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE SECURITIES ACT PROVIDED BY RULE 144A.
NOTICE TO NEW HAMPSHIRE RESIDENTS NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER CHAPTER 421-B OF THE NEW HAMPSHIRE REVISED STATUTES (RSA 421-B) WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE OF NEW HAMPSHIRE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
THE SECURITIES WILL BE SUBJECT TO CERTAIN RESTRICTIONS ON OFFERS, SALES AND TRANSFERS. SEE “TERMS AND CONDITIONS OF THE NOTES”, “TRANSFER RESTRICTIONS” AND “SUBSCRIPTION AND SALE”.
INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE TO COMPLY WITH UNITED STATES TREASURY DEPARTMENT CIRCULAR 230, PROSPECTIVE INVESTORS ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES IN THIS PROSPECTUS IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY ANY TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER U.S. FEDERAL TAX LAW; (B) ANY SUCH DISCUSSION WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) A TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
NOTICE TO RUSSIAN INVESTORS This Prospectus should not be considered as a public offer or an advertisement of the Notes in the Russian Federation, and is not an offer, or an invitation to make offers, to purchase any Notes in the Russian Federation. Neither Notes, nor this Prospectus nor any other document relating to them have been registered with the Federal Service for the Financial Markets of the Russian Federation.
iii FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus are not historical facts and are forward-looking statements. Forward-looking statements appear in various locations, including, without limitation, under the headings “Overview”, “Risk Factors”, “Operating and Financial Review” and “Business”. The Company may from time to time make written or oral forward-looking statements in reports to shareholders and in other communications. Forward-looking statements include statements concerning the Group’s plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions, its competitive strengths and weaknesses, its business strategy and the trends the Company anticipates in the industries and the political and legal environment in which it operates and other information that is not historical information. Words such as “believes”, “anticipates”, “estimates”, “expects”, “intends”, “predicts”, “projects”, “could”, “may”, “will”, “plans” and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements. By their very nature, forward-looking statements involve inherent risks and uncertainties, both general and specific, and risks exist that the predictions, forecasts, projections and other forward-looking statements will not be achieved. These risks, uncertainties and other factors include, among other things, those listed under “Risk Factors”, as well as those included elsewhere in this Prospectus. Each prospective investor should be aware that a number of important factors could cause actual results to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements. These factors include, but not limited to: • changes in the prices of gold; • changes in the Group’s ability to maintain or obtain the licences necessary for its businesses; • changes in the Group’s operating costs, including the costs of energy, transportation and labour; • changes in the Group’s ability to successfully implement any of its business, development plans or financing strategies; • changes in the Group’s ability to fund its future operations and capital needs through borrowings or otherwise; • developments in, or changes to, the laws, regulations and governmental policies governing the Group’s businesses, including changes impacting environmental liabilities; • inflation, interest rate and exchange rate fluctuations; • changes in the political, social, legal or economic conditions in Russia; • the effects of international political events; • the effects of the restrictive covenants in the Group’s financing documentation; and • the Group’s success in identifying other risks to its businesses and managing the risks of the aforementioned factors. This list of factors is not exhaustive. Some of these factors are discussed in greater detail in this Prospectus, in particular, but not limited to, discussion in “Risk Factors”. When relying on forward-looking statements, each prospective investor should carefully consider the foregoing factors and other uncertainties and events, especially in light of the political, economic, social and legal environment in which the Group operates. Such forward-looking statements speak only as of the date on which they are made. Accordingly, the Company does not undertake any obligation to update or revise any of them, whether as a result of new information, future events or otherwise, unless required to do so by applicable law. The Company does not make any representation, warranty or prediction that the results anticipated by such forward-looking statements will be achieved, and such forward-looking statements represent, in each case, only one of many possible scenarios and should not be viewed as the most likely or standard scenario.
iv PRESENTATION OF FINANCIAL AND OTHER INFORMATION
The Group was formed as a result of the combination of the OJSC Polyus Gold Group and its subsidiaries (the “Polyus Russia Group”) and KazakhGold and its subsidiaries (the “KazakhGold Group”), which resulted in KazakhGold acquiring a controlling stake in OJSC Polyus Gold (the “Combination”). Following completion of the Combination, the Company changed its name from KazakhGold Group Limited to Polyus Gold International Limited.
The Combination occurred on 25 July 2011. The consolidated financial information included in this Prospectus is issued under the name of Polyus Gold International Limited, being the new parent entity following the reorganisation, but represents a continuation of the consolidated financial information of the Polyus Russia Group, except for its capital structure. See Note 2 to the 2011 Financial Statements.
Presentation of Financial Information This Prospectus contains:
• The audited consolidated financial statements of the Group as of and for the year ended 31 December 2012 (the “2012 Financial Statements”), which include as comparative financial information the unaudited consolidated financial information of the Group as of and for the year ended 31 December 2011; and
• The audited consolidated financial statements of the Group as of and for the year ended 31 December 2011 (the “2011 Financial Statements” and together with the 2012 Financial Statements, the “Financial Statements”), which include as comparative financial information the unaudited consolidated financial information of the Group as of and for the year ended 31 December 2010.
Certain references included in the independent auditors’ report for the year ended 31 December 2012 and the 2012 Financial Statements refer to sections of the Group’s annual report for the fiscal year ended 31 December 2012 (the “2012 Annual Report”). This annual report is neither included nor incorporated by reference herein. The 2012 Annual Report can be accessed through the Company’s website via www.polyusgold.com/investors/reports/annual_reports/.
The Financial Statements were prepared in accordance with International Financial Reporting Standards (“IFRS”) as adopted by the EU and as issued by the International Accounting Standards Board (“IASB”), as set out in Note 2 to the 2012 Financial Statements.
In 2012, the Company early adopted International Financial Reporting Interpretations Committee Interpretation 20 (“IFRIC 20”) “Stripping Costs in the Production Phase of a Surface Mine” to account for waste removal costs directly related to the Group’s surface mining activity during the production phase of the mine. IFRIC 20 requires prospective application of the interpretation to production stripping costs incurred on or after the beginning of the earliest period presented in a set of financial statements upon adoption.
The 2011 Financial Statements were issued prior to the implementation of IFRIC 20, and therefore the financial information as of and for the years ended 31 December 2011 and 31 December 2010 included in the 2011 Financial Statements does not reflect the impact of adopting this interpretation. Certain financial information as of and for the year ended 31 December 2011 included as comparative financial information in the 2012 Financial Statements has been restated to give effect to the implementation of IFRIC 20. The impact of the adoption of IFRIC 20 on the previously issued financial information as of and for the year ended 31 December 2011 has been detailed in Note 2 of the 2012 Financial Statements.
Financial information included herein has been derived as follows:
• The Group’s financial information as of and for the year ended 31 December 2012 set forth herein has been derived from the 2012 Financial Statements.
v • The Group’s financial information as of and for the year ended 31 December 2011 set forth herein has, unless otherwise indicated, been derived from the 2011 Financial Statements. In certain instances, namely where the specific financial statement line items have been impacted by the adoption of IFRIC 20, financial information as of and for the year ended 31 December 2011 has been derived from the 2012 Financial Statements (such balances are noted as being impacted by IFRIC 20). In certain instances, the terms “pre IFRIC 20” and “post IFRIC 20” have been used when the restated and unrestated amounts as of and for the year ended 31 December 2011 have been presented side-by-side to avoid confusion.
• The Group’s financial information as of and for the year ended 31 December 2010 set forth herein has been derived from the 2011 Financial Statements. For the purposes of preparing the 2011 Financial Statements, the financial information for 2010 was derived from the previously audited financial statements of the Polyus Russia Group for the year ended 31 December 2010 (the “2010 Financial Statements”). The 2010 Financial Statements and the related auditors’ report were issued in respect of the Polyus Russia Group and not the Issuer or the Group as it now exists. Although the 2010 financial information as of and for the year ended 31 December 2010 set forth herein represents a continuation of, and was prepared under the same accounting principles as, the audited consolidated financial information presented in the 2010 Financial Statements, certain line items were affected as a result of the Combination. The reconciliation between the audited financial information as of and for the year ended 31 December 2010 presented in the 2010 Financial Statements and the unaudited consolidated information of the Group as of and for the year ended 31 December 2010 presented in the 2011 Financial Statements, as well as the effect of the Combination, is described in Note 2 to the 2011 Financial Statements. The 2010 Financial Statements and the related auditors’ report are neither included nor incorporated by reference herein. The 2010 Financial Statements are available on the Group’s website at www.polyusgold.com/investors/reports/full_ifrs_financial_reports/.
The underlying financial information stated in local currency has been translated into US dollars on the basis set out in “Currencies and Exchange Rates” below.
Non-IFRS Financial Measures The Company presents Adjusted EBITDA, Adjusted EBITDA margin, total cash costs (“TCC”) and net debt, which are not measures of financial performance under IFRS or other generally accepted accounting principles. These measures are used by management of the Group to assess the financial performance of the Group. Such measures as presented in this Prospectus may not be comparable to similarly titled measures of performance presented by other companies, and they should not be considered as substitutes for the information contained in the Financial Statements included in this Prospectus.
Adjusted EBITDA The Company presents Adjusted EBITDA as profit for the year before income tax, depreciation and amortisation, interest income on bank deposits, finance costs, gain on disposal of available-for-sale (“AFS”) investments, loss/(gain) from investments in listed companies held for trading, foreign exchange (gain)/loss, loss on disposal of property, plant and equipment, impairment of property, plant and equipment and exploration and evaluation assets, change in fair value of derivative, gain on loan settlement and sale and purchase agreement termination and gain on disposal of subsidiaries.
Adjusted EBITDA presented by the Company, has been calculated by management and has not been independently verified by the Group’s auditors. Adjusted EBITDA is presented in this Prospectus because the Company considers it to be an important supplemental measure of the Company’s financial performance. Additionally, the Company believes this measure is frequently used by investors, securities analysts and other interested parties to evaluate the efficiency of a group’s operations and its ability to employ its earnings toward repayment of debt, capital expenditures and working capital requirements. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for the Group’s operating results as reported under IFRS. Some of these limitations are as follows:
vi • Adjusted EBITDA does not reflect the impact of significant interest expense or the cash requirements necessary to service interest or principal payments in respect of any borrowings, which could further increase if the Group incurs more debt.
• Adjusted EBITDA does not reflect the impact of income tax expense on the Group’s operating performance.
• Adjusted EBITDA does not reflect the impact of depreciation and amortisation of assets on the Group’s performance. The assets of the Group’s business which are being depreciated and amortised will have to be replaced in the future, and such depreciation and amortisation expense may approximate the cost to replace these assets in the future. By excluding this expense from Adjusted EBITDA, Adjusted EBITDA does not reflect the Group’s future cash requirements for these replacements.
• Adjusted EBITDA does not reflect the Group’s cash expenditures or future requirements for capital expenditure or contractual commitments.
• Adjusted EBITDA does not reflect changes in or cash requirements for the Group’s working capital needs.
• Adjusted EBITDA does not reflect the impact of a number of other significant non-cash items, specifically gain/loss on disposal of AFS investments, gain/loss from investments in listed companies held for trading, foreign exchange gain/loss, loss from disposal of property, plant and equipment, impairment of exploration and evaluation assets, impairment of capital construction in progress, impairment of property, plant and equipment, gain on disposal of subsidiaries and change in fair value of derivatives.
• Other companies in the Group’s industry may calculate Adjusted EBITDA differently or may use them for different purposes than the Group does, limiting their usefulness as a comparative measure.
The Company compensates for these limitations by relying on its IFRS results and using Adjusted EBITDA only as a supplemental measure.
Adjusted EBITDA is a measure of the Group’s operating performance that is not required by, or presented in accordance with, IFRS. Adjusted EBITDA is not a measurement of the Group’s operating performance under IFRS and should not be considered as an alternative to profit for the year or any other performance measures derived in accordance with IFRS, or as an alternative to cash flow from operating activities or as a measure of the Group’s liquidity. In particular, Adjusted EBITDA should not be considered as a measure of discretionary cash available to the Company to invest in the growth of its business. For the calculation of the Group’s Adjusted EBITDA for the years ended 31 December 2012, 2011 (post IFRIC 20), 2011 (pre IFRIC 20) and 2010 and the reconciliation of Adjusted EBITDA for each such year to profit for the corresponding year, see “Selected Consolidated Financial and Other Information”.
Total cash costs/Total cash costs per ounce sold/Cash operating costs TCC is defined by the Company as the cost of gold sales reduced by amortisation and depreciation of operating assets, provision for accrued annual leave, employee benefits obligation cost, change in allowance for obsolescence of inventory and adjusted by non-monetary changes in inventories and (with respect to 2011 (pre IFRIC 20) and 2010 only) non-monetary changes in deferred stripping works. TCC per ounce sold is applicable TCC divided by the corresponding ounces of gold sold. These items are not IFRS measures. For the calculation of the Group’s TCC and TCC per ounce sold for the years ended 31 December 2012, 2011 (post IFRIC 20), 2011 (pre IFRIC 20) and 2010, see “Selected Consolidated Financial and Other Information”.
The financial items, “TCC per ounce sold”, and “cash operating costs” presented by the Company have been calculated by management and have not been independently verified by the Group’s auditors. TCC, TCC per ounce sold, and cash operating costs are discussed throughout this Prospectus, because the Company believes they provide a measure for comparing the Group’s operational performance against that of its peer
vii group. In addition, the Group uses these measurements to compare the performance of the Group’s operations period-to-period, to monitor costs and to evaluate operating efficiency. TCC is not defined by IFRS and should not be considered in isolation or as an alternative to operating expenses or cost of sales, or any measure of liquidity such as net cash from operating activities. Although the presentation of TCC, TCC per ounce sold and cash operating costs is common industry practice, the Group’s calculations of these items may vary from other gold mining companies’ calculations, and by themselves do not necessarily provide a basis for comparison with other gold mining companies.
Cash operating costs are defined by the Company as a sub-total of various IFRS line items comprising cost of gold sales, including fuel, consumables and spares, labour, tax on mining, utilities, outsourced mining services, refining costs and other costs. Cash operating costs plus amortisation and depreciation of operating assets, deferred stripping costs amortised/(capitalised) (with respect to 2011 (pre IFRIC 20) and 2010 only) and increase in gold-in process and refined gold inventories equals cost of gold sales. Cash operating costs is not in itself a recognised IFRS measure. For the calculation of the Group’s cash operating costs for the years ended 31 December 2012, 2011 (post IFRIC), 2011 (pre IFRIC 20) and 2010, see “Operating and Financial Review”.
An investor should not consider these items in isolation or as alternatives to cost of sales, profit for the year attributable to shareholders of the Company, net cash generated from operating activities or any other measure of financial performance presented in accordance with IFRS.
Presentation of Ore Reserves and Mineral Resources The resource and reserve estimates presented in this Prospectus have been prepared in accordance with the 2004 edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves (the “JORC Code”). The JORC Code differs in several significant respects from SEC Industry Guide 7, which governs disclosures of mineral reserves in registration statements and reports filed with the SEC. In particular, unlike the JORC Code, SEC Industry Guide 7 does not recognise classifications other than proven and probable reserves, and the SEC does not permit mining companies to disclose mineral resources in SEC filings.
Any and all references in this Prospectus to ounces of gold whether mined, produced, milled or extracted, or whether references to ounces of gold of the Group’s reserves and resources, or any reference to TCC per ounce sold, are references to troy ounces of gold.
General Information In this Prospectus, references to: the “Company” or the “Issuer” are to Polyus Gold International Limited; the “Group” are to the Company together with its consolidated subsidiaries; “OJSC Polyus Gold” are to OJSC “Polyus Gold”; “Guarantor” or “CJSC Polyus” are to Closed Joint-Stock Company “Gold-Mining Company Polyus”; “Jenington” are to Jenington International Inc.; “Romanshorn” are to Romanshorn LC AG; and “Kazakhaltyn” are to Kazakhaltyn MMC JSC.
In this Prospectus, all references to “Russia” are to the Russian Federation. References to “U.S.” or the “United States” are to the United States of America. References to “UK” or the “United Kingdom” are to the United Kingdom of Great Britain and Northern Ireland. References to the “EU” or the “European Union” are to the union formed following ratification of the Maastricht Treaty and currently comprising 27 states, and references to “Europe” are to the geographical region of Europe, including those states which are members of the European Union.
Definitions of certain terminology associated with the Group’s business are set forth under “Glossary of Terms”.
Currencies and Exchange Rates In this Prospectus, references to “US dollars” or “US$” are to the lawful currency of the United States, references to “roubles” or “RUB” are to the lawful currency of the Russian Federation and references to “euro” or “EUR” are to the lawful currency of the member states of the European Union that adopted the
viii single currency in accordance with the Treaty of Rome establishing the European Economic Community, as amended.
Unless otherwise indicated, the financial information contained in this Prospectus has been expressed in US dollars. The functional currency of the Russian production companies of the Group’s operations is the rouble. The functional currency of the management companies of the Group is the local currency. On consolidation, income statements of subsidiaries for which the US dollar is not the functional currency are translated into US dollars, the presentation currency for the Group, at average rates of exchange. Balance sheet items are translated into US dollars at period end exchange rates. These translations should not be construed as representations that the relevant currency could be converted into US dollars at the rate indicated or at any other rate.
The following tables show, for the periods indicated, certain information regarding the exchange rate between the rouble and the US dollar, based on the official exchange rate quoted by the Central Bank of the Russian Federation (the “CBR”).
Roubles per US dollar –––––––––––––––––––––––––––––––––––––––––––––––––– For the period High Low Average(1) Period end ––––––––––––––––––––––––––––––––– –––––––––– –––––––––– –––––––––– –––––––––– Year ended 31 December 2008 29.38 23.13 24.98 29.38 Year ended 31 December 2009 36.43 28.67 31.68 30.24 Year ended 31 December 2010 31.78 28.93 30.36 30.48 Year ended 31 December 2011 32.68 27.26 29.35 32.20 Year ended 31 December 2012 34.04 28.95 31.09 30.37 Note: 1. The average of the exchange rate for the relevant period, based on the rates in such period for each Russian business day (quoted by the CBR for that day) and each Russian non-business day (which is equal to the rate quoted by the CBR for the preceding Russian business day). It should be noted that the methodology for calculating average rates for a period for the purposes of the Financial Statements is different than the methodology used in this table. Roubles per US dollar ––––––––––––––––––––––– For each month from January 2013 High Low –––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– –––––––––– –––––––––– January 2013 30.42 30.03 February 2013 30.62 29.92 March 2013 31.08 30.51 April 2013 (up to and including 24 April) 31.72 30.88
The exchange rate between the rouble and the US dollar on 24 April 2013 was 31.64 roubles per US$1.00.
No representation is made that amounts presented in a particular currency in this Prospectus could have been converted into such currency at any particular rate or at all. A market exists for the conversion of roubles into other currencies, but the limited availability of other currencies may tend to inflate their values relative to the rouble. Fluctuations in the exchange rate between the rouble and the US dollar in the past are not necessarily indicative of fluctuations that may occur in the future. These rates may also differ from the actual rates used in the preparation of certain information in this Prospectus. Solely for the convenience of the reader, certain amounts included in “Business” and elsewhere in this Prospectus have been translated from roubles into US dollars at the rate of RUB 30.37 per US$1.00, the official exchange rate as published by the CBR on 31 December 2012.
Rounding Certain amounts that appear in this Prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic aggregation of the figures that precede them.
ix Reproduction of Information This Prospectus includes (i) in “Industry Overview”, market data that the Company has obtained from, and attributed to, the World Gold Council, Russian Union of Gold Miners or such other sources as are indicated therein, and (ii) Russian macroeconomic data obtained from information published by the CBR. The Company accepts responsibility for having correctly reproduced such information, and, as far as the Company is aware and has been able to ascertain from information published by those industry publications or public sources, no facts have been omitted which would render the reproduced information inaccurate or misleading. Other market share information and other statements in this Prospectus regarding the industry in which the Group operates and the position of the Group relative to its competitors are not based on published statistical data or information obtained from independent third parties. Rather, such information and statements reflect the reasonable estimates of the Company based upon information obtained from trade and business organisations and associations, other contacts within the precious metals industry and from annual reports and information published by other gold mining companies. This information from the internal estimates and surveys of the Group has not been verified by any independent sources.
x ENFORCEABILITY OF JUDGMENTS
The Company is a public limited company incorporated under the laws of Jersey. The Company is managed and controlled in the UK and is currently treated as UK resident for UK tax purposes. The Guarantor is a private limited company incorporated under the laws of the Russian Federation. Substantially all of the Company’s and the Guarantor’s assets are located outside the United Kingdom or the United States, and may be located outside other jurisdictions in which investors may be located. In addition, most of the Directors and members of the Company’s and the Guarantor’s senior management are nationals or residents of jurisdictions other than the United Kingdom or the United States, and may not be nationals or residents of other jurisdictions in which investors may be located, and all or a substantial portion of their assets are located outside the United Kingdom or the United States, and may be located outside other jurisdictions in which investors may be located. In particular, substantially all of the Guarantor’s operating assets are located in the Russian Federation, and several of the Directors and members of the Company’s and the Guarantor’s senior management are nationals or residents of the Russian Federation and all or a substantial portion of their assets are located in the Russian Federation.
It may be difficult for the Noteholders or the Trustee to enforce, in original actions brought in courts in jurisdictions located outside the United Kingdom, liabilities predicated upon English laws. Courts in the Russian Federation will generally recognise judgments rendered by a court in any jurisdiction outside the Russian Federation only if an international treaty providing for the recognition and enforcement of judgments in civil cases exists between the Russian Federation and the jurisdiction where the judgment is rendered or a federal law is adopted in the Russian Federation providing for the recognition and enforcement of foreign court judgments. No such treaty for the reciprocal recognition and enforcement of foreign court judgments in civil and commercial matters exists between the Russian Federation and certain other jurisdictions, including the United Kingdom, and no relevant federal law on enforcement of foreign court judgments has been adopted in the Russian Federation. As a result, new proceedings may have to be brought in the Russian Federation in respect of a judgment already obtained in any such jurisdiction against the Company or its officers or directors or the Guarantor or its officers or directors. These limitations, as well as the general procedural grounds set out in Russian legislation for the refusal to recognise and enforce foreign court judgments in the Russian Federation, may significantly delay the enforcement of such judgments or deprive the Company, the Guarantor and/or the Noteholders of effective legal recourse for claims related to the investment in the Notes.
In the absence of an applicable treaty, enforcement of a final judgment rendered by a foreign court may still be recognised by a Russian court on the basis of reciprocity, if courts of the jurisdiction where the foreign judgment is rendered have previously enforced judgments issued by Russian courts. In two recent instances, Russian courts have recognised and enforced a foreign court judgment (an English court judgment in one instance and a Dutch court judgment in the other instance), on the basis of a combination of the principle of reciprocity and the existence of a number of bilateral and multilateral treaties to which both the United Kingdom and the Russian Federation, and both the Netherlands and the Russian Federation, respectively, are parties. The courts determined that such treaties constituted grounds for the recognition and enforcement of the relevant foreign court judgment in the Russian Federation. In the absence of established court practice, however, no assurances can be given that a Russian court would be inclined in any particular instance to recognise and enforce a foreign court judgment on these or similar grounds. The existence of reciprocity must be established at the time the recognition and enforcement of a foreign judgment is sought, and it is not possible to predict whether a Russian court will in the future recognise and enforce on the basis of reciprocity a judgment issued by a foreign court, including an English court.
Accordingly, it may be difficult or impossible for investors to:
• effect service of process within the United Kingdom, the United States or other jurisdictions in which investors may be located, on certain Directors or members of the Company’s or the Guarantor’s senior management;
xi • enforce judgements obtained in courts in the United Kingdom, the United States or other jurisdictions in which investors may be located, against the Company’s or the Guarantor’s assets, against certain Directors or members of the Company’s or the Guarantor’s senior management; or
• enforce, in original actions brought in courts in the Russian Federation, liabilities predicated upon the civil liability provisions of the laws of the United Kingdom, the United States or the laws of other jurisdictions in which investors may be located.
The above limitations may deprive investors of effective legal recourse for claims related to an investment in the Notes.
Prospective investors should read the entire document and, in particular, the section headed “Risk Factors” when considering an investment in the Notes.
xii TABLE OF CONTENTS
Page OVERVIEW 1
RISK FACTORS 8
USE OF PROCEEDS 35
CAPITALISATION 36
SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION 37
OPERATING AND FINANCIAL REVIEW 43
INDUSTRY OVERVIEW 98
BUSINESS 102
MANAGEMENT AND CORPORATE GOVERNANCE 140
PRINCIPAL SHAREHOLDERS 146
RELATED PARTY TRANSACTIONS 147
REGULATORY MATTERS 148
TERMS AND CONDITIONS OF THE NOTES 164
SUMMARY OF THE PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM 195
CERTAIN ERISA CONSIDERATIONS 201
TRANSFER RESTRICTIONS 202
TAXATION 205
SUBSCRIPTION AND SALE 215
INDEPENDENT AUDITORS 217
GENERAL INFORMATION 218
GLOSSARY OF TERMS 221
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS F-1
xiii OVERVIEW
This overview may not contain all the information that may be important to prospective purchasers of the Notes and, therefore, should be read in conjunction with this entire Prospectus, including the more detailed information regarding the Group’s business and the financial statements and related notes included elsewhere in this Prospectus. Prospective purchasers of the Notes should also carefully consider the information set forth under the heading “Risk Factors”. Certain statements in this Prospectus include forward-looking statements that also involve risks and uncertainties as described under “Forward-Looking Statements”.
OVERVIEW OF THE GROUP The Group is the largest gold producer in Russia based on ounces of gold produced, according to the Russian Union of Gold Miners, and with 87.5 million ounces of gold in JORC proven and probable reserves, excluding reserves of the Group’s Kazakhstan business unit, has the third largest gold reserves in the world based on the most recent publicly available reports of other gold mining companies. The Group develops and mines hardrock gold and alluvial gold deposits, with its principal deposits in the Krasnoyarsk, Irkutsk, Magadan and Republic of Sakha (Yakutia) regions of Russia. In 2012, the Group’s operations in Russia produced 1,569 thousand ounces of gold. The Group’s total gold production in 2012 was 1,678 thousand ounces. For the year ended 31 December 2012, the Group had total gold sales of US$2,784,499 thousand, total revenue of US$2,848,105 thousand and profit before income tax of US$1,237,775 thousand, and, as at 31 December 2012, total assets of US$5,588,907 thousand and total equity of US$4,469,077 thousand. For the year ended 31 December 2011 (post IFRIC 20), the Group had total gold sales of US$2,340,650 thousand, total revenue of US$2,402,710 thousand and profit before income tax of US$784,053 thousand, and, as at 31 December 2011, total assets of US$4,236,340 thousand and equity of US$2,844,536 thousand. The Group’s Adjusted EBITDA was US$1,382,967 thousand in 2012 and US$1,131,863 thousand in 2011 (post IFRIC 20) TCC was US$1,169,607 thousand in 2012 and US$956,709 thousand in 2011 (post IFRIC 20). The Company estimates the Group’s mineral base to amount to more than 35 years of hardrock gold production and more than 10 years of alluvial gold production. The table below shows the mineral reserves and resources of the Group according to the JORC Code(1):
Ore Gold (million Grade (thousand Classification Category tonnes) (g/t) ounces) ––––––––––––––––––––––––––– –––––––––––––––––– –––––––– –––––––– –––––––– Resources (including reserves) Measured 547.7 1.8 30,905 Indicated 1,210.6 2.0 79,561 –––––––– –––––––– –––––––– Total measured and indicated –––––––– 1,758.3 –––––––– 1.9 –––––––– 110,466 Inferred 634.0 2.0 41,463 Total measured indicated and inferred –––––––– 2,392.3 –––––––– 2.0 –––––––– 151,928 Reserves Proven 509.1 1.7 27,545 Probable 806.6 2.3 59,990 –––––––– –––––––– –––––––– Total proven and probable –––––––– 1,315.7 –––––––– 2.0 –––––––– 87,535 1. Based on the most recent audits of the Group’s respective reserves. Excludes reserves and resources of the Group’s Kazakhstan and Kyrgyzstan operations, which the Company sold on 28 February 2013. See “Business – The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
1 The table below shows the gold production figures for the Group’s operations.
Year ended 31 December ––––––––––––––––––––––––––––––––––– Production of Gold (’000 ounces) 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk Region Olimpiada 653 566 581 Titimukhta 117 109 100 Blagodatnoye 401 363 251 Irkutsk Region Alluvial deposits 214 210 197 Verninskoye(1)(2) 46 13 26 Republic of Sakha (Yakutia) Kuranakh mine –––––––– 138 ––––––– 117– –––––––– 120 TOTAL (RUSSIA) 1,569 1,378 1,275 Kazakhstan(3) 109 117 110 –––––––– –––––––– –––––––– TOTAL PRODUCTION OF GOLD (4) –––––––– 1,678 ––––––– 1,495– –––––––– 1,386 Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets process plant. 2. 2011 and 2010 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit. 3. The Company sold its gold mining assets in Kazakhstan and Kyrgyzstan on 28 February 2013. 4. Totals may not sum completely due to rounding. The Group’s major gold deposits in Russia are:
• in the Krasnoyarsk region (representing 51 per cent. of the Group’s total proven and probable reserves in Russia and 70 per cent. of the Group’s total gold production in 2012) – the Olimpiada deposit, which is one of the largest gold deposits in Russia, the Blagodatnoye and Titimukhta deposits and the Razdolinskaya (which includes Poputninskoye) and Panimba fields;
• in the Irkutsk region (representing 11 per cent. of the Group’s total proven and probable reserves in Russia and 16 per cent. of the Group’s total gold production in 2012) – the Verninskoye, Pervenets and Chertovo Koryto deposits and the Medvezhy goldfields, as well as 113 alluvial deposits;
• in the Magadan region (representing 36 per cent. of the Group’s proven and probable reserves in Russia) – the Natalka deposit; and
• in the Republic of Sakha (Yakutia) (representing 2 per cent. of the Group’s total proven and probable reserves in Russia and 8 per cent. of the Group’s total gold production in 2012) – the Kuranakh ore body.
On 28 February 2013, the Group completed the sale of its gold mining assets in Kazakhstan and Kyrgyzstan, which it had held since its acquisition of a controlling stake in KazakhGold. See “Business – The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
The Group has embarked on an intensive growth and development programme, with the goal of becoming one of the world’s top five gold mining companies in terms of production, reserves and market capitalisation.
2 Competitive Strengths The Company believes that the Group benefits from the following principal competitive strengths:
A gold producer with a highly competitive position in Russia and strong track record of production from existing operations With 2012 production of 1,678 thousand ounces, 87.5 million ounces of proven and probable JORC reserves and 151.9 million ounces of measured, indicated and inferred JORC resources, the Group is the largest gold producer in Russia and one of the top three gold companies worldwide by proven and probable JORC reserves, based on the most recent publicly available reports. The Group’s current producing assets are well established, with minimal reliance on third-party infrastructure, and, as they have been producing for many years, provide the foundation for the Group’s further gold production in the medium term. As a result of its strong operations and current foothold in Russia, the Company believes that the Group is well positioned to capitalise on existing and future opportunities in the region.
An extensive resource base and defined development pipeline, providing a leading production growth profile from large development assets A major portion of the Group’s 87.5 million ounces of proven and probable JORC reserves are within assets that are currently not producing. Given its strong financial position and track record of commissioning new mines, the Company believes that the Group is well-positioned to convert its reserve base into gold production. Management expects growth to come from both the expansion of production at the existing mine and the start-up of new deposits, including the Natalka deposit. When launched, the Natalka deposit is expected to rank among the largest gold mines in the world, based on publicly available reserve and resources reports of leading gold producers.
Strong expertise in gold mining and project execution in an opportunity-rich mining region The Company believes that the Group’s operations at its current producing assets are best-in-class and are characterised by efficient use of modern equipment and low-cost, large-scale processes. Many of the Group’s operations take place in remote locations and harsh environments and the Group has a proven ability to operate in such circumstances. Likewise, the Group has a proven track record of project execution, with much of the Group’s existing production being the result of its successful development from initial exploration through to design and development and ultimately gold production. The Group’s Blagodatnoye asset is one of the largest Russian exploration projects developed in the last 10 years with reserves of 9.9 million ounces, and is now producing 401 thousand ounces of gold per annum. The successful development of the Blagodatnoye mine demonstrates the Group’s ability to commission new projects as it was brought into production ahead of schedule in July 2010 and at the projected capital cost. The Group has an in-house design bureau Polyus Project, with state-of-the-art engineering capabilities for development of industrial, energy and civil projects, with the Group’s construction and project management group providing the core expertise. The Group’s total capacity of mills commissioned during the period from 2006 to 2012 is 14.3 million tonnes per annum.
The Company, therefore, believes that the Group is well-positioned to bring its existing development projects into production. The Group is also well-placed to take advantage of future opportunities in resource-endowed Russia, as its expertise and track record will provide competitive advantage in bidding for licences and assets.
Strong financial position offering ability to capitalise on acquisition opportunities As at 31 December 2012, the Group had a net cash position of US$680 million (cash and cash equivalents less total borrowings) and an asset base of US$5,589 million. The Group generated Adjusted EBITDA of US$1,383 million and profit for the year of US$981 million in 2012. The Group’s current financial position and strong cash flow generation allows the Group financial flexibility to execute its organic growth strategy or make opportunistic acquisitions.
3 Experienced management team with strong track record and an experienced and majority independent Board The Group’s senior management team consists of experienced individuals with an average of 18 years in the mining industry. Most of the Group’s top management have worked at the Group since its formation in 2006, allowing the Group to maintain a high degree of continuity. The management team has successfully achieved growth in metrics such as reserves, production, revenue and Adjusted EBITDA. The Group believes that the management experience and track record in the full range of early stage exploration, development and producing assets positions the Group to maximise the value of its existing operations, development projects and resource base. For example, from 2006 to 2012 the Group’s JORC proven and probable reserves in Russia increased from 50.8 million ounces to 87.5 million ounces, representing an increase of 72.2 per cent., and from 2006 to 2012 processing capacity increased from 8.9 million tonnes per annum to 23.2 million tonnes per annum, representing an increase of 161 per cent., and production increased from 1,215 thousand ounces to 1,678 thousand ounces, representing an increase of 38 per cent. In addition, the Company has an experienced Board of Directors, with five out of nine Directors considered independent based on the criteria of the UK Corporate Governance Code.
Strategy The Group seeks to become one of the world’s leading gold mining and production companies, keep a competitive cost structure, significantly increase its production and maintain its commitment to operational excellence and its social and environmental responsibilities. In 2013, the Board will be deliberating the Company’s broad strategy for the period 2013-2017 and beyond. The Company’s current development programme focuses on the following principles:
• Effective implementation of development projects: The Company expects that three new mines (Natalka, an expanded Blagodatnoye and Verninskoye), as well as the Group’s existing flagship mine Olimpiada (36 per cent. of the total reserves), will be the main drivers of production growth for the Group. Further development of these mines is the Group’s top priority, both in the short and mid-term.
• Focused approach: Whilst the Group does have alluvial operations, its main mines are developed through large-scale open pit mining followed by mill processing. This method remains the Group’s core area of operational focus.
• Exploring for production growth: The Group intends to pursue uninterrupted production growth beyond 2017, whilst continuing to explore for gold in brownfield and greenfield areas in regions where it has existing infrastructure and operations.
Development Pipeline The Board has approved a capital expenditure development budget for 2013 of US$1.57 billion (including investments in Kazakhstan assets that were sold on 28 February 2013). The budget includes funding for Phase I of the Natalka development and expansion at the Titimukhta mine. In addition, the Group has commenced feasibility studies for further development of the Blagodatnoye mine, trial works at the Kuranakh mine and scoping studies for further development of the Olimpiada, Verninskoe, Poputninskoye and Panimba and Chertovo Koryto deposits.
Recent Trading In the three months ended 31 March 2013, the Group’s operations produced 337 thousand ounces of gold, compared to 328 thousand ounces of gold produced in the three months ended 31 March 2012. The Group’s production in Russia (excluding the Group’s assets in Kazakhstan that were sold on 28 February 2013) in the three months ended 31 March 2013 amounted to 320 thousand ounces of gold, as compared to 302 thousand ounces of gold produced at the Group’s Russian operations in the three months ended 31 March 2012. The growth in production was achieved as a result of significant increases in gold output at Titimukhta (56 per cent. increase) and Verninskoye (71 per cent. increase), as well as higher than planned production at Blagodatnoye (3 per cent. increase).
4 The Group’s operations in Russia moved 16.7 million cubic meters of rock in total during the three months ended 31 March 2013, which is 4 per cent. more than during the same period in 2012. The increase resulted from increased mining works at Verninskoe and Kuranakh, in line with the mine plans for these mines. A total of 6.4 million tonnes of ore was mined by the Group’s operations in Russia during the three months ended 31 March 2013, a decrease of 6 per cent., compared to 6.8 million tonnes mined during the three months ended 31 March 2012. The decrease was mainly associated with lower volumes of ore mining at Olimpiada, which was in line with the Group’s mine plan for this deposit. In the three months ended 31 March 2013, the Group’s operations in Russia processed 5.3 million tonnes of ore, which was largely unchanged when compared to 5.2 million tonnes processed in the three months ended 31 March 2012.
Risk Factors Investment in the Notes involves a high degree of risk. For a detailed discussion of the risks and other factors to be considered when making an investment with respect to the Notes, see “Risk Factors” and “Forward- Looking Statements”. Prospective investors in the Notes should carefully consider the risks and other information contained in this Prospectus prior to making any investment decision with respect to the Notes. Prospective investors should note that risk described in this Prospectus are not the only risks the Group faces. The Company and the Guarantor have described only the risks they consider to be material. However, there may be additional risk that they currently consider immaterial or of which they are currently unaware.
OVERVIEW OF THE OFFERING The following is an overview of the terms of the Securities. This overview is derived from, and should be read in conjunction with, the full text of the Terms and Conditions of the Notes (the “Conditions”) and the Trust Deed constituting the Notes, which prevail to the extent of any inconsistency with the terms set out in this overview. Capitalised terms used herein and not otherwise defined have the respective meanings given to such terms in the relevant Conditions.
Notes being offered US$750,000,000 5.625 per cent. guaranteed notes due 2020 Issuer Polyus Gold International Limited Guarantor Closed Joint-Stock Company “Gold-Mining Company “Polyus” Joint Lead Managers J.P.Morgan Securities plc., Société Générale, and VTB Capital plc. Issue price 100 per cent. Maturity date 29 April 2020 Interest The Notes will bear interest at the rate of 5.625 per cent. per annum from and including 29 April 2013. Interest payment dates Interest on the Notes will be payable semiannually in arrears on 29 April and 29 October of each year starting on 29 October 2013. Ranking of the Notes and the The Notes will constitute direct, unsubordinated and (subject to Guarantee Condition 4.1) unsecured obligations of the Issuer and shall at all times rank pari passu and rateably without any preference among themselves. The Guarantee will constitute direct, unsubordinated and (subject to Condition 4.1) unsecured obligations of the Guarantor. Each of the Issuer and the Guarantor shall ensure that at all times the claims of the holders of the Notes against them under the Notes and the Guarantee, respectively, rank in right of payment at least pari passu with the claims of all of their other present and future unsecured and unsubordinated creditors, save those whose claims are preferred by any mandatory operation of law.
5 Use of proceeds The Company intends to use the net proceeds of the Notes for the general corporate purposes of the Group, including the financing of the Group’s key development projects.
Further issues The Issuer may from time to time, without the consent of the holders of the Notes, create and issue further securities having the same terms and conditions as the Notes in all respects (or in all respects save for the first payment of interest thereon) so that such further issue shall be consolidated and form a single series with the outstanding Notes. Any such other securities shall be constituted by a deed supplemental to the Trust Deed and will benefit from a guarantee substantially in the form of the Guarantee. See “Terms and Conditions of the Notes – Further Issues”. Additional amounts In the event that withholding taxes imposed in any Relevant Jurisdiction (as defined in Condition 20) are required to be withheld or deducted from payments on any of the Notes, the Issuer or the Guarantor under the Guarantee will, subject to certain exceptions described in this Prospectus, pay such additional amounts so as to result in the receipt by the Noteholders of such amounts as would have been received by them if no such withholding or deduction had been required. See “Terms and Conditions of the Notes – Taxation”. Redemption for tax reasons The Notes may be redeemed early at the option of the Issuer, in whole but not in part, at any time at 100 per cent. of the principal amount thereof plus accrued and unpaid interest and additional amounts, if any, to the date fixed for such early redemption if certain events occur that would require the Issuer to pay additional amounts, as described under “Terms and Conditions of the Notes – Redemption and Purchase – Redemption for Tax Reasons”. Form and denomination The Notes will be in registered form, without interest coupons attached, in denominations of US$200,000 or multiples of US$1,000 in excess thereof.
The Notes will be issued in the form of the Regulation S Global Note and the Rule 144A Global Note, each in registered form without interest coupons. The Regulation S Global Note will be deposited with The Bank of New York Mellon, London Branch as common depository for, and registered in the name of The Bank of New York Depositary (Nominees) Limited as a nominee of, Euroclear and Clearstream, Luxembourg. The Rule 144A Global Note will be deposited with Deutsche Bank Trust Company Americas as custodian for, and registered in the name of Cede & Co., as nominee of DTC. Ownership interests in the Global Regulation S Global Note and the Rule 144A Global Note will be shown on, and transfer thereof will be effected only through, records maintained by DTC, Euroclear, Clearstream, Luxembourg and their respective participants. Notes in definitive form will be issued only in limited circumstances.
Listing and Trading Application has been made to the Irish Stock Exchange for the Notes to be admitted to the Official List and to trading on the Main Securities Market. The Main Securities Market is a regulated market for the purposes of Directive 2004/39/EC of the European Parliament and of the Council on markets in financial instruments.
6 Events of Default and certain The terms and conditions of the Notes contain events of default and covenants covenants (including a cross default provision and a negative pledge) as described further in “Terms and Conditions of the Notes – Events of Default” and “Terms and Conditions of the Notes – Covenants”. Trustee BNY Mellon Corporate Trustee Services Limited Principal Paying Agent and a The Bank of New York Mellon, London Branch Transfer Agent Registrar The Bank of New York Mellon (Luxembourg) S.A. U.S. Registrar, U.S. Paying The Bank of New York Mellon, New York Branch Agent and a Transfer Agent Governing law The Notes and the Trust Deed and any non-contractual obligations arising out of or in connection therewith shall be governed by and construed in accordance with English law. Risk factors Prospective purchasers of the Notes should consider carefully all of the information set forth in this Prospectus and, in particular, the information set forth under “Risk Factors” below before making an investment in the Notes. Selling restrictions The Notes are subject to selling restrictions in the United States, the United Kingdom, Ireland and the Russian Federation. See “Subscription and Sale”. Security Codes Regulation S ISIN: XS0922301717 Regulation S Common Code: 092230171 Rule 144A ISIN: US73180YAA29 Rule 144A Common Code: 092311686 Rule 144A CUSIP: 73180YAA2
Expected Rating of the Notes BBB- Fitch, BB+ Standard & Poor’s A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. Fitch is established in the European Union and is registered under the Regulation (EC) No. 1060/2009, as amended (the “CRA Regulation”). As such, Fitch is included in the list of credit rating agencies published by the European Securities and Markets Authority (“ESMA”) on its website in accordance with the CRA Regulation. Standard and Poor’s is established in the European Union and is registered under the CRA Regulation. As such, Standard and Poor’s is included in the list of credit rating agencies published by ESMA on its website in accordance with the CRA Regulation.
7 RISK FACTORS
Investment in the Notes involves a high degree of risk. Prospective investors in the Notes should carefully consider the following information about the risks described below, together with other information contained in this Prospectus prior to making any investment decision with respect to the Notes. The risks highlighted below could have a material adverse effect on the Group’s business, results of operations, financial condition or prospects, which, in turn, could have a material adverse effect on the ability of the Company to service its payment obligations under the Notes. In addition, the trading price of the Notes could decline if any of these risks materialise, and Noteholders may lose some or all of their investment.
Prospective investors should note that the risks described below are not the only risks the Group faces. The Company has described only the risks it considers to be material. However, there may be additional risks that they currently consider immaterial or of which they are currently unaware, and any of these risks could have the effect set forth above.
RISKS ASSOCIATED WITH THE GROUP’S BUSINESS AND THE GOLD MINING INDUSTRY
The financial results of companies operating in the gold mining industry depend largely on the price of gold, which may be subject to significant volatility The Group derives substantially all of its revenue from the sale of gold. Accordingly, its financial results largely depend on the price of gold. The gold market is cyclical and sensitive to changes in general economic conditions, and may be subject to significant volatility. As a result, it is not possible to forecast with accuracy the price of gold. The price of gold is influenced by various factors, many of which are outside the control of the Group, including, but not limited to:
• global and regional economic and political conditions;
• global and regional supply and demand and expectations of future supply and demand;
• speculative trading activities in gold;
• actual, expected or rumoured purchase or release of built-up reserves of gold by central banks or other large holders or dealers, as well as purchases under hedging contracts;
• military conflicts and acts of terrorism;
• changes in the use of gold in industrial applications or as an investment, as well as fluctuations in the demand for jewellery;
• local and foreign government regulations and regulatory actions, including export quotas;
• the overall level of forward sales by other gold producers;
• the overall level and cost of production by other gold producers;
• currency exchange rates, particularly movements in the value of the US dollar against other currencies; and
• actual or expected inflation and interest rates.
The gold price ranged from US$1,058 to US$1,421 per ounce in 2010, from US$1,319 to US$1,895 per ounce in 2011 and from US$1,540 to US$1,792 per ounce in 2012. In the first quarter of 2013, the average London afternoon gold price fixing was US$1,632, although the price had declined to US$1,505 by 12 April 2013. These prices are significantly above the historic average price of gold and may decline significantly in the future. Future prolonged reductions or declines in world gold prices could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
8 In the case of a significant and prolonged reduction in the price of gold, the Group may be required to revise its development plans and budget, and if the price falls below the Group’s cost of production, it may determine that it is not economically feasible to continue commercial production at some or all of its operations or the development of all of its current prospects. In such a circumstance, the Group may curtail or suspend some or all of its exploration and production activities or be required to draw down (without replacement) or restate downwards its reserves, which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Historically, the Group has sold its products, including gold and semi-products such as quartzite ore and concentrate, at current spot market prices, and has not entered into forward sales, derivative or other hedging arrangements to establish a price in advance for the sale of its future gold production. In general, hedging reduces the risk of exposure to volatility in the gold price. Hedging also enables a gold producer to fix a future price for hedged gold that generally is higher than the then-current spot price. As the Group does not currently enter into transactions to hedge against the future price at which its gold production is sold, the Group is not protected against decreases in the gold price and if the gold price decreases significantly, this may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Significant sustained declines in the price of gold may render any of the gold exploration or development activities to be undertaken by the Group less profitable or unprofitable and may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group’s Olimpiada deposit generates a significant portion of the Group’s total gold production and a disruption to its operations could adversely affect the Group’s business, financial condition or results of operations In 2012, the Group derived 39 per cent. of its total gold production from its operations at the Olimpiada deposit, and the Olimpiada deposit, together with the other production mines which form the Krasnoyarsk business unit, generated a substantial majority of the Group’s Adjusted EBITDA and 70 per cent. of total gold sales in 2012. See “Business – Principal Operations – Krasnoyarsk Region – Olimpiada Deposit” and “Operating and Financial Review – Summary of performance results by business units for the years ended 31 December 2012 and 2011 – Krasnoyarsk business unit (Olimpiada, Blagodatnoye and Titimukhta deposits)”. However, no assurances can be given that in the future such licences will not be revoked, suspended or not renewed by the relevant governmental authorities. In addition, while the Group’s operations at Olimpiada have not in the past been subject to any significant temporary or prolonged disruption, the Group did experience some difficulties in the transition of Olimpiada’s Mill No. 3 to processing of ores from deep horizons with high pyrrhotine content in 2009 as a result of technological issues related to the processing of sulphide ores. To the extent that the Group’s operations at Olimpiada are subject to a temporary or prolonged disruption, including, among other things, as a result of suspension or termination of mining licences, major equipment failure, failure to receive required supplies in a timely manner or at all, or catastrophic events, such as fires, floods or adverse weather conditions, the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes could be materially adversely affected.
Lack of improvement or worsening economic conditions within the European Union could have a significant adverse impact on the Group’s total revenue and results of operations Recent developments in the region comprising the member states of the European Union that have adopted the euro (the “Eurozone”) have been affected by the global economic crisis. Financial markets and the supply of credit are likely to continue to be impacted by concerns surrounding the sovereign debts of Greece, Ireland, Italy, Portugal, Spain and Cyprus, the possibility of further credit rating downgrades of, or defaults on, sovereign debt, concerns about a slowdown in growth in some economies and uncertainties regarding the stability and overall standing of the European Monetary Union. Governments and regulators have implemented austerity programmes and other remedial measures to respond to the Eurozone debt crisis and
9 stabilise the financial system, but the actual impact of such programmes and measures are difficult to predict. Furthermore, it has been reported that remedial measures in Cyprus may include the sale of state gold reserves. To the extent Cyprus or other Eurozone states seek to sell gold reserves in order to raise funds, the price of gold may be adversely impacted.
If the Eurozone debt crisis is not resolved, it may be the case that one or more countries may default on their debt. If such an event were to occur, it could result in unpredictable market volatility. In addition, the departure of one or more countries from the European Monetary Union or the occurrence of banking crises in such countries may result in the imposition of, among other things, capital controls, exchange controls and mandatory payment laws. For example, Cyprus governmental authorities have recently introduced temporary but extensive restrictions on the movement of currency from Cyprus, as well as restrictions on withdrawals of cash from banks within Cyprus.
The exact nature of the risks that the Group faces is difficult to predict and guard against in light of the difficulties in predicting the outcomes of the remedial measures being undertaken in Europe, the extent to which the Eurozone debt crisis, slowdown in growth or recession in Europe and elsewhere will impact on the global economy and the fact that the risks are outside of the Group’s control. To the extent that the Eurozone debt crisis leads to a significant ongoing deterioration or dislocation in economic conditions in the European Union, the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes could be materially adversely affected.
The Group requires significant capital expenditures to fund the projects contemplated by its current development pipeline, which might be subject to inflationary pressures and which may require external financing that may not be provided Management’s current development pipeline contemplates significant capital expenditures with respect to the exploration and development of its mineral assets. Management’s current development pipeline contemplates that total investment in the Group’s development programme will be approximately US$1.57 billion in 2013. See “Business – Development Pipeline”. The Group’s capital expenditures might be subject to inflationary price pressures resulting from price increases as well price increases caused by an undersupply of critical equipment for mining and processing. In addition, as the Group’s strategy involves both acquisitions and the development of existing assets, further exploration and development may be dependent upon the Group’s ability to obtain financing through the raising of equity or debt financing or other means. The Group’s ability to secure debt or equity financing in amounts sufficient to meet the financial needs of the Group could be adversely affected by many factors beyond the Group’s control, including, but not limited to, economic conditions in Russia and the level of liquidity in the Russian and international banking sectors, including in connection with the Eurozone debt crisis. There can be no assurance that additional funding required by the Group for its current development projects or any that might be undertaken in the future will be made available to it and, if such funding is available, that it will be offered on reasonable terms. If the Group is unable to obtain additional financing as needed, it may be required to reduce the scope of its operations or anticipated expansion, which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group’s principal operations are located in remote areas with harsh climates, which requires limiting production operations in the Irkutsk region to specific times of year, and the delivery of supplies to the areas where it operates may be disrupted or transportation costs may increase The Group’s principal operations are located in remote areas, some of which have harsh climates, resulting in technical and logistical challenges for conducting both geological exploration and mining. While the Group benefits from the modern mining transportation skills and technologies which it has developed for operating in areas with harsh climates, it may sometimes be unable to overcome problems related to weather and climate at a commercially reasonable cost, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
10 As a result of the cold temperatures of the winter months in the Irkutsk region, production of gold at the Group’s Irkutsk alluvial business unit is limited mainly to the period of May to October. In 2012, gold production at alluvial operations in Russia comprised 13 per cent. of the Group’s total gold production.
The remote location of the Group’s principal operations also results in increased costs and transportation difficulties. The Group’s operations use infrastructure provided by third parties, such as loading terminals and airfields, for transportation. An increase in costs of, or interruptions in, transportation could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Success in the gold mining industry depends on maintaining a highly qualified, skilled workforce, including qualified geologists and other mining specialists The ability of the Group to maintain a competitive position and to implement its business strategy depends to a large degree on the services of senior management. The business and results of operations of the Group also depends, to a large extent, on its ability to attract, retain and motivate qualified personnel, particularly qualified geologists and mining specialists. Competition in Russia for personnel with relevant expertise is intense due to the small number of qualified individuals, particularly skilled managers, accounting personnel and information technology personnel. Furthermore, only a limited number of skilled geologists and other mining specialists with adequate qualifications and experience are available in Russia and there is an increasing demand for such qualified personnel as more international companies invest in the Russian mining industries, as well as the oil and gas industries, which often compete for the same personnel. The Group has experienced difficulties in the past in recruiting sufficient qualified engineers and technicians for some of its facilities and there can be no certainty that the services of current key personnel will continue to be available to the Group. Failure to retain an adequate number of qualified geologists or other mining specialists may hinder the development of the Group’s gold assets and have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Gold exploration and the development of mines involves a high degree of risk and uncertainty To maintain future gold production beyond the life of the current reserves or to increase production materially through mining new deposits, the Group will need to extend its mineral base through geological exploration. Gold exploration may require substantial expenditure and involves a high degree of risk, and exploration projects are frequently unsuccessful. Once gold deposits are discovered, it can take several years to determine whether gold reserves exist and few prospects that are explored are developed into productive mines. The long-term success of the Group’s operations will be related to the cost and success of its exploration programmes. The risks associated with gold exploration include the identification of potential gold mineralisation based on analysis of geological data, the technological challenges of exploration and development, the receipt of necessary governmental permits and licences and the construction of mining and processing facilities at any site chosen for mining. In relation to the Group’s Nezhdaninskoye deposit, for example, at the current stage certain reserves have been identified, but a decision on the deposit has not yet been made. The Group is currently considering its options with respect to the Nezhdaninskoye deposit, which include, among others, the construction of a full-cycle proceeding plant at the deposit, with subsequent production and sale of gold doré, construction of a gold concentrate production plant at the deposit, with subsequent production and sale of floatation concentrate, or the sale of the deposit. Management continues to evaluate the deposit and has not taken a final decision. A decline in the market price of gold may render ore reserves containing relatively lower grades of gold mineralisation uneconomic. No assurance can be given that any exploration programme undertaken by the Group will result in the discovery of new resources or in any new commercial mining operation.
Substantial expenditure may be required to establish ore reserves through drilling and to determine technological processes to extract metals from ore. If reserves are developed, it can take a number of years from the initial phases of drilling and identification of mineralisation until production is possible. During this period, the assumptions on which the Group has based its assessments of the economic feasibility of the mine, including in relation to future gold prices, anticipated tonnage, grades and metallurgical characteristics
11 of ore to be mined and processed, anticipated recovery rates of gold from the ore, anticipated capital expenditures and cash operating costs, may require significant adjustment. The Group’s initial access to information when forming such assumptions and making such assessments may also be limited.
Actual cash operating costs, production levels and economic returns may differ significantly from those anticipated by studies and estimates. There are a number of uncertainties inherent in the development and construction of a new mine or an extension to an existing mine. These uncertainties include, in addition to those discussed above, the timing and cost (which can be considerable) of the construction of mining and processing facilities; the availability and cost of skilled labour, power, water, consumables (such as cyanide, lubricants and fuel) and transportation facilities; the availability and cost of appropriate smelting and refining arrangements; the need to obtain necessary environmental and other governmental permits and the timing of those permits; and the availability of funds to finance construction and development activities in the longer term.
Consequently, no assurance can be given that the current and future exploration programmes undertaken by the Group will result in the discovery of deposits, the expansion of existing reserves or the development of mines. This may result in a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The volume and grade of the ore the Group extracts may not conform to current expectations Like any mining company, the financial condition of the Group will depend on its reserves and resources. Ore reserves and mineral resources estimates of mining companies are inherently imprecise and depend to some extent on statistical inferences drawn from limited drilling and other testing, which may ultimately prove unreliable. Ore reserves and mineral resources estimates and classifications are also affected by economic factors, such as significant changes in metal prices.
Ore reserve and mineral resources estimates are expressions of professional judgement, based on knowledge, experience and industry practice, but are subject to considerable uncertainties. As a result, the Group cannot be certain that its estimated reserves and resources are completely accurate. Moreover, future volumes of mining, which may not occur for many years, and rates of recovery of metals could differ materially from such estimates. Should the Group discover, in the course of mining its deposits, that those deposits differ from those predicted by drilling, sampling and similar examinations, it may have to adjust its reserve and resource estimates and alter its mining plans in a way that might adversely affect the results of operations. The estimated resources described in this Prospectus should not be interpreted as a statement of the commercial viability, potential or profitability of any future operations.
Audits of the Group’s reserves and resources in accordance with JORC were conducted from 2006 to 2012. The Group expects to carry out a further JORC audit of its reserves and resources in 2013. There can be no assurance that this audit, if completed, would not state reserves and resources, and associated grades, that are different, and in some cases lower, from those stated in its existing audits.
If estimates of the Group’s mineral resources based on the results of exploration activities prove to be inaccurate or lower than forecast, the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes could be materially adversely affected. Alternatively, if the Group’s ore and mineral reserves exceed current forecasts, it is not certain that it will be able to develop the production capacity to exploit those reserves commercially.
The Group’s business could be adversely affected if it fails to obtain, maintain or renew necessary contracts, licences and permits, including subsoil licences, or fails to comply with the terms of its contracts, licences and permits The Group’s exploration, mining and processing activities are dependent upon the grant, renewal and continued enforceability of appropriate contracts, licences, permits and regulatory approvals and consents, which may be valid only for a defined period of time, may be subject to limitations and may provide for
12 withdrawal in certain circumstances. In particular, companies seeking to explore or mine mineral deposits in Russia must obtain a subsoil licence issued by the Federal Agency for Subsoil Use for an identified mineral deposit. Subsoil rights are not granted in perpetuity in Russia, and any renewal of the relevant licence must be granted before expiry of the relevant current term. The Group’s development plans for the Olimpiada mine, which is the Group’s main mine accounting for 39 per cent. of the Group’s total gold production in 2012, may require amendment to the Olimpiada licence terms. Although the Group’s production licence for the Olimpiada deposit is not due to expire until January 2024, any suspension, termination or failure to obtain renewal or amendment of the Olimpiada licence would have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes. See “– The Group’s Olimpiada deposit generates a significant portion of the Group’s total gold production and a disruption to these operations could adversely affect the Group’s business, financial condition or results of operations”. The Company is not aware of any reason why the Group would not be able to renew its contracts, licences, permits and regulatory approvals and consents, including at Olimpiada, or obtain a required amendment to the Olimpiada mine in accordance with its development plans, although there can be no assurance that renewal or amendment of such contracts, licences, permits or regulatory approvals and consents will be granted. The licences impose various obligations on the Group, including a schedule of works that must be performed within an agreed timeframe. See “Business – Licences”.
In addition, in August 2011, the Group obtained updated licence terms for the Natalka deposit in which the licence was extended until 31 December 2036. The licence contains a requirement that the Group commission the first stage of the mine with production capacity in accordance with the mining project by 31 December 2013. Completion of the construction of the various items of the plant at Natalka is now expected in the summer of 2014, reflecting lower-than-planned construction levels during the winter of 2013. The Company is reviewing its options regarding the start-up of the mine, including the potential commencement of production during the winter of 2013 and 2014 using the existing pilot plant, as well as optimising the revised ramp-up schedule for Natalka for 2014. If the Group is unable to commission the first stage of the mine as required by the licence, the licence may be limited, suspended or terminated. The Natalka deposit accounts for 36 per cent. of the Group’s total proven and probable reserves in Russia. Consequently, any limitation, suspension or termination of this licence may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The legal and regulatory basis for the licensing requirements in Russia is often unclear and subject to frequent change, which increases the risk that the Group may be found to be non-compliant, and the regulatory authorities in Russia exercise considerable discretion in the timing of licence issuances and renewals. In addition, it is possible that licences applied for or issued in reliance on acts and instructions relating to subsoil rights issued by the relevant regulatory agencies in Russia could be challenged by governmental prosecutorial authorities or otherwise challenged as being invalid if such acts or instructions were found to be beyond the authority of that ministry or agency or if the licences were issued in breach of the required procedures. Deficiencies of this nature may subject subsoil licencees and contracts to selective governmental claims. Any alleged non-compliance by the Group with licensing regulations or the terms of any of its licences could lead to suspension or termination of the licences and permits and to administrative, civil and criminal liability.
Compliance Regulatory authorities in Russia exercise considerable discretion in the monitoring of a licencee’s compliance with the terms of a licence. Conditions imposed by those authorities may include requirements to comply with numerous industrial standards, recruit qualified personnel and subcontractors, maintain necessary equipment and quality control systems, monitor the operations of the Group’s licence-holders, maintain appropriate filings and, upon request, submit appropriate information to the licensing authorities. As a result, compliance with such conditions may be costly and time-consuming, and delays in the commencement or continuation of exploration or mining operations may occur as a result of delays to fulfil a licence-holder’s obligations. The Group’s current subsoil use contracts impose, on an annual basis, various social, financial, tax, insurance and other obligations and require the application of a specified period of time
13 between the termination of exploration activities and the commencement of mining operations at the relevant site (for purposes of commercial discovery evaluation). The authorities have the power to impose fines for administrative violations of the terms and conditions of subsoil use contracts and licences and can require that those violations be remedied. In such circumstances, any failure to implement the required remedial measures under two or more notifications from the competent authority within the period prescribed in such notification could result in the termination of the relevant subsoil use contract, as well as the imposition of administrative and civil liabilities on the licence-holder or subsoil user. In 2009, for example, construction at the Verninskoye site was temporarily slowed due to a failure to obtain necessary regulatory authorisations. Additionally, the Group has breached certain terms of its licence for the Razdolinskaya ore cluster (representing 3 per cent. of the Group’s total gold reserves in Russia), including the requirement to complete exploration works and construct and commission the mine within the prescribed deadlines. The Group has filed an application for the extension of the applicable deadlines in order to be able to fulfil the terms of the licence for the Razdolinskaya ore cluster. A failure to obtain amendments to the licence, or to remedy such breaches in the event of an inspection by the relevant authorities of the licence-holder Krasnoyarskoye LLC, could result in termination of the subsoil licence for the Razdolinskaya deposit. There can be no assurance that all licence-holders within the Group will comply or continue to comply with their respective licence or contractual obligations.
Specific requirements of the Russian Federation The Group currently holds licences for the use of subsoil plots which are considered subsoil plots of federal importance and may in the future acquire further licences, which may relate to subsoil plots of federal importance or under which the Group may discover such subsoil plots. As a result of the composition of the Group’s shareholders, some of the Russian subsidiaries of the Group are currently designated under Russian law as companies with foreign participation. The Law of the Russian Federation 2395-1 dated 21 February 1992 “On the Subsoil”, as amended, (the “Russian Subsoil Law”), provides that, if in the course of geological research at a subsoil plot, a Russian legal entity with foreign participation discovers a deposit which meets the criteria for a subsoil plot of federal importance and, as a result, the national security of the Russian Federation may be threatened, the licensing authorities have the right to revoke the relevant subsoil licence or refuse to grant an exploration and production subsoil licence. The licence for the Bamskoye gold ore deposit is currently suspended as, following the issuance of the licence, the deposit was subsequently recognised as a subsoil plot of federal importance. As a result, the Group was required to halt all exploration works at the deposit until receipt of permission from the Russian Government to continue works in accordance with the Russian Subsoil Law. An application to carry out exploratory and mining works at Bamskoye was filed with the state authorities in the first quarter of 2013, and the Company hopes that it will receive the necessary permission during 2013. If the Russian Government refuses to grant permission for continuation of works at the Bamskoye gold ore site, the licensing authorities are likely to revoke the subsoil licence. In the case of such a revocation, the Russian Subsoil Law contemplates the reimbursement to the licence-holder of costs incurred in connection with prospecting and evaluating the relevant deposit and the amount of the one-off fee for subsoil use paid under the terms of the relevant subsoil licence or geological research licence, as well as payment of a premium. There is no assurance, however, that such amounts would cover the licence-holder’s actual costs, or be paid at all. In the interests of national security, Russian legal entities with foreign participation, including the Russian subsidiaries of the Group, may also be subject to limitations imposed by the Russian Government on participation in subsoil auctions or tenders for the use of subsoil plots of federal importance. The rights to use a subsoil plot of federal importance may not be transferred to legal entities controlled by a foreign investor or a group of persons including a foreign investor, save for the transfer of rights in exceptional cases at the discretion of the Russian Government. The above restrictions may adversely affect the Group’s development strategy.
Companies which extract precious metals are required to offer refined precious metals on a priority basis to the relevant governmental authorities, which may use their pre-emptive rights if they have entered into agreements on purchase and sale of precious metals (based on international market prices) with such companies not less than three months prior to the expected date of purchase for precious metals, and have made an advance payment under such agreements. Refined precious metals, which have not been sold to governmental authorities in priority order, may be sold in the domestic market, used in internal production or exported. Gold producers are required to obtain a licence from the Russian Ministry of Industry and Trade
14 in order to export gold. For non-banking institutions, the Russian Ministry of Industry and Trade only issues such licences with respect to each particular export contract for a term of not longer than one year. In 2012, the Group elected to sell all of its gold produced in Russia to the domestic market, primarily due to more favourable contract terms concluded with Russian banks. Depending on market conditions, however, the Group may decide to export its products in the future, for which it would be required to obtain such a licence in advance.
As a result of the foregoing uncertainties, there can be no assurance that the contracts, licences, permits and regulatory approvals and consents that the Group requires to conduct its operations will be granted, renewed or continue in force, or, if so, on what terms. The withdrawal of licences, termination of subsoil use contracts or failure to secure requisite licences or subsoil use contracts in respect of any of the Group’s operations may, therefore, have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group is subject to mining risks The Group’s operations, like those of other mining companies, are subject to all of the hazards and risks normally associated with the exploration, development and production of natural resources, any of which could result in production shortfalls or damage to persons, property or the environment. The Group engages in open-pit mining. Hazards associated with open-pit mining operations include flooding, collapses of the open-pit wall or shelf, accidents associated with the operation of mining transportation equipment, accidents associated with the preparation and ignition of large-scale open-pit blasting operations, production disruptions due to weather and hazards associated with the disposal of mineralised waste water, such as groundwater and waterway contamination. Open-pit mining may also be adversely affected by the low winter temperatures in the regions where the Group’s principal mines are located. The output of the Group’s mines may also be adversely affected by unforeseen geological conditions, as well as emergency breakdowns in mining equipment, such as those that the Group experienced at the Kuranakh mine in 2009 and at Verninskoye in 2012, where production was affected by the breakdown of the primary crusher.
The Group may experience any of these hazards. The occurrence of any of these or similar hazards could delay production, increase production costs, damage the Group’s reputation or result in injury to persons or death and damage to property, as well as associated liability for the Group, and may result in actual production differing potentially materially from estimates of production, including those contained in this Prospectus. The liability resulting from any of these risks may not be adequately covered by insurance, and it is not certain that the Group can obtain additional insurance coverage at reasonable rates. The Group may, therefore, incur significant costs, which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group is subject to extensive environmental, health and safety controls and regulations and any breach of these regulations could result in fines or the suspension of operations, which could have a material adverse effect on our reputation, operating results and financial condition The Group is subject to extensive environmental controls and regulations in Russia and other countries in which it operates. Its operations involve the use of environmentally hazardous materials, such as cyanides, as well as processes such as the discharge of materials and contaminants into the environment, disturbance of land, potential harm to flora and fauna, and other environmental concerns. In addition, environmental hazards may exist on the Group’s properties, or may be encountered when its products are in transit. Environmental laws and regulations are continually changing and are generally becoming more restrictive. New laws and regulations, the imposition of more stringent requirements in licences, increasingly strict enforcement or new interpretations of existing environmental laws, regulations or licences, or the discovery of previously unknown contamination, may require further expenditures to modify operations, install pollution control equipment, perform site clean-ups, curtail or cease operations or pay fees, fines and other penalties arising out of the failure to comply fully with environmental regulations in the past. The Group has been held to have violated health and safety regulations in the past. For example, in 2011, OJSC Pervenets
15 did not comply with a number of requirements relating to the protection of biological resources, and OJSC Aldanzoloto GRK and the Guarantor breached certain requirements concerning hydraulic engineering structures. A failure to cure these breaches could result in fines or the suspension of operations of the relevant company for a period of up to 90 days. The Group paid approximately RUB 547.4 thousand (US$17.6 thousand) in penalties and fines related to violations of the environmental protection laws in connection with waste disposal and air emissions in 2012, as compared to RUB 82.2 thousands (US$9.7 thousand) in 2011. The Group could also be liable for losses associated with environmental hazards and rehabilitation. The Group’s operations are associated with the emission of “greenhouse gases”. Ongoing international negotiations which aim to limit greenhouse gas emissions may result in the introduction of new regulations, which may have an adverse impact on Group’s operations.
In addition, the licences and subsoil use contracts under which the Group will operate include conditions regarding environmental compliance. For example, each operating mine of the Group in Russia is required to obtain a mandatory environmental permit in order to conduct atmospheric emissions, discharge waste water and dispose of waste. Failure to obtain such a permit could lead to administrative penalties, civil sanctions and, in certain circumstances, may result in the issuance of a court order prohibiting and suspending those operations of the relevant mine causing atmospheric emissions, waste water discharge or waste disposal, although the Company believes that such a severe sanction is unlikely to occur. The introduction of more stringent environmental laws and regulations could lead to the need for new or additional rehabilitation and decommissioning reserves or to an increase in the Group’s environmental liabilities, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes. See “Regulatory Matters – Environmental Law”.
Actual and potential supply chain shortages and increases in the prices of production inputs may have an adverse effect on the Group’s operations and profits The Group’s results of operations may be affected by the availability and pricing of raw materials and other essential production inputs, including fuel, grind balls, and cyanide and other reagents. A sustained interruption in the supply of any of these materials would require the Group to find acceptable substitute suppliers and, in relation to cyanide, the Group believes that the alternatives to its two current suppliers are limited. The Group is also reliant on one shipping contractor for the transportation of coal supplies since there are currently no feasible alternatives. To the extent that the Group is unable to obtain alternative sources in the event of a prolonged disruption to its usual supply network, the Group may be forced to reduce its operating levels. Furthermore, even if the Group were able to obtain supplies of production inputs from alternative sources, it may incur substantially higher costs, particularly in relation to purchases of grind balls. More generally, the price of raw materials may be substantially affected by changes in global supply and demand, along with weather conditions, governmental controls and other factors. Any significant increase in the prices of these materials will increase the Group’s operating costs and affect production considerations, which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group requires giant tyres for its large earthmoving equipment and trucks. Giant tyres of the type preferred by the Group are in short supply. The Group seeks to establish long-term agreements and relationships with the same supplier in order to be able to receive such tyres. To the extent that the Group is unable to procure an adequate supply of these tyres, it may have to alter its mining plans, especially at its open-pit operations, which could reduce its gold production and may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The cost of electricity, particularly self-generated electricity, can be unstable. An increase in power costs will make production more costly and alternative power sources may not be available Power is one of the Group’s largest operating expenses. Some of the Group’s mines currently purchase power from state-controlled regional energy agencies, which charge consumers a rate based on tariffs that are
16 modified from time to time. Electricity prices for industrial consumers in Russia have been fully deregulated since 1 January 2011, which has resulted in higher prices for the Group’s electricity needs.
Some of the Group’s mines generate their own power through coal, diesel or hydro-generation facilities located at the mines. These mines purchase diesel or transport coal by barges, and any increase in the costs of these supplies, or any interruption in any of these supplies, could result in higher overall fuel costs. These mines use a combination of self-generated and purchased power when tariffs for purchased power are lower than the cost of self-generated power. However, if power costs increase, revenue and production capacity could be negatively affected, which may result in a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
In addition, some of the Group’s subsidiaries in the Irkutsk region that provide connections to the power grid to the other Group companies are subject to governmental regulation, which may affect their operations. For instance, one of the Group’s companies was found to have violated regulations that require it to provide connections to the power grid on equal basis for Group companies and other end users, and was ordered to terminate arrangements with one of the Group companies and provide power supply to other end users on the same basis as it provides supply for the applicable Group company. The Group is contesting the orders of the regulatory authorities. If the Group’s power generation and supply companies were found to be in violation of these requirements, power supply to some of the Group’s operations could become more expensive or made more costly, which could result in a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Wage increases in Russia may reduce the Group’s profit margins Wage costs in Russia have historically been significantly lower than wage costs in the more economically developed countries of North America and Europe for similarly skilled employees. However, if wage costs were to increase in Russia, this could result in a reduction in the Group’s profit margins. To the extent that the Group is unable to continue to increase the efficiency and productivity of its employees, wage increases could have a material adverse effect on the Group’s business, results of operations and financial condition, its ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group’s operations depend to a significant extent on external contractors, which exposes the Group to certain risks The Group’s operations are dependent to a significant extent on the efforts and abilities of outside contractors, experts and other advisers. As a result, the Group’s operations at those sites at which such contractors are present are subject to a number of risks, some of which are outside the Group’s control, including:
• negotiating agreements with contractors on terms acceptable to the relevant Group company;
• the inability to replace a contractor and its operating equipment in the event that either party terminates the agreement;
• reduced control over those aspects of operations which are the responsibility of the contractor;
• failure of a contractor to perform under its agreement with the Group;
• interruption of operations or increased costs in the event that a contractor ceases its business due to insolvency or other unforeseen events; and
• failure of a contractor to comply with applicable legal and regulatory requirements, to the extent it is responsible for such compliance.
The occurrence of any one of, or a combination of any of, the risks mentioned above could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
17 The Group operates in a highly competitive industry and may not be able to compete successfully for licences, exploratory prospects and producing properties The gold market is highly competitive and the Group faces competition from other competitors in all areas of its operations, including the acquisition of mineral licences, exploratory prospects and producing properties. The Group’s competitors include international gold producers, some of which are larger, have greater resources for raising capital, have more technologically advanced production facilities and, in some cases, have lower operating costs than it does. The Group cannot guarantee that it will be able to compete successfully in the future. The intensity of competition, combined with the cyclicality and unpredictability of gold markets, results in significant variations in economic performance, which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group’s acquisition strategy may not be successful As part of its development strategy, the Group monitors potential investment opportunities in the gold mining industry, both in Russia and overseas. The Group faces significant competition for potential acquisitions of gold assets as the Company believes that some international mining companies, which have greater resources than the Group, have begun to seek investment targets in the Russian gold mining industry. The participation of such companies in an auction or sale of Russian gold deposits and assets could adversely affect the Group’s ability to acquire additional gold mining operations in Russia because of, for example, the resulting increased prices for such acquisitions.
When making acquisitions, it may not be possible for the Group to conduct a detailed investigation of the nature or title of the assets being acquired, for example, due to time constraints in making the decision. The Group may also become responsible for additional liabilities or obligations not foreseen at the time of an acquisition. As a result, unforeseen expenditures may arise which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group may not be able to renew its arrangements with trade unions on favourable terms, and its operations could be adversely affected by strikes and walkouts As at 31 December 2012, approximately 44.7 per cent. of the Group’s employees at its Russian operations were represented by trade unions. The Group has not experienced any business interruption as a result of labour disputes at any of its businesses in Russia in the past. Although the Group considers its relations with its employees in Russia to be good, large union representation subjects the Group’s businesses to the risk of interruptions through strikes, lockouts or delays in renegotiating collective agreements, whose terms are typically three years. The collective agreement for the Group’s Krasnoyarsk business unit expires on 31 December 2014 and the collective agreement for the Group’s Yakutia (Kuranakh) business unit expires on 31 December 2013. If the Group is unable to renew its existing arrangements with trade unions on favourable terms or at all, the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes could be materially adversely affected.
The Group is responsible for maintaining part of the social and physical infrastructure in some of the regions in which it operates The Group is currently responsible for establishing and maintaining some of the social and physical infrastructure in the regions of Russia in which it operates. These regions are economically dependent on the Group’s respective business operations to a significant degree, which requires a substantial commitment of resources. In addition, the Group may become liable to meet the costs of resettlement of persons living in proximity to its facilities if, as a result of changes in applicable law, such facilities no longer meet minimum standards required for industrial facilities which are located close to residential facilities. Any significant increase in such social contributions, voluntary or otherwise, could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
18 The Group’s level or scope of insurance coverage may not be adequate and the Group may become subject to liability for risks that cannot be insured against or against which it may elect not to be so insured The insurance industry is not well developed in Russia, and many forms of insurance protection common in more economically developed countries are not available in Russia on comparable terms, including coverage for business interruption. The Group does not carry insurance covering its operations, other than the limited coverage required by law. Furthermore, Russian law requires mining companies to insure against only certain limited risks. The underdeveloped insurance market in Russia offers only limited opportunities for insuring risks associated with the Group’s businesses, and reinsurance with an international insurance house may substantially increase costs. As a result, the Group, as a participant in mineral exploration and development activities, may become subject to liability for risks that cannot be insured against or against which it may elect not to be so insured because of high premium costs. Losses from uninsured risks may cause the Group to incur costs that could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Group is subject to exchange rate risks The Group’s income is subject to exchange rate fluctuations and may become subject to exchange control or similar restrictions. Gold is sold throughout the world principally in US dollars, but the rouble is the functioning currency of the majority of the Group’s subsidiaries and the Group’s operating costs are incurred principally in roubles. Any significant and sustained appreciation of the rouble against the US dollar could have a material adverse effect on the operating margins of the Group. The rouble appreciated relative to the US dollar in the years prior to the global economic crisis that began in 2008, although the exchange rate has since been volatile, with the rouble depreciating by approximately 27 per cent. in 2009 followed by an appreciation of 4 per cent. in 2010, an appreciation of 4 per cent. in 2011 and a depreciation of 6 per cent. in 2012. The Group does not currently undertake any hedging activities in relation to currency fluctuation risk and accordingly, is fully exposed to any adverse fluctuations in the relevant exchange rates.
Russian currency control regulations may hinder the Group’s ability to conduct business The Group’s operational expenses are primarily denominated in Russian roubles. The current Russian currency control laws and regulations impose a number of limitations on banking and currency transactions. Currency control restrictions include a general prohibition on foreign currency operations between Russian residents, except for certain specified operations permitted by law, and the requirement to repatriate, subject to certain exceptions, export-related earnings in Russia. These currency control restrictions may restrict the Group’s operational flexibility, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
If transactions that the Group’s Russian subsidiaries have entered into are challenged for non- compliance with applicable legal requirements, the transactions could be invalidated or liabilities could be imposed on the Group The Group’s Russian subsidiaries have taken a variety of actions relating to share issuances, share and asset disposals and acquisitions, charter capital increases and decreases, valuation of property, interested party transactions, major transactions, currency control and anti-monopoly issues, in respect of which the applicable legal procedures are not always clear and which, therefore, could be subject to legal challenges. If any such challenge was successful, it could result in the invalidation of the relevant transaction, seizure of the relevant assets or the imposition of liabilities on the Group. Moreover, since many provisions of Russian law are open to many different interpretations, the Group’s Russian subsidiaries may not be able to defend successfully any challenge in respect of such transactions. For example, the provisions of Russian law defining which transactions must be approved as “interrelated major transactions” are subject to differing interpretations and there is no assurance that former or current minority shareholders of OJSC Polyus Gold or shareholders of its Russian subsidiaries or any other interested parties will not challenge such transactions in the future. Although the Company does not expect any past transaction to be so challenged, the
19 invalidation of any such transactions or imposition of any such liabilities could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Inflation may materially adversely affect the Group’s results of operations The activities of the Group are located primarily in Russia, and the majority of its costs are incurred in Russia and in roubles. Russia has experienced high levels of inflation since the early 1990s. Inflation, along with government measures to combat inflation and public speculation about possible future government measures, has significant negative costs, contributing to economic uncertainty. Inflation increased dramatically after the 1998 financial crisis, reaching a rate of 84.4 per cent. that year. The inflation rate was 8.8 per cent. in 2010, 6.1 per cent. in 2011 and 6.6 per cent. in 2012, and Russian companies have generally experienced inflation-driven increases in their costs that are linked to the general price level in Russia, such as supplies and materials, as well as salaries. Accordingly, high rates of inflation in Russia are likely to increase the costs of the Group, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes. High inflation rates in Russia have historically been accompanied by a depreciation of the rouble relative to the US dollar, which reduces the cost of the Group’s rouble operating expenses in US dollar terms. See “– The Group is subject to exchange rate risks”.
The Group is subject to anti-monopoly laws enforced by the Federal Anti-monopoly Service, which may result in certain limitations being imposed on the Group’s activities The Group’s operations in Russia are subject to anti-monopoly laws enforced by the Federal Anti-monopoly Service (the “FAS”), which may impose certain limitations on the Group’s activities. If the Group’s activities are found to be in violation of anti-monopoly legislation, the Group could be subject to penalties or requested to change its business operations in a manner that may increase the Group’s costs or reduce the Group’s profit margin and revenues. As such, these factors could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes. In addition, the FAS may impose certain conditions on the Group in connection with any anti-monopoly approvals of the Group’s transactions.
The Company believes that the Group’s operations are currently in compliance with Russian anti-monopoly regulations. However, if the FAS undertakes an investigation into some aspect of the Group’s operations or transactions and decides to impose penalties or other sanctions against the Group, such penalties or sanctions could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
RISKS RELATING TO THE RUSSIAN FEDERATION
Emerging markets are subject to greater risks than more developed markets, including significant legal, economic and political risks Investors in emerging markets such as Russia should be aware that these markets are subject to greater risk than more developed markets, including in some cases significant legal and economic risks. Moreover, financial turmoil in any emerging market country tends to adversely affect prices in equity markets of all emerging market countries as investors move their money to more stable, developed markets. As has happened in the past, including during the current global economic crisis, financial problems or an increase in the perceived risks associated with investing in emerging economies may adversely affect the level of foreign investment, which may, in turn, adversely affect the economies in those countries. In addition, during such times, companies that operate in emerging markets can face severe liquidity constraints as foreign funding sources are withdrawn. As a result, even if the Russian economy remains relatively stable, financial turmoil in Russia could seriously disrupt the Group’s business, as well as result in a decrease in the price of the shares of the Company. Companies operating in emerging markets may also be exposed to political risks. Investors should also note that an emerging economy such as that of Russia is subject to rapid change and that the information set out in this Prospectus may become outdated relatively quickly. Accordingly, investors should exercise particular care in evaluating the risks involved and must decide for themselves
20 whether, in light of those risks, their investment is appropriate. Generally, investment in emerging markets is only suitable for sophisticated investors who fully appreciate the significance of the risks involved. Potential investors are urged to consult with their own legal and financial advisors before making an investment in the Notes.
In emerging markets generally, the bribery of officials remains at a high level relative to developed markets. The Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes could be adversely affected by illegal activities by others, by corruption or by claims, even if groundless, implicating the Group in illegal activities.
The Group is subject to limitations imposed by Russian legislation which restricts the rights of foreign entities to invest in certain Russian companies and in the subsoil sector Under the Strategic Investment Laws of the Russian Federation (as defined in “Regulatory Matters”), the acquisition by a foreign investor, or a “group” of persons, as such term is defined under Russian law, including one or more foreign investors, of 25 per cent. or more of the voting shares in a company undertaking operations at subsoil plots of federal importance (a “Strategic Subsoil Company”), requires the prior approval of a Russian Government Commission. Furthermore, if a foreign investor, or a group of persons including one or more foreign investors, already exercises direct or indirect “control” (as defined in the Strategic Investment Laws) of over 25 per cent. or more of the voting shares of a Strategic Subsoil Company, each subsequent acquisition of shares of the Strategic Subsoil Company by the foreign investor, or group of persons including a foreign investor, whether directly or indirectly, requires the prior approval of the Russian Government Commission (with the exception of transactions which do not result in the increase of the ownership percentage of a foreign investor of a group including a foreign investor in the charter capital of a Strategic Subsoil Company). Additional restrictions apply to foreign states and governmental organisations and investors controlled by them, to which lower approval thresholds apply and which are generally prohibited from establishing control over strategic entities. Failure to obtain a prior approval renders the transaction void or may lead to limitations on the foreign investor’s voting rights. As at the date of this Prospectus, gold mining subsidiaries within the Group, comprising subsidiaries of OJSC Polyus Gold, CJSC Polyus, CJSC Tonoda, OJSC SVMC, OJSC Matrosov Mine, LLC Amurskoye GRP and OJSC Pervenets, hold licences to subsoil plots of federal importance, as defined in the Russian Subsoil Law, which comprise in aggregate approximately 90 per cent. of the Group’s reserves. As a result, each of these subsidiaries is considered a Strategic Subsoil Company. Under a strict interpretation of the Strategic Investment Laws, the acquisition of 25 per cent. or more of the voting shares in a direct or indirect holding company of a Strategic Subsoil Company, such as the Company, is generally subject to similar limitations.
In addition to the above, some Russian subsidiaries of the Group, which are not Strategic Subsoil Companies, are engaged in other types of activities considered strategic under the Strategic Investment Law, which technically include production of industrial explosives and activities in the sphere of securing air safety and providing airport services. On these grounds, members of the Group CJSC Dalnyaya Taiga, CJSC Sevzoto, CJSC Svetlyi, CJSC Marakan, OJSC Aldanzoloto GRK, LLC Novyi Ugahan and CJSC Lensib are considered strategic companies. Acquisition of more than 50 per cent. of shares in such companies by a foreign investor or a group comprising a foreign investor, directly or through acquisition of shares in their holding companies, including the Company, is also subject to approval by the Russian Government Commission.
If shares of the Company are acquired in circumstances where approval under the Strategic Investment Law is required but has not been obtained, there is a risk that action could be taken against the Company to limit its voting rights in respect of the Group’s Strategic Subsoil Companies, or to invalidate the corporate decisions and transactions of such Strategic Subsoil Companies that were made following the relevant acquisition of shares of the Company without approval. To protect the Company and its subsidiaries against such consequences, the relationship agreements with Nafta, Lizarazu Limited and Receza Limited and Wamika Trading Limited include undertakings by each principal shareholder to observe the requirements of the Strategic Investment Law in relation to any transactions it may enter into involving the securities of the Company. However, given the absence of legally binding guidance on the scope of application of the Strategic Investment Law, no assurance can be given that the Russian authorities will not seek to apply a
21 more extensive interpretation of the Strategic Investment Law to the acquisition of securities in the Company or that any contractual remedy that the Company may have under these relationship agreements would be sufficient to compensate it adequately for any loss or disruption caused by the sale and purchase of securities without prior approval under the Strategic Investment Law. Any such sale could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
For a more detailed discussion of implications of the Strategic Investment Law, see “Regulatory Matters – Foreign Investment in Sectors that are of Strategic Importance for the National Security and Defence of the Russian Federation, including the Subsoil Sector”.
Some of Russia’s physical infrastructure is in very poor condition, which could disrupt normal business activity of the Group or lead to increased costs Russia’s physical infrastructure largely dates back to Soviet times and has not been adequately funded and maintained since the dissolution of the Soviet Union. The rail and road networks, power generation and transmission, communications systems and building stock have been particularly affected. In the past, Russia has experienced electricity and heating shortages and blackouts, and the Russian railway system is subject to risks of disruption as a result of the declining physical condition of rail tracks and a shortage of rail cars. The poor condition or further deterioration of the physical infrastructure in Russia may harm its national economy, disrupt the transportation of goods and supplies, increase the costs of doing business and interrupt business operations, each of which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Potential political or social conflicts could create an uncertain operating environment hindering the Group’s long-term planning ability and could have a material adverse effect on the value of investments in Russia, including the trading price of the Notes The Russian Federation is a federation of sub-federal political units, consisting of republics, territories, regions, cities of federal importance and autonomous regions and districts, some of which have the right to manage their internal affairs pursuant to agreements with the federal government and in accordance with applicable laws. The delineation of authority and jurisdiction among the members of the Russian Federation and the federal government is, in some instances, unclear. In practice, the division of authority and uncertainty could hinder the Group’s long-term planning efforts and may create uncertainties in the Group’s operating environment, which may prevent it from effectively carrying out its business strategy.
In addition, ethnic, religious, historical and other divisions have, on occasion, given rise to tensions and, in certain cases, acts of terrorism (principally connected with the North Caucuses region) and military conflict, including the military conflict between the Russian Federation and Georgia in 2008. If existing conflicts remain unresolved, or new disturbances or hostilities arise, the Group may be unable to access capital, or access capital on terms reasonably acceptable to it, which may have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Political and governmental instability could adversely affect the value of investments in Russia, including the Notes Since 1991, Russia has been moving from a one-party state with a centrally planned economy to a federal republic with democratic institutions and a market-oriented economy. The Russian political system, though more stable than in the 1990s, remains vulnerable to popular dissatisfaction, including dissatisfaction with the results of privatisations in the 1990s, as well as to demands for autonomy from particular regional and ethnic groups. The course of political, economic and other reforms has in some respects been uneven, and the composition of the Russian Government has, at times, been unstable. However, over the period from 2000 to 2008, President Vladimir Putin achieved and generally maintained political and governmental stability in the country, which accelerated the reform process and made the political and economic situation in Russia more conducive to investment. In March 2008, Mr. Dmitry Medvedev was elected as the President
22 of Russia, and a significant degree of continuity has been maintained, due in large part, to the appointment by President Medvedev of Vladimir Putin as the Russian Prime Minister, and, following Mr. Putin’s election as President of Russia in March 2012, the subsequent appointment of Mr. Medvedev as Prime Minister. It is possible, however, that future presidents may take a different approach to reforms and to the state’s foreign and domestic policies in the future. In 2011 and 2012, there were public protests alleging voting irregularities in federal parliamentary and presidential elections and demanding political reform. Any significant further increases in political instability could have a material adverse effect on the value of investments relating to Russia and as such on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The reversal of reform policies or government policies targeted at specific individuals or companies could have an adverse effect on the Group’s business, as well as investments in Russia more generally From 2001, the political and economic situation in Russia has generally become more stable and conducive to investment. Such stability, however, has been negatively affected by the global financial crisis and the ongoing economic recession. Any significant struggle over the direction of future reforms, or a reversal of the reform process, could lead to another deterioration in Russia’s investment climate that might constrain the Group’s ability to obtain financing in the international capital markets, limit its sales in Russia or otherwise have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
In the past, Russian authorities have prosecuted some Russian companies, their executive officers and their shareholders on tax evasion and related charges. In some cases, the result of these prosecutions has been the imposition of prison sentences for individuals and significant claims for unpaid taxes. According to some commentators, such prosecutions have called into question the security of property and contractual rights, the independence of the judiciary and the progress of the market and political reforms in Russia. Any similar actions by governmental authorities could lead to further negative effect on investor confidence in Russia’s business and legal environment and the Group’s ability to raise equity and debt capital in the international markets, as well as the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Economic instability in Russia could harm the Group’s business and investment plans Over the last two decades, the Russian economy has experienced at various times:
• significant volatility in its GDP;
• high levels of inflation;
• increases in, or high, interest rates;
• sudden price declines in the natural resource sector;
• instability in the local currency market;
• lack of reform in the banking sector and a weak banking system providing limited liquidity to Russian enterprises;
• the continued operation of loss-making enterprises due to the lack of effective bankruptcy proceedings;
• corruption and the penetration of organised crime into the economy;
• pervasive capital flight; and
• significant increases in poverty rates, unemployment and underemployment.
The Russian economy has been subject to abrupt downturns in the past. In late 2008, at the outset of the global economic downturn, the Government announced plans to institute more than US$200 billion in
23 emergency financial assistance in order to ease taxes, refinance foreign debt and encourage lending. However, these measures had limited short-term effect, and the impact of the global economic downturn on the Russian economy led to, among other things, several suspensions of trading on Russian stock exchanges by market regulators since September 2008, a reduction in the Russian GDP and disposable income of the general population, a severe impact on bank liquidity, a significant devaluation of the rouble against the US dollar and euro, a sharp decrease in industrial production and a rise in unemployment. Any deterioration in the general economic conditions in Russia could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The Russian banking system remains underdeveloped The Russian Federation’s banking and other financial systems are not well developed or well regulated and Russian legislation relating to banks and bank accounts may be subject to varying interpretations and inconsistent applications. Many Russian banks also do not meet international banking standards, and the transparency of the Russian banking sector still lags behind internationally accepted norms in certain respects. Banking supervision is also often inadequate and, as a result, many Russian banks do not follow existing governmental regulations with respect to lending criteria, credit quality, loan loss reserves, diversification of exposure or other requirements. The imposition of more stringent regulations or interpretations could lead to determinations of inadequate capital and the insolvency of some banks. The Russian government’s default on its internal debt obligations in August 1998 triggered a substantial decline in the value of the rouble and the bankruptcy of a number of prominent Russian banks and businesses.
The recent global financial crisis has resulted in the collapse or bail-out of some Russian banks and in significant liquidity constraints for others. Profitability levels of most Russian banks have been adversely affected and the global crisis has prompted the government to inject substantial funds into the banking system amid reports of difficulties among Russian banks and other financial institutions. The Group generally conducts its banking relationships with, and maintains accounts in, several Russian banks. The bankruptcy or insolvency of one or more of these banks could adversely affect the Group’s business. While the latest banking crisis appears to have been moderated, any future bankruptcy or insolvency of the banks in which the Group holds funds could prevent it from accessing its funds for several days or affect its ability to complete banking transactions in the Russian Federation, or may result in the loss of its deposits altogether, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Russia’s property law is subject to uncertainty and contradiction and title to some of the Group’s mineral properties or production facilities may be challenged The legal framework relating to the ownership and use of land and other real property in the Russian Federation is not yet sufficiently developed to support private ownership of land and other real property to the same extent as is common in some of the more developed market economies, such as those of North America and Western Europe. During the Russian Federation’s transformation from a centrally planned economy to a market economy, legislation was enacted to protect private property against expropriation and nationalisation. However, it is possible that, due to a lack of experience in enforcing these provisions and due to political changes, these protections would not be enforced in the event of an attempted expropriation or nationalisation, or in the event that the Group’s business is reorganised. It is often difficult to determine with certainty the validity and enforceability of title to land in the Russian Federation and the extent to which it is encumbered. Moreover, in order to use and develop real property in the Russian Federation, approvals, consents and registrations of various federal, regional and local governmental authorities are required, and this can be a lengthy and cumbersome process. Further, it is not always clear which governmental body or official has the right to lease or otherwise regulate the use of real property. In addition, building and environmental regulations often contain requirements that are impossible to fully comply with in practice. Failure to obtain or comply with the required approvals, consents, registrations or other regulations may lead to severe consequences, including with regard to any current construction activities. If the real property owned or leased by the Group is found not to be in compliance with all applicable approvals, consents,
24 registrations or other regulations, the Group may lose the use of such real property, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Negative publicity could harm the Group’s business The local and international press have reported high levels of corruption and extortion in the Russian Federation, including selective investigations and prosecutions to further the personal or commercial interests of certain favoured companies or individuals. There is also a tendency among the local and international press to generate speculative reports that contain allegations of criminal conduct or corruption on the part of Russian companies or individuals within Russian companies or the Russian government. In addition, the Russian press and other non-traditional media are suspected of publishing biased articles and reports in return for payment. Such negative publicity could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The ongoing development in the Russian legal system and Russian legislation creates an uncertain environment for investment and for business activity Russia continues to develop its legal framework in accordance with international standards and the requirements of a market economy. Since 1991, new Russian domestic legislation has been put into place. Currently, this system includes the Constitution of the Russian Federation of 1993, the Civil Code of the Russian Federation and other federal laws, decrees, orders and regulations issued by the President, the Russian Government and federal ministries, which can be complemented by regional and local rules and regulations, adopted in certain spheres of regulation. Several fundamental Russian laws have only recently become effective and there still remain gaps and inconsistencies in regulatory infrastructure. Consequently, certain areas of judicial practice are not yet fully settled, and are therefore sometimes difficult to predict.
Among the risks of the current Russian legal system are: • inconsistencies among federal laws; decrees, orders and regulations issued by the President, the Russian Government, federal ministries and regulatory authorities; and regional and local laws, rules and regulations; • limited judicial and administrative guidance on interpreting Russian legislation; • the relative inexperience of judges, courts and arbitration tribunals in interpreting new principles of Russian legislation, particularly business and corporate law; • a lack of judicial independence from political, social and commercial forces; • bankruptcy procedures that are still under development; • substantial gaps in the regulatory structure due to delay or absence of implementing legislation; and • a high degree of unchecked discretion on the part of governmental and regulatory authorities, leaving significant opportunities for unlawful, selective or arbitrary government action.
Unlawful, selective or arbitrary governmental actions have reportedly included denial or withdrawal of licences, sudden and unexpected tax audits, criminal prosecutions and civil actions and the expropriation of property. The possibility of unlawful, selective or arbitrary governmental action also enhances opportunities for official corruption and extortion, as well as the penetration of organised crime into the economy, all of which is widely reported to be high in Russia. Press reports have described instances in which governmental officials have engaged in selective investigations and prosecutions to further their personal interests. The Russian Government has pursued a campaign against corruption, the results of which have not been yet achieved. See “– Findings of failure to comply with existing laws or regulations, unlawful or arbitrary government action or increased governmental regulation of the Russian operations of the Group could result in substantial additional compliance costs or various sanctions”.
There are also legal uncertainties relating to property rights in Russia. During Russia’s transformation to a market economy, the Russian Government has enacted legislation to protect property against expropriation
25 and nationalisation, and, if property is expropriated or nationalised, legislation provides for fair compensation. However, there is no assurance that such protections would be enforced.
In addition, Russia is not party to any multilateral or bilateral treaties with most Western jurisdictions for the mutual enforcement of court judgments. Consequently, should a judgment be obtained from a court in any of such jurisdictions, it is difficult to predict whether a Russian court will give direct effect to such judgment. Russia (as successor to the Soviet Union) is a party to the New York Convention. A foreign arbitral award obtained in a state that is party to the New York Convention should be recognised and enforced by a Russian court (subject to the qualifications provided for in the New York Convention and compliance with Russian civil procedure regulations and other procedures and requirements established by Russian legislation and non-violation of Russian public policy). There is also a risk that Russian procedural legislation will be changed by way of introducing further grounds preventing foreign court judgments and arbitral awards from being recognised and enforced in Russia. In practice, reliance upon international treaties may meet with resistance or a lack of understanding on the part of Russian courts or other officials, thereby introducing delays and unpredictability into the process of enforcing any foreign judgment or any foreign arbitral award in Russia.
The Group’s operations and previously effected transactions can also be affected by changes to, and continuing development of, corporate and securities laws, regulations and related court practice in the Russian Federation. Russian corporate and securities rules and regulations and court practice implementing and construing them can be contradictory and change rapidly, which may materially adversely affect the Group’s operations and transactions they undertake. In particular, in November 2011 the Company completed its mandatory tender offer to purchase shares in OJSC Polyus Gold, as a result of which it acquired 92.95 per cent. of ordinary shares of OJSC Polyus Gold. At the time of such acquisition, Jenington held ADRs constituting approximately 2.36 per cent. of OJSC Polyus Gold’s share capital (See “Business – History of the Group”). Pursuant to the Russian Joint-Stock Companies Law, if a purchaser acquires more than 95 per cent. of ordinary, and if applicable, preferred, shares in an open joint stock company, the remaining shareholders may demand that the purchaser buy out their shares. This requirement does not apply to any securities other than shares. If the applicable court practice is amended to apply to other securities, including ADRs, or the Russian courts adopt a different interpretation of the existing legislation, the remaining shareholders of OJSC Polyus Gold may require the Company to purchase their shares from them, which may result in additional costs and financing requirements and affect the Group’s financial position.
Consequently, the transitional state of the Russian legal system could affect the Group’s ability to enforce its rights under contracts, or to defend itself against claims by others, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Findings of failure to comply with existing laws or regulations, unlawful or arbitrary government action or increased governmental regulation of the Russian operations of the Group could result in substantial additional compliance costs or various sanctions The Group’s operations and properties in Russia are subject to regulation by various government entities and agencies at both the federal and regional levels. Regulatory authorities often exercise considerable discretion in matters of enforcement and interpretation of applicable laws, regulations and standards, the issuance and renewal of licences and permits and in monitoring licencees’ compliance with licence terms. Russian authorities have the right to, and frequently do, conduct periodic inspections of operations and properties of Russian companies throughout the year. Any such future inspections may conclude that the Group violated applicable laws, decrees or regulations. Findings that the Group failed to comply with existing laws or regulations or directions resulting from government inspections may result in the imposition of fines, penalties or more severe sanctions, including the suspension, amendment or termination of the Group’s licences or permits or in requirements that the Group cease certain business activities, or in criminal and administrative penalties being imposed on the Group’s officers. Any such decisions, requirements or sanctions, or any increase in governmental regulation of the Russian operations of the Group, could increase the Group’s costs and could have a material adverse effect on the Group’s business, results of operations and
26 financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
In addition, government officials have a high degree of discretion in Russia and at times act selectively or arbitrarily, without a hearing or prior notice, and sometimes in a manner that is contrary to law or is influenced by political or commercial considerations. Unlawful, selective or arbitrary actions of Russian government officials have reportedly included the denial or withdrawal of licences, sudden and unexpected tax audits, criminal prosecutions and civil actions. The Group’s competitors may receive preferential treatment from Russian government officials, potentially giving them a competitive advantage over the Group.
Unlawful, selective or arbitrary action of government officials, if directed at the Group or to the competitive advantage of the Group’s competitors, could have a material adverse effect on the Group’s business, results of operations, financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Shareholder liability under Russian legislation could cause the Group to become liable for the obligations of its applicable subsidiaries Under Russian law, the Group may be primarily liable for the obligations of its Russian subsidiaries jointly and severally with such entities if (i) the Group has the ability to make decisions for such Russian subsidiaries as a result of its ownership interest, the terms of a binding contract or in any other way, (ii) the Group has the ability to issue mandatory instructions to such Russian subsidiaries or joint venture entities and that ability is provided for by the charter of the relevant Russian subsidiary or in a binding contract and (iii) the relevant Russian subsidiary concluded the transaction giving rise to the obligations pursuant to the Group’s mandatory instructions. In addition, the Group may have secondary liability for the obligations of its Russian subsidiaries if (i) the Group has the ability to make decisions for the relevant Russian subsidiary as a result of its ownership interest, the terms of a binding contract, or in any other way and (ii) the relevant Russian subsidiary becomes insolvent or bankrupt due to the Group’s fault (i.e. the Group has used its ability referred to in (i) above, knowing that this would result in insolvency or bankruptcy of the relevant Russian subsidiary). This type of liability could result in significant losses, and could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
In addition, some of the Group’s Russian subsidiaries do not comply with formal requirements of Russian law which provide that a shareholder of a wholly-owned subsidiary cannot be itself a wholly-owned company. In such circumstances, competent authorities could request that the existing breaches are rectified and, in case these are repeated or remain unrectified, bring a claim seeking liquidation of the company on the basis of gross or repeated breaches of law. The Group does not believe that its existing shareholding structure could result in any claims against its subsidiaries, however, if the Group’s ownership structure were challenged and the challenge was successful, the Group would be forced to restructure its existing shareholding structure. Any such challenge or restructuring, if successful, could lead to additional costs and affect the relevant companies’ operations.
Russian legislation may not adequately protect against expropriation and nationalisation The Russian government has enacted legislation to protect foreign investment and other property against expropriation and nationalisation. If property is expropriated or nationalised, legislation provides for fair compensation. However, there is no assurance that such protections would be enforced. This uncertainty is due to several factors, including weaknesses in the judiciary and insufficient mechanisms to enforce judgements, as well as reports of corruption among state officials. In addition, it is possible that due to a lack of experience in enforcing these provisions or due to political change, legislative protections may not be enforced in the event of an attempted nationalisation. Furthermore, there is little experience in enforcing legislation enacted to protect private property against nationalisation. Although the Company does not believe that there is a legal basis for the expropriation or nationalisation of any of its assets, any expropriation or nationalisation of the Group’s business could have a material adverse effect on the Group’s business,
27 results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
The recent accession of the Russian Federation to the World Trade Organisation may lead to changes in the business and legal environment in Russia The Russian Federation officially became a member of the World Trade Organisation (“WTO”) on 22 August 2012. The accession may lead to significant changes in Russian legislation including, among others, the regulation of foreign investments in Russian companies and competition laws, as well as changes in the taxation system and customs regulations in Russia. In addition, implementation of the WTO rules may lead to the increase of competition in the markets where the Group operates. It is unclear yet if and when these legislative developments may take place; however, if new legislation is implemented in Russia as a result of accession to the WTO, such legislation could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
RISKS RELATING TO TAXATION
The Russian taxation system is not well-developed and is subject to frequent changes, which could have an adverse effect on the Group The Russian Government is constantly reforming the tax system by redrafting parts of the Tax Code of the Russian Federation (the “Russian Tax Code”). These changes have resulted in some improvement in the tax climate. As of 1 January 2009 the corporate profits tax rate was reduced to 20 per cent. for individuals who are tax residents in Russia the current personal income tax rate is 13 per cent. The general rate of VAT is 18 per cent. Since 1 January 2010, the Unified Social Tax was replaced by social security charges to the Russian pension, social security and medical insurance funds. The total rate of the respective social security charges generally equals 30 per cent. on the taxable base for up to RUB 568,000 of an employees’ annual remuneration and 10 per cent. on the amount exceeding RUB 568,000 for 2013. Contributions for mandatory social insurance against occupational accidents and diseases are payable by employers in addition to the above mentioned social security charges. In addition, the new Russian transfer pricing legislation has been in force since 1 January 2012.
Under the Russian tax law, the Mineral Extraction Tax (MET) for extracted precious metals is calculated as the quantity of the extracted precious metals multiplied by the rate applicable to the type of precious metal extracted. The MET rate applicable to gold is 6 per cent.; the MET rate applicable to silver is 6.5 per cent.
However, unclear provisions in the Russian Tax Code and industry regulations result in uncertainties regarding the calculation of the quantity of extracted precious metal for MET purposes. Current business practice regarding the MET taxation of precious metals is to use the quantity of gold and silver contained in the final product after the refining process. This “concentrate” approach allows companies to reduce the MET tax base by the losses which arise during the refining process. These losses vary from company to company depending on the refining process used. Official clarifications of the Russian tax authorities and the Ministry of Finance as well as the majority of court cases support the “concentrate” approach, which is used by the companies of the Group for gold.
CJSC Polyus recently lost a court case relating to its use of the “concentrate” approach for the year 2007. The court agreed with the Russian tax authorities’ “initial volume” approach for calculating the MET tax based on the quantity of gold and silver contained in ore before the refining process. This “initial volume” approach does not allow a company to reduce the MET tax base by losses arising during the refining process. This court case involved only CJSC Polyus and the issue has not been raised by the Russian tax authorities in respect of the other Russian companies of the Group. CJSC Polyus has used the “initial volume” method since 2007.
Russian tax laws, regulations and court practice are subject to frequent change, varying interpretations and inconsistent and selective enforcement. In accordance with the Constitution of the Russian Federation, laws
28 that introduce new taxes or worsen a taxpayer’s position cannot be applied retroactively. Nonetheless, there have been several instances when such laws have been introduced and applied retroactively.
Despite the Russian Government having taken steps to reduce the overall tax burden in recent years in line with its objectives, there is a possibility that the Russian Federation would impose arbitrary or onerous taxes and penalties in the future, which could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
In addition to the usual tax burden imposed on Russian taxpayers, these conditions complicate tax planning and related business decisions. These uncertainties could possibly expose the Group to significant fines and penalties and potentially severe enforcement measures despite its best efforts at compliance, and could result in a greater than expected tax burden, and could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
Generally, taxpayers are subject to tax audits for a period of three calendar years immediately preceding the year in which the decision to carry out a tax audit has been made. In certain circumstances repeated tax audits (i.e. audits with respect to same taxes and the same periods) are possible. Generally, the statute of limitations for the commission of a tax offence is also limited to three years from the date on which it was committed or from the date following the end of the tax period during which the tax offence was committed (depending on the nature of the tax offence). Nevertheless, according to the Russian Tax Code and based on current judicial interpretation, there may be cases where the tax offence statute of limitations may be extended beyond three years.
Tax audits or inspections may result in additional costs to the Group, in particular if the relevant tax authorities conclude that the Group did not satisfy its tax obligations in any given year. Such audits or inspections may also impose additional burdens on the Group by diverting the attention of management resources. The outcome of these audits or inspections could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
In October 2006, the Plenum of the Supreme Arbitrazh Court of the Russian Federation issued a ruling concerning judicial practice with respect to unjustified tax benefits. In this context, a tax benefit means a reduction in the amount of a tax liability resulting, in particular, from a reduction of the tax base, the receipt of a tax deduction or tax concession or the application of a lower tax rate, and the receipt of a right to a refund (offset) or reimbursement of tax. The ruling provides that, where the true economic intent of operations is inconsistent with the manner in which they have been taken into account for tax purposes, a tax benefit may be deemed to be unjustified. The same conclusion may apply when an operation lacks a reasonable economic or business rationale. As a result, a tax benefit cannot be regarded as a business objective in its own right. On the other hand, the fact that the same economic result might have been obtained with a lesser tax benefit accruing to the taxpayer does not constitute grounds for declaring a tax benefit to be unjustified. Moreover, there are no rules and little practice for distinguishing between lawful tax optimisation and tax avoidance or evasion. The tax authorities have actively sought to apply this concept when challenging tax positions taken by taxpayers in court, and are anticipated to expand this trend in the future. Although the intention of this ruling was to combat tax law abuses, in practice there can be no assurance that the tax authorities will not seek to apply this concept in a broader sense than may have been intended by the Supreme Arbitrazh Court.
The above conditions create tax risks in the Russian Federation that are more significant than the tax risks typically found in countries with more developed taxation, legislative and judicial systems. These tax risks impose additional burdens and costs on the Group’s operations, including management resources. Furthermore, these risks and uncertainties complicate the Group’s tax planning and related business decisions, potentially exposing the Group to significant fines, penalties and enforcement measures, and could materially adversely affect the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
29 In addition, according to the Russian thin capitalisation rules, if the overall amount of “controlled debt” of a Russian corporate taxpayer which is not a banking or leasing organisation, calculated on an individual Related Party (as defined below) basis, exceeds three times its capital, calculated in accordance with the requirements of the Russian Tax Code, part or all of the interest to be paid by such Russian corporate taxpayer with respect to the debt obligation between (or secured by) any foreign corporate shareholder owning directly or indirectly more than a 20 per cent. share in the Russian taxpayers’ charter capital and, potentially, affiliates of such foreign corporate shareholder (collectively the “Related Parties”) would be reclassified as dividends for Russian tax purposes and subject to Russian domestic profits withholding tax at the rate of 15 per cent.
Therefore, if any part of the proceeds from the issue of the Notes are used by the Company to finance loans to its Russian subsidiaries there is a risk that in certain circumstances part or all of the interest to be paid by such Russian subsidiaries to the Company under the relevant loans could be reclassified as dividends for Russian tax purposes under the above Russian thin capitalisation rules. Such reclassification of all or a portion of the interest as dividends could potentially lead to the imposition of Russian withholding tax on such reclassified interest at the rate of 15 per cent., subject to possible exemption under an applicable double tax treaty, and the non-deductibility of such interest for Russian profits tax purposes by such Russian subsidiaries of the Company.
Furthermore, Russian tax legislation is consistently becoming more sophisticated. It is possible that new revenue raising measures could be introduced. Although it is unclear how any new measures would operate, the introduction of such measures may affect the Group’s overall tax efficiency and may result in significant additional taxes becoming payable. No assurance can be given that no additional tax exposures will arise. Additional tax exposures could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
New Russian transfer pricing rules may subject the Group’s transfer prices to challenge by the Russian tax authorities Since 1 January 2012 new transfer pricing legislation has been introduced to Russian tax law. This transfer pricing legislation has resulted in new transfer pricing rules. In particular, the methods for monitoring the prices of controlled transactions have been expanded and the list of controlled transactions currently includes: • cross-border transactions with certain types of commodities where the amount of income attributable to one counterparty exceeds RUB 60 million; • Russian domestic transactions between related entities if the total annual turnover of such transactions exceeds RUB 1 billion (RUB 3 billion for 2012 and RUB 2 billion for 2013); • transactions with residents of offshore jurisdictions included in the list established by the Ministry of Finance of the Russian Federation where the amount of income attributable to one counterparty exceeds RUB 60 million; and • transactions between Russian legal entities and related foreign legal entities.
The new transfer pricing law requires taxpayers to notify the Russian tax authorities as to all controlled transactions (for 2012 and 2013, the notification must be made in the event that the income attributable to one counterparty exceeds RUB 100 million and RUB 80 million, respectively). Taxpayers must also be required to present to the Russian tax authorities transfer pricing documentation upon their request. Violation of the Russian transfer pricing law could have a material adverse effect on the Group’s business, results of operations and financial condition, the Company’s ability to service its payment obligations under the Notes or the trading price of the Notes.
30 RISKS RELATING TO THE NOTES The Notes may be redeemed at the option of the Issuer in certain circumstances The Issuer may at its option redeem the Notes if, as a result of certain changes affecting taxation in any Relevant Jurisdiction (as defined in “Terms and Conditions of the Notes”), which are announced, enacted or become effective on or after the date of this Prospectus, the Issuer becomes obliged to pay additional amounts so that the net payment made after deduction or withholding for any taxes imposed by any Relevant Jurisdiction is not less than the full amount then due and payable. If the Issuer redeems the Notes in such circumstances, the redemption price will be equal to 100 per cent. of the principal amount of the Notes plus any interest and additional amounts due.
The Notes may not be a suitable investment for all investors Each potential investor in the Notes must determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should: • have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the merits and risks of investing in the Notes and the information contained in the Prospectus;
• have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in the Notes and the impact such investment will have on its overall investment portfolio;
• have sufficient financial resources and liquidity to bear all of the risks of an investment in the Notes;
• understand thoroughly the terms of the Notes and be familiar with the behaviour of the relevant financial markets; and
• be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.
The lack of a public market for the Notes could reduce the value of an investment in the Notes If an active trading market for the Notes does not develop or is not maintained, the market price and liquidity of the Notes may be adversely affected. In addition, stock markets in recent years and, in particular, in recent months, have experienced significant price fluctuations. These fluctuations were often unrelated to the operating performance of the companies whose securities were traded on such stock markets. Market fluctuations as well as adverse economic conditions have negatively affected the market price of many securities and may affect the market price of the Notes.
The market price of the Notes may be volatile The market price of the Notes could be subject to significant fluctuations in response to actual or anticipated variations in the Group’s and its competitors’ operating results, adverse business developments, changes to the regulatory environment in which the Group operates, changes in financial estimates by securities analysts, the actual or anticipated sale of a large number of Notes or other securities and other factors. In addition, securities markets, in recent periods, have experienced significant price fluctuations. These fluctuations were often unrelated to the operating performance of the companies whose securities are traded on such stock markets. Market fluctuations as well as adverse economic conditions have negatively affected the market price of many securities and may affect the market price of the Notes.
The Notes may only be transferred in accordance with the procedures of the depositaries in which the Notes are deposited Except in limited circumstances, the Notes will be issued only in global form with interests therein held through the facilities of Euroclear, Clearstream, Luxembourg and DTC. Ownership of beneficial interests in the Notes will be shown on, and the transfer of that ownership will be effected only through, records maintained by Euroclear, Clearstream, Luxembourg and DTC or their nominees and the records of their
31 participants. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. These laws may impair the ability to transfer beneficial interests in the Notes. Because Euroclear, Clearstream, Luxembourg and DTC can only act on behalf of their participants, which in turn act on behalf of owners of beneficial interests held through such participants and certain banks, the ability of a person having a beneficial interest in a Note to pledge or transfer such interest to persons or entities that do not participate in the Euroclear, Clearstream, Luxembourg or DTC systems may be impaired.
The Notes are subject to restrictions on transfer The Notes are being offered and sold in the United States in reliance on Rule 144A (the “Rule 144A Offering”) to purchasers who are QIBs. The Notes also may be offered and sold outside the United States (the “Regulation S Offering”) in reliance on Regulation S. Each purchaser of Notes pursuant to the Rule 144A Offering will be deemed to have represented to the Issuer that it is a QIB. Each purchaser of the Notes pursuant to the Regulation S Offering will be deemed to have represented to the Issuer that it is purchasing the Notes in an “offshore transaction” as such term is defined in Regulation S. See “Transfer Restrictions”.
The Notes are subject to risks relating to exchange rate and exchange controls The Issuer will pay principal and interest on the Notes in U.S. dollars. This presents certain risks relating to currency conversions if an investor’s financial activities are denominated principally in a currency or current unit (the “Investor’s Currency”) other than the U.S. dollar. These include the risk that exchange rates may significantly change (including changes due to devaluation of the U.S. dollar or revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the Investor’s Currency relative to the U.S. dollar would decrease (i) the Investor Currency’s equivalent yield on the Notes; (ii) the Investor’s Currency equivalent value of the principal payable on the Notes; and (iii) the Investor’s Currency equivalent market value of the Notes.
Changes to the credit ratings of the Group or the Notes may adversely affect the value of the Notes The Notes are expected to be rated BBB- by Fitch and BB+ by Standard & Poor’s. The foregoing credit ratings do not mean that the Notes are a suitable investment. A rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by the assigning rating organisation. The ratings do not address the likelihood that the principal on the Notes will be prepaid, paid on an expected final payment date or paid on any particular date before the legal final maturity date of the Notes. The ratings do not address the marketability of the Notes or any market price. The significance of each rating should be analysed independently from any other rating. Ratings provided by other rating agencies may be different. Any changes in the credit ratings of the Group or the Notes could adversely affect the value of the Notes and the price that a subsequent purchaser will be willing to pay for the Notes.
Legal investment considerations may restrict certain investments The investment activities of certain investors are subject to investment laws and regulations, or to the review by, or regulation of, certain authorities. Each potential investor should consult its legal advisers to determine whether and to what extent (i) the Notes are legal investments to it; (ii) the Notes can be used as collateral for various types of borrowing; and (iii) other restrictions apply to its purchase or pledge of any Notes. Financial institutions should consult their legal advisers or the appropriate regulators to determine the appropriate treatment of the Notes under any applicable risk based capital or similar rules.
Payments under the Guarantee may be subject to Russian withholding tax Payments following enforcement of the Guarantee to be made by the Guarantor to the non-resident Noteholders relating to interest on the Notes are likely to be characterised as Russian source income. Accordingly, there is a risk that such payments may be subject to withholding tax at a rate of 20 per cent. in the event that a payment under the Guarantee is made to a non-resident Noteholder that is a legal entity or organisation which in each case is not organised under Russian law and which holds the Notes otherwise
32 than through a permanent establishment in Russia. In the event a payment under the Guarantee is made to a non-resident individual, there is a risk that such payment may be subject to withholding tax at a rate of 30 per cent. We cannot offer any assurance that such withholding tax would not be imposed on the full amount of the payment under the Guarantee, including with respect to the principal amount of the Notes. The imposition or possibility of imposition of this withholding tax could adversely affect the value of the Notes. See “Taxation – The Russian Federation”.
All payments made by the Guarantor with respect to the Guarantee, except in certain limited circumstances, will be made free and clear of and without withholding or deduction for, or on account of, any present or future Russian taxes unless the withholding or deduction for, or on account of, such taxes is then required by law. In the event of such a deduction or withholding, the Guarantor, as applicable, will pay such additional amounts as may be necessary so that the net amounts received in respect of such payments after such withholding or deduction will equal the respective amounts that would have been received in respect of such payments in the absence of such withholding or deduction. While the Prospectus provides for the Guarantor to pay such corresponding amounts in these circumstances, it is unclear as to whether a tax gross up clause such as that contained in the Prospectus is enforceable in the Russian Federation. There is a risk that the tax gross-up for withholding tax will not take place and that the full amount of the payments made by the Guarantor, which are Russian legal entities, will be reduced by Russian withholding income tax at a rate of 20 per cent. (or potentially, 30 per cent. in respect of individual Noteholders). See “Taxation – The Russian Federation”.
Under certain circumstances, payments on the Notes may be subject to U.S. information reporting and withholding tax under the FATCA provisions of the U.S. tax code.
Under the Foreign Account Tax Compliance Act provisions of the U.S. Internal Revenue Code of 1986, as amended, and related U.S. Treasury Department guidance (“FATCA”), a 30 per cent. withholding tax is imposed in certain circumstances on payments of (i) certain U.S. source income (including interest) and gross proceeds from the sale or other disposition of property that can produce U.S. source interest or dividends and (ii) payments (“foreign passthru payments”) made by certain foreign financial institutions (“FFIs”) that agree to comply with FATCA (“participating FFIs”) to the extent attributable, under rules not yet provided by the U.S. Treasury, to withholdable payments. The application of the FATCA withholding rules will be phased in beginning 1 January 2014, with withholding on foreign passthru payments made by participating FFIs taking effect no earlier than 1 January 2017. FATCA withholding on foreign passthru payments generally does not apply to debt obligations issued before 1 January 2014 (or, if later, the date that is six months after the date on which the final regulations that define “foreign passthru payments” are published), such as the Notes, unless they are materially modified after that date.
It is possible that, in order to comply with FATCA, the Issuer or the Guarantor (or if the Notes are held through another financial institution, such other financial institution) may be required, pursuant to an agreement entered into with the IRS or under applicable law (including pursuant to the terms of any applicable intergovernmental agreement relating to FATCA entered into between the United States and another jurisdiction (an “IGA”)) to request certain information from holders or beneficial owners of the Notes, which information may be provided to the IRS. In addition, if the terms of the Notes are materially modified after 1 January 2014 (or, if later, the date that is six months after the date on which the final regulations that define “foreign passthru payments” are published), including by substitution of another obligor for the Issuer, it is possible that the Issuer, the Guarantor or such other financial institution may be required to apply the FATCA withholding tax on all or a portion of payments with respect to the Notes made after 31 December 2016 (or if later, the date that is six months after the date on which the final regulations that define “foreign passthru payments” are published) if such information is not provided or if payments are made to certain FFIs that have not entered into a similar agreement with the IRS (and are not otherwise required to comply with the FATCA regime under applicable law (including pursuant to the terms of any applicable IGA)). Neither the Issuer nor the Guarantor will have any obligation to gross up or otherwise pay additional amounts for any withholding or deduction required with respect to payments on the Notes under or in connection with FACTA.
33 The United States recently concluded an IGA with the United Kingdom and is actively discussing an IGA with Jersey and many other jurisdictions. Such IGAs, when applicable, could modify the application of FATCA to the Notes.
Each prospective Noteholder – particularly if it may be classified as an FFI – should consult its own tax advisers regarding the application of FATCA to the Notes.
Payments of interest on the Notes may be subject to UK withholding tax unless an exemption is available The Issuer is managed and controlled in the UK and is currently treated as UK resident for UK tax purposes. Accordingly, interest on the Notes will have a UK source and, as such, payments of interest on the Notes will be subject to UK withholding tax unless an exemption is available under UK domestic law or an applicable double tax treaty. In view of the fact that the Notes will be listed on the Main Market of the Irish Stock Exchange, which is a “recognised stock exchange” for the purposes of UK domestic law, under current law the quoted Eurobond exemption should apply. In the event that any withholding or deduction on account of UK tax is required to be made (see “Taxation – United Kingdom - Payments on the Notes – Withholding Tax”), the Issuer or the Guarantor (as the case may be) will generally be obliged, except in certain circumstances (see “Terms and Conditions of the Notes – Taxation”), to pay such additional amounts so as to result in the receipt by the Noteholders of such amounts as would have been received by them if no such withholding or deduction had been required.
There can be no assurance that the quoted Eurobond exemption will continue to apply to payments of interest on the Notes, or that individual Noteholders will be entitled to additional amounts under the Terms and Conditions of the Notes in the event that any UK withholding tax becomes applicable to payments of interest on the Notes.
A derogation has been granted by the CBI in relation to the Guarantor Under Annex VI of the European Commission Regulation (EC) No 809/2004, as amended, a guarantor must disclose information about itself as if it were the issuer of that same type of security that is the subject of the guarantee. This normally requires the inclusion of a guarantor’s individual financial statements in the prospectus relating to such securities. The Issuer has applied to the CBI for derogation from the requirement for the Guarantor to include its individual financial statements in this Prospectus. Under Regulation 25(c) of the Prospectus (Directive 2003/71/EC) Regulations 2005, the CBI has granted such derogation. The equivalent information is included in the Financial Statements included in this Prospectus.
34 USE OF PROCEEDS
The net proceeds to the Company from the issue of the Notes are expected to be US$744.6 million, which the Company intends to use for the general corporate purposes of the Group, including the financing of the Group’s key development projects.
35 CAPITALISATION
The following table sets forth the Company’s consolidated cash and cash equivalents and capitalisation as of 31 December 2012, derived from the 2012 Financial Statements included elsewhere in this Prospectus. The following table should be read in conjunction with “Selected Consolidated Financial and Other Information”, “Operating and Financial Review” and the Financial Statements included elsewhere in this Prospectus.
As of 31 December 2012 (Amounts in thousands of US dollars) –––––––––––––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––– Cash and cash equivalents ––––––––– 959,932 Current borrowings 187,555 Long term borrowings 160,792 ––––––––– Total borrowings 348,347 Capital and reserves Share capital 482 Additional paid-in capital 2,151,765 Translation reserve (76,684) Retained earnings 2,110,869 ––––––––– Equity attributable to shareholders of the Company ––––––––– 4,186,432 Capitalisation (total borrowings and equity attributable to shareholders of the Company) ––––––––– 4,534,779 There have been no material changes in the consolidated capitalisation of the Company and its subsidiaries since 31 December 2012.
The Group expects to receive net proceeds from the offering of the Notes of approximately US$744.6 million (taking into account the estimated total commissions and expenses payable in relation to the offering of the Notes and the admission to trading of the Notes, which are expected to be approximately US$5.4 million).
36 SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION
The tables set forth below show certain selected consolidated financial and other information of the Group as of the dates and for the periods indicated below. For a discussion of the presentation of financial information, see “Presentation of Financial and Other Information”.
Financial information has been derived as follows: • The financial information as of and for the year ended 31 December 2012 has been derived from the 2012 Financial Statements included elsewhere in this Prospectus.
• The financial information as of and for the year ended 31 December 2011 has, unless otherwise indicated, been derived from the 2011 Financial Statements included elsewhere in this Prospectus.
In certain instances, namely where specific financial statement line items have been impacted by the adoption of IFRIC 20, financial information as of and for the year ended 31 December 2011 has been derived from the 2012 Financial Statements included elsewhere in this Prospectus. Such individual balances are noted as being impacted by IFRIC 20.
In certain instances, the terms “pre IFRIC 20” and “post IFRIC 20” have been used when the restated and unrestated amounts as of and for the year ended 31 December 2011 have been presented side-by-side, in order to avoid confusion.
• The financial information as of and for the year ended 31 December 2010 set forth below has been derived from the 2011 Financial Statements, and this financial information has not been restated to reflect the adoption of IFRIC 20. See “Presentation of Financial Information and Other Information”.
See “Presentation of Financial Information and Other Information”. The selected consolidated financial information should be read in conjunction with “Operating and Financial Review” and the Financial Statements and the notes thereto included elsewhere in this Prospectus.
The Group was formed as a result of the combination of the Polyus Russia Group and the KazakhGold Group, which completed on 25 July 2011 and resulted in KazakhGold (subsequently renamed Polyus Gold International Limited) acquiring a controlling stake in OJSC Polyus Gold. The Combination was in effect a reverse takeover by the Company of its ultimate parent company since OJSC Polyus Gold had acquired a controlling stake in the Company in August 2009.
The Group completed the Combination during 2011, which resulted in the reorganisation of the shareholding structure of the Group. The consolidated financial information included in this Prospectus is issued under the name of the Company, being the parent entity following the reorganisation, but represents a continuation of the consolidated financial information of the Polyus Russia Group, except for its capital structure. See Note 2 to the 2011 Financial Statements.
37 Year ended Year ended 31 December 31 December ––––––––––––––––––– ––––––––––––––––––– 2012 2011 2011 2010 (post (pre (US$’000, except for per share amounts) IFRIC 20) IFRIC 20) ––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– –––––––– Consolidated income statement information Gold sales 2,784,499 2,340,650 2,340,650 1,711,298 Other sales 63,606 62,060 62,060 37,506 –––––––– –––––––– –––––––– –––––––– Total revenue 2,848,105 2,402,710 2,402,710 1,748,804 Cost of gold sales (1,361,827) (1,143,033)(1) (1,162,019) (895,555) Cost of other sales (45,674) (46,343) (46,343) (33,424) –––––––– –––––––– –––––––– –––––––– Gross profit 1,440,604 1,213,334(1) 1,194,348 819,825 Gain on disposal of subsidiaries 6,268 – – – Selling, general and administrative expenses (267,903) (225,618) (225,618) (194,549) Other income/(expenses), net 12,803 (24,077) (24,077) (35,101) Impairment of property, plant and equipment (17,249) (23,501) (23,501) (27,179) Impairment of capital construction-in-progress (19,198) – – – Impairment of exploration and evaluation assets (338) (54,708) (54,708) (13,584) Impairment of stockpiles – (25,209) (25,209) – Gain on loan settlement and sale and purchase agreement termination 79,084 – – – Research expenses (2,079) (2,581) (2,581) (2,412) –––––––– –––––––– –––––––– –––––––– Operating profit 1,231,992 857,640(1) 838,654 547,000 Finance costs (34,791) (71,403) (71,403) (42,717) Income/(loss) from investments, net 35,960 3,630 3,630 (23,711) Foreign exchange gain/(loss) 4,614 (5,814) (5,814) 765 –––––––– –––––––– –––––––– –––––––– Profit before income tax 1,237,775 784,053(1) 765,067 481,337 Income tax (257,249) (210,850)(1) (207,052) (124,840) –––––––– –––––––– –––––––– –––––––– Profit for the year –––––––– 980,526 –––––––– 573,203(1) –––––––– 558,015 –––––––– 356,497 Attributable to: Shareholders of the Company 929,679 483,474(1) 468,998 332,169 Non-controlling interests –––––––– 50,847 –––––––– 89,729(1) –––––––– 89,017 –––––––– 24,328 Basic and diluted earnings per share (US cents) 32 16 16 11
Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
38 Year ended Year ended 31 December 31 December ––––––––––––––––––– ––––––––––––––––––– 2012 2011 2011 2010 (post (pre (US$’000) IFRIC 20) IFRIC 20) ––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– –––––––– Consolidated cash flow information Net cash generated from operating activities 991,769 775,588(1) 765,405 445,307 Net cash utilised in investing activities (763,789) (270,546)(1) (260,363) (171,114) Net cash from/(utilised) in financing activities 35,972 (134,958) (134,958) (110,983) –––––––– –––––––– –––––––– –––––––– Net increase in cash and cash equivalents 263,952 370,084 370,084 163,210 Cash and cash equivalents at the beginning of the year 657,488 326,905 326,905 173,360 –––––––– –––––––– –––––––– –––––––– Effect of foreign exchange rate changes on cash and cash equivalents 38,532 (39,541) (39,541) (9,665) –––––––– –––––––– –––––––– –––––––– Cash and cash equivalents at the end of the year –––––––– 959,932 –––––––– 657,448 –––––––– 657,448 –––––––– 326,905
Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation. Year ended Year ended 31 December 31 December ––––––––––––––––––– ––––––––––––––––––– 2012 2011 2011 2010 (post (pre (US$’000) IFRIC 20) IFRIC 20) ––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– –––––––– Consolidated statement of financial position information Cash and cash equivalents 959,932 657,448 657,448 326,905 Total assets 5,588,907 4,236,340(1) 4,219,011 4,004,174 Non-current borrowings 160,792 123,048 123,048 29,686 Current borrowings 187,555 675,632 675,632 173,762 Total liabilities 1,119,830 1,391,804(1) 1,388,338 763,643 Total equity 4,469,077 2,844,536(1) 2,830,673 3,240,531
Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
39 Year ended Year ended 31 December 31 December ––––––––––––––––––– ––––––––––––––––––– 2012 2011 2011 2010 (post (pre (US$’000) IFRIC 20) IFRIC 20) ––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– –––––––– Non-IFRS measures Adjusted EBITDA 1,382,967 1,131,863(1) 1,110,745 716,655 Adjusted EBITDA margin (%) 49 47(1) 46 41 Net debt (Net cash) (679,871) 129,057 129,057 (162,808) Net debt to Adjusted EBITDA – 0.11(1) 0.12 –
Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
Adjusted EBITDA Adjusted EBITDA has been calculated by management and has not been independently verified by the Group’s auditors. The following table sets out a reconciliation of the Group’s Adjusted EBITDA for the years ended 31 December 2012 and 2011 (post IFRIC 20): Year ended 31 December ––––––––––––––––––––– 2012 2011 (post (US$’000) IFRIC 20) Change % –––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Profit for the year 980,526 573,203(1) 71 + Income tax 257,249 210,850(1) 22 + Depreciation and amortisation 195,858 190,081(1) 3 – Interest income on bank deposits (35,757) (16,252) 120 + Finance costs 34,791 71,403 (51) – Gain on disposal of AFS investments (581) (17,023) (97) + Loss from investments in listed companies held for trading 378 20,984 (98) + Foreign exchange (gain)/loss (4,614) 5,814 (179) + Loss on disposal of property, plant and equipment 3,684 5,933 (38) + Impairment of property, plant and equipment and exploration and evaluation assets(2) 36,785 78,209 (53) + Change in fair value of derivative – 8,661 – – Gain on loan settlement and sale and purchase agreement termination (79,084) – – – Gain on disposal of subsidiaries (6,268) – – ––––––––– ––––––––– Adjusted EBITDA 1,382,967 1,131,863(1) 22 ––––––––– ––––––––– Note: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation. 2. Impairment of property, plant and equipment and exploration and evaluation assets includes impairment of property, plant and equipment of US$17,249 thousand and US$23,501 thousand, impairment of capital construction-in-progress of US$19,198 thousand and US$ nil and impairment of exploration and evaluation assets of US$338 thousand and US$54,708 thousand, in each case, for the years ended 31 December 2012 and 2011, respectively.
40 The following table sets out a reconciliation of the Group’s Adjusted EBITDA for the years ended 31 December 2011 (pre IFRIC 20) and 2010: Year ended 31 December ––––––––––––––––––––– 2011 2010 (pre (US$’000) IFRIC 20) Change % –––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Profit for the year 558,015 356,497 57 + Income tax 207,052 124,840 66 + Foreign exchange loss/(gain) 5,814 (765) (860) + Loss on derivatives classified as held for trading 8,661 63,775 (86) + Loss/(gain) from investments in listed companies held for trading 20,984 (11,446) (283) – Gain on disposal of AFS investments (17,023) (20,289) (16) – Interest income on bank deposits (16,252) (8,329) 95 + Finance costs 71,403 42,717 67 + Impairment of property, plant and equipment and exploration and evaluation assets(1) 78,209 40,763 92 + Loss on disposal of property, plant and equipment 5,933 2,037 191 + Depreciation and amortisation 187,949 126,855 48 ––––––––– ––––––––– Adjusted EBITDA 1,110,745 716,655 55 ––––––––– ––––––––– Note: 1. Impairment of property, plant and equipment and exploration and evaluation assets includes impairment of property, plant and equipment of US$23,501 thousand and US$27,179 thousand and impairment of exploration and evaluation assets of US$54,708 thousand and US$13,584 thousand, in each case, for the years ended 31 December 2011 and 2010, respectively.
Total Cash Costs (TCC) TCC and TCC per ounce sold have been calculated by management and have not been independently verified by the Group’s auditors. The following tables show the Group’s TCC and TCC per ounce sold for the years ended 31 December 2012 and 2011 (post IFRIC 20). Year ended 31 December ––––––––––––––––––––– 2012 2011 (post (US$’000, unless otherwise indicated) IFRIC 20) Change % –––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Cost of gold sales 1,361,827 1,143,033(1) 19 – amortisation and depreciation of operating assets (190,387) (184,067)(1) 3 – employee benefit obligation cost (2,369) (3,774) (37) – provision for annual vacation payment (5,705) (1,620) 252 – change in allowance for obsolescence of inventory 1,815 (2,819)(1) (164) + non-monetary changes in inventories(2) 4,426 5,956(1) (26) –––––––– –––––––– TCC 1,169,607 956,709 22 Gold sales (’000 ounces) –––––––– 1,685 ––––––– 1,483– 14 TCC (US$/ounce sold) 694 645 8 TCC (RUB/ounce sold) 21,579 18,964 14 Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation. 2. “Non-monetary changes in inventories” is a calculation to estimate the non-cash portion of costs included in the change in the amount of inventory, primarily representing depreciation and amortisation.
41 The following tables show the Group’s TCC and TCC per ounce sold for the years ended 31 December 2011 (pre IFRIC 20) and 2010.
Year ended 31 December ––––––––––––––––––––– 2011 2010 (pre (US$’000, unless otherwise indicated) IFRIC 20) Change % –––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Cost of gold sales 1,162,019 895,555 30 – amortisation and depreciation of operating assets (181,935) (118,559) 53 – employee benefit obligations cost (3,774) (10,596) (64) – provision for annual vacation payment (1,620) (7,208) (78) – change in allowance for obsolescence of inventory (2,819) – – + non-monetary changes in inventories(1) 6,795 12,225 (44) + non-monetary changes in deferred stripping works(2) 1,174 (8,459) (114) –––––––– –––––––– TCC 979,840 762,958 28 Gold sales (’000 ounces) –––––––– 1,483 ––––––– 1,377– 8 TCC (US$ per ounce sold) 661 554 19 TCC (RUB per ounce sold) 19,427 16,833 15
Notes: 1. “Non-monetary changes in inventories” is a calculation to estimate the non-cash portion of costs included in the change in the amount of inventory, primarily representing depreciation and amortisation. 2. “Non-monetary changes in deferred stripping works” is a calculation to estimate the non-cash position of costs included in the change in the amount of deferred stripping costs, primarily representing depreciation and amortisation.
42 OPERATING AND FINANCIAL REVIEW
The following Operating and Financial Review includes forward-looking statements that involve risks and uncertainties. See “Risk Factors” and “Forward-Looking Statements” for a discussion of important factors that could cause the actual results to differ materially from the results described in the forward-looking statements contained in this Prospectus.
In the comparison of financial information as of and for the years ended 31 December 2012 and 2011 and 31 December 2011 and 2010:
• The financial information as of and for the year ended 31 December 2012 has been derived from the 2012 Financial Statements included elsewhere in this Prospectus.
• The financial information as of and for the year ended 31 December 2011 has, unless otherwise indicated, been derived from the 2011 Financial Statements included elsewhere in this Prospectus.
In certain instances, namely where specific financial statement line items have been impacted by the adoption of IFRIC 20, financial information as of and for the year ended 31 December 2011 has been derived from the 2012 Financial Statements included elsewhere in this Prospectus. Such individual balances are noted as being impacted by IFRIC 20.
In certain instances, the terms “pre IFRIC 20” and “post IFRIC 20” have been used when the restated and unrestated amounts as of and for the year ended 31 December 2011 have been presented side-by-side, in order to avoid confusion.
• The financial information as of and for the year ended 31 December 2010 set forth below has been derived from the 2011 Financial Statements and this financial information has not been restated to reflect the adoption of IFRIC 20. See “Presentation of Financial Information and Other Information”.
See “Presentation of Financial Information and Other Information” for further discussion.
The following should be read in conjunction with the Financial Statements and the related notes included in this Prospectus. Investors should not rely solely on the information contained in this section.
Overview The Group is the largest gold producer in Russia based on ounces of gold produced, according to the Russian Union of Gold Miners, and with 87.5 million ounces of gold in JORC proven and probable reserves, excluding reserves of the Group’s Kazakhstan business unit, has the third largest gold reserves in the world based on the most recent publicly available reports of other gold mining companies. The Group develops and mines hardrock gold and alluvial gold deposits, with its principal deposits in the Krasnoyarsk, Irkutsk, Magadan and Republic of Sakha (Yakutia) regions of Russia. In 2012 the Group’s operations in Russia produced 1,569 thousand ounces of gold. The Group’s total gold production in 2012 was 1,678 thousand ounces (including 109 ounces of gold produced by the Group’s Kazakhstan business unit). In 2012, the Group’s Russian operations accounted for 94 per cent. of the Group’s gold sales, with the rest derived from sales of its Kazakhstan business unit. On 28 February 2013, the Company completed the sale of its assets in Kazakhstan and Kyrgyzstan. See “Business – The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
The Group was formed as a result of the Combination, which was substantially completed by 30 June 2011, with the final conditions satisfied by 25 July 2011, and resulted in KazakhGold Group Limited becoming the legal parent of OJSC Polyus Gold. Following the completion of the Combination, KazakhGold Group Limited was renamed Polyus Gold International Limited. The Combination occurred on 25 July 2011. The consolidated financial information included in this Prospectus is issued in the name of Polyus Gold International Limited, being the new parent entity following the Combination, but represents a continuation of the consolidated financial information of the Polyus Russia Group, except for its capital structure. See Note 2 to the 2011 Financial Statements.
43 For the year ended 31 December 2012, the Group had total gold sales of US$2,784,499 thousand, total revenue (which comprises gold sales plus revenues from the sale of electricity, transportation, handling and storage services and rent services) of US$2,848,105 thousand and profit before income tax of US$1,237,775 thousand. The Group’s Adjusted EBITDA was US$1,382,967 thousand in 2012 and US$1,131,863 thousand in 2011 (post IFRIC 20) and TCC was US$1,169,607 thousand in 2012 and US$956,709 thousand in 2011 (post IFRIC 20).
Presentation of Financial Information In 2012, the Company adopted IFRIC 20 “Stripping costs in the Production Phase of a Surface Mine” to account for waste removal costs directly related to the Group’s surface mining activity during the production phase of the mine. IFRIC 20 requires prospective application of the interpretation to production stripping costs incurred on or after the beginning of the earliest period presented in a set of financial statements upon adoption. Deferred stripping costs related to production which existed at the beginning of the earliest period presented are recognised and amortised on the same basis as new stripping asset activity could be identified with a remaining component of an ore body. If such balances could not be identified with a remaining component of the ore body that was made more accessible by the stripping activity, the asset was reduced and recognised as an adjustment to opening retained earnings.
The 2011 Financial Statements were issued prior to the implementation of IFRIC 20. Consequently, financial information included within the 2011 Financial Statements as of and for the year ended 31 December 2011 and as of and for the year ended 31 December 2010 does not reflect early adoption of IFRIC 20. For purposes of comparison between 2011 and 2010, financial information for both periods has been derived from the 2011 Financial Statements and is therefore presented as originally reported on a pre IFRIC 20 basis.
Significant External Market Factors Affecting the Group’s Financial Results The results of the Group are significantly affected by fluctuations in gold prices, the price of commodities that it requires for the gold mining and production process, such as oil and steel and movements in currency exchange rates, particularly the rouble/US dollar exchange rate.
The table below shows average rates for these main external market factors for the periods indicated:
Year ended 31 December —————————————————— Average price/rate 2012 2011 2010 ———————————————————————— ———— ———— ———— London afternoon gold price fixing (US$ per troy ounce)(1) 1,669 1,572 1,225 Average RUB/US$ rate(2) 31.09 29.39 30.36 Period end RUB/US$ rate(2) 30.37 32.20 30.47 Average KZT/US$ rate(3) 149.11 146.62 147.35 Period end KZT/US$ rate(3) 150.74 148.40 147.40
Notes: 1. Source: London Bullion Market Association. 2. Source: The CBR. 3. Source: The National Bank of Kazakhstan.
Gold Prices The market price of gold is the most significant factor influencing the profitability and operating cash flow of the Group. The global gold price is subject to volatile movements over short periods of time. In 2012, the average London afternoon gold price fixing was US$1,669 per ounce, with gold reaching its lowest level of US$1,540 per ounce on 30 May 2012 and a high of US$1,792 on 4 October 2012. For the 2012 year, the London afternoon gold price fixing increased by 4 per cent. from US$1,598 to US$1,657 per ounce on the first and the last business days, respectively. In 2011, the average London afternoon gold price fixing was US$1,572 per ounce, with gold reaching its lowest level of US$1,319 per ounce in January 2011 and a high of US$1,895 per ounce in September 2011. For the 2011 year, the London afternoon gold price fixing
44 increased by 10 per cent. from US$1,389 to US$1,531 per ounce on the first and the last business days in 2011, respectively. In 2010 the average London afternoon gold price fixing was US$1,225 per ounce.
Exchange Rates The Group’s revenue from gold sales is denominated in US dollars, whereas most of the Group’s operating expenses and capital expenditures are denominated in roubles. Accordingly, an appreciation of the Russian rouble against the US dollar may negatively affect the Group’s margins by increasing the US dollar value of its rouble-denominated costs. Conversely, an appreciation of the US dollar may positively affect the Group’s margins by decreasing the US dollar value of its Russian rouble-denominated costs. In 2012, the average RUB/US$ exchange rate increased by 6 per cent. to RUB 31.09 per US dollar from 29.39 in 2011. This contributed to an effective decrease in US dollar terms during 2012 in comparison with 2011 for salaries and other expenses denominated in Russian roubles. The decrease in the closing rate to RUB 30.37 per US dollar as of 31 December 2012 (31 December 2011: RUB 32.20) led to an increase in the statement of financial position items in US dollar terms. In 2011, the average RUB/US$ exchange rate decreased by 3 per cent. to RUB 29.39 per US dollar from 30.36 in 2010. This contributed to an increase in US dollar terms during 2011 in comparison with 2010 for salaries and other expenses denominated in Russian roubles, due to the effect of translation to the US dollar presentation currency. The increase in the closing rate to RUB 32.20 per US dollar as of 31 December 2011 (31 December 2010: RUB 30.47) led to a decrease in the statement of financial position items in US dollar terms.
Seasonality The Group’s sales volumes of gold are typically higher in the summer months, primarily as a result of the seasonal nature of the Group’s alluvial operations. Due to the cold temperatures of the winter months in the Irkutsk region, production of gold at the Group’s Irkutsk alluvial business unit is limited mainly to the period of May to October. In 2012, gold production at alluvial operations comprised 16 per cent. of the Group’s total gold production in Russia. In addition, the more favourable weather conditions of the summer months enable the Krasnoyarsk business unit to produce and sell higher volumes of gold as compared to the winter period. See “Risk Factors – The Group’s principal operations are located in remote areas with harsh climates, which requires limiting production operations in the Irkutsk region to certain times of year, and the delivery of supplies to the areas where it operates may be disrupted or transportation costs may increase”.
Recent Trading In the three months ended 31 March 2013, the Group’s operations produced 337 thousand ounces of gold, compared to 328 thousand ounces of gold produced in the three months ended 31 March 2012. The Group’s production in Russia (excluding the Group’s assets in Kazakhstan that were sold on 28 February 2013) in the three months ended 31 March 2013 amounted to 320 thousand ounces of gold, as compared to 302 thousand ounces of gold produced at the Group’s Russian operations in the three months ended 31 March 2012. The growth in production was achieved as a result of significant increases in gold output at Titimukhta (56 per cent. increase) and Verninskoye (71 per cent. increase), as well as higher than planned production at Blagodatnoye (3 per cent. increase).
The Group’s operations in Russia moved 16.7 million cubic meters of rock in total during the three months ended 31 March 2013, which is 4 per cent. more than during the same period in 2012. The increase resulted from increased mining works at Verninskoe and Kuranakh, in line with the mine plans for these mines.
A total of 6.4 million tonnes of ore was mined by the Group’s operations in Russia during the three months ended 31 March 2013, a decrease of 6 per cent., compared to 6.8 million tonnes mined during the three months ended 31 March 2012. The decrease was mainly associated with lower volumes of ore mining at Olimpiada, which was in line with the Group’s mine plan for this deposit.
In the three months ended 31 March 2013, the Group’s operations in Russia processed 5.3 million tonnes of ore, which was largely unchanged when compared to 5.2 million tonnes processed in the three months ended 31 March 2012.
45 Recent Developments Sale of subsidiaries in Kazakhstan and Kyrgyzstan On 28 February 2013, the Company completed the sale of its assets in Kazakhstan and Kyrgyzstan to a consortium consisting of Institute Project B.V., Financial Services B.V. and Folkstand Consortium Limited. See “Business – The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
Discussion of Results of Operations for the Years Ended 31 December 2012 and 2011 The following table shows a summary of the Group’s consolidated income statement for the periods indicated and the percentage change from year to year.
Year ended 31 December 2012 ———————————– against 2012 2011 2011 US$’000 % ———————————————————————— ————– ————– ————– Gold sales 2,784,499 2,340,650 19 Other sales 63,606 62,060 2 ––––––––– ––––––––– Total revenue 2,848,105 2,402,710 19 Cost of gold sales (1,361,827) (1,143,033)(1) 19 Cost of other sales (45,674) (46,343) (1) ––––––––– ––––––––– Gross profit 1,440,604 1,213,334(1) 19 Gross profit margin 50.6% 50.5%(1) – Including: Gross profit on gold sales 1,422,672 1,197,617(1) 19 Gain on disposal of subsidiaries 6,268 – – Selling, general and administrative expenses (267,903) (225,618) 19 Other income/(expenses), net 12,803 (24,077) 153 Impairment of property, plant and equipment (17,249) (23,501) 27 Impairment of capital construction-in-progress (19,198) – – Impairment of exploration and evaluation assets (338) (54,708) (99) Impairment of stockpiles – (25,209) – Gain on loan settlement and sale and purchase agreement termination 79,084 – – Research expenses (2,079) (2,581) (19) ––––––––– ––––––––– ––––––––– Operating profit 1,231,992 857,640(1) 44 Finance costs (34,791) (71,403) (51) Income from investments, net 35,960 3,630 890 Foreign exchange gain/(loss) 4,614 (5,814) (179) ––––––––– ––––––––– Profit before income tax 1,237,775 784,053(1) 58 Pre-tax margin 43.5% 32.6%(1) – Income tax expense (257,249) (210,850)(1) 22 ––––––––– ––––––––– Profit for the year 980,526 573,203(1) 71 ––––––––– ––––––––– Profit for the year attributable to shareholders of the Company 929,679 483,474(1) 92 Non-controlling interests 50,847 89,729(1) (43) Profit margin 34.4% 23.9%(1) – Earnings per share – basic and diluted (US Cents) 32 16 100
Note: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
46 Adjusted EBITDA Adjusted EBITDA has been calculated by management and has not been verified by the Group’s auditors. The following table sets out the Group’s Adjusted EBITDA for the years ended 31 December 2012 and 2011.
Year ended 31 December ———————————– 2012 2011 (US$’000) Change % ———————————————————————— ————– ————– ————– Profit for the year 980,526 573,203(1) 71 + Income tax 257,249 210,850(1) 22 + Depreciation and amortisation 195,858 190,081(1) 3 – Interest income on bank deposits (35,757) (16,252) 120 + Finance costs 34,791 71,403 (51) – Gain on disposal of AFS investments (581) (17,023) (97) + Loss from investments in listed companies held for trading 378 20,984 (98) + Foreign exchange (gain)/loss (4,614) 5,814 (179) + Loss on disposal of property, plant and equipment 3,684 5,933 (38) + Impairment of property, plant and equipment and exploration and evaluation assets(2) 36,785 78,209 (53) + Change in fair value of derivative – 8,661 – – Gain on loan settlement and sale and purchase agreement termination (79,084) – – – Gain on disposal of subsidiaries (6,268) – – ––––––––– ––––––––– Adjusted EBITDA 1,382,967 1,131,863(1) 22 ––––––––– ––––––––– Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
2. Impairment of property, plant and equipment and exploration and evaluation assets includes impairment of property, plant and equipment of US$17,249 thousand and US$23,501 thousand, impairment of capital construction-in-progress of US$19,198 thousand and US$ nil and impairment of exploration and evaluation assets of US$338 thousand and US$54,708 thousand, in each case, for the years ended 31 December 2012 and 2011, respectively.
The Group’s Adjusted EBITDA in 2012 was US$1,382,967 thousand, compared to US$1,131,863 thousand in 2011. The increase of 22 per cent. was mainly due to higher realised gold prices combined with increased sales volumes.
Total Cash Costs (TCC) The following table shows the Group’s TCC per ounce sold for the years ended 31 December 2012 and 2011. TCC and TCC per ounce sold have been calculated by management and have not been independently verified by the Group’s auditors.
47 Year ended 31 December 2012 ———————————– against 2012 2011 2011 (US$’000, unless otherwise indicated) % ———————————————————————— ————– ————– ————– Cost of gold sales 1,361,827 1,143,033(1) 19 – amortisation and depreciation of operating assets (190,387) (184,067)(1) 3 – employee benefit obligations cost (2,369) (3,774) (37) – provision for annual vacation payment (5,705) (1,620) 252 – change in allowance for obsolescence of inventory 1,815 (2,819)(1) (164) + non-monetary changes in inventories(2) 4,426 5,956(1) (26) ————– ————– TCC 1,169,607 956,709(1) 22 Gold sales (’000 ounces) 1,685 1,483 14 ————– ————– TCC (US$ per ounce sold) 694 645 8 TCC (RUB per ounce sold) 21,579 18,964 14 Notes: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation. 2. “Non-monetary changes in inventories” is a calculation to estimate the non-cash portion of costs included in the change in the amount of inventory, primarily representing depreciation and amortisation.
In 2012, the TCC per ounce sold increased by 14 per cent. on a rouble basis. The increase of 8 per cent. on a USD basis was lower due to the strengthening of the US dollar relative to the Russian rouble. During 2012, TCC per ounce sold was affected mainly by a material increase in costs resulting primarily from significant increases in the consumption of materials, fuel and spare parts, salaries indexation, an increase in the average number of personnel, increased prices for some materials and components and an increase in mining tax charges due to the higher gold price and increased volumes of sales. Despite improvements in the processing efficiency of the Group’s mines, the increase in gold production and sales volumes was not sufficient to meet the growth of costs, which led to an increase in the Group’s TCC indicator. Gold Sales The following table shows the results and breakdown of the Group’s gold sales for the years ended 31 December 2012 and 2011 and the percentage change from year to year. Year ended 31 December 2012 ———————————– against 2012 2011 2011 Gold Sales % ———————————————————————— ————– ————– ————– Gold sales (US$ thousands) 2,784,499 2,340,650 19 Gold sales (thousand troy ounces)(1) 1,685 1,483 14 In the domestic market (US$ thousands)(2) 2,643,340 2,188,271 21 In the domestic market (%) 95 93 – For export (US$ thousands)(3) 141,159 152,379 (7) For export (%) 7 7 – Weighted-average gold selling price (US$ per ounce) 1,653 1,578 5 Average London afternoon gold price fixing (US$ per ounce)(4) 1,669 1,572 6 Excess/(deficit) of average selling price over/(under) average London afternoon gold price fixing (US$ per ounce) (16) 6 (346) Notes: 1. For 2011 gold sales do not include 13 thousand ounces produced at pilot plants from the ores of the Verninskoye and Natalka deposits and sold during that year. These sales were not included in the Group’s revenue due to non-commercial scale of production. The net proceeds from these sales were insignificant and were offset against the costs of construction. 2. Sales on the domestic market comprise of sales by the Group’s Russian subsidiaries on the Russian market and by the Kazakhstan business unit on the Kazakhstan market.
48 3. Export sales comprise sales by the Kazakhstan business unit to foreign customers. 4. Source: London Bullion Market Association.
The following table shows the results and breakdown of the Group’s gold production for the years ended 2012 and 2011 and a percentage change from year to year. Year ended 31 December 2012 ———————————– against 2012 2011 2011 Production of Gold (’000 ounces) % ———————————————————————— ————– ————– ————– Krasnoyarsk Region Olimpiada mine 653 566 15 Titimukhta 117 109 7 Blagodatnoye mine 401 363 11 Irkutsk Region Alluvial deposits 214 210 2 Verninskoye(1), (2) 46 13 254 Republic of Sakha (Yakutia) Kuranakh mine 138 117 18 Kazakhstan(3) Aksu, Bestobe, Zholymbet and Akzhal 109 117 (7) ––––—––– ––—––––– Total production of gold 1,678 1,495 12 ––––—––– ––—––––– Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets processing plant. 2. 2011 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit. 3. On 28 February 2013, the Company sold its gold mining assets in Kazakhstan (see “– Recent Developments”).
In 2012, the Group’s gold sales amounted to US$2,784,499 thousand, an increase of 19 per cent. from 2011. The increase in gold sales resulted from a combination of higher realised gold prices and increased sales volumes.
The Group sold 1,685 thousand ounces of gold in 2012, including 1,571 thousand ounces sold by the Group’s mines in Russia in the form of refined gold and flotation concentrate, as well as 114 thousand ounces of gold sold by the Kazakhstan business unit in the form of sludge, flotation and gravitation concentrates and other semi-products. The Group sold 1,483 thousand ounces of gold in 2011, including 1,369 thousand ounces of refined p.m. gold sold by the Group’s mines in Russia and 113 thousand ounces of gold sold by the Kazakhstan operations in the form of sludge, flotation and gravitation concentrates and other semi-products.
In 2012, the weighted-average realised gold price was US$1,653 per ounce, a 5 per cent. increase compared to 2011. This was US$16 per ounce lower than the average gold price fixing on the London market, as low volumes of gold were sold during the first quarter of 2012, when gold spot prices were high and alluvials did not operate, and higher volumes of gold were sold between June and August, when the alluvials operated and the spot price was relatively low. In August 2012, the gold spot price increased, but the sales volumes were disrupted by lower production of the Olimpiada mine, as a result of electricity outages. In October 2012, the gold spot price was still high, but sales volumes decreased as a result of the end of the alluvial season, and weighted-average realised gold price decreased as a result of one-off sales of semi-products produced by the Krasnoyarsk business unit, which were sold with a discount to the market price.
In 2011, the weighted-average realised gold price was US$6 per ounce higher than the average afternoon gold price fixing, since over 32 per cent. of the Group’s total sales of gold by volume was made in the third quarter of the year, when the gold price was higher than the average for the year as a whole.
The Group sells semi-products produced by the Kazakhstan business unit with a discount to the market. This negatively affected weighted-average realised gold price both in the years ended 31 December 2012 and 2011.
49 Other Sales Other sales include the sale of electricity, transportation, handling and storage services and rent services, and were US$63,606 thousand in 2012, compared to US$62,060 thousand in 2011.
Cost of Gold Sales The following table shows the components of the Group’s cost of gold sales for the years ended 31 December 2012 and 2011.
Year ended 31 December 2012 ———————————– against 2012 2011 2011 US$’000 % ———————————————————————— ————– ————– ————– Fuel, consumables and spares 454,584 389,537(1) 17 Labour 373,431 279,780(1) 33 Tax on mining 202,409 179,116 13 Utilities 60,136 54,240(1) 11 Outsourced mining services 31,264 22,147 41 Refining costs 5,621 5,067 11 Other 81,223 72,929(1) 11 –––––––– –––––––– Cash operating costs 1,208,668 1,002,816(1) 21 –––––––– –––––––– Amortisation and depreciation of operating assets 190,387 184,067(1) 3 Increase in gold-in-process and refined gold inventories (37,228) (43,850)(1) (15) –––––––– –––––––– Cost of gold sales 1,361,827 1,143,033(1) 19 –––––––– –––––––– Note: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
Cost of gold sales increased by 19 per cent. to US$1,361,827 thousand in 2012 from US$1,143,033 thousand in 2011, mainly as a result of growth in cash operating costs.
Cash operating costs Cash operating costs increased by 21 per cent. to US$1,208,668 thousand in 2012 from US$1,002,816 thousand in 2011, mainly from the 12 per cent. increase in the volume of gold produced, increases in the purchase price and consumption of fuel, consumables and spares, higher labour costs, increased tax on mining and increased utilities expenses.
Fuel, consumables and spares Expenses for fuel, consumables and spares were the largest component of cash operating costs in 2012 and 2011, comprising 38 per cent. and 39 per cent., respectively, of cash operating costs in those periods.
The cost of consumables and spares consumed in 2012 represented 27 per cent. of the Group’s cash operating costs and amounted to US$323,042 thousand, an increase of 14 per cent. as compared with 2011. This increase was primarily due to increased expenses for the purchase of grinding balls, spare parts, tyres and chemical products. The increase in costs for consumables and spares was driven largely by the increase in the purchase price (for example, the average price for cyanides increased 12 per cent. from 2011) and, in some cases, by growth in consumption.
In 2012, expenses in respect of fuel accounted for 11 per cent. of the Group’s cash operating costs and amounted to US$131,542 thousand, an increase of 25 per cent. in comparison to 2011. This increase was primarily due to increased prices for oil products, as well as by additional consumption, mainly as a result of diesel consumption by the Irkutsk ore business unit (as the Verninskoye mine had diesel power generation
50 feed only until it was connected to the federal power grid in May 2012). In addition, the alluvial mines (due to early commissioning of operations) and the Yakutia Kuranakh business unit (due to increases in freight turnover) experienced higher consumption of fuel in 2012. Offsetting these increases, the Krasnoyarsk business unit decreased consumption of fuel by approximately 6 thousand tonnes from 2011, primarily as a result of a decrease in in-house generation and a changeover to the purchase of less expensive electricity from federal grids.
Labour The second largest item included in cash operating costs in 2012 and 2011 was labour expenses, comprising 31 per cent. and 28 per cent., respectively, of cash operating costs in those periods.
In 2012, labour costs increased by 33 per cent. to US$373,431 thousand from US$279,780 thousand in 2011. This increase was primarily attributable to increased labour costs at the Krasnoyarsk and Irkutsk ore business units. At the beginning of 2012, the Group initiated indexation of salaries for operating employees. The average indexation level, or payroll increase, was 6 per cent., ranging from 3 per cent. in the Magadan business unit to 13 per cent. in the Krasnoyarsk business unit. The growth in labour expenses was also driven by changes in the estimation of annual bonuses for 2012 and the launch of the Verninskoye mine in December 2011. The growth in labour expenses was also driven by changes in the estimation of annual bonuses for 2012, the increase in labour force following the launch of the Verninskoye mine in December 2011, as well as increase in production personnel at the Magadan business unit.
Tax on mining Expenses on mining tax represented 17 per cent. and 18 per cent. of cash operating costs in 2012 and 2011, respectively.
In 2012, the Group incurred US$202,409 thousand in mining tax, compared to US$179,116 thousand in 2011. The 13 per cent. increase in 2012 over 2011 resulted from higher gold selling prices and increased sales volumes.
Utilities Expenses on power and other utilities represented 5 per cent. of the cash operating costs in each of 2012 and 2011.
In 2012, utilities expenses increased by 11 per cent. to US$60,136 thousand from US$54,240 thousand in 2011. The increase in power costs was driven principally by increased power consumption at the Krasnoyarsk business unit (10 per cent. from 2011), as a result of increased mining and processing volumes and a decrease in in-house generation. In addition, the Irkutsk ore business unit doubled its power consumption as a result of the connection to the federal grid, and the Yakutia Kuranakh business unit increased power consumption by 6 per cent. from 2011, principally reflecting an 11 per cent. increase in the amount of ore processed.
Amortisation and depreciation of operating assets Mining assets are amortised on a straight-line basis over the lesser of estimated economic useful life of the asset or the life of mines, which is based on estimated proven and probable ore reserves and ranges from 6 to 20 years. For accounting purposes, the estimated economic useful life of the Group’s operating mines is based on mine operating plans, which call for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code. The economic useful lives in accordance with the Russian Resource Reporting Code may vary compared to the economic useful lives under the JORC Code. Amortisation is charged from the date a new mine reaches commercial production quantities and is included in the cost of production. Non-mining assets are stated at cost less accumulated depreciation and impairment. Depreciation is provided on a straight-line basis over the economic useful lives of such assets.
In 2012, amortisation and depreciation of operating assets increased by 3 per cent. to US$190,387 thousand from US$184,067 thousand in 2011. This increase in depreciation charges was primarily a result of the launch of the new Verninskoye mine.
51 Change in gold-in-process and refined gold inventories In 2012, total metal inventories increased from 1,130 thousand ounces at the beginning of the year to 1,364 thousand ounces at the end of the year. The increase in inventories was mainly due to the increase in ore stockpiles, including long-term ore stocks, at the Krasnoyarsk business unit, which contained 1,130 thousand ounces of gold, as compared to 867 thousand ounces at the beginning of the year. The various types of metal inventories are valued using different approaches. Refined gold is valued at the average cost of production per saleable unit of metal. Work-in-process, metal concentrate and doré are valued at the average production costs at the relevant stage of production. The US dollar equivalent of the increase in metal inventories in 2012 was equal to US$37,228 thousand.
Cost of other sales Cost of other sales includes, in addition to electricity costs, payroll costs, expenses on fuel and materials, depreciation and some other costs related to non-mining activities. Cost of other sales was US$45,674 thousand in 2012, as compared to US$46,343 thousand in 2011.
Selling, general and administrative expenses The following table sets forth the selling, general and administrative expenses of the Group for the years ended 31 December 2012 and 2011 and the percentage change from year to year.
Year ended 31 December 2012 ———————————– against 2012 2011 2011 US$’000 % ———————————————————————— ————– ————– ————– Salaries 142,569 116,295 23 Professional services 30,279 36,350 (17) Taxes other than mining and income taxes 62,226 42,630 46 Amortisation and depreciation 3,737 4,830 (23) Other 29,092 25,513 14 ––––––––– ––––––––– Total ––––––––– 267,903 ––––––––– 225,618 19 In 2012, the Group’s selling, general and administrative expenses increased by 19 per cent. to US$267,903 thousand from US$225,618 thousand in 2011. This increase was primarily driven by an increase in salaries and taxes other than mining and income taxes, offset by a decline in professional services.
Salaries In 2012, the Group’s administrative labour costs increased by 23 per cent. to US$142,569 thousand from US$116,295 thousand in 2011. This increase was primarily attributable to the increase in bonus payments relating to 2011 results (calculated proportionately to the actual bonus paid for 2011), including bonus payments to the senior management team, which were higher than in 2011, as well as to the launch of the Verninskoye mine. In addition, salaries increased as a result of an increase in the average number of administrative personnel at the Yakutia (Kuranakh) and Krasnoyarsk business units, as well as indexation of salaries from the beginning of 2012.
Professional services In 2012, the Group incurred US$30,279 thousand of costs related to professional services, reflecting payments for advisory services provided to the Group in connection with the premium listing on the London Stock Exchange and negotiations related to the sale of PGIL’s operating subsidiaries in Kazakhstan and Romania, as well as an increase in software and maintenance costs. Audit and audit related service payments decreased by 47 per cent.
52 Taxes, other than mining and income taxes In addition to tax on mining and income taxes, the Group pays property tax, VAT (which for the purpose of this item includes only non-recoverable VAT) and other taxes.
The following table shows the components of taxes, other than mining and income taxes, for the years ended 31 December 2012 and 2011 and the percentage change from year to year.
Year ended 31 December 2012 ———————————– against 2012 2011 2011 US$’000 % ———————————————————————— ————– ————– ————– Property tax 19,353 20,661 (6) VAT 1,405 2,167 (35) Tax on dividends 38,090 16,388 132 Other taxes 3,378 3,414 (1) ––––––––– ––––––––– Total ––––––––– 62,226 ––––––––– 42,630 46 In 2012, the Group accrued US$62,226 thousand in federal and regional taxes other than tax on mining and income tax, compared to US$42,630 thousand in 2011. Property tax charges were broadly at the level of the previous year. Tax on dividends increased by 132 per cent. to US$38,090 thousand, mainly due to increase in dividends accrued by OJSC Polyus Gold in favour of PGIL and Jenington International Inc. (accrued US$376,564 thousand in 2012 and US$159,809 thousand in 2011).
Other income/(expenses), net In 2012, other income, net amounted to US$12,803 thousand, and primarily included income from change an estimation of decommissioning liabilities of US$15,247 thousand and other income of US$6,961 thousand, offset by charitable donations in the amount of US$6,339 thousand and loss on disposal of property, plant and equipment and capital construction-in-process of US$3,684 thousand. In 2011, other expenses, net amounted to US$24,077 thousand and included penalties on tax on mining of US$8,040 thousand, a change in allowance for reimbursable VAT of US$6,602 thousand, a loss on disposal of property, plant and equipment and capital construction-in-progress in the amount of US$5,933 thousand, and charitable donations in the amount of US$5,468 thousand.
Impairment of property, plant and equipment The Group recognised an impairment of property, plant and equipment in the amount of US$17,249 thousand in 2012 (US$23,501 thousand in 2011). The 2012 impairment of property, plant and equipment included impairment of mining assets in the amount of US$11,622 thousand and US$1,189 thousand, which were recognised following the decision to abandon activities related to the Omchak deposit and other deposits in Irkutsk ore business unit, respectively. The remaining amount of the impairment charge was a result of an impairment at the Kazakhstan business unit, where the Group reassessed property, plant and equipment requirements at the unit and considered plans for their future use. As a result, certain assets’ book values and expected useful lives exceeded their anticipated recoverable values and, accordingly, an impairment was recorded in respect of those assets. Impairments in 2011 related to certain operating assets in Kazakhstan, the Kvartsevaya Gora deposit in the Krasnoyarsk region and Sukhoy Log, which terminated operations in April 2011.
Impairment of capital construction-in-process The Group recognised an impairment of capital construction-in-process in the amount of US$19,198 thousand in 2012 (no impairment in 2011). The 2012 impairment of capital construction-in-process included an impairment in the amount of US$16,742 thousand, which was recognised following the reassessment of recoverability of certain assets’ book value at Talas Gold Mining Company, which was included in Kazakhstan business unit. The remaining amount of the impairment charge was a result of an impairment at the exploration business unit, due to the reassessment of plans for the future use of certain capital construction-in-progress assets.
53 Impairment of exploration and evaluation assets In 2012, the Group recognised an impairment loss of US$338 thousand (US$54,708 thousand in 2011). The 2011 impairment related to previously capitalised exploration and evaluation costs that had not led to the discovery of commercially viable quantities of gold resources and consequently resulted in the decision to discontinue such activities. Those exploration and evaluation costs had been incurred at the following exploration fields: • Kyuchus in the Republic of Sakha (Yakutia); • Kuzeevskaya in the Krasnoyarsk region; • Chai-Yurinskaya (sold in May 2012), Doroninskoye and Tokichan in the Magadan region; • Zapadnoye, Mukodek and Illigirskaya in the Irkutsk region; and • Kaskabulak in the Republic of Kazakhstan.
Impairment of stockpiles In 2011, an impairment of stockpiles in the amount of US$25,209 thousand was recognised in respect of ore stockpiled at the Zapadnoye mine in the Irkutsk region (1.7 million tonnes). As a result of the depletion of reserves in the pit contour of the Zapadnoye deposit, the Group decided to suspend the Zapadnoye mine in the beginning of April 2011, since processing of stockpiled ore with a grade of 1.3 g/t was not considered to be economically viable.
Gain on loan settlement and sale and purchase agreement termination The gain on loan settlement and sale and purchase agreement termination of US$79,084 thousand related to the termination by the Group of its agreement to sell the Group’s operating subsidiaries in Kazakhstan and Kyrgyzstan (the “KazakhGold Operating Subsidiaries”) to AltynGroup Kazakhstan LLP.
On 11 June 2009, the Company (formerly, KazakhGold) signed two convertible loan agreements with Gold Lion Holdings Limited (“Gold Lion”), a company represented by the former shareholders of KazakhGold. Principal amounts of US$21,650 thousand and US$9,375 thousand together with accrued interest were to be payable on 6 November 2014.
During the year 2012, a Restated and Amended Principal Agreement and a Sale and Purchase Agreement (the “SPA”) were entered into with companies represented by the former shareholders of KazakhGold for the sale of the Group’s operating subsidiaries in Kazakhstan and Kyrgyzstan. These were terminated, and the acquisition of the Group’s operating subsidiaries in Kazakhstan and Kyrgyzstan did not proceed in 2012.
The termination of the SPA resulted in:
• a gain of US$38,437 thousand following the Gold Lion loan forgiveness by way of novation of all its rights, benefits and obligations under Gold Lion loan agreements to Jenington International Inc., a subsidiary of the Group, for no additional monetary consideration); and
• and additional gain of US$40,647 thousand which arose when the non-refundable deposit paid by the companies represented by the former shareholders of KazakhGold was received and the transaction eventually did not occur.
The operating subsidiaries in Kazakhstan and Kyrgyzstan were sold on 28 February 2013. See “Business – The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
Finance costs, income from investments, net and foreign exchange gain/(loss) The following table sets forth the components of financial and investment activity for the years ended 31 December 2012 and 2011 and the percentage change from year to year.
54 Year ended 31 December 2012 ———————————– against 2012 2011 2011 US$’000 % ———————————————————————— ————– ————– ————– Finance costs (34,791) (71,403) (51) Income from investments, net 35,960 3,630 891 Foreign exchange gain/(loss) 4,614 (5,814) 179
Finance costs In 2012, the Group’s finance costs decreased by 51 per cent. to US$34,791 thousand from US$71,403 thousand in 2011. The decline in finance costs was partially the result of a decrease in the level of borrowings in 2012, which fell by 56 per cent. from 31 December 2011 to 31 December 2012. This decrease was the result of the repayment of 9.875 per cent. senior notes due November 2013, for a total consideration of US$212 million (including interest), and cancellation of a loan with the KazakhGold Group Limited’s previous major shareholder, Gold Lion, for a total consideration of US$34,160 thousand, which had an annual interest rate of 10 per cent. (see – “Gain on loan settlement and sale and purchase agreement termination” above). During 2012, the Group obtained several new loans with significantly lower effective interest rates, resulting in a decrease in interest expenses of 28 per cent. from US$31,241 thousand to US$22,648 thousand. In 2012 the Group also repaid the VTB credit facility, for a total consideration of US$230,000 thousand, and a Societe Generale credit facility, for a total consideration of US$230,000 thousand. Finance costs in 2011 were also impacted by a one-off debt modification expense recognised in 2011 in the total amount of US$26,928 thousand, which was a result of the early redemption of the Senior Notes.
Income from investment, net In 2012, the Group received income from investments totalling US$35,960 thousand, compared to US$3,630 thousand in 2011. The income from investments in 2012 included interest income on bank deposits of US$35,757 thousand.
The income from investment in 2011 reflected a gain on disposal of available-for-sale investments represented by shares owned in Rosfund in the amount of US$17,023 thousand and interest income on bank deposits in the amount of US$16,252 thousand. These were offset by a decrease in the fair value of call options to acquire all rights and obligations under the convertible loan agreements between the Company and its previous major shareholder, Gold Lion, in the amount of US$8,661 thousand resulting from the decline in the Company’s share price during the first half of 2011, as well as a loss of US$20,984 thousand due to a revaluation of held for trading investments.
Foreign exchange gain/(loss) In 2012, fluctuations in the exchange rates of the national currencies of Russia and Kazakhstan resulted in a net foreign exchange gain of US$4,614 thousand, compared to a net foreign exchange loss of US$5,814 thousand in 2011.
Income tax In 2012, income tax expense was US$257,249 thousand, an increase of 22 per cent. as compared to 2011. This increase was largely attributable to a higher profit before taxation in comparison with the previous year. The effective income tax rate of the Group was 21 per cent. in 2012 (as compared to 27 per cent. in 2011), while the statutory income tax rate in Russia and Kazakhstan was 20 per cent. in both periods.
Summary of performance results by business units for the years ended 31 December 2012 and 2011 For operational purposes, the Group’s businesses are divided into the following principal business units: • the Krasnoyarsk business unit, comprised of the Group’s operations at the Olimpiada deposit, the Titimukhta deposit and the Blagodatnoye deposit;
55 • the Irkutsk alluvial business unit, comprised of the Group’s operations at the alluvial deposits; • the Yakutia Kuranakh business unit, comprised of the Group’s operations at the Kuranakh deposit; • the Irkutsk ore business unit, comprised of the Group’s operations at the Zapadnoye mine and the Verninskoye deposit; and • the Magadan business unit, comprised of the Group’s operations at the Natalka deposit. The Group also has a Capital Construction business unit, which is represented by LLC “Polyus Stroy” and CJSC “Vitimenergostroy” which perform construction works at Natalka, Verninskoye, Olimpiada and other deposits and an Exploration business unit, comprised of the Group’s exploration operations in Yakutia, Krasnoyarsk, Irkutsk, Amur and other regions of the Russian Federation. In addition, during the years ended 31 December 2012 and 2011 the Group’s business also included the Kazakhstan business unit, comprised of the Group’s operations in Kazakhstan, Romania and Kyrgyzstan. On 28 February 2013, the Company completed the sale of its assets in Kazakhstan and Kyrgyzstan. See “Business – The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”. Segment profit or loss for each business unit is a pre-tax pre finance costs measure, computed in accordance with local accounting standards. The following discussion does not include the financial results of the Magadan business unit because in 2012 the Magadan business unit did not commercially produce or sell any gold (other than minor quantities of semi-products produced at the Group’s pilot plants at the Natalka deposit). The Company expects to commission operations at Natalka at the end of 2013 or during the first half of 2014. See “Business – New Projects – Natalka”. The following tables show the Group’s performance results by business unit for the years ended 31 December 2012 and 2011. Year ended 31 December 2012 –––––––———————————————————–—––––––––– Gold Sales Production Sales –––––––—––––––––– –––––––—––––––––– –––––––—––––––––– ’000 ’000 US$’000 % ounces % ounces % –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Krasnoyarsk business unit 1,948,587 70 1,171 70 1,173 69 Irkutsk alluvial business unit 363,552 13 214 13 214 13 Yakutia Kuranakh business unit(1) 229,719 8 138 8 138 8 Irkutsk ore business unit 76,166 3 46 3 46 3 Kazakhstan business unit 166,475 6 109 6 114 7 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Group total ––––––––2,784,499 –––––––– 100 –––––––– 1,678 –––––––– 100 –––––––– 1,685 –––––––– 100 Year ended 31 December 2011 –––––––———————————————————–—––––––––– Gold Sales Production Sales –––––––—––––––––– –––––––—––––––––– –––––––—––––––––– ’000 ’000 US$’000 % ounces % ounces % –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Krasnoyarsk business unit 1,641,380 70 1,038 69 1,040 70 Irkutsk alluvial business unit 350,213 15 210 14 210 14 Yakutia Kuranakh business unit(1) 184,735 8 117 8 117 8 Irkutsk ore business unit 3,497 0 13 1 3 0 Kazakhstan business unit 160,825 7 117 8 113 8 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Group total ––––––––2,340,650 –––––––– 100 –––––––– 1,495 –––––––– 100 –––––––– 1,483 –––––––– 100 Note: 1. Operating and financial results of the Yakutia Kuranakh business unit include the results of the Exploration business unit (See Note 6 to the 2012 Financial Statements).
56 Krasnoyarsk business unit (Olimpiada, Blagodatnoye and Titimukhta deposits) The Krasnoyarsk business unit is the Group’s largest mining operation. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2012 2011 —————————————————————————————— ————– ————– Gold sales 1,948,587 1,641,380 Segment profit 990,463 918,078 Segment profit margin (%) 51% 56% TCC per ounce sold (US$/ounce sold) 628 582 Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2012 Financial Statements. In 2012, the Krasnoyarsk business unit sold 1,173 thousand ounces of gold (17 thousand ounces produced in 2011 and 1,156 thousand ounces produced in 2012). Metal balance at the refinery plant in Krasnoyarsk at the end of 2012 amounted to 15 thousand ounces, which were sold in 2013. The sales growth was mainly attributable to the growth in average gold prices, as well as growth in production at all three mines, Olimpiada, Titimukhta and Blagodatnoye. The Olimpiada mine produced 653 thousand ounces of gold, as compared to 566 thousand ounces produced in 2011, following successful implementation of the Group’s production optimisation programme, which resulted in a higher recovery rate of 74 per cent., as compared to 69 per cent. in 2011. The Titimukhta mine produced 117 thousand ounces of gold which was an increase of 7 per cent. from 2011. The Blagodatnoye mine produced 401 thousand ounces of gold, an increase of 11 per cent. from 2011, attributable primarily to the continuing ramp-up and increase in recovery rate.
The increase of US$46 in TCC per ounce sold in 2012 was attributable to an increase in labour costs at the Krasnoyarsk business unit, which amounted to 13 per cent. as a result of salary indexations, and increases in the prices for consumables and spares. Consumption of explosives also increased at the Krasnoyarsk business unit due to the overall growth in drilling and blasting operations at Blagodatnoye and Olimpiada. The Krasnoyarsk business unit also increased power consumption (11 per cent. year-on-year) following increased mining and processing volumes and following a decrease in in-house generation.
Irkutsk alluvial business unit (Alluvial deposits) The Irkutsk business unit operates alluvial deposits. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2012 2011 —————————————————————————————— ————– ————– Gold sales 363,552 350,213 Segment profit 97,009 102,795 Segment profit margin (%) 27% 29% TCC per ounce sold (US$/ounce sold) 925 776 Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2012 Financial Statements. In 2012, the Irkutsk alluvial business unit sold all of the gold that it produced. Total sales amounted to 214 thousand ounces of gold, which is 2 per cent. higher than in 2011, when the group produced 210 thousand ounces of gold.
The increase in TCC per ounce sold at the Irkutsk alluvial business unit in 2012 was mainly attributable to increased payroll costs as a result of bonus payments to workers for exceeding the production plan, increased volumes of repair works and the increased cost of outsourced mining services. Labour costs have been the largest component of the cost of gold sales at the Irkutsk alluvial business unit, in addition, higher consumption of fuel during the first half of 2012 was experienced at the alluvial mines (due to early commissioning of operations).
57 Yakutia Kuranakh business unit (Kuranakh mine) The Yakutia Kuranakh business unit operates the Kuranakh mine in the Sakha Republic (Yakutia) and includes the Exploration business unit. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2012 2011 —————————————————————————————— ————– ————– Gold sales 229,719 184,735 Segment profit 57,245 13,797 Segment profit margin (%) 25% 7% TCC per ounce sold (US$/ounce sold) 993 922 Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2012 Financial Statements. The Yakutia Kuranakh business unit sold 138 thousand ounces of gold in 2012, an increase of 21 thousand ounces or 18 per cent., as compared to 117 thousand ounces sold in 2011. The increase is primarily attributable due to growth in average gold prices as well as the increase in processing and mining volumes at the Kuranakh mine.
The increase in TCC per ounce sold in 2012 was attributable to an increase in capital mining operations (39 per cent. increase in total rock moved), increased costs for metal-roll (mainly due to increased purchase prices), and costs of tyres (as a result of price increases, as well as increased ware of the tyres due to higher mileages driven by vehicles following the pit’s enlargement). In addition, freight turnover also resulted in higher consumption of fuel. Labour costs and expenses on materials remained the largest components of the cost of gold sales at the Yakutia Kuranakh business unit. Expenses on transport services (in many cases provided by third parties) have also remained high at the Kuranakh mine.
Irkutsk ore business unit (Verninskoye mine) The Irkutsk ore business unit conducts hard-rock mining operations at the Verninskoye mine. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2012 2011 —————————————————————————————— ————– ————– Gold sales 76,166 3,497 Segment profit 29,687 (13,042) Segment profit margin (%) 39% – TCC per ounce sold (US$/ounce sold) 789 841 Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2012 Financial Statements. The Irkutsk ore business unit sold 46 thousand ounces of gold in 2012, an increase of 33 thousand ounces, as compared to 3 thousand ounces sold in 2011. The increase in production resulted from the launch and continued ramp-up of the Verninskoye mine following the decommissioning of the Zapadnoye mine in April 2011.
Launched on 31 December 2011, the Verninskoye mine was in a ramp-up phase for the major part of 2012, which resulted in higher than expected TCC per ounce sold for this project. The high TCC per ounce sold was the result of increased diesel consumption during the first four months of 2012, when the Verninskoye mine had diesel power generation only. In May 2012, the mine was connected to the federal power grid. Comparatively high TCC per ounce in 2011 related to the surrounding small mines (Pervenets and Zapadnoye) with relatively high costs, which produced 16 thousand ounces and sold 13 thousand ounces in 2011.
58 Kazakhstan business unit (Aksu, Bestobe, Zholymbet and Akzhal mines) The Kazakhstan business unit sold by the Company on 28 February 2013 comprised the Aksu, Bestobe, Zholymbet and Akzhal mines. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2012 2011 —————————————————————————————— ————– ————– Gold sales 166,475 160,825 Segment profit 64,485 5,773 Segment profit margin (%) 39% 4% TCC per ounce sold (US$/ounce sold) 654 653 Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2012 Financial Statements. The Kazakhstan business unit demonstrated a slight growth in sales from 113 thousand ounces of gold sold in 2011 to 114 thousand ounces of gold sold in 2012. This increase in sales was the result of sales of gold produced in 2011, as production of gold at Kazakhstan business unit decreased by 8 thousand ounces.
In 2012, growth in TCC per ounce sold was driven by a material decline in the average gold grade of the ore processed, a decrease in the volumes of cheap processing at the heap leaching facilities, and a deterioration in the ore quality.
Review of Financial Sustainability and Solvency for the years ended 31 December 2012 and 2011 Analysis of statement of financial position items The table below shows key items from the Group’s consolidated statement of financial position at 31 December 2012 and 2011.
Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– ASSETS Non-current assets Property, plant and equipment 2,216,637 1,771,107(5) Capital construction-in-progress 623,277 371,668 Exploration and evaluation assets 467,269 399,846 Investments in securities and other financial assets 16,034 3,643 Inventories 242,005 206,801(5) Other non-current assets(1) – 35 ––––––––– ––––––––– Total non-current assets 3,565,222 2,753,100(5) Current assets Investments in securities and other financial assets 78,360 63,468 Inventories 659,480 539,442(5) Other current assets(2) 325,913 222,882 Cash and cash equivalents 959,932 657,448 ––––––––– ––––––––– Total current assets 2,023,685 1,483,240(5) ––––––––– ––––––––– TOTAL ASSETS ––––––––– 5,588,907 ––––––––– 4,236,340(5)
59 Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– EQUITY AND LIABILITIES Equity attributable to shareholders of the Company(3) 4,186,432 2,608,507(5) Non-controlling interests 282,645 236,029(5) ––––––––– ––––––––– TOTAL EQUITY 4,469,077 2,844,536(5) ––––––––– ––––––––– Total non-current liabilities(4) 514,635 481,139 Current liabilities Borrowings 187,555 675,632 Trade, other payables and accrued expenses 289,846 192,077 Taxes payable 127,794 42,956 ––––––––– ––––––––– Total current liabilities 605,195 910,665 ––––––––– ––––––––– TOTAL LIABILITIES 1,119,830 1,391,804 ––––––––– ––––––––– TOTAL EQUITY AND LIABILITIES ––––––––– 5,588,907 ––––––––– 4,236,340 Notes: 1. Other non-current assets consist of the long-term portion of reimbursable value added tax and other non-current assets. 2. Other current assets consist of deferred expenditures, trade and other receivables, advances paid to suppliers and prepaid expenses, and taxes receivable. 3. Equity attributable to shareholders of the Company includes share capital, additional paid-in capital, treasury shares, investments revaluation reserve, translation reserve and retained earnings. 4. Total non-current liabilities consist of site restoration and environmental obligations, borrowings, deferred tax liabilities and other non-current liabilities. 5. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
Assets At 31 December 2012, the Group’s total assets amounted to US$5,588,907 thousand, compared to US$4,236,340 thousand at 31 December 2011.
Non-current assets Property, plant and equipment The table below sets forth the components of the Group’s property, plant and equipment at 31 December 2012 and 2011.
Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Mining assets 1,992,186 1,651,929 Non-mining assets 49,238 32,820 Stripping activity asset 175,213 86,358(1) ––––––––– ––––––––– Total property, plant and equipment ––––––––– 2,216,637 ––––––––– 1,771,107(1) Note: 1. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
The increase in property, plant and equipment during the period was due to additions of US$332,650, mainly related to construction equipment for the development of the Natalka mine. There was also an increase of US$88,855 thousand related to stripping activity asset as a result of early adoption of IFRIC 20.
60 In addition to the acquisition of equipment for Natalka, the Group’s primary expenditures on mining assets during 2012 related to:
• the acquisition of mining and production equipment at the Verninskoye mine in the Irkutsk region;
• the replacement of mining assets and fleet at the alluvial deposits and the Titimukhta mine; and
• growth in investments at the Blagodatnoye mine.
Exploration and evaluation assets Exploration and evaluation assets as at 31 December 2012 were comprised of Nezhdaninskoe (US$249,893 thousand), Panimba (US$28,818 thousand), Razdolinskoye (US$26,907 thousand), Olimpiada (US$23,983 thousand) and a number of smaller exploration assets.
The increase in exploration and evaluation assets by US$67,423 thousand in 2012 is due to additions of US$46,738 thousand, mainly at Nezhdaninskoe, Razdolinskoye, Smezhny and other projects, and a positive translation effect in the amount of US$23,791 thousand, which was offset by disposals of Romanian assets amounting to US$4,424 thousand.
Inventories Non-current inventories represent stockpiles which are expected to be processed after 2013. The increase in inventory as at 31 December 2012, as compared to 31 December 2011, was mainly due to the increase at the Krasnoyarsk business unit in long-term stockpiles by US$20,652 thousand (810 thousand ounces as at 31 December 2012, as compared to 769 thousand ounces as at 31 December 2011).
Investments in securities and other financial assets Investments in securities and other financial assets comprise investments in loan participation notes and loans receivable. Movements in investments in securities and other financial assets during the years ended 31 December 2012 and 2011 are presented in the table below.
Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Loan Participation Notes 13,286 – Loans receivable 2,748 3,643 ––––––––– ––––––––– Total investments in securities and other financial assets ––––––––– 16,034 ––––––––– 3,643 In 2012, total investments in securities and other financial assets amounted to US$16,034 thousand, as compared to US$3,643 in 2011. In 2012, the Group sold all Rosfund, SPC shares for US$30,768 thousand, of which US$13,286 thousand were paid by Loan Participation Notes issued by EMIS Finance BV. The Loan Participation Notes are denominated in US dollars, mature between 2015 and 2018, carry a semi-annual coupon of 6 per cent. and 7 per cent., and are fully guaranteed by CJSC “Rosbusinessconsulting” (“RBC”).
Current assets Inventories Current inventories increased by US$120,038 thousand to US$659,480 thousand as at 31 December 2012, as compared to US$539,442 thousand as at 31 December 2011, and comprised stores and materials (US$449,767 thousand), gold-in-process at net production cost (US$185,320 thousand) and refined gold at refinery (US$ 24,393 thousand).
The increase in current inventories was mainly attributable to a US$95,259 thousand increase in stores and materials, where US$58,090 thousand related to the Krasnoyarsk business unit and US$21,461 thousand to the Irkutsk ore business unit, due to the launch of the Verninskoye mine.
61 The remaining US$24,779 thousand of the total increase in current inventories related to the increase in short-term stockpiles at the Krasnoyarsk business unit by US$12,699 thousand (155 thousand ounces as at 31 December 2012, as compared to 83 thousand ounces as at 31 December 2011).
Investments in securities and other financial assets Current investments in securities and other financial assets comprise bank deposits, equity investments in listed companies held for trading, available-for-sale investments and other investments. Balances in investments and other financial assets as at 31 December 2012 and 2011 are presented in the table below.
Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Bank deposits 68,286 12,175 Equity investments in listed companies held for trading 9,276 14,857 Other 798 1,692 AFS equity investments – 34,744 ––––––––– ––––––––– Total investments in securities and other financial assets ––––––––– 78,360 ––––––––– 63,468 In 2012, the Group deposited US$56,111 thousand in bank deposit accounts. The Group’s bank deposits bear interest at a rate of 7.8 per cent. to 8.76 per cent. per annum (2011: 2.14 per cent. to 8.05 per cent. per annum) and are denominated in roubles with a maturity date at the end of June 2013.
Equity investments in listed companies held for trading are represented by financial assets carried at fair value through profit and loss. During 2012, the Group disposed of US$4,732 thousand of these investments. By the end of the year, the fair value of held for trading investments was US$9,276 thousand. The balance of US$525 thousand related to currency differences.
Cash and cash equivalents As at 31 December 2012, the balance of cash and cash equivalents reached US$959,932 thousand. The Group’s cash and cash equivalents are comprised of current rouble bank accounts and short-term bank deposits (less than 3-month period payback). The increase resulted from strong positive operating cash flows, mainly attributable to the Krasnoyarsk business unit, and sale of the treasury shares.
Equity and liabilities Capital and reserves Capital and reserves increased by US$1,624,541 thousand mainly due to sale of treasury shares, increase of retained earnings and effect of translating into presentation currency.
On 11 May 2012, the Company completed the sale of 151,607,496 of its shares, representing 5 per cent. less one share of its issued share capital, to Chengdong Investment Corporation, a wholly-owned subsidiary of CIC International Co. Ltd., and of 50,198,271 of its shares and 25,153,897 Level I GDRs, representing 2.50 per cent. of the Company's issued share capital, to JSC VTB Bank. The net cash proceeds from this sale was US$624,372 thousand.
The change in translation reserve was due to the decrease in the closing rate of the rouble against the US dollar in 2012 as compared to 2011 (6 per cent. since 31 December 2011).
The increase in retained earnings resulted from an increase in profit for the year attributable to the shareholders of the Company, which amounted to US$929,679 thousand. The profit for the year was partly offset by a net loss on disposal of treasury shares of the Company in the amount of US$103,166 thousand (calculated as the difference between net proceeds from the sale of shares of US$624,372 thousand and the book value of the disposed treasury shares of US$727,538 thousand).
62 Non-current liabilities Non-current liabilities include long-term borrowings, deferred tax liabilities, environmental obligations and other non-current liabilities. Balances in non-current liabilities as at 31 December 2012 and 2011 are presented in the table below. Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Site restoration and environmental obligations 119,150 149,876 Borrowings 160,792 123,048 Deferred tax liabilities 208,998 184,207 Other non-current liabilities 25,695 24,008 ––––––––– ––––––––– Total non-current liabilities ––––––––– 514,635 ––––––––– 481,139 During 2012, the Group reassessed the closure costs for all significant mines. As a result of this assessment, the estimated liability of the Group decreased from US$149,876 thousand in 2011 to US$119,150 thousand in 2012.
For an analysis of borrowings please see the analysis of current liabilities below.
Current liabilities Current liabilities include short-term borrowings, trade and other payables and accrued expenses and taxes payable. Balances in current liabilities as at 31 December 2012 and 2011 are presented in the table below. Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Borrowings 187,555 675,632 Trade, other payables and accrued expenses 289,846 192,077 Taxes payable 127,794 42,956 ––––––––– ––––––––– Total ––––––––– 605,195 ––––––––– 910,665 Short-term borrowings decreased 72 per.cent., which was related to the redemption of US$460,000 thousand bridge facilities from Societe Generale and VTB bank and US$204,520 thousand of Senior Notes in March 2012. Two new facilities, for approximately US$100,000 thousand each, were entered with HSBC and Unicredit bank during 2012. During 2012, the Group utilized US$25,389 thousand out of a US$67,502 thousand export financing credit facility agreement with Societe Generale for the purchase of mining equipment. Also during 2012, OJSC “Matrosov Mine” (a subsidiary of the Group) entered into number of letter of credit agreements with banks for the acquisition of mining equipment with deferred payment terms.
The increase in trade and other payables was primarily attributed to increased purchases of property plant and equipment related to the construction of the Natalka mine.
Growth in taxes payable was mainly primarily the result of an increase in income tax payable by US$27,862 thousand due to carry forward of the actual payment for the fourth quarter of 2012 and by increase of other taxes primarily attributed to tax on dividends resulting from the declaration of dividends by OJSC Polyus Gold to PGIL for the first 9 months of 2012 (US$38,090 thousand).
Cash flow analysis The following table sets forth the main components of the Group’s consolidated cash flow statement for the years ended 31 December 2012 and 2011.
63 Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Operating activities: Profit before income tax 1,237,775 784,053(4) Non-cash items(1) 176,850 383,046(4) ––––––––– ––––––––– 1,414,625 1,167,099(4) Movements in working capital (191,754) (137,345) ––––––––– ––––––––– Cash flows from operations 1,222,871 1,029,754(4) Interest paid (27,613) (23,423) Income tax paid (203,489) (230,743) ––––––––– ––––––––– Net cash generated from operating activities ––––––––– 991,769 ––––––––– 775,588(4) Investing activities: Cash items related to Capital expenditure/changes to Group structure(2) (767,532) (369,579)(4) Cash items related to investment Banking/Deposits(3) 3,743 99,033 ––––––––– ––––––––– Net cash utilised in investing activities (763,789) (270,546)(4) Financing activities: Net cash from/(utilised) in financing activities 35,972 (134,958) ––––––––– ––––––––– Net increase/(decrease) in cash and cash equivalents 263,952 370,084(4) ––––––––– ––––––––– Effect of foreign exchange rates on cash and cash equivalents 38,532 (39,541) Cash and cash equivalents at beginning of the year 657,448 326,905 ––––––––– ––––––––– Cash and cash equivalents at end of the year ––––––––– 959,932 ––––––––– 657,448 Notes: 1. Adjustments for non-cash items include: gain from disposal of subsidiaries, loss on disposal of property, plant and equipment, change in allowance for reimbursable value added and tax provision, finance costs, income from investments, amortisation and depreciation, impairment of property, plant and equipment, impairment of capital construction-in-progress, impairment of exploration and evaluation assets, impairment of stockpiles, gain on loan settlement and sale and purchase agreement termination, change in allowance for doubtful debts, foreign exchange (loss)/gain, net and other items. 2. Capital expenditures, acquisition of subsidiaries and payments for stripping activity asset include proceeds from subsidiaries’ disposal, net of cash disposed, proceeds from termination of the sale and purchase agreement, purchases of property, plant and equipment, payments for stripping activity asset and proceeds from sales of property, plant and equipment. 3. Other investments spending/proceeds include interest received, purchases of investments in securities and placement of deposits in banks and proceeds on sales of investments in securities and redemption of bank deposits.
4. Balance has been impacted by the adoption of IFRIC 20 – in connection with the early application of IFRIC 20, certain financial statement line items have been restated from the previously reported amounts included in the 2011 Financial Statements. See Note 2 to the 2012 Financial Statements for a full reconciliation.
Operating activities In 2012, the Group generated profit before income tax in the amount of US$1,237,775 thousand, compared to US$784,053 thousand in 2011. The increase in profit before taxation resulted from a combination of the increased selling prices and higher gold sales volumes. Operating cash flow before working capital changes was US$1,414,625 thousand, which was 21 per cent. more than in the previous year. In 2012, the Group made significant investments in working capital, with inventories increasing by US$155,242 thousand. Net cash generated from operating activities increased to US$991,769 thousand in 2012 from US$775,588 thousand in 2011.
Investing activities In 2012, the Group used US$763,789 thousand in investing activities, as compared to US$270,546 thousand in 2011. The largest spending during 2012 comprised capital expenditures (purchase of property, plant and
64 equipment) totalling US$750,224 thousand, compared to US$343,037 thousand in 2011. This outflow was partly offset by proceeds from the sale of investments in securities, the proceeds from the disposal of the Romanian assets, proceeds from termination of the share purchase agreement and interest received.
Financing activities Cash inflow from financing activities in 2012 totalled US$35,972 thousand, as compared to an outflow of US$134,958 thousand in 2011. The proceeds from the placement of the block of treasury shares and the obtaining of new loans (total US$897,839 thousand) were almost fully offset by the outflow for loan repayments and dividends (total US$861,867 thousand).
Capital expenditures, acquisitions of subsidiaries and stripping activity asset The following table shows the Group’s capital expenditures, acquisition of subsidiaries and payments for stripping activity asset for the years ended 31 December 2012 and 2011.
Year ended 31 December ———————————– US$’000 2012 2011 —————————————————————————————— ————– ————– Purchases of property, plant and equipment 750,224 343,037 Proceeds on sales of property, plant and equipment (2,874) (1,911) ––––––––– ––––––––– Net capital expenditures 747,350 341,126 Acquisition of subsidiary’s shares – 588,816 Acquisition of subsidiary’s shares – 588,816 Payments for stripping activity asset 81,802 28,453 ––––––––– ––––––––– Total capital expenditures, acquisition of subsidiaries and stripping activity asset ––––––––– 829,152 ––––––––– 958,395 In 2012, the Group’s total payment for purchases of property, plant and equipment increased from US$343,037 thousand in 2011 to US$750,224 thousand in 2012, mainly due to investments into construction of the Natalka mine and completion of construction at the Verninskoye mine. Payments for stripping activity asset increased from US$28,453 thousand in 2011 to US$81,802 thousand in 2012 due to increased volume of stripping works done in 2012.
Contingent Liabilities Capital commitments The Group’s contracted capital expenditure commitments as at 31 December 2012 amounted to US$481,849 thousand (31 December 2011: US$107,019 thousand).
Operating leases The land in the Russian Federation on which the Group’s production facilities are located is owned by the state. The Group leases this land through operating lease agreements, which expire in various years through 2060.
Future minimum lease payments due under non-cancellable operating lease agreements at 31 December 2012 were as follows. US$’000 –––––––––––––––––––––––––––––––––––——————————————————— ————– Due within one year 2,928 From one to five years 9,236 Thereafter 19,085 ––––––––– Total ––––––––– 31,249
65 Capital resources Historically, the Group has relied on cash provided by operations to finance its working capital requirements and capital investment programme. In 2012, the Group’s capital expenditures amounted to US$850,719 thousand, an increase of 131 per cent., as compared to US$368,139 thousand in 2011. The Group intends to finance its future capital investment programme primarily with cash flows from operations, as well as debt and equity financing. Since 99 per cent. of the Group’s consolidated operating cash flows in 2012 were generated by the Group’s operations in Russia, the Company does not expect that the sale of its assets in Kazakhstan and Kyrgyzstan that occurred on 28 February 2013 will have a material impact on its cash flows or capital resources.
As at 31 December 2012, the Group’s headroom (cash and cash equivalents and committed debt facilities) equalled approximately US$1,602 million, with US$960 million represented with cash and cash equivalents, and approximately US$642 million represented with available committed bank facilities. A summary of the Group’s principal outstanding borrowings at 31 December 2012 is set out below.
Pervenets Facilities In October 2011 OJSC Pervenets entered into a facility with Société Générale for loan in the amount of US$100 million for general corporate purposes, including repayment of intra-group loan to CJSC Polyus and capital expenditure (the “Pervenets Facility”). The Pervenets Facility is repayable before October 2014. OJSC Pervenets, obligations under the Pervenets Facility are guaranteed by CJSC Polyus. OJSC Pervenets and CJSC Polyus are subject to limitations on security pledges, disposals, loans and guarantees, and also subject to financial covenants requiring that the ratio of consolidated total net debt to consolidated EBITDA (as defined in the agreement) of the Group (including OJSC Pervenets and CJSC Polyus) not exceed 3:1, ratio of consolidated EBITDA (as defined in the agreement) to consolidated interest expenses be not less than 5:1 and ratio of consolidated total net debt to consolidated tangible net worth not exceed 1:1.
On 6 October 2011 Société Générale transferred a US$50 million participation in the loan under the Pervenets Facility to ZAO Unicredit Bank (“Unicredit Bank”) (the “Unicredit Pervenets Facility”). The Unicredit Pervenets Facility is to be repaid in nine equal instalments in intervals of three months starting from 4 October 2012.
As of 31 December 2012, the Pervenets Facility and the Unicredit Pervenets Facility have been drawn in full and OJSC Pervenets has commenced making repayments on each of the facilities.
Ex-Im Bank Facility In October 2011, CJSC Polyus entered into a facility with Société Générale for a loan in the amount of up US$67,502 thousand with maximum disbursement amount of US$10 million (“Ex-Im Bank Facility”). The Ex-Im Bank Facility is provided for the purpose of financing and refinancing of acquisition of certain equipment and machinery manufactured in the United States. The Ex-Im Bank Facility is guaranteed by Export-Import Bank of the United States. The loan is available for drawing within 365 days from the date of the condition precedent satisfaction. Depending on the size of the relevant loans, the loans are repayable from 2 to 5 years from the date of disbursement. CJSC Polyus is subject to limitations on liens, disposals of the goods acquired with the funds provided under the Ex-Im Bank Facility and disposals of substantial part of its assets in general, mergers and consolidations. As of 31 December 2012, US$25,389 thousand was outstanding under the Ex-Im Bank Facility.
VTB Facility On 27 March 2012, CJSC Polyus entered into a facility agreement with VTB Bank for a loan facility in an amount of up to RUB 10 billion (the “VTB Facility”) for general corporate purposes of CJSC Polyus, including the modernisation of its production units and construction works, making loans to members of the Group (other than for the purposes of any of their indebtedness), repayment of indebtedness of CJSC Polyus, the purchase or buy-back of shares of members of the Group or for equity injections in any member of the Group. Drawdowns may be made up to 1,065 days from the date of the signing of the VTB Facility. The minimum drawdown amount for a loan is RUB 150 million (or its equivalent in US dollars or euros, calculated in accordance with the terms of the VTB Facility). Loans under the VTB facility are repayable in
66 accordance with, and as specified in, the applicable drawdown request from anywhere between 60 and 730 days and all outstanding loans under the VTB Facility are repayable on the date falling 1095 days (3 years) of its signing date. CJSC Polyus and certain companies of the Group (including the Company) are subject to limitations on creating security, disposals, loans and guarantees, and also subject to financial covenants requiring that the Group ratio of Net Indebtedness (as this and following terms are defined in the VTB Facility) to EBITDA not exceed 3:1 and that the Group ratio of EBITDA to Net Finance Charges be not less than 4:1. As of the date of this Prospectus, CJSC Polyus has not drawn on the VTB Facility.
Deutsche Bank Guarantee and Letter of Credit Facility On 12 December 2011, OJSC Matrosov Mine entered into a bank guarantee and letter of credit facility agreement with LLC Deutsche Bank for the provision on demand of bank guarantees and/or irrevocable documentary letters of credit (the “Deutsche LoC Facility”). Bank guarantees and/or letters of credit under the Deutsche LoC Facility are available for drawing on demand at the written request of OJSC Matrosov Mine. The amount and the repayment term of each bank guarantee and/or letter of credit issued under the Deutsche LoC Facility are determined on the basis of the written requests submitted by OJSC Matrosov Mine on a case by case basis. LLC Deutsche Bank may with respect to any guarantee and/or letter of credit issued under the Deutsche LoC Facility, at its discretion, request that OJSC Matrosov Mine provide such cover or security (or additional cover or security, as the case may be) in respect of any outstanding guarantee or letter of credit as may be reasonably acceptable to LLC Deutsche Bank. During the year ended 31 December 2012, OJSC Matrosov Mine entered into a number of letters of credit under the Deutsche LoC Facility in respect of acquisitions of mining equipment with deferred payment terms. As of 31 December 2012, OJSC Matrosov Mine had outstanding indebtedness of US$30,856 thousand and EUR 4,345 thousand under such deferred payments. Amounts outstanding under the letters of credit mature between June and September 2013.
VTB Bank Letter of Credit Facility On 25 July 2012, OJSC Matrosov Mine entered into a letter of credit facility agreement with VTB Bank for the provision on demand of irrevocable documentary letters of credit up to an aggregate outstanding amount of RUB 5 billion (the “VTB LoC Facility”). Letters of credit under the VTB LoC Facility are available for drawing on demand at the written request of OJSC Matrosov Mine. Each letter of credit is valid for, or is repayable within, 1,825 days from the date of issuance of the letter of credit. OJSC Matrosov Mine is subject to limitations on security pledges, disposals, loans and guarantees, and also subject to financial covenants requiring that the ratio of Net Debt to EBITDA (each as defined in the VTB LoC Facility) of the Group (including OJSC Matrosov Mine) not exceed 3:1 and that the ratio of EBITDA to Net Finance Charges (each as defined in the VTB LoC Facility) of the Group (including OJSC Matrosov Mine) be not less than 4:1. The VTB LoC Facility will be used to support the purchase of equipment for the Natalka project. As of 31 December 2012, OJSC Matrosov Mine did not have any deferred payment obligations under the VTB LoC Facility.
Unicredit and HSBC Facilities On 15 March 2012, the Company voluntarily redeemed the Senior Notes in accordance with the terms of the Senior Notes. The Company funded the redemption from the proceeds of the Unicredit Facility and the HSBC Facility, each as described below. The Company’s obligations under these facilities are guaranteed by CJSC Polyus. The Company utilised these facilities in full to fund the redemption of the Senior Notes.
Unicredit Facility On 29 December 2011, the Company entered into a facility with Unicredit Bank as arranger, agent and original lender for a loan in the amount of US$100 million to be used for general corporate purposes or repayment of outstanding indebtedness under the Senior Notes (the “Unicredit Facility”). The Unicredit Facility is repayable on or before 29 December 2013. The Company’s obligations under the Unicredit Facility are guaranteed by CJSC Polyus. The Company, CJSC Polyus and certain companies of the Group are subject to limitations on creating security, disposals, loans and guarantees, and also subject to financial covenants requiring that the Group ratio of Net Indebtedness (as this and following terms are defined in the
67 Unicredit Facility) to EBITDA not exceed 3:1, ratio of EBITDA to Interest Expenses be not less than 5:1 and ratio of Net Indebtedness to Tangible Net Worth not exceed 1:1. The Company utilised the Unicredit Facility in full to fund the redemption of the Senior Notes.
HSBC Facility On 10 February 2012, the Company entered into a facility with HSBC Bank PLC for a loan in the amount of US$100 million to be used for general corporate purposes (the “HSBC Facility”). The loan is repayable by five equal instalments, the first instalment to be paid on the last day of the 24th month following the first drawdown and the last instalment to be paid on the date falling 36 months from the first drawdown. The first drawdown occurred on 7 March 2012, with the last instalment being payable on 7 March 2015. The Company’s obligations under the HSBC Facility are guaranteed by CJSC Polyus. The Company, CJSC Polyus and certain companies of the Group are subject to limitations on creating security and disposals, and also subject to financial covenants requiring that the Group ratio of Consolidated Total Net Debt (as this and following terms are defined in the HSBC Facility) to Consolidated EBITDA be equal or less than 3 and the ratio of Consolidated EBITDA to Consolidated Net Finance Charges be equal or more than 2.5. The Company utilised the HSBC Facility in full to fund the redemption of the Senior Notes.
Unicredit letter of credit facilities On 22 August 2012, OJSC Matrosov Mine and CJSC Polyus each entered into a letter of credit facility agreement with UniCredit Bank for the provision on demand of bank guarantees or documentary letters of credit up to an aggregate outstanding amount of EUR 30 million (the “Unicredit LoC Facilities”). Bank guarantees or letters of credit under the Unicredit LoC Facilities are available for drawing on demand at the written request of each of OJSC Matrosov Mine and CJSC Polyus. Each letter of credit or bank guarantee is repayable within 18 months from the date of the Unicredit LoC Facilities (from 22 August 2012). OJSC Matrosov Mine and CJSC Polyus are each subject to limitations on disposals and to financial covenants that require the ratio of Net Debt to EBITDA (each as defined in the Unicredit LoC Facilities) of the Group not exceed 3:1, the ratio of EBITDA (as defined in the Unicredit LoC Facilities) to Net interest expense of the Group be not less than 5:1, and the ratio of Net Debt to Net tangible assets (each as defined in the Unicredit LoC Facilities) of the Group not exceed 1:1. Obligations of OJSC Matrosov Mine under the Unicredit LoC Facilities are secured by the suretyship provided by CJSC Polyus guaranteeing the due and punctual performance of the obligations of OJSC Matrosov Mine.
68 Discussion of Results of Operations for the Years Ended 31 December 2011 and 2010 The financial information for the years ended 31 December 2011 and 31 December 2010 has been derived from the 2011 Financial Statements and is therefore presented as originally reported on a pre IFRIC 20 basis.
The following table shows a summary of the Group’s consolidated income statement for the periods indicated and the percentage change from year to year.
Year ended 31 December 2011 ———————————– against 2011 2010 2010 US$’000 % ———————————————————————— ————– ————– ————– Gold sales 2,340,650 1,711,298 37 Other sales 62,060 37,506 65 ––––––––– ––––––––– Total revenue 2,402,710 1,748,804 37 Cost of gold sales (1,162,019) (895,555) 30 Cost of other sales (46,343) (33,424) 39 ––––––––– ––––––––– Gross profit 1,194,348 819,825 46 ––––––––– ––––––––– Gross profit margin 49.7% 46.9% – Including: Gross profit on gold sales 1,178,631 815,743 44 Selling, general and administrative expenses (225,618) (194,549) 16 Impairment(1) (103,418) (40,763) 154 Research expenses (2,581) (2,412) 7 Other expenses, net (24,077) (35,101) 31 ––––––––– ––––––––– Operating Profit 838,654 547,000 53 Finance costs (71,403) (42,717) 67 Income/(loss) from investments, net 3,630 (23,711) (115) Foreign exchange (loss)/gain (5,814) 765 (860) Profit before income tax 765,067 481,337 59 Pre-tax margin 31.8% 27.5% – Income tax (207,052) (124,840) 66 ––––––––– ––––––––– Profit for the year 558,015 356,497 57 ––––––––– ––––––––– Profit for the year attributable to shareholders of the Company 468,998 332,169 41 Non-controlling interests 89,017 24,328 266 Profit margin 23.2% 20.4% – Earnings per share – basic and diluted (US Cents) 16 11 45
Note: 1. Impairment loss comprises impairment of exploration and evaluation assets, impairment of stockpiles and impairment of property, plant and equipment.
69 Adjusted EBITDA Adjusted EBITDA has been calculated by management and has not been verified by the Group’s auditors. The following table sets out the Group’s Adjusted EBITDA for the years ended 31 December 2011 and 2010.
Year ended 31 December ———————————– 2011 2010 Change US$’000 % ———————————————————————— ————– ————– ————– Profit for the period 558,015 356,497 57 + Income tax 207,052 124,840 66 + Foreign exchange loss/(gain) 5,814 (765) (860) + Loss on derivatives classified as held for trading 8,661 63,775 (86) + Loss/(gain) from investments in listed companies held for trading 20,984 (11,446) (283) – Gain on disposal of AFS investments (17,023) (20,289) (16) – Interest income on bank deposits (16,252) (8,329) 95 + Finance costs 71,403 42,717 67 + Impairment of property, plant and equipment and exploration and evaluation assets(1) 78,209 40,763 92 + Loss on disposal of property, plant and equipment 5,933 2,037 191 + Depreciation and amortisation 187,949 126,855 48 ––––––––– ––––––––– Adjusted EBITDA 1,110,745 716,655 55 ––––––––– ––––––––– Note: 1. Impairment of property, plant and equipment and exploration and evaluation assets includes impairment of property, plant and equipment of US$23,501 thousand and US$27,179 thousand and impairment of exploration and evaluation assets of US$54,708 thousand and US$13,584 thousand, in each case, for the years ended 31 December 2011 and 2010, respectively.
The Group’s Adjusted EBITDA in 2011 was US$1,110,745 thousand, compared to US$716,655 thousand in 2010. The increase of 55 per cent. was attributable primarily to increased gold prices combined with higher sales volumes.
Total Cash Costs (TCC) The following table shows the Group’s TCC per ounce sold for the years ended 31 December 2011 and 2010. TCC and TCC per ounce sold have been calculated by management and have not been independently verified by the Group’s auditors.
Year ended 31 December 2011 ———————————– against 2011 2010 2010 (US$’000, unless otherwise indicated) % ———————————————————————— ————– ————– ————– Cost of gold sales 1,162,019 895,555 30 – amortisation and depreciation of operating assets (181,935) (118,559) 53 – employee benefit obligations cost (3,774) (10,596) (64) – provision for vacation payment (1,620) (7,208) (78) – change in allowance for obsolescence of inventory (2,819) – (100) + non-monetary changes in inventories(1) 6,795 12,225 (44) + non-monetary changes in deferred stripping works(2) 1,174 (8,459) (114) ––––––––– ––––––––– TCC 979,840 762,958 28 Gold sales (’000 ounces) 1,483 1,377 8 ––––––––– ––––––––– TCC (US$ per ounce sold) 661 554 19 TCC (RUB per ounce sold) 19,427 16,833 15
70 Notes: 1. “Non-monetary changes in inventories” is a calculation to estimate the non-cash portion of costs included in the change in the amount of inventory, primarily representing depreciation and amortisation. 2. “Non-monetary changes in deferred stripping works” is a calculation to estimate the non-cash portion of costs included in the change in the amount of deferred stripping costs, primarily representing depreciation and amortisation. In 2011, TCC per ounce sold increased by 19 per cent., as a result of the appreciation of the Russian rouble rate relative to the US dollar, and certain other factors described below. TCC per ounce sold in Russian rouble terms increased by 15 per cent. in 2011 over the 2010 levels due to an increase in tax on mining charges as a result of growing gold prices, increased labour costs and higher fuel expenses. Growing transportation costs and expenses on outsourced mining services also contributed to the increase of per unit cash costs. Although the Group made improvements in the processing efficiency of its mines, the resulting rate of increase in gold production and sales volumes was less than the rate of growth of costs, which led to an increase in the Group’s TCC indicator.
Gold Sales The following table shows the results and breakdown of the Group’s gold sales for the years ended 31 December 2011 and 2010 and the percentage change from year to year.
Year ended 31 December 2011 ———————————– against Gold Sales 2011 2010 2010 % ———————————————————————— ————– ————– ————– Gold sales (US$ thousands) 2,340,650 1,711,298 37 Gold sales (thousand troy ounces)(1) 1,483 1,377 8 In the domestic market (thousand ounces)(2) 1,373 1,273 8 In the domestic market (%) 93 92 – For export (thousand ounces)(3) 110 103 7 For export (%) 7 8 – Weighted-average gold selling price (US$ per ounce) 1,578 1,243 27 Average London afternoon gold price fixing (US$ per ounce)(4) 1,572 1,225 28 Excess/(deficit) of average selling price over/(under) average London afternoon gold price fixing (US$ per ounce) 6 18 (67)
Notes: 1. Gold sales do not include 2011: 13 thousand ounces and 2010: 5 thousand ounces produced at pilot plants from the ores of the Verninskoye and Natalka deposits and sold during these years. These sales were not included in the Group’s revenue due to non-commercial scale of production. The net proceeds from these sales was insignificant and was offset against the costs of construction. 2. Sales on the domestic market comprise of sales by the Group’s Russian subsidiaries on the Russian market. Export sales comprise of sales by the Company on the international market. 3. Represents sales by the Group’s Kazakhstan business unit. 4. Source: London Bullion Market Association.
71 The following table shows the results and breakdown of the Group’s gold production for the years ended 2011 and 2010 and a percentage change from year to year.
Year ended 31 December 2011 ———————————– against Production of Gold (’000 ounces) 2011 2010 2010 % ———————————————————————— ————– ————– ————– Krasnoyarsk Region Olimpiada mine 566 581 (3) Titimukhta 109 100 9 Blagodatnoye mine 363 251 45 Irkutsk Region Alluvial deposits 210 197 7 Verninskoye(1), (2) 13 26 (50) Republic of Sakha (Yakutia) Kuranakh mine 117 120 (3) Kazakhstan(3) Aksu, Bestobe, Zholymbet and Akthal 117 110 6 ––––––––– ––––––––– Total production of gold ––––––––– 1,495 ––––––––– 1,386 8 Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets process plant. 2. 2011 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit. 3. The Company sold its gold mining assets in Kazakhstan and Kyrgyzstan on 28 February 2013.
In 2011, the Group’s gold sales amounted to US$2,340,650 thousand, an increase of 37 per cent. from 2010. The increase in gold sales resulted from a combination of higher realised gold prices and increased sales volumes.
In 2011, the weighted-average realised gold price was US$1,578 per ounce, a 27 per cent. increase as compared to 2010. The Group’s weighted-average realised gold price was US$6 per ounce higher than the p.m. gold fixing price on the London market in 2011, since the majority of the Group’s total sales of gold by volume was made in the third quarter of the year, when the gold price was higher than the average for the year as a whole. This increase offset the impact of the sale of semi-products by the Kazakhstan business unit at a discount to the London afternoon gold price fixing. The weighted-average realised gold price for the refined gold sold by the Group’s Russian subsidiaries amounted to US$1,592 per ounce in 2011.
The Group sold 1,483 thousand ounces of gold in 2011, including 110 thousand ounces sold for export by the Kazakhstan business unit. The comparable sales volume in 2010 was 1,377 thousand ounces and 103 thousand ounces, respectively. In 2011, the Group produced 1,495 thousand ounces of gold, compared to 1,386 thousand ounces in 2010. The production volumes for 2011 included 1,378 thousand ounces of refined gold produced by the Group’s mines in Russia and 117 thousand ounces of gold produced by the Kazakhstan business unit in the form of sludge, flotation and gravitation concentrates and other semi-products. An 8 per cent. increase in total gold production was primarily the result of the increase of production levels at the Blagodatnoye mine (launched in July 2010), reflecting the successful ramp-up of the mine, which reached the projected recovery rate during 2011 and exceeded the designed throughput capacity.
In 2011, the Group produced 1,495 thousand ounces (48.1 tonnes) of refined gold (including 117 thousand ounces produced by its Kazakhstan business unit), an increase of 8 per cent. as compared with the 1,386 thousand ounces (47.3 tonnes) it produced in 2010 (including 110 thousand ounces produced by its Kazakhstan business unit). The growth in production was primarily the result of ramping-up of the Blagodatnoye mine in the Krasnoyarsk region, which reached its projected recovery rate and exceeded the designed throughput capacity. In addition, output at Titimukhta increased as a result of increased throughput capacity of the plant which resulted from ongoing upgrades to the grinding circuit. Further, a considerable contribution to the production growth was made possible by the Alluvials business unit, as a result of the
72 completion of the replacement of the mining fleet and haulage equipment ahead of a longer than usual mining season and as a result of the continued upgrade of the Group’s production facilities at its Kazakhstan business unit.
Other Sales Other sales increased by 65 per cent. in 2011 to US$62,060 thousand from US$37,506 thousand in 2010. This increase resulted primarily from increased sales of electricity. The realised prices for electricity in years prior to 2011 were state-regulated and were sometimes set at levels below the cost of generation. In 2011, the electricity pricing process was deregulated resulting in prices principally being determined by supply and demand. This change led to a substantial increase in electricity tariffs and consequently to higher revenue from sales of electricity received by the Group. For example, revenue from electricity sales from Mamakan HPS increased 3.6 times from 2010. In 2010, the cost of generation for Mamakan HPS was higher than the state-regulated realised price in that year, whereas, in 2011, the realised price exceeded the cost of generation by 37 per cent. The effect of this revenue increase in 2011 was enhanced by the appreciation of the average rate of Russian rouble relative to the US dollar as compared to 2010.
Cost of Gold Sales The following table shows the components of the Group’s cost of gold sales for the years ended 31 December 2011 and 2010.
Year ended 31 December 2011 ———————————– against US$’000 2011 2010 2010 % ———————————————————————— ————– ————– ————– Fuel, consumables and spares 410,243 365,504 12 Labour 288,866 237,602 22 Tax on mining 179,116 130,230 38 Utilities, including: 55,140 46,043 20 Outsourced mining services 22,147 8,897 149 Refining costs 5,067 2,059 146 Other 75,696 56,866 33 ––––––––– ––––––––– Total cash operating cost ––––––––– 1,036,275 ––––––––– 847,201 22 Amortisation and depreciation of operating assets 181,935 118,559 53 (Capitalisation)/amortisation of deferred stripping costs, net (7,335) 44,412 (117) Increase in gold-in-process and refined gold inventories (48,856) (114,617) (57) ––––––––– ––––––––– Cost of gold sales ––––––––– 1,162,019 ––––––––– 895,555 30 In 2011, cost of gold sales increased by 30 per cent. to US$1,162,019 thousand from US$895,555 thousand in 2010. This increase resulted mainly from an 8 per cent. increase in the volume of gold sales, an increase of mining tax charges reflecting the increase in gold prices, an increase in labour costs and higher amortisation and depreciation charges. Cost of gold sales was also adversely affected by strengthening of the Russian rouble relative to the US dollar.
Cash operating costs In 2011, cash operating costs were US$1,036,275 thousand, compared to US$847,201 thousand in 2010. The increase in cash operating costs in 2011 as compared with 2010 was primarily a result of a US$51,264 thousand increase in labour costs and a US$48,886 thousand increase of tax on mining.
Fuel, consumables and spares The cost of materials and spares consumed in 2011 represented 29 per cent. of the Group’s cash operating costs and amounted to US$296,442 thousand, an increase of 7 per cent. as compared with 2010. This increase was primarily due to the increase in gold production volumes. Another contributing factor for the increase in materials and spares in 2011 was an increase in purchase prices for materials and components,
73 including steel, cyanides, lime and explosives. The increase in the cost of materials and spares was enhanced by the effect of the strengthening of the Russian rouble in 2011, which resulted in a further 3 per cent. increase in materials and spares costs relative to 2010, in addition to the aforementioned items.
Fuel expenses, including diesel oil and lubricants for trucks and excavators, comprised the third largest component of consumables and spares in the periods under review. In 2011, expenses in respect of fuel accounted for 11 per cent. of the Group’s cash operating costs and amounted to US$113,801 thousand, an increase of 30 per cent. in comparison to 2010. This increase was in line with the growth in production and an increase in prices for diesel fuel and gasoline, which corresponded with general global pricing trends for those products.
The increase in consumption of fuel by volume in 2011 was mainly attributable to the Irkutsk alluvial business as a result of the earlier commencement of mining works in 2011 as compared with 2010, and an increase in volumes of sand washing. Fuel consumption also increased at the Krasnoyarsk business unit owing to the increased volume of mining and transportation costs as a result of full scale operations at Blagodatnoye and the 9 per cent. increase in volumes of ore processing at Olimpiada.
Labour The second largest item included in cash operating costs in 2011 and 2010 was labour expenses, comprising 28 per cent. and 28 per cent., respectively, of cash operating costs in those periods.
In 2011, labour costs increased by 22 per cent. over the 2010 level to US$288,866 thousand from US$237,602 thousand in 2010. This increase was primarily attributable to a rise in the average headcount of production personnel at the Krasnoyarsk business due to the increase in production levels at Blagodatnoye to full capacity, as well as the planned indexation of salaries to inflation throughout the Group and the appreciation of the average Russian rouble rate relative to the US dollar. In addition, the alluvial mining season in 2011 started earlier than in 2010, which led to higher payroll costs at the Irkutsk alluvial business unit. Payroll costs at the Kazakhstan business unit also increased in 2011 due to an increase in the number of production personnel and an increase in remuneration levels.
Tax on mining Expenses on mining tax represented 17 per cent. and 15 per cent. of cash operating costs in 2011 and 2010, respectively.
In 2011, the Group incurred US$179,116 thousand in mining tax, compared to US$130,230 thousand in 2010. The 38 per cent. increase in 2011 over 2010 resulted from higher gold selling prices and increased sales volumes.
Utilities Expenses on power and other utilities represented 5 per cent. of cash operating costs in each of 2011 and 2010.
In 2011, utilities expenses increased by 20 per cent. to US$55,140 thousand from US$46,043 thousand in 2010. The increase in power costs was driven principally by the increase in electricity tariffs in Russia and Kazakhstan. The strengthening of the average rouble exchange rate relative to the US dollar also contributed to the increase in utilities costs over the period.
The consumption of electricity increased primarily at the Krasnoyarsk business unit and resulted from the enhanced processing volumes at Olimpiada. Transition to the full-scale operation of Blagodatnoye during in 2011 (the mine was operating in the pre-commissioning mode in 2010) also led to an increase in electricity consumption. In addition, the Group’s mines in Kazakhstan slightly increased their consumption of electricity in 2011 due to the commissioning of new electric equipment in accordance with the approved investment programme, and additional electricity purchases were required to ensure the heat supply to underground shafts and plants during the protracted 2011 winter season. These increases were offset to some extent by the decrease in electricity consumption by the Irkutsk ore business unit due to termination of operations at the Zapadnoye mine.
74 Amortisation and depreciation of operating assets In 2011, amortisation and depreciation of operating assets increased by 53 per cent. to US$181,935 thousand from US$118,559 thousand in 2010. This increase in depreciation charges was primarily a result of the commissioning of new equipment at the Blagodatnoye mine and the installation of additional processing equipment at Olimpiada as part of the modernisation programme, as well as the appreciation of the average Russian rouble rate relative to the US dollar.
(Capitalisation)/amortisation of deferred stripping costs, net In 2011, the stripping ratio at Olimpiada and Blagodatnoye was lower than the average life-of-mine ratio, and, consequently, previously capitalised stripping costs were expensed. This expense was more than offset by the capitalisation of excessive stripping costs incurred in the reporting period at the Titimukhta and Kuranakh mines. As a result, deferred stripping costs in the net amount of US$7,335 thousand were capitalised in 2011, while in 2010 US$44,412 thousand were charged to operating costs in 2010.
Increase in gold-in-process and refined gold inventories Metal inventories increased in 2011. These inventories comprised 22 thousand ounces of doré gold at the Krasnoyarsk business unit, which were not refined during the year and remained in stock at the Group’s processing plants and at refinery plants at the end of 2011, as compared with 4 thousand ounces at the end of 2010. The amount of gold under processing increased mainly at the Irkutsk ore business unit, hydrometallurgical and bio-oxidation workshops of Mill Nos. 2 and 3 of the Olimpiada mine and at the Yakutia Kuranakh business unit. The Group continues to focus on improving the bio-leaching circuit of the Olimpiada mine.
Total gold-in-process of US$48,856 thousand was recorded to inventory from cost of gold sales in 2011. This was, however, much lower than in 2010 (US$114,617 thousand) due to technological improvements at Olimpiada and increased recovery rates, which resulted in the decreased rate of ore stockpiling.
Cost of other sales In 2011, cost of other sales amounted to US$46,343 thousand, as compared to US$33,424 thousand in 2010. In 2011, revenue from other sales exceeded the cost of other sales, which resulted in a net gain from other sales in the amount of US$15,717 thousand, compared to US$4,082 thousand in 2010. Gross profit on other sales margin improved from 11 per cent. in 2010 to 25 per cent. in 2011.
Selling, general and administrative expenses The following table sets forth the selling, general and administrative expenses of the Group for the years ended 31 December 2011 and 2010 and the percentage change from year to year.
Year ended 31 December 2011 ———————————– against US$’000 2011 2010 2010 % ———————————————————————— ————– ————– ————– Salaries 116,295 103,811 12 Professional services 36,350 28,274 29 Taxes other than mining and income taxes 42,630 27,528 55 Amortisation and depreciation 4,830 4,217 15 Other 25,513 30,719 (17) ––––––––– ––––––––– Total ––––––––– 225,618 ––––––––– 194,549 16 In 2011, the Group’s selling, general and administrative expenses increased by 16 per cent. to US$225,618 thousand from US$194,549 thousand in 2010. This increase was primarily driven by an increase in taxes other than mining and income taxes (i.e. an increase in tax on dividend payments) and salaries.
75 Salaries In 2011, the Group’s administrative labour costs increased by 12 per cent. to US$116,295 thousand from US$103,811 thousand in 2010. This increase was primarily attributable to the Moscow head office. Payroll costs also increased at the Kazakhstan business unit due to the increased level of remuneration coupled with the increased headcount of administrative personnel. The increase in payroll costs was also negatively impacted by the effect of the RUB appreciation.
Professional services In 2011, expenses on professional service costs increased by 29 per cent. to US$36,350 thousand from US$28,274 thousand in 2010. This increase was primarily attributable to audit services, as well as legal and financial advisory services provided to the Group in connection with its reorganisation, the private exchange offer by KazakhGold to holders of OJSC Polyus Gold securities completed in July 2011, the private exchange offer by Jenington to holders of OJSC Polyus Gold ADRs completed in August 2011, the mandatory tender offer by the Company to holders of OJSC Polyus Gold securities completed in December 2011, the preparation of proceedings against the former owners of the Company, and negotiations with AltynGroup Kazakhstan LLP for the sale of the Company’s operating subsidiaries.
Taxes, other than mining and income taxes In addition to tax on mining and income taxes, the Group pays property tax, VAT (which for the purpose of this item includes only non-recoverable VAT) and other taxes.
The following table shows the components of taxes, other than mining and income taxes, for the years ended 31 December 2011 and 2010 and the percentage change from year to year.
Year ended 31 December 2011 ———————————– against US$’000 2011 2010 2010 % ———————————————————————— ————– ————– ————– Property tax 20,661 16,463 25 VAT 2,167 1,435 51 Other taxes 19,802 9,630 106 –––––––– –––––––– –––––––– Total –––––––– 42,630 ––––––– 27,528– –––––––– 55 In 2011, the Group accrued US$42,630 thousand in federal and regional taxes other than tax on mining and income tax, compared to US$27,528 thousand in 2010. Property tax charges increased in 2011 mainly due to the commissioning of new property, plant and equipment at the Krasnoyarsk business unit as a result of the Blagodatnoye mine launch in July 2010 and modernisation at the Mills Nos. 2 and 3 of the Olimpiada mine. In addition, in 2011 the Company and its subsidiary Jenington accrued US$16,388 thousand in tax on dividends declared by OJSC Polyus Gold based on the results for the nine months of 2011.
Impairment loss In 2011, the Group incurred US$103,418 thousand of loss on impairment of exploration and evaluation assets and property, plant and equipment and stockpiles, compared to US$40,763 thousand in 2010.
Impairment of exploration and evaluation assets In 2011, the Group recognised an impairment loss of US$54,708 thousand (US$13,584 thousand in 2010) related to previously capitalised exploration and evaluation costs that had not led to the discovery of commercially viable quantities of gold resources and consequently resulted in the decision to discontinue such activities. Those exploration and evaluation costs had been incurred at the following exploration fields:
• Kyuchus in the Republic of Sakha (Yakutia);
• Kuzeevskaya in the Krasnoyarsk region;
• Chai-Yurinskaya (sold in May 2012), Doroninskoye and Tokichan in the Magadan region;
76 • Zapadnoye, Mukodek and Illigirskaya in the Irkutsk region; and
• Kaskabulak in the Republic of Kazakhstan.
Impairment of property, plant and equipment The Group recognised an impairment of property, plant and equipment in the amount of US$23,501 thousand in 2011 (US$27,179 thousand in 2010), which related to certain operating assets in Kazakhstan, the Kvartsevaya Gora deposit in the Krasnoyarsk region and Sukhoy Log, which terminated operations in April 2011. The Group reassessed property, plant and equipment requirements at the Krasnoyarsk business unit and considered plans for their future use. As a result, certain assets’ book values and expected useful lives exceeded their anticipated recoverable values and accordingly an impairment was recorded in respect of those assets, and their useful lives were revised downwards.
Impairment of stockpiles In 2011, an impairment of stockpiles in the amount of US$25,209 thousand was recognised in respect of ore stockpiled at the Zapadnoye mine in the Irkutsk region (1.7 million tonnes). As a result of the depletion of reserves in the pit contour of the Zapadnoye deposit, the Group decided to suspend the Zapadnoye mine in the beginning of April 2011, since processing of stockpiled ore with a grade of 1.3 g/t was not considered to be economically viable.
Research expenses In 2011, research expenses amounted to US$2,581 thousand, which is approximately the same as in 2010, and related to exploration and evaluation works undertaken at the Group’s deposits in the Krasnoyarsk region and alluvial deposits in the Irkutsk region.
Other expenses, net In 2011, other expenses, net, amounted to US$24,077 thousand (US$35,101 in 2010). Other expenses primarily included in 2011 penalties on tax on mining of US$8,040 thousand, a change in allowance for reimbursable VAT of US$6,602 thousand, a loss on disposal of property, plant and equipment in the amount of US$5,933 thousand and charitable donations in the amount of US$5,468 thousand. The major portion of the charitable donations in 2011 were made by the Yakutia business unit (the construction of a vocational school building in Yakutia) and OJSC Polyus Gold (construction of an indoor swimming pool in the Irkutsk region). In 2010, other expenses included a tax provision of US$14,352 thousand, non-recoverable VAT of US$8,600 thousand, a loss on disposal of property, plant and equipment in the amount of US$2,037 thousand and charitable donations in the amount of US$3,367 thousand
Finance costs, income/(loss) from investments and foreign exchange (loss)/gain The following table sets forth the components of financial and investment activity for the years ended 31 December 2011 and 2010 and the percentage change from year to year.
Year ended 31 December 2011 ———————————– against US$’000 2011 2010 2010 % ———————————————————————— ————– ————– ————– Finance costs (71,403) (42,717) 67 Income/(loss) from investments, net 3,630 (23,711) (115) Foreign exchange (loss)/gain (5,814) 765 (860) Finance costs In 2011, the Group’s finance costs grew by 67 per cent. to US$71,403 thousand from US$42,717 thousand in 2010. The level of borrowings was stable for most of the year, with an increase in borrowings related to the mandatory tender offer for OJSC Polyus Gold in November. In December 2011 the Board of Directors of the Company resolved to redeem the US$200 million 9.875 per cent. Senior Notes due November 2013 (the “Senior Notes”) at a price of 102.344 per cent. of nominal value, which resulted in the accelerated
77 amortisation of the fair value of the Senior Notes to the redemption price. As a result, the Group incurred an additional US$26,928 thousand of debt redemption expense in 2011.
Income/(loss) from investments, net In 2011, the Group received income from investments totalling US$3,630 thousand, compared to a net loss of US$23,711 thousand in 2010.
As part of the acquisition of a 50.15 per cent. stake in the Company in 2009, the Group obtained call options to acquire all rights and obligations under the convertible loan agreements between the Company and its previous major shareholder, Gold Lion. The call options for convertible loans were classified as financial assets and were carried at fair value. The decline in the Company’s share price during the first half of 2011 resulted in the decrease in fair value of the instrument by US$8,661 thousand (US$63,775 thousand in 2010), which was recognised as an investment loss. As a result of completion of the Combination in 2011, the call options were recognised as treasury shares at an amount equal to the fair value of the options at 30 June 2011 of US$37,475 thousand (US$46,136 thousand at 31 December 2010). In addition, in 2011, the Group incurred a loss of US$20,984 thousand due to a revaluation of held for trading investments, compared to a gain of US$11,446 thousand in the previous year. These losses were more than offset by a gain on disposal of available-for-sale investments represented by shares owned in Rosfund in the amount of US$17,023 thousand (US$20,289 thousand in 2010) and interest income on bank deposits in the amount of US$16,252 thousand (US$8,329 thousand in 2010).
Foreign exchange (loss)/gain In 2011, fluctuations in the exchange rates of the national currencies of Russia and Kazakhstan resulted in a net foreign exchange loss of US$5,814 thousand, compared to a net gain of US$765 thousand in 2010.
Income tax In 2011, income tax expense was US$207,052 thousand, an increase of 66 per cent. as compared with 2010. This increase was largely attributable to a higher profit before taxation in comparison with the previous year. The effective income tax rate (the ratio of current and deferred tax expense to IFRS income before tax) was 27 per cent. in 2011 (as compared to 26 per cent. in 2010), while the statutory income tax rate in Russia and Kazakhstan was 20 per cent. in both periods. The difference between the statutory and the effective tax rates was due to a number of non-deductible items for tax purposes, including expenses incurred in connection with early redemption of the Senior Notes, accrual of dividends by OJSC Polyus Gold in respect of Jenington International Inc. and the Company and other permanent differences.
Summary of performance results by business units for the years ended 31 December 2011 and 2010 The following tables show the Group’s performance results by business unit for the years ended 31 December 2011 and 2010. Year ended 31 December 2011 –––––––———————————————————–—––––––––– Gold Sales Production Sales –––––––—––––––––– –––––––—––––––––– –––––––—––––––––– ’000 ’000 US$’000 % ounces % ounces % –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Krasnoyarsk business unit 1,641,380 70 1,038 69 1,040 70 Irkutsk alluvial business unit 350,213 15 210 14 210 14 Yakutia Kuranakh business unit(1) 184,735 8 117 8 117 8 Irkutsk ore business unit 3,497 – 13 1 3 – Kazakhstan business unit 160,825 7 117 8 113 8 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Group total ––––––––2,340,650 –––––––– 100 –––––––– 1,495 –––––––– 100 –––––––– 1,483 –––––––– 100
78 Year ended 31 December 2010 –––––––———————————————————–—––––––––– Gold Sales Production Sales –––––––—––––––––– –––––––—––––––––– –––––––—––––––––– ’000 ’000 US$’000 % ounces % ounces % –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Krasnoyarsk business unit 1,176,392 69 932 67 937 68 Irkutsk alluvial business unit 248,254 15 197 14 197 14 Yakutia Kuranakh business unit(1) 149,597 9 120 9 120 9 Irkutsk ore business unit 22,607 1 26 2 19 1 Kazakhstan business unit 114,448 7 110 8 103 7 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Group total 1,711,298–––––––– –––––––– 100 –––––––– 1,386 –––––––– 100 –––––––– 1,377 –––––––– 100 Notes: 1. Operating and financial results of the Yakutia Kuranakh business unit include the results of the Exploration business unit (See Note 6 to the 2011 Financial Statements.
Krasnoyarsk business unit (Olimpiada, Blagodatnoye and Titimukhta deposits) The Krasnoyarsk business unit is the Group’s largest mining operation. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2011 2010 —————————————————————————————— ————– ————– Gold sales 1,641,380 1,176,392 Segment profit 918,078 398,359 Segment profit margin (%) 56% 34% TCC per ounce sold (US$/ounce sold) 606 519
Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2011 Financial Statements. In 2011, the Krasnoyarsk business unit produced 1,038 thousand ounces of refined gold, compared to 932 thousand ounces in 2010. Mills No.2 and 3 of the Olimpiada mine produced 566 thousand ounces of refined gold in 2011, compared to 581 thousand ounces in 2010. Gold output decreased primarily due to the decline in average grade (3.43 g/t in 2011 vs. 3.77 g/t in 2010), as mixed ore was treated in 2010 and only sulphide ore treated in 2011. Measures aimed at increasing the Olimpiada mine’s efficiency of sulphide refractory ore processing implemented at Mills Nos. 2 and 3 in 2010, allowed the mine to achieve its design capacity of 8 million tonnes of ore per annum in 2011. The upgrade programme continued in 2011. However, gold recovery rates for primary refractory ores processed at Mills Nos. 2 and 3 were lower than planned due to a delay in commissioning the final concentration step of primary concentrate, from gravity concentrate of Mills Nos. 2 and 3 (completed in December 2011) and difficulties encountered during adjustment of the second stage of the acid biopulp centrifuging on the hydrometallurgical circuit of Mill-3. The Titimukhta project (Mill No.1 of Olimpiada mine) produced 109 thousand ounces of refined gold in 2011, compared to 100 thousand ounces in 2010. The 9 per cent. increase was primarily the result of continued efforts to bring the Titimukhta project’s performance to the design processing parameters. The Blagodatnoye mine produced 363 thousand ounces of gold in 2011, compared to 251 thousand ounces a year in 2010. The 45 per cent. increase in gold output reflected a successful ramp-up of the mine, which was commissioned in July 2010. In 2011, the mine exceeded its design ore processing capacity of 6 million tonnes per year and reached targeted gold recovery levels. Gold sales revenue of the Krasnoyarsk business unit in 2011 amounted to US$1,641,380 thousand, compared to US$1,176,392 thousand in 2010. During 2011, 1,040 thousand ounces of refined gold were sold. The comparative sales volumes for 2010 amounted to 937 thousand ounces.
79 The segment profit margin increased from 34 per cent. in 2010 to 56 per cent. in 2011 as a result of the combination of an increase in consumption, an improvement in the recovery level, and the increase in gold prices in 2011. TCC per ounce sold for the Krasnoyarsk business unit amounted to US$606 in 2011, compared to US$519 in 2010. In addition to the factors impacting on cash costs throughout the Group in 2011 (see “– Discussion of Results of Operations for the Years Ended 31 December 2011 and 2010 – Cost of Gold Sales – Cash operating costs”), the increase in TCC per ounce sold at the Krasnoyarsk business unit was also attributable to the increase of cost of ore mining at the Blagodatnoye mine and Titimukhta mine, including expenditures on transportation, drilling and blasting operations, which increased due to deepening and forming of open pits at these deposits, as well as increased labour costs and transportation expenses. The Krasnoyarsk business unit’s TCC per ounce sold increased in 2010 to US$519 per ounce. Following transition to the processing of sulphide ores at Olimpiada, the Group faced certain difficulties at the bio- leaching and flotation stages of the production process, resulting in lower gold recovery, additional consumption of materials and chemicals and a decrease in production volumes. In addition, the lower than expected gold grade in the ore of the Titimukhta deposit and continued adjustments to the technology at Mill No.1 prevented production reaching the designed output at Titimukhta.
Irkutsk alluvial business unit (Alluvial deposits) The Irkutsk business unit operates alluvial deposits. The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2011 2010 —————————————————————————————— ————– ————– Gold sales 350,213 248,254 Segment profit 102,795 90,283 Segment profit margin (%) 29% 36% TCC per ounce sold (US$/ounce sold) 776 612
Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2011 Financial Statements. In 2011, refined gold production at the Group’s alluvial deposits in the Irkutsk region grew by 7 per cent. to 210 thousand ounces from 197 thousand ounces in 2010. This increase was due to the accelerated repair and maintenance works performed during the winter season, as well as a renewal of the mining fleet at the deposits, which allowed the Group to commence mining earlier than planned. In addition, warm weather conditions in October-November 2011 allowed operations to be extended.
Gold sales of the alluvial business unit increased from US$248,254 thousand in 2010 to US$350,213 thousand in 2011 on the back of the growing realised gold price and increased sales volumes. All gold produced during 2011, amounting to 210 thousand ounces, was sold.
TCC per ounce sold amounted to US$776 in 2011, compared to US$612 in 2010. In addition to the factors impacting on cash costs throughout the Group in 2011 (see “– Discussion of Results of Operations for the Years Ended 31 December 2011 and 2010 – Cost of gold sales – Cash operating costs”), the increase in TCC per ounce sold at the Irkutsk alluvial business unit was mainly attributable to increased payroll costs (due to bonus payments for exceeding the production plan) and consumables and spares consumption, including fuel, resulting from the early commencement of the mining season, increased volumes of sands washing and repair works and the increased cost of outsourced mining services. Labour costs have been the largest component of cost of gold sales at the Irkutsk alluvial business unit.
Yakutsk Kuranakh business unit (Kuranakh mine) The Yakutsk Kuranakh business unit operates the Kuranakh mine in the Sakha Republic (Yakutia) and includes the Exploration business unit. The table below shows selected financial and operating data for this unit for the periods indicated.
80 Year ended 31 December ———————————– US$’000, unless otherwise indicated 2011 2010 —————————————————————————————— ————– ————– Gold sales 184,735 149,597 Segment profit 13,797 38,923 Segment profit margin (%) 7% 26% TCC per ounce sold (US$/ounce sold) 890 710
Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2011 Financial Statements. In 2011, the Kuranakh mine produced 117 thousand ounces of refined gold, compared to 120 thousand ounces in 2010. The reduction in gold output at the Kuranakh mine was caused by challenging hydrogeological conditions at the Kuranakh ore fields. A significant hydrogeological assessment and pit dewatering programme have been initiated to overcome this problem. In addition, increased hardness of the ore mined reduced efficiency of the primary crushing circuit preparing the feed to the Kuranakh processing plant. In 2011, the Group implemented performance testing at the plant as part of the expansion and upgrade programme at the Kuranakh mine.
In 2011, gold sales revenue of the Yakutia Kuranakh business unit amounted to US$184,735 thousand, compared to US$149,597 thousand in 2010. Gold sales volumes in 2011 amounted to 117 thousand ounces, compared to 120 thousand in 2010. TCC per ounce sold increased from US$710 in 2010 to US$890 in 2011. In addition to the factors impacting on cash costs throughout the Group in 2011 (see “– Discussion of Results of Operations for the Years Ended 31 December 2011 and 2010 – Cost of Gold Sales – Cash operating costs”), the increase in TCC per ounce sold at the Yakutia Kuranakh business unit was also attributable to the increased consumption of key production materials and spare parts for repair and maintenance works. The operation of the mining and transportation equipment was complicated and equipment load intensified due to excessive water in the producing open pits and high clay content in the soil, leading to increased repair and maintenance costs and expenses on transportation services provided by third parties. The decrease in the segment profit of the Yakutia Kuranakh business unit in 2011 was due to difficulties with watering in the pits and the interruption to the operation of the processing plant as it is one of the older assets in the Group.
Irkutsk ore business unit (Zapadnoye mine) The table below shows selected financial and operating data for this unit for the periods indicated.
Year ended 31 December ———————————– US$’000, unless otherwise indicated 2011 2010 —————————————————————————————— ————– ————– Gold sales 3,497 22,607 Segment profit (13,042) (4,191) Segment profit margin (%) – – TCC per ounce sold (US$/ounce sold) 841 1,045
Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2011 Financial Statements. In 2011, the Irkutsk ore business unit produced 13 thousand ounces of gold, compared to 23 thousand ounces produced in 2010. The production volumes in 2011 included 3 thousand ounces produced at the Zapadnoye mine and 10 thousand ounces produced at the Pervenets pilot plant, operating within the Verninskoye project development. As a result of depletion of reserves in the pit contour of the Zapadnoye deposit, a decision was made to suspend operations at the Zapadnoye mine with effect from the start of April 2011. The pit suspension measures were developed and approved by the Irkutsk branch of Rostechnadzor (Federal Agency on Environmental, Technological and Nuclear Supervision).
81 Gold sales revenue of the Irkutsk ore business unit in 2011 amounted to US$3,497 thousand, compared to US$22,607 thousand in 2010. The decrease was a result of the Zapadnoye mine suspension in April 2011. Gold sales volumes in 2011 amounted to 3 thousand ounces. The decline in the profitability of the Irkutsk ore business unit in 2011 was principally the result of the Zapadnoye mine suspension.
Kazakhstan business unit (Aksu, Bestobe, Zholymbet and Akzhal mines) The Kazakhstan business unit sold by the Company on 28 February 2013 comprised the Aksu, Bestobe, Zholymbet and Akzhal mines. The table below shows selected financial and operating data for this unit for the periods indicated. Year ended 31 December ———————————– US$’000, unless otherwise indicated 2011 2010 —————————————————————————————— ————– ————– Gold sales 160,825 114,448 Segment profit 5,773 (55,943) Segment profit margin (%) 4% – TCC per ounce sold (US$/ounce sold) 653 585 Source: Management accounting data. For reconciliation of segment profit/(loss) refer to Note 6 to the 2011 Financial Statements. In 2011, the Kazakhstan operations of the Group produced 117 thousand ounces of gold in semi-finished products, compared to 110 thousand ounces in 2010. The increase of 6 per cent. was achieved due to the enhanced ore processing at plants coupled with improved recoveries as a result of implementation of the investment programme to upgrade existing operations, as well as improved grades of the ore under processing at Bestobe and Zholymbet.
Gold sales amounted to US$160,825 thousand in 2011, compared to US$114,448 thousand in 2010. Sales volumes amounted to 113 thousand ounces in 2011, compared to 103 thousand ounces in 2010.
TCC per ounce sold in 2011 amounted to US$653, compared to US$585 in 2010. In addition to the factors impacting on cash costs throughout the Group in 2011, the increase in TCC per ounce sold at the Kazakhstan mines was driven by the increased payroll costs and consumption of electricity due to the commissioning of new electric equipment in accordance with the approved investment programme, and additional electricity purchases required to ensure heat supply to underground shafts and plants during the cold weather conditions in January-March 2011. TCC per ounce sold was also negatively impacted by the suspension of the production at the Akzhal mine from May 2011 due to the delay in the state listing of gold reserves (Akzhal HL facilities were partly loaded by the ore from the Kaskabulak deposit), and a material decline in the average gold grade in the ore processed at the Aksu mine from 2.5 g/t in 2010 to 1.9 g/t in 2011. In December 2011, gold reserves of the Akzhal deposit were listed with the State Reserves Committee and operations at the mine resumed.
In 2011, the segment profit of the Kazakhstan operations amounted to US$5,773 thousand, compared to US$55,943 thousand of losses incurred in 2010. The improvement of the financial results of the business unit was the result of higher realised gold prices during the period, as well as stabilisation of production at the Kazakhstan operating subsidiaries of the Group.
Review of Financial Sustainability and Solvency for the years ended 31 December 2011 and 2010 Analysis of statement of financial position items The table below shows key items from the Group’s consolidated statement of financial position at 31 December 2011 and 2010.
82 Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– ASSETS Non-current assets Property, plant and equipment 2,056,417 2,058,636 Exploration and evaluation assets 399,846 442,316 Deferred stripping costs 64,460 61,023 Inventories 207,789 201,030 Investments in securities and other financial assets 3,643 50,273 Other non-current assets(1) 35 1,860 –––––––– –––––––– Total non-current assets 2,732,190 2,815,138 –––––––– –––––––– Current assets Inventories 543,023 455,144 Investments in securities and other financial assets 63,468 177,332 Other current assets(2) 222,882 229,655 Cash and cash equivalents 657,448 326,905 –––––––– –––––––– Total current assets 1,486,821 1,189,036 –––––––– –––––––– TOTAL ASSETS ––––––––4,219,011 ––––––––4,004,174 Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– EQUITY AND LIABILITIES Equity attributable to shareholders of the Company(3) 2,595,356 3,183,645 Non-controlling interests 235,317 56,886 –––––––– –––––––– TOTAL EQUITY 2,830,673 3,240,531 –––––––– –––––––– Total non-current liabilities(4) 477,673 368,710 Current liabilities Borrowings 675,632 173,762 Trade, other payables and accrued expenses 192,077 169,037 Taxes payable 42,956 52,134 –––––––– –––––––– Total current liabilities 910,665 394,933 –––––––– –––––––– TOTAL LIABILITIES 1,388,338 763,643 –––––––– –––––––– TOTAL EQUITY AND LIABILITIES ––––––––4,219,011 ––––––––4,004,174 Notes: 1. Other non-current assets consist of the long-term portion of reimbursable value added tax, inventories and other non-current assets. 2. Other current assets consist of deferred expenditures, trade and other receivables, advances paid to suppliers and prepaid expenses, and taxes receivable. 3. Equity attributable to shareholders of the Company includes share capital, additional paid-in capital, treasury shares, investments revaluation reserve, translation reserve and retained earnings. 4. Total non-current liabilities consist of site restoration and environmental obligations, borrowings, deferred tax and other non-current liabilities.
Assets At 31 December 2011, the Group’s total assets amounted to US$4,219,011 thousand, compared to US$4,004,174 thousand at 31 December 2010. This increase of 5 per cent. resulted primarily from an increase in current assets, including current inventories and cash and cash equivalents.
83 Non-current assets Property, plant and equipment The table below sets forth the components of the Group’s property, plant and equipment at 31 December 2011 and 2010.
Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– Mining assets 1,651,929 1,722,332 Non-mining assets 32,820 40,722 Capital construction-in-progress 371,668 295,582 –––––––– –––––––– Total property, plant and equipment ––––––––2,056,417 ––––––––2,058,636 At 31 December 2011, the value of property, plant and equipment totalled US$2,056,417 thousand, compared to US$2,058,636 thousand at 31 December 2010. The slight decrease in property, plant and equipment was attributable to the effect of depreciation of the rouble against the US dollar.
In 2011 and 2010, the Group’s primary expenditures on mining assets denominated in the national currencies related to:
• the acquisition of mining and transportation equipment at the Blagodatnoye and Olimpiada mines in the Krasnoyarsk region;
• the upgrade of the mining fleet at the alluvial deposits;
• replacement of some equipment at the Titimukhta and Kuranakh mines; and
• the modernisation of operating assets in Kazakhstan.
The closing balance of the Group’s mining assets at 31 December 2011 was US$1,651,929 thousand, compared to US$1,722,332 thousand at 31 December 2010. At 31 December 2011, mining assets included mineral rights of US$335,470 thousand.
In 2011, the Group recognised an impairment charge on property, plant and equipment in the amount of US$23,501 thousand (US$27,179 thousand in 2010), related mainly to the reassessment of some fixed assets at the Kazakhstan business unit and suspension of the Zapadnoye and Kvartsevaya Gora mines. In 2011, the Group reassessed some property, plant and equipment at the Kazakhstan business unit. As a result, certain assets’ book values and expected useful lives exceeded the anticipated recoverable values and accordingly an impairment was recorded in respect of those assets.
The value of capital construction-in-progress increased by 26 per cent. to US$371,668 thousand at 31 December 2011 from US$295,582 thousand at 31 December 2010. This increase was mainly attributable to the construction of the Verninskoye and Natalka mines, modernisation of Olimpiada and construction at the operating assets in Kazakhstan. The change in value of the non-mining assets was primarily due to the reclassification of some non-mining assets to mining assets as a result of the reorganisation of the Irkutsk ore business unit.
At 31 December 2011, property, plant and equipment with a carrying value of US$4,613 thousand had been pledged to a secure bank guarantee liability. At 31 December 2010, property, plant and equipment with a carrying value of US$3,620 thousand were pledged to secure borrowings and a bank guarantee liability.
Exploration and evaluation assets At 31 December 2011, exploration and evaluation assets amounted to US$399,846 thousand, a decrease of 10 per cent. as compared to 31 December 2010. The decrease was partly the result of recognition of an impairment charge and also due to the depreciation of the rouble against the US dollar. In 2011, the Group recognised an impairment charge of US$54,708 thousand related to previously capitalised exploration and evaluation costs that had not led to the discovery of commercially viable quantities of gold resources and the
84 subsequent decision to cease such exploration activities. Those exploration and evaluation costs had been incurred at the following exploration fields: Kuzeevskaya in the Krasnoyarsk region, Chai-Yurinskaya, Doroninskoye and Tokichan in the Magadan region, Mukodek and Illigirskaya in the Irkutsk region and Kaskabulak in the Republic of Kazakhstan. The Chai-Yurinskaya field was sold in May 2012. These decreases were partly offset by capitalisation of exploration expenses incurred in the Krasnoyarsk region at Olimpiada and Panimba, in the Republic of Sakha (Yakutia) at Nezhdaninskoye, in the Irkutsk region at Zapadnoye Medvezhiy, in the Magadan region at Degdekan and in the Amur region at Bamskoye.
Deferred stripping costs In 2011, the Group capitalised stripping costs or charged previously capitalised stripping costs to operating costs on the basis of the average life-of-mine stripping ratio. Deferred stripping costs increased by 6 per cent. to US$64,460 thousand at 31 December 2011 from US$61,023 thousand at 31 December 2010. In 2011, the stripping ratio at Olimpiada was lower than the average life-of-mine ratio and, therefore, previously capitalised stripping costs were charged to operating costs and deferred stripping costs were also expensed at Blagodatnoye reducing this asset item. The effect of the US$/RUB exchange rate factor also reduced the amount of deferred stripping items. These reductions were partly offset by the deferral of stripping costs incurred at Titimukhta and Kuranakh.
Inventories In 2011, inventories expected to be recovered after twelve months (stockpiles) slightly increased from US$201,030 thousand at the beginning of the year to US$207,789 thousand at 31 December 2011. Long-term ore stockpiles increased at the Krasnoyarsk business unit due to stockpiling of ore from Olimpiada and reclassification of ore stockpiles at Titimukhta from short-term to long-term inventories. This increase was partly offset by the impairment of low-grade ore stockpiles at the Irkutsk hard rock business unit in a total amount of US$25,209 thousand (1,742 thousand tonnes), as the Group determined that gold production from low-grade ore from the Zapadnoye deposit, which remained after suspension of the mine, was not economically viable. Further, there was a decrease of long-term ore stockpiles at the Kazakhstan mines. The rouble depreciation relative to the US dollar reduced the relative value of the stockpiles.
During 2010, the Group discovered that some of its existing ore stockpiles (totalling 6,637 thousand tonnes at Krasnoyarsk and 1,228 thousand tonnes at Irkutsk) were taking longer to process at its Olimpiada mine due to technological issues. See “Business – Principal Operations – Krasnoyarsk Region – Olimpiada Deposit – Processing of ores”. Consequently, the Group postponed processing part of its stockpiles while it modified its ore processing methods in order to enable improved recovery rates at the completion of the manufacturing process. Accordingly, such stockpiles were classified as inventories expected to be recovered after twelve months. As a result, the closing balance of inventories expected to be recovered after twelve months at 31 December 2010 was US$201,030 thousand.
From May 2009, the Group began accumulating stockpiles at the Olimpiada mine.
At the date of the Group’s transition to IFRS, stockpiles (6.8 million tonnes) at the Group’s Krasnoyarsk business unit were accounted for at zero cost. This was on the basis that the stockpiles were low-grade and, at that point in time, the gold price was such that the valuation of such stockpiles was negligible.
Throughout 2010, the Group did not process any zero-value stockpile. Accordingly, the financial information for this period has not been impacted by the production and sale of the same During 2011, 1.2 million tonnes of this zero-value inventory has been processed, and the positive impact on operating profit was estimated to have been US$28.5 million.
Non-current investments in securities and other financial assets At 31 December 2010, non-current investment in securities and other financial assets consisted mostly of derivative financial assets, comprising call options to acquire all rights and obligations under convertible loan agreements between the Company and its previous major shareholder Gold Lion, which was derecognised in 2011. Under the convertible loan agreements, the lender could convert the principal amounts together with accrued interest into ordinary shares of the Company at the price of US$1.50 per share. These options had
85 been obtained following the acquisition of a 50.15 per cent. stake in KazakhGold Group Limited (now, the Company) by the Group in 2009. The call options were classified as a financial asset held through profit and loss and were carried at fair value. The fair value of the instrument was determined by financial assumption with reference to the Company’s spot market price. Between 31 December 2010 and 30 June 2011 the Company’s share price declined and the fair value of the call options decreased from US$46,136 thousand at 31 December 2010 to US$37,475 thousand at 30 June 2011. At 30 June 2011 as a result of the completion of the Combination, the call options were classified as treasury shares at an amount equal to the fair value of the options at 30 June 2011 with a corresponding loss from change in fair value of the options recognised as an investment loss in the consolidated income statement.
Current assets At 31 December 2011, the Group’s current assets amounted to US$1,486,821 thousand, compared to US$1,189,036 thousand at 31 December 2010. This increase of 25 per cent. resulted primarily from an increase in inventories and increased cash balances.
Inventories In 2011, the Group’s inventories expected to be recovered in the next twelve months increased by 19 per cent. to US$543,023 thousand at 31 December 2011 from US$455,144 thousand at 31 December 2010. During 2011, metal inventories increased from US$164,855 thousand at 31 December 2010 to US$188,515 thousand at 31 December 2011. The 14 per cent. increase was largely attributable to an increase in gold-in- process at net production cost at the Krasnoyarsk and Irkutsk alluvial business units. At the Krasnoyarsk business unit, the balance of doré gold remaining at the plant and refinery at 31 December 2011 amounted to 1.2 thousand ounces, as compared with 4 thousand ounces at 31 December 2010. In addition, the amount of gold under processing increased significantly at the bio-oxidation workshop of Mill No. 3 of the Olimpiada mine as a result of accumulation of gold concentrate due to re-equipment of the production flowsheet (installation of centrifugal concentrators) and repair works, which subsequently increased the processing efficiency of the mine’s production facilities. Stocks of ore materially increased at Blagodatnoye and Titimukhta as a result of the ramp-up of production at these mines, and, at the Irkutsk alluvial business unit, gold-in-process at net production cost also increased due to the seasonal nature of alluvial gold mining. The increase in volume of inventories was magnified by an increase in the cost of production at which metal inventories were recorded to the statement of financial position. This increase was partially offset by a decrease in stocks of refined gold at net production cost from US$19,523 thousand at 31 December 2010 to US$24,757 thousand at 31 December 2011 and the impact of the depreciation of the Russian rouble relative to the US dollar. The stocks of finished goods at the reporting date were attributable mainly to the Kazakhstan business unit. Stores and materials increased by 22 per cent. to US$354,508 thousand during 2011, which was mainly related to the Krasnoyarsk business unit, where stores of diesel oil were accumulated for the winter period and spare parts for ore mining and processing equipment were procured for the purpose of repair and maintenance works. Additional materials were acquired for the needs of construction and launch of the Verninskoye mine. The change in value of stores and materials in the period under review was also affected by the rising prices for diesel oil, sodium cyanide and other chemicals.
Investments in securities and other financial assets Movements in investments in securities and other financial assets during the years ended 31 December 2011 and 2010 are presented in the table below.
Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– AFS equity investments 34,744 99,721 Equity investments in listed companies held for trading 14,857 36,730 Bank deposits 12,175 39,351 Other 1,692 1,530 ––––––––– ––––––––– Total investments in securities and other financial assets 63,468 177,332 ––––––––– –––––––––
86 In 2011 and 2010, the Group’s AFS equity investments primarily included investments in securities managed by Rosfund, as well as equity investments in listed companies, bonds and depositary receipts. Equity investments in listed companies held for trading are represented by financial assets carried at fair value through profit and loss.
At 31 December 2011, short-term investments in securities and other financial assets declined by 64 per cent. to US$63,468 thousand at 31 December 2011 from US$177,332 thousand at 31 December 2010. The return on investments in 2011 amounted to 10 per cent. During 2011, the Group sold 56 per cent. of its investment in Rosfund and achieved a gain of US$17,023 thousand, which was reflected as investment income. In 2011, the fair value of the remaining AFS equity investments declined by US$8,976 thousand. This decrease was recognised in equity within the investment revaluation reserve. During 2011, the Group disposed of US$1,332 thousand of equity investments in listed companies held for trading. By 31 December 2011, the fair value of held for trading investments decreased to US$14,857 thousand, which was reflected as an investment loss in the consolidated income statement. In addition, in 2011, the Group partly withdrew cash from bank accounts and used it to open deposits. The closing balance of the Group’s bank deposits at 31 December 2011 was US$12,175 thousand (US$39,351 thousand at 31 December 2010). These deposits are denominated in roubles and bear interest rates ranging between 2.1 to 8.1 per cent. per annum and mature through June 2012.
Cash and cash equivalents In 2011, the balance of cash and cash equivalents doubled as compared to 31 December 2010 and at the reporting date amounted to US$657,448 thousand. The increase was the result of significant cash inflows from operating activities and the withdrawal of funds from short-term investments.
Equity and liabilities Capital and reserves At 31 December 2011, capital and reserves were US$2,830,673 thousand, as compared to US$3,240,531 thousand at 31 December 2010. In 2011, the Group’s capital and reserves changed as a result of the business reorganisation comprising the Combination with KazakhGold, which was completed on 25 July 2011. On 14 July 2011, the authorised share capital of the Company was increased to 3,600,000,000 ordinary shares at par value of £0.0001 per share (31 December 2010: 2,100,000,000 shares). The issued and fully paid-up share capital of the Company comprised 3,032,149,962 ordinary shares (31 December 2010: 119,608,333 shares) at par value of £0.0001 per share.
At 31 December 2011, treasury shares were held by a wholly-owned subsidiary of the Group, Jenington, and were recorded at cost. During 2011, treasury shares increased by 22 per cent. from US$626,313 thousand at 31 December 2010 to US$765,013 thousand at 31 December 2011. As a result of the Combination, shares in the Company held by Jenington became treasury shares of the reorganised Group, and were recorded at the amount of consideration paid for the Company (US$220,848 thousand). This amount includes the consideration paid for the acquisition of a 50.2 per cent. stake in the Company in 2009 and the subsequent increase of the stake to 65 per cent. through the Group’s participation in the Company’s equity placement in 2010, adjusted thereafter for the post-acquisition change in Jenington’s share of net assets of the Company. In addition, call options to acquire all rights and obligations under convertible loan agreements between the Company and Gold Lion (the former owner of the Company) became treasury shares of the reorganised Group, and were recorded at the cost of US$37,475 thousand, the fair value of the options at 30 June 2011. On 29 July 2011, Jenington launched an additional private exchange offer for shares of OJSC Polyus Gold. The offer closed on 15 August 2011 and resulted in Jenington acquiring 4.1 million OJSC Polyus Gold ADRs, representing approximately 1.09 per cent. of the total issued share capital of OJSC Polyus Gold, in exchange for 35.5 million of the Company’s treasury shares for the total value of US$119,623 thousand.
The investments revaluation reserve decreased by US$25,999 thousand in 2011 to US$4,557 thousand at 31 December 2011, as a result of a decline in the fair value of AFS equity investments together with the realised gain on disposal of AFS equity investments.
87 In 2011, the Group’s retained earnings decreased by 21 per cent. to US$1,424,516 thousand. The decrease was primarily attributable to the effect of reorganisation (US$417,460 thousand) and dividends declared in respect of 2010 results (US$72,327 thousand), which offset the profit for the year attributable to shareholders of the Group of US$468,998 thousand.
Dividends for 2010 at the rate of RUB 19.77 per ordinary share were declared by OJSC Polyus Gold’s annual general shareholders’ meeting on 20 May 2011. Taking into account the interim dividend payment of RUB 8.52 per ordinary share in respect of the results of the first half of 2010, the final dividend rate for the second half of the year was RUB 11.25 per OJSC Polyus Gold ordinary share, or US$0.40 per share (based on the exchange rate at 20 May 2011). This amount represents a dividend of RUB 0.71 or US$0.03 per share in the Company, after giving effect to reorganisation. The dividends were payable by 19 July 2011.
Due to the Combination, non-controlling interests increased by US$417,460 thousand, reflecting non-controlling interests in OJSC Polyus Gold, which became the Company’s subsidiary. As a result of the acquisition of a 2.36 per cent. stake in OJSC Polyus Gold by Jenington in July-August 2011 and a 3.81 per cent. stake in OJSC Polyus Gold by the Company through the mandatory tender offer for OJSC Polyus Gold shares completed in December 2011, non-controlling interests decreased by US$223,480 thousand. Other changes of non-controlling interests included total comprehensive income for the period attributable to non-controlling interests in the amount of US$33,400 thousand and dividends declared to shareholders of non-controlling interests by the Irkutsk alluvial business unit in the amount of US$48,949 thousand.
Non-current liabilities Movements in non-current liabilities during the years ended 31 December 2011 and 2010 are presented in the table below.
Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– Site restoration and environmental obligations 149,876 136,410 Borrowings 123,048 29,686 Deferred tax 180,741 182,948 Other non-current liabilities 24,008 19,666 –––––––– –––––––– Total non-current liabilities 477,673 368,710 –––––––– –––––––– In 2011, non-current liabilities increased by 30 per cent. to US$477,673 thousand at 31 December 2011 from US$368,710 thousand at 31 December 2010. Site restoration and environmental obligations increased by 10 per cent. and at 31 December 2011 amounted to US$149,876 thousand. The increase resulted from the change of the discount and inflation rates applied for the estimation of the obligations and unwinding of the discount on obligations, which was partly offset by the effect of the RUB depreciation.
Long-term borrowings of the Group at the reporting date were represented by the long-term portion of the amount payable to Société Générale under the US$100 million credit facility provided to OJSC Pervenets (Irkutsk ore business unit) and loans payable to Gold Lion, formerly the Company’s major shareholder. The loans payable to Gold Lion bear an interest rate of 10 per cent. per annum (the effective rate is 16 per cent.) and are due in November 2014. At 31 December 2011, the sum payable under the loans was equal to US$34,160 thousand (US$29,686 thousand at 31 December 2010).
Deferred tax decreased by 1 per cent. from US$182,948 thousand at 31 December 2010 to US$180,741 thousand at 31 December 2011, which was mostly due to the effect of the Russian rouble depreciation.
Current liabilities Movements in current liabilities during the years ended 31 December 2011 (pre IFRIC 20) and 2010 are presented in the table below.
88 Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– Borrowings 675,632 173,762 Trade, other payables and accrued expenses 192,077 169,037 Taxes payable 42,956 52,134 –––––––– –––––––– Total –––––––– 910,665 –––––––– 394,933 Current liabilities increased by 131 per cent. to US$910,665 thousand at 31 December 2011 from US$394,933 thousand at 31 December 2010, primarily due to an increase in borrowings incurred to fund the acquisition of OJSC Polyus Gold shares in the mandatory tender offer. At 31 December 2010 the liability under the Senior Notes valued at US$173,762 thousand comprised the largest part of the Group’s current liabilities. In November 2006, the Company (formerly KazakhGold Group Limited) issued the Senior Notes, with the principal due on 6 November 2013. The Senior Notes were unconditionally and irrevocably guaranteed by Kazakhaltyn, a wholly owned subsidiary of the Company, and its subsidiaries. Following the acquisition of the Company by Jenington, OJSC Polyus Gold became an additional limited liability guarantor of the Senior Notes. The Company was obliged to comply with a number of covenants in respect of the Senior Notes, including limitations on additional indebtedness, financial reporting timelines and certain other financial covenants. At 31 December 2011 and 2010, the Company (formerly KazakhGold) was not in compliance with all required covenants and did not receive the waiver from noteholders; as a result the Senior Notes were reclassified as a current liability. The Senior Notes were held at amortised cost and were carried at US$204,520 thousand at 31 December 2011 (US$173,762 thousand at 31 December 2010). On 17 November 2011, the Company notified the Trustee for the Senior Notes that the entry into the US$100 million loan by its subsidiary OJSC Pervenets with Société Générale, guaranteed by CJSC Polyus, did not comply with the indebtedness limitations and restrictions on affiliate transactions under the terms of the Senior Notes. It further notified the Trustee that it has not published interim financial statements for the first six months of 2011 within the time period required by the terms of the Senior Notes. In July 2011 the Group completed a consent solicitation for the Senior Notes with respect to, among other things, consent relating to the combination of the Polyus Russia Group with the KazakhGold Group, and paid a consent fee of US$3.4 million. As part of the consent fee the interest of the Senior Notes increased from 9.375 per cent. to 9.875 per cent. from 6 November 2011. The Company redeemed 100 per cent. of the Senior Notes, ahead of their stated maturity, at a redemption price equal to 102.344 per cent. of the principal amount of the Senior Notes on 15 March 2012. The Company funded the redemption from the proceeds of two facilities provided by Unicredit and HSBC. See also “– Capital Resources – Unicredit and HSBC Facilities”. Trade, other payables and accrued expenses increased by 14 per cent. to US$192,077 thousand at 31 December 2011 from US$169,037 thousand at 31 December 2010, primarily as a result of the increase in wages and salaries payable, the outstanding balances of which related mainly to the Krasnoyarsk business unit and alluvial enterprises, and trade payables. Trade payables increased primarily at the Krasnoyarsk business unit for the delivery of diesel oil and at the Irkutsk alluvial business unit for the supply of materials and spares and payments due under contracts for outsourced mining services. The cost of supplies was also affected by the growth of purchase prices for fuel, materials and spares. In 2011, taxes payable decreased by 18 per cent. to US$42,956 thousand at 31 December 2011 from US$52,134 thousand at 31 December 2010. This decrease was driven by the reduction in income tax payable, which was partly offset by an increase in social taxes, tax on mining and VAT payables.
89 Cash flow analysis The following table sets forth the main components of the Group’s consolidated cash flow statement for the years ended 31 December 2011 and 2010. Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– Operating activities: Profit before income tax 765,067 481,337 Adjustments(1) 391,849 310,409 –––––––– –––––––– Operating profit before working capital movements 1,156,916 791,746 Movements in working capital (137,345) (234,888) Cash flows generated from operations 1,019,571 556,858 Interest paid (23,423) (23,213) Income tax paid (230,743) (88,338) –––––––– –––––––– Net cash from operating activities 765,405 445,307 Investing activities: Capital expenditures,and deferred stripping costs(2) (359,396) (359,424) Other investments spending/proceeds(3) 99,033 188,310 –––––––– –––––––– Net cash utilised in investing activities (260,363) (171,114) Financing activities: Net cash utilised in financing activities (134,958) (110,983) –––––––– –––––––– Net increase/(decrease) in cash and cash equivalents 370,084 163,210 –––––––– –––––––– Effect of foreign exchange rate changes on cash and cash equivalents (39,541) (9,665) Cash and cash equivalents at beginning of the year 326,905 173,360 –––––––– –––––––– Cash and cash equivalents at end of the year 657,448 326,905 –––––––– –––––––– Notes: 1. Adjustments for non-cash items include: amortisation and depreciation, finance costs, expensed stripping costs, impairment of inventories, impairment of exploration and evaluation assets, impairment of property, plant and equipment, loss on disposal of property, plant and equipment, change in allowance for reimbursable value added tax and tax provision, income/(loss) from investments, change in allowance for doubtful debts, foreign exchange gain/(loss), net and other items. 2. Capital expenditures and deferred stripping costs include, purchases of property, plant and equipment, payments for deferred stripping costs, proceeds on sales of property, plant and equipment. 3. Other investments spending/proceeds include interest received, purchases of investments in securities and placement of deposits in banks and proceeds on sales of investments in securities and redemption of bank deposits.
Operating activities In 2011, the Group generated profit before income tax in the amount of US$765,067 thousand, compared to US$481,337 thousand in 2010. The increase in profit before income tax resulted from a combination of the higher realised gold prices and increased gold sales volumes. Operating profit before working capital changes was US$1,156,916 thousand, an increase of 46 per cent. as compared with 2010. In 2011, movements in working capital were substantially lower than in 2010, when the Group recorded a material increase in reimbursable VAT and inventories, particularly at the Krasnoyarsk business unit as a result of technical problems associated with the processing of sulphide ores at the Olimpiada mine. Net cash generated from operating activities increased from US$445,307 thousand in 2010 to US$765,405 thousand in 2011.
Investing activities In 2011, the Group utilised US$260,363 thousand in investing activities, as compared to US$171,114 thousand in 2010. The largest items of expenditure in 2011 comprised capital expenditures and deferred stripping costs totalling US$359,396 thousand, which was approximately the same as in 2010. In addition, the Group deposited cash in the amount of US$37,596 thousand (US$64,996 thousand in 2010) into current
90 bank accounts with an original maturity of more than three months, which was presented as acquisition of financial assets. This outflow was partly offset by proceeds from disposal of AFS equity investments, bank deposits and equity investments in listed companies held-for-trading for the total sum of US$121,270 thousand (US$244,955 thousand in 2010). In 2011, the Group also received US$15,359 thousand of interest income on bank deposits, as compared to US$8,351 thousand in 2010.
Financing activities Cash outflow from financing activities in 2011 totalled US$134,958 thousand, as compared to cash outflow of US$110,983 thousand in 2010. Cash expended on acquisition of subsidiary’s shares totalled US$588,816 thousand. These funds were used for the acquisition of 4.9 million OJSC Polyus Gold ADRs by Jenington in August 2011 and 7.3 million OJSC Polyus Gold ordinary shares by the Company in the mandatory tender offer for the shares of OJSC Polyus Gold in November – December 2011, representing approximately 1.27 per cent. and 3.81 per cent. of the total issued share capital of OJSC Polyus Gold, respectively. These cash outflows were offset by proceeds from borrowings totalling US$560,000 thousand, which included US$460,000 thousand drawn under the bridge facilities provided to the Group by VTB Bank and Société Générale to finance the acquisition of shares of OJSC Polyus Gold under the Mandatory Tender Offer and a US$100,000 thousand loan provided to OJSC Pervenets (Irkutsk alluvial business unit) by Société Générale in October 2011.
Financial expenditures in 2011 also included payment of dividends to shareholders of OJSC Polyus Gold for the second half of 2010 in the amount of US$73,191 thousand (US$104,801 thousand in 2010) and dividends paid to non-controlling shareholders by OJSC Polyus Gold for the nine months ended 30 September 2011 and the Irkutsk alluvial business unit in the total sum of US$26,225 thousand (US$12,226 thousand in 2010).
During April 2013, Polyus Gold’s Board of Directors expects to decide on the dividend for the financial year 2012 taking into account the Company’s dividend policy and will submit the proposed dividend to shareholders for their consideration at the Annual General Meeting.
Capital expenditures and deferred stripping costs The following table shows the Group’s capital expenditures, acquisition of subsidiaries and deferred stripping costs for the years ended 31 December 2011 and 2010.
Year ended 31 December ———————————– US$’000 2011 2010 —————————————————————————————— ————– ————– Purchases of property, plant and equipment 343,037 350,327 Proceeds on sales of property, plant and equipment (1,911) (643) ––––––––– ––––––––– Net capital expenditures 341,126 349,684 Acquisition of subsidiary, net of cash acquired, and increase of ownership in subsidiaries 588,816 – Acquisition of subsidiary, net of cash acquired 588,816 – Payments for deferred stripping costs 18,270 9,740 ––––––––– ––––––––– Total capital expenditures, acquisition of subsidiaries and deferred stripping costs 948,212 359,424 ––––––––– ––––––––– In 2011, the Group’s total capital expenditures and deferred stripping costs amounted to US$359,396 thousand, which was approximately at the level of 2010. Net cash outflow on acquisition of property, plant and equipment amounted to US$341,126 thousand in 2011, as compared to US$349,684 thousand in 2010. The capital expenditure funds were mainly invested in the construction of the Verninskoye mine, continuing development of Blagodatnoye, the modernisation of production facilities at Olimpiada and the upgrade of alluvial mining equipment and operating assets in Kazakhstan. In 2011, the Group capitalised stripping costs incurred at the Titimukhta and Kuranakh mines totalling US$18,270 thousand, as compared to US$9,740 thousand in 2010.
91 Capital commitments The Group’s contracted capital expenditure commitments as at 31 December 2011 amounted to US$107,019 thousand (31 December 2010: US$24,304 thousand).
Operating leases Future minimum lease payments due under non-cancellable operating lease agreements at 31 December 2011 were as follows.
US$’000 ————————————————————————————————————– ––––––––– Due within one year 4,275 From one to five years 7,629 Thereafter 17,199 ––––––––– Total 29,103 ––––––––– Critical accounting judgements and key sources of estimation uncertainty Preparation of the consolidated financial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgements which are based on historical experience, current and expected economic conditions, and all other available information. Actual results could differ from those estimates. The following sets forth a discussion of critical accounting judgements and key sources of estimation uncertainty arising in connection with the preparation of the Group’s financial statements as of and for the year ended 31 December 2012.
Critical judgements in applying accounting policies Management considers the determination if exploration and evaluation assets will be recouped by future exploitation or sale, identification and valuation of tangible and intangible assets and liabilities, assessment of the outcome of contingencies and the interpretation of tax legislation as critical judgements made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements. All of these critical judgements require an estimation of amounts recorded in the consolidated financial statements as described below.
Key sources of estimation uncertainty The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the 2012 reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
Useful economic lives of property, plant and equipment The Group’s mining assets, classified within property, plant and equipment, are amortised using the straight-line method over the life-of-mine based on a mine operating plan, which calls for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code. When determining life-of-mine, assumptions that were valid at the time of estimation may change when new information becomes available.
The factors that could affect estimation of life-of-mine include the following:
• change of estimates of proven and probable ore reserves;
• the grade of ore reserves varying significantly from time to time;
• differences between actual commodity prices and commodity price assumptions used in the estimation of ore reserves;
• unforeseen operational issues at mine sites; and
92 • changes in capital, processing and reclamation costs, discount rates and foreign exchange rates possibly adversely affecting the economic viability of ore reserves.
Any of these changes could affect prospective amortisation of mining assets and their carrying value.
Non-mining property, plant and equipment are depreciated on a straight-line basis over their economic useful lives. Management periodically reviews the appropriateness of the assets’ economic useful lives. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the Group.
Exploration and evaluation assets Management’s judgement is involved in the determination of whether the expenditures which are capitalised as exploration and evaluation assets may be recouped by future exploitation or sale or should be impaired. Determining this, management estimates the possibility of finding recoverable ore reserves related to a particular area of interest. However, these estimates are subject to significant uncertainties. The Group is involved in exploration and evaluation activities, and some of its licensed properties contain gold resources under the definition of internationally recognised mineral resource reporting methodologies. A number of licensed properties have no mineral resource delineation. Many of the factors, assumptions and variables involved in estimating resources are beyond the Group’s control and may prove to be incorrect over time. Subsequent changes in gold resources estimates could impact the carrying value of exploration and evaluation assets.
Exploration and evaluation assets: Nezhdaninskoe deposit The Nezhdaninskoe deposit is treated and classified as an exploration and evaluation asset because, at the current stage certain reserves have been identified, but the decision on the development of the deposit has not yet been made. Among future options are:
• construction of a full cycle processing plant, with subsequent sale of gold doré;
• construction of a gold concentrate production plant, with subsequent sale of flotation concentrate; and
• sale of the deposit to independent third parties at a price above accumulated exploration and evaluation expenses.
Management continues to evaluate the deposit and has not taken a final decision yet.
Stripping activity asset The Group incurs stripping costs during the production phases of its surface mining operations. Significant judgement is required to distinguish between the production stripping which relates to the extraction of inventory and that relates to the creation of a stripping activity asset.
In order to perform the allocation the Group is required to identify separate components towards which the stripping costs have been incurred for the ore bodies in each of its mines. An identifiable component is a specific volume of the ore body that is made more accessible by the stripping activity. Significant judgement is required to identify and define these components, and also to determine the expected volumes of waste to be stripped and ore to be mined in each of these components. For the purposes of identification of a separate component the Group uses mine operating plans, which are based on estimated proven and probable ore reserves under the Russian Resource Reporting Code.
Each discrete stage of mining identified at mine plan is considered as units of account. If the mine plan initially identifies several discrete stages of mining which will take place consecutively (one after another), these stages would be identified as components. These assessments are undertaken for each individual mine.
Stripping costs incurred during production phase are allocated between inventory produced and the stripping activity asset by using allocation basis. The Group considers that the volume of waste extracted compared with expected volume of a specific component of the ore body, for a given level of ore production, to be the most suitable allocation basis.
93 Impairment of tangible assets The Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets are impaired. In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Management applies its judgement in allocating assets that do not generate independent cash flows to appropriate cash-generating units, and also in estimating the timing and value of underlying cash flows within the value-in-use calculation. Subsequent changes to the cash-generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.
Site restoration and environmental obligations The Group’s mining and exploration activities are subject to various environmental laws and regulations. The Group estimates site restoration and environmental obligations based on the management’s understanding of the current legal requirements in the various jurisdictions, terms of the license agreements and internally generated engineering estimates. A provision is recognised, based on the net present values for decommissioning and land restoration costs as soon as the obligation arises. Actual costs incurred in future periods could differ materially from the amounts provided. Additionally, future changes to environmental laws and regulations, life-of-mine estimates and discount rates could affect the carrying amount of this provision.
Income taxes The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the Group’s provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. The estimation of that probability includes judgements based on the expected performance. Various factors are considered to assess the probability of the future utilisation of deferred tax assets, including past operating results, operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected.
Contingencies By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgements and estimates of the outcome of future events.
Quantitative and Qualitative Disclosures about Market Risk The main risks arising from the Group’s financial instruments are equity investments price, foreign currency, credit and liquidity risks. Due to the fact that the Group has sufficient positive net position in respect of the outstanding balance of borrowings and cash and cash equivalents available to settle these obligations within a short period if conditions would become unfavourable, management believes that the Group is not significantly exposed to interest rate risk. If the interest rate was 1 per cent. higher or lower during the year ended 31 December 2012 interest expense for the year 2012 would increase/decrease by US$3,039 thousand.
The Group does not enter into any hedging contracts or use other financial instruments to mitigate the commodity price risk.
94 Equity investments price risk The Group is exposed to equity investments price risk. Presented below is the sensitivity analysis illustrating the Group’s exposure to equity investments price risks at the reporting date. Management of the Group has decided to use the range of market prices of 10 per cent. higher/lower for the sensitivity analysis as the effect of such variation is considered to be significant and appropriate in the current market situation. If market prices for equity investments had been 10 per cent. higher or lower, the profit before tax as a result of changes in fair value of financial assets at fair value through profit or loss would increase/decrease as follows:
Year ended 31 December ———————————– (US$’000) 2012 2011 —————————————————————————————— ————– ————– Profit before tax 928 1,486 Investment revaluation reserve – 3,474
Fair value measurements recognised in the statement of financial position The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3, based on the degree to which the fair value is observable:
• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;
• Level 2 fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and
• Level 3 fair value measurements are those derived form valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
As at 31 December 2012, the Group held the following financial instruments measured at fair value:
(US$’000) Level 1 Level 2 Total ———————————————————————— ————– ————– ————– Equity investments in listed companies held for trading 9,276 – 9,276 ————– ————– ————– Total 9,276 – 9,276 ––––––––– ––––––––– ––––––––– As at 31 December 2011, the Group held the following financial instruments measured at fair value:
(US$’000) Level 1 Level 2 Total ———————————————————————— ————– ————– ————– Available for sale equity investments – 34,744 34,744 Equity investments in listed companies held for trading 14,857 – 14,857 ————– ————– ————– Total 14,857 34,744 49,601 ––––––––– ––––––––– ––––––––– During the years ended 31 December 2012 and 2011, there were no transfers between Level 1 and Level 2. The fair value of financial assets and liabilities is determined as follows:
• the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets is determined with reference to quoted market prices; and
• the fair value of other financial assets and financial liabilities is determined in accordance with generally accepted pricing model, based on discounted cash flow analysis using rices from observable current market transactions.
The Company believes that the carrying values of financial assets and other financial liabilities recorded at amortised cost in the Financial Statements approximate their fair values.
95 Foreign Currency risk Currency risk is the risk that the financial results of the Group will be adversely affected by changes in exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies. Prices for gold are quoted in US dollars based on international quoted prices, and paid in local currencies (roubles or tenge). The majority of the Group’s expenditures are denominated in roubles and, accordingly, operating profits are adversely impacted by appreciation of the Russian rouble against the US dollar. In assessing this risk, management takes into consideration changes in gold price.
The carrying amounts of monetary assets and liabilities denominated in foreign currencies other than functional currencies of the individual Group entities at 31 December 2012 and 31 December 2011 were as follows:
Assets Liabilities ——––——–———–———– ——––——–———–———– 31 December 31 December 31 December 31 December US$’000 2012 2011 2012 2011 ———————————————— ––————– ––————– ––————– ––————– US$ 348,508 62,809 381,499 888,405 EUR 1,888 222 14,087 680 ––————– ––————– ––————– ––————– Total 350,396 63,031 395,586 889,085 ––––––––––– ––––––––––– ––––––––––– ––––––––––– Currency risk is monitored on a regular basis by performing sensitivity analysis of foreign currency positions in order to verify that potential losses are at an acceptable level.
The table below details the Group’s sensitivity to changes of exchange rates by 10 per cent., which is the sensitivity rate used by the Group for internal analysis. The analysis was applied to monetary items at the reporting dates denominated in respective currencies.
Year ended 31 December ———————————– 2012 2011 —————————————————————————————— ————– ————– Profit or loss (RUB to US$) 3,852 61,910 Profit or loss (RUB to EURO) 1,612 64 Profit or loss (KZT to US$) (553) 20,650
Credit risk Credit risk is the risk that a customer may default or not meet its obligations to the Group on a timely basis, leading to financial losses to the Group. Credit risk arises from cash, cash equivalents and deposits kept with banks, loans granted, advances paid, promissory notes and trade and other receivables, and other investments in securities.
In order to mitigate the credit risk, the Group conducts its business with creditworthy and reliable counterparties, minimises the advance payments to suppliers, and actively uses letters of credit and other trade finance instruments.
The Group employs a methodology for in-house financial analysis of banks and non-banking counterparties, which enables management to estimate an acceptable level of credit risk with regard to particular counterparties and to set appropriate individual risk limitations. Within the Group’s core companies the procedures for preparing new agreements include analysis and contemplation of credit risk, estimation of the aggregate risk associated with a counterparty (arising both from an agreement under consideration and from previously existing contracts, if any) and verifying compliance with individual credit limits.
The Group’s credit risk profile is regularly observed by management in order to seek to avoid undesirable increases in risk, limit concentration of credit and to ensure compliance with above mentioned policies and procedures.
Although in 2012 the Group sold more than 84 per cent. of the gold sold to three major customers, the Group is not economically dependent on these customers because of the high level of liquidity in the gold
96 commodity market. A substantial portion of gold sales are made to banks on advance payment or immediate payment terms, and therefore the Company believes that credit risk related to trade receivables is minimal. At 31 December 2012, the Group had US$20,284 thousand of outstanding trade receivables for gold sales, as compared to US$4,869 thousand as at 31 December 2011.
Gold sales to the Group’s three major customers, amounted to US$2,336,743 thousand in 2012, as compared to US$2,060,107 thousand in 2011.
Other receivables include amounts receivable in respect of sale of electricity, transportation, handling and warehousing services and other services. The procedures of accepting a new customer include check by the Group’s security department and responsible on-site management for business reputation, licences and certification, credit-worthiness and liquidity.
The Company believes that there is no other significant concentration of credit risk.
Liquidity risk Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group’s liquidity position is carefully monitored and managed. The Group manages liquidity risk by maintaining detailed budgeting, cash forecasting process and matching the maturity profiles of financial assets and liabilities to help ensure that it has adequate cash available to meet its payment obligations.
Historically, the Group has not relied extensively on external financing. Following the development of new capital projects during 2012, the Group arranged certain external finance facilities with banks. See “– Capital Resources”.
The Group’s cash management procedures include medium-term forecasting (budget approved each financial year and updated on a quarterly basis), short-term forecasting (monthly cash-flow budgets are established for each business unit and each entity’s daily cash position is reviewed on a two-week rolling basis).
The table below shows the maturity profile of the Group’s financial liabilities as at 31 December 2012 based on undiscounted contractual payments, including interest payments:
Borrowings Other non- Trade and –––—————–––––– current other US$’000 Principal Interest liabilities payables Total –––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Due within three months 11,481 2,053 524 282,997 297,055 Due within three to nine months 61,235 4,526 – – 65,761 Due within nine to twelve months 115,294 2,673 – – 117,967 Due in the second year 52,811 4,080 – – 56,891 Due in the third year 108,366 659 – – 109,025 Due in the fourth year 290 2 – – 292 Due thereafter – – – – – –––––––– –––––––– –––––––– –––––––– –––––––– TOTAL 349,477 13,993 524 282,997 646,991 –––––––– –––––––– –––––––– –––––––– ––––––––
97 INDUSTRY OVERVIEW
Gold has been used for many centuries to store value, as a form of money and to produce jewellery. Until recently, many economies used gold as the basis for international monetary standards, and the Company believes it remains a popular investment tool. Due to its qualities of malleability, ductility, reflectivity, resistance to corrosion and excellent thermal and electric conductivity, gold is also used in a wide variety of industrial and medical applications. Since 2008, demand for gold has been at record highs.
Historically, jewellery has been by far the most important market for gold. In 2012, total demand for gold equalled approximately 4,406 tonnes, the main components of which were jewellery, which accounted for approximately 43 per cent. of total demand; bar and coin production, which accounted for approximately 29 per cent.; official sector purchases, which accounted for approximately 12 per cent.; technology, which accounted for approximately 10 per cent.; and exchange traded funds (“ETFs”) and similar products, which accounted for approximately 6 per cent.
In addition to rings, brooches, necklaces and earrings, people also use gold in the form of gold leaf for decoration and protection and for screen printing (for example, directly onto bone china, earthenware, porcelain and glass surfaces). Gold is also the key component for both “liquid gold”, a formulation containing up to 12 per cent. gold, which is ideal for decorative applications using brushes, and gold pastes used for screen printing.
Gold is also used as a coinage metal. Apart from gold coins, gold ingots and gold bars, gold is available in many forms, including pure gold and alloys, such as gold flakes, foil gauzes, grain, powders, sheet, sponges, tubes, wires and even single gold crystals.
In recent years, gold catalysts have become increasingly useful in the chemical industry. Many other gold compounds, including neutral gold halides, aurates, gold cyanides, gold oxides, phosphine gold complexes, gold hydroxides and gold nitrates, are available to industrial users. Chloroauric acid, which contains gold, is used in photography for toning silver images.
Gold is also a useful metal for use in electronics owing to its inert nature and other physical properties. Examples of the use of gold in electronics include electrical contacts, bonding wire, solder alloys and electroplating. Gold is also a useful brazing material, and manufacturers use it for coating space satellites, since it reflects infrared light well and is inert.
As an alloy, gold is used extensively for dentistry in gold teeth, dental attachments, inserts and solders and is used increasingly for medical implants in eyes and ears, as well as in many other medically useful wires, tubes, sheets, and foils. Disodium aurothiomalate, a compound containing gold, is administered through an intramuscular injection as a treatment for arthritis.
The Company believes that, because of its historically high value, the bulk of the gold mined throughout history is still in circulation today in one form or another.
Gold Production Gold deposits are located throughout the world. In 2012, global gold production, according to the World Gold Council, amounted to 2,848 tonnes, which was approximately the same as in 2011. Several of the largest gold producing countries suffered material losses in gold output in 2011, offsetting increases in production of gold in other regions. The most substantial decrease in production was recorded in Indonesia, which was mainly attributable to decreases in production at the world’s largest mine, the Grasberg mine, as well as the operations at Batu Hijau. South Africa recorded a significant decrease in production for the tenth year in a row, as major labour unrest across the country continued to affect production. In addition, gold output also fell in the United States, Australia and Brazil. These decreases were offset by increases in production in China, Russia, Canada, Ghana, Mexico and Peru. In 2012, gold production in China increased by 12 per cent. on a year-on-year basis to 403 tonnes. This increase was largely attributable to toll smelters that process ore on behalf of other producers, as well as to by-product output by producers of non-ferrous metals.
98 In 2012, Russia maintained its position as the fourth largest global producing country in the world in terms of production. According to data published by the Russian Union of Gold Miners, mine production in Russia amounted to 218 tonnes, an increase of 7 per cent. over 2011 levels. The increase was largely attributable to the ramp-up of newly commissioned operations at Albyn and Albazino and improved performance at the Group’s Olimpiada and Blagodatnoye mines, as well as at the Kubaka and Vysochaishy processing plants.
The top five gold producers globally, measured by the amount of JORC proven and probable reserves based on the most recent publicly available company reports were: Barrick Gold (140 million ounces), Newmont Mining Corp. (99 million ounces), Polyus Gold (88 million ounces), Newcrest Mining Ltd. (87 million ounces) and Gold Fields Ltd. (78 million ounces). Based on publicly available reports, the top five gold producers globally, as measured by the amount of gold produced in 2012, were: Barrick Gold (7.4 million ounces), Newmont Mining (5.0 million ounces), AngloGold (3.9 million ounces), Kinross Gold Corporation (2.6 million ounces) and Goldcorp (2.4 million ounces).
Supply and Demand Supply In 2012, the supply of gold decreased by 1 per cent. to 4,453 tonnes compared to 2011, mainly as a result of lower gold recycling volumes. Mine production represents the main source of gold supply, accounting for 64 per cent. of the global supply of gold in 2012.
Another important source of the world’s gold supply is scrap. As a result of the prolonged period of high gold prices in recent years, supply of gold from scrap reached record highs, as individuals used the opportunity to sell accrued scrap at higher gold prices. Although the supply of scrap metal in 2012 remained high relative to historical levels as a result of the high average gold prices, in most regions of the world, recycling of gold has begun to decline as consumers have adjusted to high gold prices. This decline in 2012 was partially offset by an increase in gold recycling in India, where recycling nearly doubled, and an increase in gold recycling in Egypt.
Central banks and the International Monetary Fund have been another traditional source of gold supply in the global market. Recently, however, purchases of gold by the official sector have surpassed sales. In 2012, official sector sales fell to 17 tonnes, compared to 59 tonnes in 2011 and 236 tonnes in 2010. The principal sellers of the metal in 2012 were Germany, Russia and Mexico.
Demand In 2012, the demand for gold decreased as compared to 2011 and amounted to 4,406 tonnes as compared to 4,582 tonnes in 2011. Although the jewellery and technology sectors remained the two largest consumers of gold, demand from these sectors fell by 3 per cent. and 5 per cent. to 1,908 tonnes and 428 tonnes, respectively. Decline in demand in the jewellery market was mainly attributable to a decline in demand from India and China, the two leading jewellery manufacturing markets, resulting in part from unclear price trends and a general slowdown in economic growth. In contrast, demand for gold in the jewellery sector grew in Switzerland, Egypt and Russia. Demand for gold from the technology sector declined as a result of rising gold prices which have encouraged manufacturers to consider less costly gold substitutes.
According to the World Gold Council demand from the official sector amounted to 535 tonnes, an increase of 17 per cent. as compared to 2011. This increase was driven by the desire of countries to diversify state reserves in view of the weakness of major global currencies, the escalation of the sovereign debt crisis and perceived geopolitical risks. According to the World Gold Council, Russia is estimated to have been the principal buyer of gold in 2012, with other large buyers being the central banks of the Philippines, Brazil, South Korea, Kazakhstan, Iraq, Venezuela, Mexico, Paraguay, Ukraine and Belarus.
Investment Demand The investment demand for gold includes the demand for gold bullion, coins, medals and “gold” financial instruments (such as traded index funds and ETFs). In 2012, investment demand accounted for over a third of the total global demand for gold and amounted to 1,535 tonnes, a slight decrease from 2011 levels.
99 Investment in physical bars and coins was the largest component of investment demand, and amounted to 1,256 tonnes in 2012.
In 2012, investment demand was largely driven by unstable fiscal situations in the European Union and the US, perception of growing inflationary pressures, negative short-terms interest rates and stagnant equity and debt markets. India and China remained the largest investors in physical gold, with other large consumers including the United States, Germany and Switzerland.
Demand from ETFs and other financial instruments linked to the gold price increased to 279 tonnes in 2012, representing an increase of 50 per cent. as compared to 2011.
Pricing and Trading Unlike most commodities, gold is not consumed, and most above-ground stocks of gold can be brought back to market. As a result, variations in new gold output from mines in any given time period may not have an immediate material impact on the gold price, as the amount of gold produced in any single year represents a small portion of the total potential supply of gold available for sale. As a result, the price of gold has historically been less volatile as compared with most other commodities. However, rising investor demand against a backdrop of relatively flat supply, as rising scrap volumes are offset by decreases in mine production and official sector sales, has resulted in an increasing gold price in recent years, before experiencing volatility in prices in 2012 and declines in the price at the beginning of 2013.
Gold Prices Historical Gold Prices – London afternoon gold price fixing (US$/oz)
$2,000.0
$1,900.0
$1,800.0
$1,700.0
$1,600.0
$1,500.0
$1,400.0
$1,300.0
$1,200.0
$1,100.0
$1,000.0
$900.0
$800.0
$700.0
$600.0 2008 2009 2010 2011 2012
Source: World Gold Council www.gold.org
Average Gold Price Year (US$/oz) 2008 2009 2010 2011 2012 ––––––– ––––––– ––––––– ––––––– ––––––– 872 973 1,225 1,571 1,669
The price of gold has historically been significantly affected by macroeconomic factors, such as inflation, exchange rates, reserve policy and by global political and economic events. Gold is often purchased as a store of value in periods of price inflation and weakening currency.
London is the world’s largest pool of gold liquidity, with trading conducted primarily via an over-the-counter format in 400 ounce gold bars with a purity of 9,950 parts per 10,000 or higher. The LBMA fixes the gold
100 price twice daily in London (at 10.30 a.m. and 3.00 p.m.), using prices derived from five fixing members of the LBMA. These price fixings are used as a key indicator for gold market participants around the world. Leading gold futures markets are the COMEX in New York and TOCOM in Tokyo.
In 2012, as a result of investment demand and official sector demand, the price of gold continued to grow, with the annual average gold price reaching a record of US$1,669 per ounce, an increase of 6 per cent. as compared to the 2011 average gold price.
Despite the overall price increase in 2012, as compared with 2011, gold prices experienced high volatility in the course of 2012 on account of rising demand from investors seeking a safe haven amid fears of a global economic downturn. At the start of 2012, gold prices rose in response to a downgrade by Standard and Poor’s of the credit ratings of nine members of the Eurozone. Gold prices then started to fall in late February and reached their lowest level of US$1,540 per ounce in May. The fall was largely attributable to the strengthening of the US dollar and a rise in supply as a result of sales by investors. As a result of sovereign debt concerns, monetary policy easing by the Federal Reserve System and the European Central Bank, as well as further sovereign rating downgrades, gold prices started rising in August, peaking in October at US$1,792 per ounce. In the first quarter of 2013, the average London afternoon gold price fixing was US$1,632, although the price had declined to US$1,505 by 12 April 2013.
Overview of the Gold Mining Environment in Russia According to the Russian Union of Gold Miners, total gold production in Russia increased by 6.8 per cent. in 2012 from 2011 levels and amounted to 7.3 million ounces (226 tonnes). The amount of gold produced by the Group represented approximately 22 per cent. of the total Russian output in 2012.
101 BUSINESS
Overview The Group is the largest gold producer in Russia based on ounces of gold produced, according to the Russian Union of Gold Miners, and with 87.5 million ounces of gold in JORC proven and probable reserves, excluding reserves of the Group’s Kazakhstan business unit, has the third largest gold reserves in the world based on the most recent publicly available reports of other gold mining companies. The Group develops and mines hardrock gold and alluvial gold deposits, with its principal deposits in the Krasnoyarsk, Irkutsk, Magadan and Republic of Sakha (Yakutia) regions of Russia. In 2012, the Group’s operations in Russia produced 1,569 thousand ounces of gold. The Group’s total gold production in 2012 was 1,678 thousand ounces.
For the year ended 31 December 2012, the Group had total gold sales of US$2,784,499 thousand, total revenue of US$2,848,105 thousand and profit before income tax of US$1,237,775 thousand, and, as at 31 December 2012, total assets of US$5,588,907 thousand and total equity of US$4,469,077 thousand. For the year ended 31 December 2011 (post IFRIC 20), the Group had total gold sales of US$2,340,650 thousand, total revenue of US$2,402,710 thousand and profit before income tax of US$784,053 thousand, and, as at 31 December 2011, total assets of US$4,236,340 thousand and equity of US$2,844,536 thousand. The Group’s Adjusted EBITDA was US$1,382,967 thousand in 2012 and US$1,131,863 thousand in 2011 (post IFRIC 20) and TCC was US$1,169,607 thousand in 2012 and US$956,709 thousand in 2011 (post IFRIC 20).
The Company estimates the Group’s mineral base to amount to more than 35 years of hardrock gold production and more than 10 years of alluvial gold production.
The table below shows the mineral reserves and resources of the Group according to the JORC Code(1):
Ore Gold (million Grade (thousand Classification Category tonnes) (g/t) ounces) –––––––––––––––––– –––––––––––––––––––––––––– –––––––– –––––––– –––––––– Resources (including reserves) Measured 547.7 1.8 30,905 Indicated 1,210.6 2.0 79,561 –––––––– –––––––– –––––––– Total measured and indicated 1,758.3 1.9 110,466 –––––––– –––––––– –––––––– Inferred 634.0 2.0 41,463 Total measured indicated and inferred 2,392.3 2.0 151,928 –––––––– –––––––– –––––––– Reserves Proven 509.1 1.7 27,545 Probable 806.6 2.3 59,990 –––––––– –––––––– –––––––– Total proven and probable 1,315.7 2.0 87,535 –––––––– –––––––– –––––––– Note: 1. Based on the most recent audits of the Group’s respective reserves. Excludes reserves and resources of the Group’s Kazakhstan and Kyrgyzstan operations, which the Company sold on 28 February 2013. See “– The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
102 The table below shows the gold production figures for the Group’s operations. Year ended 31 December ––––––––––––––––––––––––––––––––––– Production of Gold (’000 ounces) 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk Region Olimpiada 653 566 581 Titimukhta 117 109 100 Blagodatnoye 401 363 251 Irkutsk Region Alluvial deposits 214 210 197 Verninskoye(1) (2) 46 13 26 Republic of Sakha (Yakutia) Kuranakh mine 138 117 120 –––––––– –––––––– –––––––– TOTAL (RUSSIA) 1,569 1,378 1,275 Kazakhstan(3) 109 117 110 –––––––– –––––––– –––––––– TOTAL PRODUCTION OF GOLD (4) –––––––– 1,678 ––––––– 1,495– –––––––– 1,386 Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets process plant. 2. 2011 and 2010 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit. 3. The Company sold its gold mining assets in Kazakhstan and Kyrgyzstan on 28 February 2013. 4. Totals may not sum completely due to rounding.
The Group’s major gold deposits in Russia are: • in the Krasnoyarsk region (representing 51 per cent. of the Group’s total proven and probable reserves in Russia and 70 per cent. of the Group’s total gold production in 2012) – the Olimpiada deposit, which is one of the largest gold deposits in Russia, the Blagodatnoye and Titimukhta deposits and the Razdolinskaya (which includes Poputninskoye) and Panimba fields; • in the Irkutsk region (representing 11 per cent. of the Group’s total proven and probable reserves in Russia and 16 per cent. of the Group’s total gold production in 2012) – the Verninskoye, Pervenets and Chertovo Koryto deposits and the Medvezhy goldfields, as well as 113 alluvial deposits; • in the Magadan region (representing 36 per cent. of the Group’s proven and probable reserves in Russia) – the Natalka deposit; and • in the Republic of Sakha (Yakutia) (representing 2 per cent. of the Group’s total proven and probable reserves in Russia and 8 per cent. of the Group’s total gold production in 2012) – the Kuranakh ore body.
On 28 February 2013, the Group completed the sale of its gold mining assets in Kazakhstan and Kyrgyzstan, which it had held since its acquisition of a controlling stake in KazakhGold. See “– The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
The Group has embarked on an intensive growth and development programme, with the goal of becoming one of the world’s top five gold mining companies in terms of production, reserves and market capitalisation.
History of the Group In 2002, OJSC MMC Norilsk Nickel (“Norilsk Nickel”) acquired CJSC Polyus, which held various gold mining assets in the Krasnoyarsk region of Russia.
In 2004, CJSC Polyus completed the acquisition of a controlling interest in the Russian gold mining companies, OJSC Lenzoloto (in the Irkutsk region of Russia) and OJSC Matrosov Mine (in the Magadan
103 region of Russia), and subsequently increased its stake in both companies. Following several restructurings, some of the assets of OJSC Lenzoloto are now held by another Group company, OJSC Pervenets.
In August to September 2005, CJSC Polyus further expanded its gold mining assets through the acquisition of Aldanzoloto, OJSC YMC and OJSC SVMC in the Republic of Sakha (Yakutia) region in Russia. As a result of those acquisitions, CJSC Polyus increased its production of gold in 2005 to 1.038 million ounces, as compared to 832,000 ounces in 2003, and, in terms of production, CJSC Polyus became Russia’s largest gold mining company.
In March 2006, Norilsk Nickel transferred all of the shares of CJSC Polyus, together with a cash contribution of RUB 10 billion (approximately US$360 million at the time), to OJSC Polyus Gold, a newly formed Russian open joint stock company, as part of a spin-off of Norilsk Nickel’s gold mining business.
In May 2006, the shares of OJSC Polyus Gold were admitted to listing and trading on the RTS and MICEX stock exchanges. In July 2006, OJSC Polyus Gold established a Level I American depositary receipt programme, and in December 2006 the OJSC Polyus Gold ADSs were listed on the Official List of the United Kingdom Listing Authority (the “UKLA”) and admitted to trading on the London Stock Exchange.
On 9 July 2009, CJSC Polyus’s subsidiary, Jenington International Inc. (“Jenington”), made a partial offer for the shares of KazakhGold to shareholders of KazakhGold. The partial offer was declared unconditional on 14 August 2009, following which Jenington became the controlling shareholder of KazakhGold, which held mining assets in Kazakhstan, Kyrgyzstan and Romania.
On 17 June 2011, KazakhGold announced the Combination. The Combination, which comprised a private exchange offer by KazakhGold to holders of OJSC Polyus Gold securities as well as option agreements with Jenington and the principal shareholders of KazakhGold, completed on 25 July 2011 and resulted in KazakhGold acquiring 89.14 per cent. of the issued share capital of OJSC Polyus Gold. On 26 July 2011, KazakhGold changed its name to Polyus Gold International Limited. Following a mandatory tender offer by the Company to remaining shareholders of OJSC Polyus Gold in accordance with Russian law, the Company increased its total interest in the issued share capital of OJSC Polyus Gold to 92.95 per cent. In addition, Jenington acquired OJSC Polyus Gold ADRs through a private exchange offer and open-market acquisitions to acquire a total interest (in the form of ADRs) of 2.36 per cent. in the share capital of OJSC Polyus Gold.
On 10 May 2012, Jenington completed the sale, in privately negotiated transactions, of 151,607,496 shares of the Company to Chengdong Investment Corporation, a wholly-owned subsidiary of CIC International Co. Ltd., and 50,198,271 shares of the Company and 25,153,897 Level I GDRs to VTB Bank.
On 18 May 2012, the Group completed the sale of its Romanian assets for a total consideration of US$20 million to a British Virgin Islands incorporated holdings company affiliated with SAT & Company JSC.
On 19 June 2012, the entire issued share capital of the Company was admitted to the Premium Listing Segment of the Official List of the UKLA and to trading on the main market of the London Stock Exchange.
On 28 February 2013, the Group completed the sale of its gold mining assets in Kazakhstan and Kyrgyzstan to a consortium consisting of Institute Project B.V., Financial Services B.V. and Folkstand Consortium Limited.
104 Group Structure The structure chart below sets out the holding structure of the Group’s subsidiaries that the Company considers significant. See Note 34 to the 2012 Financial Statements.
Polyus Gold International Limited (Issuer) (Jersey)
92.95%
OJSC “Polyus Gold” 2.36% (1) (Russia) Holding company
100%
Closed Joint-Stock Company “Gold-Mining Company “Polyus” (Guarantor) (Russia) Mining 100%
Jenington International Inc. (BVI) Investment
100% 64.08% 100% 100% 100% 63.42%
LLC “Polyus Stroy” OJSC “Lenzoloto” OJSC “Pervenets” OJSC “Matrosov Mine” OJSC “Aldanzoloto GRK” OJSC “SVMC” 36.58% (Russia) (Russia) (Russia) (Russia) (Russia) (Russia) Construction Market agent Mining Mining (development stage) Mining Mining (development stage)
31.30%
5.6% 94.4% 100% 15.87% 0.92%
CJSC “ZDK Lenzoloto” CJSC “Tonoda” 1.91% Polyus Exploration Limited 49.99% (Russia) (Russia) (BVI) Mining Exploration (development stage) Investment
61% CJSC “Lensib” (Russia) Mining
84% CJSC “Svetliy” (Russia) Mining
82% CJSC “Dalnaya Taiga” (Russia) Mining
84% CJSC “Marakan” (Russia) Mining
65% CJSC “Sevzoto” (Russia) Mining
Note: 1. Held through ADRs.
Competitive Strengths The Company believes that the Group benefits from the following principal competitive strengths:
A gold producer with a highly competitive position in Russia and strong track record of production from existing operations With 2012 production of 1,678 thousand ounces, 87.5 million ounces of proven and probable JORC reserves and 151.9 million ounces of measured, indicated and inferred JORC resources, the Group is the largest gold producer in Russia and one of the top three gold companies worldwide by proven and probable JORC reserves, based on the most recent publicly available reports. The Group’s current producing assets are well established, with minimum reliance on third-party infrastructure, and, as they have been producing for many
105 years, provide the foundation for the Group’s further gold production in the medium term. As a result of its strong operations and current foothold in Russia, the Company believes that the Group is well positioned to capitalise on existing and future opportunities in the region.
An extensive resource base and defined development pipeline, providing a leading production growth profile from large development assets A major portion of the Group’s 87.5 million ounces of proven and probable JORC reserves are within assets that are currently not producing. Given its strong financial position and track record of commissioning new mines, the Company believes that the Group is well-positioned to convert its reserve base into gold production. Management expects growth to come from both the expansion of production at the existing mine and the start-up of new deposits, including the Natalka deposit. The Company believes that the Natalka deposit, once launched, would rank among the largest gold mines in the world, based on publicly available reserve and resources reports of leading gold producers.
Strong expertise in gold mining and project execution in an opportunity-rich mining region The Company believes that the Group’s operations at its current producing assets are best-in-class and are characterised by efficient use of modern equipment and low-cost, large-scale processes. Many of the Group’s operations take place in remote locations and harsh environments and the Group has a proven ability to operate in such circumstances. Likewise, the Group has a proven track record of project execution, with much of the Group’s existing production being the result of its successful development from initial exploration through to design and development and ultimately gold production. The Group’s Blagodatnoye asset is one of the largest Russian exploration projects developed in the last 10 years with reserves of 9.9 million ounces, and is now producing 401 thousand ounces of gold per annum. The successful development of the Blagodatnoye mine demonstrates the Group’s ability to commission new projects as it was brought into production ahead of schedule in July 2010 and at the projected capital cost. The Group has an in-house design bureau Polyus Project, with state-of-the-art engineering capabilities for development of industrial, energy and civil projects, with the Group’s construction and project management group providing the core expertise. The Group’s total capacity of mills commissioned during the period from 2006 to 2012 is 13.9 million tonnes per annum.
The Company, therefore, believes that the Group is well-positioned to bring its existing development projects into production. The Group is also well-placed to take advantage of future opportunities in resource-endowed Russia, as its expertise and track record will provide competitive advantage in bidding for licences and assets.
Strong financial position offering ability to capitalise on acquisition opportunities As at 31 December 2012, the Group had a negative net debt position of US$680 million (total borrowings less cash and cash equivalents) and an asset base of US$5,589 million. The Group generated Adjusted EBITDA of US$1,383 million and net profit for of US$981 million in 2012. The Group’s current financial position and strong cash flow generation allows the Group financial flexibility to execute its organic growth strategy or make opportunistic acquisitions.
Experienced management team with strong track record and an experienced and majority independent Board The Group’s senior management team consists of experienced individuals with an average of 18 years in the mining industry. Most of the Group’s top management have worked at the Group since its formation in 2006, allowing the Group to maintain a high degree of continuity. The management team has successfully achieved growth in metrics such as reserves, production, revenue and Adjusted EBITDA. The Group believes that the management experience and track record in the full range of early stage exploration, development and producing assets positions the Group to maximise the value of its existing operations, development projects and resource base. For example, from 2006 to 2012 the Group’s JORC proven and probable reserves in Russia increased from 50.8 million ounces to 87.5 million ounces, representing an increase of 72.2 per cent., and from 2006 to 2012 processing capacity increased from 8.9 million tonnes per annum to 23.2 million tonnes per annum, representing an increase of 161 per cent., and production increased from 1,215 thousand
106 ounces to 1,678 thousand ounces, representing an increase of 38 per cent. In addition, the Company has an experienced Board of Directors, with five out of nine Directors considered independent based on the criteria of the UK Corporate Governance Code.
Strategy The Group seeks to become one of the world’s leading gold mining and production companies, keep a competitive cost structure, significantly increase its production and maintain its commitment to operational excellence and its social and environmental responsibilities. In 2013, the Board will be deliberating the Company’s broad strategy for the period 2013-2017 and beyond. The Company’s current development programme focuses on the following principles:
• Effective implementation of development projects: The Company expects that three new mines (Natalka, an expanded Blagodatnoye and Verninskoye), as well as the Group’s existing flagship mine Olimpiada (36 per cent. of the total reserves), will be the main drivers of production growth for the Group. Further development of these mines is the Group’s top priority, both in the short and mid-term.
• Focused approach: Whilst the Group does have alluvial operations, its main mines are developed through large-scale open pit mining followed by mill processing. This method remains the Group’s core area of operational focus.
• Exploring for production growth: The Group intends to pursue uninterrupted production growth beyond 2017, whilst continuing to explore for gold in brownfield and greenfield areas in regions where it has existing infrastructure and operations.
Development Pipeline The Board has approved a capital expenditure development budget for 2013 of US$1.57 billion (including investments in Kazakhstan assets that were sold on 28 February 2013). The budget includes funding for Phase I of the Natalka development and expansion at the Titimukhta mine. In addition, the Group has commenced feasibility studies for further development of the Blagodatnoye mine, trial works at the Kuranakh mine and scoping studies for further development of the Olimpiada, Verninskoe, Poputninskoye and Panimba and Chertovo Koryto deposits.
The following table sets forth the allocation of the Group’s planned capital investments for 2013:
Investments in US$ million 2013 ––––––––––– Existing Deposits Olimpiada 177 Titimukhta 12 Blagodatnoye 13 Kuranakh 21 Alluvials 15 Verninskoye 67 Kazakhstan (1) 45 New Projects Natalka 1,124 Exploration 47 Other 49 ––––––––––– Total 1,570 ––––––––––– Note: 1. The Group sold its gold mining assets in Kazakhstan and Kyrgyzstan on 28 February 2013, reducing capital investment there.
107 Commitment to operational excellence and its social and environmental responsibilities The Group believes operational excellence to be integral to the success of its business and continuously seeks to improve its compliance with health, safety and environmental requirements and plans to gain the membership of the ICMM, whose sustainable development principles are the current world recognised health and safety standard. As part of this strategy, the Group is committed to be a modern, transparent company, with world class corporate governance standards and a firm recognition of its social and environmental responsibilities, while seeking to provide development opportunities for its personnel.
M&A growth options While the Group’s primary focus will be on developing its organic growth pipeline, the Group intends to be opportunistic and will consider suitable M&A options that would reinforce the Group’s asset portfolio, offer attractive growth potential and geographic diversification.
Principal Operations The map below shows the location of the Group’s assets, comprising Olimpiada and the five other main production assets, as well as the major Natalka development project.
Natalka
Nezhdaninskoye Blagodatnoye
Titimukhta Olimpiada Chertovo Koryto Kuranakh Panimba Verninskoye Razdolinskaya
Alluvials
Production Construction Exploration
Upon completion of construction in Phase 1 of the Natalka project, which was launched in December 2010, the deposit is expected to reach a processing capacity of 10 million tonnes of ore per annum with projected annual gold production of 500 thousand ounces in 2014. See “– New Projects – Natalka”. The Group has also formulated expansion projects for several of its current production assets, as further described below (see “– Current Production Assets”). Management intends to seek Board approval for further projects as the projects develop in the future. There can be no assurance that approval for such projects will be obtained. Consequently, it is possible that the development projects approved by the Board in the future may differ from the plans described below, which may result in lower levels of capital expenditure and production levels achieved than is contemplated by the current plans.
108 Current Production Assets The chart below sets forth the breakdown by mine of production in 2012:
700 653
600
500
401 400
2012 Production (’000 ounces) 300
214 200 138 117 109 100 46
0
Kuranakh Alluvials Olimpiada Titimukhta Verninskoye Kazakhstan Blagodatnoye
See “Operating and Financial Review – Summary of performance results by business units for the years ended 31 December 2012 and 2011” for more information. On 28 February 2013, the Group completed the sale of its gold mining assets in Kazakhstan and Kyrgyzstan. See “– The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets”.
Krasnoyarsk Region The Group’s principal operations in the Krasnoyarsk region are located at the Olimpiada deposit, which, for 2012, accounted for 42 per cent. of the Group’s total Russian gold production.
The Group acquired licences to additional deposits and fields in the Krasnoyarsk region, including the Titimukhta deposit in 2003 and Panimbinskaya exploration area in 2004. The Group commenced ore mining at the Titimukhta deposit in 2008 and production in 2009, and exploration works at Panimba have been in progress since 2005. Both sites are located close to Olimpiada.
In addition, in 2005, the Group acquired licences for exploration and subsequent gold production at the Razdolinskaya exploration area. The Group has been conducting exploration works at Razdolinskaya since 2006, which included estimation of probable resources and mineralogical research for the project. See “– New Projects – Panimba and Razdolinskaya”.
In 2000, the Group obtained state registration of the Blagodatnoye reserves, one of the largest Russian exploration projects in the last 10 years, and in November 2007, the Board of Directors of OJSC Polyus Gold approved construction of an open-pit mine to exploit the licence. In 2010, the Group commissioned the plant with a projected capacity at 6 million tonnes of ore per year. For 2012, the Blagodatnoye mine accounted for 26 per cent. of the Group’s total Russian gold production.
Olimpiada Deposit The Group’s largest producing asset in terms of gold production volumes is the Olimpiada hardrock gold deposit, at which the Group mines and processes refractory sulphide ores. In 2010, the Olimpiada mine completed processing of oxide ores. In 2012, the Group produced 653 thousand ounces of gold at Olimpiada, comprising 42 per cent. of the Group’s total gold production in Russia, representing a 15 per cent. increase as compared to 566 thousand ounces of gold in 2011. Gold output increased primarily as a result of improvement in recovery rates, which were 73.7 per cent. in 2012 as compared to 69.1 per cent. in 2011, as well as increased mass pull from floatation and the successful optimisation of the bio-leaching facility operation. The achieved increase in mass pull from floatation enabled the Group to accumulate excessive floatation concentrate, which was sold to a third-party in the second half of 2012.
109 Mining of ores The Group extracts ore at Olimpiada through open-pit mining at the Vostochny pit. The current pit is 420 metres deep and 1.7 kilometres in diameter. The Group also previously mined from a second pit, the Zapadny pit.
The reserves of oxidised ores at the Olimpiada deposit had been fully depleted by the end of 2007, and the Group has been mining only sulphide ore since that date. In 2012, the Group mined 8.0 million tonnes of primary sulphide ore with an average gold grade of 3.4 g/t, as compared to 7.0 million tonnes of primary sulphide ore with an average gold grade of 3.4 g/t mined in 2011. The 14 per cent. increase was in accordance with the Group’s mine plan.
Processing of ores The Group transfers the ore it mines at Olimpiada by truck to its processing plant in Olimpiada to recover gold for refinement. The Group’s main processing facility comprises two extraction plants – Mill No. 2 and Mill No. 3 – for the processing of sulphide ores. The Group closed Mill No. 1, previously used for processing oxidised ores, in August 2008, and modernised it for processing ores from Titimukhta. The modernisation works on Mill No. 1 were completed in 2009.
As a result of the depletion of oxidised ores at Olimpiada, the Group transferred ore from the Group’s mining operations at the Olenye deposit to Olimpiada for processing at Mill No. 2 and Mill No. 3. The Group stopped mining the Olenye deposit in April 2008, although it continued to transfer and process ore from Olenye until the end of 2009. In 2009, ore from the Olenye deposit was depleted.
The average gold grade in the ore under processing, measured in grams per tonne, was 3.4 in sulphide ores in 2012, compared to 3.4 in 2011 and 3.8 in 2010.
The Group processes sulphide ore at Mill No. 2 and Mill No 3. Mill No. 2 was built in 2001. This plant employs a bio-oxidation process – the oxidation of sulphide minerals by bacterial action – rendering the minerals amenable to leach extraction of the metals contained in the ore. This plant has an annual capacity of three million tonnes of ore.
Mill No. 3 began operations in 2007. This plant also uses bio-oxidation technology to process sulphide ore, and it has an annual capacity of five million tonnes of ore. The Company believes that this third plant will enable the Group to maintain current gold output levels at Olimpiada, since the depletion of oxidised ore reserves should be offset by the increase in the Group’s capacity to process eight million tonnes of sulphide ores per year.
In 2012, the Group processed 8.1 million tonnes of sulphide ores at Olimpiada, which was consistent with the volume of sulphide ores processed at Olimpiada in 2011.
The Group’s rate of gold recovery from the sulphide ores processed at Olimpiada increased to 73.7 per cent. in 2012 from 69.1 per cent. in 2011, as a result of a series of measures implemented by the Group aimed at raising the efficiency of sulphide ore processing at Olimpiada mine and improving the CJSC Polyus’s BIONORD® bio-leaching technology. The Company expects recovery rates to improve further as a result of an ongoing performance optimisation programme, including the installation of additional cooling in the third quarter of 2013, full automation of the facility by the end of 2013 and the installation of new bio-oxidation reactor mixers currently undergoing testing by the Group.
Development Management’s current development plans for the Olimpiada deposit for the period between 2013 and 2015 envisage the implementation of a modernisation programme aimed at raising the processing efficiency of the existing plant, the purchase of a new mining fleet and continued work at the Zapadny and Vostochny pits. In addition, in order to ensure uninterrupted operation of the Olimpiada mine, during 2012 the Group installed a ring feed supply from the Group’s existing power station and expects to install an additional power line in the first half of 2013. The Group’s target is to achieve gold recovery of at least 78 to 80 per cent. in 2013.
110 The results of exploration works carried out from 2009 to 2012 have indicated that significant increases in reserves may be achieved at the Olimpiada deposit, which would allow the Group to potentially extend the life of the mine from 2024 to at least 2035, subject to receipt of the required licences and other approvals. Based on the results of a scoping study that is currently being performed, management’s plans aim to optimise and improve production to increase recovery and reduce the cost of production and to develop the existing mines at the Olimpiada deposit, either by constructing a super pit or the staged launched of underground mining operations.
Blagodatnoye Deposit The Blagodatnoye deposit is located 26 kilometres north of the Olimpiada mine. The Group mines the deposit using the open-pit method. The plant capacity is six million tonnes of ore per year.
The proximity of the Blagodatnoye deposit to the Olimpiada mine has allowed the Group to use some of its existing and available social, maintenance and warehousing infrastructure when developing the Blagodatnoye deposit. The Group began construction of the mine in 2007, shortly after approval of the project by the Board. The Group commissioned the mine in July 2010.
During 2012, the Group mined and processed 6.5 million tonnes of ore at the Blagodatnoye deposit with an average gold grade of 2.1 g/t. In 2012, the Group produced 401 thousand ounces of gold at the Blagodatnoye mine, compared to 363 thousand ounces in 2011. The 11 per cent. increase resulted primarily from actual throughput exceeding the mill design parameters and continued improvement in recovery rates (86.4 per cent. in 2012 compared to 84.5 per cent. in 2011) primarily due to the completion of the automation of the processing plant.
In 2011, the Group completed the construction of surface facilities of the Blagodatnoye mine and began to implement the development plans for the operation of the Blagodatnoye mine, which contemplate the increase of the mining and processing capacity of the mine to 8 million tonnes of ore per annum and the increase of gold production to 440 thousand ounces per annum. In 2012, the Group completed the feasibility study for the expansion of the mill. The feasibility study has been submitted to the relevant authorities and is currently undergoing regulatory review. Following the receipt of regulatory approvals and necessary revisions, management expects to submit the project for approval by the Board of Directors. If approved, the project schedule contemplates that the start of the upgrade is to be synchronised with the beginning of construction of the Razdolinskaya-Novaya Eruda power line by the state-owned grid company, which is expected in the first half of 2013. If approved by the Board, these plans envisage gold production at the Blagodatnoye mill increasing from 401 thousand ounces per annum in 2012 to a projected annual average of 440 thousand ounces per annum between 2016 and 2028, with investment in the project envisaged to amount to US$300 million through 2016.
Titimukhta Deposit The Titimukhta deposit is located in the Severo-Yeniseysky district, nine kilometres from the Olimpiada mine. During the period from 2004 to 2007, the Group conducted geological exploration on the deposit, which resulted in proven and probable reserves estimated in accordance with the JORC Code in 2008 of 2.2 million ounces.
The close proximity of the Titimukhta deposit to the Olimpiada mine allows the Group to use the Olimpiada mine’s facilities for the development of the Titimukhta deposit. As processing of rich oxidised ore from the Olimpiada deposit ended in 2008, the Group used Mill No. 1 at the Olimpiada mine to process ore from the Titimukhta deposit following its reconstruction. The Group began reconstructing Mill No. 1 and delivering mining equipment in 2007, together with the construction of the access road to the deposit. The modernisation of Mill No. 1 was completed in November 2008.
In April 2009, the Titimukhta project was successfully completed and development started. The Group extracts ore at the Titimukhta deposit through open-pit mining. The mine’s capacity (using the reconstructed Mill No. 1 of the Olimpiada mine) is 2.2 million tonnes of ore per annum. Mill No. 1 was built in 1996 with an annual capacity of 1.5 million tonnes of ore. Following the plant’s modernisation, its potential capacity increased to 2.2 million tonnes of ore per annum. The Company projects that the Titimukhta deposit will
111 provide Mill No. 1 with a supply of ore until 2022. In July 2011, the Group decided to expand the capacity of Mill No. 1 up to 2.4 million tonnes of ore per annum. In December 2011, the Group installed Knelson concentrators at the Titimukhta deposit, which is projected to allow throughput recovery of 86.2 per cent. In May 2012, the Group announced that it had completed the expansion of capacity to 2.4 million tonnes of ore per annum at Mill No. 1.
During 2012, the Group mined 2,422 thousand tonnes of ore at the Titimukhta deposit and processed 2,131 thousand tonnes of ore with an average gold grade of 2.1 g/t. In 2012, the Group produced 117 thousand ounces of gold at the Titimukhta deposit, as compared to 109 thousand ounces in 2011, an increase of 7 per cent. The increase mainly resulted from significantly higher volumes of ore processed following the upgrade of the grinding circuit of the plant from 2.2 million tonnes per annum to 2.4 million tonnes per annum, which was completed in May 2012.
The current mining plan for the Titimukhta deposit contemplates that the deposit will be mined until 2021. After 2021, Management’s current development plans contemplate that Mill No. 1 will be modified in order to process the deep horizon ores of the Olimpiada mine.
Irkutsk Region The Group’s current operations in the Irkutsk region comprise various alluvial deposits, from which it derived 15.2 per cent. of its total Russian gold production in 2011, in addition to exploration and development projects. The Group mines the alluvial deposits through its subsidiary CJSC ZDK Lenzoloto, and various subsidiaries of CJSC ZDK Lenzoloto (the alluvial mining operations are collectively referred to as “Lenzoloto”). The Group’s ownership interest in the subsidiaries of CJSC ZDK Lenzoloto ranges from approximately 38.4 per cent. to 63.0 per cent.
Following an initial restructuring in 2005, the Group’s subsidiary, Lenzoloto, retained its alluvial gold mining operations, and, in 2012, it produced 214 thousand ounces of gold, as compared with 210 thousand ounces of gold produced in 2011.
The Group primarily mines these deposits by the use of bulldozers and dredging operations, although the Group also conducts some overground and underground mining. The Irkutsk alluvial business unit operates washing machines, drag lines and a sluice enrichment plant, with a total annual capacity of 10 million m3. The cost per unit of gold production of alluvial gold mining at Lenzoloto is higher as compared to the Group’s operations at Olimpiada.
The Irkutsk business unit also includes hardrock mining operations at the Zapadnoye mine, which produced 19 thousand ounces of gold in 2010 and 3 thousand ounces of gold in 2011. In April 2011, the Group closed the mine as a result of ore depletion, although the Company expects to re-deploy certain assets of the Zapadnoye mine to its operations at Verninskoye.
The Group has acquired licences to additional deposits and fields in that region, including, in 2004, through the acquisition of CJSC Tonoda, the Chertovo Koryto deposit. The Group conducted exploration works at Chertovo Koryto between 2006 and 2008. As a result, in 2008 the Group estimated 2.6 million ounces of JORC proven and probable reserves for Chertovo Koryto.
In 2005, the Group acquired OJSC Pervenets, which holds licences for the Verninskoye and Pervenets deposits located in the Bodaibo district of the Irkutsk region. These two deposits form a single ore field.
Verninskoye Deposit The Verninskoye deposit is located in the Bodaibo district of the Irkutsk region, 140 kilometres north of Bodaibo city, close to the Zapadnoye mine. Based on the results of the JORC audit dated December 2010 conducted by MICON International Ltd., proven and probable reserves at the deposit increased to 65.4 million tonnes of ore, or 5.8 million ounces (179 tonnes) of gold at an average grade of 2.7 g/t. In 2011 and 2012, the Group completed exploration of the western and eastern flanks of the Verninskoye deposit. In 2013, the Group intends to complete the remaining exploration works and to commence the preparation of a feasibility study required by Russian regulatory authorities.
112 The Group’s development of the Verninskoye mine began in 2006 with the construction of the camp for the project. In 2008, the Board of Directors of OJSC Polyus Gold approved a feasibility study for the construction of a gold mining facility on the Verninskoye deposit with a capacity of 2.2 million tonnes of ore per annum. All project and construction documentation has been completed and approved and the Verninskoye mine was commissioned on 30 December 2011. In 2012, the Group completed modelling processing technology and fully commissioned production at Verninskoye. The Group mined 2,616 thousand tonnes of ore at Verninskoye and its satellite deposit Pervenets in 2012, as compared to 801 thousand tonnes in 2011, an increase of 226 per cent. The Group processed 1,342 thousand tonnes of ore at Verninskoye in 2012, an increase of 876 per cent. over 2011 levels when the Group processed 309 thousand tonnes of ore. Verninskoye produced 46 thousand ounces of gold in 2012, as compared to 10 thousand ounces of gold produced at Verninskoye in 2011 (not including an additional 3 thousand ounces produced at the Zapadnoye and Pervenets mines).
Plant automation started in the fourth quarter of 2012 and is expected to be completed in the spring of 2013. During the fourth quarter of 2012, the Company strengthened the mine management team by hiring a new mine manager and hiring experienced industry specialists. In December 2012, the Group was awarded the contract for the design of the first stage of the Peleduy-Mamakan grid. The first stage of the grid is expected to be installed during the second half of 2014. The purpose of the construction of the Peleduy-Mamakan grid is to eliminate power shortages in the Bodaibo district of the Irkutsk region affecting the Group and to improve the local power grid in the region to ensure sufficient and more reliable supply of power to Verninskoye in order to enable the Group to expand the mine in accordance with Management’s current expansion plans.
Management expects to submit the project for the grid construction, the design of which is expected to be completed during the summer of 2013, and the subsequent expansion of the Verninskoye mill from 2.2 million tonnes per year to 3.6 million tonnes per year for approval by the Board of Directors during the first half of 2013.
Republic of Sakha (Yakutia Region) In September 2005, the Group acquired two subsidiaries, Aldanzoloto and OJSC SVMC, through which it conducts its operations in the Yakutia region. In addition to mining operations at the Kuranakh field, the Group also holds licences for the Nezhdaninskoye field. The Group’s mining operations in Yakutia are primarily conducted by its subsidiary, Aldanzoloto, at the Kuranakh group of deposits through open-pit mining. The Group transports the ore by truck to a central processing plant for recovery into gold using conventional cyanide leaching and resin-in-pulp techniques.
Kuranakh Mine In 2012, the Group produced 138 thousand ounces of gold at Kuranakh as compared to 117 thousand ounces of gold at Kuranakh in 2011. The 19 per cent. increase in gold was primarily attributable to improved recovery rates, combined with an overall improvement in planning and organisation efficiency at the Kuranakh mine, resulting in higher mining and processing volumes. In 2012, the Group mined 3,984 thousand tonnes of ore at Kuranakh, as compared to 3,558 thousand tonnes in 2011, representing an increase of 12 per cent. Processing of ores at Kuranakh increased by 11 per cent. and amounted to 3,735 thousand tonnes in 2012, as compared to 3,376 thousand tonnes in 2011.
The Group commenced exploration work at the field in 2008, where its exploration activities included drilling and excavation work. In 2009, the Group completed works on the scoping study and reserves assessment. Further development of the Kuranakh field requires the widening of the open pits, which will result in waste stock being piled next to the open pit. To enable this development, in July 2008 the Group acquired CJSC Kuranakhzoloto, a licence holder with permission to stock pile waste, for approximately US$50 million.
In 2011, the Group initiated an extensive hydrogeological assessment and a de-watering programme. As part of this work, the Group initiated extensive drilling at the Kuranakh field to extend the reserves and to develop
113 an effective strategy to effectively de-water the pits. In addition, the Group tested performance of the Kuranakh processing plant as part of its expansion programme for the mine.
The main works on the plant’s modernisation were completed in 2012. Since 2012 the Group has been assessing different strategic options for development of the Kuranakh mine. A feasibility study for the expansion of the mine to 6 million tonnes per annum is currently under review by management.
Reserves and Resources The Group reports its reserves and resources in accordance with the JORC Code. While the Russian Resource Reporting Code remains in use within the Russian legal environment, for the basis of the Group’s accountability to the Russian state, Group reporting on reserves to investors is carried out in accordance with the JORC Code.
For accounting purposes, the estimated economic useful life of the Group’s operating mines is based on mine operating plans, which call for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code. The economic useful lives in accordance with the Russian Resource Reporting Code may vary compared to the economic useful lives under the JORC Code.
The following table shows the mineral resources, inclusive of reserves, of the Group’s Russian operations as stated in accordance with the JORC Code (based on the most recent audits of the Group’s respective reserves):
Total measured and Measured Indicated indicated –––––––––––––––––––––––––––– –––––––––––––––––––––––––––– –––––––– Ore Gold Ore Gold Gold (million Grade (’000 (million Grade (’000 (’000 tonnes) (g/t) ounces) tonnes) (g/t) ounces) ounces) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Operating Facilities Krasnoyarsk Region Olimpiada(1) 25.6 3.8 3,168 279.7 3.4 30,385 33,553 Blagodatnoye(2) 3.4 2.5 271 132.8 2.4 10,230 10,501 Titimukhta(3) 9.7 3.1 950 17.6 3.1 1,750 2,700 Republic of Sakha (Yakutia) Kuranakh(4) 1.8 1.9 106 160.4 1.2 6,447 6,553 Irkutsk Region Verninskoye(5) 2.0 3.0 200 72.9 2.7 6,434 6,634 Lenzoloto(6) 32.1 0.2 237 169.8 0.4 2,091 2,328 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Total Operating Facilities –––––––– 74.6 –––––––– 2.1 –––––––– 4,932 –––––––– 833.2 –––––––– 2.1 ––– 57,337––––– –––––––– 62,269 Projects Krasnoyarsk Region Panimba & Razdolinskaya(1) 4.8 2.3 359 21.9 3.2 2,223 2,582 Magadan Region Natalka(7) 464.2 1.7 25,367 309.1 1.7 17,259 42,626 Irkutsk Region Chertovo Koryto(8) 4.1 1.9 247 46.4 1.8 2,742 2,989 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Total projects –––––––– 473.1 –––––––– 1.7 –––––––– 25,973 –––––––– 377.4 –––––––– 1.8 ––– 22,224––––– –––––––– 48,197 TOTAL –––––––– 547.7 –––––––– 1.8 –––––––– 30,905 –––––––– 1,210.6 –––––––– 2.0 ––– 79,561––––– –––––––– 110,466
114 Inferred ––––––––––––––––––––––––––––––––––– Ore Gold (million Grade (’000 tonnes) (g/t) ounces) –––––––– –––––––– –––––––– Operating Facilities Krasnoyarsk Region Olimpiada(1) 154.1 2.8 13,991 Blagodatnoye(2) 36.1 2.2 2,555 Titimukhta(3) 3.6 2.4 270 Republic of Sakha (Yakutia) Kuranakh(4) 7.3 1.5 346 Irkutsk Region Verninskoye(5) 52.1 1.8 2,953 Lenzoloto(6) 29.2 0.6 520 –––––––– –––––––– –––––––– Total Operating Facilities –––––––– 282.4 ––––––– 2.3– –––––––– 20,635 Projects Krasnoyarsk Region Panimba & Razdolinskaya(1) 44.0 2.6 3,673 Magadan Region Natalka(7) 305.5 1.7 17,046 Irkutsk Region Chertovo Koryto(8) 2.1 1.6 109 –––––––– –––––––– –––––––– Total projects –––––––– 351.6 ––––––– 1.8– –––––––– 20,828 TOTAL –––––––– 634.0 ––––––– 2.0– –––––––– 41,463 Notes: 1. Audited in October 2011 by Wardell Armstrong International. 2. Audited in November 2008 by Micon International Co. Limited. 3. Audited in June 2008 by Micon International Co. Limited. 4. Audited in October 2006 by Micon International Co. Limited. 5. Audited in December 2010 by Micon International Co. Limited. 6. Audited in December 2006 by Micon International Co. Limited. Ore in thousand cubic metres (m3), gold grade in grams per cubic metre (g/m3). Conversion of sands was based on the ratio of 2 metric tonnes per 1 cubic metre. 7. Audited in February 2012 by Micon International Co. Limited. 8. Audited in January 2008 by Micon International Co. Limited.
115 Proven and Probable reserves Total proven and Proven Probable probable –––––––––––––––––––––––––––– –––––––––––––––––––––––––––– –––––––– Ore Gold Ore Gold Gold (million Grade (’000 (million Grade (’000 (’000 tonnes) (g/t) ounces) tonnes) (g/t) ounces) ounces) –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Operating Facilities Krasnoyarsk Region Olimpiada(1) 25.5 3.9 3,154 262.0 3.4 28,978 32,132 Blagodatnoye(2) 3.1 2.3 226 132.1 2.3 9,633 9,859 Titimukhta(3) 7.7 3.3 817 13.4 3.3 1,422 2,239 Republic of Sakha (Yakutia) Kuranakh(4) – – – 31.9 1.6 1,646 1,646 Irkutsk Region Verninskoye(5) 2.1 2.9 200 63.3 2.7 5,555 5,755 Lenzoloto(6) 12.5 0.3 128 104.8 0.5 1,603 1,731 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Total Operating Facilities –––––––– 50.9 –––––––– 2.8 –––––––– 4,525 –––––––– 607.5 –––––––– 2.5 ––– 48,837––––– –––––––– 53,362 Projects Magadan Region Natalka(7) 454.5 1.6 22,802 159.4 1.7 8,801 31,603 Irkutsk Region Chertovo Koryto(8) 3.8 1.8 218 39.8 1.8 2,352 2,570 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Total projects –––––––– 458.3 –––––––– 1.6 –––––––– 23,020 –––––––– 199.2 –––––––– 1.7 ––– 11,153––––– –––––––– 34,173 TOTAL –––––––– 509.1 –––––––– 1.7 –––––––– 27,545 –––––––– 806.6 –––––––– 2.3 ––– 59,990––––– –––––––– 87,535 Notes: 1. Audited in October 2011 by Wardell Armstrong International. 2. Audited in November 2008 by Micon International Co. Limited. 3. Audited in June 2008 by Micon International Co. Limited. 4. Audited in October 2006 by Micon International Co. Limited. 5. Audited in December 2010 by Micon International Co. Limited. 6. Audited in December 2006 by Micon International Co. Limited. Ore in thousand cubic metres (m3), gold grade in grams per cubic metre (g/m3). Conversion of sands was based on the ratio of 2 metric tonnes per 1 cubic metre. 7. Audited in February 2012 by Micon International Co. Limited. 8. Audited in January 2008 by Micon International Co. Limited.
The table below shows the estimated mine life, exploration potential and/or duration of commercial activities for the Group’s Russian licences:
Estimated Year of the Expiration Existing Operations Mine Life(1) of the Existing Licences –––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––– ––––––––––––––––––––– Olimpiada 2060 2013 Blagodatnoye 2028 2022 Titimukhta 2022 2023 Kuranakh 2028 2014–2024 Lenzoloto 2033 2012–2024
116 Estimated Year of the Expiration Existing Operations Expiration Potential(1) of the Existing Licences –––––––––––––––––––––––––––––––––––––––––– ––––––––––––––––– ––––––––––––––––––––– Natalka 2039 2036 Verninskoye 2027 2020 Chertovo Koryto 2030 2020 Bamskoye 2028 2030 Nezhdaninskoye 2031 2021 Poputninskoye and Panimba 2027 2025–2029
Note: 1. The calculation of the estimated mine life and exploration potential assume the receipt of any necessary licences or approvals upon expiry of the current licences and approvals. See “– Licences” and “Risk Factors – Risks associated with the Group’s business in the gold mining industry – The Group’s business can be adversely affected if it fails to obtain, maintain or renew necessary contracts, licences and permits, including subsoil licences, or fails to comply with the terms of its contracts, licences, and permits”.
The Company believes that the Group will be able to extend the life of mine at Olimpiada through the consolidation of the existing pits or the development of underground mining to exploit the large ore body. See “– Principal Operations – Krasnoyarsk – Region – Olimpiada Deposit – Development”.
Ore in Stockpiles As at 31 December 2012, the Group had accumulated approximately 19,093 thousand tonnes of ore in stockpiles at certain of its mines in Russia. The average grade of the stockpiled ore was 2.43g/t and it contained 1,494.6 thousand ounces of doré gold. The table below sets forth the breakdown of stockpiles by mine:
Ore Stockpiles as at 31 December 2012 ––––––––––––––––––––––––––––––––––– Ore (thousand Grade Gold Deposit tonnes) (g/t) (’000 ounces) ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Olimpiada 13,086 2.77 1,167.1 Blagodatnoye 297 1.50 14.3 Titimukhta 2,713 1.60 139.9 Kuranakh 71 1.33 3.0 Verninskoye 2,926 1.81 170.3 –––––––– –––––––– –––––––– Total –––––––– 19,093 ––––––– 2.43– –––––––– 1,494.6 Gold production and refining The Group’s gold production primarily comprises the mining and processing of ores at hardrock mines. Its main production facilities are located at the Olimpiada deposit, which, following the depletion of reserves of oxidised ores, now contains sulphide ores only. The cost of production of oxidised ores is typically less than those of sulphide ores. In addition, the Group extracts gold from the alluvial deposits of its subsidiary, Lenzoloto. The Group outsources the refining of the output from both these hardrock and alluvial deposits into gold conforming to the international Good Delivery standard.
117 The tables below shows the quantities of ore mined and gold produced by the Group in Russia for the periods indicated.
Year ended 31 December ––––––––––––––––––––––––––––––––––– Ore Mined (’000 tonnes or as noted) 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk/Olimpiada mine Ore mined 8,056 7,041 9,516 Average gold grade (g/t) 3.4 3.4 3.2 Krasnoyarsk/Titimukhta deposit Ore mined 2,422 2,327 2,345 Average gold grade (g/t) 2.1 2.1 2.0 Krasnoyarsk/Blagodatnoye deposit Ore mined 6,463 6,480 5,563 Average gold grade (g/t) 2.1 2.1 2.0 Irkutsk/Verninskoye deposit(1)(2) Ore mined 2,616 801 684 Average gold grade (g/t) 1.8 2.5 1.9 Yakutia/Kuranakh mine Ore mined 3,984 3,558 3,476 Average gold grade (g/t) 1.3 1.3 1.3 –––––––– –––––––– –––––––– Total –––––––– 23,540 ––––––– 20,208– –––––––– 21,584 Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets process plant. 2. 2011 and 2010 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit.
118 Year ended 31 December ––––––––––––––––––––––––––––––––––– Ore Processed (’000 tonnes or as noted) 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk/Olimpiada mine Ore processed Ore processed 8,068 8,051 7,377 Average gold grade (g/t) 3.4 3.4 3.8 Recovery (%) 73.7 69.1 66.5 Krasnoyarsk/Titimukhta deposit Ore processed 2,131 1,920 1,557 Average gold grade (g/t) 2.1 2.1 2.4 Recovery (%) 82.2 83.8 84.1 Krasnoyarsk/Blagodatnoye deposit Ore processed 6,499 6,505 5,363 Average gold grade (g/t) 2.1 2.1 2.0 Recovery (%) 86.4 84.5 76.7 Irkutsk/Verninskoye deposit(1)(2) Ore processed 1,324 309 635 Average gold grade (g/t) 2.2 1.8 1.8 Recovery (%) 64.2 69.3 68.1 Yakutia/Kuranakh mine Ore processed 3,735 3,376 3,298 Average gold grade (g/t) 1.3 1.3 1.3 Recovery (%) 86.6 85.1 85.1 Irkutsk/Alluvial deposits Sand washed (million m3) 9.96 9.86 8.91 Average grade (g/m3) 0.7 0.7 0.7 –––––––– –––––––– –––––––– Total (excluding sands washed) –––––––– 21,758 ––––––– 20,161– –––––––– 18,230 Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets process plant. 2. 2011 and 2010 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit. Year ended 31 December ––––––––––––––––––––––––––––––––––– Production of Gold (’000 ounces) 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk Region Olimpiada mine 653 566 581 Titimukhta 401 109 100 Blagodatnoye mine 117 363 251 Irkutsk Region Alluvial deposits 214 210 197 Verninskoye(1)(2) 46 13 26 Republic of Sakha (Yakutia) Kuranakh mine 138 117 120 –––––––– –––––––– –––––––– Total production of gold (3) –––––––– 1,569 ––––––– 1,378– –––––––– 1,276 Notes: 1. Verninskoye figures include production from Verninskoye and Pervenets deposits at the Pervenets process plant. 2. 2011 and 2010 totals include the results of the Zapadnoye mine, which was decommissioned by the Group in April 2011 due to depletion of the deposit. 3. Totals may not sum completely due to rounding.
119 In 2012, the Group mined 23.5 million tonnes of ore in Russia, as compared to 20.2 million tonnes of ore in 2011 and 21.6 million tonnes of ore in 2010. This increase of 16.5 per cent. was primarily due to a 14 per cent. increase in ores mined at Olimpiada, a 12 per cent. increase in ore mined at Kuranakh and the start-up of the Verninakoye mine. In 2011, the amount of ore mined by the Group in Russia decreased, primarily as a result of the continuing implementation of the upgrade programme at Olimpiada and the decommissioning of the Zapadnoye mine. The Group processed 21.8 million tonnes of ore in 2012 in Russia, as compared to 20.1 million tonnes of ore in 2011 and 18.2 million tonnes of ore in 2010. The increase was mainly due to the start-up of Verninskoye and increased volumes processed at Titimukhta and Kurankh. Grades in ore processed remained stable across the Group’s operations in Russia, with exception of Verninskoye, where grades increased by 22 per cent. The Group produced 1,569 thousand ounces of gold in 2012 in Russia, as compared to 1,378 thousand ounces of gold in 2011 and 1,275 thousand ounces of gold in 2010, representing, on a year-on-year basis, an increase in production of 14 per cent. in 2012 and 8 per cent. in 2011. The increases were primarily attributable to the Group’s continued investment and implementation of optimisation programmes at its mining facilities in Russia.
New Projects The Group’s new projects are summarised below.
Natalka The Group conducts its operations in the Magadan region through its subsidiary, OJSC Matrosov Mine, which holds a licence for the Natalka deposit in the Tenkinsky district of Magadan region.
In 2004, the Group began an exploration programme at the Natalka deposit in order to assess the amount of reserves that were available for more profitable open-pit mining. The Group completed the exploration programme in 2006, and in 2007 Micon International Co. Limited confirmed the results with a reserves audit conducted in accordance with the JORC Code. The audit stated that the Natalka deposit had proven and probable reserves of 40.8 million ounces of gold.
On 17 August 2011, the Group obtained updated licence terms for the Natalka deposit, in which the licence was extended until 31 December 2036. The licence was granted with the right to mine to a depth of 450 metres and included a requirement that the Group commission the first stage of the plant by no later than 31 December 2013. The introduction of this limit of 450 metres was incorporated into the reserve calculation included in the report dated February 2012 that the Group commissioned from Micon International Co. Limited, and resulted in the reduction of the proven and probable reserves, as compared with the 2007 reserves audit, which had been conducted in accordance with the previous licence terms. The October 2011 audit stated that the Natalka deposit has proven and probable reserves of gold of 31.6 million ounces of gold. Since there are additional mineral resources below the 450 metres level, the Group expects to apply for a licence to mine depths below that level provided it concludes at the relevant time that such operations would be commercially viable, although there can be no assurance that such an additional licence will be granted.
The hardrock Natalka deposit is located in the Tenkinsky district of the Magadan region (390 kilometres north west of Magadan) in the Omchak river basin. The deposit was discovered in 1944 and was developed using the underground mine method. In 2004, the Group terminated the operation due to the inefficiency of the mining operations there. From 2004 to 2006, the Group carried out a large scale geological exploration project on the Natalka deposit. In September 2007, the Group completed an audit of the Natalka deposit in accordance with the JORC Code, which recognised the deposit as one of the largest known gold deposits in the world at the time (based on publicly available company reports). In February 2012, the Group completed a further audit of the Natalka deposit in accordance with the JORC Code, which showed total proven and probable reserves of 31.6 million ounces, with an average gold grade of 1.6 grams per tonne.
In March 2009, the Board of Directors of OJSC Polyus Gold approved an amended development plan for the Natalka deposit. In December 2010, the Board of Directors of OJSC Polyus Gold reviewed the development project of the Natalka deposit and approved the launch of construction of a mining complex at the deposit. The realisation of this project in full would require the Group to obtain a licence to mine the Natalka deposit at a depth below 450 metres. Under the approved development project, the launch of the mining complex at
120 the Natalka deposit is expected to be completed in three stages, which are described below; stages two and three require the approval of the Board.
Stage One: 10 million tonnes processing capacity per annum – in 2014 The Group plans to develop the Natalka mine to achieve a capacity throughput of 10 million tonnes of ore per annum with a recovery rate of 85 per cent. and average gold production of 500 thousand ounces of gold per annum by the summer of 2014. In 2008, the Group launched a pilot plant at the Natalka deposit to test the projected extraction numbers and technical decisions envisaged as part of the development strategy. On the basis of the tests conducted at the pilot plant, the Group has created an extraction model which confirms the projected extraction numbers. In addition, the Group has reached an agreement with OJSC MagadanEnergo, a regional electricity provider, to develop the existing power infrastructure to provide the necessary energy for the expanded mine. As part of the ongoing developments of the energy infrastructure, together with OJSC MagadanEnergo, the Group has commenced the reconstruction and replacement of the existing overhead line grid and the joining of the existing power grids in the region in order to supply the production plant at the mine with the necessary power. Implementation of pre-mining grade control drilling accompanied by mining plan optimisation procedures has led to an increase in the average grade of ore supplied to the plant to 2.1 grams per tonne at a 0.8 gram per tonne cut-off grade. An independent audit of the mining plan was carried out by Hatch Ltd. in December 2010, covering both the audit of the average grade and volumes of ore to be processed.
In 2011, the Group spent approximately US$32 million on the expansion of the mine, which included expenditure on choosing the supplier for crushing and grinding equipment, conveyers and mills, on pre- mining grade control drilling and on preparing a block model and mine plan for open pit optimisation audit. The new crushing and grinding equipment was partly contracted for in 2011.
In 2012, the Group spent approximately US$323 million on the construction of the mine. By the end of 2012, a major portion of the earthworks was completed. During the fourth quarter of 2012, the construction of the ditch for the processing plant building was completed. The Group is currently conducting construction of foundations and installation of metal frames at these sites and is in the process of installing bored piles at the desorption section and gold cash room sites.
In 2013, construction works are planned to be performed at 14 sites, including the mill, ore crusher and conveyor, tailing dam, mechanical repair workshops and boiler room. All major processing equipment has been procured and is expected to arrive on site between late March and late July 2013. Mining works in 2013 are expected to amount to 6.1 million cubic metres of rock moved with 5 million tonnes of ore mined. The Group’s plans envisage the construction of crushing, grinding, gravity separation, flotation, intensive cyanidation and CIL equipment, as well as electrolysis and smelting equipment.
In 2013, the Group plans to spend approximately US$1.1 billion to US$1.2 billion on the development of the Natalka project. The Group estimates total capital expenditure on the first stage of the Natalka project to be in the range of US$1.7 billion to US$1.8 billion.
Completion of the construction of the various items of the plant at Natalka is now expected in the summer of 2014, reflecting lower-than-planned construction levels during the winter of 2013. The Company is reviewing its options regarding the start-up of the mine, including the potential commencement of production during the winter of 2013 and 2014 using the existing pilot plant, as well as optimising the revised ramp-up schedule for Natalka for 2014.
Stage Two: 20 million tonnes processing capacity per annum – in 2016 (subject to Board approval) During the second stage of development, the Group would expand the mine to achieve a projected throughput of 20 million tonnes of ore per annum with average gold production per annum projected to reach 1 million ounces.
121 Stage Three: 40 million tonnes processing capacity per annum – 2020 through 2039 (subject to Board approval) Between 2020 and 2039, the Group would develop the mine to achieve projected throughput of 40 million tonnes of ore and average gold production projected to reach 1.5 million ounces per annum.
Panimba and Razdolinskaya The Panimba and Razdolinskaya (a part of which is the Poputninskoye ore field) deposits are located within a close proximity of each other and have a similar quality of refractory sulphide ores such that the two deposits can be treated by a single processing unit. In December 2012, the Group finalised and filed with the relevant authorities the feasibility report for Panimba. Management’s current development plans contemplate the continued exploration at Poputninskoye during 2013–2014 and the filing of the feasibility report with the relevant authorities by 31 December 2014. The Group also intends to use POX technology to test the extracted sulphide ores of the deposits. In the event that the tests yield positive results, the Management’s current development plans contemplate the construction of a POX plant with a projected throughput capacity of 2.5 million tonnes per annum in 2018, which would lead to the gold output reaching 220 thousand ounces per annum. See “Risk Factors – The Group’s business could be adversely affected if it fails to obtain, maintain or renew necessary contracts, licences and permits, including subsoil licences, or fails to comply with the terms of its contracts, licences and permits” and “– Licences – Exploration and Production Licences”.
Chertovo Koryto The Chertovo Koryto deposit is located in the Irkutsk region of Russia. In 2011, the Company started pre- project preparation works, in which it received initial permits, selected contractors for survey works and updated process regulations for the mill.
The pre-feasibility study for the Chertovo Koryto development is expected to be completed by the middle of 2013, following which management expects to submit the project to the Board of Directors for approval. Development of the project depends, in part, on the approval of the construction of the first stage of the Peleduy-Mamakan grid (see “– Principal Operations – Irkutsk Region – Verninskoye Deposit”).
Advanced Exploration Projects Bamskoye The Bamskoye deposit is located in the Amur region of Russia. Between 2005 and 2011, the Group completed the first stage of exploration of the Bamskoye deposit and submitted the relevant feasibility report.
The licence for the Bamskoye gold ore site is currently suspended because the deposit has been recognised as a subsoil plot of federal importance, and the Group has stopped all exploration works at the deposit until the Russian Government grants its permission for continuation of works in accordance with Art. 2.1 of the Russian Subsoil Law. An application to carry out exploration and mining works at Bamskoye was filed with the state authorities in the first quarter of 2013 and the Group expects to receive the relevant permission during 2013, though there can be no assurance that the permission will be obtained. See “Risk Factors – Risks associated with the Group’s business in the gold mining industry – The Group’s business can be adversely affected if it fails to obtain, retain or renew necessary contracts, licences and permits, including subsoil licences, or fails to comply with the terms of its contacts, licences, and permits – Specific requirements of the Russian Federation”.
Nezhdaninskoye The Nezhdaninskoye deposit is located in the Republic of Sakha (Yakutia) region of Russia. In December 2011, SNC-Lavalin, Gold Fields (BIOX) and AB Global Mining issued a draft pre-feasibility report for the Nezhdaninskoye deposit. Based on the draft report, the Group initiated optimisation measures aimed at maximising the net present value of the project. In December 2012, the Group submitted the project technological application for the development of the Nezhdaninskoye deposit for regulatory review. The Nezhdaninskoe deposit is treated and classified as an exploration and evaluation asset. The Group is currently considering its options with respect to the Nezhdaninskoye deposit, which include, amongst others,
122 the construction of a full-cycle processing plant at the deposit, with subsequent production and sale of gold doré, construction of a gold concentrate production plant at the deposit, with subsequent production and sale of flotation concentrate, or the sale of the deposit.
Polyus Project The Group carries out project design and engineering centrally through LLC Polyus Project. As of 31 December 2012, there were 140 specialists of LLC Polyus Project involved in designing and engineering works for the Group, including designing of industrial plants and equipment, preparation of project documentation, engineering, surveying land plots and general project planning. LLC Polyus Project is also responsible for preparing project documentation on demolition, dismantlement and shutdown of buildings and constructions, inspection of environmental and fire controls and the ongoing inspection of various constructions of the Group. LLC Polyus Project is currently involved in modernisation works at the Olimpiada and Titimukhta mines.
Transportation The Group’s produced doré gold is accumulated as unfinished product at special stocks maintained at the Olimpiada mine (including doré gold produced at the Blagodatnoye and Titimukhta mines), Verninskoye mine and Kuranakh mine, as well as at four special stocks of the Group’s subsidiary, CJSC ZDK Lenzoloto, in respect of the Group’s alluvial operations. The doré gold is transported on armoured vehicles from the storage facilities either directly to the refinery (in case of the Olimpiada mine) or to local airports (Bodaibo, Irkutsk region, or Neryungri, Yakutia region) from where it is flown to state-owned refinery plants. The transportation is handled by armed guards, either employed by the Group, with support from local police departments, or hired armed guards from companies which provide professional services in handling and deliveries of valuable cargoes (such as Rosincas of the CBR, the Courier Communications Central Board or Joint-Stock Company “Special Transportation Services”). Rosincas is a subsidiary of the CBR, which provides encashment services on the territory of the Russian Federation. The Courier Communication Central Board is the federal state unitary enterprise providing a number of services including reception, processing, storage and delivery of confidential correspondence and valuable cargoes. All shipments are fully insured with reputable Russian insurance companies and reinsured through leading international insurance brokers.
Refining The Group outsources the refining of gold that it produces to OJSC Krastsvetmet and, through OJSC Aldanzoloto GRK, to OJSC Prioksky Plant of Non-Ferrous Metals. Both refiners are included by the LBMA in its list of refining companies that meet “Good Delivery” standards. In addition to OJSC Krastsvetmet and OJSC Prioksky Plant of Non-Ferrous Metals, there are six other refining plants in Russia which are included in the LBMA’s Good Delivery list. The Group may consider, in the future, entering into agreements with one or more of these plants. Doré gold produced at Olimpiada, Blagodatnoye and Titimukhta mines and at the alluvial operations is processed at OJSC Krastcvetmet and doré gold produced at the Kuranakh mine is processed at OJSC Prioksky Plant of Non-Ferrous Metals.
Sales Sales of gold by the Group (not including sales of gold by the Group’s Kazakh operations) are made through CJSC Polyus, which sells gold produced by its Krasnoyarsk business unit, as well as gold produced by its subsidiaries at the other business units as their agent. The Company believes that this centralised sales system improves the pricing terms that the Group is able to obtain for its products.
123 The table below shows the Group’s total sales of gold for the periods indicated (excluding sales of gold by the KazakhGold Operating Subsidiaries). All such sales during this period were made to the domestic market.
Year ended 31 December ––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––––– 2012 2011 2010 ––––––––––––––––––––––––– ––––––––––––––––––––––––– ––––––––––––––––––––––––– Average sale Average sale Average sale Amount (’000 price Amount price Amount price ounces) (US$/ounce) (’000 ounces) (US$/ounce) (’000 ounces) (US$/ounce) –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– –––––––––––– 1,571 1,666 1,369 1,592 1,273 1,254
The Russian authorities regulate the sale of gold in Russia and sales may be made to licenced commercial banks or under an export licence obtained from the Russian Ministry of Industry and Trade. The Group’s Russian subsidiaries did not export gold in 2012, 2011 and 2010 due to more favourable contract terms with Russian banks. The Group’s average gold sales prices (excluding sales of gold by the KazakhGold Operating Subsidiaries) were US$1,666 per ounce in 2012, US$1,592 per ounce in 2011 and US$1,254 per ounce in 2010. Except for sales of gold by the KazakhGold Operating Subsidiaries and the sale of 23 thousand ounces in floatation concentrate by Olimpiada in 2012, the Group sells gold in its domestic market primarily to Russian commercial banks in individual transactions under standby master agreements, as well as one-year-term delivery contracts with an agreed delivery schedule for the relevant year, pursuant to which the Group sold a portion of its produced gold in 2011 and 2010. The prices for these sales are based on the spot market price (London afternoon gold price fixing) at the time of delivery, although the Group has typically discounted the prices by an amount which approximates to the purchaser’s overheads for the export of the gold. In general, these discounts have not been significant relative to the global gold price. Payment for gold is made in roubles at the applicable rate of exchange of the rouble and the US dollar, typically with advance payment or immediate payment terms. The gold is sold ex-works at the refinery and title and risk to the gold transfers to the customer at the warehouse of the refining plant (primarily, OJSC Krastcvetmet and OJSC Prioksky Plant of Non-Ferrous Metals). Although the prices quoted on the international commodities markets determine the price of gold in both the Russian and international markets, there may be some variations in the pricing terms available in those markets as a result of variations in the discounts and premiums that the Group agrees with its customers to reflect transportation, insurance and other costs.
Research and Development The Group established its research and development centre in 2004 in the city of Krasnoyarsk to support its exploration, mining and ore processing activities. The centre employed 61 researchers and other staff on average throughout 2012. The centre uses technologically advanced instruments, including an atomic- emission spectrometer, a spectrophotometer and an atomic-absorption spectrometer, and comprises the following laboratories: • Mineralogical laboratory, which studies ores from the deposits to which the Group holds licences to optimise exploration, production and ore processing. This laboratory accumulates data on mineral and chemical composition, the structural and textural features of bed rocks and ores and the behaviour of ores during processing and gold extraction rates. • Geomechanics and engineering laboratory, which develops technologies for mining, mine engineering and mine construction. Its activities include the study of the physical and technological properties of rocks and soils and the evaluation of the stability of pit benches and walls. This laboratory is developing a proprietary database to record the physical and technological parameters of ores and rocks from the deposits to which the Group holds licences. • Ore-processing laboratory, which is one of the core divisions of the research and development centre. It develops flotation, gravitational enrichment, magnetic separation, concentration, filtration and other technologies for ore processing.
124 • Hydrometallurgy laboratory, which develops complex ore processing technologies and equipment utilising leaching, absorption and thermal treatment. This laboratory also develops new absorption chemicals and alternative non-cyanide leaching agents, as well as waste treatment and refinement technologies. • Analytical laboratory, which specialises in the evaluation of the gold and precious metal content in ores, ore concentrates and ore treatment products, as well as the development of precise measurement technologies. • In addition, the Group has a laboratory of pyrometallurgical processes. This laboratory focuses on the development of technologies for thermal ore treatment to minimise the impact on the environment of those operations.
The Group spent US$2.1 million, US$2.6 million and US$2.4 million on research and development in 2012, 2011 and 2010, respectively.
Environmental protection Management views measures ensuring environmental production safety and environmental protection as an integral part of the Group’s sustainable development. The Group has invested in new technologies and equipment to reduce the environmental impact of its operations. The Group has also implemented a system to monitor its operating sites and the surrounding areas through the observation of air, ground and underground waters and soils in accordance with a planned schedule. In 2008, the Group began to develop environmental management systems at the Olimpiada mine in accordance with the International Organisation for Standardisation’s standards, specifically ISO: 14001:2004. By the end of 2010, environmental management systems were implemented at Olimpiada and Aldanzoloto. In December 2010, the Group’s environmental management systems were certified as complying with international standards. The Group plans to further improve and expand the range of areas for which it seeks environmental management system certification.
Cyanide reduction As is common with gold industry operations, the Group’s gold processing operations currently require significant quantities of cyanide-based materials, which potentially present risks to human health and the environment. The Group is seeking to reduce the use of cyanides in its gold extraction processes through the development of alternative technologies, including implementation of cyanide-free leaching. The Group is testing and plans to implement modern and worldwide proved cyanide removal technologies. The Group’s total environmental protection expenditures, which include the protection and rational use of natural and water resources, protection of land resources, waste management and reduction of air emissions, increased from US$12.4 million in 2011 to US$20.2 million in 2012.
Rational use of natural resources The Group focuses on the rational use of natural resources and raw materials. Raw materials are repeatedly used, where possible. The Group uses a closed circuit system for the supply of water at all of its production units.
Protection and rehabilitation of land The Group is actively engaged in the reclamation and rehabilitation of disturbed land. For example, in order to reduce the environmental impact of its operations, the Group constructed landfills for the disposal of solid consumer waste and a landfill for industrial waste at the Olimpiada and Kuranakh mines. The Group is also developing mine closure plans for each operating site at the earliest project development stages. Each of the operating subsidiaries of the Group conducts an inventory of affected land plots on an annual basis so that these land plots can be effectively recultivated in the future.
Waste management More than 90 per cent. of all waste generated during production in 2012 was classified as non-hazardous waste from ore-mining and processing operations (Hazard Class IV and V under the applicable Russian
125 categories), including hard rock and tailings, process tailings and coal slag. Hard rock and tailings are removed and disposed of in specially-designed and built waste facilities, where their safe storage can be ensured. Domestic and industrial solid waste, slag and cinders are all disposed of at specially-constructed waste disposal sites. The Group does not have any subsidiaries within its structure which specialise in utilisation of production waste and therefore the Group utilises or recycles only certain waste products. The Company believes that waste management in the Group’s companies conforms to applicable regulatory requirements, as confirmed in the audit conclusion of Bureau Veritas for 2011–2012.
Water use and water resource protection The water supply for the Group’s utility and production needs is drawn from local surface water bodies and underground sources. The Group targets the efficient and sustainable use of water resources and the establishment of closed water supply systems, enabling the Group to effectively recycle water for its main production processes at its processing plants at Olimpiada, Aldanzoloto and OJSC Pervenets. Another important challenge for the Group is wastewater disposal and the reduction of disposals of polluting agents into the sewage systems and surface water bodies to acceptable permitted levels. The Group uses modern water treatment facilities and puts necessary controls in place at each of its mines in order to determine and monitor water quality on an on-going basis.
Protection of air, energy efficiency and emission of greenhouse gases Key sources of atmospheric emissions in gold ore production include drilling and blasting operations and open-pit equipment. The bulk of harmful emissions consists of suspended substances, such as dust, fuel combustion products and incompletely-burned blasting agents, which emit sulphur, nitrogen oxides and carbon monoxide. To reduce dust levels, open-pit roads and shovel/bulldozer operation areas are watered in the summertime. To reduce gas and dust emissions during blasting, several technologies are used, including using blasting agents with near-zero oxygen balance, blasting the shells with air gaps, neutralising additives for stemming purposes and spraying blasted rock after each blast. To reduce atmospheric emissions at the ore processing stage, various air purification systems are used, including aspiration systems, battery cyclones, foam gas purifiers and exhaust neutralisers. The Group recognises its social and economic responsibility to constructively engage on climate change issues. In 2012, the Group calculated for the first time its greenhouse gas emissions, which amounted to
4.38 and 4.78 million tonnes of CO2 in 2011 and 2012, respectively. Actual emissions of atmospheric pollutants in 2012, 2011 and 2010 throughout the Group’s operations in Russia did not exceed the maximum admissible levels.
Health and Safety The Group is subject to OHS (occupational health and safety) requirements of Russian legislation and international regulations related to occupational health and safety. All of the Group’s entities have established commissions performing industrial control over OHS at all facilities. Health and safety management at all of the Group’s businesses is overseen centrally by the Group’s management. The Group has also implemented international standards to improve the existing system of health and safety management in accordance with OHSAS 18001:2007.
Health and Safety statistics In 2012, there were 42 lost time injuries resulting in 6 fatalities at the Group’s facilities, as compared to 52 lost time injuries resulting in 6 fatalities at the Group’s facilities in 2011. The Group seeks to develop and
126 implement measures to eliminate violations and prevent the re-occurrence of such incidents in the future. The following table sets forth a summary of the Group’s lost time injuries in 2012, 2011 and 2010.
Lost time injuries Fatalities –––––––––––––––––––––––––––––– –––––––––––––––––––––––––––––– Business unit 2012 2011 2010 2012 2011 2010 –––––––––––––––––––––– –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Krasnoyarsk 7 5 9 0 1 3 Irkutsk (alluvial) 7 12 13 0 2 3 Irkutsk (ore) 3 8 5 1 1 0 Yakutia (Kuranakh) 7 8 6 2 0 1 Magadan 1 1 0 0 0 0 Exploration (Nezhdaninskoye) 0 1 0 0 0 0 Kazakhstan(1) 13 15 1 1 2 1 Services(2) 4 2 0 2 0 0 –––––––– –––––––– –––––––– –––––––– –––––––– –––––––– Total –––––––– 42 –––––––– 52 –––––––– 34 –––––––– 6 –––––––– 6 –––––––– 8 Notes: 1. The Group sold its gold mining assets in Kazakhstan and Kyrgyzstan on 28 February 2013. 2. Polyus Stroy, Polyus Project, Polyus Schit, Polyus Logistics.
All of the Group’s business units have health service facilities and perform regular medical checks of employees working in health hazard areas. Medical aid posts are established at all of the Group’s business units to carry out a medical inspection on employees before their shift begins, during working hours and at the end of their shift. In 2012, the Group’s total expenditure on health and safety was RUB 359.3 million (US$11.6 million) as compared with RUB 363.8 million (US$12.4 million) and RUB 302 million (US$9.9 million) in 2011 and 2010, respectively.
The international standard for reporting industrial accidents is the Lost Time Injuries Frequency Rate (“LTIFR”). An incident becomes registered as a Lost Time Injury when a worker loses a single shift. In 2012, as a result of the Group’s focus on the implementation of its health and safety management systems and the introduction of risk assessment mechanisms, LTIFR decreased by 17 per cent. to 0.15, as compared to 0.18 in 2011 and 0.20 in 2010. The Group uses a 200,000 man hour denominator in accordance with GRI requirements (Sustainability Reporting Guidelines).
LTIFR = LTIs * 200,000 man hours/hours worked ––––––––––––––––––––––––––––––––––– Business Unit 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk 0.11 0.07 0.11 Irkutsk (alluvial) 0.14 0.29 0.30 Irkutsk (ore) 0.21 0.44 0.26 Yakutia (Kuranakh) 0.49 0.58 0.48 Magadan 0.18 0.20 0.00 Exploration (Nezhdaninskoye) 0.00 1.32 0.00 Polyus Stroy 0.27 0.00 0.00 Polyus Logistic 0.00 0.48 – Polyus Energy 0.15 – – Moscow headquarters 0.00 0.00 0.00 –––––––– –––––––– –––––––– Total 0.15 0.18 0.20 –––––––– –––––––– –––––––– Health and Safety training The Group has introduced a health and safety policy and training programmes at all of its business units aimed at detecting and preventing dangers and hazards at workplaces. New hires undergo safety induction and are appointed a mentor for the duration of their training. All business units conduct regular appraisals of the managers and staff working in industrial and labour safety. In 2012, the Group hired DuPont Safety
127 Systems to provide a leadership safety training course, which was attended by 160 senior managers of the Group. In 2013, the Group expects to expand the programme to over 1,000 senior and mid-level staff.
Insurance The insurance industry in Russia is still developing, and many forms of insurance coverage common in developed markets are not yet generally available. The Group implemented a property risk insurance programme in 2004, which is ongoing. This programme provides coverage for the replacement of key production equipment, buildings and structures, and for losses resulting from a temporary disruption in production. The Group also has general insurance policies against risks relating to transportation of its valuable cargo, including doré gold, dust and refined gold. Shipments are insured with reputable Russian insurance companies, with up to 99 per cent. of cargo value typically reinsured on international markets through reputable global brokers. The Group does not currently have full coverage for its mining, processing and transportation facilities, for business interruption or for third party liabilities in respect of property or environmental damage arising from accidents on its property or relating to its operations. See “Risk Factors – Risks associated with the Group’s Business and the Gold Mining Industry – The Group’s level or scope of insurance coverage may not be adequate and the Group may become subject to liability for risks that cannot be insured against or against which it may not be so insured”.
Employees The table below sets out the number of people employed by the Group as at the dates indicated:
31 December ––––––––––––––––––––––––––––––––––– Business unit/location 2012 2011 2010 ––––––––––––––––––––––––––––––––––––––––––––––– –––––––– –––––––– –––––––– Krasnoyarsk business unit 5,497 5,347 6,929 Irkutsk alluvial business unit 2,991 3,055 3,183 Irkutsk hard rock business unit 1,426 1,791 2,076 Yakutia business unit (Kuranakh, Nezhdaninskoye, YaGK)(1) 1,914 1,787 1,732 Magadan business unit 867 508 455 Services(2) 3,947 2,780 1,056 Moscow headquarters 279 258 225 Kazakhstan business unit(3) 4,402 4,250 4,334 –––––––– –––––––– –––––––– Total 21,323 19,776 19,990 –––––––– –––––––– –––––––– Notes: 1. This line is a combination of the Yakutia (Kuranakh) business unit and the Exploration (Nezhdaninskoye) business unit. 2. Polyus Stroy, Polyus Project, Polyus Schit, Polyus Logistics. 3. The Group sold its gold mining assets in Kazakhstan and Kyrgyzstan on 28 February 2013.
Corporate Social Responsibility The Group strives to establish relations with individuals and legal entities at the regional and federal level, to create new projects, to expand the scope of cooperation and use more efficient approaches to achieving social and economic goals identified by the Group and the society. The Group’s social investments in sustainable development have received several awards, including in surveys carried out by Vedomosti, Donors Forum and PricewaterhouseCoopers in 2007 and 2010. The Group has also established local charitable programmes to support the communities in which it operates.
The Group’s interest in Kazakh, Kyrgyz and Romanian gold mining assets Prior to 28 February 2013, in addition to its main Russian gold mining operations, the Group also held a controlling interest in gold mining assets in Kazakhstan, an exploration asset in Kyrgyzstan (the “KazakhGold Assets”) as well as non-producing assets in Romania. The Group acquired the KazakhGold Assets and the Romanian assets following the acquisition by OJSC Polyus Gold in August 2009 of a
128 controlling interest in KazakhGold, which held these assets through the KazakhGold Operating Subsidiaries. These assets mainly comprised the Aksu mine (including the Aksu and adjacent Quartzite Hills deposits), the Bestobe mine, the Zholymbet mine, and the Akzhal mine in Northern and Eastern Kazakhstan as well as development properties in Northern, Eastern and Central Kazakhstan, and exploration projects at Yuzhny Karaultube and Kaskabulak. In 2012, 2011 and 2010, the KazakhGold Assets produced 109 thousand ounces of gold, 117 thousand ounces of gold and 110 thousand ounces of gold, respectively.
On 18 May 2012, the Group completed the sale of its Romanian assets for a total consideration of US$20 million to a British Virgin Islands incorporated holdings company affiliated with SAT & Company JSC, and on 28 February 2013, the Group completed the sale of its gold mining assets in Kazakhstan and Kyrgyzstan to a consortium consisting of Institute Project B.V., Financial Services B.V. and Folkstand Consortium Limited.
On 28 February 2013, the Company completed the sale of its assets in Kazakhstan and Kyrgyzstan to a consortium consisting of Institute Project B.V., Financial Services B.V. and Folkstand Consortium Limited. In connection with this transaction: (i) Romanshorn sold 100 per cent. of the shares in Kazakhaltyn to Institute Project B.V. for cash consideration of US$10 million less applicable withholding tax of US$1.5 million, (ii) Jenington novated all of its rights and obligations under the loan agreements between Kazakhaltyn, as borrower, and Jenington, as lender, to Institute Project B.V. and Financial Services B.V. for an aggregate cash consideration, after adjustment in accordance with the transaction agreements, of approximately US$288 million, and (iii) the Company sold 100 per cent. of the issued and outstanding shares in Norox Mining Company Limited to Folkstand Consortium Limited for cash consideration of US$1 million.
Licences The tables below show the periods and main terms of the principal licences held by the Group. Except as indicated below, the Group has complied with all of the material terms of the licences.
Exploration and Production Licences Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– Krasnoyarsk region Blagodatnoye deposit 24.5.2000 1.2.2022 – By 24 May 2005: complete the first stage of geological study. – By 1 October 2005: prepare and agree in the prescribed manner the project for the second stage of prospecting and evaluation works. – By 31 December 2008: complete exploration. – By 31 December 2009: complete geological study of the licence area and file a report with the relevant authorities prepared in the prescribed manner with calculation of reserves and resources of gold at the Talovskoe, Kirkilovskoe and other ore occurrences. – By 31 December 2011: obtain approval for development project. – By 1 June 2012: commence construction.
129 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– – By 1 July 2013: achieve full design capacity; production capacity to be determined in accordance with the development project.
Verkhnekadrinskaya area 17.8.2010 20.8.2036 – By 20 August 2011: prepare, agree and obtain approval in the prescribed manner for the prospecting and evaluation project on the licence area.
– By 20 November 2011: commence prospecting and evaluation works.
– By 20 August 2013: complete the evaluation of the licence area and file the geological study with calculation of reserves and resources according to P1 and C2 categories.
– By 20 February 2014: prepare, agree and obtain approval for exploration project. – By 20 June 2014: commence exploration. – By 20 February 2016: complete exploration works and file an exploration report on the gold deposits prepared in the prescribed manner with the state expert review. – By 20 August 2017: prepare and agree the technical proposal for the mining of the area covered by the licence. – By 20 February 2018: commence construction of mine infrastructure. – By 20 February 2019: commission mine. – By 20 February 2020: achieve full design capacity.
Vangashskaya area 17.8.2010 20.8.2036 – By 20 August 2011: prepare, agree and obtain approval in the prescribed manner for the prospecting and evaluation project on the licence area.
– By 20 November 2011: commence prospecting and evaluation works.
130 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– Vangashskaya area 17.8.2010 20.8.2036 – By 20 August 2013: complete evaluation on the licence area and file the geological study with calculation of reserves and resources according to P1 and C2 categories.
– By 20 February 2014: prepare, agree and obtain approval for the exploration project.
– By 20 June 2014: complete exploration.
– By 20 February 2016: complete exploration works.
– By 20 August 2017: prepare and agree the technical proposal for the mining of the area covered by the licence.
– By 20 February 2018: commence construction of mine infrastructure.
– By 20 February 2019: commission mine.
– By 20 February 2020: achieve full design capacity.
Panimbinskaya block 1.2.2007 1.11.2029 – By 6 December 2010: undertake geological study of licence area and calculation of reserves.
– As the mineable reserves are discovered, prepare, agree and obtain approval in the prescribed manner for the project documentation for the development of the licence area and obtain the positive opinion of the State Ecology Expertise and State Expertise on the Industrial Safety and Resources Protection.
– Commissioning of mine to be settled upon reserves state listing.
– Design capacity is preliminary set as 300 kg of gold per annum and may be amended upon the results of the geological review during the preparation of the feasibility study.
131 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– Razdolinskaya block1 4.7.2007 1.11.2025 – By 1 October 2006: prepare, agree and obtain approval in the prescribed manner for the project for the geological study of the area.
– By 1 October 2006: begin geological prospecting of licence site.
– By 1 April 2007: prepare, agree and obtain approval in the prescribed manner for the prospecting project (for known gold occurrences).
– By 1 October 2009: complete geological prospecting of licence site and file the geological study with calculation of reserves and resources according to P1 and C2 categories.
– By 1 October 2009: complete the first phase of prospecting for known gold occurrences at the site and file geological report for state expert review of mineral reserves.
– By 1 April 2010: develop and agree technical design of the mine.
– By 1 October 2010: commence construction of mine and infrastructure.
– By 1 October 2011: commission mine with a minimum annual production capacity of 500 kg of gold.
Amur region Bamskoye gold ore site2 4.2.2008 15.4.2030 – By 15 February 2006: prepare geological study project.
– By 15 April 2006: commence geological study.
– By 15 July 2006: prepare exploration project (within the licence area of the Bamskoye deposit).
1. LLC Krasnoyarskoe GRP, the licenceholder, is currently in violation of certain terms of the licence. See “Risk Factors – Risks associated with the Group’s business in the gold mining industry – The Group’s business can be adversely affected if it fails to obtain, maintain or renew necessary contracts, licences and permits, including subsoil licences, or fails to comply with the terms of its contracts, licences, and permits – Compliance”. 2. The Licence for the Bamskoye project is currently suspended. See “Risk Factors – Risks associated with the Group’s business in the gold mining industry – The Group’s business can be adversely affected if it fails to obtain, maintain or renew necessary contracts, licences and permits, including subsoil licences, or fails to comply with the terms of its contracts, licences, and permits – Specific requirements of the Russian Federation”.
132 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– – By 31 December 2008: complete the first stage of exploration of the deposit.
– By 15 April 2009: complete geological study.
– By 31 July 2010: complete the second stage of exploration at the deposit.
– By 1 August 2010: prepare and agree technical design.
– By 15 April 2011: commence construction of mine.
– By 15 April 2013: commission mine with a minimum annual production capacity of 1 million tonnes of ore.
Irkutsk region Chertovo Koryto deposit 20.1.1998 1.1.2020 – By 1 February 2003: submit report with calculation of reserves for state expert examination.
– By 1 June 2014: prepare, agree and obtain approval in the prescribed manner for the technical project for the mining of gold in ore occurrences and gold placer deposits of Chertovo Koryto. The project must be approved by the relevant state experts.
– By 1 January 2015: commence the construction of the infrastructure for the mine.
– By 1 January 2018: commission mine.
– By 1 January 2019: achieve full design capacity in accordance with the technical project for the mine approved in the prescribed manner by the relevant authorities.
Pervenets deposit 10.2.2003 1.6.2020 – Commence works within one year from registration of the licence.
– Ensure annual review of gold production level by the government of the Irkutsky region.
– By 2010: achieve annual production of 50 kg of gold, substantially in accordance with technical project of the deposit development.
133 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– Verninskoye deposit 19.5.2003 1.6.2020 – By 1 January 1999: submit report of calculation of reserves for expert review. – Level of production to be defined by annual quota established by the regional administration.
Smezhny area 7.10.2010 10.10.2035 – By 10 August 2011: prepare geological study project.
– By 10 October 2011: commence geological study.
– By 10 October 2014: complete geological study.
– By 10 April 2015: prepare and approve exploration project.
– By 10 October 2015: commence exploration project.
– By 10 October 2018: complete exploration.
– By 10 October 2019: prepare and agree technical design.
– By 10 April 2020: begin construction of mine infrastructure.
– By 10 April 2021: commission mine.
– By 10 April 2022: achieve full design capacity.
Republic of Sakha (Yakutia) region Nezhdaninskoye 2.7.2003 27.9.2021 – By 1 June 2000: provide for state expert review and approval project for construction of certain production facilities.
– By 1 July 2000: prepare, agree and approve in the prescribed manner the development project.
– By 15 July 2008: develop preliminary production feasibility study.
– By 31 December 2008: submit cut-off feasibility study with calculation of reserves for state expert review.
134 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– – By 31 December 2016: construct and commission mining and processing facility with a minimum production capacity stipulated in the technical project approved by state expert examination.
Chukotka Autonomous region East 11.1.2011 11.1.2036 – By 11 January 2012: prepare geological Burgakhchanskaya area study project.
– By 11 April 2012: commence geological study.
– By 11 January 2016: complete geological study and file geological study report and feasibility study with calculation of reserves and resources according to P1 and C2 categories.
– By 11 July 2016: prepare and approve exploration project.
– By 11 January 2017: commence exploration.
– By 11 January 2019: complete exploration and file geological study report and feasibility study with calculation of reserves according to C1 and C2 categories.
– By 11 July 2020: prepare and agree technical design.
– By 11 January 2021: begin construction of mine infrastructure.
– By 11 January 2023: commission mine.
– By 11 January 2024: achieve full design capacity.
135 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– West 11.1.2011 11.1.2036 – By 11 January 2012: prepare geological Burgakhchanskaya area study project. – By 11 April 2012: commence geological study. – By 11 January 2016: complete geological study and file geological study report and feasibility study with calculation of reserves and resources according to P1 and C2 categories. – By 11 July 2016: prepare and approve exploration project. – By 11 January 2017: commence exploration. – By 11 January 2019: complete exploration and file geological study report and feasibility study with calculation of reserves according to C1 and C2 categories. – By 11 July 2020: prepare and agree technical design. – By 11 January 2021: begin construction of mine infrastructure. – By 11 January 2023: commission mine. – By 11 January 2024: achieve full design capacity.
Central 11.1.2011 11.1.2036 – By 11 January 2012: prepare geological Burgakhchanskaya area study project. – By 11 April 2012: commence geological study. – By 11 January 2016: complete geological study and file geological study report and feasibility study with calculation of reserves and resources according to P1 and C2 categories. – By 11 July 2016: prepare and approve exploration project. – By 11 January 2017: commence exploration.
136 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– – By 11 January 2019: complete exploration and file geological study report and feasibility study with calculation of reserves according to C1 and C2 categories. – By 11 July 2020: prepare and agree technical design. – By 11 January 2021: begin construction of mine infrastructure. – By 11 January 2023: commission mine. – By 11 January 2024: achieve full design capacity.
Production Licences Krasnoyarsk region Titimukhta deposit 29.12.2003 31.12.2023 – By 30 September 2004: prepare and agree development project.
– By 30 December 2004: commence exploration.
– By 30 December 2005: complete exploration.
– By 30 September 2007: verification of reserves.
– By 30 September 2008: approval of development project.
– By 30 September 2009: commission mine with minimum capacity of 2,000 kg of gold per annum.
Olimpiada deposit (incl. 24.5.2000 1.1.2024 – Extraction of gold from sulphide ores, Vostochny pit and minimum 10 tonnes per annum. Zapadny pit) – By 2010: increase production capacity up to 2.5 to 3 million tonnes of ore.
137 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– Magadan region Natalka deposit 31.3.2003 31.12.2036 – Extraction of gold from sulphide ores, minimum 10 tonnes per annum.
– In 1993-2003: ensure extraction of 1000 kg of gold per annum.
– By 1 October 2004: approve exploration project.
– By 1 November 2004: commence exploration.
– By 31 March 2005: prepare feasibility study for calculation of reserves.
– By 30 November 2007: complete exploration and file a report with calculation of gold reserves in the amount of not less than 1000 tonnes.
– By 1 February 2009: prepare and agree development project.
– By 31 December 2013: commission first stage of mine with production capacity in accordance with the terms of the mining project. Republic of Sakha (Yakutia) region Yuzhnoye deposit of 25.7.2006 31.12.2015 – Conduct state expert examination of the Kuranakh ore field projects for all types of works, obtain permit for all types of use of natural resources and environmental impact prior to commencement of works.
– Exploit the deposit after the registration of the mining allotment and approval of the technical project in the prescribed manner.
– Until 31 December 2011: production level to be determined by technical mining project.
– A 15 per cent. decrease in production level is considered to be a violation of the licence’s terms.
– After 1 January 2012: annual production level is determined in accordance with the general schedule for development of the group of deposits of the Kuranakh ore field and the technical project, which has received the approval of state authorities.
138 Term of Licence Registration/ Facility re-registration Expiry Periods and main terms ––––––––––––––––––– –––––––––––– –––––––––––– –––––––––––––––––––––––––––––––––––––– Each of Delbe, 25.7.2006 1.1.2014 – Conduct state expert examination of Kanavnoye, (Porfirovoye) projects for all types of works, obtain Yakokutskoye, 31.12.2014 permit for all types of use of natural Dorozhnoye, Bokovoye, (Severnoye) resources and environmental impact prior Porfirovoye, Severnoye 1.1.2015 to commencement of works. and Tsentralnoye (Kanavnoye) deposits of the Kuranakh 30.6.2015 – Exploit the deposit after the registration of ore field (Yakokutskoye) the mining allotment and approval of the 1.1.2017 technical project in the prescribed matter. (Bokovoye and – The annual production level is determined Dorozhnoye) in accordance with the technical project, 1.1.2022 which has received the approval of state (Tsentralnoye) authorities. 1.1.2024 (Delbe)
Stockpile waste of 22.12.2009 30.6.2024 – Conduct state expert examination of Kuranakh field projects for all types of works, obtain permit for all types of use of natural resources and environmental impact prior to commencement of works.
– Until 31 December 2011: production level to be determined by technical mining project, as such may be amended, and approved by the government of the Republic of Sakha (Yakutia), but no less than 1,250 kg of gold per annum.
– After 1 January 2012: annual production level is determined in accordance with the general schedule for development of the group of deposits of the Kuranakh ore field and the technical project, which has received the approval of state authorities.
Nezhdaninskoye 2.7.2003 31.12.2013 – From 2008 to 15 July 2008: development (additional vein areas) of a preliminary production feasibility study.
– By 31 December 2008: submit cut-off feasibility study with calculation of reserves for state expert review.
– By 30 December 2012: agree and submit mining project for state expert review.
– By 31 December 2013: construction and commissioning of mining and processing facility with a minimum production capacity of not less than 100,000 tonnes of ore per annum.
139 MANAGEMENT AND CORPORATE GOVERNANCE
The Board of Directors currently comprises a non-executive Chairman, Robert Buchan, the chief executive officer, Mr. German Pikhoya, and seven non-executive Directors.
The Board considers five of the eight directors, Messrs. Buchan, Coates, Buck, Moolman and the Lord Clanwilliam, to be independent within the meaning of the UK Corporate Governance Code. Mr. Adrian Coates has been appointed as Senior Independent Director.
The table below shows the current members of the Company’s Board of Directors. The business address for each of the Company’s Directors is Argyll, 18b Charles Street, London W1J 5DU, United Kingdom.
On 15 April 2013, the Company announced that it had been notified by Robert Buchan, the Chairman of the Board, that, in light of his recent appointment as President and CEO of Allied Nevada Gold Corp., in addition to his position as Executive Chairman of that company, he intends to resign from the Board at the conclusion of the Company’s 2013 Annual General Meeting. The Board’s Nomination Committee has initiated a search for a new independent Chairman of the Board.
Board of Directors Name Year of Birth Position ———————————— —————– —————————————————————– Mr. Robert Buchan 1947 Chairman and Independent Non-Executive Director Mr. Bruce Buck 1946 Independent Non-Executive Director Lord Clanwilliam 1960 Independent Non-Executive Director Mr. Adrian Coates 1958 Independent Non-Executive Director Mr. Igor Gorin 1978 Non-Executive Director Ms. Anna Kolonchina 1972 Non-Executive Director Mr. Kobus Moolman 1953 Independent Non-Executive Director Mr. German Pikhoya 1970 Chief Executive Officer
Robert Buchan, Independent Non-executive Director and Chairman of the Board Mr. Buchan joined the Board as an Independent Non-Executive Director and has been the Chairman of the Board since 2011. Mr. Buchan served as the Chairman and Chief Executive Officer of Kinross Gold Corp., the parent company of Echo Bay Mines Ltd., from 1993 to 2003. From 2003 to 2005, he served as Chief Executive Officer of Kinross Gold Corp. He is a founder of Katanga Mining Ltd. and Kinross Gold Corp. Mr. Buchan has served as the Executive Chairman of Allied Nevada Gold Corp. since 2007 and, since March 2013, also as its President and Chief Executive Officer. Between April 2005 and December 2007, Mr. Buchan served as the Executive Chairman of Quest Capital Corp (now Sprott Resource Lending Corp). Mr. Buchan held the Chairmanship of Extract Resources Ltd., from April 2007 until February 2009, of Angus Mining Inc. until March 2012, Foxpoint Capital until March 2012, Samco Gold until December 2011, Touchstone Gold until March 2012 and Rainy Mountain Royalty Corporation until November 2011. He has also served on the boards of Katanga Mining, Dundee Bancorp, Allied Nevada Gold Corp, Rockwater Capital Corporation, Claude Resources, Forsys Metals Group, Dayton Mining Corporation, Richmont Mines Inc. and Rainy Mountain Capital. He served on the board of OJSC Polyus Gold from June 2008 until May 2009. Mr. Buchan held the Chairmanship of the Board of Elgin Mining Inc. (formerly, Phoenix Coal Inc.) from 2008 until April 2012. Mr. Buchan serves as Chairman of the Nominations Committee.
Bruce Buck, Independent Non-executive Director Mr. Buck is the Managing Partner for Europe of the international law firm Skadden Arps Slate Meagher & Flom LLP. A graduate of Columbia University School of Law in New York and a registered foreign lawyer in England and Wales, Mr. Buck has practised law in Europe for more than 25 years and specializes in financing transactions, as well as mergers and acquisitions. Mr. Buck is Chairman of Chelsea FC plc. and its operating subsidiary Chelsea Football Club Limited. He is also on the Audit Committee of the FA Premier League, the top tier football league in England. Mr. Buck is the longest serving trustee and a member of the
140 Audit Committee of Orbis UK, a charity devoted to eradicating curable blindness in the developing world. Mr. Buck serves as Chairman of the Health, Safety, Environment and Community Committee and member of the Nomination Committee and Remuneration Committee.
Lord Clanwilliam, Independent Non-executive Director Following a career in the British military, Paddy Clanwilliam started his business career with Hanson plc., and was seconded from there to the Home Office working with the Rt. Hon Douglas Hurd CBE, then Home Secretary. In 1993, he founded the communications company The Policy Partnership Limited, now called Meade Hall. From 2000 to 2004, he was the non-executive Chairman of the Board at Cleveland Bridge UK Ltd, Europe’s leading bridge and large steel construction company. In 2007, he was appointed Chairman of Eurasia Drilling Company Limited, the largest drilling company in Russia as measured by meters drilled. He is also a director of Touchstone Gold, a Columbian gold exploration start-up, which listed on London’s Alternative Investment Market in 2012, and is a Director of NMC Healthcare, a FTSE 250 company with operations in the UAE. He also chairs the Charitable Foundation of Oracle Capital, the London-based multi-family wealth office. Lord Clanwilliam has been a member of the Board of Polyus Gold since 2006. Lord Clanwilliam serves as Chairman of the Remuneration Committee and a member of the Audit Committee, Nomination Committee and Health, Safety, Environment and Community Committee.
Adrian Coates, Independent Non-executive Director and Senior Independent Director Mr. Coates has over 20 years’ experience in the mining sector, most recently at HSBC Bank plc., London where he was Global Sector Head Resources and Energy until 2008, with strategic responsibility for HSBC’s relationships and businesses with major clients globally in the resources and utilities sectors. Mr. Coates was the lead HSBC banker in a number of large-scale metals and mining transactions. He was cited in the press as “HSBC’s star advisory banker” and named in Financial News’ “Top 20 European Dealmakers” in late 2007. Previously, as Managing Director, Metals and Mining at UBS Investment Bank, London, he was responsible for originating the landmark Billiton IPO, a deal which both restarted the London mining market and set a precedent for the subsequent influx of emerging market companies. He has an MA degree in Economics from Cambridge University and an MBA from the London Business School. In his non-executive career, Mr. Coates has served as an adviser to a number of leading mining companies. He is a non-executive Director and Chairman of the Audit Committee of Regal Petroleum plc. Mr. Coates serves as Chairman of the Risk Committee and a member of the Audit Committee, Nomination Committee and Remuneration Committee.
Igor Gorin, Non-executive Director Mr. Gorin is Managing Director of Raiffeisen Investment (the investment banking arm of Raiffeisenbank) with responsibility for client coverage in respect of equity capital markets and M&A. Prior to joining Raiffeisenbank in 2005, Mr. Gorin had gained extensive corporate banking experience at VTB and Commerzbank. Since joining Raiffeisenbank, Mr. Gorin has occupied various senior positions in corporate and investment banking. Since 2010, he has headed the equity capital markets and M&A business. Mr. Gorin graduated from the Finance Academy of the Government of the Russian Federation in 2000 and obtained his PhD in economics in 2003.
Anna Kolonchina, Non-executive Director Ms. Kolonchina has a degree in economics from the State Academy of Finance. From 2001 until 2008, she was a Director of Deutsche Bank AG, London. From 2008 to 2010, she was a Managing Director of Wainbridge Limited; and from November 2008 until 2010, she was Vice-President for Economics and Finance at OJSC PIK Group, where she has been a member of the Board of Directors since 2010. From 2010 to 2012, Ms. Kolonchina serves as a member of the Board of Directors of JSC Bank International Financial Club, and, from 2010 to 2011, she was a member of the Supervisory Board of BPC. From 2010 to 2013, Ms. Kolonchina was the Managing Director of Nafta Moskva Company, where, since 2013, Ms. Kolonchina is an Executive Managing Director. Ms. Kolonchina has been a member of the Board of OJSC Polyus Gold since May 2010 and a member of the Board of Directors of the Company since 2011. Ms. Kolonchina serves as a member of the Risk Committee.
141 Kobus Moolman, Independent Non-executive Director Mr. Moolman has a Masters degree in financial accounting, is a qualified chartered accountant and is a member of the Independent Regulatory Board For Auditors in South Africa and The South African Institute of Chartered Accountants. Between 1981 and 2002, Mr. Moolman was employed by Ernst & Young in South Africa, where he became a Senior Audit Partner. Between 2002 and 2008, he was Senior Audit Partner and Leader of the Mining Industry Group at Deloitte & Touche CIS, in Russia. From 2009 to 2010, he was an Audit and IFRS technical partner for the Gulf Co-operation Council region of an international audit firm in the Kingdom of Bahrain. Since 2010, he has been the Chief Audit Executive for the Saudi Arabian Mining Company (Ma’aden), in the Kingdom of Saudi Arabia. Mr. Moolman serves as the Chairman of the Audit Committee and a member of the Risk Committee.
German Pikhoya, Executive Director and Chief Executive Officer Mr. German Pikhoya has been with Polyus Gold since 2002, initially as Deputy CEO for strategy and corporate development, and later as Chief Executive Officer since 2011. Prior to joining Polyus Gold, from 1998 to 2002, he led business development and acquisition evaluation in Russia for Placer Dome International (now part of Barrick Gold). From 1994 to 1998, he was general manager at OJSC Central Company of the Eurogold Financial and Industrial Group. Mr. Pikhoya graduated from Urals State University in Yekaterinburg with an honours degree in history. As part of his degree, he conducted research at Bowdoin College in the United States. Mr. Pikhoya also graduated from Russian Presidential Academy of Public Administration in Moscow with a degree in economics. Mr. Pikhoya serves as a member of the Health, Safety, Environment and Community Committee.
Senior Management Team The table below shows the Group’s senior management. The business address for each member of the Group’s senior management is 15/1 Tverskoy Boulevard, Moscow 123104, Russian Federation.
Name Year of Birth Position ———————————— —————– ——————————————————————– Mr. German Pikhoya 1970 Chief Executive Officer Mr. Artem Borisanov 1976 Deputy CEO for Strategy and Corporate Development Mr. Oleg Ignatov 1969 Chief Financial Officer Mr. James Nieuwenhuys 1954 Chief Operating Officer Mr. Fyodor Kirsanov 1979 Deputy CEO for Procurement Mr. Boris Zakharov 1954 Deputy CEO for Engineering and Innovation
Mr. German Pikhoya, Chief Executive Officer Please refer to “– Board of Directors” for a brief biography of Mr. Pikhoya.
Mr. Artem Borisanov, Deputy CEO for Strategy and Corporate Development Mr. Borisanov has been the Deputy CEO for Strategy and Corporate Development since July 2011. From 2009 to 2011, Mr. Borisanov was an investment director at CJSC Polyus and from 2008 to 2009, an investment director at OJSC Polyus Gold. From 2004 to 2007, Mr. Borisanov was head of project valuation at CJSC Polyus. Prior to then, from 2002 to 2004, Mr. Borisanov was an investment manager at OJSC AKB Rosbank. Mr. Borisanov graduated from the University of Maryland with a B.Sc. in Business and Management and from Irkutsk State University with a Masters degree in World Economics.
Mr. Oleg Ignatov, Chief Financial Officer Mr. Igantov has been the Chief Financial Officer of the Company since July 2011 and a member of the board of directors of OJSC Polyus Gold since December 2011. Since 2008, Mr. Ignatov is a member of the board of directors of CJSC Polyus and CJSC ZDK Lenzoloto. From 2005 to 2008, Mr. Ignatov was deputy director for economics and finance at the polar division of OJSC MMC “Norilsk Nickel”. From 2003 to 2005, Mr. Ignatov was the first deputy mayor of Norilsk. Prior to then, from 2002 to 2003, he was deputy general director for finance at OJSC ChelyabEnergo. From 1998 to 2002, Mr. Ignatov was head of the regional
142 relationship development department, deputy head of client relations, vice-president and senior vice-president at OJSC AKB Rosbank. Mr. Ignatov graduated from the Moscow Machine-Instrument Institute (STANKIN) in 1992 with a degree in electrical engineering. Mr. Ignatov graduated with honours from the Financial University, under the Government of the Russian Federation in 1998, with a degree in finance and credit.
Mr. Fyodor Kirsanov, Deputy CEO for Procurement Prior to joining Polyus Gold in March 2013, Mr. Fyodor Kirsanov headed the procurement department at the United Shipbuilding Corporation, Russia’s leading industrial manufacturer and at Sibur, Russia’s largest petrochemicals producer, managing procurement budgets of over US$ 1 billion. From 2005 to 2007, he worked as a consultant at McKinsey & Co. Mr. Kirsanov graduated from People’s Friendship University of Russia in Moscow in 2003 with a degree in economics and holds an MBA with honours in strategic management from Fox School of Business at Temple University in Philadelphia, Pennsylvania and a master’s degree in economics from People’s Friendship University of Russia.
Mr. James Nieuwenhuys, Chief Operating Officer Mr. Nieuwenhuys has been the Chief Operating Officer since May 2011. From 2008 to 2011, Mr. Nieuwenhuys was managing director at SNC-Lavalin South Africa and, from 2007 to 2008, a vice president for special projects at SNC-Lavalin Inc. From 2006 to 2007, Mr. Nieuwenhuys was managing director at Bateman Diamonds (Pty) Limited and, from 2003 to 2006, a senior general manager for strategic development diamonds at Bateman Minerals & Metals. From 2001 to 2003, Mr. Nieuwenhuys was head of the representative office in the Russian Federation at Bateman International B.V. From 1994 to 2001, he was a director of mechanical engineering at Bateman Minerals & Metals. From 1993 to 1994, Mr. Nieuwenhuys was an engineer in special projects department at Xcel Engineering and Management and, from 1991 to 1993, a project engineer at Venetia Mine at De Beers Consolidated Mines Ltd. Mr. Nieuwenhuys graduated from the University of Cape Town in 1982 with a B.Sc. in mechanical engineering.
Mr. Boris Zakharov, Deputy CEO for Engineering and Innovation Mr. Zakharov has been Deputy CEO for Engineering and Innovation since 2011 and was a member of the board of the Company from 2009 to 2010. From April 2010 to August 2011, he was a member of the board of directors of CJSC ZDK Lenzoloto. From 2010 to 2013, Mr. Zakharov has been chairman of the board of directors of JSC MMC Kazakhaltyn. Since 2010, Mr. Zakharov has been the chairman of the board of directors of LLC Polyus Project and a member of the board of directors of CJSC ZDK Lenzoloto. Since 2009, he has been a member of the board of directors of OJSC Matrosov Mine. Since 2008, Mr. Zakharov has served as chairman of the board of directors of OJSC Aldanzoloto GRK and a member of the board of directors of LLC Polyus Stroy. From 2008 to 2011, Mr. Zakharov was deputy general director for production of CJSC Polyus. Prior to then, from 2003 to 2008, Mr. Zakharov was head of the directorate for planning and coordination of research and engineering development of OJSC MMC “Norilsk Nickel”. From 1999 to 2003, Mr. Zakharov was chief engineer of the production association of processing plants of OJSC MMC “Norilsk Nickel” and, from 1992 to 1999, deputy head of the crushing and floatation shop, and later head of the crushing and floatation shop, at OJSC MMC “Norilsk Nickel”. From 1985 to 1992, Mr. Zakharov was the chief engineer of the Erdenet mine in Mongolia. From 1977 to 1985, and from 1992 to 1999, Mr. Zakharov held various positions, including mill operator, foreman, senior foreman of the crushing and floatation shop at the main production site at Norilsk Mine. Mr. Zakharov graduated from the Moscow Institute of Steel and Alloys in 1978 with a degree in mineral enrichment. Mr. Zakharov holds a Ph.D. in Technical Sciences (kandidat tekhnicheskih nauk).
Remuneration of Directors and Senior Management The total amount paid to the members of the Board of Directors and the Group’s Senior Management in 2012 was US$35 million. The Senior Management are entitled to pensions at the level required by Russian law. All directors of the Company benefit from directors and officers insurance.
143 Shares held by Directors and Senior Management As at the date of this Prospectus, other than Lord Clanwilliam, Adrian Coates and Kobus Moolman, who, respectively, hold 2,656, 33,000 and 39,579 shares of the Company, no other member of the Company’s Board of Directors or Senior Management holds any shares or holds any option over shares in the Company.
Corporate Governance The Company is committed to maintaining high standards of corporate governance. As a company with shares admitted to the Premium Listing Segment of the Official List of the UKLA, the Company’s Board of Directors reports on an ongoing basis to the shareholders as to the Company’s compliance with the UK Corporate Governance Code in accordance with the Listing Rules of the Financial Conduct Authority. The Board of Directors currently comprises a non-executive Chairman, a Chief Executive Officer and seven non-executive Directors. Currently, the Chairman and four of the Company’s non-executive Directors (excluding the Chairman) are considered by the Board as being independent for the purposes of the UK Corporate Governance Code. Mr. Adrian Coates has been appointed senior independent director. The role of the senior independent director is to evaluate the performance of the Chairman and address shareholders’ concerns that are not resolved through the normal channels of communication with the Chairman, the Chief Executive Officer or when such communications would be inappropriate.
Board committees The Board of Directors has established an Audit Committee, a Nomination Committee, a Remuneration Committee, a Risk Committee and a Health, Safety, Environment and Community Committee.
Audit committee The Audit Committee is appointed by the Board of Directors from the Non-Executive Directors of the Company. The Audit Committee’s terms of reference were established and approved on 7 October 2011. The Company’s Audit Committee is chaired by the independent non-executive director, Mr. Kobus Moolman (who is a qualified Chartered Accountant), and also includes Mr. Adrian Coates and the Lord Clanwilliam. The Audit Committee assists the Board of Directors in discharging its responsibilities regarding financial reporting, external and internal audits and controls, as well as reviewing the Group’s annual financial statements. It also assists by reviewing and monitoring the extent of non-audit work undertaken by external auditors, advising on the appointment of external auditors and reviewing the effectiveness of the Group’s internal audit activities, internal controls and risk management systems. The Audit Committee normally meets not fewer than three times a year.
The UK Corporate Governance Code recommends that the Audit Committee be comprised of at least three independent non-executive Directors and that at least one member of the Audit Committee has to be financially qualified (as recognised by the Consultative Committee of Accountancy Bodies). The Board believes the Company complies with the requirements of the UK Corporate Governance Code in this regard.
Nomination Committee The Nomination Committee was formed by a resolution of the Board of Directors on 26 July 2011. The Nomination Committee was appointed by the Board for a period of up to three years. The Board also appointed the Committee Chairman who is also the Chairman of the Board (Robert Buchan). The Nomination Committee comprises four members, all of whom are independent Non-Executive Directors: Mr. Robert Buchan, Mr. Bruce Buck, Mr. Adrian Coates and Lord Clanwilliam. The Nomination Committee is responsible for preparing selection criteria and appointment procedures for members of the Board of Directors and reviewing on a regular basis the structure, size and composition of the Board of Directors. In undertaking this role, the committee refers to the skills, knowledge and experience required of the Board of Directors given the Company’s stage of development and makes recommendations to the Board of Directors as to any changes. The Nomination Committee also reviews the leadership needs of the organisation and determines succession plans for the Chairman and Chief Executive Officer. The Nomination Committee did not meet in 2012 as the Board had been constituted prior to the Company’s admission to premium listing in
144 June 2012 and no vacancies occurred or succession planning was considered necessary by the end of the year. The Nomination Committee plans to meet at least twice in 2013.
The UK Corporate Governance Code recommends that a majority of the Nomination Committee be non-executive Directors, independent in character and judgement and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgement. The Board believes that the Company complies with the requirements of the UK Corporate Governance Code in that regard.
Remuneration Committee The Remuneration Committee is appointed by the Board of Directors from the Non-Executive Directors of the Company. The Remuneration Committee was formed by the resolution of the Board of Directors on 26 July 2011. The Remuneration Committee is composed of three members: Lord Clanwilliam, Mr. Adrian Coates and Mr. Bruce Buck. The Chairman of the Risk Committee is Lord Clanwilliam. The Remuneration Committee is responsible for making recommendations and preparing an annual report to the Board on the Company’s remuneration policies and reviews and determines the remuneration of the Chief Executive Officer. The Remuneration Committee reviews the ongoing appropriateness and relevance of the remuneration policy. In particular, the Remuneration Committee reviews the scale and structure of the remuneration packages of the Chief Executive Officer and the terms of their service or employment contracts, including any share incentive plans, other employee incentive schemes adopted by the Company from time to time and pension contributions. No director or manager may be involved in any decisions as to his or her own remuneration. The Remuneration Committee normally meets not fewer than twice a year.
The UK Corporate Governance Code recommends that all members of the Remuneration Committee be non-executive Directors, independent in character and judgement and free from any relationship or circumstance which may, could or would be likely to, or appear to, affect their judgement. The Board considers that the Company complies with the requirement of the UK Corporate Governance Code in that regard.
Risk Committee The Risk Committee is appointed by the Board of Directors from the Non-Executive Directors of the Group. The Risk Committee’s terms of reference were established and approved on 26 October 2011, and include all matters set out in Section C.2 of the UK Corporate Governance Code. The Risk Committee is composed of three members: Mr. Adrian Coates, Mr. Kobus Moolman, and Ms. Anna Kolonchina. The Chairman of the Risk Committee is Mr. Adrian Coates. The Risk Committee is responsible for the oversight of the effectiveness of the Group’s internal controls and risk management systems, including a review of the Group’s procedures for the prevention of bribery and fraud. The role of the Risk Committee also includes making recommendations to the Board on the appointment or removal of the chief risk officer. The Risk Committee normally meets not fewer than three times a year.
Health, Safety, Environment and Community Committee The Health, Safety, Environment and Community Committee is appointed by the Board of Directors from two Non-Executive Directors and one Executive Director of the Company. The Health, Safety, Environment and Community Committee is composed of three members: Mr. Bruce Buck, Lord Clanwilliam and Mr. German Pikhoya. The Chairman of the Health, Safety, Environment and Community Committee is Mr. Bruce Buck. The Health and Safety Committee is responsible for evaluating the effectiveness of the Group’s policies and procedures for identifying and managing health and safety risks in the Group’s operations; assessing the performance of the senior officers of the Company in ensuring the compliance of the Company, the Group and its employees with internal policies on health and safety and applicable health and safety legislation; monitoring legislative and other developments in health and safety and encouraging a “best practices” ethos within the Group; and reviewing the management’s response to health and safety incidents and accidents. The Health, Safety, Environment and Community Committee normally meets not fewer than twice a year.
145 PRINCIPAL SHAREHOLDERS
The following table shows the name and shareholding of each registered shareholder of the Company holding 3 per cent. or more of its share capital as of the date of this Prospectus based on the information received from the Company’s share registrar and as notified by those shareholders or as otherwise indicated.
Shares Owned ————————————— Shareholder Number Per cent. ————————————————————————————— —————— —————— Nafta(1) 1,219,680,676 40.22% Lizarazu Limited(2) 560,947,743 18.50% Wamika Trading Limited(3) 303,214,996 10.00% Receza Limited(3) 281,265,281 9.28% Chengdong Investment Corporation(4) 151,607,496 4.99% JSC VTB Bank 110,761,797 3.65%
Notes: 1. Nafta is a group of privately-owned companies, including Wandle Holdings Limited, the beneficial owner of which is Mr. Suleiman Kerimov. Of the 1,219,680,676 shares of the Company that Nafta, including Wandle Holdings Limited, beneficially owns, substantially all are subject to repurchase agreements, under which Nafta retains the voting rights attributable to the shares of the company sold under the repurchase agreements. Nafta has accomplished a number of sizeable projects in the mining, metals, telecommunications, real estate and retail sectors, and the stock markets. Its investments include a stake in Uralkali, one of the world’s largest potash producers, and PIK Group, one of the leading residential developers in Russia. 2. Lizarazu Limited is a company ultimately beneficially owned by Mr. Zelimkhan Mutsoev. 3. Wamika Trading Limited and Receza Limited are companies ultimately beneficially owned by Mr. Gavril Yushvaev. 4. Chengdong Investment Corporation is a wholly-owned subsidiary of CIC International Co. Ltd. Each of Nafta, Lizarazu Limited and Wamika Trading Limited and Receza Limited has entered into a relationship agreement with the Company to regulate the ongoing relationship between them and the Group with a view to ensuring that the Group is capable of carrying on its business independently of them and to ensure that transactions and relationships between the Group and them are at arm’s length and on normal commercial terms.
Save as disclosed above, the Company is not aware of any persons who, directly or indirectly, jointly or severally, exercise or could exercise control of the Company.
146 RELATED PARTY TRANSACTIONS
The following is a summary of the Group’s transactions with related parties (as determined under IFRS) for the years ended 31 December 2012, 2011 and 2010. For further details, see Note 30 to the 2012 Financial Statements and Note 32 to the 2011 Financial Statements.
The Group’s transactions with related parties in the years ended 31 December 2012, 2011 and 2010 comprised primarily contracts for insurance with Insurance Company Soglasie, deposit accounts with Bank “Mezhdunarodniy Finansoviy Club” (“MFC”). Loan participation notes held in RBC, as well as investments in securities and other financial assets at Bank “Mezhdunarodniy Finansoviy Club” and equity investments in listed companies held for trading through accounts with RBC.
In 2012, 2011 and 2010 the Group paid US$3.0 million, US$2.2 million and US$1.8 million, respectively, to Insurance Company Soglasie in respect of premiums on insurance policies (incurred on competitive terms).
As of 31 December 2012, the Group had approximately US$151.7 million deposited with MFC, as compared with US$149.3 million as of 31 December 2011. The Group received interest on arm’s length terms from these deposits. In addition, the Group held investments in securities and other financial assets at MFC in a total amount of US$7.6 million as of 31 December 2012 (US$1.6 million as of 31 December 2011).
As of 31 December 2012, the Group held loan participation notes guaranteed by RBC, which was an entity under common control during the reporting period, in a total amount of US$14.4 million (US$1.0 as of 31 December 2011). See Note 17 to the 2012 Financial Statements. The Group also held equity investments held for trading in RBC of US$7.5 million as of 31 December 2012 (US$7.7 million as of 31 December 2011).
As of 31 December 2012, the Group holds loan participation notes in RBC in the aggregate principal amount of US$14.4 million, as compared to an aggregate principal amount of US$1.0 million in loan participation notes of RBC held in 2011. As of 31 December 2012, the Group holds investments in securities and other Financial assets with MFC amounting to US$7.6 million and investments in listed companies held for trading through accounts with RBC amounting to US$7.5 million, as compared to US$1.6 million and US$7.7 million held in such assets, respectively in 2011.
147 REGULATORY MATTERS
Below is a summary of Russian regulatory matters that are applicable to the Group’s operations in the Russian Federation.
Overview The Group’s operations in Russia are regulated by a number of laws relating to mining operations, precious metals, quality standards, industrial safety, environmental regulation and other matters. The relevant legislation includes the following laws:
• the Constitution of the Russian Federation dated 12 December 1993 (as amended);
• the Civil Code of the Russian Federation (as amended) (the “Civil Code”);
• the Land Code of the Russian Federation dated 25 October 2001, as amended (the “Land Code”);
• the Russian Subsoil Law;
• the Federal Law No. 41-FZ “On Precious Metals and Gems” dated 26 March 1998, as amended (the “Precious Metals Law”);
• the Federal Law “On Licensing of Certain Types of Activities” No. 128-FZ dated 8 August 2001 (the “Licensing Law”);
• the Federal Law “On Licensing of Certain Types of Activities” No. 99-FZ dated 4 May 2011, as amended (the “New Licensing Law”);
• the Federal Law “On Environmental Protection” No. 7-FZ dated 10 January 2002, as amended (the “Environmental Protection Law”);
• the Federal Law “On Industrial Safety of Dangerous Industrial Facilities” No. 116-FZ dated 21 July 1997, as amended (the “Safety Law”);
• the Federal Law dated 10 December 2003 No. 173-FZ “On Currency Regulation and Currency Control”, (as amended) (the “Russian Currency Law”); and
• the Federal Law dated 29 April 2008 No. 57-FZ “On Procedure of Foreign Investments in Commercial Entities Having Strategic Importance for the Defence of the Country and the Security of State” (as amended) (the “Foreign Investments Law”), and rules and regulations adopted in accordance with those laws.
Subsoil Use and Mining Subsoil licences The Precious Metals Law, the Russian Subsoil Law and the regulations issued under those laws are the main legal acts which establish the licensing regime in Russia for the use of subsoil for geological research, exploration and production of mineral resources, particularly gold. In accordance with the Precious Metals Law, the Russian Subsoil Law governs the licensing of use of subsoil plots containing precious metals and gems, under which the Russian Federal Agency for Subsoil Use (the “Rosnedra”) may grant several types of subsoil licences in relation to the geological survey and exploration and production of natural resources, including:
• combined licences for the geological survey, exploration, assessment and production of natural resources;
• licences for the geological exploration and assessment of a subsoil plot; and
• licences for the production of natural resources.
148 Until January 2000, when the Federal Law No. 20-FZ “On Amendments and Supplements to the Russian Subsoil Law” introduced important amendments to the Russian Subsoil Law, the Russian Government’s Committee for Geology and Subsoil Use typically granted geological survey licences for up to 5 years, production licences for up to 20 years and licences for combined activities for up to 25 years. Under the Russian Subsoil Law, as currently in effect, the maximum term of a regular geological survey licence is still 5 years (although the maximum term of a licence for the geological survey of subsoil plots under inland sea waters, territorial waters and the continental shelf of the Russian Federation is 10 years). The Rosnedra may issue a production licence and combined licence for the useful life of a mineral reserves field, calculated on the basis of a feasibility study for exploration and production that ensures rational use and protection of the subsoil.
Amendments to the Russian Subsoil Law, passed in August 2004, significantly changed the procedure for awarding geological survey and production licences, in particular abolishing the joint grant of licences by federal and regional authorities. Under the Russian Subsoil law, as currently in effect, the Rosnedra now awards production licences and combined geological survey exploration and production licences by tender or auction. While the auction or tender commission formed by the Rosnedra must include a representative of the relevant region, the Russian Subsoil Law no longer requires the separate approval of regional authorities in order to issue subsoil licences. Regional authorities may, however, issue production licences for “common” mineral resources, such as clay, sand or limestone. An auction for subsoil plots of federal importance (as defined by Article 2.1 of the Russian Subsoil Law) and on certain other cases is arranged by the Russian Government, and the Government may impose limitations on Russian legal entities with foreign shareholders participating in the auctions . The Russian Subsoil Law provides that, in a tender, the licence should be awarded to the bidder which has submitted the most technically competent, financially attractive and socially and environmentally sound proposal that meets published tender terms and conditions, and, in an auction, to the bidder which has offered the largest one-off payment for the use of the subsoil plot. The Rosnedra may also, pursuant to a decision of the special committee comprised of representatives of the federal and state authorities, issue licences for exploration and production without holding an auction or tender if holders of geological survey licences discover mineral resource deposits through a geological survey (except for the subsoil plots of federal and local importance).
Amendments to the Russian Subsoil Law adopted in 2008 introduced certain further amendments to the Russian Subsoil Law, including the concept of subsoil plots of federal importance. Subsoil plots of federal importance include, among other things, subsoil plots with aggregate gold reserves exceeding or equal to 50 tonnes of vein gold. Under these amendments, if a geological survey conducted at a subsoil site has identified a deposit falling under the classification of a subsoil plot of federal importance, in the interests of national defence and security, the Russian Government may decide to deny a Russian legal entity with foreign participation the right to conduct exploration and production (even if a combined licence has already been issued to the subsoil user, which would entail the revocation of the licence subject to payment of compensation to the subsoil user for expenses incurred in conducting the geological survey and reimbursement of the lump sum payment upon issue of the licence). The transfer for any reason of subsoil use rights to subsoil plots of federal importance to Russian legal entities controlled by foreign investors is prohibited, other than the transfer of rights in exceptional cases at the discretion of the Russian Government. See “– Foreign Investment in Sectors that are of Strategic Importance for the National Security and Defence of the Russian Federation, including the Subsoil Sector”.
Licensing agreements for subsoil use identify the terms and conditions for the use of the subsoil, the rights and obligations of the licencee and the manager of the subsoil plot and the level of payments. Although most of the conditions set out in a licence are based on mandatory rules, the parties may negotiate a number of provisions in a licensing agreement.
As a general rule, the Russian Subsoil Law prohibits the transfer of rights of subsoil use, subject to a licence, with certain exceptions, including the following:
• to a newly established Russian legal entity in which the initial licence holder has at least a 50 per cent. interest;
• from a parent company to a Russian subsidiary;
149 • from a subsidiary to a Russian parent company;
• between two subsidiaries of the same parent company, provided that a transferee is a Russian company; and
• to a Russian legal entity as a result of the acquisition of property of a previous subsoil user in the course of insolvency proceedings.
Generally, the Russian Subsoil Law prohibits the transfer of rights of subsoil use over the subsoil plots of federal importance to a Russian legal entity controlled by a foreign investor or a group of persons including a foreign investor if such foreign investor or such group of persons including a foreign investor: directly or indirectly possesses 10 per cent. or more of the total number of votes conferred by voting shares in the share capital of that entity; has the right, through a contract or otherwise, to issue binding instructions to that entity, including control over the business operations; or has the right to appoint the chief executive officer or more than 10 per cent. of the members of the collective executive body, or has an unconditional right to elect more than 10 per cent. of the board of directors or another collective management body of that entity. Such entities may obtain the right of subsoil use over the subsoil plots of federal importance in exceptional cases at the discretion of the Russian Government.
A licence holder has the right to develop and to use (including to sell) resources extracted from the licence area for a specified period. The Russian Federation, however, retains ultimate state ownership of all subsoil resources.
Licences generally require the licence holder to make various commitments, including:
• extracting an agreed target amount of reserves annually;
• complying with specified requirements, including in relation to the use of technology;
• conducting agreed mining and other exploratory and development activities;
• protecting the environment in the licence areas from damage;
• providing geological information and data to the relevant authorities;
• submitting on a regular basis formal progress reports to regional authorities;
• making all obligatory payments when due; and
• participating in the social and economic development of the relevant region.
The Group’s licences are scheduled to expire at different times during the period between 2013 and 2036. See “Business – Licences”. In addition, some of these licences require periodic review and confirmation of reserves as a condition to continued mining under the licences.
Article 10 of the Russian Subsoil Law provides that a licence holder may, on application to the Rosnedra, extend its licence if the licence holder complies with the terms of the licence and if the exploration, assessment or development of the licenced field requires completion or wind-up operations. The Group intends to extend its licences for each of the fields that are expected to be productive following the end of their current periods. If it is determined that the Group has not complied with the terms of the relevant licence, however, the Group may not be able to extend the licence upon the expiration of its current period.
Governmental authorities may undertake periodic reviews for ensuring compliance by subsoil users with the terms of their licences and applicable legislation. The Federal Service for Supervision in the Sphere of Natural Resource Use (“Rosprirodnadzor”) and the Federal Service for Ecological, Technological and Nuclear Supervision (“Rostechnadzor”) can fine a licencee for failing to comply with a subsoil licence and requirements of subsoil protection and efficient subsoil use, and Rosnedra can revoke, suspend or limit a subsoil production licence in certain circumstances, including:
• a breach or violation by the licencee of material terms and conditions of the licence;
150 • repeated violation by the licencee of subsoil regulations;
• the failure by the licencee to commence operations within a required period of time or to produce required volumes, as specified in the licence;
• the occurrence of an emergency;
• the emergence of a direct threat to the life or health of people working or residing in the area affected by the subsoil use operations;
• the liquidation of the licencee; and
• a failure to submit reporting data in accordance with legislation.
Mining allotments Under the Russian Subsoil Law, the Rosnedra provides a subsoil plot to a subsoil user as a “mining allotment”, in other words, a geometric block of subsoil. The Rosnedra determines the boundaries of the preliminary mining allotment at the time it issues the licence, subject to approval of the regional bodies of Rostechnadzor. Following the preparation of a development plan by the licencee, which the state mining supervision authorities and an environmental examination committee must approve, Rostechnadzor approves the exact mining allotment boundaries based on the report and certifies such boundaries in a mining allotment act, which it issues to the licence holder. The licence will then incorporate the exact mining allotment boundaries.
Land use permits In addition to a subsoil production licence, a licencee needs to obtain rights to use surface land within the specified licenced mining area. The land resources management authorities provide a subsoil user with rights to the relevant land plot pursuant to Russian civil, forestry and land legislation. Under the Federal law dated 25 October 2001 No. 137-FZ “On Enactment of the Land Code of the Russian Federation” (as amended), commercial legal entities were required to purchase or enter into lease agreements with respect to land plots occupied by their operations by 1 July 2012. The Group is in compliance with these requirements with respect to its material land plots occupied by its principal operations.
Payment System for the use of subsoil Pursuant to the Russian Subsoil Law, the payment system for the use of subsoil currently consists of the following payment obligations:
• one-off payments in cases specified in the licence;
• regular payments for subsoil use;
• fees for the right to participate in tenders and auctions; and
• other payments and fees set forth by the legislation of the Russian Federation on taxes and duties.
The Russian Subsoil Law contains a range of minimum and maximum rates of regular payments for the use of subsoil and the federal authorities have authority to set the rate in any particular licence. The Russian tax code contains the relevant rates of mineral extraction tax.
Precious metals regulation The extraction, production and refining of precious metals are subject to specific regulations set forth in the Precious Metals Law. As a general rule, a company which extracts ores that contain precious metals has title to those precious metals. Russian companies may buy ores and concentrate which contain precious metals provided that they are registered with the Russian State Assay Chamber. Only authorised persons approved by the Russian Government may refine precious metals. Companies which extract precious metals are required to offer refined precious metals on a priority basis to the relevant governmental authorities that have entered into agreements for the purchase and sale of the precious metals not less than three months prior to
151 the expected date of purchase and have made an advance payment under those agreements. Since 2008, the governmental authorities have not acquired any refined metals from the Group on such a priority basis. Refined precious metals which have not been sold to governmental authorities may be sold in the domestic markets, used in internal production or exported.
Companies are required to obtain a licence from the Russian Ministry of Industry and Trade in order to export refined gold. For non-banking institutions, the Ministry of Industry and Trade only issues such licences with respect to each particular export contract for a term of not longer than 1 year. This kind of one-off licence is granted for a fixed volume of product, as specified in the sale contract. Imports of precious metals into Russia are not subject to licensing. In 2012, 2011 and 2010, the Group believed it could obtain more favourable contract terms with Russian banks for the sale of gold than in the export markets, and, as a result, did not apply for any export licences.
Licensing of Types of Activity In addition to licences for subsoil use, the Group is required to obtain other licences, authorisations and permits from Russian governmental authorities for its operations. In particular, the Group requires licences for the operation of its hazardous industrial facilities (both for industrial facilities using explosive and flammable materials and industrial facilities using chemically hazardous materials) and for the use of its underground water resources.
Licensing of the operation of hazardous facilities The Rostechnadzor issues licences for the operation of industrial facilities using chemically hazardous materials and industrial facilities using explosive and flammable materials and maintains a register of such facilities. In accordance with the New Licensing Law, many provisions of which came into effect on 3 November 2011, the Group must continue to conduct those types of its activities on the basis of previously issued licences issued under the Licensing Law and the regulations introduced under that law. Under the Licensing Law, licences were issued for a minimum period of 5 years. Licences issued under the New Licensing Law are not limited to a specified term. The issuance of the licence is subject to completion of a state industrial safety review and an industrial safety declaration and other requirements set forth in the licensing regulations. Licences issued prior to and valid as at the date of the New Licensing Law coming into force will also have unlimited duration.
Under the New Licensing Law, a licence will be suspended by a licensing authority in the following situations:
• imposition of administrative sanctions on a licencee for failure to implement, within the established period, orders issued by the licensing authority curing a material violation of the licensing requirements; and
• imposition upon a licencee of an administrative penalty in the form of administrative suspension of activity by reason of a material violation of licensing requirements.
If during a period of administrative suspension of the activity and suspension of a licence, as established by a court or an official of the Rostechnadzor, a licencee has failed to cure a material violation of the licensing requirements, the licensing authority is obliged to bring before a court an application for revocation of the licence.
Licensing of surface water use The Water Code of the Russian Federation No. 74-FZ dated 3 June 2006 (the “Water Code”) does not require licensing of surface water use. However, prior to the Water Code, the law did require such licensing and the Group currently holds all of the licences that were previously required. Under the Water Code, water users may use surface water under a water use agreement concluded with state or local authorities; a decision of state or local authorities granting rights to the use of surface water; or without any such agreements or decisions, depending on the purpose of the surface water use. Water users and state or local authorities may conclude agreements on water use for a period of up to 20 years.
152 Licensing of underground water use Users of underground water resources in Russia require a subsoil licence issued under the Russian Subsoil Law and the regulations adopted under that law. The Rosnedra currently issues licences for the use of underground water following a procedure which involves representatives of the federal and regional subsoil authorities. The Rosnedra may grant licences for a term of up to 25 years. Licencees may only amend the conditions of a subsoil licence, including its term, by application to the licensing authorities. The user may also enter into an agreement with the licensing authorities which sets out further terms of use of the relevant resources. In addition, the Subsoil Law requires the licencee to hold a right of use (through ownership or lease since 1 July 2012) to the land where the licenced subsoil plot is located.
However, if underground water is produced for the process of water supply by the holders of combined licences for the geological survey, exploration and production of natural resources or licences for the geological survey and exploration of a subsoil plot, the requirements described above do not apply and the subsoil user is entitled to produce underground water upon approval of the technical project.
In the event of repeated breaches by the licencee of applicable regulations or material terms of the licence, as well as upon the occurrence of certain emergencies, the licensing authorities may amend, suspend or terminate the licence. Breaches may also result in the imposition of fines.
Environmental Law General The Group is subject to extensive federal and state environmental laws and regulations and local environmental regulations in the Russian Federation. The operations of the Group involve the discharge of materials and contaminants into the environment, the disturbance of land, potential damage to flora and fauna and other environmental concerns. As part of the Group’s mining operations, the Group uses various chemicals and produces wastewater that could, if improperly disposed of, have a negative impact on wildlife and vegetation. In addition, the Group uses hazardous materials, such as solvents, to clean, refurbish and maintain its equipment. Russian laws and regulations set various health and environmental quality standards, provide for penalties and other liabilities for the violation of such standards and establish, in certain circumstances, obligations to compensate for environmental damage and restore environmental conditions.
Environmental protection laws are primarily set forth in Environmental Protection Law, together with a number of other federal, state and local legal acts.
Pay-to-pollute The Environmental Protection Law establishes a “pay-to-pollute” regime administered by federal and local authorities. Additional payment obligations may arise under other laws.
Pursuant to Decree No. 161 dated 6 April 2004, the Russian Government created the Federal Service for Surveillance in the Sphere of Ecology and Environmental Use under the auspices of the Ministry of Natural Resources (as well as the Rosnedra), and transferred the control and surveillance functions of the Ministry of Natural Resources to this service. A Decree of the President of the Russian Federation No. 649, dated 20 May 2004, transformed the Federal Service for Surveillance in the Sphere of Ecology and Environmental Use into the Rosprirodnadzor, and transferred its ecology surveillance functions to the Rostechnadzor, which is now the authority responsible for administering the “pay-to-pollute” regime.
The Russian Government and the Rostechnadzor have established standards that regulate the permissible impact of industrial and other business activities on the environment. They have also determined limits for emissions and disposal of hazardous substances, waste disposal and soil and subsoil contamination. Companies must develop their own pollution standards based on these statutory standards, as modified to take into account the type and scale of the environmental impact of their operations. Companies must then submit these standards for approval by the Rostechnadzor, which, if those standards do not comply with the relevant regulations, may determine the applicable limit for pollution and require the relevant company to prepare and submit a programme for the reduction of emissions or disposals to the prescribed limit. The law generally requires a company to implement an emission reduction programme within a specified period.
153 The Rostechnadzor assesses fees on a sliding scale for both the statutory or individually approved limits on emissions and effluents and for pollution in excess of these limits. It imposes the lowest charges for pollution within the statutory limits, intermediate fees for pollution within the individually approved limits, and the highest fees for pollution exceeding such limits. Payments of such fees do not relieve a company from its responsibility to take environmental protection measures and undertake restoration and clean-up activities. The Group paid approximately US$966 thousand, US$546 thousand and US$814 thousand in such charges in Russia in 2012, 2011 and 2010, respectively.
Ecological approval The Federal Law dated 23 November 1995 No. 174-FZ “On Ecological Expert Examination” (the “Ecological Examination Law”) provides for mandatory ecological approval of documentation before the implementation of certain types of activities made to prevent negative impact of these activities on the environment, and the receipt of a positive examination by state ecological expert before the project may commence or financed. State ecological approval must be obtained from federal or regional authorities based on the list of certain types of documentation being objects of such ecological approval set forth by the Ecological Examination Law. Violation of the Ecological Examination Law may result in administrative fines, civil liability (to compensate for damages and losses) and criminal liability as described below.
Environmental protection authorities The Rosprirodnadzor, the Rostechnadzor, the Russian Federal Service for Hydrometrology and Environmental Monitoring, the Rosnedra, the Russian Federal Agency on Forestry and the Russian Federal Agency on Water Resources, along with their regional branches, are primarily responsible for environmental control, and the monitoring, implementation and enforcement of the relevant laws and regulations. The Russian Government and the Russian Ministry of Natural Resources and Ecology are responsible for the development of regulations in the sphere of environmental protection and for the coordination of activities of the regulatory authorities in this area. These regulatory authorities, along with other state authorities, individuals and public and non-governmental authorities, have the right to initiate lawsuits for the compensation of damage caused to the environment. The statute of limitations for such lawsuits is 20 years.
Environmental liability If the operations of a company violate environmental requirements or cause harm to the environment or any individual or legal entity, the environmental authorities may suspend these operations (for up to 90 days) or a court action may be brought to limit or ban these operations and require the company to remedy the effects of the violation. Any company that fails to comply with environmental regulations may be subject to administrative or civil liability, and its employees may be held civilly or criminally liable. A court may impose an obligation to conduct reclamation measures at the expense of a breaching entity pursuant to a plan of restorative works.
Reclamation Reclamation activities, such as re-cultivation, restoration, regeneration and other methods of rehabilitation, are prescribed in the Basic Regulations on Land Reclamation, Removal, Preservation, and Rational Use of the Fertile Soil Layer, approved by Order No. 525/67 of 22 December 1995 of the Ministry of Natural Resources and the Russian Committee for Land Resources and Land Use. In general, reclamation activities applicable to the Group involve both a technical stage and a biological stage. In the first, technical stage, the Group performs landscaping operations (backfilling of the pits, grades and terraces mound slopes, levelling of the surface of the mounds, and adding clay rock on top for greater adaptability of young plants). In the second, biological stage, the Group plants conifers, such as pine, larch or cedar, on horizontal and gently sloping surfaces, as well as shrubs and bushes to reinforce inclines. Russian environmental regulations do not require mines to achieve the approximate original contour of the property as is required, for example, in the United States.
154 Regulation of Real Estate General At present, the Russian Federation or the Russian regions and municipalities own most land in Russia, and only a small proportion of land is in private ownership. A relatively higher proportion of buildings and similar real estate is privately owned, due to a less restrictive regulatory regime which applies to such property.
Under the Land Code, companies generally have one of the following rights in relation to the use of land in the Russian Federation: ownership; or lease. The Group owns or leases the majority of land plots that it uses in its activities.
The Federal Service for State Registration, Cadastre and Cartography (“Rosreestr”) records details of land plots, including their measurements and boundaries, in a unified register, or “cadastre”. As a general rule, a landowner must obtain a state cadastre number for a land plot as a condition to selling, leasing or otherwise transferring interests in that plot. As described below, the government maintains a separate register for the registration of all real estate and transactions relating to that real estate.
Russian law categorises all land as having a particular designated purpose, for example agricultural land, industry land, settlement lands, lands by specially protected territories and objects. Land should be used in accordance with the purpose designated by the relevant category.
Those companies that had obtained a right of perpetual use over land prior to the enactment of the Land Code were required, by 1 July 2012, either to purchase the land from, or to enter into a land lease agreement with, the relevant federal, regional or municipal authority owning the land. Those companies that have a right of perpetual use over land containing linear facilities (such as power transmission lines, communication lines, pipelines and railway lines) may either purchase such land or enter into a land lease agreement by 1 January 2015. The Group owns or leases the majority of land plots that it uses in its activities.
Under Russian law, it is possible that the person or entity holding the ownership rights to a building may not be the same person or entity holding the ownership rights to the land plot on which the building is constructed. In these circumstances, the owner of that building, as a general rule, has a right of permanent use over the relevant portion of that plot of land, unless otherwise determined by law, contract or the regulatory decision which determined the allocation of that plot of land. Moreover, an owner of a building or plot of land may require that the owner of an adjoining plot of land grants a right of limited use of the adjoining plot of land (servitude) in its favour.
State registration of real estate and transactions involving registered real estate The Rosreestr maintains the Unified State Register of Rights to Immovable Property and Transactions Therewith (the “Register of Rights”). The Federal Law dated 21 July 1997 “On State Registration of Rights to Immovable Property and Transactions Therewith” No. 122-FZ, as amended, requires registration in the Register of Rights for, among other things, buildings, facilities, land plots and other real estate; and specified transactions involving leases of the registered real estate for a term of not less than one year (with certain exceptions). Regional divisions of the Rosreestr effect registration in the Russian region where the property is located, and a person acquires rights to the relevant real estate only upon such state registration. A failure to register a transaction which requires state registration generally results in the transaction being rendered unconcluded or, to the extent stipulated by law, null and void.
Regulation of the sale and lease of real estate The Civil Code requires that agreements for the sale or lease of buildings expressly set out the price of such sale or lease. In relation to leases, both the rights granted by the lease and the lease agreement (other than lease agreements for a term of less than one year) require registration. In relation to sales, only the transfer of ownership effected by the relevant sale (but not the sale agreement itself) requires registration.
155 Technical Regulation The Group is subject to various technical regulations and standards which apply to industrial manufacturing businesses. The Federal Law No. 184-FZ “On Technical Regulation” dated 27 December 2002 (the “Technical Regulation Law”) introduced, on 1 July 2003, a new regime for the development, enactment, application and enforcement of mandatory rules applicable to products, manufacturing, storage, transportation, sales and specified other operations and processes, as well as new regulations relating to the quality of products and processes, including technical regulations, standards and certifications. Following this adoption, technical regulations are expected to replace the previously adopted state standards (the so-called “GOSTs”). However, the Russian Government has not yet implemented most technical regulations, and, in the absence of such technical regulations, the existing federal laws and regulations, including GOSTs, that prescribe rules for different products and processes remain in force to the extent that they protect health, property, the environment or consumers. In any event, the State Committee on Standardisation and Metrology (a predecessor of the Federal Service for Technical Regulation and Metrology) has declared GOSTs and interstate standards adopted before 1 July 2003 to be the applicable national standards.
In those cases where the Technical Regulation Law provides for mandatory confirmation that a product conforms to established technical regulations or standards, companies are required to obtain certifications of compliance with the applicable technical regulations, standards and terms of contracts. Currently, companies must certify a number of products containing precious metals and Russian law requires mandatory certification under a classification system. Where certification is not mandatory, a company may elect for voluntary certification by applying for a compliance certificate from the relevant authorities. Following the issuance of that certificate, the applicant has the right to use the relevant compliance mark on its products.
Health and Safety Due to the nature of the business of the Group, and the Group’s workplace safety issues are of significant importance to the operation of these sites.
The principal law regulating industrial safety is the Federal Law dated 21 July 1997 “On Industrial Safety of Dangerous Industrial Facilities” No. 116-FZ, as amended (the “Safety Law”). The Safety Law applies, in particular, to industrial facilities and sites where companies undertake specific activities, including sites where companies use lifting machines, produce alloys of ferrous and non-ferrous metals and conduct certain types of mining. Dangerous industrial facilities under the Safety Law are divided into four categories based on the level of hazard. These categories vary from level one (extremely dangerous industrial sites) to level four (least dangerous industrial sites). Classification of all dangerous industrial sites in accordance with requirements of the Safety Law is required to be completed by 1 January 2014. The Safety Law also contains a comprehensive list of dangerous substances and their permitted concentration, and extends to facilities and sites where companies use these substances. Under the Safety Law, a company is obliged to adopt an industrial safety declaration.
Other Russian regulations address safety rules for coal mines and the production and processing of ore, gold smelting and alloy production. Additional safety rules also apply to metallurgical and coke chemical enterprises, the foundry industry and other industries.
Any construction, reconstruction, liquidation or other activity in relation to regulated industrial sites is subject to a state industrial safety review. Any deviation from project documentation in the process of construction, reconstruction and liquidation of industrial sites is prohibited, unless the revised documentation undergoes expert examination and the Rostechnadzor approves the same.
Companies that operate such industrial facilities and sites have a wide range of obligations under the Safety Law and other laws, including the Russian Labour Code effective from 1 February 2002, as amended (the “Labour Code”). In particular, companies must limit access to such sites to qualified specialists, maintain industrial safety controls, have third-party insurance liability for injuries caused in the course of operating industrial sites and comply with other specific obligations. The Safety Law also requires these companies to enter into contracts with professional wrecking companies or, in some cases, create their own wrecking
156 services; conduct personnel training programmes; create emergency response systems and inform the Rostechnadzor of accidents and maintain these systems in good working order.
In some cases, companies operating industrial sites must also prepare declarations of industrial safety, which summarise the risks associated with operating a particular industrial site and the measures the company has taken, and will take, to mitigate such risks and to use the site in accordance with applicable industrial safety requirements. The chief executive officer of the company must adopt those declarations, and is personally responsible for the completeness and accuracy of the data contained in the declarations. The Rostechnadzor requires the industrial safety declaration, as well as a state industrial safety review, for the issuance of a licence permitting the operation of a dangerous industrial facility when such a licence is required by law.
The Rostechnadzor has broad authority in the field of industrial safety. In the event of an accident, a special commission led by a representative of the Rostechnadzor conducts a technical investigation of the cause of the incident. The company operating the dangerous industrial facility where the accident took place must bear all the costs of the investigation. The officials of the Rostechnadzor have the right to access industrial sites and may inspect documents to ensure a company’s compliance with safety rules. The Rostechnadzor may suspend or terminate operations or impose administrative liability on the company or its officials.
Any company or individual violating industrial safety rules may incur administrative or civil liability, and individuals may also incur criminal liability. A company that violates safety rules in a way that negatively impacts the health of an individual may also be obliged to compensate the individual for lost earnings, as well as for health-related damages, and, in certain cases, its activity may be suspended.
Employment and Labour General The Labour Code is the key law in Russia which governs labour matters. In addition to this core legislation, various federal laws, such as the Law dated 19 April 1991 “On Employment of Population in the Russian Federation” No. 1032-1, as amended, regulate relationships between employers and employees.
Employment contracts As a general rule, employers must conclude employment contracts for an indefinite term with all employees. Russian labour legislation expressly limits the possibility of entering into fixed term employment contracts. However, employers and employees may enter into an employment contract for a fixed term in certain cases where it is not possible to establish labour relations for an indefinite term due to the nature of the duties or the conditions of the performance of such duties, as well as in other cases expressly identified by federal law.
An employer may terminate an employment contract only on the basis of the specific grounds stated in the Labour Code, including, among others:
• liquidation of the enterprise or downsizing of staff;
• failure of the employee to comply with the position’s requirements due to incompetence;
• systematic failure of the employee to fulfil his or her labour duties if he or she was the subject of disciplinary measures;
• a gross violation by the employee of labour duties; and
• provision by the employee of false documents upon entering into the employment contract.
Employees’ rights The Labour Code provides an employee with certain minimum rights, including the right to a working environment which complies with health and safety requirements and the right to receive a salary on a timely basis and to participate in the management of the authorised entity.The employer may extend these rights by an employment contract.
157 An employee dismissed from an enterprise due to downsizing or liquidation is entitled to receive compensation from his or her employer, including a severance payment and, depending on the circumstances, salary payments for a specified period of time.
The Labour Code also provides protections for specified categories of employees. For example, except in limited circumstances, an employer cannot dismiss minors, expectant mothers, mothers with a child under the age of three, single mothers with a child under the age of 14 (or with a disabled child under the age of 18) or other persons caring for a child under the age of 14 without a mother.
Any termination by an employer that is inconsistent with the Labour Code requirements may be invalidated by a court, which may require the employer to reinstate the employee. Lawsuits resulting in the reinstatement of illegally dismissed employees and the payment of damages for wrongful dismissal are increasingly frequent and Russian courts tend to support employees’ rights in most cases. Where a court reinstates an employee, the employer must compensate the employee for unpaid salary for the period between the wrongful termination and reinstatement, as well as for any mental distress.
Work time The Labour Code sets the regular working week at 40 hours. In general, an employer must compensate an employee for any time worked beyond 40 hours per week, as well as for work on public holidays and weekends, at a higher rate.
Annual paid vacation leave under the law is generally 28 calendar days. The Group’s employees who perform underground and open-pit mining works or other work in harmful conditions are entitled to additional paid vacation of at least 7 calendar days. Employees required to work non-standardised working hours are entitled to additional paid vacation of at least three calendar days.
The retirement age in the Russian Federation is 60 years for males and 55 years for females. However, the retirement ages of males who have worked in arduous working conditions for at least 12 years and six months and females who have worked in arduous working conditions for at least 10 years are 55 years and 50 years, respectively. In the case of work involving underground operations, hazardous conditions or hot workshops, the retirement age is 50 years for males who have worked in such conditions for at least 10 years and 45 years for females who have worked in such conditions for at least 7 years and six months. Persons who have worked as miners in open-pit mines or underground mines for at least 25 years, and in specified circumstances for at least 20 years, may retire regardless of age.
Salary The minimum monthly salary in Russia is established by federal law from time to time. Starting from 1 January 2013, the minimum monthly salary is set at an amount of RUB 5,205. Although the law requires that the minimum wage be at or above a minimum subsistence level, the current statutory minimum monthly salary is generally considered to be less than the minimum subsistence level. Salaries of the Group’s employees are generally higher than the statutory minimum and none are below such minimum.
Strikes The Labour Code defines a strike as the temporary and voluntary refusal of workers to fulfil their work duties with the intention of settling a collective labour dispute. Russian legislation contains several requirements which must be met for strikes to be legal. An employer may not use an employee’s participation in a legal strike as grounds for terminating an employment contract, although Russian law generally does not require employers to pay wages to striking employees for the duration of the strike. Conversely, an employee’s participation in an illegal strike may provide adequate grounds for termination of his or her employment contract.
Trade unions Trade unions are defined by the Federal Law dated 12 January 1996 No. 10-FZ “On Trade Unions, Their Rights and Guaranties of Their Activity”, as amended (the “Trade Union Law”), as voluntary unions of individuals with common professional interests which are created for the purposes of representing and
158 protecting social and labour rights and interests of their members. Russian law also permits national trade union associations, which coordinate activities of trade unions throughout Russia.
Although Russian labour regulations have curtailed the authority of trade unions, they still retain significant influence over employees and, as such, may affect the operations of large industrial companies in Russia. The Group’s management routinely interacts with trade unions in order to ensure the appropriate treatment of its employees and the stability of the Group’s business.
The activities of trade unions are generally governed by the Trade Union Law and applicable legal acts including the Labour Code.
As part of their activities, trade unions may:
• negotiate collective contracts and agreements such as those between the trade unions and employers, federal, regional and local governmental authorities and other entities;
• monitor compliance with labour laws, collective contracts and other agreements;
• access work sites and offices, and request information relating to labour issues from the management of companies and state and municipal authorities;
• represent their members and other employees in individual and collective labour disputes with management;
• participate in strikes and meetings to protect social and labour rights of employees; and
• monitor the redundancy of employees and seek action by municipal authorities to delay or suspend mass redundancies.
Russian laws require that companies cooperate with trade unions and not interfere with their activities. Trade unions and their members enjoy certain guarantees as well, such as:
• the retention of job positions for those employees who stop working due to their election to the management of trade unions;
• protection from dismissal for employees who previously served in the management of a trade union for two years after the termination of the office term; and
• the provision of the necessary equipment, premises and transportation vehicles by the employer for use by the trade union free of charge, if provided for by a collective bargaining contract or other agreement.
If a trade union discovers any violation of work condition requirements, notification is sent to the employer with a request to cure the violation and to suspend work if there is an immediate threat to the lives or health of employees. The trade union may receive information on social and labour issues from an employer (or employers’ unions) and state and local authorities, as well as cooperate with state authorities for the purposes of supervision of compliance with Russian labour laws. Trade unions may also initiate collective labour disputes, which may lead to strikes.
To initiate a collective labour dispute, trade unions must present their demands to the employer. The employer is then obliged to consider the demands and notify the trade union of its decision. If the dispute remains unresolved, a reconciliation commission attempts to end the dispute. If this proves unsuccessful, collective labour disputes are generally referred to mediation or labour arbitration.
The Trade Union Law provides that those who violate the rights and guarantees of trade unions and their officers may be subject to disciplinary, administrative and criminal liability. Although neither the Russian Code on Administrative Misdemeanours of 30 December 2001, as amended, nor the Russian Criminal Code of 13 June 1996, as amended, currently has provisions specifically relating to these violations, general provisions and sanctions may be applicable.
159 Regulation of Competition The Federal Law “On the Protection of Competition” No. 135-FZ, dated 26 July 2006, as amended (“Competition Law”), regulates competition in Russia, through the FAS.
Register of market participants As part of its competition monitoring activities, the Competition Law requires the FAS to maintain a register of companies which have a share in excess of 35 per cent. in a particular commodity market (the “Register”). Other than CJSC Vitimenergo, neither OJSC Polyus Gold nor any of the companies in the Group are currently included in the Register. CJSC Vitimenergo is included as an entity holding more than a 65 per cent. share in the electric power transmission services market and telecommunications services market in the Bodaibo district of Irkutsk region of Russia. CJSC Vitimenergo does not have a material effect on the Group’s consolidated results of operations.
Dominant position in the market The Competition Law determines a dominant position pursuant to certain criteria, including, among other things, where a company or a group of persons has a market share in a particular commodity market in excess of 50 per cent., unless the FAS specifically establishes that the relevant company does not have a dominant position. However, even if a company has a market share of less than 50 per cent. in a particular commodity market, the FAS may still specifically determine that the company has a dominant position. The Competition Law assumes that a company has a dominant position if it has a substantial influence on the circulation of goods in a particular commodity market; may force other participants from such market; or may restrict the access of other companies to such market. The Competition Law also provides for a new principle based on “collective” dominance, which applies to a number of markets characterised by an absence of substitute goods and fixed demand for goods. In such markets, any one of three or fewer entities with a total market share of more than 50 per cent., or any one of five or fewer entities with a total market share of more than 70 per cent. (and the share of each such entity is bigger than the shares of other participants in this market and in no event is less than 8 per cent.), shall be deemed to be in a dominant position to the extent that, for a period of at least one year or for the period of existence of the relevant market, the market shares of the respective entities do not change in any significant respect and the access of new competitors to this market is impeded.
As a general rule, a company may not be deemed to be in a dominant position if its market share is less than 35 per cent., but this rule does not apply if the company is holding a collective dominant position (as described above); the dominant position of the company holding less than 35 per cent. of market share is determined by the federal law; or the dominance is determined by the anti-monopoly body upon conducting an analysis of the competitive situation in the market if the company is subject to compliance with certain requirements provided for by the Competition Law.
Russian law prohibits companies having a dominant position from, among other things, entering into agreements which have the effect of price fixing or which otherwise have the effect of limiting competition, artificially limiting the supply of goods, maintaining high or low monopolistic prices and refusing without justification to sell goods to third parties. Companies in a dominant position may also become subject to additional anti-monopoly restrictions imposed by the FAS.
Merger control The FAS also exercises state control over competition by reviewing merger and acquisition transactions. Relevant persons must obtain prior anti-monopoly clearance from the FAS for an acquisition of: more than 25 per cent. of the voting shares in a Russian joint stock company (or a one-third interest in a Russian limited liability company) and any subsequent increase of that stake to more than 50 per cent. or more than 75 per cent. of the voting shares (or a one-half and two-thirds interest in a Russian limited liability company); subject to certain exceptions, an acquisition of fixed production assets or goodwill of a company located in Russia in an amount exceeding 20 per cent. of the aggregate balance sheet value of all fixed production assets and goodwill of the company; the right to control the business activities of another Russian company or perform the functions of its executive body; or an acquisition of more than 50 per cent. of voting shares
160 (or a 50 per cent. interest) in a company registered outside Russia, which delivered goods to the Russian territory in the amount exceeding RUB 1 billion within the previous year, or any other right to control its business activities or perform the functions of its executive body. Certain other transactions are also subject to a prior anti-monopoly clearance from the FAS.
Any of the above acquisition transactions would require prior approval by the FAS if, based on the latest balance sheet: the aggregate asset value of a purchaser (and its group) together with the target (and its group) exceeds RUB 7 billion; or the total revenues of such persons for the preceding calendar year exceed RUB 10 billion and in each case the total asset value of the target (and its group) exceeds RUB 250 million. In addition, prior approval is required if any of the purchaser (or its group entity) or the target (or its group entity) is included in the Register. Mergers and acquisitions within the same group are exempt from pre- transactional clearance by the FAS, subject to compliance with specified reporting requirements.
The same acquisition transactions outlined above would require subsequent notification (within 45 days post closing) to the FAS if based on the latest balance sheet the aggregate asset value or total revenues of a purchaser (and its group) and a target (and its group) for the preceding calendar year exceed RUB 400 million and, at the same time, the total asset value of the target (and its group) based on the balance sheet exceeds RUB 60 million.
Foreign Investment in Sectors that are of Strategic Importance for the National Security and Defence of the Russian Federation, including the Subsoil Sector In May 2008, new laws came into effect that changed the legal environment for foreign investment in sectors that are of strategic importance for the national security and defence of the Russian Federation, including the gold mining industry. The relevant laws are the Foreign Investments Law and the Federal Law dated 29 April 2008 No. 58-FZ “On Certain Legislative Acts of the Russian Federation and Deeming Inoperative Certain Legislative Acts of the Russian Federation in Connection with the Adoption of the Federal Law on Procedure of Foreign Investment in Commercial Entities Having Strategic Importance for the Defence of the Country and the Security of the State” (the “Amending Law”) (together with the Foreign Investments Law, the “Strategic Investment Laws”), which introduced, among other things, various amendments to the Russian Subsoil Law.
The Foreign Investments Law provides for stringent requirements in respect for foreign investment in companies engaged in activities that have strategic importance for the national defence and security, the list of which is provided in the Foreign Investments Law. These activities include geological exploration of and production on subsoil plots of federal importance. Companies engaged in such activities are considered Strategic Subsoil Companies. Foreign investors, or a group of persons including a foreign investor, intending to enter into a transaction which results in the acquisition of “control” (as defined in the Foreign Investments Law) over Strategic Subsoil Companies are required to obtain the prior approval of the Government Commission on Monitoring Foreign Investment in the Russian Federation. Under the Russian Subsoil Law, subsoil plots of federal importance include, among other things, subsoil plots with aggregate vein gold reserves exceeding or equal to 50 tonnes of gold (based on the data contained in the State Balance of Reserves of Mineral Resources on or after 1 January 2006). The list of subsoil plots of federal importance was officially published in March 2009, and has been subsequently amended several times. As at the date of this Prospectus, certain material subsidiaries of OJSC Polyus Gold, namely, CJSC Polyus (the holder of the licences with respect to Titimukhta, Olimpiada and Blagodatnoye deposits), CJSC Tonoda (the holder of the licence with respect to Chertovo Koryto deposit), OJSC SVMC (the holder of the licence with respect to the Nezhdaninskoe deposit), OJSC Matrosov Mine (the holder of the licence with respect to Natalka deposit) and LLC Amurskoye GRP (the holder of the licence with respect to Bamskoye deposit), are using subsoil plots of federal importance, as defined in the Russian Subsoil Law that are included in the list of such deposits maintained by the Federal Agency for Subsoil Use, and therefore are considered Strategic Subsoil Companies. OJSC Pervenets holds the licence with respect to the Verninskoye deposit, which although not included in the list of subsoil plots of federal importance, falls within the definition contained in the Russian Subsoil law. Therefore, OJSC Pervenets may also be considered a Strategic Subsoil Company.
161 Under the Foreign Investments Law, the acquisition by a foreign investor (or a “group” of persons (as defined in the Competition Law) including one or more foreign investors directly or indirectly) of 25 per cent. or more of the voting shares of a Strategic Subsoil Company is subject to prior approval. The Foreign Investments Law further provides that if a foreign investor (or a group of persons including one or more foreign investors) already exercises direct or indirect control over 25 per cent. or more of the voting shares of a Strategic Subsoil Company, each subsequent acquisition of shares of the Strategic Subsoil Company by the foreign investor (or group of persons including the foreign investor) would require the prior approval of the Government Commission on Monitoring Foreign Investment in the Russian Federation (with the exception of transactions which do not result in the increase of an ownership percentage of a foreign investor or a group including a foreign investor in the charter capital of a Strategic Subsoil Company). The Foreign Investments Law is not clear as to whether an acquisition of shares in a holding company of a Strategic Subsoil Company would be subject to similar limitations, although the FAS on an individual case basis has indicated that the acquisition of a controlling interest in such a holding company would require approval. Failure to obtain such prior approval will either render the relevant transaction void or may prevent the relevant foreign investor, or the group of persons including the foreign investor, from voting at shareholders meetings of the relevant Strategic Subsoil Company.
Furthermore, should a foreign investor or a group of persons including a foreign investor establish control over a Strategic Subsoil Company as a result of events other than the direct acquisition of shares, for example, as a result of a buy-out or redemption by the Strategic Subsoil Company of its own shares, a conversion of its preferred shares into ordinary shares or otherwise, the relevant foreign investor or a group of persons including a foreign investor would be obliged to apply for approval of control by the Government Commission on Monitoring Foreign Investment in the Russian Federation within three months from the date of establishment of control. Failure to apply for such approval may result in a prohibition on voting, as set out above. Should the Government Commission on Monitoring Foreign Investment in the Russian Federation refuse to approve the establishment of foreign control over a Strategic Subsoil Company, the relevant foreign investor or a group of persons including a foreign investor would be obliged to dispose of all or part of its shares so that the remaining shares do not represent a controlling stake. If the foreign investor (or a group of persons including a foreign investor) fails to dispose of the shares within three months from the date when the prior governmental approval is declined, the FAS may file a lawsuit in a Russian court requiring that a foreign investor (or a group of persons including a foreign investor) be prohibited from voting at the shareholders meeting of the Strategic Subsoil Company.
The Russian Subsoil Law also provides that exploration and production at a subsoil plot of federal importance, even under a previously issued combined subsoil licence, may only be commenced if permitted by the Russian Government following the completion of a geological survey. If, in the course of geological research at a subsoil plot, a foreign investor or a Russian legal entity with foreign participation discovers a deposit which meets the criteria for a subsoil plot of federal importance, and is a possibility of an apparent threat to the national security of the Russian Federation, the licensing authorities have the right to revoke the related combined subsoil licence or refuse to grant an exploration and production subsoil licence following a decision of the Russian Government. In the case of such a revocation, the Russian Subsoil Law contemplates that the licence holder will be reimbursed for costs incurred in connection with prospecting and evaluating the relevant deposit and the amount of the one-off fee for subsoil use paid under the terms of the related combined subsoil licence or geological research licence, and may be paid a premium in accordance with applicable procedures. These amounts, however, may not cover the licence holder’s actual costs, or be paid at all. In addition, the Russian Subsoil Law provides that only Russian legal entities are entitled to use subsoil plots of federal importance. In the interests of national security, Russian legal entities with foreign participation may also be subject to limitations imposed by the Russian Government on participation in subsoil auctions or tenders for the use of subsoil plots of federal importance. The rights to use a subsoil plot of federal importance may not be transferred to legal entities controlled by a foreign investor or a group of persons including a foreign investor, save for the transfer of rights in exceptional cases at the discretion of the Russian Government.
The Strategic Investment Laws are worded vaguely, which leaves wide scope for their interpretation by the competent state authorities. For example, the Strategic Investment Laws are unclear on various issues, including the exact definition of the term “legal entity with foreign participation”, the explicit scope of the
162 transactions subject to regulation, the approval procedure for these transactions and the scope and applicability of exemptions with respect to intra-group transactions. Although the Strategic Investment Laws do not apply retroactively, and generally apply to transactions and legal relationships taking place or arising after 5 May 2008, there is no assurance that the Strategic Investment Laws will not be amended or otherwise supplemented to apply retroactively or to include additional provisions.
Currency Restrictions The Group’s operations are subject to certain currency control restrictions, which are set forth in the Russian Currency Law and respective regulations of the CBR.
Pursuant to the Russian Currency Law, Russian residents and non-residents may settle transactions between them either in roubles or in a foreign currency, and there are no restrictions on currency operations between Russian residents and non-residents.
Under the Russian Currency Law, Russian residents conducting foreign trade operations must, subject to certain exemptions stipulated by the Russian Currency Law, repatriate to accounts in authorised Russian banks all roubles and foreign currency payable to them under foreign trade contracts. In addition, such Russian residents must procure the repatriation of funds paid to non-residents for goods, works, services, intellectual property and information that were not delivered into the Russian Federation.
In addition, the Russian Currency Law and the CBR Regulation No. 138-I of 4 June 2012 sets forth the requirement for Russian residents to open a “transaction passport” with an authorised Russian bank to comply with CBR regulations on currency control. This procedure applies, as a general rule, to export and import operations between Russian residents and non-residents, and to loans granted to Russian residents by non-residents (and vice versa). In relation to imports, the relevant parties must complete this procedure prior to making payments for the imported goods.
163 TERMS AND CONDITIONS OF THE NOTES
The following is the text of the Conditions which contains summaries of certain provisions of the Trust Deed and which (subject to completion and amendment) will be endorsed on each Definitive Note and will be attached and (subject to the provisions thereof) apply to the Global Certificate: The US$750,000,000 5.625 per cent. guaranteed notes due 2020 of Polyus Gold International Limited (the “Issuer”) (the “Notes”, which expression includes any further Notes issued pursuant to Condition 15 and forming a single series therewith) are unconditionally and irrevocably guaranteed by CJSC Polyus (the “Guarantor”). The Notes were authorised by a meeting of the board of directors of the Issuer held on 10 April 2013. The Guarantee (as defined below) of the Notes was authorised by a meeting of the board of directors of the Guarantor held on 19 April 2013. The Notes are constituted by a trust deed dated 29 April 2013 (the “Trust Deed”) between the Issuer, the Guarantor and BNY Mellon Corporate Trustee Services Limited (the “Trustee”, which expression shall include all persons for the time being who are the trustee or trustees under the Trust Deed) as trustee for the Noteholders (as defined below) of the Notes. These terms and conditions (the “Conditions”) include summaries of, and are subject to, the detailed provisions of the Trust Deed. The Issuer and the Guarantor have entered into a paying agency agreement dated 29 April 2013 (the “Paying Agency Agreement”) with the Trustee, The Bank of New York Mellon, London Branch as principal paying agent (the “Principal Paying Agent” and, together with any other paying agents appointed under the Paying Agency Agreement, the “Paying Agents”), The Bank of New York Mellon (Luxembourg) S.A. as registrar (the “Registrar”) and Transfer Agents named therein (the “Transfer Agents”). The Registrar, Paying Agents and Transfer Agents are together referred to herein as the “Agents”. Copies of the Trust Deed and the Paying Agency Agreement are available for inspection during normal business hours at the principal office of the Issuer (being at the date hereof Argyll, 18b Charles Street, London W1J 5DU, United Kingdom), the specified office of the Trustee, being at the date hereof One Canada Square, London E14 5AL, United Kingdom), and at the specified offices of the Agents. The Noteholders (as defined below) are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Trust Deed and are deemed to have notice of those provisions of the Paying Agency Agreement applicable to them. Capitalised terms used but not defined in these Conditions shall have the respective meanings given to them in the Trust Deed.
1. Form and Denomination The Notes are issued in fully registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof (each an “Authorised Denomination”) without coupons attached. The Notes will be initially issued in global, fully registered form, and represented by (i) a Rule 144A Global Note (the “Rule 144A Global Note”), interests in which are to be sold to qualified institutional buyers (each a “QIB”) within the meaning of, and pursuant to, Rule 144A (“Rule 144A”) under the Securities Act and (ii) a Regulation S Global Note (the “Regulation S Global Note” and, together with the Rule 144A Global Note, the “Global Notes”), interests in which are to be offered outside the United States to non-US persons within the meaning of, and pursuant to, Regulation S under the Securities Act (“Regulation S”) which will each be exchangeable for Notes in definitive, fully registered form (“Definitive Notes”) in the limited circumstances specified in the Global Notes and the Paying Agency Agreement.
2. Guarantee and Status 2.1 Guarantee The Guarantor has unconditionally and irrevocably guaranteed the payment when due of all sums expressed to be payable by the Issuer under the Trust Deed and the Notes (the “Guarantee”).
2.2 Status The Notes constitute direct, unsubordinated and (subject to Condition 4.1) unsecured obligations of the Issuer and shall at all times rank pari passu and rateably without any preference among
164 themselves. The Guarantee constitutes direct, unsubordinated and (subject to Condition 4.1) unsecured obligations of the Guarantor. Each of the Issuer and the Guarantor shall ensure that at all times the claims of the Noteholders against them under the Notes and the Guarantee, respectively, rank in right of payment at least pari passu with the claims of all their other present and future unsecured and unsubordinated creditors, save those whose claims are preferred by any mandatory operation of law.
3. Register, Title and Transfers 3.1 Register The Registrar shall maintain a Register in respect of the Notes (the “Register”) outside the United Kingdom at the specified office for the time being of the Registrar in accordance with the provisions of the Paying Agency Agreement and shall record in the Register the names and addresses of the Noteholders, particulars of the Notes and all transfers and redemptions thereof. In these Conditions, the “Holder” of a Note means the person in whose name such Note is for the time being registered in the Register (or, in the case of a joint holding, the first named thereof) and “Noteholder” shall be construed accordingly.
3.2 Title Title to the Notes will pass by and upon registration in the Register. The Holder of each Note shall (except as otherwise required by a court of competent jurisdiction or applicable law) be treated as the absolute owner of such Note for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any other interest therein, any writing on the Definitive Note relating thereto (other than the endorsed form of transfer) or any notice of any previous loss or theft of such Definitive Note) and no person shall be liable for so treating such Holder.
3.3 Transfers Subject to Conditions 3.6 and 3.7 below, a Note may be transferred in whole or in part in an Authorised Denomination upon surrender of the relevant Definitive Note representing that Note, together with the form of transfer (including any certification as to compliance with restrictions on transfer included in such form of transfer endorsed thereon) (the “Transfer Form”), duly completed and executed, at the specified office of a Transfer Agent or of the Registrar, together with such evidence as such Agent or the Registrar may reasonably require to prove the title of the transferor and the authority of the persons who have executed the Transfer Form. Where not all the Notes represented by the surrendered Definitive Note are the subject of the transfer, a new Definitive Note in respect of the balance not transferred will be delivered by the Registrar to the transferor in accordance with Condition 3.4. Neither the part transferred nor the balance not transferred may be less than US$200,000.
3.4 Registration and delivery of Definitive Notes Within five business days of the surrender of a Definitive Note in accordance with Condition 3.3 above, the Registrar shall register the transfer in question and deliver a new Definitive Note to each relevant Holder at the specified office of the Registrar or (at the request of the relevant Noteholder) at the specified office of a Transfer Agent or (at the request and risk of such relevant Holder) send it by uninsured first class mail (airmail if overseas) to the address specified for the purpose by such relevant Holder. In the case of the transfer of only a part of the Notes represented by a Definitive Note, a new Definitive Note in respect of the balance of the Notes not transferred will be so delivered at the specified office of the Registrar or (at the request of the transferor) at the specified office of a Transfer Agent or (at the request and risk of such transferor) send it by uninsured first class mail (airmail if overseas) to the address specified for the purpose by such transferor. In this paragraph, “business day” means a day on which commercial banks are open for business (including dealings in foreign currencies) in the cities where the Registrar and (if applicable) the relevant Transfer Agent have their specified offices.
165 3.5 No Charge The registration of the transfer of a Note shall be effected without charge to the Holder or transferee thereof, but against such indemnity from the Holder or transferee thereof as the Registrar or the Transfer Agent, as applicable, may require in respect of any tax or other duty of whatsoever nature which may be levied or imposed in connection with such transfer.
3.6 Closed periods Noteholders may not require the transfer of a Note to be registered (i) during the period of 15 days ending on the due date for any payment of principal or interest in respect of such Note and (ii) after any Note has been called for redemption.
3.7 Regulations concerning Transfer and Registration All transfers of Notes and entries on the Register are subject to the detailed regulations concerning the transfer and registration of Notes set out in the Schedule 2 to the Paying Agency Agreement. The regulations may be changed by the Issuer with the prior written approval of the Trustee and the Registrar. A copy of the current regulations will be available at the specified office of the Registrar and will be sent by the Registrar free of charge to any person who so requests and can confirm that they are a Noteholder to the satisfaction of the Registrar.
4. Covenants 4.1 Limitation on Liens 4.1.1 The Issuer shall not, and the Issuer shall procure that the Guarantor and each Material Subsidiary of the Issuer shall not, directly or indirectly, create, incur, assume, permit or suffer to exist any Lien (for the purposes of this Condition 4.1.1, the “Initial Lien”), other than a Permitted Lien, on any of its properties or assets, whether owned at the Issue Date or thereafter acquired, or on any income, revenue or profits therefrom, securing any Indebtedness, unless, at the same time or prior thereto, the Issuer’s obligations under the Notes or the Guarantor’s obligations under the Guarantee, as the case may be, shall (a) have been secured equally and rateably with such other secured Indebtedness or (b) benefit from such other security or other arrangements as either (i) the Trustee shall in its absolute discretion deem not materially less beneficial to the interests of the Noteholders or (ii) shall be approved by an Extraordinary Resolution (as defined in the Trust Deed), in each case any Lien created for the benefit of the Noteholders pursuant to this Condition 4.1.1 shall provide by its terms that such Lien shall be automatically and unconditionally released and discharged upon (a) the release and discharge of the Initial Lien or (b) the full and irrevocable payment of all amounts payable by the Issuer and the Guarantor (if applicable) under the Notes, these Conditions and the Trust Deed; and
4.1.2 If the Issuer, the Guarantor and the Material Subsidiaries of the Issuer are no longer subject to the provisions of Condition 4.1.1 pursuant to Condition 4.11 the Issuer shall:
(i) not, and the Issuer shall procure that the Guarantor and each Material Subsidiary of the Issuer shall not, directly or indirectly, create, incur, assume, permit or suffer to exist any Lien (for the purposes of this Condition 4.1.2, the “Initial Lien”), other than a Permitted Security Interest on any of its properties or assets, whether owned at the Issue Date or thereafter acquired, or on any income, revenue or profits therefrom, to secure for the benefit of the holders of any Relevant Indebtedness:
(a) payment of any sum due in respect of any such Relevant Indebtedness;
(b) any payment under any guarantee of any such Relevant Indebtedness; or
(c) any payment under any indemnity or other like obligation relating to any such Relevant Indebtedness;
166 (ii) procure that the Guarantor and each Material Subsidiary shall not give any guarantee of, or indemnity in respect of, any of the Issuer’s Relevant Indebtedness (other than Domestic Relevant Indebtedness) to the holders thereof,
without in any such case at the same time or prior thereto procuring that the Notes or the Guarantor’s obligations under the Guarantee, as the case may be, (x) are secured at least equally and rateably with such Relevant Indebtedness for so long as such Relevant Indebtedness is so secured or (y) have the benefit of such other guarantee, indemnity or other like obligations or such other security (in each case) as either (i) the Trustee shall in its absolute discretion deem not materially less beneficial to the interests of the Noteholders or (ii) shall be approved by an Extraordinary Resolution (for as long as such Relevant Indebtedness has the benefit of such other guarantee, indemnity, other like obligation or other security), in each case any Lien created for the benefit of the Noteholders pursuant to this Condition 4.1.2 shall provide by its terms that such Lien shall be automatically and unconditionally released and discharged upon (a) the release and discharge of the Initial Lien or (b) the full and irrevocable payment of all amounts payable by the Issuer and the Guarantor (if applicable) under the Notes, these Conditions and the Trust Deed.
4.2 Limitation on Indebtedness 4.2.1 The Issuer will not, and the Issuer will not permit the Guarantor or any Subsidiary of the Issuer to, incur, directly or indirectly, any Indebtedness; provided, however, that the Issuer, the Guarantor and each Subsidiary of the Issuer will be entitled to incur Indebtedness if:
(i) after giving effect to such incurrence and the application of the proceeds thereof, as if such Indebtedness had been incurred, no Potential Event of Default or Event of Default would occur or be continuing; and
(ii) on the date of such incurrence and after giving effect thereto and the application of the proceeds thereof the Group Leverage Ratio does not exceed 3.5 to 1.
4.2.2 Notwithstanding the foregoing Condition 4.2.1, the Issuer, the Guarantor and any Subsidiary of the Issuer will be entitled to incur Permitted Indebtedness.
4.2.3 Notwithstanding the foregoing, neither the Issuer nor the Guarantor will incur any Indebtedness pursuant to Condition 4.2 if the proceeds thereof are used, directly or indirectly, to Refinance any Subordinated Obligations of the Issuer or the Guarantor unless such Indebtedness shall be subordinated to the Notes or the Guarantee to at least the same extent as such Subordinated Obligations.
4.2.4 For the purposes of determining compliance with this Condition 4.2:
(i) in the event that an item of Indebtedness (or any portion thereof) meets the criteria of more than one of the types of Indebtedness described in Conditions 4.2.1 or 4.2.2, the Issuer, in its sole discretion, will classify such item of Indebtedness (or any portion thereof) at the time of incurrence and will only be required to include the amount and type of such Indebtedness in one of the above sub-Conditions;
(ii) the Issuer will be entitled to divide and classify an item of Indebtedness in more than one of the types of Indebtedness described in Conditions 4.2.1 or 4.2.2 and may change the classification of an item of Indebtedness (or any portion thereof) to any other type of Indebtedness described in Conditions 4.2.1 or 4.2.2 at any time.
The outstanding principal amount of any particular Indebtedness shall be counted only once and any obligations arising under any guarantees, Lien, letters of credit or similar instrument supporting such Indebtedness shall not be double counted; and
(iii) any entity that is allowed to incur Indebtedness under Condition 4.2.1 or Condition 4.2.2 (and the definition of “Permitted Indebtedness”) may provide a guarantee of any other
167 entity’s incurrence of such Indebtedness, provided that such other entity incurs such Indebtedness pursuant to Condition 4.2.1 or Condition 4.2.2 (and the same paragraph of the definition of “Permitted Indebtedness”) under which the guaranteeing entity provides its guarantee of such Indebtedness.
4.2.5 For the purposes of determining compliance with any US dollar denominated restriction on the incurrence of Indebtedness where the Indebtedness incurred is denominated in a different currency, the amount of such Indebtedness will be the US Dollar Equivalent determined on the date of the incurrence of such Indebtedness; provided, however, that if any such Indebtedness denominated in a different currency is subject to a Currency Agreement with respect to US dollars covering all principal, premium, if any, and interest payable on such Indebtedness, the amount of such Indebtedness expressed in US dollars will be as provided in such Currency Agreement. The principal amount of any Refinancing Indebtedness incurred in the same currency as the Indebtedness being Refinanced will be the US Dollar Equivalent, as appropriate, of Indebtedness Refinanced, except to the extent that (A) such US Dollar Equivalent was determined based on a Currency Agreement, in which case the principal amount of such Refinancing Indebtedness will be determined in accordance with the preceding sentence and (B) the principal amount of the Refinancing Indebtedness exceeds the principal amount of the Indebtedness being Refinanced, in which case the US Dollar Equivalent of such excess, as appropriate, will be determined on the date such Refinancing Indebtedness is incurred. Notwithstanding any other provision of this Condition 4.2, the maximum amount that the Issuer, the Guarantor or a Material Subsidiary of the Issuer may incur pursuant to this Condition 4.2 shall not be deemed to be exceeded, with respect to outstanding Indebtedness, solely as a result of fluctuations in the exchange rates of currencies.
4.3 Merger and Consolidation 4.3.1
(i) The Issuer will not consolidate with, amalgamate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all its assets to, any Person, unless:
(a) the resulting, surviving or transferee Person (the “Successor Company”) will be a corporation or limited liability company organised and existing under the laws of Jersey, Guernsey, Liechtenstein, the Isle of Man, the British Virgin Islands, the Cayman Islands, Switzerland, Canada, South Africa, Australia, the Russian Federation, any member state of the European Union that is a member of the European Union as of the Issue Date, or of the United States of America, any State thereof or the District of Columbia;
(b) the Successor Company (if not the Issuer) will expressly assume, by supplemental Trust Deed, executed and delivered to the Trustee, in form and manner satisfactory to the Trustee, all the obligations of the Issuer under the Notes and Trust Deed;
(c) immediately before and after giving effect to such transaction (and treating any Indebtedness that becomes an obligation of the Successor Company as a result of such transaction as having been incurred by the Successor Company at the time of such transaction), no Potential Event of Default or Event of Default shall have occurred and be continuing;
(d) unless Condition 4.2.1 does not apply pursuant to Condition 4.11, immediately after giving effect to such transaction, the Successor Company would be able to incur at least an additional US$1.00 of Indebtedness pursuant to Condition 4.2.1;
(e) if the Successor Company is organised or resident for tax purposes in a jurisdiction (the “Substituted Territory”) other than the United Kingdom or
168 Jersey (the “Issuer’s Territory”), the Successor Company will (unless the Trustee otherwise agrees) give to the Trustee an undertaking satisfactory to the Trustee acting in good faith in terms corresponding to Condition 8 (and subject to the exceptions corresponding to those set out in Condition 8) with the substitution for the references in that Condition to the Issuer’s Territory of references to the Substituted Territory whereupon Condition 8 will be read accordingly;
(f) the Issuer or the Successor Company shall have delivered to the Trustee, in form and substance satisfactory to the Trustee, an Officer’s Certificate (attaching the computations to demonstrate compliance with sub-clauses (c) and (d) above) and an opinion of independent counsel, each stating that such consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposition, and if a supplemental Trust Deed is required in connection with such transaction, such supplemental Trust Deed will, comply with the requirements of the Trust Deed and has been duly authorised, executed and delivered by the Issuer and/or the Successor Company and constitutes a legal, valid, binding and enforceable obligation of each such party thereto, provided that in giving such opinion such counsel may rely on an Officers’ Certificate as to compliance with the foregoing clauses (c) and (d) and as to matters of fact and such opinion may contain customary assumptions and qualifications. No opinion of counsel shall be required for a consolidation, merger, sale, assignment, conveyance, transfer, lease or other disposition described in paragraph (ii)(A) of this Condition 4.3.1; and
(g) the Issuer, the Guarantor and the Successor Company comply with such other requirements as the Trustee may reasonably direct in the interests of the Noteholders.
(ii) (A) Condition 4.3.1 shall not apply to any transaction in which any Subsidiary consolidates with, merges into or transfers all or part of its assets to the Issuer (with the Issuer as the Successor Company thereof) and (B) clause (d) of Condition 4.3.1(i) shall not apply if the Issuer consolidates or merges with or into or transfers all or substantially all of its properties and assets to (x) an Affiliate incorporated or organised for the purpose of reincorporating or reorganising the Issuer in another jurisdiction or changing its legal structure to a corporation or other entity or (y) a Subsidiary of the Issuer so long as all assets of the Issuer and its Subsidiaries or the Issuer, respectively, immediately prior to such transaction (other than Capital Stock of such Subsidiary) are owned by such Subsidiary and its Subsidiaries immediately after the consummation thereof.
(iii) In the case of any transaction complying with this Condition to which the Issuer is a party, the Successor Company shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under the Trust Deed; provided, that the predecessor Issuer shall not be relieved from its obligations to pay the principal and interest on the Notes in the case of a lease of all or substantially all of the assets of the Issuer and its Subsidiaries taken as a whole.
For the purposes of this Condition 4.3.1, the sale, lease, conveyance, assignment, transfer, or other disposition of all or substantially all of the properties and assets of one or more Subsidiaries of the Issuer, which properties and assets, if held by the Issuer instead of such Subsidiaries, would constitute all or substantially all of the properties and assets of the Issuer on a consolidated basis, shall be deemed to be the transfer of all or substantially all of the properties and assets of the Issuer.
4.3.2 (i) The Guarantor shall not enter into any reorganisation (by way of a merger, accession, division, separation, or transformation, or other bases or procedures for reorganisation
169 contemplated or as may be contemplated from time to time by Russian legislation, as these terms are construed by applicable Russian legislation) either (A) with any other member or members of the Group where the Guarantor is not the surviving entity and which would have a Material Adverse Effect or (B) involving a Person which is not a member of the Group and which would have a Material Adverse Effect; and
(ii) The Issuer shall ensure that, without the prior written consent of the Trustee (or, alternatively, without the approval of an Extraordinary Resolution (as defined in the Trust Deed) so permitting), no Material Subsidiary (A) enters into any reorganisation (whether by way of a merger, accession, division, separation or transformation as these terms are construed by applicable Russian legislation), or (B) in the case of a Material Subsidiary incorporated in a jurisdiction other than the Russian Federation, participates in any type of corporate reconstruction or other analogous event (as determined under the legislation of the relevant jurisdiction), in each case of (A) and (B) involving a Person which is not a member of the Group which would have a Material Adverse Effect.
4.4 Disposals The Issuer shall not and the Issuer shall ensure that the Guarantor and each of the Material Subsidiaries of the Issuer do not consummate any Asset Sale unless the consideration received by the Issuer, the Guarantor or such Material Subsidiary, as the case may be, is at least equal to the Fair Market Value of the assets sold or disposed of.
4.5 Reports 4.5.1 As long as any Notes are outstanding, the Issuer will furnish to the Noteholders and the Trustee:
(i) within 150 days after the end of each financial year, Financial Statements containing the audited statements of financial position of the Group as of the end of the last financial year prepared in accordance with IFRS, and including complete notes to such Financial Statements and the independent auditor’s report on the Financial Statements; and
(ii) within 90 days after the end of the first semi-annual period of each financial year of the Issuer thereafter Financial Statements containing the unaudited statements of financial position of the Group as of the end of such period and the comparable prior year periods, in each case prepared in accordance with IFRS, and including condensed notes to such interim condensed Financial Statements (unaudited) of the Group together with a review report thereon conducted in accordance with International Standard on Review Engagements No. 2410 (or such replacement standard in force at such time).
4.5.2 The Issuer shall also (i) post copies of such Financial Statements as and to the extent required by the applicable requirements published by the Stock Exchange and (ii) post such Financial Statements on its website, each within the respective time periods referred to in this Condition 4.5. Such posting on the website shall be deemed to satisfy the obligations of the Issuer under Condition 4.5.1. All Financial Statements referred to in this section will be available for inspection at the respective offices of the Principal Paying Agent.
4.5.3 In addition, so long as any of the Notes are restricted securities (as defined in Rule 144 under the Securities Act) and during any period during which the Issuer is not subject to the reporting requirements of the Exchange Act or exempt therefrom pursuant to Rule 12g3-2(b), the Issuer will furnish to any Holder or beneficial owner of Notes initially offered and sold in the United States to Qualified Institutional Buyers pursuant to Rule 144A under the Securities Act, and to prospective purchasers in the United States designated by such Holder or beneficial owners, upon request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.
170 4.6 Payment of Taxes and Other Claims So long as any amount remains outstanding under the Notes, the Issuer shall, and the Issuer shall cause the Guarantor and the Issuer’s Material Subsidiaries to, pay or discharge or cause to be paid or discharged, before the same shall become overdue and without incurring penalties, (a) all taxes, assessments and governmental charges levied or imposed upon, or upon the income, profits or assets of the Issuer, the Guarantor or any such Material Subsidiary, as the case may be, and (b) all lawful claims for labour, materials and supplies which, if unpaid, would by law become a Lien (other than a “Permitted Lien”) upon the property of the Issuer, the Guarantor or any such Material Subsidiary, as the case may be; provided, however, that none of the Issuer, the Guarantor nor any such Material Subsidiary, as the case may be, shall be required to pay or discharge or cause to be paid or discharged any such tax, assessment or charge or any such claim which is overdue or for which penalties are incurred (i) whose amount, applicability or validity is being contested in good faith by appropriate proceedings; or (ii) with respect to (a) where the aggregate of all such taxes, assessments or charges does not exceed US$150,000,000 or the US Dollar Equivalent thereof at any time or (iii) with respect to (b) where the aggregate of all such claims would not have a Material Adverse Effect, provided that, in the case of (i), (ii) or (iii), if any such tax, assessment or charge or any such claim (including any applicable penalties) is paid or discharged after becoming overdue, such payment or discharge shall be deemed to remedy any breach of this Condition 4.6 with respect to such tax, assessment, charge or claim.
4.7 Maintenance of Authorisations 4.7.1 The Issuer shall, and shall procure that the Guarantor shall obtain or make, and procure the continuance or maintenance of, all governmental registrations, recordings, filings, consents, licences, approvals and authorisations, which may at any time be required by applicable law to be obtained or made in Russia or Jersey for the purposes of the execution, delivery or performance of the Notes and the Trust Deed and for the validity and enforceability thereof; and
4.7.2 The Issuer shall, and the Issuer shall procure that the Guarantor and each Material Subsidiary of the Issuer shall, obtain, make or do, and procure the continuance or maintenance of, all governmental registrations, recordings, filings, consents, licences, approvals, authorisations and things, which may at any time be required by applicable law to be obtained or made in Russia or Jersey (or the relevant jurisdiction of incorporation of a Material Subsidiary, if not Russia or Jersey) to ensure the continuance of its corporate existence and its Restricted Business, except where such failure would not have a Material Adverse Effect,
provided that if the Issuer and/or the Guarantor and/or a Material Subsidiary, as the case may be, can remedy any failure to comply with this Condition 4.7 within (a) 180 days, in respect of any subsoil license, or (b) 90 days, in respect of any other registration, recording, filing, consent, licence, approval, authorisation or thing specified in Condition 4.7.1 or 4.7.2 above, in each case from the date of such failure or the occurrence of such event, this covenant shall be deemed not to have been breached.
4.8 Change of Business The Issuer shall procure that no material change is made to the general nature of the principal business of the Group as conducted as at the Issue Date (being primarily mining, production and sale of gold, precious metals and other minerals, and any business related, ancillary or complimentary thereto) (the “Restricted Business”).
4.9 Environmental compliance The Issuer shall and shall ensure that the Guarantor and each of the Issuer’s Material Subsidiaries will, comply with all Environmental Laws and obtain and maintain any Environmental Licence, except where failure to do so would not have a Material Adverse Effect.
171 4.10 Claims Pari passu The Issuer shall, and shall procure that the Guarantor shall ensure that at all times the claims of the Noteholders against it under the Notes and the Guarantee, as applicable, shall rank at least pari passu with claims of all its other present and future unsecured creditors (other than claims preferred under any bankruptcy, insolvency, liquidation or similar laws or any other mandatory provisions of applicable law).
4.11 Covenant Suspension If on any date following the Issue Date (the “Suspension Date”): 4.11.1 the Notes have Investment Grade Status; and 4.11.2 no Potential Event of Default or Event of Default has occurred and is continuing on such date,
(together, the “Suspension Conditions”), and such conditions are certified to the Trustee in an Officers’ Certificate, then beginning on the Suspension Date and continuing until such time (the “Reversion Date”), if any, at which the Notes cease to have Investment Grade Status (such period, the “Suspension Period”), the Issuer, the Guarantor and any Subsidiary of the Issuer (as applicable) will not be subject to Conditions 4.1.1, 4.2, 4.4, 4.6, 4.7, 4.8, 4.9 and 4.10 (the “Suspended Covenants”) and, in each case, any related Potential Events of Default or Events of Default under Condition 9 will cease to be effective and will not be applicable to the Issuer, the Guarantor or any Subsidiary of the Issuer.
If a Reversion Date occurs, the Issuer, the Guarantor and any Subsidiary of the Issuer (if applicable) will thereafter again be subject to the Suspended Covenants until such time (if any) as the Suspension Conditions are again satisfied.
Notwithstanding that the Suspended Covenants may be reinstated upon the occurrence of a Reversion Date, no Potential Event of Default or Event of Default will be deemed to have occurred or continue to occur as a result of any omission or failure by the Issuer, the Guarantor or any Subsidiary of the Issuer to act in compliance with any of the Suspended Covenants during the Suspension Period. On the Reversion Date, all Indebtedness incurred during the Suspension Period will be classified to have been incurred pursuant to one of the paragraphs of the definition of “Permitted Indebtedness” in Condition 20 (to the extent such Indebtedness would be permitted to be incurred thereunder as of the Reversion Date and after giving effect to Indebtedness incurred prior to the Suspension Period and outstanding on the Reversion Date). To the extent such Indebtedness would not be so permitted to be incurred pursuant to a paragraph of the definition of “Permitted Indebtedness”, such Indebtedness will be deemed to have been outstanding on the Issue Date, so that it is classified as permitted under paragraph (a) of the definition of “Permitted Indebtedness”. On the Reversion Date, all disposals made during the Suspension Period will be classified to have been made in compliance with Condition 4.4. For the purpose of determining, compliance with Condition 4.4 after the Reversion Date, the 12 month period for determining the aggregate value of any disposals shall be reset to the Reversion Date and any amount of proceeds from a disposal made during the Suspension Period will be deemed to be reset to zero for the purposes of compliance with Condition 4.4. On the Reversion Date, any Lien made or entered into during the Suspension Period will be deemed to have been outstanding on the Issue Date, so that it is classified as permitted under paragraph (a) of the definition of “Permitted Liens”.
5. Interest The Notes bear interest from and including the Issue Date at the Rate of Interest, payable semi-annually in arrear no later than 10.00 a.m. (New York City time) on 29 April and 29 October in each year (each an “Interest Payment Date”), the first such Interest Payment Date being on 29 October 2013. Each Note will cease to bear interest from the due date for redemption unless, upon due presentation, payment of principal is improperly withheld or refused, in which event interest will continue to accrue (before or after any judgment) at the Rate of Interest to but excluding the date on which payment in full of the principal thereof is made.
172 In these Conditions, the period beginning on and including the Issue Date and ending on but excluding the first Interest Payment Date and each successive period beginning on and including an Interest Payment Date and ending on but excluding the next succeeding Interest Payment Date is called an “Interest Period”.
Interest in respect of any Note shall be calculated per US$1,000 in principal amount of the Notes (the “Calculation Amount”). The amount of interest payable per Calculation Amount for any Interest Period shall be calculated by applying the Rate of Interest to the Calculation Amount, dividing the resulting product by two and rounding the resulting figure to the nearest cent (half a cent being rounded upwards). If interest is required to be calculated for a period of less than a complete Interest Period, the relevant day-count fraction will be determined on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, the number of actual days elapsed.
6. Redemption and Purchase 6.1 Final redemption Unless previously redeemed, or purchased and cancelled, the Notes will be redeemed or repaid by the Issuer at 100 per cent. of their principal amount thereof together with accrued interest on 29 April 2020 (the “Maturity Date”). The Notes may not be redeemed at the option of the Issuer other than in accordance with this Condition 6.
6.2 Redemption for tax reasons The Notes may be redeemed at the option of the Issuer in whole, but not in part, at any time, on giving not less than 30 nor more than 60 days’ notice to the Noteholders in accordance with Condition 16 (which notice shall be irrevocable) at the principal amount thereof, together with interest accrued to the date fixed for redemption but otherwise without premium or penalty, if (i) the Issuer satisfies the Trustee immediately prior to the giving of such notice that it has or will become obliged to pay additional amounts as provided or referred to in Condition 8.1 as a result of any change in, or amendment to, or clarification of the laws, treaties, protocols, rulings or regulations of any Relevant Jurisdiction, or any change in the published application or official interpretation of such laws, treaties, protocols, rulings or regulations and including the decision of any court governmental agency or tribunal, which change or amendment is announced, enacted or becomes effective on or after 29 April 2013 and (ii) such obligation cannot be avoided by the Issuer taking reasonable measures available to it; provided that no such notice of redemption shall be given earlier than 90 days prior to the earliest date on which the Issuer would be obliged to pay such additional amounts were a payment in respect of the Notes then due. Prior to the publication of any notice of redemption pursuant to this Condition, the Issuer shall deliver to the Trustee (x) an Officers’ Certificate stating that the obligation referred to in (i) above cannot be avoided by the Issuer taking reasonable measures available to it and the Trustee shall be entitled to accept such Officers’ Certificate as sufficient evidence of the satisfaction of the conditions precedent set out in (ii) above, in which event it shall be conclusive and binding on the Noteholders and (y) an opinion of independent legal advisers of recognised standing to the effect that the Issuer has or will become obliged to pay such additional amounts as a result of such change or amendment or clarification. All Notes in respect of which any such notice of redemption is given under and in accordance with this Condition shall be redeemed on the date specified in such notice in accordance with this Condition.
6.3 Purchase The Issuer, the Guarantor and any Subsidiaries of the Issuer may at any time purchase Notes in the open market or otherwise at any price. The Notes so purchased, while held on or behalf of the Issuer, the Guarantor or any of their respective Subsidiaries, shall not entitle the holder to vote at any meetings of the Noteholders and shall not be deemed to be outstanding for the purposes of calculating quorums at meetings of the Noteholders of for the purposes of Conditions 9 or 12.
173 6.4 Cancellation All Notes redeemed or purchased pursuant to this Condition 6 shall be either cancelled forthwith, held or, to the extent permitted by law, resold. Any Notes so cancelled may not be reissued.
7. Payments 7.1 Principal and other amounts Payment of principal and interest in respect of the Notes will be made to the persons shown as the Holder in the Register at the opening of business on the Record Date (as defined below). Payments of all amounts other than as provided in this Condition 7.1 will be made as provided in these Conditions.
7.2 Payments Each payment in respect of the Notes pursuant to Condition 7.1 shall be made by transfer to a US dollar account maintained by or on behalf of the payee with a bank in New York City and (in the case of interest payable on redemption) upon surrender of the relevant Notes at the specified office of the Principal Paying Agent or at the specified office of a Transfer Agent. Subject to the Principal Paying Agent receiving written notification of the relevant US dollar account details prior to such time, payment instructions (for value on the due date or, if that is not a business day (as defined below), for value the first following day which is a business day) will be initiated on the business day preceding the due date for payment (for value the next business day).
7.3 Payments subject to fiscal laws All payments in respect of the Notes are subject in all cases to any applicable fiscal or other laws and regulations in the place of payment, but without prejudice to the provisions of Condition 8.
7.4 Payments on business days A Note may only be presented for payment on a day which is a business day in the place of presentation. If the due date for any payment of principal or interest under this Condition 7 is not a business day, the Holder of a Note shall not be entitled to payment of the amount due until the next following business day and shall not be entitled to any further interest or other payment in respect of any such delay. In this Condition 7 only, “business day” means any day on which (i) the London interbank market is open for dealings between the banks generally, and (ii) if on that day a payment is to be made hereunder, commercial banks generally are open for business in Moscow, London, New York City, and in the city where the specified office of the relevant Paying Agent is located.
7.5 Record date “Record Date” means the fifteenth business day, in the place of the specified office of the Registrar, before the due date for the relevant payment.
7.6 Agents The initial Agents and their initial specified offices are listed below. The Issuer reserves the right to vary or terminate the appointment of all or any of the Agents at any time (with the written approval of the Trustee) and appoint additional or other payment or transfer agents, provided that the Issuer will at all times maintain (i) a Registrar and a Principal Paying Agent, (ii) a Paying Agent and a Transfer Agent having specified offices in at least one major European city approved by the Trustee and (iii) a Paying Agent with a specified office in a European Union member state that will not be obliged to withhold or deduct tax pursuant to any law implementing European Council Directive 2003/48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26-27 November 2000. Notice of any such change will be provided to Noteholders as described in Condition 16.
174 In acting under the Paying Agency Agreement and in connection with the Notes, the Agents act solely as agents of the Issuer and the Guarantor and (to the extent provided therein) the Trustee and do not assume any obligations towards or relationship of agency or trust for or with any of the Noteholders.
8. Taxation 8.1 All payments of principal and interest in respect of the Notes by or on behalf of the Issuer or by the Guarantor under the Guarantee shall be made without withholding or deduction for, or on account of, any present or future taxes, duties, assessments or governmental charges of whatsoever nature imposed, levied, collected, withheld or assessed by or within the Relevant Jurisdiction, unless such withholding or deduction is required by law. In that event, the Issuer or (as the case may be) the Guarantor shall pay such additional amount so as to result in the receipt by the Noteholders of such amounts as would have been received by them if no such withholding or deduction had been required, except that no such additional amounts shall be payable in respect of any Note: 8.1.1 held by or on behalf of a Holder which is (i) liable to such taxes, duties, assessments or governmental charges in respect of such Note or the Guarantee by reason of its (or its beneficial owners) having some connection with the Relevant Jurisdiction other than the mere holding of such Note or the benefit of the Guarantee or (ii) able to avoid such deduction or withholding by satisfying any statutory requirements or by making a declaration of non-residence or other claim to the relevant taxing authority; or 8.1.2 where (in the case of a payment of principal or interest on redemption or at maturity) the relevant Definitive Note is surrendered for payment more than 30 days after the Relevant Date except to the extent that the relevant Holder would have been entitled to such additional amounts if it had surrendered the relevant Definitive Note on the last day of such period of 30 days; or 8.1.3 where such withholding or deduction is imposed on a payment to an individual and is required to be made pursuant to any law implementing European Council Directive 2003/ 48/EC or any other Directive implementing the conclusions of the ECOFIN Council meeting of 26- 27 November 2000 or any law implementing or complying with, or introduced to conform to any such Directive; or 8.1.4 held by or on behalf of a Noteholder who would have been able to avoid such withholding or deduction by arranging to receive the relevant payment through another Paying Agent in a member state of the European Union; or 8.1.5 in respect of taxes, duties, assessments or governmental charges that are imposed or withheld by reason of the failure of the Noteholder to comply with a request of, or on behalf of, the Issuer or the Guarantor addressed to the Noteholder to provide information or documentation concerning the nationality, residence or identity of such Noteholder or to make any declaration or similar claim or satisfy any clarification, information or reporting requirement, which is required or imposed by a statute, treaty, regulation, protocol or administrative practice as a precondition to exemption from all or part of, or reduction in the rate of, such taxes, duties, assessments or governmental charges; or 8.1.6 where such withholding or deduction is required pursuant to Section 1471(b) of the Code or otherwise imposed pursuant to Sections 1471 through 1474 of the Code (or any amended or successor version), any current or future regulations or agreements (including any intergovernmental agreements) thereunder, official interpretations thereof, or any law implementing an intergovernmental approach thereto; or 8.1.7 in respect of estate, inheritance, gift, sales, excise, transfer, personal property or similar taxes, duties, assessments or governmental charges; or
8.1.8 any combination of the above.
175 8.2 In these Conditions, “Relevant Date” means whichever is the later of (a) the date on which the payment in question first becomes due and (b) if the full amount payable has not been received for the account of the Principal Paying Agent or the Trustee on or prior to such due date, the date on which (the full amount having been so received) notice to that effect has been given to the Noteholders by the Issuer in accordance with Condition 16.
8.3 Any reference in these Conditions to principal or interest shall be deemed to include any additional amounts in respect of principal or interest (as the case may be) which may be payable under Condition 8 or any undertaking given in addition to or in substitution for it under the Trust Deed.
9. Events of Default The Trustee at its discretion may, and if so requested in writing by Noteholders holding not less than 25 per cent. of the principal amount of the Notes then outstanding or if so directed by an Extraordinary Resolution (as defined in the “Trust Deed”) shall (subject in each case to its being indemnified and/or secured and/or pre-funded to its satisfaction), give notice to the Issuer that the Notes are immediately due and repayable at their principal amount together with accrued interest if any of the following events occurs and is continuing (each an “Event of Default”):
9.1.1 the Issuer fails to pay the principal of or any interest on any of the Notes when due (whether at its stated maturity, on optional redemption, on required purchase, on declaration of acceleration or otherwise) and such failure continues for a period of five Business Days (in the case of principal) or ten Business Days (in the case of interest or other amounts); or
9.1.2 the Issuer or the Guarantor, as the case may be, defaults in the performance or observance of any of their respective other obligations under the Notes or the Trust Deed, as the case may be, and except where such default is not, in the opinion of the Trustee, capable of remedy, such default remains unremedied for 30 Business Days after written notice thereof, addressed to the Issuer, or where applicable the Guarantor, has been delivered by or on behalf of the Trustee to the Issuer or the Guarantor, as the case may be; or
9.1.3 a default under any Indebtedness of the Issuer, the Guarantor or any Material Subsidiary of the Issuer, if that default (i) is caused by a failure to repay any amounts under such Indebtedness within any originally applicable grace period at final maturity; or (ii) results in the acceleration of such Indebtedness prior to its stated maturity as a result of an event of default (howsoever described) under such Indebtedness; provided that the amount of Indebtedness referred to in sub-paragraph (i) and/or sub-paragraph (ii) above individually or in the aggregate exceeds US$50,000,000 or the US Dollar Equivalent thereof; or
9.1.4 the amount of unsatisfied judgments or orders of courts or dispute resolution bodies of competent jurisdiction that have come into force for the payment of money against the Issuer, the Guarantor or any Material Subsidiary of the Issuer in the aggregate at any given moment of time exceeds US$75,000,000 or the US Dollar Equivalent thereof except in circumstances where such judgment, decree or order, as the case may be, is being contested or appealed by the Issuer, the Guarantor or any Material Subsidiary in good faith or is discharged within 60 days of being made; or
9.1.5 the Issuer, the Guarantor or any Material Subsidiary of the Issuer is unable or admits in writing inability to pay its debts as they fall due, generally suspends making payments on any of its debts or, by reason of actual or anticipated financial difficulties, commences negotiations with its creditors generally with a view to a general rescheduling of any of its Indebtedness in excess of US$50,000,000 or the US Dollar Equivalent in aggregate; and/or a moratorium is declared in respect of all or, in the opinion of the Trustee, any substantial part of the Indebtedness of any of the Issuer, the Guarantor or any Material Subsidiary of the Issuer as a result of any action taken by any competent authority where, in the case of any Material Subsidiary, such inability, action or declaration would have a Material Adverse Effect; or
176 9.1.6 the occurrence of any of the following events: (i) the Issuer, the Guarantor or any Material Subsidiary of the Issuer is seeking or consenting to (or an effective resolution is passed by it for) the introduction of proceedings for its liquidation or the appointment of a liquidator, or liquidation commission (likvidatsionnaya komissiya) or a similar officer of the Issuer, the Guarantor or any Material Subsidiary of the Issuer as the case may be or files a petition in relation to the Issuer, the Guarantor or any Material Subsidiary of the Issuer organised outside Russia for its winding up, examinership or dissolution (otherwise in each case than for the purposes of or pursuant to an amalgamation, consolidation, merger, reorganisation, liquidation, dissolution, restructuring or analogous event whilst solvent or in accordance with Condition 4.3);
(ii) the acceptance by a court of competent jurisdiction, arbitration court or any competent agency of a petition in respect of any of the Issuer, the Guarantor or any Material Subsidiary of the Issuer alleging, or for, its bankruptcy, insolvency, examinership, dissolution or liquidation (or any analogous proceedings) or the declaration by such court or agency of the insolvency or bankruptcy of any of the Issuer, the Guarantor or any Material Subsidiary of the Issuer under any bankruptcy or insolvency law (other than (i) any vexatious or frivolous petition; (ii) any petition that is not accepted by such court or competent agency for review on its merits; (iii) where such petition is presented or filed by a person that is not the Issuer, the Guarantor or a Subsidiary of the Issuer, and such petition has been discharged within 120 calendar days (excluding any period during which the court or competent agency has suspended the proceedings in respect of the petition on account of the petition not being in a form prescribed by law and/or while awaiting further documentation from the petitioner); (iv) any petition for the purposes of or pursuant to an amalgamation, consolidation, merger, reorganisation, liquidation, dissolution, restructuring or analogous event whilst solvent or in accordance with Condition 4.3; and (v) in the case of a Material Subsidiary only, where it would not have a Material Adverse Effect);
(iii) the institution, against the Guarantor or any Material Subsidiary of the Issuer organised within Russia of supervision (nablyudeniye), financial rehabilitation (finansovoye ozdorovleniye), external management (vneshneye upravleniye) or bankruptcy management (konkursnoye proizvodstvo), in each case, which is not discharged within 120 days and, in the case of a Material Subsidiary only, where it would have a Material Adverse Effect;
(iv) the entry by the Issuer, the Guarantor or any Material Subsidiary of the Issuer into, or the agreeing by the Issuer, the Guarantor or any Material Subsidiary of the Issuer to enter into any amicable settlement which, in the case of any entity in the Russian Federation and without limitation, shall include amicable settlement (mirovoye soglasheniye) with its creditors, as such terms are defined in the Federal Law of the Russian Federation No. 127-FZ “On Insolvency (Bankruptcy)” dated 26 October 2002 (as amended or replaced from time to time) and which, in the case of a Material Subsidiary only, has a Material Adverse Effect; or
(v) any judicial liquidation in respect of the Issuer, the Guarantor or any Material Subsidiary of the Issuer (otherwise than for the purposes of or pursuant to an amalgamation, consolidation, merger, reorganisation, liquidation, dissolution, restructuring or analogous event whilst solvent or in accordance with Condition 4.3) and which, in the case of a Material Subsidiary only, has a Material Adverse Effect; or
9.1.7 any expropriation, attachment, sequestration, execution, Lien or distress is levied against or becomes enforceable and is enforced against, or an encumbrancer takes possession of or sells, the whole or any, in the opinion of the Trustee, material part of, the property, undertaking, revenues or assets of the Group taken as a whole which, in each case, is not removed, satisfied, stayed, dismissed or otherwise discharged within 60 calendar days of its commencement; or
9.1.8 the Notes, the Trust Deed or the Guarantee is held in any judicial or arbitral proceeding to be unenforceable or invalid or ceases to be legal, valid, binding and in full force and effect (other than in
177 accordance with the terms of such document) or the Issuer or the Guarantor denies, disaffirms, repudiates (or purports or evidences in writing an intention to repudiate) its obligations under the Notes, the Trust Deed or the Guarantee; or
9.1.9 at any time it is or becomes unlawful for the Issuer or the Guarantor to perform or comply with any or all of their respective material obligations under any of the Notes, the Guarantee or the Trust Deed and any such event continues for more than 30 Business Days; or
9.1.10 any seizure, compulsory acquisition, expropriation, or nationalisation of all or, in the opinion of the Trustee, a material part of the undertaking, assets and revenues of the Issuer, the Guarantor or any Material Subsidiary of the Issuer is made by any state authority and, in the case of a Material Subsidiary only, which has a Material Adverse Effect; or
9.1.11 any event occurs which under the laws of any relevant jurisdiction has an analogous effect to any of the events referred to in any of the foregoing paragraphs.
10. Prescription Claims for the payment of principal and interest in respect of any Note shall be prescribed and become void unless made within 10 years (for claims for the payment of principal) or five years (for claims for the payment of interest) of the appropriate Relevant Date.
11. Replacement of Definitive Notes If a Note shall become mutilated, defaced, lost, stolen or destroyed it may, subject to all applicable laws and regulations and requirements of the Stock Exchange, be replaced at the specified offices of the Registrar or the Transfer Agents on payment of such costs, expenses, taxes and duties as may be incurred in connection therewith and on such terms as to evidence, security and indemnity and otherwise as may reasonably be required by or on behalf of the Registrar or the Transfer Agents. Mutilated or defaced Notes must be surrendered before replacements will be issued.
12. Meetings of Noteholders, Modification and Waiver 12.1 Meetings of Noteholders The Trust Deed contains provisions for convening meetings of Noteholders to consider any matter affecting their interests, including any modification of, or any arrangement in respect of, the Notes or the Trust Deed. Noteholders will be entitled to one vote per US$1,000 in principal amount of Notes held by them. Such a meeting may be convened by the Issuer, the Guarantor or the Trustee and shall be convened by the Trustee, subject to its being indemnified and/or secured and/or prefunded to its satisfaction, upon the request in writing of holders of the Notes holding not less than one tenth of the aggregate principal amount of the outstanding Notes or when it considers it necessary to determine compliance with any covenant under the Notes. The Trust Deed provides that special quorum provisions apply for meetings of Noteholders convened for the purpose of, inter alia (i) altering the terms and conditions relating to the maturity, redemption, prepayment and repayment (including, without prejudice to the generality of the foregoing, Condition 5) or postponing any date for payment of interest, (ii) reducing the principal amount of the Notes, (iii) varying the amounts corresponding to interest or principal payable in respect of the Notes or the method of determining such payments in respect of the Notes, (iv) varying the currency in which payments under the Notes are to be made, (v) modifying or cancelling the Guarantee, (vi) amending the provisions of Schedule 3 of the Trust Deed concerning the quorum required at any meeting of the Noteholders or any adjourned such meeting thereof or concerning the majority required to pass an Extraordinary Resolution, (vii) amending the proviso to paragraph 5 of Schedule 3 of the Trust Deed, or (viii) giving a direction pursuant to Condition 12.2 or Clause 7.1(i) of the Trust Deed, in which case the necessary quorum will be two or more persons holding or representing not less than 75 per cent., or at any adjourned meeting not less than 25 per cent., in principal amount of the Notes for the time being outstanding. Any resolution duly passed at a meeting of Noteholders will be binding on all the Noteholders, whether present or not.
178 The Trust Deed provides that a resolution in writing signed by or on behalf of the holders of not less than 75 per cent. in principal amount of the Notes outstanding shall for all purposes be as valid and effective as an Extraordinary Resolution passed at a meeting of Noteholders duly convened and held. Such a resolution in writing may be contained in one document or several documents in the same form, each signed by or on behalf of one or more Noteholders.
12.2 Modification and Waiver The Trustee may agree, without the consent of the Noteholders, to any modification of the Notes, the Trust Deed or the Paying Agency Agreement which in the opinion of the Trustee is of a formal, minor or technical nature, is made to correct a manifest error or (except as mentioned in the Trust Deed) in the opinion of the Trustee is not materially prejudicial to the interests of the Noteholders. The Trustee may also waive or authorise or agree to the waiving or authorising of any breach or proposed breach by the Issuer or the Guarantor of the Notes or the Trust Deed, or determine that any event which would or might otherwise give rise to a right of acceleration under the Notes shall not be treated as such, if in the opinion of the Trustee, to do so would not be materially prejudicial to the interests of the Noteholders, provided always that the Trustee may not exercise such power of waiver in contravention of a written request given by holders of 25 per cent. in aggregate principal amount of the Notes then outstanding or any express direction by Extraordinary Resolution. Any such modification, waiver, authorisation or determination shall be binding on the Noteholders and, unless the Trustee agrees otherwise, shall be promptly notified to the Noteholders in accordance with Condition 16.
12.3 Entitlement of the Trustee In connection with the exercise of any of its powers, trusts, authorities or discretions, the Trustee shall have regard to the interests of the Noteholders as a class and, in particular, shall not have regard to the consequences of such exercise for individual Noteholders resulting from their being for any purpose domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any particular territory. No Noteholder is entitled to claim from the Issuer, a Guarantor or the Trustee any indemnification or payment in respect of any tax consequence of any such exercise upon individual Noteholders.
13. Enforcement At any time after an Event of Default has occurred and for as long as it is continuing, the Trustee may, at its discretion and without further notice, institute such proceedings or take such steps or actions against the Issuer and/or the Guarantor as it may think fit to enforce the terms of the Trust Deed and/or the Notes, but it need not take any such proceedings and nor shall the Trustee be bound to take, or omit to take any step or action (including instituting such proceedings, steps or actions) unless (a) it shall have been so directed by an Extraordinary Resolution or so requested in writing by Noteholders holding at least 25 per cent. in principal amount of the Notes outstanding and (b) it shall have been indemnified and/or secured and/or prefunded to its satisfaction. No Noteholder may proceed directly against the Issuer or the Guarantor unless the Trustee, having become bound so to proceed, fails to do so within a reasonable time and such failure is continuing.
14. Indemnification and Removal of the Trustee The Trust Deed contains provisions for the indemnification of the Trustee and for its relief from responsibility including provisions relieving it from taking proceedings or steps or actions to enforce payment unless indemnified and/or secured and/or prefunded to its satisfaction, and to be paid its costs and expenses in priority to any claims of Noteholders. In addition, the Trustee is entitled to enter into business transactions with the Issuer, the Guarantor and any entity related to the Issuer or the Guarantor without accounting for any profit.
The Trustee’s responsibilities are solely those of trustee for the Noteholders on the terms of the Trust Deed. Accordingly, the Trustee makes no representations and assumes no responsibility for the validity or enforceability of the Notes or for the performance by the Issuer or the Guarantor of its obligations under or
179 in respect of the Notes and the Trust Deed. The Trustee is entitled to assume that each of the Issuer and the Guarantor is performing all of its obligations pursuant to the Notes and the Trust Deed (and shall have no liability for doing so) until it has actual knowledge to the contrary.
The Trustee may rely without liability to Noteholders on any certificate or report prepared by auditors, accountants or any other expert pursuant to the Trust Deed, whether or not addressed to the Trustee and whether or not the auditors’, accountants’ or expert’s liability in respect thereof is limited by a monetary cap or otherwise. The Trust Deed provides that the Noteholders shall together have the power, exercisable by Extraordinary Resolution, to remove the Trustee (or any successor trustee or additional trustees) provided that the removal of the Trustee or any other trustee shall not become effective unless there remains a Trustee in office after such removal.
15. Further Issues The Issuer may from time to time, without the consent of the Noteholders, create and issue further securities having the same terms and conditions as the Notes in all respects (or in all respects except for the first payment of interest, the date of issue and the amount of principal) and so that such further issue shall be consolidated and form a single series with the outstanding Notes. References in these Conditions to the Notes include (unless the context requires otherwise) any other securities issued pursuant to this Condition and forming a single series with the Notes. Any such other securities shall be constituted by a deed supplemental to the Trust Deed and will benefit from a guarantee substantially in the form of the Guarantee given in respect of these Notes. The Trust Deed contains provisions for convening a single meeting of the Noteholders for the holders of securities of other series where the Trustee so decides. Application will be made for such further securities to be listed and admitted to trading on the stock exchange on which the Notes are from time to time listed or quoted.
16. Notices Notices to the Noteholders shall be valid if sent to them by first class mail (airmail if overseas) at their respective addresses on the Register or by any means designated from time to time by any clearing system on which trades in Notes settle. Any such notice shall be deemed to have been given on the fourth day after the date of mailing. In addition, so long as the Notes are listed on the Stock Exchange and the rules or guidelines of that exchange so require, notices will be published via the companies announcements office of the Stock Exchange. Any such notice shall be deemed to have been given on the date of such publication or, if published more than once or on different dates, on the first date on which publication is made.
17. Currency Indemnity If any sum due from the Issuer in respect of the Notes or the Guarantor in respect of the Guarantee or any order or judgment given or made in relation thereto has to be converted from the currency (the “first currency”) in which the same is payable under these Conditions or such order or judgment into another currency (the “second currency”) for the purpose of (a) making or filing a claim or proof against the Issuer or the Guarantor, (b) obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or judgment given or made in relation to the Notes or the Guarantee, the Issuer, failing whom the Guarantor, shall indemnify each recipient, on the written demand of such recipient addressed to the Issuer and the Guarantor and delivered to the Issuer and the Guarantor or to the specified office of the Registrar, against any loss suffered as a result of any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in question from the first currency into the second currency and (ii) the rate or rates of exchange at which such recipient may in the ordinary course of business purchase the first currency with the second currency upon receipt of a sum paid to it in satisfaction, in whole or in part, of any such order, judgment, claim or proof.
This indemnity constitutes a separate and independent obligation of the Issuer or, as the case may be, the Guarantor and shall give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted by any Noteholder or any other person and will continue in full force and effect despite any judgment, order, claim or proof for a liquidated amount in respect of any sum due under the Trust Deed and/or the Notes or any other judgment or order.
180 18. Contracts (Rights of Third Parties) Act 1999 No person shall have any right to enforce any term or condition of the Notes under the Contracts (Rights of Third Parties) Act 1999 except and to the extent, if any, that the Notes expressly provide for such Act to apply to any of their terms.
19. Governing Law and Arbitration 19.1 The Trust Deed, the Notes and these Conditions and any non-contractual obligations arising out of or in connection therewith shall be governed by and interpreted in accordance with English law.
19.2 Any dispute, claim or difference of whatever nature arising out of or in connection with the Trust Deed, the Notes and these Conditions (including a dispute regarding the existence, validity or termination of the Trust Deed, the Notes or these Conditions or a dispute relating to non-contractual obligations arising out of or in connection with the Trust Deed, the Notes and these Conditions) (a “Dispute”) shall be referred to and finally resolved by arbitration under the rules of the LCIA (the “Rules”), which Rules are deemed incorporated by reference into these Conditions, as amended herein.
19.2.1 The arbitral tribunal shall consist of three arbitrators. The claimant(s), irrespective of number, shall nominate jointly one arbitrator. The respondent(s), irrespective of number, shall nominate jointly the second arbitrator. The third arbitrator, who shall serve as Chairman, shall be nominated by agreement of the two party-nominated arbitrators. Failing such agreement within 15 days of the confirmation of the appointment of the second arbitrator, the third arbitrator shall be appointed by the LCIA as soon as possible. For the avoidance of doubt, the parties to this Agreement agree for the purpose of Article 8.1 of the Rules, that the claimant(s), irrespective of number, and the respondent(s), irrespective of number, shall constitute two separate sides for the formation of the arbitral tribunal.
19.2.2 In the event that the claimant(s) or the respondent(s) fail to nominate an arbitrator in accordance with the Rules, such arbitrator shall be nominated by the LCIA as soon as possible, preferably within 15 days of such failure. In the event that the respondent(s) or both the claimant(s) and the respondent(s) fail to nominate an arbitrator in accordance with the Rules, all 3 arbitrators shall be nominated and appointed by the LCIA as soon as possible, preferably within 15 days of such failure, and such arbitrators shall then designate one amongst them as Chairman.
19.2.3 The seat of arbitration shall be London, England and the language of the arbitration shall be English.
19.2.4 If more than one arbitration is commenced under the Trust Deed, the Notes or these Conditions and any party contends that two or more such arbitrations are so closely connected that it is expedient for them to be resolved in one set of proceedings, the arbitral tribunal appointed in the first filed of such proceedings (the “First Tribunal”) shall have the power to determine, provided no date for the hearing on the merits of the Dispute in any such arbitrations has been fixed, that the proceedings shall be consolidated.
19.2.5 The tribunal in such consolidated proceedings shall be selected as follows:
(i) the parties to the consolidated proceedings shall agree on the composition of the tribunal; and
(ii) failing such agreement within 30 days of consolidation being ordered by the First Tribunal, the LCIA shall appoint all members of the tribunal within 30 days of a written request by any of the parties to the consolidated proceedings.
19.2.6 For the avoidance of doubt, the parties to the Trust Deed, the Notes and these Conditions are intended by the parties to this Agreement to have the right under the Contracts (Rights of Third Parties) Act 1999 to enforce the terms of Condition 19.2(e).
181 19.3 The Guarantor undertakes irrevocably to appoint the Issuer at Argyll, 18b Charles Street, London W1J 5DU, United Kingdom, as agent to accept service of process and any other documents in proceedings in England or in any legal action or proceedings arising out of or in connection with these Conditions and the Notes (the “Process Agent”), provided that:
19.3.1 service upon the Process Agent shall be deemed valid service upon the Guarantor whether or not the process is forwarded to or received by the Guarantor;
19.3.2 the Guarantor shall inform the Trustee, in writing, of any change in the address of the Process Agent within 28 days of such change;
19.3.3 if the Process Agent ceases to be able to act as a process agent or to have an address in England, the Guarantor irrevocably agrees to appoint a new process agent in England acceptable to the Trustee and to deliver to the trustee within 14 days a copy of a written acceptance of appointment by the new process agent; and
19.3.4 nothing in these Conditions shall affect the right to serve process in any other manner permitted by law.
19.4 To the extent that the Issuer or the Guarantor may now or hereafter be entitled, in any jurisdiction in which any legal action or proceeding may at any time be commenced pursuant to or in accordance with these Conditions, to claim for itself or any of its undertaking, properties, assets or revenues present or future any immunity (sovereign or otherwise) from suit, jurisdiction of any court, attachment prior to judgment, attachment in aid of execution of a judgment, execution of a judgment or award or from set-off, banker’s lien, counterclaim or any other legal process or remedy with respect to its obligations under these Conditions and/or to the extent that in any such jurisdiction there may be attributed to the Issuer or the Guarantor any such immunity (whether or not claimed), each of the Issuer and the Guarantor hereby irrevocably agrees not to claim, and hereby waive, any such immunity.
19.5 Each of the Issuer and the Guarantor irrevocably and generally consents in respect of any proceedings anywhere to the giving of any relief or the issue and service on it of any process in connection with those proceedings including, without limitation, the making, enforcement or execution against any assets whatsoever (irrespective of their use or intended use) of any order or judgment which may be made or given in those proceedings.
20. Definitions In these Conditions the following terms have the meaning given to them in this Condition 20.
“Accounting Standards” means IFRS, or any other internationally recognised set of accounting standards deemed equivalent to IFRS by the relevant regulators for the time being; provided however, that where such term is used with respect to the financial statements of the Subsidiaries of the Issuer, in these Conditions, it shall, where financial statements prepared in accordance with IFRS are not available, be deemed to include US GAAP, Russian accounting standards or any other generally accepted accounting standards of the jurisdiction of incorporation of the relevant Subsidiary from time to time;
“Affiliate” of any specified Person means (i) any other Person, directly or indirectly, controlling or controlled by or under direct or indirect common control with such specified Person or (ii) any other Person who is a director or officer (a) of such specified Person, (b) of any Subsidiary of such specified Person or (c) of any Person described in (i) above. For the purposes of this definition, control when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms controlling and controlled have meanings correlative to the foregoing;
“Asset Sale” means a lease, sale (other than a sale and lease-back) transfer or other disposition either in one transaction or in a series of related transactions, by the Issuer, the Guarantor or any Material Subsidiary to a Person that is not a member of the Group, of any assets the book value of which exceeds 10 per cent. of the
182 Group Total Assets in any 12-month period excluding any period prior to the Issue Date (determined in each case by reference to the most recent publicly available audited annual financial statements or reviewed interim financial statements of the Group prepared in accordance with the Accounting Standards); provided that “Asset Sale” shall not include:
(a) sales or other dispositions of inventory, Commodities or stock in trade in the ordinary course of business;
(b) assignments of or other arrangements over the rights or revenues arising from Product Delivery Contracts;
(c) disposition of Cash;
(d) any distribution or payment of dividends;
(e) any disposition pursuant to or in compliance with Condition 4.3;
(f) the sale, lease or other disposition of obsolete, worn out, negligible, surplus or outdated equipment or machinery or raw materials or inventory or any other asset, in each case which is no longer used or usable in the ordinary course of business, such sale, lease or other disposition being in the ordinary course of business;
(g) the lease, assignment or sublease of any real or personal property in the ordinary course of business, including the sale of accounts receivable in factoring arrangements entered into in the ordinary course of business;
(h) sales or other dispositions of assets or property received by the Issuer, the Guarantor or any Material Subsidiary of the Issuer upon the foreclosure of a Lien granted in favour of the Issuer, the Guarantor or any Material Subsidiary of the Issuer or any other transfer of title with respect to any ordinary course secured investment in default; and
(i) the surrender or waiver of contract rights or the settlement, release, or surrender of contract, tort or other claims, in the ordinary course of business;
“Average Life” means, as of the date of determination, with respect to any Indebtedness, the quotient obtained by dividing (a) the sum of the products of the numbers of years from the date of determination to the dates of each successive scheduled principal payment of, or redemption or similar payment with respect to, such Indebtedness multiplied by the amount of such payment by (b) the sum of all such payments;
“Business Day” means, other than for the purposes of Condition 7, a day on which, if on that day a payment is to be made hereunder, commercial banks generally are open for business in Moscow, London, New York City and in the city where the Specified Office (as defined in the Paying Agency Agreement) of the Principal Paying Agent is located;
“Cash” means, at any time, cash and cash equivalents presented in the most recently published Financial Statements of the Group;
“Capital Lease Obligation” means an obligation that is required to be classified and accounted for as a finance lease for financial reporting purposes in accordance with IFRS, and the amount of Indebtedness represented by such obligation shall be the capitalised amount of such obligation determined in accordance with IFRS;
“Capital Stock” of any Person means any and all shares, interests (including partnership interests), rights to purchase, warrants, options, participations or other equivalents of or interests in (however designated) equity of such Person, including any preferred stock of such Person, whether now outstanding or issued after the Issue Date, including without limitation, all series and classes of such Capital Stock but excluding any debt securities convertible into such equity; the “Code” means the United States Internal Revenue Code of 1986, as amended;
183 “Commodity” means ore products, precious metal products and any other related products of the Group;
“Currency Agreement” means any foreign exchange contract, currency swap agreement or other similar agreement with respect to currency values;
“Domestic Relevant Indebtedness” means any Relevant Indebtedness which is not quoted, listed or ordinarily dealt in or traded on any stock exchange or any public or institutional securities market, in each case outside the Russian Federation;
“EBITDA for any period” means profit before income tax of the Group for that period, as adjusted by:
(a) adding back Interest Expenses;
(b) excluding any loss, and adding back any income, from investments;
(c) before taking into account any items treated as exceptional or extraordinary items (such as but not limited to: any impairments, forex exchange gains/losses, loss/income from disposal of property, plant and equipment);
(d) adding back any amount attributable to the amortisation of intangible assets and the depreciation of tangible assets; and
(e) excluding any one-off items as required to ensure calculation of the EBITDA comparable with the prior period,
in each case, as such amount is calculated as presented in the most recently published Financial Statements of the Group.
“Environment” means living organisms including the ecological systems of which they form part and the following media:
(a) air (including air within natural or man-made structures, whether above or below ground);
(b) water (including territorial, coastal and inland waters, water under or within land and water in drains and sewers); and/or
(c) land (including land under water);
“Environmental Law” means all applicable laws and regulations of any jurisdiction in which the Issuer, the Guarantor or any Material Subsidiary conducts business which:
(a) have as a purpose or effect the protection of, and/or prevention of harm or damage to, the Environment;
(b) provide remedies or compensation for harm or damage to the Environment; and
(c) relate to Hazardous Substances or health or safety matters;
“Environmental Licence” means any authorisation, consent, approval, resolution, licence, exemption, filing or registration required at any time under Environmental Law;
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended;
“Fair Market Value” means, with respect to any asset or property, the price that would be paid in an arms’ length, free market transaction between an informed, willing and able seller and an informed, willing and able buyer, neither of whom is under undue pressure or compulsion to complete the transaction. Fair Market Value will be determined in good faith by a duly authorised officer of the Issuer, whose determination (in the absence of fraud or manifest error) will be conclusive;
“Financial Statements” means (i) the consolidated financial statements for the periods ended on or before 31 December 2012 and (ii) the consolidated financial statements for the periods starting 1 January 2013, prepared in accordance with IFRS, in each case of the Group;
184 “Fitch” means Fitch Ratings Limited, any credit rating agency affiliate thereof or any successor to the rating agency business thereof;
“Group” means the Issuer and its Subsidiaries taken as a whole;
“Group Leverage Ratio” as of any date of determination (the “Determination Date”), means the ratio of (x) the aggregate amount of Group Indebtedness to (y) the aggregate amount of EBITDA for the period (the “EBITDA Calculation Period”) of the two most recent consecutive semi-annual periods, ending prior to the date of such determination for which Financial Statements of the Group are available; provided, however, that:
(a) if (i) the Issuer, the Guarantor or any Subsidiary of the Issuer has incurred any Indebtedness since the balance sheet date (the “Relevant Date”) of the latest published Financial Statements of the Group published immediately preceding the date of determination which remains outstanding on the Determination Date or (ii) if the transaction giving rise to the need to calculate the Group Leverage Ratio is an incurrence of Indebtedness, or both, the Group Leverage Ratio shall be calculated by adjusting the Group Indebtedness for such period to give effect to the incurrence of any Indebtedness mentioned in (i) or (ii) above, or both, as if such Indebtedness had been incurred on the Relevant Date;
(b) if (i) the Issuer, the Guarantor or any Subsidiary of the Issuer has repaid, repurchased, defeased or otherwise discharged any Indebtedness since the Relevant Date or (ii) if any Indebtedness is to be repaid, repurchased, defeased or otherwise discharged (in each case other than Indebtedness incurred under any revolving credit facility unless such Indebtedness has been permanently repaid and has not been replaced) on the date of the transaction giving rise to the need to calculate the Group Leverage Ratio, or both, the Group Leverage Ratio shall be calculated by adjusting the Group Indebtedness for such period to give effect to such repayment, repurchase, defeasement or dischare mentioned in (i) or (ii) above, as if such repayment, repurchase, defeasement or dischare had occurred on the Relevant Date;
(c) if since the Relevant Date the Issuer, the Guarantor or any Subsidiary of the Issuer has made an Asset Sale as a result of which a Person ceased to be a Subsidiary of the Issuer, the Group Leverage Ratio shall be calculated by adjusting the Group Indebtedness for such period to give effect to any reduction of Indebtedness (to the extent originally included) equal to the Indebtedness of such Person as if such disposal had occurred on the Relevant Date;
(d) if since the beginning of the EBITDA Calculation Period the Issuer, the Guarantor or any Subsidiary of the Issuer (by merger or otherwise) shall have made an investment in any Person which as a result of such investment becomes a Subsidiary of the Issuer or an acquisition of assets which constitutes all or substantially all of an operating unit of a business (including any acquisition of assets occurring in connection with a transaction requiring a calculation to be made hereunder), the Group Leverage Ratio shall be calculated by adjusting the EBITDA for such EBITDA Calculation Period as if such investment or acquisition had occurred on the first day of such EBITDA Calculation Period; and
(e) if since the beginning of the EBITDA Calculation Period the Issuer, the Guarantor or any Subsidiary of the Issuer made an Asset Sale the Group Leverage Ratio shall be calculated by reducing the EBITDA for such EBITDA Calculation Period by an amount equal to EBITDA (if positive) directly attributable to the assets which are the subject of such Asset Sale, or increased by an amount equal to EBITDA (if negative), directly attributable thereto for such period as if such Asset Sale had occurred on the first day of such EBITDA Calculation Period.
The Group Leverage Ratio shall be determined in good faith by an authorised officer of the Issuer, whose determination will be conclusive (in the absence of manifest error);
“Group Total Assets” means at any date of determination the total assets of the Issuer and its Subsidiaries as shown in the most recently published statement of the financial position of the Group prepared in accordance with IFRS;
185 “guarantee” means a guarantee other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner including, without limitation, by way of reimbursement agreements in respect thereof, of all or any part of any Indebtedness;
“Hazardous Substance” means any waste, pollutant, contaminant or other substance (including any liquid, solid, gas, ion, living organism or noise) that may be harmful to human health or other life or the Environment or a nuisance to any person;
“Hedging Obligations of any Person” means the obligations of such Person pursuant to any Interest Rate Agreement or Currency Agreement;
“IFRS” means International Financial Reporting Standards issued by the International Accounting Standards Board (the “IASB”) and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB, consistently applied and which are in effect from time to time;
“Indebtedness” means, without duplication, in respect of the Issuer and its Subsidiaries for or in respect of:
(a) moneys borrowed (the principal amount of which as determined in accordance with IFRS);
(b) any principal amount (as determined in accordance with IFRS) raised by acceptance under any acceptance credit facility;
(c) any principal amount (as determined in accordance with IFRS) raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock or any similar instrument;
(d) any principal amount (as determined in accordance with IFRS) raised under any other transaction having the economic or commercial effect of a borrowing; and
(e) the amount of any liability in respect of the guarantee or indemnity for, or similar undertaking given in respect of, any of the items referred to above in relation to any Person which is not the Issuer or its Subsidiary.
For the avoidance of doubt the following amounts shall not constitute “Indebtedness”: (i) trade account payables arising solely in the ordinary course of business; (ii) advances received from customers; (iii) any tax liability and any letters of credit and bank guarantees issued in relation to trade related activities, customs activities or tax payments; (iv) contingent liabilities other than with respect to items of Indebtedness described in the preceding sentence; and (v) any Intra-Group Transactions;
“Interest Expenses” means, for any EBITDA Calculation Period, finance costs presented in the most recently published Financial Statements of the Group, including the interest element of leasing and hire purchase payments;
“Interest Rate Agreement” means any interest rate swap agreement, interest rate cap agreement or other financial agreement or arrangement with respect to exposure to interest rates;
“Intra-Group Transaction” means (a) any loan, guarantee, surety, reorganisation and any other transaction solely between the Issuer and/or Subsidiary of the Issuer on the one hand and the Issuer and/or another Subsidiary of the Issuer on the other hand and (b) any transaction by the Issuer and/or a Subsidiary of the Issuer in favour of the Issuer and/or another Subsidiary of the Issuer, including the payment of dividends or the making of other distributions by a Subsidiary of the Issuer to the Issuer or another Subsidiary of the Issuer;
“Investment Grade Rating” means a rating equal to or higher than Baa3 (or the equivalent) by Moody’s and BBB- (or the equivalent) by Fitch or Standard & Poor’s or, if applicable in relation to any other Rating Agency, an equivalent rating by such other Rating Agency;
“Investment Grade Status” shall be deemed to have been reached on the date that the Notes have an Investment Grade Rating from at least two of the Ratings Agencies;
“Issue Date” means 29 April 2013;
186 “Lien” means any mortgage, pledge, encumbrance, lien, charge or other security interest securing any obligation of any Person;
“Material Adverse Effect” means a material adverse effect on:
(a) the business or financial condition of the Group taken as a whole; or
(b) the Issuer or any Guarantor’s ability to perform its payment or other material obligations under the Conditions or Trust Deed; or
(c) the validity, legality or enforceability of the Conditions or Trust Deed or the rights or remedies of the Noteholders or Trustee under the Conditions or Trust Deed;
“Material Subsidiary” means, at any given time, a Subsidiary of the Issuer which:
(a) has gross revenues representing 10 per cent. or more of the consolidated gross revenues of the Group; or
(b) has total assets representing 10 per cent. or more of the consolidated total assets of the Group, in each case calculated by reference to the latest published Financial Statements and respective unconsolidated financial information of the Subsidiary, prepared under the same principles as the Financial Statements, but, in respect of (a), excluding any intra-Group items, provided, however, that a report based on the above criteria by the Auditors (if such report is requested by the Issuer), that a Subsidiary is, or is not, a Material Subsidiary shall, in the absence of manifest error, be conclusive and binding;
“Moody’s” means Moody’s Investors Service Limited, any credit rating agency affiliate thereof or any successor to the rating agency business thereof;
“Officers’ Certificate” means, a certificate executed on behalf of such person by a duly authorised officer of the Issuer or the Guarantor, as the case may be;
“Permitted Indebtedness” means any or all of the following Indebtedness:
(a) Indebtedness outstanding at the Issue Date;
(b) Indebtedness represented by the Notes and the Guarantee or any supplement or amendment to the Trust Deed made in connection with a further issuance by the Issuer of securities having identical terms and conditions, term, tenor and rate of interest as, and forming a single fungible series with, the Notes;
(c) Refinancing Indebtedness incurred by the Issuer, the Guarantor or any Subsidiary of the Issuer to Refinance Indebtedness;
(d) Indebtedness incurred pursuant to Hedging Obligations; provided that such Hedging Obligations are entered into in the ordinary course of business of the Group and not for speculative purposes;
(e) Indebtedness in respect of workers’ compensation claims or claims arising under similar legislation, or pursuant to self-insurance obligations and not in connection with the borrowing of money or the obtaining of advances or credit;
(f) customer deposits and advance payments received from customers in the ordinary course of business of the Group;
(g) intercompany and intra-Group Indebtedness owed to, and held by, the Issuer, the Guarantor or a Subsidiary of the Issuer in respect of the Issuer, the Guarantor or a Subsidiary of the Issuer; provided, however, that any subsequent disposition, pledge or transfer of such Indebtedness (other than to the Issuer, the Guarantor or a Subsidiary of the Issuer) shall be deemed, in each case, to constitute the incurrence of such Indebtedness by the relevant obligor in respect of such Indebtedness;
187 (h) obligations in respect of performance, bid, judgmental, appeal and surety bonds, completion guarantees, letters of credit, bank’s acceptances, veksels (being Russian rouble-denominated short- term promissory notes) or similar obligations provided by the Issuer, the Guarantor or any Subsidiary of the Issuer in the ordinary course of business of the Group;
(i) Purchase Money Indebtedness and Capital Lease Obligations incurred to finance the acquisition by the Issuer, the Guarantor or a Subsidiary of the Issuer of assets in the ordinary course of business of the Group;
(j) Indebtedness of a Subsidiary of the Issuer incurred and outstanding on or prior to the date on which such Subsidiary was acquired by the Issuer or a Subsidiary of the Issuer (other than Indebtedness incurred in connection with, or to provide all or any portion of the funds or credit support utilised to consummate, the transaction or series of related transactions pursuant to which such Subsidiary became a Subsidiary of the Issuer or was acquired by the Issuer); provided, however, that on the date of such acquisition and after giving effect thereto, as if such acquisition had occurred, the Issuer would have been entitled to incur at least US$1.00 of additional Indebtedness pursuant to Condition 4.2.1;
(k) Indebtedness of either the Issuer, the Guarantor or any Subsidiary of the Issuer consisting of guarantees of Indebtedness of either the Issuer, the Guarantor or any Subsidiary incurred under Condition 4.2.1 or any other paragraph of this definition;
(l) Indebtedness arising from the honouring by a bank or other financial institution of a cheque, draft or similar instrument inadvertently drawn against insufficient funds in the ordinary course of business; provided, however, that such Indebtedness is extinguished within five Business Days of its incurrence;
(m) Indebtedness arising from agreements of the Issuer or a Subsidiary of the Issuer providing for indemnification, adjustment of purchase price or similar obligations, in each case, incurred or assumed in connection with the acquisition or disposition of any business, assets or Capital Stock of the Issuer or any Subsidiary of the Issuer; provided that (A) the maximum aggregate liability in respect of all such Indebtedness shall at no time exceed the net proceeds (including the Fair Market Value of non-cash consideration) actually received by (or held in escrow as a collateral for such Indebtedness for later release to) the Issuer and its Subsidiaries in connection with such disposition (without giving effect to any subsequent changes in value) and (B) such Indebtedness is not reflected on the balance sheet of the Issuer or any Subsidiary of the Issuer (contingent obligations referred to in a footnote to financial statements and not otherwise reflected on the balance sheet shall not be deemed to be reflected on such balance sheet for the purposes of this part (B));
(n) Indebtedness under any export credit facility existing on the Issue Date incurred to finance the acquisition by the Issuer or a Subsidiary of the Issuer of an asset, including construction, additions and improvements, in the ordinary course of business (including the cost of design, development, construction, acquisition, transportation, installation, improvement and migration of assets); provided, however, that (A) any Lien arising in connection with any such Indebtedness shall be limited to the specific asset being financed or, in the case of real property or fixtures, including additions and improvements, the real property on which such assets is attached, and (B) the aggregate principal amount of such Indebtedness at any one time outstanding shall not exceed (x) the Fair Market Value of the acquired or constructed asset or improvement so financed or (y) in the case of an uncompleted constructed asset, the amount of the asset to be constructed, as determined on the date the contract for construction of such asset was entered into by the Issuer or the relevant Subsidiary of the Issuer (including, in each case, any related premiums, fees, expenses and taxes incurred in connection with such acquisition, construction or development);
(o) in addition to the items referred to in paragraphs (a) to (n), Indebtedness of the Issuer, the Guarantor and the Subsidiaries of the Issuer incurred in an aggregate outstanding principal amount which, when taken together with the principal amount of all other Indebtedness incurred pursuant to this paragraph (o) and then outstanding, will not exceed US$200,000,000 at any time outstanding;
188 “Permitted Liens” means:
(a) Liens existing on the Issue Date;
(b) Liens under worker’s compensation laws, unemployment insurance laws, social security benefits or similar legislation, or to secure public or statutory obligations, surety bonds, customs duties, bid, judgmental or appeal bonds and the like, or for the payment of rent, in each case incurred in the ordinary course of business of the Group and not securing Indebtedness;
(c) Liens imposed by law, such as carriers’, vendors’, warehousemen’s and mechanics’ liens, in each case for sums not yet due or being contested in good faith and by appropriate proceedings;
(d) Liens arising by operation of law and in the ordinary course of business of the Group or in respect of taxes, assessments, government charges or claims, including without limitation those in favour of Russian governmental fiscal or customs authorities;
(e) Liens in respect of Taxes or assessments, government charges and similar charges which either are not delinquent or are being contested in good faith by appropriate proceedings for which the Issuer has set aside in its books of account reserves to the extent required by IFRS, as consistently applied;
(f) with respect to any Person, survey exceptions, encumbrances, easement or reservations of, or rights of others, licences, rights of way, sewers, electrical lines, telegraph or telephone lines and other similar purposes, or zone or other restrictions as to the use of real property or Liens incidental to the conduct of the business of such Person or to the ownership of its properties which do not act in the aggregate materially adversely effect the value of the property or materially impair their use in the operation of the business of such Person;
(g) (i) licences or leases or subleases as licensor, lessor or sublessor of any of its property in the ordinary course of business of the Group and (ii) with respect to any leasehold interest where either the Issuer, the Guarantor or any of the Subsidiaries of the Issuer is a lessee, tenant, subtenant or other occupant, mortgages, obligations, liens and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord or sublandlord of such leased real property encumbering such landlord’s or sublandlord’s interest in such leased real property;
(h) any bankers’ Liens in respect of deposit accounts, statutory landlords’ Liens and deposits to secure bids, contracts, leases, and other similar obligations (provided such Liens do not secure obligations constituting Indebtedness and are incurred in the ordinary course of business of the Group), direct debit arrangements, any netting or set-off arrangement entered into by any member of the Group in the normal course of its banking arrangements for the purpose of netting debit and credit balances and judgment Liens not giving rise to a Potential Event of Default or an Event of Default so long as such Lien is adequately bonded and any appropriate legal proceedings that may have been duly initiated for the review of such judgment have not been finally terminated or the period within which such proceedings may be initiated has not expired;
(i) Liens securing Indebtedness permitted to be incurred under Condition 4.2 to finance or refinance the acquisition, construction, purchase or lease of, or repairs, improvements or additions to, property of such Person; provided, however, that the Lien may not extend to any other property (other than property related to the property being financed) owned by such Person or any of its Subsidiaries at the time the Lien is incurred, and the Indebtedness (other than any interest thereon) secured by the Lien may not be incurred more than 180 days after the later of the refinancing, acquisition, lease, completion of construction, repair, improvement, addition or commencement of full operation of the property subject to the Lien;
(j) Liens on property at the time such Person or any of its Subsidiaries acquires such property, including any acquisition by means of a merger or consolidation with or into the Issuer, the Guarantor or any Subsidiary of the Issuer; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such acquisition and provided further, that the Liens may not
189 extend to any other property owned by such Person or any of its Subsidiaries (other than assets and property affixed or appurtenant thereto);
(k) Liens securing Indebtedness or other obligations of either the Issuer, the Guarantor or a Subsidiary of the Issuer in favour of either the Issuer, the Guarantor or a Subsidiary of the Issuer;
(l) Liens securing Hedging Obligations so long as such Hedging Obligations are permitted to be incurred under these Conditions and the related Indebtedness is permitted to be incurred in accordance with these Conditions and such Hedging Obligations are entered into in the ordinary course of business of the Group and are not speculative;
(m) any title transfer or retention of title arrangement entered into by any member of the Group in the ordinary course of its business;
(n) Liens to secure a Refinancing Indebtedness that was secured by a Lien permitted thereunder and that was incurred in accordance with these Conditions; provided that such Liens do not extend to or cover any property or assets of either the Issuer, the Guarantor or any Subsidiary of the Issuer other than assets or property securing the Indebtedness so refinanced;
(o) deposits made by and escrow or similar arrangements to secure obligations or liabilities arising from agreements providing for indemnification, adjustment of purchase price, earnout or other similar obligations, in each case incurred or assumed in connection with the disposition of any assets (to the extent such disposition of assets is permitted hereby);
(p) Liens on assets, income, property or share capital of another Person at the time such other Person is acquired, merged into or consolidated with the Issuer and/or any of its Subsidiaries; provided, however, that such Liens are not created, incurred or assumed in connection with, or in contemplation of, such event and provided further that the Liens may not extend to any other property owned by the Issuer, the Guarantor or a Subsidiary of the Issuer (other than assets and property affixed or appurtenant thereto);
(q) any Liens in respect of, in support of or in connection with Project Financing;
(r) any Lien over any rights, title or interest in, to or under any Product Delivery Contract, including the receivables generated under any such Product Delivery Contract and all other monies and proceeds arising in connection with any such Product Delivery Contract, and any Lien over any bank accounts into which the receivables, monies and proceeds from any such Product Delivery Contract or any cash collateral are paid or transferred (including (i) amounts standing to the credit of such bank accounts and (ii) any rights under any agreements establishing or opening such bank accounts);
(s) a right of set-off, netting, right to combine accounts or any analogous right which any bank or other financial institution may have relating to any credit balance of any member of the Group;
(t) Liens upon, or with respect to, any present or future assets or revenues or any part thereof which are created pursuant to any repo or other derivatives transaction;
(u) any Lien created in connection with the raising of any Indebtedness for working capital purposes;
(v) any Liens (other than those contemplated above in paragraphs (a) to or (u) or (w) below) on the property, income, revenue or assets of the Issuer or any of its Subsidiaries securing Indebtedness of the Issuer or such Subsidiaries incurred in an aggregate principal amount at any one time outstanding not to exceed 15 per cent. of Group Total Assets as determined by reference to the most recently available consolidated financial statements of the Group prepared in accordance with the Accounting Standards;
(w) any extension, renewal of or substitution for any Lien permitted by any of the preceding paragraphs, provided, however, that such extension, renewal or replacement shall be no more restrictive in any material respect than the original Lien; with respect to Liens incurred pursuant to this paragraph (w) the principal amount secured has not increased (other than any increase representing costs, fees,
190 expenses or commission associated with such extension, renewal or substitution) and the Liens have not been extended to any additional property or assets (other than proceeds of the property or assets in question);
“Permitted Security Interest” means: (a) any Lien:
(i) existing on the Closing Date; or
(ii) securing Refinancing Indebtedness in respect of Indebtedness existing on the Closing Date, provided that such Liens are limited to all or part of the assets, undertaking, property or revenues that secured the original Indebtedness and that the aggregate principal amount of such Refinancing Indebtedness secured over such assets does not exceed the sum of (x) the aggregate principal amount of the Indebtedness being refinanced; (y) accrued and unpaid interest on such Refinancing Indebtedness and (z) fees, premiums and other costs and expenses incurred in connection with such Refinancing Indebtedness;
(b) any Lien created or existing in respect of Domestic Relevant Indebtedness;
(c) any Lien:
(i) existing on any undertaking, property, assets or revenues of any person at the time such person becomes a Subsidiary of the Issuer or such undertaking property, assets or revenues are acquired by the Issuer or any Subsidiary of the Issuer provided that such Lien was not created in contemplation of such event and that no such Lien shall extend to other undertaking property, assets or revenues of such person or the Group; or
(ii) securing Refinancing Indebtedness in respect of the Indebtedness specified in paragraph (c)(i) above provided that such Liens are limited to all or part of the undertaking, assets, property or revenues that secured the original Indebtedness and that the aggregate principal amount of such Refinancing Indebtedness secured over such assets does not exceed the sum of (x) the aggregate principal amount of the Indebtedness being refinanced; (y) accrued and unpaid interest on such Refinancing Indebtedness and (z) fees, premiums and other costs and expenses incurred in connection with such Refinancing Indebtedness;
(d) any Lien created in respect of Relevant Indebtedness in the form of, or represented by, notes, debentures, bonds or other debt securities exchangeable for or convertible into Treasury Shares or shares in any other company (except a Subsidiary of the Issuer) listed on a stock exchange, including American Depositary Receipts or Global Depositary Receipts (as the case may be) representing rights in respect of such shares;
“Person” means any individual, company, corporation, firm, partnership, joint venture, association, organisation, state or agency of a state or other entity, whether or not having separate legal personality;
“Potential Event of Default” means an event which, with the lapse of time and/or the issue, making or giving of any notice or both, would constitute an Event of Default;
“Product Delivery Contract” means any contract for the sale or delivery of any Commodity, entered into from time to time between the Issuer or any of its Subsidiaries and any other person in the ordinary course of business, the issuer’s or such Subsidiary’s business that is customary in the mining and precious metals industry, including, without limitation, any commission agency contracts, any spot sale contract and any transportation or other contracts related thereto;
“Project Finance Company” means any Person in which the Issuer holds a direct or indirect interest or which is a special purpose vehicle, where such person is established or used for the purposes of undertaking the ownership, acquisition, construction or development of any project whose main source of finance is Project Financing;
191 “Project Financing” means any Indebtedness issued, raised or borrowed by a Project Finance Company to finance the ownership, acquisition, construction, repair, improvement, modification or development of any project if the recourse of the person or persons providing such financing is limited to (a) the project financed, and/or (b) the revenues derived from such project as the main source of repayment for the moneys advanced (it being acknowledged and agreed that equity contribution agreements (and related guaranties), subordinated debt obligations and equity pledges and similar arrangements, in each case, provided by or on behalf of the direct or indirect owners of such project shall not result in such financing being considered recourse to such owners);
“Purchase Money Indebtedness” means Indebtedness (including Capital Lease Obligations) (i) consisting of the deferred purchase price of property, conditional sale obligations, obligations under any title retention agreement, other purchase money obligations and obligations in respect of Indebtedness, in each case where the maturity of such Indebtedness does not exceed the anticipated useful life of the asset being financed, and (ii) incurred (including under an export finance facility) to finance the acquisition by the Issuer, the Guarantor or a Subsidiary of the Issuer of such asset, including construction, additions, repair, refurbishment and improvements, in the ordinary course of business of the Group (including the cost of design, development, construction, acquisition, transportation, installation, improvement and migration of assets); provided, however, that (A) any Lien arising in connection with any such Indebtedness shall be limited to the specific asset being financed or, in the case of real property or fixtures, including additions and improvements, the real property on which such asset is attached, (B) such Indebtedness is incurred within 180 days after such acquisition of such assets and (C) the aggregate principal amount of Purchase Money Indebtedness at any one time outstanding shall not exceed (x) the Fair Market Value of the acquired or constructed asset or improvement so financed or (y) in the case of an uncompleted constructed asset, the amount of the asset to be constructed, as determined on the date the contract for construction of such asset was entered into by the Issue, the Guarantor or the relevant Subsidiary of the Issuer (including, in each case, any reasonable related fees and expenses incurred in connection with such acquisition, construction or development)
“Rate of Interest” means interest in US dollars on the outstanding principal amount of the Notes at the rate of 5.625 per cent. per annum;
“Rating Agencies” means Fitch, Moody’s and Standard & Poor’s or, if any or all of Fitch, Moody’s or Standard & Poor’s shall not provide a publicly available rating on the Notes, an internationally recognised securities rating agency or agencies, as the case may be, selected by the Issuer with the prior written approval of the Trustee, which shall be substituted for Fitch, Moody’s and/or Standard & Poor’s, with respect to the Notes; references to “reasonable” or “reasonably” and similar expressions relating to the Trustee and any exercise of power, opinion, determination or other similar matter shall be construed as meaning reasonable or reasonably (as the case may be) having regard to, and taking into account, the interests of the Noteholders only;
“Refinance” means, in respect of any Indebtedness, to refinance, extend, renew, refund, repay, prepay, purchase, redeem, defease or retire, or to issue other Indebtedness in exchange or replacement for, such Indebtedness. Refinances, Refinanced and Refinancing shall have correlative meanings;
“Refinancing Indebtedness” means Indebtedness that Refinances any Indebtedness of the Issuer, the Guarantor or any Subsidiary of the Issuer existing on the Issue Date or incurred in compliance with these Conditions, including Indebtedness that Refinances Refinancing Indebtedness; provided, however, that:
(a) such Refinancing Indebtedness has a Stated Maturity no earlier than the Stated Maturity of the Indebtedness being Refinanced or earlier provided that the Stated Maturity is later than the Stated Maturity of the Notes;
(b) such Refinancing Indebtedness has an Average Life at the time such Refinancing Indebtedness is incurred that is equal to or greater than the Average Life of the Indebtedness being Refinanced or earlier provided that the Average Life is greater than the Average Life of the Notes;
192 (c) such Refinancing Indebtedness has an aggregate principal amount (or if incurred with original issue discount, an aggregate issue price) that is equal to or less than the aggregate principal amount (or if incurred with original issue discount, the aggregate accreted value) then outstanding (plus all accrued interest and fees and expenses, including any premium and defeasance costs) under the Indebtedness being Refinanced; and
(d) if the Indebtedness being Refinanced is subordinated in right of payment to the Notes and the Guarantee, such Refinancing Indebtedness is subordinated in right of payment to the Notes and the Guarantee at least to the same extent as the Indebtedness being Refinanced;
“Relevant Indebtedness” means any Indebtedness which: (a)(i) is in the form of or represented by any bond, note, debenture stock, loan stock, certificate or other debt instrument (but for the avoidance of doubt, excluding term or revolving loans (whether syndicated or unsyndicated), credit facilities, credit agreements and other similar facilities and evidence of indebtedness under such loans, facilities, credit agreements or similar facilities) which is listed or quoted on any stock exchange or (ii) is in the form of a loan to the Issuer, Guarantor or any of the Material Subsidiaries of the Issuer which is financed by the issuance of any of the foregoing forms of debt in (a)(i) above, where such issuance is by a special purpose company or a bank and the rights to payment of the holders of such forms of debt are limited to payments actually made by either the Issuer, the Guarantor or such Material Subsidiary pursuant to such loan; and (b) in the case of the debt referred to in (a)(i) above or the debt financing a loan referred to in (a)(ii) above, was initially issued and distributed (as to more than 50 per cent. of the original principal amount of such debt) outside the Russian Federation;
“Relevant Jurisdiction” means: (a) in the case of payment by the Issuer, the United Kingdom, Jersey or any political subdivision or any authority thereof or therein having power to tax;
(b) in the case of payments by the Guarantor, the Russian Federation or any political subdivision or any authority thereof or therein having power to tax; or
(c) in any case except in relation to Condition 6.2, any other jurisdiction or any political subdivision or any authority thereof or therein having power to tax in which the Issuer or the Guarantor becomes organised or resident for tax purposes or through which payments are made by it of principal or interest on the Notes or under the Guarantee;
“Restricted Business” has the meaning given to it in Condition 4.8;
“Securities Act” means the U.S. Securities Act of 1933, as amended;
“Standard & Poor’s” means Standard & Poor’s Credit Market Services Europe Limited, any credit rating agency affiliate thereof or any successor to the rating agency business thereof;
“Stated Maturity” means, with respect to any Indebtedness, the date specified in such Indebtedness as the fixed date on which the final payment of principal of such Indebtedness is due and payable, including pursuant to any mandatory redemption provision (but excluding any provision providing for the repurchase or redemption of such Indebtedness at the option of the holder or lender thereof upon the happening of any contingency unless such contingency has occurred);
“Stock Exchange” means the Irish Stock Exchange Limited;
“Subordinated Obligation” means, with respect to a Person, any Indebtedness of such Person (whether outstanding on the Issue Date or thereafter incurred) which is subordinate or junior in right of payment to the Notes or a guarantee of such Person, as the case may be, pursuant to a written agreement to that effect;
“Subsidiary of any specified Person” means any corporation, partnership, joint venture, association or other business or entity, whether existing on the Issue Date or thereafter organised or acquired:
(a) which is controlled directly or indirectly by such Person; and/or
193 (b) which is beneficially owned directly or indirectly for more than 50 per cent. of the issued share capital or similar right of ownership by such Person; and/or (c) of which more than 50 per cent. of the total voting power of the voting stock is held by such Person and/or any Subsidiaries of such Person; and which in each case is required under IFRS to be consolidated in the financial statements of such Person prepared in accordance with IFRS;
“Taxes” means any taxes, duties, assessments or government charges of whatever nature (including interest or penalties thereon) which are now or at any time hereafter imposed, assessed, charged, levied, collected, demanded, withheld or claimed by a Relevant Jurisdiction or any tax authority thereof or therein and the term Taxation shall be construed accordingly;
“Total Debt” means at any time (and without double counting), the aggregate outstanding principal, capital or nominal amount (and any fixed or minimum premium payable on prepayment or redemption) of the Indebtedness of the Group on a consolidated basis at such time;
“Treasury Shares” means any shares in the share capital of the Issuer as may be owned by the Issuer or any Subsidiaries of the Issuer; and
“US Dollar Equivalent” means with respect to any monetary amount in a currency other than US dollars, at any time for determination thereof, the amount of US dollars obtained by converting such foreign currency involved in such computation into US dollars at the spot rate for the purchase of US dollars with the applicable foreign currency as published in The Wall Street Journal in the “Exchange Rates” column under the heading “Currency Trading” or any replacement thereof on the date two Business Days prior to such determination.
194 SUMMARY OF THE PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM
The Global Notes The Notes will be evidenced on issue by (i) in the case of Regulation S Notes, the Regulation S Global Note deposited with, and registered in the name of a nominee for, a common depositary for Euroclear and Clearstream, Luxembourg and (ii) in the case of Rule 144A Notes, the Rule 144A Global Note deposited with a custodian for, and registered in the name of Cede & Co. as nominee of, DTC.
Beneficial interests in the Regulation S Global Note may be held only through Euroclear or Clearstream, Luxembourg. See “– Book-entry Procedures for the Global Notes”. By acquisition of a beneficial interest in the Regulation S Global Note, the purchaser thereof will be deemed to represent, among other things, that it is purchasing the Notes in an “offshore transaction” as such term is defined in Regulation S. See “Transfer Restrictions”. Beneficial interests in the Rule 144A Global Note may be held only through DTC at any time. See “– Book-entry Procedures for the Global Notes”. By acquisition of a beneficial interest in the Rule 144A Global Note, the purchaser thereof will be deemed to represent, among other things, that it is a QIB and that, if in the future it determines to transfer such beneficial interest, it will transfer such interest in accordance with the procedures and restrictions contained in the Paying Agency Agreement. See “Transfer Restrictions”.
Beneficial interests in each Global Note will be subject to certain restrictions on transfer set forth therein and in the Paying Agency Agreement, and with respect to the Rule 144A Global Note, as set forth in Rule 144A, and the Notes will bear the legends set forth thereon regarding such restrictions set forth under “Transfer Restrictions.” A beneficial interest in the Regulation S Global Note may be transferred to a person who takes delivery in the form of an interest in the Rule 144A Global Note, only upon receipt by the Registrar of a written certification (in the form provided in the Paying Agency Agreement) to the effect that the transferor reasonably believes that the transferee is a QIB and that such transaction is in accordance with any applicable securities laws of any state of the United States or any other jurisdiction. Beneficial interests in the Rule 144A Global Note may be transferred to a person who takes delivery in the form of an interest in the Regulation S Global Note only upon receipt by the Registrar of a written certification (in the form provided in the Paying Agency Agreement) from the transferor to the effect that the transfer is being made in accordance with Regulation S.
Any beneficial interest in the Regulation S Global Note that is transferred to a person who takes delivery in the form of an interest in the Rule 144A Global Note will, upon transfer, cease to be an interest in the Regulation S Global Note, and become an interest in the Rule 144A Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in the Rule 144A Global Note for as long as it remains such an interest. Any beneficial interest in the Rule 144A Global Note that is transferred to a person who takes delivery in the form of an interest in the Regulation S Global Note, will, upon transfer, cease to be an interest in the Rule 144A Global Note and become an interest in the Regulation S Global Note and, accordingly, will thereafter be subject to all transfer restrictions and other procedures applicable to beneficial interests in the Regulation S Global Note for so long as it remains such an interest. No service charge will be made for any registration of transfer or exchange of Notes, but the Registrar may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Except in the limited circumstances described below, owners of beneficial interests in Global Notes will not be entitled to receive physical delivery of certificated Notes in definitive form (the “Definitive Notes”). The Notes are not issuable in bearer form.
Amendments to Conditions Each Global Note contains provisions that apply to the Notes that they represent, some of which modify the effect of the Terms and Conditions of the Notes. The following is a summary of those provisions:
195 Payments Payments of principal and interest in respect of Notes evidenced by a Global Note will be made to the person who appears at the relevant time on the register of Noteholders against presentation and (if no further payment falls to be made on it) surrender thereof to or to the order of the Principal Paying Agent, (or to or to the order of such other Paying Agent as shall have been notified to the relevant Noteholders for such purpose). A record of each payment so made will be endorsed in the appropriate schedule to the relevant Global Note, which endorsement will be prima facie evidence that such payment has been made in respect of the relevant Notes.
Notices So long as any Notes are evidenced by a Global Note and such Global Note is held by or on behalf of a clearing system, notices to Noteholders may be given by delivery of the relevant notice to that clearing system for communication by it to entitled account holders in substitution for delivery thereof as required by the Terms and Conditions of such Notes. The Issuer shall also ensure that all notices are duly published (if such publication is required) in a manner which complies with the rules and regulations of any stock exchange or other relevant authority on which the Notes are for the time being listed and/or admitted to trading. Any such notice shall be deemed to have been given on the date of such notice.
Record Date So long as the relevant Global Note is held by or on behalf of a common depositary for Euroclear, Clearstream, Luxembourg, DTC or an Alternative Clearing System, “Record Date” shall mean the Clearing System Business Day before the relevant due date for payment, where “Clearing System Business Day” means a day when Euroclear and Clearstream, Luxembourg is open for business.
Meetings The holder of each Global Note and any proxy appointed by it will be treated as being one person for the purposes of any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders and in any such meeting as having one vote in respect of each US$1,000 in principal amount of Note represented by the Global Notes.
Trustee’s Powers In considering the interests of Noteholders while the relevant Global Note is held on behalf of a clearing system, the Trustee, to the extent it considers it appropriate to do so in the circumstances, may have regard to any information provided to it by such clearing system or its operator as to the identity (either individually or by category) of its accountholders with entitlements to such Global Note and may consider such interests as if such accountholders were the holders of such Global Note.
Exchange for Definitive Notes Exchange Each Global Note will be exchangeable, free of charge to the holder, in whole but not in part, for Notes in definitive, registered form if: a Global Note is held by or on behalf of (A) DTC, and DTC notifies the Issuer that it is no longer willing or able to discharge properly its responsibilities as depositary with respect to the Global Note or ceases to be a “clearing agency” registered under the Exchange Act or if at any time it is no longer eligible to act as such, and the Issuer is unable to locate a qualified successor within 90 days of receiving notice or becoming aware of such ineligibility on the part of DTC or (B) Euroclear or Clearstream, Luxembourg, and Euroclear or Clearstream, Luxembourg, as the case may be, is closed for business for a continuous period of 14 days (other than by reason of holidays, statutory or otherwise) or announces an intention permanently to cease business or does in fact do so, by the holder giving notice to the Registrar or any Transfer Agent.
The Registrar will not register the transfer of, or exchange of interests in, a Global Note for Definitive Notes for a period of 15 calendar days ending on the date for any payment of principal or interest or on the date of optional redemption in respect of the Notes.
196 “Exchange Date” means a day falling not later than 90 days after that on which the notice requiring exchange is given and on which banks are open for business in the city in which the specified office of the Registrar or the Transfer Agent is located.
Delivery In such circumstances, the relevant Global Note shall be exchanged in full for Definitive Notes and the Issuer will, at the cost of the Issuer (but against such indemnity as the Registrar or any relevant Transfer Agent may require in respect of any tax or other duty of whatever nature which may be levied or imposed in connection with such exchange), cause sufficient Definitive Notes to be executed and delivered to the Registrar for completion, authentication and dispatch to the relevant Noteholders. A person having an interest in a Global Note must provide the Registrar with (a) a written order containing instructions and such other information as the Issuer and the Registrar may require to complete, execute and deliver such Notes and (b) in the case of the Rule 144A Global Note only, a fully completed, signed certification substantially to the effect that the exchanging holder is not transferring its interest at the time of such exchange or, in the case of simultaneous sale pursuant to Rule 144A, a certification that the transfer is being made in compliance with the provisions of Rule 144A to a QIB. Definitive Notes issued in exchange for a beneficial interest in the Rule 144A Global Note shall bear the legend applicable to transfers pursuant to Rule 144A, as set out under “Transfer Restrictions”.
Legends The holder of a Definitive Note may transfer the Notes evidenced thereby in whole or in part in the applicable minimum denomination by surrendering it at the specified office of the Registrar or any Transfer Agent, together with the completed form of transfer thereon. Upon the transfer, exchange or replacement of a Rule 144A Definitive Note bearing the legend referred to under “Transfer Restrictions”, or upon specific request for removal of the legend on a Rule 144A Definitive Note, the Issuer will deliver only Rule 144A Definitive Notes that bear such legend, or will refuse to remove such legend, as the case may be, unless there is delivered to the Issuer and the Registrar such satisfactory evidence, which may include an opinion of counsel, as may reasonably be required by the Issuer that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act.
Book-Entry Procedures for the Global Notes For each series of Notes evidenced by both the Regulation S Global Note and the Rule 144A Global Note, custodial and depositary links are to be established between DTC, Euroclear and Clearstream, Luxembourg to facilitate the initial issue of the Notes and cross-market transfers of the Notes associated with secondary market trading. See “– Settlement and Transfer of Notes”.
Euroclear and Clearstream, Luxembourg The Regulation S Global Note representing the Regulation S Notes will have an ISIN, Common Code CUSIP number and CFI and will be registered in the name of a nominee for, and deposited with a common depositary on behalf of, Euroclear and Clearstream, Luxembourg.
Euroclear and Clearstream, Luxembourg each hold securities for their customers and facilitate the clearance and settlement of securities transactions through electronic book-entry transfer between their respective accountholders. Indirect access to Euroclear and Clearstream, Luxembourg is available to other institutions which clear through or maintain a custodial relationship with an accountholder of either system. Euroclear and Clearstream, Luxembourg provide various services including safekeeping, administration, clearance and settlement of internationally-traded securities and securities lending and borrowing. Euroclear and Clearstream, Luxembourg also deal with domestic securities markets in several countries through established depository and custodial relationships. Euroclear and Clearstream, Luxembourg have established an electronic bridge between their two systems across which their respective customers may settle trades with each other. Their customers are worldwide financial institutions including underwriters, securities brokers and dealers, banks, trust companies and clearing corporations. Investors may hold their interests in such Global Notes directly through Euroclear or Clearstream, Luxembourg if they are accountholders (“Direct
197 Participants”) or indirectly (“Indirect Participants” and together with Direct Participants, “Participants”) through organisations which are accountholders therein.
DTC The Rule 144A Global Note representing the Rule 144A Notes will have an ISIN, Common Code and CUSIP number and will be deposited with a custodian for, and registered in the name of Cede & Co. as nominee of, DTC. The Custodian and DTC will electronically record the principal amount of the Notes held within the DTC System.
DTC has advised the Issuer as follows: DTC is a limited purpose trust company organised under the laws of the State of New York, a “banking organisation” under the laws of the State of New York, a member of the U.S. Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial code and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities for its Participants and facilitate the clearance and settlement of securities transactions between Participants through electronic computerised book-entry changes in accounts of its Participants, thereby eliminating the need for physical movement of certificates. Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organisations. Indirect access to DTC is available to others, such as banks, securities brokers, dealers and trust companies, which clear through or maintain a custodial relationship with a DTC Direct Participant, either directly or indirectly.
Investors may hold their interests in the Rule 144A Global Note directly through DTC if they are Direct Participants in the DTC system, or as Indirect Participants through organisations which are Direct Participants in such system.
DTC has advised the Issuer that it will take any action permitted to be taken by a holder of Notes only at the direction of one or more Direct Participants and only in respect of such portion of the aggregate principal amount of the Rule 144A Global Note as to which such Participant or Participants has or have given such direction. However, in the circumstances described under “Exchange for Definitive Notes”, DTC will surrender the Rule 144A Global Note for exchange for individual Rule 144A Definitive Notes (which will bear the legend applicable to transfers pursuant to Rule 144A).
Relationship of Participants with Clearing Systems Each of the persons shown in the records of Euroclear, Clearstream, Luxembourg or DTC as the holder of a note evidenced by a Global Note must look solely to Euroclear, Clearstream, Luxembourg or DTC (as the case may be) for his share of each payment made by the Issuer to the holder of such Global Note and in relation to all other rights arising under the Global Note, subject to and in accordance with the respective rules and procedures of Euroclear, Clearstream, Luxembourg or DTC (as the case may be). The Issuer expects that, upon receipt of any payment in respect of Notes evidenced by a Global Note, the common depositary by whom such note is held, or nominee in whose name it is registered, will immediately credit the relevant participants’ or accountholders’ accounts in the relevant clearing system with payments in amounts proportionate to their respective beneficial interests in the principal amount of the relevant Global Note as shown on the records of the relevant clearing system or its nominee. The Issuer also expects that payments by Direct Participants in any clearing system to owners of beneficial interests in any Global Note held through such Direct Participants in any clearing system will be governed by standing instructions and customary practices. Save as aforesaid, such persons shall have no claim directly against the Issuer in respect of payments due on the Notes for so long as the Notes are evidenced by such Global Note and the obligations of the Issuer will be discharged by payment to the registered holder, as the case may be, of such Global Note in respect of each amount so paid. None of the Issuer, the Trustee or any Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of ownership interests in any Global Note or for maintaining, supervising or reviewing any records relating to such ownership interests.
198 Settlement and Transfer of Notes Subject to the rules and procedures of each applicable clearing system, purchases of Notes held within a clearing system must be made by or through Direct Participants, which will receive a credit for such Notes on the clearing system’s records. The ownership interest of each actual purchaser of each such note (the “Beneficial Owner”) will in turn be recorded on the Direct and Indirect Participants’ records. Beneficial Owners will not receive written confirmation from any clearing system of their purchase, but Beneficial Owners are expected to receive written confirmations providing details of the transaction, as well as periodic statements of their holdings, from the Direct or Indirect Participant through which such Beneficial Owner entered into the transaction.
Transfers of ownership interests in Notes held within the clearing system will be affected by entries made on the books of Participants acting on behalf of Beneficial Owners. Beneficial Owners will not receive certificates representing their ownership interests in such Notes, unless and until interests in any Global Note held within a clearing system are exchanged for Definitive Notes.
No clearing system has knowledge of the actual Beneficial Owners of the Notes held within such clearing system and their records will reflect only the identity of the Direct Participants to whose accounts such Notes are credited, which may or may not be the Beneficial Owners. The Participants will remain responsible for keeping account of their holdings on behalf of their customers. Conveyance of notices and other communications by the clearing systems to Direct Participants, by Direct Participants to Indirect Participants, and by Direct Participants and Indirect Participants to Beneficial Owners will be governed by arrangements among them, subject to any statutory or regulatory requirements as may be in effect from time to time.
The laws of some jurisdictions may require that certain persons take physical delivery in definitive form of securities. Consequently, the ability to transfer interests in a Global Note to such persons may be limited. Because DTC can only act on behalf of Direct Participants, who in turn act on behalf of Indirect Participants, the ability of a person having an interest in the Rule 144A Global Note to pledge such interest to persons or entities that do not participate in DTC, or otherwise take actions in respect of such interest, may be affected by a lack of physical certificate in respect of such interest.
Trading between Euroclear and/or Clearstream, Luxembourg Participants Secondary market sales of book-entry interests in the Notes held through Euroclear or Clearstream, Luxembourg to purchasers of book-entry interests in the Notes held through Euroclear or Clearstream, Luxembourg will be conducted in accordance with the normal rules and operating procedures of Euroclear and Clearstream, Luxembourg and will be settled using the procedures applicable to conventional Eurobonds.
Trading between DTC Participants Secondary market sales of book-entry interests in the Notes between DTC participants will occur in the ordinary way in accordance with DTC rules and will be settled using the procedures applicable to United States corporate debt obligations in DTC’s Same-Day Funds Settlement system in same-day funds, if payment is effected in U.S. dollars. Where payment is not effected in U.S. dollars, separate payment arrangements outside DTC are required to be made between the DTC participants.
Trading between DTC seller and Euroclear/Clearstream, Luxembourg purchaser When book-entry interests in Notes are to be transferred from the account of a DTC participant holding a beneficial interest in the Rule 144A Global Note to the account of a Euroclear or Clearstream, Luxembourg accountholder wishing to purchase a beneficial interest in the Regulation S Global Note, as the case may be (subject to the certification procedures provided in the Paying Agency Agreement), the DTC participant will deliver instructions for delivery to the relevant Euroclear or Clearstream, Luxembourg accountholder to DTC by 12 noon, New York time, on the settlement date. Separate payment arrangements are required to be made between the DTC participant and the relevant Euroclear or Clearstream, Luxembourg participant. On the settlement date, the custodian of the relevant Rule 144A Global Note will instruct the Registrar to
199 (i) decrease the amount of Notes registered in the name of Cede & Co. and evidenced by such Rule 144A Global Note of the relevant class and (ii) increase the amount of Notes registered in the name of the nominee of the common depositary for Euroclear and Clearstream, Luxembourg and evidenced by the relevant Regulation S Global Note. Book-entry interests will be delivered free of payment to Euroclear or Clearstream, Luxembourg, as the case may be, for credit to the relevant accountholder on the first business day following the settlement date.
Trading between Euroclear/Clearstream, Luxembourg seller and DTC purchaser When book-entry interests in the Notes are to be transferred from the account of a Euroclear or Clearstream, Luxembourg accountholder to the account of a DTC participant wishing to purchase a beneficial interest in the Rule 144A Global Note (subject to the certification procedures provided in the Paying Agency Agreement), the Euroclear or Clearstream, Luxembourg participant must send to Euroclear or Clearstream, Luxembourg delivery free of payment instructions by 7.45 p.m., Brussels or Luxembourg time, one business day prior to the settlement date. Euroclear or Clearstream, Luxembourg, as the case may be, will in turn transmit appropriate instructions to the common depositary for Euroclear and Clearstream, Luxembourg and the Registrar to arrange delivery to the DTC participant on the settlement date. Separate payment arrangements are required to be made between the DTC participant and the relevant Euroclear or Clearstream, Luxembourg accountholder, as the case may be. On the settlement date, the common depositary for Euroclear and Clearstream, Luxembourg will (a) transmit appropriate instructions to the custodian of the Rule 144A Global Note who will in turn deliver such book-entry interests in the Notes free of payment to the relevant account of the DTC participant and (b) instruct the Registrar to (i) decrease the amount of Notes registered in the name of the nominee of the common depositary for Euroclear and Clearstream, Luxembourg and evidenced by the relevant Regulation S Global Note; and (ii) increase the amount of Notes registered in the name of Cede & Co. and evidenced by the Rule 144A Global Note.
Although Euroclear, Clearstream, Luxembourg and DTC have agreed to the foregoing procedures in order to facilitate transfers of beneficial interest in Global Notes among participants and accountholders of Euroclear, Clearstream, Luxembourg and DTC, they are under no obligation to perform or continue to perform such procedure, and such procedures may be discontinued at any time. None of the Issuer, the Guarantor, the Trustee nor any Agent will have the responsibility for the performance by Euroclear, Clearstream, Luxembourg or DTC or their respective Direct or Indirect Participants of their respective obligations under the rules and procedures governing their operations.
Pre-issue Trades Settlement It is expected that delivery of Notes will be made against payment therefor on the Closing Date thereof, which could be more than three business days following the date of pricing. Under Rule 15c6-l under the Exchange Act, trades in the United States secondary market generally are required to settle within three business days (T+3), unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade Notes in the United States on the date of pricing or the next succeeding business days until three days prior to the relevant Closing Date will be required, by virtue of the fact the Notes initially will settle beyond T+3, to specify an alternate settlement cycle at the time of any such trade to prevent a failed settlement. Settlement procedures in other countries will vary. Purchasers of Notes may be affected by such local settlement practices, and purchasers of Notes between the relevant date of pricing and the relevant Closing Date should consult their own advisors.
200 CERTAIN ERISA CONSIDERATIONS
This Prospectus was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax law. This Prospectus was written to support the promotion or marketing of the Notes.
ERISA imposes fiduciary standards and certain other requirements on employee benefit plans subject thereto (collectively “ERISA Plans”), including collective investment funds, separate accounts, and other entities or accounts whose underlying assets are treated as assets of such plans pursuant to the U.S. Department of Labor “plan assets” regulation, 29 CFR Section 2510.3-101 (as modified by Section 3(42) of ERISA, the “Plan Asset Regulation”) and on those persons who are fiduciaries with respect to ERISA Plans.
Section 406 of ERISA and Section 4975 of the Internal Revenue Code of 1986 (the “Code”) prohibit certain transactions involving the assets of an ERISA Plan (as well as those plans that are not subject to ERISA but which are subject to Section 4975 of the Code (together with ERISA Plans, “Plans”)) and certain persons (referred to as “parties in interest” or “disqualified persons”) having certain relationships to such Plans, unless a statutory or administrative exemption applies to the transaction. In particular, an extension of credit between a Plan and a “party in interest” or “disqualified person” may constitute a prohibited transaction. A party in interest or disqualified person who engages in a prohibited transaction may be subject to excise taxes or other liabilities under ERISA and the Code.
The Company or the Trustee, directly or through affiliates, may be considered a party in interest or disqualified person with respect to many Plans. Prohibited transactions within the meaning of Section 406 of ERISA or Section 4975 of the Code may arise if the Notes are acquired by a Plan with respect to which the Company or the Trustee or any of their respective affiliates is a party in interest or a disqualified person, unless the Notes are acquired pursuant to and in accordance with an applicable exemption. Certain exemptions from the prohibited transaction provisions of Section 406 of ERISA and Section 4975 of the Code may apply depending in part on the type of Plan fiduciary making the decision to acquire a Note and the circumstances under which that decision is made.
While not subject to ERISA, the Code or the Plan Assets Regulation, a governmental, church or non U.S. plan may be subject to federal, state, local, non U.S. or other laws or regulations that are substantially similar to the prohibited transaction provisions of ERISA or section 4975 of the Code (“Similar Laws”).
BY ITS ACQUISITION OR ACCEPTANCE HEREOF OR ANY INTEREST HEREIN, THE HOLDER HEREOF OR OF SUCH INTEREST REPRESENTS THAT (1) EITHER (A) NO ASSETS OF (I) AN EMPLOYEE BENEFIT PLAN SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), (II) A PLAN DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”), (III) AN ENTITY WHOSE UNDERLYING ASSETS ARE DEEMED TO INCLUDE ASSETS OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN, OR (IV) A NON-U.S., GOVERNMENTAL OR CHURCH PLAN THAT IS SUBJECT TO ANY U.S. FEDERAL, STATE, LOCAL OR NON-U.S. LAW OR REGULATION THAT IS SUBSTANTIALLY SIMILAR TO SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE (“SIMILAR LAW”), HAVE BEEN USED TO PURCHASE THIS NOTE OR ANY INTEREST HEREIN, OR (B) THE PURCHASE AND HOLDING OF THIS NOTE OR ANY INTEREST HEREIN BY THE HOLDER IS EXEMPT FROM THE PROHIBITED TRANSACTION RESTRICTIONS OF ERISA AND THE CODE OR ANY PROVISION OF SIMILAR LAW PURSUANT TO ONE OR MORE PROHIBITED TRANSACTION STATUTORY OR ADMINISTRATIVE EXEMPTIONS, AND (2) IT WILL NOT SELL OR OTHERWISE TRANSFER THE NOTES OR ANY INTEREST HEREIN OTHERWISE THAN TO A PURCHASER OR TRANSFEREE THAT IS DEEMED TO MAKE THESE SAME REPRESENTATIONS, WARRANTIES AND AGREEMENTS WITH RESPECT TO ITS PURCHASE, HOLDING AND DISPOSITION OF THE NOTES.
201 TRANSFER RESTRICTIONS
Because of the following restrictions, you are advised to consult legal counsel prior to making any offer, resale or other transfer of the Notes offered hereby.
Each purchaser of the Securities within the United States pursuant to Rule 144A, by accepting delivery of this Prospectus, will be deemed to have represented, agreed and acknowledged that:
(a) (i) it is a QIB, (ii) it is not a participant-directed employee plan, such as a 401(k) plan, (iii) it is holding this note for its own account or for the account of another QIB, (iv) it was not formed for the purpose of investing in the Issuer or this Note, (v) it, and each account for which it holds Notes, will hold and transfer at least US$200,000 in principal amount of Notes, (vi) it understands that the Issuer may receive a list of participants holdings positions in its securities from one or more book-entry depositories, and (vii) it will provide notice of the foregoing transfer restrictions to its subsequent transferees.
(b) It understands that such Securities have not been and will not be registered under the Securities Act and may not be offered, sold, pledged or otherwise transferred except (i) in accordance with Rule 144A to a person that it and any person acting on its behalf reasonably believe is a QIB purchasing for its own account or the account of another QIB; (ii) in an offshore transaction in accordance with Rule 903 or Rule 904 of Regulation S; (iii) pursuant to Rule 144 under the Securities Act (if available); or (iv) pursuant to any other available exemption from the registration requirements of the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States.
(c) It acknowledges that the Securities offered and sold hereby in the manner set forth in paragraph (a) are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, are being offered and sold in a transaction not involving any public offering in the United States within the meaning of the Securities Act and that no representation is made as to the availability of the exemption provided by Rule 144 for resales of such Notes.
(d) It understands that any offer, sale, pledge or other transfer of the Securities made other than in compliance with the above-stated restrictions may not be recognised by the Issuer.
(e) It understands that such Securities, unless otherwise agreed between the Issuer, the Guarantor and the Trustee in accordance with applicable law, will bear a legend to the following effect:
THIS NOTE AND THE GUARANTEE IN RESPECT HEREOF HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933 (THE “SECURITIES ACT”) OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION OF THE UNITED STATES AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (1) IN ACCORDANCE WITH RULE 144A UNDER THE SECURITIES ACT (“RULE 144A”) TO A PERSON THAT THE HOLDER AND ANY PERSON ACTING ON ITS BEHALF REASONABLY BELIEVE IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A (A “QIB”) PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QIB WHOM THE HOLDER HAS INFORMED, IN EACH CASE, THAT SUCH OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A UNDER THE SECURITIES ACT, OR (2) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT (“REGULATION S”), (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, OR (4) PURSUANT TO ANY OTHER AVAILABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT, AND IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER FROM IT OF THE NOTES IN RESPECT HEREOF OF THE RESALE RESTRICTIONS REFERRED TO ABOVE. TRANSFER IN VIOLATION OF THE FOREGOING WILL BE OF NO FORCE OR EFFECT, WILL BE VOID AB INITIO AND WILL NOT
202 OPERATE TO TRANSFER ANY RIGHTS TO THE TRANSFEREE, NOTWITHSTANDING ANY INSTRUCTIONS TO THE CONTRARY TO THE ISSUER OF THIS NOTE, THE TRUSTEE OR ANY INTERMEDIARY. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALES OF THIS NOTE.
EACH BENEFICIAL OWNER HEREOF REPRESENTS THAT (1) IT IS A QIB; (2) IT IS NOT A PARTICIPANT-DIRECTED EMPLOYEE PLAN, SUCH AS A 401(k) PLAN; (3) IT IS HOLDING THIS NOTE FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER QIB; (4) IT WAS NOT FORMED FOR THE PURPOSE OF INVESTING IN THE ISSUER OR THIS NOTE; (5) IT, AND EACH ACCOUNT FOR WHICH IT HOLDS NOTES, WILL HOLD AND TRANSFER AT LEAST US$200,000 IN PRINCIPAL AMOUNT OF NOTES; (6) IT UNDERSTANDS THAT THE ISSUER MAY RECEIVE A LIST OF PARTICIPANTS HOLDING POSITIONS IN ITS SECURITIES FROM ONE OR MORE BOOK- ENTRY DEPOSITORIES AND (7) IT WILL PROVIDE NOTICE OF THE FOREGOING TRANSFER RESTRICTIONS TO ITS SUBSEQUENT TRANSFEREES.
BY ITS ACQUISITION OR ACCEPTANCE HEREOF OR ANY INTEREST HEREIN, THE HOLDER HEREOF OR OF SUCH INTEREST REPRESENTS THAT (1) EITHER (A) NO ASSETS OF (I) AN EMPLOYEE BENEFIT PLAN SUBJECT TO TITLE I OF THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED (“ERISA”), (II) A PLAN DESCRIBED IN SECTION 4975(E)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE “CODE”), (III) AN ENTITY WHOSE UNDERLYING ASSETS ARE DEEMED TO INCLUDE ASSETS OF ANY SUCH EMPLOYEE BENEFIT PLAN OR PLAN, OR (IV) A NON-U.S., GOVERNMENTAL OR CHURCH PLAN THAT IS SUBJECT TO ANY U.S. FEDERAL, STATE, LOCAL OR NON-U.S. LAW OR REGULATION THAT IS SUBSTANTIALLY SIMILAR TO SECTION 406 OF ERISA OR SECTION 4975 OF THE CODE (“SIMILAR LAW”), HAVE BEEN USED TO PURCHASE THIS NOTE OR ANY INTEREST HEREIN, OR (B) THE PURCHASE AND HOLDING OF THIS NOTE OR ANY INTEREST HEREIN BY THE HOLDER IS EXEMPT FROM THE PROHIBITED TRANSACTION RESTRICTIONS OF ERISA AND THE CODE OR ANY PROVISION OF SIMILAR LAW PURSUANT TO ONE OR MORE PROHIBITED TRANSACTION STATUTORY OR ADMINISTRATIVE EXEMPTIONS; AND (2) IT WILL NOT SELL OR OTHERWISE TRANSFER ANY NOTE THEREIN TO ANY PERSON WITHOUT FIRST OBTAINING THESE SAME FOREGOING REPRESENTATIONS, WARRANTIES AND COVENANTS FROM THAT PERSON WITH RESPECT TO ITS ACQUISITION, HOLDING AND DISPOSITION OF SUCH NOTE.
BY ACCEPTANCE OF THIS NOTE BEARING THE ABOVE LEGEND, WHETHER UPON ORIGINAL ISSUANCE OR SUBSEQUENT TRANSFER, EACH HOLDER OF THIS NOTE ACKNOWLEDGES THE RESTRICTIONS ON THE TRANSFER OF THIS NOTE SET FORTH ABOVE AND AGREES THAT IT SHALL TRANSFER THIS NOTE ONLY AS PROVIDED HEREIN AND IN THE TRUST DEED.
(f) It understands and acknowledges that its purchase, holding and disposition of the Notes constitutes a representation and agreement by it that at the time of purchase and throughout the period it holds such Notes or any interest therein: (1) either (a) no assets of (i) an employee benefit plan subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), (ii) a plan described in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended (the “Code”), (iii) an entity whose underlying assets are deemed to include assets of any such employee benefit plan or plan, or (iv) a non-U.S., governmental or church plan that is subject to any U.S. federal, state, local or non-U.S. law or regulation that is substantially similar to section 406 of ERISA or section 4975 of the Code (“Similar Law”), have been used to purchase this Note or any interest herein, or (b) the purchase and holding of this Note or any interest herein by the holder is exempt from the prohibited transaction restrictions of ERISA and the Code or any provision of Similar Law pursuant to one or more prohibited transaction statutory or administrative exemptions, and (2) it will not sell or otherwise transfer any note or interest therein to any person without first obtaining these same foregoing representations, warranties and covenants from that person with respect to its acquisition, holding and disposition or such Note.
203 (g) It acknowledges that, prior to any transfer of Securities or of beneficial interests in the Global Notes, the holder of Securities or the holder of beneficial interests in Global Notes, as the case may be, may be required to provide certifications and other documentation relating to the manner of such transfer and submit such certifications and other documentation as provided in this Agreement and the Trust Deed.
(h) If it is acquiring any Securities for the account of one or more QIBs, it represents that it has sole investment discretion with respect to each such account and that it has full power to make (and does make) the foregoing acknowledgments, representations and agreements on behalf of each such account. The Issuer, the Guarantor, the Registrar, the Joint Lead Managers and their respective affiliates, and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and it agrees that, if any of the acknowledgements, representations or agreements deemed to have been made by it by its purchase of Securities pursuant to Rule 144A is no longer accurate, it shall promptly notify the Issuer and the Joint Lead Managers.
(i) It understands that the Notes offered in reliance on Rule l44A will be represented by the Rule 144A Global Note. Before any interest in the Rule 144A Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Regulation S Global Note, it will be required to provide a Transfer Agent with a written certification (in the form provided in the Paying Agency Agreement) as to compliance with applicable securities laws.
Prospective purchasers are hereby notified that the sellers of the Securities may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A.
204 TAXATION
The following is a general description of certain tax laws relating to the Notes and does not purport to be a comprehensive discussion of the tax treatment of the Notes. Prospective investors in the Notes should consult their own tax advisors as to the tax consequences of the purchase, ownership and disposition of the Notes in light of their particular circumstances, including but not limited to the consequences of receipt of interest and sale or redemption of the Notes.
JERSEY The following summary of the anticipated tax treatment in Jersey of the Company and holders of Notes (other than residents of Jersey) is based on Jersey taxation law as it is understood to apply at the date of this document. It does not constitute legal or tax advice. Holders of Notes should consult their professional advisers on the implications of acquiring, buying, holding, selling or otherwise disposing of Notes under the laws of the jurisdictions in which they may be liable to taxation. Holders of Notes should be aware that tax rules and practice and their interpretation may change.
Income Tax The Company Under the Income Tax (Jersey) Law 1961, as amended (the “Jersey Income Tax Law”), the Company will be regarded as either:
(a) not resident in Jersey under Article 123(1) of the Jersey Income Tax Law provided that (and for so long as) it satisfies the conditions set out in that provision, in which case the Company will not (except as noted below) be liable to Jersey income tax; or
(b) resident in Jersey under Article 123C of the Income Tax Law, in which case the Company (being neither a financial services company nor a specified utility company under the Jersey Income Tax Law at the date hereof) will (except as noted below) be subject to Jersey income tax at a rate of 0 per cent.
The Company conducts its affairs so as to fall within paragraph (a) above.
If the Company derives any income from the ownership or disposal of land in Jersey or the importation and supply of hydrocarbon oil into Jersey, such income will be subject to tax at the rate of 20 per cent. It is not expected that the Company will derive any such income.
Holders of Notes The Company will be entitled to make payments in respect of the Notes without any withholding or deduction for or on account of Jersey income tax (however, please see the section below entitled “Retention tax in Jersey” in relation to payments made by a paying agent established in Jersey). Holders of Notes (other than residents of Jersey) will not be subject to any tax in Jersey in respect of the holding, sale or other disposition of Notes.
Retention tax in Jersey As part of an agreement reached in connection with the European Union directive on the taxation of savings income in the form of interest payments, and in line with steps taken by other relevant third countries, Jersey introduced with effect from 1 July 2005 a retention tax system in respect of payments of interest, or other similar income, made to an individual beneficial owner resident in an EU Member State by a paying agent established in Jersey. The retention tax system applies for a transitional period prior to the implementation of a system of automatic communication to EU Member States of information regarding such payments. During this transitional period, such an individual beneficial owner resident in an EU Member State will be entitled to request a paying agent not to retain tax from such payments but instead to apply a system by which the details of such payments are communicated to the tax authorities of the EU Member State in which the beneficial owner is resident.
205 The retention tax system in Jersey is implemented by means of bilateral agreements with each of the EU Member States, the Taxation (Agreements with European Union Member States) (Jersey) Regulations 2005 and Guidance Notes issued by the Policy & Resources Committee of the States of Jersey. Based on these provisions and our understanding of the current practice of the Jersey tax authorities (and subject to the transitional arrangements described above), the Issuer would not be obliged to levy retention tax in Jersey under these provisions in respect of interest payments made by it to a paying agent established outside Jersey.
Goods and services tax The Company is an “international services entity” for the purposes of the Goods and Services Tax (Jersey) Law 2007 (the “GST Law”). Consequently, the Company is not required to:
(a) register as a taxable person pursuant to the GST Law;
(b) charge goods and services tax in Jersey in respect of any supply made by it; or
(c) subject to limited exceptions that are not expected to apply to the Company, pay goods and services tax in Jersey in respect of any supply made to it.
Stamp duty No stamp duty is payable in Jersey on the issue or inter vivos transfer of Notes.
Upon the death of a holder of Notes, a grant of probate or letters of administration will be required to transfer the Notes of the deceased person to the extent that the Notes are considered moveable estate situated in Jersey, except that where the deceased person was domiciled outside of Jersey at the time of death, the Company may (at its discretion) dispense with this requirement where the value of the deceased’s movable estate in Jersey does not exceed £10,000.
Upon the death of a holder of Notes (and to the extent that the Notes are considered moveable estate situated in Jersey), Jersey stamp duty will be payable on the registration in Jersey of a grant of probate or letters of administration, which will be required in order to transfer or otherwise deal with:
(a) (where the deceased person was domiciled in Jersey at the time of death) the deceased person’s personal estate wherever situated (including any Notes in the Company to the extent that the Notes are considered moveable estate situated in Jersey) if the net value of such personal estate exceeds £10,000; or
(b) (where the deceased person was domiciled outside of Jersey at the time of death) the deceased person’s personal estate situated in Jersey (including any Notes in the Company to the extent that the Notes are considered moveable estate situated in Jersey) if the net value of such personal estate exceeds £10,000.
The rate of stamp duty payable is:
(a) (where the net value of the deceased person’s relevant personal estate does not exceed £100,000) 0.50 per cent. of the net value of the deceased person’s relevant personal estate; or
(b) (where the net value of the deceased person’s relevant personal estate exceeds £100,000) £500 for the first £100,000 plus 0.75 per cent. of the net value of the deceased person’s relevant personal estate which exceeds £100,000.
In addition, application and other fees may be payable.
UNITED KINGDOM The following summary discusses in general terms, based upon UK tax law and published H.M. Revenue & Customs (“HMRC”) practice as of the date hereof, the material UK tax consequences relating to the ownership of the Notes. Such laws may be repealed, revoked or modified and such practice may change, so as to result in UK tax consequences different from those discussed below.
206 Except where noted, the discussion relates only to the position of persons who are the absolute beneficial owners of Notes which are held as investments (and, therefore, not held in connection with any trade) and may not apply to persons in special situations, such as financial institutions, investment funds and trustees and persons who are or become connected with the Issuer other than through their holding of Notes. The discussion does not constitute legal or tax advice and, accordingly, persons considering the purchase, ownership or disposition of Notes should consult their own tax advisers concerning the UK tax consequences in the light of their particular situations as well as any consequences arising under the law of any other relevant tax jurisdiction. No representations with respect to the UK tax consequences to any particular holder of Notes are made in this section.
References in this discussion to Notes owned, held or disposed of by holders of Notes include references to the Book-Entry Interests held by purchasers in the Notes in global form deposited with, and registered in the name of a common depositary for, Euroclear and Clearstream.
Payments on the Notes – Withholding Tax No withholding or deduction on account of UK income tax will be required from payments of principal on the Notes.
Interest on the Notes will generally be paid after deduction of UK income tax at the basic rate (currently 20 per cent.). However, no withholding or deduction of UK income tax at source will be required from payments of interest where:
• the Notes are listed on a “recognised stock exchange” within the meaning of section 1005 of the Income Tax Act 2007 (the Irish Stock Exchange being such a recognised stock exchange for these purposes); or
• the Issuer reasonably believes that the person beneficially entitled to such interest is a company which is:
(a) a company resident in UK; or
(b) a company not resident in the UK which carries on a trade in the UK through a permanent establishment and which brings into account the interest in computing its UK taxable profits; or
(c) a partnership each member of which is a company referred to in (a) or (b) above or a combination of companies referred to in (a) and (b) above,
and HMRC has not given a direction that the interest should be paid under deduction of tax.
For these purposes, the Notes will be regarded as listed on a recognised stock exchange if they are officially listed in the Republic of Ireland in accordance with provisions corresponding to those generally applicable in EEA states and are admitted to trading on the Irish Stock Exchange. Under current HMRC practice, the admission of the Notes to trading on the Main Market of the Irish Stock Exchange fulfils these requirements.
Furthermore, the Issuer may be able, by virtue of the provisions of an applicable double tax treaty, to pay interest on a holding of Notes free of deduction or subject to a reduced rate of deduction. Such a payment may only be made following receipt by the Issuer of a direction from HMRC to pay interest gross or subject to withholding tax at a reduced treaty rate. In the absence of such a direction, a holder of Notes who is entitled to the protection of an applicable double tax treaty may be eligible to recover all or part of any UK tax withheld from payments of interest to which such holder is beneficially entitled by making a claim under the treaty on the appropriate form.
Taxation of Interest and other Returns UK Resident Individuals A holder of Notes who is a UK resident individual for tax purposes will generally be subject to UK income tax at the applicable rate on any interest received on the Notes (grossed up where deduction at source
207 applies), but subject to credit for (or, if no liability arises, repayment of) any UK income tax deducted at source.
UK Resident Corporations In general, a holder of Notes which is a UK resident company will be liable to, or entitled to relief from, UK corporation tax on all profits, gains and losses arising to it from the Notes, generally computed in accordance with UK GAAP or International Accounting Standards. In general, holders of the Notes who are within the charge to UK corporation tax will be subject to a tax on income in respect of all profits, gains and losses on, and fluctuations in value of, the Notes (whether attributable to currency fluctuations or otherwise) measured and recognised in each accounting period broadly in accordance with their statutory accounting treatment.
Non-UK Residents Except for any income tax deducted at source as described above, a holder of Notes who is not resident in the United Kingdom (other than certain trustees) will not be liable or assessable to UK tax on interest received on the Notes, unless that holder carries on a trade, profession or vocation through a UK branch or agency or, in the case of a UK company, a permanent establishment, in connection with which the interest is received or the Notes are held. In certain cases, a UK broker or investment manager is not treated as a UK branch, agency or permanent establishment for these purposes.
If a non-UK resident holder is liable to UK tax on any interest received on the Notes, the holder will receive credit for (and if no liability for UK tax arises, repayment of) any income tax deducted at source.
As noted above, where there is an applicable double tax treaty between the United Kingdom and the country in which the holder of Notes is resident, any liability of the noteholder to UK tax on interest received on the Notes may be reduced or eliminated by the treaty.
Accrued Income Scheme On a transfer of Notes by a holder who is liable to UK income tax, such as a UK resident individual, any interest which has accrued since the last interest payment date may be chargeable to UK income tax as income of that holder.
The accrued income scheme will not, however, generally apply in the case of a holder of Notes who is not resident in the UK, unless that holder carries on a trade through a UK branch or agency in connection with which the Notes are held.
Taxation of Chargeable Gains The Notes should not be treated as “qualifying corporate bonds” within the meaning of section 117 of the Taxation of Chargeable Gains Act 1992 for the purposes of UK capital gains tax (but not corporation tax on chargeable gains). Accordingly, a disposal (including a redemption) of Notes by an individual holder of Notes resident in the UK, or who carries on a trade, profession or vocation in the UK through a branch or agency to which the Note is attributable, may give rise to a chargeable gain or an allowable loss for the purposes of the UK taxation of chargeable gains.
United Kingdom Information Reporting Any paying agent or other person in the United Kingdom through whom interest is paid to, or by whom interest is received on behalf of, a holder of Notes may be required to provide information in relation to the payment (including the amount of the interest) and the holder concerned (including name and address) to HMRC. The Issuer may also be required to provide similar information. These provisions will apply whether or not the interest has been paid subject to withholding or deduction for or on account of United Kingdom income tax and whether or not the holder is resident in the United Kingdom for United Kingdom taxation purposes. In certain circumstances, HMRC may communicate this information to the tax authorities of certain other jurisdictions.
208 Inheritance Tax A gift or transfer at undervalue by a holder of Notes who is an individual of any Notes held by such holder or the death of such a holder may give rise to a liability to UK inheritance tax.
Stamp Duty and Stamp Duty Reserve Tax No UK stamp duty or stamp duty reserve tax will be payable on the issue of the Notes.
EU Savings Directive The EU has adopted a directive (Council Directive 2003/48/EC, the “EU Savings Directive”) regarding the taxation of savings income. The EU Savings Directive requires countries that are member states of the EU to provide the tax authorities of other member states of the EU with the details of payments of interest and other similar income paid by a person established within its jurisdiction (or for the benefit of) to an individual who is the beneficial owner of such interest or other similar income or to certain other persons resident in another Member State, with the exception of Austria and Luxembourg, who are instead required to operate a withholding system for a transitional period unless during such period they elect otherwise (subject to a procedure whereby, on meeting certain conditions, the beneficial owner of the interest or other similar income may request that no tax be withheld). A number of non-EU countries and territories (including Jersey) have adopted measures similar to the EU Savings Directive by either applying the withholding system or the automatic exchange of information procedure. The European Commission has proposed certain amendments to the EU Savings Directive, which may, if implemented, amend or broaden the scope of the requirements described above.
THE RUSSIAN FEDERATION The following is an overview of certain Russian tax considerations relevant to payments under the Guarantee. The overview is based on the laws of the Russian Federation in effect on the date of this Prospectus, which are subject to potential change (possibly with retroactive effect). The overview does not seek to address the applicability of, and procedures in relation to, taxes levied by regions, municipalities or other non-federal authorities of the Russian Federation. Nor does the overview seek to address the availability of double tax treaty relief in respect of the Notes, and it should be noted that there may be practical difficulties, including satisfying certain documentation requirements, involved in claiming double tax treaty relief. Prospective investors should consult their own advisers regarding the tax consequences of investing in the Notes. No representations with respect to the Russian tax consequences of investing, owning or disposing of the Notes to any particular Noteholder is made hereby.
The provisions of the Russian Tax Code applicable to Noteholders and transactions involving the Notes are ambiguous and lack interpretive guidance. Both the substantive provisions of the Russian Tax Code applicable to financial instruments and the interpretation and application of those provisions by the Russian tax authorities may be more inconsistent and subject to more rapid and unpredictable change than in jurisdictions with more developed capital markets or more developed taxation systems. In particular, the interpretation and application of such provisions will in practice rest substantially with local tax inspectorates.
In practice, interpretation by different tax inspectorates may be inconsistent or contradictory and may constitute the imposition of conditions, requirements or restrictions not provided for by the existing legislation. Similarly, in the absence of binding precedents court rulings on tax or related matters by different Russian courts relating to the same or similar circumstances may also be inconsistent or contradictory.
According to the Russian Tax Code, a tax resident is an individual who spent in Russia not less than 183 days within 12 consecutive months (days of medical treatment and education outside of the Russian Federation are also counted as Russian days if the individual departed from the Russian Federation for these purposes for less than six months).
The interpretation of this definition by the Ministry of Finance of the Russian Federation states that for tax withholding purposes an individual’s tax residence status should be determined on the date of income payment (based on the number of Russian days in the 12-month period preceding the date of payment). The
209 individual’s final tax liability in the Russian Federation for the reporting calendar year should be determined based on his/her tax residence status for such calendar year, i.e. based on the number of Russian days in the 12-month period as of the end of such period.
For the purposes of this overview, a “non-resident Noteholder” means (i) an individual Noteholder who has not established a Russian tax residence status for the reporting calendar year as discussed above; or (ii) a legal entity or organisation in each case not organised under Russian law that holds and disposes of the Notes otherwise than through a permanent establishment in Russia.
For the purposes of this overview, a “Russian resident Noteholder” means (i) an individual Noteholder who has established a Russian tax residence status for the reporting calendar year as discussed above; or (ii) a legal entity or organisation which is a Noteholder but is not qualified a non-resident Noteholder as defined in the previous paragraph.
Russian withholding tax Non-Resident Noteholders Payments following enforcement of the Guarantee to be made by the Guarantor to the non-resident Noteholder to the extent relating to interest on the Notes are likely to be characterised as Russian source income. Accordingly, such payments should be subject to withholding tax at a rate of 20 per cent. in the event that a payment under the Guarantee is made to a non-resident Noteholder that is a legal entity or organisation which in each case is not organised under Russian law and which holds the Notes otherwise than through a permanent establishment in Russia, subject to any available double tax treaty relief. In the event a payment under the Guarantee is made to a non resident individual Noteholder, such payment should be subject to withholding tax at a rate of 30 per cent., subject to any available double tax treaty relief.
The Issuer and the Guarantor cannot offer any assurance that: (i) double tax treaty advance relief (or refund of any taxes withheld) will be available for a non resident Noteholder with respect to payments under the Guarantee or (ii) that such withholding tax would not be imposed upon the entire payment under the Guarantee, including with respect to the principal amount of the Notes. The imposition or possibility of imposition this withholding tax could adversely affect the value of the Notes.
If the payments under the Guarantee are subject to any withholding taxes for any reason (as a result of which the Guarantor would reduce the payments to be made under the Guarantee by the amount of such taxes to be withheld), the Guarantor, except in certain circumstances, is required to increase the payments as may be necessary so that the net amounts received in respect of such payments after such withholding or deduction will equal the respective amounts that would have been received in respect of such payments in the absence of such withholding or deduction. As indicated above, it is currently unclear whether the provisions obliging the Guarantor to gross-up payments will be enforceable in the Russian Federation. There is a risk that the tax gross-up for withholding tax will not take place and that the full amount of the payments made by the Guarantor will be subject to reduction by the Russian income tax at a rate of 20 per cent. (or potentially, 30 per cent. in respect of individual Noteholders).
Non resident Noteholders should consult their own tax advisors with respect to the tax consequences of the receipt of payments under the Guarantee, including applicability of any available double tax treaty relief.
Resident Noteholders A Russian resident Noteholder is subject to all applicable Russian taxes and responsible for complying with any documentation requirements that may be established by law or practice in respect of payments to be received by such Noteholder under the Guarantee.
Resident Noteholders should consult their own tax advisers with respect to the tax consequences of the receipt of payments under the Guarantee.
210 Russian VAT The applicable Russian tax law does not establish specific rules for VAT treatment of payments under the Guarantee, the additional tax gross-up amounts, as described above, and the payments under Guarantee attributable to compensation of other expenses.
Based on the analysis of the general provisions of the Russian tax law, payments under the Guarantee attributable to the principal amount or interest under the Notes and the additional tax gross-up amounts, as described above, should likely not be subject to Russian VAT. In turn, the payments under the Guarantee attributable to compensation of other expenses (if any) could be subject to the Russian VAT based on application of the specific ‘place of supply’ rules established by the applicable Russian tax law.
Noteholders should consult their own tax advisers with respect to the Russian VAT consequences of the receipt of payments under the Guarantee.
Tax Treaty Relief Advance Treaty Relief Where payments under the Guarantee are received from a Russian source, in order for the non-resident Noteholders to receive the benefits of an applicable double tax treaty, documentary evidence is required to confirm the applicability of the double tax treaty for which benefits are claimed.
Currently, a non-resident Noteholder that is a legal entity or organisation should present to the payer of income an apostilled or legalised confirmation of its tax residence, attaching a notarised translation in Russian. The confirmation should be presented before any payment is made and should be certified by the competent authority of the country of the Noteholder’s tax residence. Such confirmation is valid for the calendar year in which it is issued.
For non-resident individual Noteholders, procedures for advance treaty clearance are not specifically provided for by current Russian legislation. Therefore, from a practical point of view, it is unlikely that for non-resident individual Noteholders an advance reduction of the Russian withholding income tax or advance exemption from such tax provided by a respective double tax treaty between Russia and the country of the tax residence of such non-resident individual Noteholder could be obtained. Non-resident Noteholders should consult their own tax advisers with respect to the possibilities to enjoy any double tax treaty relief or tax refund and the relevant Russian procedures.
Refund of Tax Withheld For a non-resident Noteholder which is not an individual and for which double tax treaty relief is available, if Russian withholding tax on income was withheld by the source of payment, a refund of such tax is possible within three years from the end of the tax period in which the tax was withheld. In order to obtain a refund, the tax documentation confirming the right of the non-resident recipient of the income to double tax treaty relief is required. However, there could be no assurance that the refund of any taxes withheld or double tax treaties reliefs (as described above) will be available for such non-resident Noteholders which are not individuals.
If non-resident individual Noteholders do not obtain double tax treaty relief at the time the relevant income is paid to such non-resident individual Noteholders and income tax is withheld by a Russian payer of the income, such non-resident individual Noteholders may apply for a refund within one year from the end of the tax period in which the tax was withheld. The documentation requirements to obtain such a refund would include an apostilled or legalised confirmation of the individual’s residence in a state having an effective double tax treaty, and confirmation of the income received and the taxes paid in the country of tax residence of the non-resident individual Noteholders as confirmed by the relevant tax authorities of such countries as well as a notarised translation in Russian. However, there can be no assurance that the refund of any taxes withheld or double tax treaty relief (as described above) will be available for such non-resident individual Noteholders.
211 The Russian tax authorities may, in practice, require a wide variety of documentation confirming the right to benefits under a double tax treaty. Such documentation, in practice, may not be explicitly required by the Russian Tax Code.
Obtaining a refund of Russian tax withheld may be a time consuming process and can involve considerable practical difficulties, including the possibility that a tax refund may be denied for various reasons.
U.S. FEDERAL INCOME TAX CONSIDERATIONS The following is a discussion of certain U.S. federal income tax considerations relating to the purchase, ownership and disposition of the Notes by U.S. Holders (as defined below) that purchase the Notes at their issue price (generally the first price at which a substantial amount of the Notes is sold, excluding sales to bond houses, brokers or similar persons or organisations acting in the capacity of underwriters, placement agents or wholesalers) pursuant to this offering and hold such Notes as capital assets. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury regulations promulgated or proposed thereunder and administrative and judicial interpretations thereof, all as in effect on the date hereof, and all of which are subject to change, possibly with retroactive effect, or to different interpretation. This discussion does not address all of the U.S. federal income tax considerations that may be relevant to specific U.S. Holders in light of their particular circumstances or to U.S. Holders subject to special treatment under U.S. federal income tax law (such as banks, insurance companies, dealers in securities or other U.S. Holders that generally mark their securities to market for U.S. federal income tax purposes, tax-exempt entities, retirement plans, regulated investment companies, real estate investment trusts, certain former citizens or residents of the United States, U.S. Holders that hold a Note as part of a straddle, hedge, conversion or other integrated transaction or U.S. Holders that have a “functional currency” other than the U.S. dollar). This discussion does not address any U.S. state or local or non-U.S. tax considerations or any U.S. federal estate, gift or alternative minimum tax considerations.
As used in this discussion, the term “U.S. Holder” means a beneficial owner of a Note that, for U.S. federal income tax purposes, is (i) an individual who is a citizen or resident of the United States, (ii) a corporation created or organised in or under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate the income of which is subject to U.S. federal income tax regardless of its source or (iv) a trust (x) with respect to which a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions or (y) that has in effect a valid election under applicable U.S. Treasury regulations to be treated as a United States person.
If an entity treated as a partnership for U.S. federal income tax purposes invests in a Note, the U.S. federal income tax considerations relating to such investment will depend in part upon the status and activities of such entity and the particular partner. Any such entity should consult its own tax advisor regarding the U.S. federal income tax considerations applicable to it and its partners relating to the purchase, ownership and disposition of a Note.
PERSONS CONSIDERING AN INVESTMENT IN THE NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE U.S. FEDERAL, STATE AND LOCAL AND NON-U.S. INCOME AND OTHER TAX CONSIDERATIONS RELATING TO THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE NOTES IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
EACH TAXPAYER IS HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF U.S. FEDERAL TAX ISSUES IN THIS PROSPECTUS IS NOT INTENDED OR WRITTEN TO BE USED, AND CANNOT BE USED BY THE TAXPAYER, FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON THE TAXPAYER UNDER U.S. FEDERAL TAX LAW; (B) ANY SUCH DISCUSSION IS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED HEREIN; AND (C) THE TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.
212 Interest In general, interest payable on a Note (without reduction for any Russian or any other non-U.S. tax that may be withheld with respect to such payment) will be taxable to a U.S. Holder as ordinary interest income when it is received or accrued, in accordance with such U.S. Holder’s regular method of accounting for U.S. federal income tax purposes. The Notes are not expected to be issued with more than de minimis original issue discount (“OID”). However, if the Notes are issued with more than de minimis OID, each U.S. Holder generally will be required to include OID in its income as it accrues, regardless of its regular method of accounting for U.S. federal income tax purposes, using a constant yield method, possibly before such U.S. Holder receives any payment attributable to such income. The remainder of this discussion assumes that the Notes are not issued with more than de minimis OID.
Interest income on the Notes generally will be treated as income from sources outside the United States and generally will be categorised for U.S. foreign tax credit purposes as “passive category income” or, in the case of some U.S. Holders, as “general category income.” A U.S. Holder may be eligible to elect to claim a U.S. foreign tax credit against its U.S. federal income tax liability, subject to applicable limitations and holding period requirements, for any Russian or any other non-U.S. income tax that may be withheld from payments in respect of interest on the Notes including any payment made under the Guarantee. A U.S. Holder that does not elect to claim a U.S. foreign tax credit for Russian or any other non-U.S. income tax withheld may instead claim a deduction for such withheld tax, but only for a taxable year in which such U.S. Holder elects to do so with respect to all non-U.S. income taxes paid or accrued in such taxable year. The rules relating to U.S. foreign tax credits are very complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Sale, Exchange, Retirement or Other Disposition of the Notes Upon the sale, exchange, retirement or other disposition of a Note, a U.S. Holder generally will recognize gain or loss in an amount equal to the difference between the amount realised on such sale, exchange, retirement or other disposition (other than any amount attributable to accrued interest, which, if not previously included in such U.S. Holder’s income, will be taxable as interest income to such U.S. Holder) and such U.S. Holder’s adjusted tax basis in such Note. Any gain or loss so recognised generally will be capital gain or loss and will be long-term capital gain or loss if such U.S. Holder has held such Note for more than one year at the time of such sale, exchange, retirement or other disposition. Net long-term capital gain of certain non-corporate U.S. Holders is generally subject to preferential rates of tax. The deductibility of capital losses is subject to limitations. Such gain or loss generally will be from sources within the United States.
Substitution of the Issuer The terms of the Notes provide that in certain circumstances, the obligations of the Issuer under the Notes may be assumed by another entity. If another entity is substituted in place of the Issuer as the obligor under the Notes, such substitution could be treated for U.S. federal income tax purposes as a taxable exchange of the Notes for new notes of the new obligor. As a result of this deemed exchange, a U.S. Holder could be required to recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the issue price of the new notes (as determined for U.S. federal income tax purposes), and the U.S. Holder’s tax basis in the Notes. U.S. Holders should consult their own tax advisors as to the U.S. federal income tax considerations relating to such an event.
Further Issues The Issuer may, without the consent of the Holders of outstanding Notes, issue additional Notes with identical terms. These additional Notes, even if they are treated for non-tax purposes as part of the same series as the original Notes, in some cases may be treated as a separate series for U.S. federal income tax purposes. In such a case, the additional Notes may be considered to have been issued with OID even if the original Notes had no OID, or the additional Notes may have a greater amount of OID than the original Notes. These differences may affect the market value of the original Notes if the additional Notes are not otherwise distinguishable from the original Notes.
213 Medicare Tax Beginning in 2013, in addition to regular U.S. federal income tax, certain U.S. Holders that are individuals, estates or trusts are subject to a 3.8 per cent. tax on all or a portion of their “net investment income,” which may include all or a portion of their interest income and net gain from the disposition of a Note.
Information Reporting and Backup Withholding Under certain circumstances, information reporting and/or backup withholding may apply to a U.S. Holder with respect to payments of principal and interest on, or proceeds from the sale, exchange, retirement or other disposition of, a Note, unless an applicable exemption is satisfied. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability if the required information is furnished by such U.S. Holder on a timely basis to the Internal Revenue Service.
Disclosure Requirements for Specified Foreign Financial Assets Individual U.S. Holders (and certain U.S. entities specified in U.S. Treasury Department guidance) who, during any taxable year, hold any interest in any “specified foreign financial asset” generally will be required to file with their U.S. federal income tax returns certain information on IRS Form 8938 if the aggregate value of all such assets exceeds certain specified amounts. “Specified foreign financial asset” generally includes any financial account maintained with a non-U.S. financial institution and may also include the Notes if they are not held in an account maintained with a financial institution. Substantial penalties may be imposed, and the period of limitations on assessment and collection of U.S. federal income taxes may be extended, in the event of a failure to comply. U.S. Holders should consult their own tax advisors as to the possible application to them of this filing requirement.
214 SUBSCRIPTION AND SALE
J.P. Morgan Securities plc, Société Générale and VTB Capital plc (together, the “Joint Lead Managers”) have, pursuant to a Subscription Agreement dated 25 April 2013, severally and not jointly nor jointly and severally agreed with the Issuer, subject to the satisfaction of certain conditions, to subscribe for the Notes at 5.625 per cent. of their principal amount in the following amounts:
Joint Lead Manager Principal Amount of Notes (US$) J.P.MORGAN SECURITIES PLC 250,000,000 SOCIÉTÉ GÉNÉRALE 250,000,000 VTB CAPITAL PLC 250,000,000
The Issuer, failing whom the Guarantor, has agreed to pay to the Joint Lead Managers a combined management, underwriting and selling commission of 0.25 per cent. of such principal amount. In addition, the Issuer, failing whom the Guarantor, have agreed to reimburse the Joint Lead Managers for certain of their expenses in connection with the issue of the Notes. The Subscription Agreement entitles the Joint Lead Managers to terminate it in certain circumstances prior to payment being made to the Issuer. The Issuer and the Guarantor have in the Subscription Agreement agreed to indemnify the Joint Lead Managers against certain liabilities incurred in connection with the issue of the Notes, including liabilities under the Securities Act.
The Joint Lead Managers and their respective affiliates have performed and expect to perform in the future various financial advisory, investment banking and commercial banking services for, and may arrange loans and other non-public market financing for, and enter into derivative transactions with, the Issuer and its affiliates (including its shareholders and the Guarantor) and for which they will receive customary fees.
Each of the Joint Lead Managers and their respective affiliates may, from time to time, engage in further transactions with, and perform services for, the Issuer and the Group in the ordinary course of their respective businesses.
No Securities Commission Approval The Securities have not been approved or disapproved by the U.S. Securities and Exchange Commission (the “SEC”), any state securities commission in the United States or any other U.S. regulatory authority, nor have any of the foregoing authorities passed upon or endorsed the merits of the offering of the Securities or the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offence in the United States.
General Each Joint Lead Manager, the Issuer and the Guarantor severally and not jointly nor jointly and severally has agreed that it has in all material respects (to the best of its knowledge and belief) complied and will comply with all applicable laws and regulations in each jurisdiction in which it offers, sells or delivers Notes. Each Joint Lead Manager, the Issuer and the Guarantor severally and not jointly nor jointly and severally undertake that it will use its reasonable efforts not to, directly or indirectly, offer or sell any Notes in any country or jurisdiction except under circumstances that will (to the best of its knowledge and belief) result in compliance with any applicable laws and regulations and all offers and sales of Notes by it will be made on the same terms.
United States The Securities have not been and will not be registered under the Securities Act and, subject to certain exceptions, may not be offered or sold within the United States.
The Securities are being offered and sold outside of the United States in reliance on Regulation S. The Subscription Agreement provides that the Joint Lead Managers may directly or through their respective U.S.
215 broker-dealer affiliates arrange for the offer and resale of Securities within the United States only to qualified institutional buyers in reliance on Rule 144A.
In addition, until 40 days after the commencement of the offering of the Securities, an offer or sale of the Securities within the United States by any dealer (whether or not participating in the offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A.
United Kingdom Each Joint Lead Manager severally and not jointly nor jointly and severally has represented, warranted and undertaken that:
(a) Financial promotion: it has only communicated or caused to be communicated, and will only communicate or cause to be communicated, any invitation or inducement to engage in investment activity (within the meaning of section 21 of the Financial Services and Markets Act 2000 (“FSMA”)) received by it in connection with the issue or sale of any Notes in circumstances in which section 21(1) of the FSMA does not apply to the Issuer; and
(b) General compliance: it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
Ireland Each Joint Lead Manager severally and not jointly nor jointly and severally has represented, warranted and undertaken that:
(a) it will not underwrite the issue of, or place the Notes, otherwise than in conformity than with the provisions of the Irish European Communities (Markets in Financial Instruments) Regulations 2007 (Nos. 1 to 3), including, without limitation, Regulations 7 and 152 thereof and any codes of conduct used in connection therewith and the provisions of the Investor Compensation Act 1998;
(b) it will not underwrite the issue of, or place, the Notes, otherwise than in conformity with the provisions of the Irish Central Bank Acts 1942–2010 (as amended) and any codes of conduct rules made under Section 117(1) of the Central Bank Act 1989;
(c) it will not underwrite the issue of, or place, or do anything in Ireland in respect of the Notes otherwise than in conformity with the provisions of the Irish Prospectus (Directive 2003/71/EC) Regulations 2005 and any rules issued under Section 51 of the Irish Investment Funds, Companies and Miscellaneous Provisions Act 2005, by the CBI; and
(d) it will not underwrite the issue of, place or otherwise act in Ireland in respect of the Notes, otherwise than in conformity with the provisions of the Irish Market Abuse (Directive 2003/6/EC) Regulations 2005 and any rules issued under Section 34 of the Irish Investment Funds, Companies and Miscellaneous Provisions Act 2005 by the CBI.
Russian Federation Each of the Joint Lead Managers has agreed that the Notes will not be offered, transferred or sold as part of their initial distribution or at any time thereafter to or for the benefit of any persons (including legal entities) resident, incorporated, established or having their usual residence in the Russian Federation or to any person located within the territory of the Russian Federation unless and to the extent otherwise permitted under Russian Law.
216 INDEPENDENT AUDITORS
The consolidated financial statements of the Group as of and for the year ended 31 December 2012 have been audited by Deloitte LLP of 2 New Street Square London EC4A 3BZ, United Kingdom, independent auditors, as stated in their report appearing herein. Deloitte LLP is a member of the Institute of Chartered Accountants in England and Wales.
The consolidated financial statements of the Group as of and for the year ended 31 December 2011 have been audited by ZAO Deloitte & Touche CIS of 5 Lesnaya St., Moscow, 125047, Russian Federation, independent auditors, as stated in their reports appearing herein. ZAO Deloitte & Touche CIS is a member of the Audit Chamber of Russia (Auditorskaya Palata Rossii).
The consolidated financial statements of the Polyus Russia Group as of and for the year ended 31 December 2010 have been audited by ZAO Deloitte & Touche CIS of 5 Lesnaya St., Moscow, 125047, Russian Federation, independent auditors, as stated in their report appearing therein. The consolidated financial statements of the Polyus Russia Group as of and for the year ended 31 December 2010 are neither included nor incorporated by reference herein. The 2010 Financial Statements are available on the Group’s website at www.polyusgold.com/investors/reports/full_ifrs_financial_reports/.
217 GENERAL INFORMATION
1. The Notes have been accepted for clearance through the facilities of DTC, Euroclear and Clearstream, Luxembourg. For the Regulation S Notes, the International Security Identification Number (ISIN) is XS0922301717 and the Common Code is 092230171. For the Rule 144A Notes, the ISIN is US73180YAA29, the Common Code is 092311686 and the CUSIP number is 73180YAA2. The address of DTC is 55 Water Street, New York, New York 10041-10099, United States of America. The address of Euroclear is Euroclear Bank S.A./N.V., 1 Boulevard du Roi Albert II, B-1210, Brussels and the address of Clearstream, Luxembourg is Clearstream Banking, 42 Avenue JF Kennedy, L-1855, Luxembourg. 2. It is expected that admission of the Notes to trading on the Main Securities Market of the Irish Stock Exchange will be granted on or before 29 April 2013, subject only to the issue of the Notes. Transactions will normally be effected for settlement in US dollars and for delivery on the third business day after the day of the transaction. 3. The Company and the Guarantor have obtained all necessary consents, approvals, authorisations or other orders for the issue of the Notes and the other documents to be entered into by the Company in connection with the issue of the Notes. The issue of the Notes was authorised by a decision of the Board of Directors of the Company on 10 April 2013. 4. The Company was incorporated in Jersey on 26 September 2005 with registered number 91264 under the Jersey Companies Law as a private company limited by shares with the name KazakhGold Group Limited and converted to a public company on 21 November 2005. On 26 July 2011, the Company changed its name to Polyus Gold International Limited. The Company’s legal and commercial name is Polyus Gold International Limited. The Company has its registered offices at Queensway House, Hilgrove Street, St. Helier, Jersey JE1 1ES, Channel Islands. The Company’s London office is Argyll, 18b Charles Street, London W1J 5DU, United Kingdom, telephone +44 (0) 20 3585 3537. 5. The Guarantor is a closed joint stock company organised under the laws of the Russian Federation with the legal name Closed Joint Stock Company “Polyus”. The Guarantor was registered in the Russian Federation on 26 May 1993 with registration number 1022401504740. The Guarantor’s registered address is Ulitsa Belinskogo 2 B, Severo-Eniseyskiy townside, Krasnoyarsk region 663280, Russia. The Guarantor’s principal place of business is 15/1 Tverskoy Boulevard, Moscow 123104, Russian Federation, telephone +7 (495) 641 33 77. 6. The Company is a holding company for its operating and intermediary holding subsidiaries that together (including, without limitation, the Guarantor) comprise the Group. As a holding company, the Company is dependent on its operating subsidiaries for its income. The Guarantor is an indirect subsidiary of the Company and an operating company and a holding company for its operating and intermediary holdings subsidiaries that together comprise the business of the Group. See “Business – Group Structure”. The strategic development of the Group (including, without limitation, the Guarantor) is carried out under the supervision of the Board of Directors of the Company. In particular, the Board is responsible, among other things, for monitoring of the activities of the Group, evaluating business strategies and monitoring their implementation, monitoring the performance of existing assets and new business initiatives, monitoring key performance indicators, monitoring the auditing and control mechanisms, ensuring the management of operational business and financial risk to which the Group is exposed and ensuring continued adherence to disclosure provisions of relevant legislation. The Board considers five out of eight of its members to be independent within the meaning of the UK Corporate Governance Code and the Board regularly reports on an ongoing basis to the shareholders of the Company about the Company’s compliance with the UK Corporate Governance Code. See “Management and Corporate Governance”. In addition, the CEO and member of the Board of Directors of the Company is also the CEO (General Director) of the Guarantor. As a general rule under Russian law, members of boards of directors, as well as CEOs (General Directors) of subsidiary
218 companies are required to act in the best interest of the company and perform their duties with reasonable care and skill and in good faith. 7. The table below shows the directors of the Guarantor. The business address for director of the Guarantor is 15/1 Tverskoy Boulevard, Moscow 123104, Russian Federation.
Year of Name Birth Position –––––––––––––––––––––––– ––––––– ––––––––––––––––––––––––––––––––––––––––––– Mr. German Pikhoya 1970 General Director of the Guarantor Mr. Oleg Ignatov 1969 Chairman of the Board of Directors of CJSC Polyus and Deputy General Director for Economics and Finance of the Guarantor Mr. Ivan Bakulev 1977 General Counsel of the Guarantor Mr. Boris Zakharov 1954 Deputy General Director for Engineering and Innovation of the Guarantor Mr. Alexey Teksler 1973 Managing Director – Head of Krasnoyarsk Business Unit
8. As at and for the year ended 31 December 2012, the EBITDA of the Guarantor and its consolidated subsidiaries accounted for 87 per cent. of the total EBITDA of the Group and its consolidated net assets accounted for 96 per cent. of the total net assets of the Group. As at and for the year ended 31 December 2012, and as at and for the year ended 31 December 2011, on an unaudited basis, the EBITDA of the non-Guarantor subsidiaries of the Company, which do not form part of the Guarantor and its consolidated subsidiaries, accounted for 5 per cent. of the total EBITDA of the Group in 2012 and 6 per cent. of the total EBITDA of the Group in 2011, and their consolidated net liabilities accounted for 4 per cent. of the total net assets of the Group in 2012 and their consolidated net liabilities accounted for 6 per cent. of the total net assets of the Group in 2011. The net liabilities of the non-Guarantor subsidiaries of the Company, which as at 31 December 2012 comprised mainly the KazakhGold Operating Subsidiaries, were due to impairments of property, plant and equipment recognised with respect to assets held by those subsidiaries.
9. Other than with respect to Ms. Kolonchina and Mr. Gorin, who were nominated as Directors pursuant to relationship agreements between the Company and Nafta and Receza Limited and Wamika Trading Limited, respectively, there are no potential conflicts of interest between any duties of the members of the administrative, management or supervisory bodies of the Company towards the Company and their private interests or other duties.
10. There are no potential conflicts of interest between any duties of the members of the administrative, management or supervisory bodies of the Guarantor towards the Guarantor and their private interests or other duties.
11. The estimated expenses associated with the admission to trading on the regulated market of the Irish Stock Exchange of the Notes are expected to be approximately EUR 5,000.
12. Arthur Cox Listing Services Limited is acting solely in its capacity as listing agent for the Issuer in connection with the Notes and is not itself seeking admission of the Notes to the Official List of the Irish Stock Exchange or to trading on its regulated market for the purposes of the Prospectus Directive.
13. Until the maturity date or earlier repayment of the Notes, copies (and certified English translations where documents at issue are not in English) of the following documents may be inspected at and are available in physical form from the principal office of the Company at Argyll, 18b Charles Street, London W1J 5DU, United Kingdom and the offices of the Principal Paying Agent in London at One Canada Square, London E14 5AL, United Kingdom during usual business hours on any business day (Saturdays, Sundays and public holidays excepted):
(a) a copy of this Prospectus, together with any supplement to this Prospectus;
219 (b) the memorandum and articles of association of the Company;
(c) a copy of the charter of the Guarantor (together with an English translation thereof);
(d) the Financial Statements, including the report thereon, of the Group in respect of the financial years ended 31 December 2012, 2011 and 2010; and
(e) the Paying Agency Agreement; and
(f) the Trust Deed, which includes the forms of the Global Certificate and the Certificates.
14. Save as disclosed in the Prospectus, there has been no significant change in the financial or trading position of the Company, the Guarantor or of the Group since 31 December 2012, and there has been no material adverse change in the prospects of the Company, the Guarantor or of the Group since 31 December 2012.
15. There have been no governmental, legal or arbitration proceedings (including any such proceedings which are pending or threatened of which the Company is aware), during the previous 12 months in relation to the Company or the Guarantor, which may have, or have had in the recent past, significant effects on the Company’s, the Guarantor’s and/or the Group’s financial position or profitability.
16. Save for the fees payable to the Joint Lead Managers, the Trustee, the Principal Paying Agent and the Registrar, so far as the Company is aware, no person involved in the issue of the Notes has an interest that is material to the issue of the Notes.
17. The Bank of New York Mellon (Luxembourg) S.A. will act as Registrar in relation to the Notes.
18. BNY Mellon Corporate Trustee Services Limited is a professional trustee company, which is providing its services in relation to the Notes on an arm’s length basis in consideration of a fee. Under the terms of the Trust Deed, the power of appointing new trustees is vested in the Company but a trustee so appointed must in the first place be approved by an Extraordinary Resolution of Noteholders. The Noteholders have the power, exercisable by Extraordinary Resolution, to remove any trustee or trustees. The removal of any trustee is only effective if following the removal there remains a trustee (being a trust corporation) in office after such removal. In addition, BNY Mellon Corporate Trustee Services Limited, or any other trustee duly appointed, may retire at any time upon giving not less than three months’ notice in writing to the Company. The retirement of any trustee is only effective if, following the retirement, there remains a trustee (being a trust corporation) in office after such retirement. If the trustee has given notice of its desire to retire and the Company is unable to procure a new trustee to be appointed and the Company has not by the expiry of such notice (with the prior written consent of the Company appointed a new trustee, the trustee shall have the power of appointing new trustee(s).
19. The Trust Deed provides, among other things, that the Trustee may rely on any certificate or report prepared by accountants pursuant to the Trust Deed (whether or not addressed to the Trustee), notwithstanding whether or not the accountants’ liability in respect thereof is limited by a monetary cap or otherwise.
20. The language of the Prospectus is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.
220 GLOSSARY OF TERMS
Term or expression Meaning —————————————— ——————————————————————————— Bio-leaching Oxidation of sulphide minerals exposed to bacteria in an aqueous environment with metal extraction through desalination BIOX Bio-leaching technology using strains of bacteria, developed by the Group’s specialists
Carbon-in-leach or CIL a process in which carbon is added to the solution following leaching in order to extract gold
Carbon-in-pulp or CIP the recovery process in which gold is first leached from gold ore pulp by cyanide and then absorbed onto activated carbon granules in separate vessels. The loaded carbon is then separated from the pulp for subsequent gold removal by elution cathodic gold the gold product that arises following the processing of mined ore by the CIP and HL methods, which ends with the gold bearing solution being treated by electrolysis. The gold is deposited on the cathodes of the cell, which are then washed to remove the deposited gold, which can be further smelted into doré bars cathodic sludge the gold residue in the electrolysis cell from that part of the solution that is not deposited on the cathodes cut-off grade lowest grade of mineralised material considered economic, used in the calculation of ore resources cyanide leaching a method of extracting exposed gold or silver from crushed or ground ore by dissolving them in a weak cyanide solution. It may be carried out in slurry in tanks or in large heaps of ore deposit the aggregation of a mineral on the surface of the Earth or in the Earth’s crust, suitable in terms of quantity, quality and mode of occurrence for commercial mining flotation a mineral separation process in which valuable mineral particles are induced to become attached to bubbles and float as other particles sink flotation concentrate the product of flotation. The resultant gold concentrate is then filtered to form flotation concentrate free gold gold uncombined with other substances, gold not found in chemical combination with other minerals or gold found largely in placer gold form
FSU Classification the reserves and resources classification system of the former Soviet Union gold doré unrefined gold bullion bars, which will be further refined to almost pure metal (99.9 per cent. gold) grade the quality of metal per unit mass of ore expressed as grams of gold per tonne of ore gravitation gold particles in slurry which are separated based on their specific gravity
221 Term or expression Meaning —————————————— ——————————————————————————— g/t grams per tonne
Heap Leaching or HL an ore processing technology used to process low-grade oxide ores, although it is the lowest-cost method of processing, recovery rates are only approximately 60 per cent. indicated mineral resource as defined in the JORC Code, that part of a mineral resource which has been sampled by drill holes, underground openings or other sampling procedures at locations that are too widely spaced to ensure continuity but close enough to give a reasonable indication of continuity and where geoscientific data are known with a reasonable degree of reliability. An indicated mineral resource will be based on more data and therefore will be more reliable than an inferred mineral resource estimate inferred mineral resource as defined in the JORC Code, is that part of a mineral resource for which the tonnage and grade and mineral content can be estimated with a low level of confidence. It is inferred from the geological evidence and has assumed but not verified geological and/or grade continuity. It is based on information gathered through the appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes which may be limited or of uncertain quality and reliability
JORC Code The 2004 edition of the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves
LBMA The London Bullion Market Association
London fixing spot market price at the moment of delivery measured mineral resource defined in the JORC Code, that part of a measured mineral resource for which the resource has been intersected and tested by drill holes, underground openings or other sampling procedures at locations which are spaced closely enough to confirm continuity and where geoscientific data are reliably known. A measured mineral resource estimate will be based on a substantial amount of reliable data, interpretation and evaluation which allows a clear determination to be made of the shapes, sizes, densities and grades mine an excavation from which valuable materials are recovered mineable portion of a mineralised deposit for which extraction is technically and economically feasible mineral deposit a body of mineralisation that represents a concentration of valuable metals. The limits can be defined by geological contracts or assay cut-off grade criteria mineral reserve under the FSU Classification, the equivalent of the western mineral resource and ore reserve. Mineral reserves are subdivided into A, B, C1 and C2 categories depending on the level of definition and technological study mineral resource a concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such a form that there are reasonable prospects for the eventual economic extraction. The
222 Term or expression Meaning —————————————— ——————————————————————————— location, quantity, grade geological characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological evidence and knowledge. Mineral resources are sub-divided into inferred mineral resources, indicated mineral resources and measured mineral resources open pit a mine that is entirely on the Earth’s surface; also referred to as open-cut or open-cast mine open pit mining extraction of minerals from the Earth’s surface by their removal from an open pit ore natural mineral matter containing metals or metal compounds in quantities and in a form suitable for commercial extraction ore body a distinct naturally occurring agglomeration of ore defined structurally and geologically by a particular element or combination thereof ore reserve according to the JORC Code, the economically mineable part of a measured and/or indicated mineral resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments and studies have been carried out, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could be reasonably justified. Ore reserves are sub-divided in order of increasing confidence into probable ore reserves and proven ore reserves
POX pressure oxidation, an aqueous process for sulphur removal carried out in a continuous autoclave, operating at high pressures and elevated temperatures probable ore reserve according to the JORC Code, the economically mineable part of an indicated and/or measured mineral resource. It is inclusive of diluting materials and allows for losses that may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out, including consideration of, and modification by, realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and government factors. These assessments demonstrate at the time of reporting that extraction is reasonably justified proved ore reserve according to the JORC Code, the economically mineable part of a measured mineral resource. It is estimated with a high level of confidence. It is inclusive of diluting materials and allows for losses that may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out, including consideration of, and modification by, realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and government factors. These assessments demonstrate at the time of reporting that extraction is reasonably justified
223 Term or expression Meaning —————————————— ——————————————————————————— reserves the part of a mineral deposit, extraction of which from the Earth’s crust is economically and legally feasible at the time the reserves are identified stripping activities undertaken to remove waste material and gain access to a specific section of the ore body tailings material that remains after all metals/minerals considered economic have been removed from the ore tonne 1,000 kilogrammes underground mining extraction of minerals from the Earth’s crust using a system of underground mine workings vein a tabular deposit of mineralised rock
224 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS OF POLYUS GOLD INTERNATIONAL LIMITED AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2012 Independent Auditors’ Report* F-3
Consolidated income statement F-6
Consolidated statement of comprehensive income F-7
Consolidated statement of financial position F-8
Consolidated statement of changes in equity F-9
Consolidated statement of cash flows F-10
Notes to the consolidated financial statements F-11
ANNUAL CONSOLIDATED FINANCIAL STATEMENTS OF POLYUS GOLD INTERNATIONAL LIMITED AS AT AND FOR THE YEAR ENDED 31 DECEMBER 2011 Independent Auditors’ Report F-60
Consolidated income statement F-61
Consolidated statement of comprehensive income F-62
Consolidated statement of financial position F-63
Consolidated statement of changes in equity F-64
Consolidated statement of cash flows F-65
Notes to the consolidated financial statements F-66
* Certain references included in the independent auditors’ report for the year ended 31 December 2012 are referring to sections of the Group’s annual report for that year. This annual report is neither included nor incorporated by reference herein. The same statement applies to any other cross-reference included in the annual consolidated financial statements of the Group, which cross- refers to a section not included in the index list above.
F-1
Polyus Gold International Limited
Consolidated financial statements for the year ended 31 December 2012
F-2 F-3 F-4 Polyus Gold International Limited
Consolidated financial statements for the year ended 31 December 2012
Index Page
Consolidated income statement 2
Consolidated statement of comprehensive income 3
Consolidated statement of financial position 4
Consolidated statement of changes in equity 5
Consolidated statement of cash flows 6
Notes to the consolidated financial statements 7-52
F-5
Polyus Gold International Limited
Consolidated income statement for the years ended 31 December (in thousands of US Dollars, except for earnings per share data)
Notes 2012 2011*
Gold sales 7 2,784,499 2,340,650 Other sales 63,606 62,060
Total revenue 2,848,105 2,402,710
Cost of gold sales 8 (1,361,827) (1,143,033) Cost of other sales (45,674) (46,343)
Gross profit 1,440,604 1,213,334
Gain on disposal of subsidiaries 5 6,268 - Selling, general and administrative expenses 9 (267,903) (225,618) Other income / (expenses), net 10 12,803 (24,077) Impairment of property, plant and equipment 14 (17,249) (23,501) Impairment of capital construction-in-progress 15 (19,198) - Impairment of exploration and evaluation assets 16 (338) (54,708) Impairment of stockpiles - (25,209) Gain on loan settlement and sale and purchase agreement termination 25 79,084 - Research expenses (2,079) (2,581)
Operating profit 1,231,992 857,640
Finance costs 11 (34,791) (71,403) Income from investments, net 12 35,960 3,630 Foreign exchange gain / (loss) 4,614 (5,814)
Profit before income tax 1,237,775 784,053
Income tax 13 (257,249) (210,850)
Profit for the year 980,526 573,203
Profit for the year attributable to: Shareholders of the Company 929,679 483,474 Non-controlling interests 50,847 89,729
980,526 573,203
Weighted average number of ordinary shares in issue during the period (‘000s) 2,950,916 2,960,311
Earnings per share (US Cents), basic and diluted1 32 16 ______1 There were no financial instruments or any other instances which could cause antidilutive effect on earnings per share calculation.
______* The comparative information for the year ended 31 December 2011 reflects adjustments made in connection with early application of IFRIC 20 (refer to note 2).
F-6 2 Polyus Gold International Limited
Consolidated statement of comprehensive income for the years ended 31 December (in thousands of US Dollars)
Note 2012 2011*
Profit for the year 980,526 573,203
Available for sale financial assets: Loss from change in fair value of available-for-sale investments (3,976) (8,976) Losses recycled to profit or loss on disposal of available-for-sale investments 12 (581) (17,023)
(4,557) (25,999)
Effect of translation to presentation currency 200,568 (195,632)
Other comprehensive income / (loss) for the year 196,011 (221,631)
Total comprehensive income for the year 1,176,537 351,572
Attributable to: Shareholders of the Company 1,108,189 317,460 Non-controlling interests 68,348 34,112
1,176,537 351,572
______* The comparative information for the year ended 31 December 2011 reflects adjustments made in connection with early application of IFRIC 20 (refer to note 2).
F-7 3 Polyus Gold International Limited
Consolidated statement of financial position at 31 December (in thousands of US Dollars)
Assets Notes 2012 2011*
Non-current assets Property, plant and equipment 14 2,216,637 1,771,107 Capital construction-in-progress 15 623,277 371,668 Exploration and evaluation assets 16 467,269 399,846 Investments in securities and other financial assets 17 16,034 3,643 Inventories 18 242,005 206,801 Other non-current assets - 35
3,565,222 2,753,100
Current assets Investments in securities and other financial assets 17 78,360 63,468 Inventories 18 659,480 539,442 Deferred expenditures 19 19,090 18,512 Trade and other receivables 20 45,369 24,712 Advances paid to suppliers and prepaid expenses 40,619 29,636 Taxes receivable 21 220,835 150,022 Cash and cash equivalents 22 959,932 657,448
2,023,685 1,483,240
Total assets 5,588,907 4,236,340
Equity and liabilities
Capital and reserves Share capital 23 482 482 Additional paid-in capital 23 2,151,765 2,189,240 Treasury shares 23 - (765,013) Investments revaluation reserve - 4,557 Translation reserve (76,684) (259,751) Retained earnings 2,110,869 1,438,992
Equity attributable to shareholders of the Company 4,186,432 2,608,507 Non-controlling interests 282,645 236,029
4,469,077 2,844,536
Non-current liabilities Site restoration and environmental obligations 24 119,150 149,876 Borrowings 25 160,792 123,048 Deferred tax liabilities 26 208,998 184,207 Other non-current liabilities 25,695 24,008
514,635 481,139
Current liabilities Borrowings 25 187,555 675,632 Trade, other payables and accrued expenses 27 289,846 192,077 Taxes payable 28 127,794 42,956
605,195 910,665
Total liabilities 1,119,830 1,391,804
Total equity and liabilities 5,588,907 4,236,340
______* The comparative information as of 31 December 2011 reflects adjustments made in connection with early application of IFRIC 20 (refer to note 2).
F-8 4 Polyus Gold International Limited
Consolidated statement of changes in equity for the years ended 31 December (in thousands of US Dollars)
Number of Equity attributable to shareholders of the Company outstanding Additional Investments Non- shares, Share paid-in Treasury revaluation Translation Retained controlling Notes (thousands) capital capital shares reserve reserve earningsTotal interests Total
Balance at 31 December 2010 3,082,656 519 2,087,978 (626,313) 30,556 (119,736) 1,810,641 3,183,645 56,886 3,240,531
Profit for the year * ------483,474 483,474 89,729 573,203 Other comprehensive loss * - - - - (25,999) (140,015) - (166,014) (55,617) (221,631)
Total comprehensive income * - - - - (25,999) (140,015) 483,474 317,460 34,112 351,572
Effect of reorganisation (312,955) (37) 220,885 (258,323) - - (417,460) (454,935) 417,460 (37,475) Increase of ownership in subsidiary 35,489 - (119,623) 119,623 - - (365,336) (365,336) (223,480) (588,816) Dividends declared to shareholders of the Company 23 ------(72,327) (72,327) - (72,327) Dividends to shareholders of (48,949)
F-9 non-controlling interests ------(48,949)
Balance at 31 December 2011 * 2,805,190 482 2,189,240 (765,013) 4,557 (259,751) 1,438,992 2,608,507 236,029 2,844,536
Profit for the year ------929,679 929,679 50,847 980,526 Other comprehensive income/ (loss) - - - - (4,557) 183,067 - 178,510 17,501 196,011
Total comprehensive income - - - - (4,557) 183,067 929,679 1,108,189 68,348 1,176,537
Dividends declared to shareholders of the Company 23 ------(124,318) (124,318) - (124,318) Sale of treasury shares 23 226,960 - - 727,538 - - (133,484) 594,054 30,318 624,372 Transfer of balance relating to call option 23 - - (37,475) 37,475 ------Dividends declared to shareholders of non-controlling interests ------(52,050) (52,050)
Balance at 31 December 2012 3,032,150 482 2,151,765 - - (76,684) 2,110,869 4,186,432 282,645 4,469,077
______* The comparative information for the year ended 31 December 2011 reflects adjustments made in connection with early application of IFRIC 20 (refer to note 2).
Polyus Gold International Limited
Consolidated statement of cash flows for the years ended 31 December (in thousands of US Dollars)
Notes 2012 2011*
Net cash generated from operating activities 29 991,769 775,588
Investing activities
Proceeds from subsidiaries’ disposal, net of cash disposed 5 20,973 - Proceeds from termination of sale and purchase agreement 25 40,647 - Purchases of property, plant and equipment (750,224) (343,037) Payments for stripping activity asset (81,802) (28,453) Proceeds from sales of property, plant and equipment 2,874 1,911 Interest received 35,942 15,359 Purchases of investments in securities and placement of deposits in banks (58,265) (37,596) Proceeds on sales of investments in securities and redemption of bank deposits 26,066 121,270
Net cash utilised in investing activities (763,789) (270,546)
Financing activities
Acquisition of subsidiary’s shares - (588,816) Proceeds from sale of treasury shares 23 624,372 - Dividends paid to shareholders of the Company 23 (124,318) (73,191) Dividends paid to shareholders of non-controlling interests (47,547) (26,225) Proceeds from borrowings 25 273,467 560,000 Repayment of borrowings 25 (690,002) - Other - (6,726)
Net cash from / (utilised) in financing activities 35,972 (134,958)
Net increase in cash and cash equivalents 263,952 370,084
Cash and cash equivalents at beginning of the year 22 657,448 326,905
Effect of foreign exchange rate changes on cash and cash equivalents 38,532 (39,541)
Cash and cash equivalents at end of the year 22 959,932 657,448
______* The comparative information for the year ended 31 December 2011 reflects adjustments made in connection with early application of IFRIC 20 (refer to note 2).
F-10 6 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
1. General
Polyus Gold International Limited (the “Company”) was incorporated on 26 September 2005 and re- registered as a public limited company under Companies (Jersey) Law 1991 on 18 November 2005.
On 19 June 2012, the Company was admitted to the Official List of the UK Listing Authority and commenced trading on the London Stock Exchange’s premium listed market.
The principal activities of the Company and its controlled entities (the “Group”) are the extraction, refining and sale of gold. Mining and processing facilities of the Group are located in the Krasnoyarsk and Irkutsk regions and Sakha Republic of the Russian Federation and in the Republic of Kazakhstan.
The Group also performs research, exploration and development works, primarily at the Natalka license area located in the Magadan region, Nezhdaninskoye license areas located in the Sakha Republic, Kyrgyzstan and the Republic of Kazakhstan. Further details regarding the nature of the business and of the significant subsidiaries of the Group are presented in note 34.
2. Basis of preparation and presentation
Going concern
In assessing its going concern status, the Directors have taken account of the Group’s financial position, expected future trading performance, its borrowings and available credit facilities and its capital expenditure commitments and plans, considerations of gold price, together with other risks facing the Group. After making appropriate enquiries, the Directors consider that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of these consolidated financial statements and that it is appropriate to adopt the going concern basis in preparing these consolidated financial statements.
Compliance with the International Financial Reporting Standards
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”) as adopted by the European Union (“EU”). IFRS includes the standards and interpretations approved by the IASB including International Accounting Standards (“IAS”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).
Basis of presentation
The entities of the Group maintain their accounting records in accordance with the laws, accounting and reporting regulations of the jurisdiction in which they are incorporated and registered. The accounting principles and financial reporting procedures in these jurisdictions may differ substantially from those generally accepted under IFRS as adopted by the EU. Accordingly, such financial information has been adjusted to ensure that the consolidated financial statements are presented in accordance with IFRS as adopted by the EU.
The consolidated financial statements of the Group are prepared on the historical cost basis, except for mark-to-market valuation of certain financial instruments, in accordance with IAS 39 “Financial Instruments: recognition and measurement”.
Certain reclassifications were performed in the comparative financial information to be consistent with the classification in the reporting year.
F-11 7 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
2. Basis of preparation and presentation (continued)
Standards and interpretations in issue not yet adopted
At the date of approval of the consolidated financial statements, the following new or amended IFRS standards have been issued by the IASB in the year ended 31 December 2012, but are not mandatory for the current reporting period and therefore have not been applied:
Effective for annual periods beginning on or after
IFRS 1 “First-time Adoption of International Financial Reporting Standards” 1 January 2013 IFRS 7 “Financial Instruments: Disclosures” – amendment 1 January 2013 IFRS 10 “Consolidated financial statements” 1 January 2013 IFRS 11 “Joint arrangements” 1 January 2013 IFRS 12 “Disclosure of interests in other entities” 1 January 2013 IFRS 13 “Fair value measurement” 1 January 2013 IAS 19 “Employee benefits” – amendment 1 January 2013 IAS 27 “Separate financial statements” – amendment 1 January 2013 IAS 28 “Investments in associates and joint ventures” - amendment 1 January 2013 IAS 34 “Interim Financial Reporting” – amendment 1 January 2013 IAS 32 “Financial instruments: Presentation” - amendment 1 January 2014 IFRS 9 “Financial Instruments – Classification and Measurement” 1 January 2015
The impact of the adoption of these standards and interpretations in the preparation of the consolidated financial statements in future periods is currently being assessed by Group’s management; however, no material effect on the Group’s financial position or results of its operations is anticipated.
Early adoption of IFRIC 20 and restatement of the comparative figures
Before adoption of IFRIC 20 the Group capitalized stripping costs, using the life-of-mine stripping ratio. If the actual stripping ratio exceeded the expected average life-of-mine stripping ratio, stripping costs related to the stripping in excess of the life-of-mine ratio were deferred and recognised as a separate non-current asset. When the actual stripping ratio was below the expected average life-of- mine ratio, the shortfall in stripping cost to meet the average life-of-mine stripping ratio was expensed.
In 2012, the Company has early adopted IFRIC 20 “Stripping costs in the Production Phase of a Surface mine” to account for costs directly related to its surface mining stripping activity.
IFRIC 20 requires prospective application of the standard to production stripping costs incurred on or after the beginning of the earliest period presented. Deferred stripping costs related to production which existed at the beginning of the earliest period presented are recognised and amortised on the same basis as new stripping activity asset could be identified with a remaining component of an ore body. If such balances could not be identified with a remaining component of the ore body that was made more accessible by the stripping activity, the asset was reduced and recognised as an adjustment to opening retained earnings.
The adoption of IFRIC 20 has not resulted in the write down of previously recognised deferred stripping cost balance as at 1 January 2011.
F-12 8 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
2. Basis of preparation and presentation (continued)
The reconciliation of the previously reported and adjusted components of the consolidated financial statements as of and for the year ended 31 December 2011 is as follows:
31 December 2011 as previously reported adjustments as restated Consolidated statement of financial position
Assets Property, plant and equipment 1,684,749 86,358 1,771,107 Deferred stripping costs 64,460 (64,460) - Inventories, non-current 207,789 (988) 206,801 Inventories, current 543,023 (3,581) 539,442
Equity and liabilities Translation reserve (258,426) (1,325) (259,751) Retained earnings 1,424,516 14,476 1,438,992 Non-controlling interests 235,317 712 236,029 Deferred tax liabilities 180,741 3,466 184,207
Consolidated income statement for the year ended Cost of gold sales (1,162,019) 18,986 (1,143,033) Income tax (207,052) (3,798) (210,850)
Consolidated statement of comprehensive income for the year ended Effect of translation to presentation currency (194,307) (1,325) (195,632)
Total comprehensive income for the year attributable to Shareholders of the Company 468,998 14,476 483,474 Non-controlling interests 89,017 712 89,729
Consolidated statement of cash flows for the year ended
Operating activities Profit before income tax 765,067 18,986 784,053 Adjustments for: Amortisation and depreciation 187,949 2,132 190,081 Expensed stripping costs 10,935 (10,935) -
Investing activities Payments for stripping activity asset (18,270) (10,183) (28,453)
F-13 9 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies
3.1 Basis of consolidation
Subsidiaries
The consolidated financial statements of the Group include the financial statements of the Company and all its subsidiaries, from the date that control effectively commenced until the date that control effectively ceased. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Non-controlling interest in consolidated subsidiaries are identified separately from the Group’s equity therein. The interest of non-controlling shareholders may initially be measured either at fair value or at the non-controlling interest’s proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of the non-controlling interest is the amount of those interests at initial recognition plus the non-controlling interest’s share of subsequent changes in net assets since the date of the combination. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interest having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company.
When the Group loses control of a subsidiary, the profit and loss on disposal is calculated as the difference between the aggregate of the fair value of the consideration received and the fair value of any retained interest and the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for in the same manner as would be required if the relevant assets or liabilities were disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 “Financial Instruments: Recognition and Measurement” or, when applicable, the cost on initial recognition of an investment in an associate or jointly controlled entity.
All intra-group balances, transactions and any unrealised profits or losses arising from intra-group transactions are eliminated on consolidation.
Business combinations
Except for common control transactions, acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of acquisition) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition- related costs are recognised in profit or loss as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRS.
F-14 10 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
Where a business combination is achieved in stages, the Group’s previously held interests in the acquired entity are remeasured to fair value at the acquisition date (i. e. the date the Group obtains control) and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to the consolidated income statement, where such treatment would be appropriate if that interest were disposed of.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 “Business Combinations “ (2008) are recognised at their fair value at the acquisition date, except that:
x deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 “Income Taxes” and IAS 19 “Employee Benefits” respectively; x liabilities or equity instruments related to the replacement by the Group of an acquiree’s share- based payment awards are measured in accordance with IFRS 2 “Share-based Payment”; and x assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 “Non- current Assets Held for Sale and Discontinued Operations” are measured in accordance with that Standard.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. The measurement period may not exceed one year from the effective date of the acquisition.
Functional currency
The individual financial statements of the Group’s subsidiaries are each prepared in their respective functional currencies. The functional currency of the Company is US Dollar. The Russian Rouble (“RUB”) is the functional currency of all the subsidiaries of the Group, except for the following subsidiaries operating with significant degrees of autonomy:
Functional Subsidiaries currency
Jenington International Incorporated US Dollar Polyus Exploration Limited US Dollar Polyus Investments Limited US Dollar JSC “MMC Kazakhaltyn” and its subsidiaries Kazakh Tenge
F-15 11 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
3.2 Presentation currency
The Group presents its consolidated financial statements in the US Dollar (“USD”), as management believes it is a more convenient presentation currency for international users of the consolidated financial statements of the Group as it is a common presentation currency in the mining industry. The translation of the financial statements of the Group entities from their functional currencies to the presentation currency is performed as follows:
x all assets, liabilities, both monetary and non-monetary are translated at closing exchange rates at each reporting date; x all income and expenses are translated at the average exchange rates for the years presented, except for significant transactions that are translated at rates on the date of such transactions; x resulting exchange differences are included in equity and presented as Effect of translation to presentation currency within the Translation reserve; and x in the statement of cash flows, cash balances at beginning and end of each reporting period presented are translated at exchange rates at the respective dates. All cash flows are translated at the average exchange rates for the years presented, except for significant transactions that are translated at rates on the date of transaction.
Exchange rates used in the preparation of the consolidated financial statements were as follows:
2012 2011 2010 Russian Rouble/US Dollar Year end rate 30.37 32.20 30.47 Average for the year 31.09 29.39 30.36
Kazakh Tenge/US Dollar Year end rate 150.74 148.40 147.40 Average for the year 149.11 146.62 147.35
3.3 Foreign currencies
Transactions in currencies other than the entity’s functional currencies (foreign currencies) are recorded at the exchange rates prevailing on the dates of the transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the reporting date. Non-monetary items carried at historical cost are translated at the exchange rate prevailing on the date of transaction. Non-monetary items carried at fair value are translated at the exchange rate prevailing on the date on which the most recent fair value was determined. Exchange differences arising from changes in exchange rates are recognised in the consolidated income statement.
3.4 Revenue recognition
Gold sales revenue
Revenue from the sale of refined gold and other gold-bearing products is recognised when the risks and rewards of ownership are transferred to the buyer, the Group retains neither a continuing degree of involvement or control over the goods sold, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the entity. Revenue from gold doré sales is recognised at the time of shipment from the refining plant when the Group has received confirmation of sale to the third party. Revenue from gold-bearing products is recognised when the goods have been delivered to a contractually agreed location. Gold sales are stated at their invoiced value net of value-added tax.
F-16 12 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
Other revenue
Other revenue comprises mainly sales of electricity, transportation, handling and warehousing services, and other. Revenue from the sales of electricity is recognised when a contract exists, delivery has taken place, a quantifiable price has been established or can be determined and the receivables are likely to be recovered. Delivery takes place when the risks and benefits associated with ownership are transferred to the buyer. Revenue from service contracts are recognised when the services are rendered.
3.5 Income tax
Income tax expense represents the sum of the tax currently payable and deferred tax. Income taxes are computed in accordance with the laws of countries where the Group operates.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary differences associated with investments in subsidiaries and associates are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
F-17 13 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
Current and deferred tax for the year
Current and deferred tax are recognised as an expense or income in the consolidated income statement, except when they relate to items that are recognised outside the consolidated income statement, in which case the tax is also recognised outside consolidated income statement, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost.
3.6 Operating leases
The lease of assets under which all the risks and benefits of ownership are retained by the lessor are classified as operating leases. Costs for operating leases are recognised on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.
3.7 Dividends
Dividends and related taxation thereon are recognised as a liability in the period in which they have been declared and become legally payable.
Retained earnings legally distributable by the Company are based on the amounts available for distribution in accordance with the applicable legislation and as reflected in the statutory financial statements of the individual subsidiaries of the Group. These amounts may differ significantly from the amounts calculated on the basis of IFRS.
3.8 Property, plant and equipment
Mineral rights
Mineral rights are recorded as assets upon acquisition at fair value and are included within mining assets or exploration and evaluation assets.
Mining assets
Mining assets are recorded at cost less accumulated amortisation. Mining assets include the cost of acquiring and developing mining properties, pre-production expenditure and mine infrastructure, processing plant, mineral rights and mining and exploration licenses and the present value of future decommissioning costs.
Mining assets are amortised on a straight-line basis over the estimated economic useful life of the asset, or the remaining useful life of mines of 6 to 20 years per mine operating plans, which call for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code, whichever is shorter. Amortisation is charged from the date a new mine reaches commercial production quantities and is included in the cost of production.
The estimated remaining useful lives of the Group’s significant mines based on the mine operating plans are as follows:
Olimpiada 12 years Blagodatnoe 9-20 years Kuranakh 15 years
F-18 14 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
Non-mining assets
Non-mining assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the economic useful lives of such assets:
Building, structures, plant and equipment 5-50 years Transport 3-11 years Other assets 3-10 years
Stripping activity asset
Stripping costs incurred during the production phase are considered to create two benefits, being either the production of inventory in the current period and/or improved access to the ore to be mined in the future. Where production stripping costs are incurred and the benefit is improved access to ore to be mined in the future, the costs are recognised as a stripping activity asset, if the following criteria are met:
x Future economic benefits (being improved access to the ore body) are probable; x The component of the ore body for which access will be improved can be accurately identified; and x The costs associated with the improved access can be reliably measured.
If not all of the criteria are met, the production stripping costs are included in the cost of inventory which are expensed in the consolidated income statement as cost of gold sales as they are sold.
The stripping activity asset is initially measured at cost, which is the accumulation of costs directly incurred to perform the stripping activity that improves access to the identified component of ore, plus an allocation of directly attributable overhead costs. The costs associated with incidental operations are not included in the costs of stripping activity asset.
The Group uses an allocation basis that is based on volumes of waste extracted compared with expected volumes of ore extracted from a specific component of the ore body to allocate stripping costs between inventory and the stripping activity asset in accordance with the Group’s mine operating plans. Production forecasts included in the mine operating plans are based on estimated proven and probable ore reserves under the Russian Resource Reporting Code.
The stripping activity asset is accounted for as a part of property, plant and equipment and subsequently depreciated using the straight-line method over the life of the identified component of the ore body that became more accessible as a result of the stripping activity. After initial recognition the stripping activity asset is carried at cost less depreciation and any impairment losses.
Leased assets
Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets subject to finance leases are capitalised as property, plant and equipment at the lower of fair value or present value of future minimum lease payments at the date of acquisition, with the related lease obligation recognised at the same value. Assets held under finance leases are depreciated over their estimated economic useful lives or over the term of the lease, if shorter. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is useful life of the asset.
Finance lease payments are allocated using the effective interest rate method, between the lease finance cost, which is included in interest paid, and the capital repayment, which reduces the related lease obligation to the lessor.
F-19 15 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
Impairment of tangible assets, other than exploration and evaluation assets
An impairment review of tangible assets is carried out when there is an indication that those assets have suffered an impairment loss. If any such indication exists, the carrying amount of the asset is compared to the estimated recoverable amount of the asset in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell or value-in-use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. The impairment loss is recognised in the consolidated income statement immediately, unless the relevant asset is carried at revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash- generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the original carrying amount that would have been determined had no impairment loss been recognised in prior periods.
A reversal of an impairment loss is recognised in the consolidated income statement immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
3.9 Capital construction-in-progress
Capital construction-in-progress comprises costs directly related to mine project development such as construction of buildings, infrastructure, processing plant, machinery and equipment. When the capital construction-in-progress has been completed and in the condition necessary for them to be capable of operating in the manner intended by management, the objects are reclassified to mining assets.
Finance costs
Finance costs directly attributable to the construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the finance costs eligible for capitalisation.
All other finance costs are recognised in the consolidated income statement in the period in which they are incurred.
F-20 16 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
3.10 Exploration and evaluation assets
Exploration and evaluation assets represent capitalised expenditures incurred by the Group in connection with the exploration for and evaluation of gold resources, such as:
x acquisition of rights to explore potentially mineralised areas; x topographical, geological, geochemical and geophysical studies; x exploratory drilling; x trenching; x sampling; and x activities in relation to evaluating the technical feasibility and commercial viability of extracting gold resource.
Exploration and evaluation expenditures are capitalised when the exploration and evaluation activities have not reached a stage that permits a reasonable assessment of the existence of commercially recoverable gold resources. When the technical feasibility and commercial viability of extracting a gold resource are demonstrable and a decision has been made to develop the mine, capitalised exploration and evaluation assets are reclassified to mining assets.
Impairment of exploration and evaluation assets
Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. The following facts and circumstances, among other, indicate that exploration and evaluation assets must be tested for impairment:
x the term of exploration license in the specific area has expired during the reporting period or will expire in the near future, and is not expected to be renewed; x substantive expenditure on further exploration for and evaluation of gold resources in the specific area is neither budgeted nor planned; x exploration for and evaluation of gold resources in the specific area have not led to the discovery of commercially viable quantities of gold resources and the decision was made to discontinue such activities in the specific area; and x sufficient data exists to indicate that, although a development in the specific area is likely to occur, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale. For the purpose of assessing exploration and evaluation assets for impairment, such assets are allocated to cash-generating units, being exploration license areas.
Any impairment loss is recognised as an expense in accordance with the policy on impairment of tangible assets set out above.
F-21 17 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
3.11 Inventories
Refined gold, ore stockpiles and gold-in-process
Inventories including refined metals, metals in concentrate and in process, ore stockpiles and doré are stated at the lower of production cost or net realisable value. Production cost is determined as the sum of the applicable expenses incurred directly or indirectly in bringing inventories to their existing condition and location. Refined metals are valued at the average cost of production per saleable unit of metal. Work-in-process, metal concentrate and doré are valued at the average production costs at the relevant stage of production. Net realisable value represents the estimated selling price for product based on prevailing spot metal prices, less estimated costs to complete production and costs necessary to make the sale.
Stores and materials
Stores and materials consist of consumable stores and are stated at the lower of cost and net realisable value. Costs of stores and materials are determined on a weighted average cost basis.
Net realisable value represents the estimated selling price for stores and materials less all costs necessary to make the sale.
3.12 Financial assets
Financial assets are recognised on trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for financial assets classified as at fair value through profit or loss, which are initially measured at fair value.
The Group’s financial assets are classified into the following categories:
x financial assets at fair value through profit or loss (“FVTPL”); x held-to-maturity investments; x available-for-sale (“AFS”) financial assets; and x loans and receivables.
The classification depends on the nature and purpose of the financial asset and is determined at the time of initial recognition.
Financial assets at FVTPL
Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.
A financial asset is classified as held for trading if:
x it has been acquired principally for the purpose of selling in the near future; or x it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or x it is a derivative that is not designated and effective as a hedging instrument.
F-22 18 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:
x such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or x the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or x it forms part of a contract containing one or more embedded derivatives, and IAS 39 “Financial Instruments: Recognition and Measurement” permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the (Loss)/income from investments line item in the consolidated income statement. Fair value is determined in the manner described in note 32.
Held-to-maturity investments
Promissory notes with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held- to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with income recognised on an effective yield basis.
AFS financial assets
AFS financial assets mainly include investments in listed and unlisted shares.
Listed shares held by the Group that are traded in an active market are stated at fair value. Fair value of AFS is determined as follows:
x the fair value of AFS financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; and x the fair value of other AFS financial assets are determined in accordance with generally accepted pricing model based on discounted cash flow analysis using prices from observable current market transactions.
Gains and losses arising from changes in fair value are recognised directly in equity in the Investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in the consolidated income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investment revaluation reserve is included in the consolidated income statement for the period.
Dividends on AFS equity instruments are recognised in the consolidated income statement when the Group’s right to receive the dividends is established.
The fair value of AFS financial assets denominated in a foreign currency is determined in that foreign currency and translated at the exchange rate at the reporting date. The change in fair value attributable to translation differences that result from a change in amortised cost of the asset is recognised in the consolidated income statement, and other changes are recognised in equity.
F-23 19 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
Loans and receivables
Loans and receivables with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written-off against the allowance account. Subsequent recoveries of amounts previously written-off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the consolidated income statement.
With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of AFS equity securities, any increase in fair value subsequent to an impairment loss is recognised directly in equity.
Derecognition of financial assets
The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating interest income or expense, respectively, over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments, as applicable, through the expected life of the financial asset or liability, or, where appropriate, a shorter period.
Income is recognised on an effective interest rate basis for debt instruments other than those financial assets designated as at FVTPL.
F-24 20 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
3. Significant accounting policies (continued)
3.13 Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs, and subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis within finance cost.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
3.14 Cash and cash equivalents
Cash and cash equivalents comprise cash balances, cash deposits and highly liquid investments with original maturities of three months or less, which are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.
3.15 Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
3.16 Site restoration and environmental obligations
Site restoration and environmental obligations include decommissioning and land restoration costs. Future decommissioning and land restoration costs, discounted to net present value, are added to respective assets and corresponding obligations raised as soon as the constructive obligation to incur such costs arises and the future cost can be reliably estimated. Additional assets are amortised on a straight-line basis over the useful life of the corresponding asset. The unwinding of the obligation is included in the consolidated income statement as finance costs. Obligations are periodically reviewed in light of current laws and regulations, and adjustments made as necessary to the corresponding item of property, plant and equipment.
Ongoing restoration costs are expensed when incurred.
F-25 21 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
4. Critical accounting judgements and key sources of estimation uncertainty
Preparation of the consolidated financial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgements which are based on historical experience, current and expected economic conditions, and all other available information. Actual results could differ from those estimates.
Critical judgements in applying accounting policies
Management considers the determination if exploration and evaluation assets will be recouped by future exploitation or sale, identification and valuation of tangible and intangible assets and liabilities, assessment of the outcome of contingencies and the interpretation of tax legislation as critical judgements made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements. All of these critical judgements require estimation of amounts recorded in the consolidated financial statements as described below.
Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
The most significant areas requiring the use of management estimates and assumptions relate to:
x economic useful lives of property, plant and equipment; x exploration and evaluation assets; x deferred stripping costs; x impairment of tangible assets; x site restoration and environmental obligations; x income taxes; and x contingencies.
Economic useful lives of property, plant and equipment
The Group’s mining assets, classified within property, plant and equipment, are amortised using the straight-line method over the life-of-mine based on a mine operating plan, which calls for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code. When determining life-of-mine, assumptions that were valid at the time of estimation may change when new information becomes available.
The factors that could affect estimation of life-of-mine include the following:
x change of estimates of proven and probable ore reserves; x the grade of ore reserves varying significantly from time to time; x differences between actual commodity prices and commodity price assumptions used in the estimation of ore reserves; x unforeseen operational issues at mine sites; and x changes in capital, processing and reclamation costs, discount rates and foreign exchange rates possibly adversely affecting the economic viability of ore reserves.
Any of these changes could affect prospective amortisation of mining assets and their carrying value.
F-26 22 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
4. Critical accounting judgements and key sources of estimation uncertainty (continued)
Non-mining property, plant and equipment are depreciated on a straight-line basis over their economic useful lives. Management periodically reviews the appropriateness of the assets’ economic useful lives. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the Group.
Exploration and evaluation assets
Management’s judgement is involved in the determination of whether the expenditures which are capitalised as exploration and evaluation assets may be recouped by future exploitation or sale or should be impaired. Determining this, management estimates the possibility of finding recoverable ore reserves related to a particular area of interest. However, these estimates are subject to significant uncertainties. The Group is involved in exploration and evaluation activities, and some of its licensed properties contain gold resources under the definition of internationally recognised mineral resource reporting methodologies. A number of licensed properties have no mineral resource delineation. Many of the factors, assumptions and variables involved in estimating resources are beyond the Group’s control and may prove to be incorrect over time. Subsequent changes in gold resources estimates could impact the carrying value of exploration and evaluation assets.
Exploration and evaluation assets: Nezhdaninskoye deposit
Nezhdaninskoye deposit is treated and classified as an exploration and evaluation asset because, at the current stage certain reserves have been identified, but a decision on the deposit has not yet been made. Among the future options are:
x construction of a full cycle processing plant, with subsequent sale of gold doré; x construction of a gold concentrate production plant, with subsequent sale of flotation concentrate; and x sale of the deposit to independent third parties at a price above accumulated exploration and evaluation expenses.
Management continues to evaluate the deposit and has not taken a final decision.
Stripping activity asset
The Group incurs stripping costs during the production phases of its surface mining operations. Significant judgement is required to distinguish between the production stripping which relates to the extraction of inventory and that relates to the creation of a stripping activity asset.
In order to perform the allocation the Group is required to identify separate components towards which the stripping costs have been incurred for the ore bodies in each of its mines. An identifiable component is a specific volume of the ore body that is made more accessible by the stripping activity. Significant judgement is required to identify and define these components, and also to determine the expected volumes of waste to be stripped and ore to be mined in each of these components. For the purposes of identification of separate component the Group uses mine operating plans, which are based on estimated proven and probable ore reserves under the Russian Resource Reporting Code.
Each discrete stage of mining identified at mine plan is considered as units of account. If the mine plan initially identifies several discrete stages of mining which will take place consecutively (one after another), these stages would be identified as components. These assessments are undertaken for each individual mine.
Stripping costs incurred during production phase should be allocated between inventory produced and the stripping activity asset by using allocation basis. The Group considers that the volume of waste extracted compared with expected volume of a specific component of the ore body, for a given level of ore production, to be the most suitable allocation basis. F-27 23 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
4. Critical accounting judgements and key sources of estimation uncertainty (continued)
Impairment of tangible assets
The Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets are impaired. In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Management necessarily applies its judgement in allocating assets that do not generate independent cash flows to appropriate cash-generating units, and also in estimating the timing and value of underlying cash flows within the value-in-use calculation. Subsequent changes to the cash-generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.
Site restoration and environmental obligations
The Group’s mining and exploration activities are subject to various environmental laws and regulations. The Group estimates site restoration and environmental obligations based on the management’s understanding of the current legal requirements in the various jurisdictions, terms of the license agreements and internally generated engineering estimates. A provision is recognised, based on the net present values for decommissioning and land restoration costs as soon as the obligation arises. Actual costs incurred in future periods could differ materially from the amounts provided. Additionally, future changes to environmental laws and regulations, life-of-mine estimates and discount rates could affect the carrying amount of this provision.
Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgement is required in determining the Group’s provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. The estimation of that probability includes judgements based on the expected performance. Various factors are considered to assess the probability of the future utilisation of deferred tax assets, including past operating results, operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected.
Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgements and estimates of the outcome of future events.
F-28 24 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
5. Disposal of subsidiaries
During the year ended 31 December 2012, the following subsidiaries of the Group:
x Romaltyn Mining S.R.L., Romaltyn Exploration S.R.L., Romaltyn Limited (previously attributable to Kazakhstan business unit); x GRK Bargold Ltd and Yakutskoe GRP Ltd (previously attributable to the Exploration business unit), were sold to independent non related parties.
Romaltyn Mining and Romaltyn Exploration (together, “the Romanian assets”) hold rights to various mining assets in Romania including a gold treatment plant with an annual processing capacity of 2.5 million tonnes (currently not in operation) and a number of exploration properties. Romanian assets were acquired in 2009, together with the Group’s subsidiaries in Kazakhstan. The disposal of the Romanian assets was driven by the strategic objectives of the Group and the increased focus on our core large-scale operations.
GRK Bargold and Yakutskoe GRP hold rights to a number of exploration properties in Russia. The Group’s investment in GRK Bargold was fully impaired during the year ended 31 December 2011.
There were no contingent liabilities or deferred consideration applicable to the sales. All the proceeds were received in cash.
The following assets and liabilities were disposed during the year ended 31 December 2012:
GRK Bargold Total Romanian and Yakutskoe assets / assets / GRP assets / liabilities liabilities liabilities disposed
Property, plant and equipment 9,772 - 9,772 Capital construction-in-progress 6,572 - 6,572 Exploration and evaluation assets 3,880 544 4,424 Cash 572 686 1,258 Other assets 900 18 918 Site restoration and environmental obligations (5,022) - (5,022) Other liabilities (1,947) (12) (1,959)
Total net assets disposed 14,727 1,236 15,963 Proceeds 20,000 2,231 22,231
Gain on disposal 5,273 995 6,268
F-29 25 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
6. Segment information
For management purposes, the Group is organised in separate business segments defined by a combination of operating activities and geographical area. Separate financial information is available for each segment and reported regularly to the chief operating decision maker (“CODM”) and the Executive Committee. The Group’s eight (2011 – seven) identified reportable segments are located and described as follows:
x Krasnoyarsk business unit (Krasnoyarsk region of the Russian Federation) – Extraction, refining and sales of gold from the Olimpiada, Blagodatnoye and Titimukhta mines, as well as research, exploration and development work at the Olimpiada deposits; x Kazakhstan business unit (Republic of Kazakhstan and Kyrgyzstan) – Extraction, refining and sales of gold from Aksu, Bestobe, Akzhal and Zholymbet mines, as well as exploration and evaluation works in Southern Karaultube; x Irkutsk alluvial business unit (Irkutsk region, Bodaibo district of the Russian Federation) – Extraction, refining and sales of gold from several alluvial deposits; x Irkutsk ore business unit (Irkutsk region, Bodaibo district of the Russian Federation) – Extraction, refining and sales of gold from the Verninskoye mine, research, exploration and development works at Pervenets, Verninskoye and Medvezhiy Zapadny deposits, and electricity and utilities production and sales in the Bodaibo district of the Irkutsk region; x Yakutia Kuranakh business unit (Sakha Republic of the Russian Federation) – Extraction, refining and sales of gold from the Kuranakh mines; x Magadan business unit (Magadan region of the Russian Federation) – Represented by OJSC “Matrosov Mine” which performs development works at the Natalka deposit; x Exploration business unit – Comprising two operating segments that are combined into one reportable segment as they satisfy the criteria for aggregation: - Yakutia (Nezhdaninskoye) business unit (Sakha Republic of Russian Federation) – Research and exploration works at the Nezhdaninskoye deposit; and - Krasnoyarsk region, Irkutsk region, Amur region, and others – Research and exploration works in several regions of the Russian Federation; x Capital construction unit - Represented by LLC “Polyus Stroy” and CJSC “Vitimenergostroy” which perform construction works at Natalka, Verninskoye, Olimpiada and other deposits. In 2012, following the significant increase of construction activities CODM started to analyse this segment separately. Previously, LLC “Polyus Stroy” was reported within the Krasnoyarsk business unit. Information for the comparative period was not restated due to the insignificance of its operations in 2011. CJSC “Vitimenergostroy” was established in 2012.
The reportable segments derive their revenue primarily from gold sales. The CODM performs an analysis of the operating results based on these separate business units and evaluates the reporting segment’s results, for purposes of resource allocation, based on the segment measure; segment profit before income tax excluding the finance costs, other sales, costs of other sales and income from investments.
Business segment assets and liabilities are not reviewed by the CODM and therefore are not disclosed in these consolidated financial statements. Segment financial information provided to the CODM is prepared from the management accounts which are based on Russian or Kazakhstan accounting standards.
F-30 26 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
6. Segment information (continued)
The Group does not allocate segment results of companies that perform management, investing activities and certain other administrative functions within its internal reporting.
Depreciation Segment Capital and Gold sales profit/(loss) expenditures amortisation For the year ended 31 December 2012
Business units Krasnoyarsk 1,948,587 990,463 144,555 112,379 Irkutsk alluvial 363,552 97,009 19,825 10,944 Yakutia Kuranakh 229,719 57,245 23,446 9,420 Kazakhstan 166,475 64,485 42,152 21,061 Irkutsk ore 76,166 29,687 151,188 6,477 Magadan - (20,061) 191,043 5,632 Exploration - (10,083) 22,535 2,103 Capital construction - 1,339 133,916 5,528
Total 2,784,499 1,210,084 728,660 173,544
For the year ended 31 December 2011
Business units Krasnoyarsk 1,641,380 918,078 236,780 104,821 Irkutsk alluvial 350,213 102,795 22,808 6,550 Yakutia Kuranakh 184,735 13,797 12,569 8,298 Kazakhstan 160,825 5,773 38,583 14,939 Irkutsk ore 3,497 (13,042) 111,751 7,307 Magadan - (16,313) 22,026 3,784 Exploration - (14,107) 11,213 973
Total 2,340,650 996,981 455,730 146,672
Gold sales reported above represent revenue generated from external customers. There were no inter-segment gold sales during the years ended 31 December 2012 and 2011.
F-31 27 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
6. Segment information (continued)
The segment measure of profit/(loss) reconciles to the IFRS reported profit before income tax on a consolidated basis as follows:
Year ended 31 December 2012 2011
Segment profit 1,210,084 996,981
Differences between IFRS and management accounts: Capitalised exploration works 21,895 (206) Provisions and accruals (26,692) (49,109) Additional depreciation charge and amortisation of mineral rights (22,314) (39,145) Calculation of gold-in-process at net production cost 493 (26,912) Difference in stripping costs capitalisation 29,867 32,559 Other (11,227) (3,219)
Adjusted segment net profit 1,202,106 910,949 Unallocated central costs, results of financing and investing activities and differences in accounting treatment under IFRS 35,669 (126,896)
Profit before income tax 1,237,775 784,053
The segment capital expenditures reconciles to the IFRS reported numbers on a consolidated basis as follows:
Segment capital expenditures 728,660 455,730
Differences between IFRS and management accounts: Differences at the moment of recognition of capital expenditures 46,175 (85,268) Reclassification of advances paid for property, plant and equipment and construction works (21,041) 20,148 Reclassification of materials related to construction works 71,375 (9,322) Differences in capitalised exploration and evaluation costs 2,015 (12,635) Other 4,861 (1,821)
Adjusted segment capital expenditure 832,045 366,832 Unallocated central capital expenditures 18,674 1,307
Capital expenditures 850,719 368,139
The segment depreciation and amortisation reconciles to the IFRS reported numbers on a consolidated basis as follows:
Segment depreciation and amortisation 173,544 146,672
Additional depreciation charge 16,373 30,010 Amortisation of mineral rights 5,941 13,399
Depreciation and amortisation 195,858 190,081
The Group’s information about its non-current assets other than financial instruments by geographical location is as follows:
31 December 2012 2011 Russian Federation 3,224,228 2,392,751 Republic of Kazakhstan 310,821 308,358 Kyrgyzstan 14,069 31,084 Romania - 17,170 United Kingdom 70 94 Total 3,549,188 2,749,457
F-32 28 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
6. Segment information (continued)
The impairment losses under IFRS in relation to Property, plant and equipment attributable to each reportable segment are presented as follows:
Year ended 31 December Business units 2012 2011 Magadan 11,622 - Kazakhstan 4,307 11,417 Irkutsk ore 1,189 7,193 Irkutsk alluvial 131 - Krasnoyarsk - 4,891 Total 17,249 23,501
The impairment losses under IFRS in relation to Capital construction-in-progress attributable to each reportable segment are presented as follows:
Year ended 31 December Business units 2012 2011 Kazakhstan 17,054 - Exploration 2,063 - Irkutsk alluvial 81 - Total 19,198 -
The impairment losses under IFRS in relation to Exploration and evaluation assets attributable to each reportable segment are presented as follows:
Year ended 31 December Business units 2012 2011 Exploration 239 43,596 Krasnoyarsk 99 5,054 Irkutsk ore - 4,351 Kazakhstan - 1,707
Total 338 54,708
7. Gold sales
Year ended 31 December 2012 2011 Refined gold 2,588,722 2,179,825 Other gold-bearing products 195,777 160,825 Total 2,784,499 2,340,650
F-33 29 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
8. Cost of gold sales
Year ended 31 December 2012 2011 Fuel, consumables and spares 454,584 389,537 Labour 373,431 279,780 Tax on mining 202,409 179,116 Utilities 60,136 54,240 Outsourced mining services 31,264 22,147 Refining costs 5,621 5,067 Other 81,223 72,929 Sub-total 1,208,668 1,002,816 Amortisation and depreciation of operating assets (note 14) 190,387 184,067 Increase in gold-in-process and refined gold inventories (37,228) (43,850) Total 1,361,827 1,143,033
9. Selling, general and administrative expenses
Year ended 31 December 2012 2011
Salaries 142,569 116,295 Taxes other than mining and income taxes 62,226 42,630 Professional services 30,279 36,350 Amortisation and depreciation 3,737 4,830 Other 29,092 25,513
Total 267,903 225,618
10. Other (income) / expenses, net
Year ended 31 December 2012 2011
Change in estimations of decommissioning liabilities (note 24) (15,247) - Other (6,961) (2,156) Change in allowance for reimbursable value added tax (618) 6,602 Donations 6,339 5,468 Loss on disposal of property, plant and equipment and capital construction-in-progress 3,684 5,933 Penalties on tax on mining - 8,040 Non-recoverable VAT - 190
Total (12,803) 24,077
11. Finance costs
Year ended 31 December 2012 2011
Interest on borrowings 22,648 31,241 Unwinding of discounts 12,143 11,999 Debt modification expense - 26,928 Other - 1,235
Total 34,791 71,403
F-34 30 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
12. Income from investments, net
Year ended 31 December 2012 2011
Interest income on bank deposits 35,757 16,252 Gain on disposal of AFS investments 581 17,023 Loss from investments in listed companies held for trading accounted for at fair value through profit and loss (378) (20,984) Loss on derivatives classified as held for trading accounted for at fair value through profit and loss - (8,661)
Total 35,960 3,630
13. Income tax
Year ended 31 December 2012 2011 Current tax expense 242,616 200,297 Deferred tax expense 14,633 10,553 Total 257,249 210,850
The corporate income tax rates in the countries where the Group has a taxable presence vary from 0% to 24%.
A reconciliation of Russian Federation statutory income tax, the location of the Group’s major production entities and operations, to the income tax expense recorded in the consolidated income statement is as follows:
Profit before income tax 1,237,775 784,053 Income tax at statutory rate applicable to principal entities (20%) 247,555 156,811 Tax effect of non-deductible expenses and other permanent differences 5,198 25,463 Unrecognised tax losses 124 11,109 Effect of different tax rates of subsidiaries operating in other jurisdictions 15,565 14,483 Tax effect of utilisation of tax losses not previously recognised (6,128) (4,990) Other (5,065) 7,974 Income tax expense at effective rate of 21% (2011: 27%) 257,249 210,850
F-35 31 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
14. Property, plant and equipment
Non-mining Stripping Mining assets assets activity asset Total Cost
Balance at 31 December 2010 2,356,373 70,313 61,023 2,487,709 Additions 160,674 14,386 39,493 214,553 Transfers from capital construction-in-progress and reclassifications 90,693 (26,523) - 64,170 Transfers from exploration and evaluation assets (note 16) 264 - - 264 Change in decommissioning liabilities (note 24) 7,833 - - 7,833 Disposals (25,698) (468) - (26,166) Effect of translation to presentation currency (130,593) (2,519) (6,704) (139,816) Balance at 31 December 2011 2,459,546 55,189 93,812 2,608,547 Additions 318,364 14,286 96,623 429,273 Transfers from capital construction-in-progress and reclassifications 210,312 5,643 - 215,955 Transfers to exploration and evaluation assets (note 16) (1,656) - - (1,656) Change in decommissioning liabilities (note 24) (28,986) - - (28,986) Disposals (25,774) (1,414) - (27,188) Disposals of subsidiaries (13,580) - - (13,580) Effect of translation to presentation currency 133,134 3,145 8,081 144,360 Balance at 31 December 2012 3,051,360 76,849 198,516 3,326,725
Accumulated amortisation, depreciation and impairment
Balance at 31 December 2010 (634,041) (29,591) - (663,632) Charge (201,023) (4,716) (8,166) (213,905) Reclassifications (10,335) 10,335 - - Disposals 18,172 610 - 18,782 Impairment (23,497) (4) - (23,501) Effect of translation to presentation currency 43,107 997 712 44,816 Balance at 31 December 2011 (807,617) (22,369) (7,454) (837,440) Charge (215,988) (4,477) (15,031) (235,496) Disposals 21,549 302 - 21,851 Disposals of subsidiaries 3,808 - - 3,808 Impairment (17,249) - - (17,249) Effect of translation to presentation currency (43,677) (1,067) (818) (45,562)
Balance at 31 December 2012 (1,059,174) (27,611) (23,303) (1,110,088)
Net book value
31 December 2011 1,651,929 32,820 86,358 1,771,107
31 December 2012 1,992,186 49,238 175,213 2,216,637
During the year ended 31 December 2012, impairment of mining assets in the amount of USD 11,622 thousand and USD 1,189 thousand were recognised following the decision to abandon activities related to the Omchak deposit and other deposits in the Irkutsk ore business unit respectively.
The remaining amount of impairment charge was a result of impairment at the Kazakhstan business unit, due to reassessment of property, plant and equipment requirements and plans for their future use. As the result, certain assets’ net book value and expected economic useful life exceeded the anticipated recoverable value.
F-36 32 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
14. Property, plant and equipment (continued)
During the year ended 31 December 2011, impairment of mining assets in the amount of USD 12,080 thousand was recognised at Sukhoy Log and Kvartsevaya Gora. The impairment relates to the decision to abandon activities related to the deposits.
In 2011, the Kazakhstan business unit of the Group has reassessed property, plant and equipment requirements and plans for their future use. As the result, certain assets’s net book value and expected economic useful life exceeded the anticipated recoverable value and accordingly an impairment was recorded in the amount of USD 11,417 thousand.
The carrying values of mineral rights included in mining assets were as follows: 31 December 2012 2011 Mineral rights 332,609 335,470
Amortisation and depreciation charge is allocated as follows: Year ended 31 December 2012 2011 Cost of gold sales (note 8) 190,387 184,067 Selling, general and administrative expenses and cost of other sales 5,471 6,014 Capitalised within capital construction-in-progress 39,638 23,824 Total 235,496 213,905
The carrying value of mining assets under development and not yet in production for which depreciation has not yet commenced was equal to USD 335,313 thousand at 31 December 2012 (2011: USD 306,090 thousand).
The carrying values of property, plant and equipment pledged to a bank guarantee liability were as follows: 31 December 2012 2011 Pledged property, plant and equipment 52,375 4,613
15. Capital construction-in-progress
Year ended 31 December 2012 2011 Balance at beginning of the year 371,668 295,582 Additions 471,331 161,385 Transfers to property, plant and equipment (215,955) (64,170) Disposals (1,221) (460) Disposals of subsidiaries (6,572) - Impairment (19,198) - Effect of translation to presentation currency 23,224 (20,669) Balance at end of the year 623,277 371,668
During the year ended 31 December 2012, impairment of Capital construction-in-progress in the amount of USD 16,742 thousand was recognized following the reassessment of recoverability of certain assets' book value at the Talas Gold Mining Company (incorporated in Kyrgyzstan and included in the Kazakhstan business unit).
The remaining amount of impairment charge was a result of impairment at the Exploration business unit due to the reassessment of plans for the future use of certain capital construction-in-progress assets.
F-37 33 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
16. Exploration and evaluation assets
Year ended 31 December 2012 2011 Balance at beginning of the year 399,846 442,316 Additions 46,738 31,694 Transfer to mining assets, net (Note 14) 1,656 (264) Impairment (338) (54,708) Disposals of subsidiaries (4,424) - Effect of translation to presentation currency 23,791 (19,192) Balance at end of the year 467,269 399,846
During the year ended 31 December 2012, the Group impaired USD 338 thousand of exploration and evaluation assets, because those assets did not demonstrate any future commercial viability.
During the year ended 31 December 2011, the Group impaired USD 54,708 thousand of exploration and evaluation assets, because those assets (Kuchyus, Kuzeevskaya, Chai-Yurinskaya, Doroninskoye, Tokichan, Zapadnoe, Mukodek, Kaskabulak, Illigirskaya fields) did not demonstrate any future commercial viability.
As of 31 December 2012 and 31 December 2011, accumulated capitalised exploration and evaluation expenses directly attributable to the Nezhdaninskoye deposit amounted to USD 249,893 thousand and USD 217,316 thousand respectively.
17. Investments in securities and other financial assets
Year ended 31 December 2012 2011
Non-current Loan Participation Notes 13,286 - Loans receivable 2,748 3,643
Total 16,034 3,643
Current Bank deposits 68,286 12,175 Equity investments in listed companies held for trading 9,276 14,857 Other 798 1,692 AFS equity investments - 34,744
Total 78,360 63,468
AFS investments, carried at fair value
At 31 December 2011, AFS investments primarily comprised of shares owned in Rosfund, SPC (Cayman Islands) acquired in July 2006.
During the year ended 31 December 2012, the Group sold all Rosfund, SPC shares for USD 30,768 thousand (USD 13,286 thousand were paid by Loan Participation Notes, USD 383 thousand by shares, USD 14,000 thousand in cash and remaining USD 3,099 thousand remained short-term receivable as of 31 December 2012) and recognised a gain in the amount of USD 581 thousand in the consolidated income statement (note 12).
Loan Participation Notes issued by EMIS Finance BV and are fully guaranteed by CJSC “Rosbusinessconsulting” (“RBC”) with the fixed semi-annual coupons from 6% to 7%, denominated in USD with the maturity in the years 2015-2018.
F-38 34 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
17. Investments in securities and other financial assets (continued)
Bank deposits
Bank deposits at 7.8 – 8.76% (2011: 2.14 – 8.05%) per annum are denominated in RUB with a maturity date at the end of June 2013.
18. Inventories
31 December 2012 2011 Inventories expected to be recovered after twelve months Stockpiles 242,005 206,801 Total 242,005 206,801 Inventories expected to be recovered in the next twelve months Gold-in-process at net production cost 185,320 160,177 Refined gold at net production cost 24,393 24,757 Total metal inventories 209,713 184,934 Stores and materials at cost 449,767 354,508 Total 659,480 539,442
The Group has 4.5 million tonnes of stockpiles (2011: 5.6 million tonnes) which are carried at zero value, as previously these stockpiles were considered as waste materials.
19. Deferred expenditures
31 December 2012 2011
Deferred expenditures 19,090 18,512
Deferred expenditures relate to the preparation for the seasonal alluvial mining activities comprised of excavation costs, general production and specific administration costs.
20. Trade and other receivables
31 December 2012 2011
Trade receivables for gold sales 20,284 4,869
Other receivables 36,342 24,984 Less: Allowance for doubtful debts (11,257) (5,141)
25,085 19,843
Total 45,369 24,712
Substantially all gold sales are made to banks with immediate payment terms. Other receivables include amounts receivable from sales of electricity, transportation, handling, warehousing services and other services. The procedure for accepting a new customer includes checks by the security department regarding the customer’s business reputation, licenses and certifications.
F-39 35 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
20. Trade and other receivables (continued)
31 December 2012 2011
The average credit period on gold-bearing product sales to customers, other than banks was 23 days 7 days
The average credit period for other receivables was 52 days 57 days
The Group’s largest customers (individually exceeding 5% of the total balance) represented of the total outstanding balance of other accounts receivable, at the reporting date 29% 15%
21. Taxes receivable
31 December 2012 2011 Reimbursable value added tax 210,383 129,493 Income tax prepaid 6,683 17,821 Other prepaid taxes 3,769 2,708 Total 220,835 150,022
22. Cash and cash equivalents
31 December 2012 2011 Bank deposits - RUB 524,947 487,467 - foreign currencies 100,000 - Current bank accounts - RUB 100,411 146,761 - foreign currencies 232,769 21,992 Other cash and cash equivalents 1,805 1,228 Total 959,932 657,448
Bank deposits are denominated in RUB and USD and bear interest of 1.3-8.7% per annum with original maturity within three months.
23. Share capital
The authorised share capital of the Company comprised 3,600,000 thousand ordinary shares with a par value of GBP0.0001 per share.
The issued and fully paid up share capital of the Company comprise 3,032,150 thousand ordinary shares issued at a premium resulting in share capital of USD 482 thousand and additional paid-in- capital of USD 2,151,765 thousand.
Treasury shares
On 11 May 2012, Jenington International Inc, a subsidiary of the Group, completed the sale of the Company’s treasury shares. 151,608 thousand shares were sold to Chengdong Investment Corporation, a wholly-owned subsidiary of CIC International Co. Ltd., and 50,198 thousand shares and 25,154 thousand Level I GDRs (one GDR is equal to one ordinary share) to JSC VTB Bank. The gross proceeds received from the two transactions were equal to USD 635,487 thousand, less USD 11,115 thousand of arrangement fees directly attributable to the sale of the treasury shares.
F-40 36 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
23. Share capital (continued)
In connection with the sale of treasury shares, the Group transferred the remaining balance of USD 37,475 thousand relating to the call options to acquire all the rights and obligations under the Gold Lion Holdings convertible loan agreements [see note 25 (viii)] from the treasury share account to the additional paid-in capital account.
Dividends to shareholders of the Company
Year ended 31 December 2012 2011 Dividend declared and paid during the year, USD thousand 124,318 72,327 Dividend declared and paid during the year, US cents per share 0.04 0.02
24. Site restoration and environmental obligations
Year ended 31 December 2012 2011 Balance at beginning of the year 149,876 136,410 New obligations raised (note 14) 2,012 - Change in estimation (notes 10 and 14) (46,245) 7,833 Unwinding of discount on decommissioning obligations (note 11) 12,143 11,999 Effect of translation to presentation currency 5,203 (6,366) Disposal of subsidiaries (note 5) (5,022) - Other 1,183 - Balance at end of the year 119,150 149,876
The principal assumptions used for the estimation of site restoration and environmental obligations were as follows:
Discount rates 6.21-8.27% 6.83-9.28% Inflation rates 2.5% -8.1% 3.3%-7.4% Expected mine closure dates 2013-2050 2012-2050
The present value of cost to be incurred for settlement of the site restoration and environmental obligations is as follows:
31 December 2012 2011
Due from second to fifth year 3,156 7,322 Due from sixth to tenth year 11,447 49,012 Due from eleventh to fifteenth year 45,877 27,534 Due from sixteenth to twentieth year 34,884 7,719 Due thereafter 23,786 58,289
Total 119,150 149,876
F-41 37 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
25. Borrowings
31 December 2012 31 December 2011 Nominal Outstanding Nominal Outstanding rate % balance rate % balance
3 months USD HSBC credit facility (i) LIBOR+3% 99,325 - -
3 months USD Unicredit Bank credit facility (ii) LIBOR+2.95% 99,544 - -
Societe Generale credit facility to OJSC 3 months USD 3 months USD “Pervenets” (iii) LIBOR + 2.4% 44,444 LIBOR + 2.4% 50,000
Unicredit Bank credit facility to OJSC 3 months USD 3 months USD “Pervenets” (iv) LIBOR + 2.4% 44,444 LIBOR + 2.4% 50,000
Societe Generale export financing credit facility agreement to CJSC “Gold Mining 6 months USD Company Polyus” (v) LIBOR + 0.55% 25,389 - -
Deutsche Bank letters of credit with deferred payment to OJSC “Matrosov Mine” (vi) - - 6 months USD - nominated in USD LIBOR + 0.65% 30,856 - - Cost of fund - nominated in EUR (COF) + 0.8% 4,345 - -
Guaranteed senior notes (vii) - - 9.875% 204,520
Gold Lion Holdings Limited loans (viii) - - 10.00% 34,160
LIBOR + Societe Generale credit facility (ix) - - 1.95% 230,000
LIBOR + VTB credit facility (x) - - 2.25% 230,000
Total 348,347 798,680
Less: current portion due within twelve months (187,555) (675,632)
Long-term borrowings 160,792 123,048
Summary of borrowing agreements
(i) HSBC credit facility On 10 February 2012, the Company entered into a three year USD 100 million credit facility with HSBC to fund the redemption of the Guaranteed senior notes [see note (vii) below]. The facility was fully utilised as of 31 December 2012.
(ii) Unicredit Bank credit facility On 29 December 2011, the Company entered into a two year USD 100 million facility agreement arranged by Unicredit Bank to fund the redemption of Guaranteed senior notes [see note (vii) below]. The facility was fully utilised as of 31 December 2012.
(iii) Societe Generale credit facility to OJSC “Pervenets” On 4 October 2011, OJSC “Pervenets”, a subsidiary of the Group, entered into a three year USD 100 million term loan facility agreement with Societe Generale as a lender to fund general corporate purposes. On 6 October 2011, Societe Generale transferred USD 50 million of the facility to a new lender, Unicredit Bank [see note (iv) below]. The facility is to be repaid in nine equal instalments in intervals of three months starting from 4 October 2012. As of 31 December 2012, USD 50 million had been drawn down and the first repayment made.
(iv) Unicredit Bank credit facility to OJSC “Pervenets” On 6 October 2011, Societe Generale transferred USD 50 million of the facility [see note (iii) above] to a new lender Unicredit Bank. The facility is to be repaid in nine equal instalments in intervals of three months starting from 4 October 2012. As of 31 December 2012, USD 50 million had been drawn down and the first repayment made.
F-42 38 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
25. Borrowings (continued)
(v) Societe Generale export financing credit facility agreement to CJSC “Gold Mining Company Polyus” As of 31 December 2012, USD 25,389 thousand was utilised out of a USD 67,502 thousand export financing credit facility agreement with Societe Generale for making available financing to be used for the purchase of mining equipment. The facility is established for facilitation of exports from the United States of America and guaranteed by Export-Import Bank of the United States. The maturity of the outstanding amounts varies from the year 2013 to 2016.
(vi) Deutsche Bank letters of credit with deferred payment to OJSC “Matrosov Mine” During the year ended 31 December 2012, OJSC “Matrosov Mine” entered into number of letter of credit agreements for the acquisition of mining equipment with deferred payment terms. The maturity of the outstanding amounts varies from June to September 2013.
(vii) Guaranteed senior notes On 15 March 2012, USD 200 million guaranteed senior notes were redeemed at 102.344% of nominal value funded by two USD 100 million loans from HSBC and Unicredit Bank, see notes (i) and (ii) above.
(viii) Gold Lion Holdings Limited loans On 11 June 2009, the Company (formerly KazakhGold) signed two convertible loan agreements with Gold Lion Holdings Limited, a company represented by former shareholders of KazakhGold (KazakhGold now forms the Kazakhstan Business Unit of the Group). Principal amounts of USD 21,650 thousand and USD 9,375 thousand together with accrued interest were to be payable on 6 November 2014.
During the year 2012, a Restated and Amended Principal Agreement (the “RAPA”) and a Sale and Purchase Agreement (the “SPA”) signed between the Group and companies represented by the former shareholders of KazakhGold, according to which the former agreed to acquire the Group’s operating subsidiaries in Kazakhstan and Kyrgyzstan, were terminated.
The termination of the SPA resulted in: x the gain of USD 38,437 thousand following the Gold Lion loan settlement by a way of novation of all its rights, benefits and obligations under Gold Lion Holdings Limited loan agreements to Jenington International Inc., a subsidiary of the Group, for no additional monetary consideration); x an additional gain of USD 40,647 thousand.
Had the transaction been completed both of these amounts would have been included in the purchase price consideration in accordance with the SPA terms.
(ix) Societe Generale credit facility On 15 May 2012, the Societe Generale credit facility and corresponding accrued interest were fully repaid.
(x) VTB credit facility On 15 May 2012, the VTB credit facility and corresponding accrued interest were fully repaid.
(xi) Unused credit facilities On 15 March 2012, CJSC “Gold Mining Company Polyus”, a subsidiary of the Group, entered into a three year RUB 10 billion (approximately USD 329 million) credit line with VTB to fund its general corporate purposes. The interest rate is subject to a separate agreement under each of the credit line drawdowns but can not exceed 20% or MosPrime Rate + 6.5% for RUB denominated drawdown and 14% or LIBOR/EURIBOR + 13.5% – for USD/EURO denominated drawdown.
On 25 July 2012, OJSC “Matrosov Mine”, a subsidiary of the Company, entered into a finance agreement with VTB Bank for a total amount of up to RUB 5 billion (approximately USD 165 million). The facility will be utilised in the form of letters of credit issued by VTB Bank on the subsidiary’s request, with the repayment period not later than 5 years after the drawdown date at an interest rate of 10% per year. The facility will be used to support the purchase of equipment for the Natalka project.
F-43 39 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
25. Borrowings (continued)
CJSC “Gold Mining Company Polyus” guaranteed liabilities of the subsidiary under all the finance agreements.
HSBC, Unicredit Bank and Societe Generale credit facilities contain certain financial covenants. The Group believes that it was in compliance with these covenants as of 31 December 2012.
26. Deferred tax liabilities
The movement in the Group’s deferred taxation position was as follows:
Year ended 31 December 2012 2011
Net deferred tax liability at beginning of the year 184,207 182,948 Recognised in the consolidated income statement 14,633 10,553 Effect of translation to presentation currency 10,158 (9,294)
Net deferred tax liability at end of the year 208,998 184,207
Deferred taxation is attributable to the temporary differences that exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The temporary differences that give rise to deferred taxation are presented below:
31 December 2012 2011
Property, plant and equipment 192,923 178,067 Inventory 61,592 54,383 Investments (1,825) 1,370 Receivables (1,322) (1,596) Accrued operating expenses (42,370) (48,017)
Total 208,998 184,207
The unrecognised deferred tax asset in respect of tax losses carried forward available for offset against future taxable profit of certain subsidiaries within the Group is presented as follows:
31 December 2012 2011
Unrecognised deferred tax asset 40,143 40,019
Such tax losses expire in periods up to ten years, and are not recognised as management does not believe it is probable that future taxable profit will be available against which the respective entities can utilise the benefits.
The unrecognised deferred tax liability for taxable temporary differences associated with investments in subsidiaries is presented as follows:
31 December 2012 2011
Unrecognised deferred tax liability 78,020 61,839
The deferred tax liability presented above was not recognised because the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
F-44 40 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
27. Trade, other payables and accrued expenses
31 December 2012 2011
Trade payables to third parties 41,204 30,980
Other payables
Other accounts payable and accrued expenses 103,968 24,973 Wages and salaries payable 81,768 61,977 Dividends payable 25,906 39,004 Interest payable 726 3,718 Bank guarantee liability - 37
Total other payables 212,368 129,709
Accrued annual leave 36,274 31,388
Total 289,846 192,077
The average credit period for payables at 31 December 2012 was 21 days, (2011: 17 days). No interest was charged on the outstanding payables balance during the credit period. The Group has financial risk management policies in place, which include budgeting and analysis of cash flows and payments schedules to ensure that all amounts payable are settled within the credit period.
28. Taxes payable
31 December 2012 2011
Income tax payable 30,583 2,721 Value added tax 14,227 6,262 Social taxes 20,319 12,958 Tax on mining 15,306 13,260 Property tax 4,123 4,703 Other taxes 43,236 3,052
Total 127,794 42,956
F-45 41 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
29. Net cash generated from operating activities
Year ended 31 December Note 2012 2011
Profit before income tax 1,237,775 784,053
Adjustments for: Gain from disposal of subsidiaries 5 (6,268) - Loss on disposal of property, plant and equipment 10 3,684 5,933 Change in allowance for reimbursable value added and tax provision 10 (618) 6,602 Finance costs 11 34,791 71,403 Income from investments 12 (35,960) (3,630) Amortisation and depreciation 14 195,858 190,081 Impairment of property, plant and equipment 14 17,249 23,501 Impairment of capital construction- in-progress 15 19,198 - Impairment of exploration and evaluation assets 16 338 54,708 Impairment of stockpiles - 25,209 Gain on loan settlement and sale and purchase agreement termination 25 (79,084) - Change in allowance for doubtful debts 778 (546) Foreign exchange gain / (loss), net (4,614) 5,814 Other 31,498 3,971
1,414,625 1,167,099 Movements in working capital Inventories 18 (104,392) (168,688) Deferred expenditures 19 521 (230) Trade and other receivables 20 (20,819) (5,811) Advances paid to suppliers and prepaid expenses (4,423) (354) Taxes receivable 21 (78,489) 8,029 Trade and other payables and accrued expenses 27 (7,135) 29,813 Other non-current liabilities 4,044 4,026 Taxes payable 28 18,939 (4,130)
Cash flows from operations 1,222,871 1,029,754
Interest paid (27,613) (23,423) Income tax paid (203,489) (230,743)
Net cash generated from operating activities 991,769 775,588
F-46 42 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
30. Related parties
Related parties include substantial shareholders, entities under common ownership and control with the Group and members of key management personnel. The Company and its subsidiaries, in the ordinary course of business, enter into purchase and service transactions with related parties. The terms of these transactions would not necessarily be on similar terms had the Group entered into the transactions with third parties.
The Group had no transactions with its shareholders in 2012. During the year 2011, the Group had a number of transactions with its shareholders such as exchange of shares, share buy-backs during the Reorganisation of the Group which is described in the annual consolidated financial statements for the year ended 31 December 2011.
Entities under common ownership
The Group had the following outstanding balances with entities under common control:
31 December 2012 2011 Cash and cash equivalents at Bank “Mezhdunarodniy finansoviy club” 151,692 149,323 Loan Participation Notes “RBC” 14,366 1,019 Investments in securities and other financial assets at “Mezhdunarodniy finansoviy club” 7,603 1,553 Equity investments in listed companies held for trading “RBC” 7,465 7,660 Advances and prepaid expenses paid to suppliers 298 216
The amounts outstanding at 31 December 2012 are unsecured and expected to be settled in cash. No expense has been recognised in the reporting period for bad or doubtful debts in respect of the amounts owed by related parties.
The Group entered into the following transactions with entities under common control:
Year ended 31 December 2012 2011
Purchase of goods and services 2,988 2,224 Interest income 10,147 5,136
Key management personnel
Year ended 31 December 2012 2011
Short-term compensation of key management personnel amounted to 35,012 24,495
F-47 43 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
31. Commitments and contingencies
Commitments
Capital commitments
The Group’s contracted capital expenditure commitments are as follows:
31 December 2012 2011 Contracted capital expenditure commitments 481,849 107,019
Operating leases: Group as a lessee
The land in the Russian Federation on which the Group’s production facilities are located is owned by the state. The Group leases this land through operating lease agreements, which expire in various years through 2060.
Future minimum lease payments due under non-cancellable operating lease agreements at the end of the year were as follows:
31 December 2012 2011 Due within one year 2,928 4,275 From one to five years 9,236 7,629 Thereafter 19,085 17,199 Total 31,249 29,103
Contingencies
Litigations
In the ordinary course of business, the Group is subject to litigation in a number of jurisdictions, the outcome of which is uncertain and could give rise to adverse outcomes. At the date of issuance of these consolidated financial statements the Group was party to a number of claims and litigation, most of which are not material, except for a lawsuit against JSC “MMC Kazakhaltyn” with a potential exposure of USD 15 million. Management believes that this claim will not have a material adverse impact on the Group.
KazakhGold dispute
During the year ended 31 December 2012, the Restated and Amended Principal Agreement (the “RAPA”) signed on 10 April 2011 was terminated (see note 25) following noncompliance with a number of conditions.
Sale of the company’s Kazakhstan and Kyrgyzstan assets
On 18 December 2012, Sale and Purchase Agreements were signed according to which the Company sells all its Kazakhstan and Kyrgyzstan assets to the third party companies consisting of Institute Project B.V., Financial Services B.V. and Folkstand Consortium Limited.
As of 31 December 2012, the completion of the transactions was subject to certain conditions, including the receipt of all necessary governmental consents, approvals and waivers in Kazakhstan, which were beyond the Company’s control, thus the Kazakhstan and Kyrgyzstan subsidiaries sale were treated as continuing operations.
F-48 44 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
31. Commitments and contingencies (continued)
Insurance
The insurance industry is not yet well developed in the Russian Federation and the Republic of Kazakhstan and many forms of insurance protection common in more economically developed countries are not yet available on comparable terms. The Group does not have full insurance coverage for its mining, processing and transportation facilities, for business interruption, or for third party liabilities in respect of property or environmental damage arising from accidents on the Group’s property or relating to the Group’s operations, other than limited coverage required by law.
The Group, as a participant in exploration and mining activities may become subject to liability for risks that cannot be insured against, or against which it may elect not to be insured because of high premium costs. Losses from uninsured risks may cause the Group to incur costs that could have a material adverse effect on the Group’s business and financial condition.
Taxation contingencies in the Russian Federation
Commercial legislation of Russian Federation, including tax legislation, is subject to varying interpretations and frequent changes. In addition, there is a risk of tax authorities making arbitrary judgements of business activities. If a particular treatment, based on management’s judgement of the Group’s business activities, was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest.
Generally, taxpayers are subject to tax audits with respect to three calendar years preceding the year of the audit. However, completed audits do not exclude the possibility of subsequent additional tax audits performed by upper-level tax inspectorates reviewing the results of tax audits of their subordinate tax inspectorates. Also according to the clarification of the Russian Constitutional Court the statute of limitation for tax liabilities may be extended beyond the three year term set forth in the tax legislation, if a court determines that the taxpayers has obstructed or hindered a tax inspection.
The management of the Group is confident that applicable taxes have all been accrued and, consequently, creation of respective provisions is not required.
In terms of Russian tax legislation, authorities have a period of up to three years to re-open tax declarations for further inspection. Changes in the tax system that may be applied retrospectively by authorities could affect the Group’s previously submitted and assessed tax declarations.
With regards to matters where practice concerning payment of taxes is unclear, management estimated the there was no tax exposure estimated at 31 December 2012 (2011: USD 2,607 thousand). This amount had not been accrued at 31 December 2012 as management does not believe the payment to be probable.
Environmental matters
The Group is subject to extensive federal, local environmental controls and regulations in the regions in which it operates. The Group’s operations involve the discharge of materials and contaminants into the environment, disturbance of land that could potentially impact on flora and fauna, and give rise to other environmental concerns.
The Group’s management believes that its mining and production technologies are in compliance with the existing environmental legislation in the countries in which it operates. However, environmental laws and regulations continue to evolve. The Group is unable to predict the timing or extent to which those laws and regulations may change. Such change, if it occurs, may require that the Group modernise technology to meet more stringent standards.
F-49 45 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
31. Commitments and contingencies (continued)
The Group is obliged in terms of various laws, mining licenses and ‘use of mineral rights’ agreements to decommission mine facilities on cessation of its mining operations and to restore and rehabilitate the environment. Management of the Group regularly reassesses site restoration and environmental obligations for its operations. Estimations are based on management’s understanding of the current legal requirements and the terms of the license agreements. Should the requirements of applicable environmental legislation change or be clarified, the Group may incur additional site restoration and environmental obligations.
32. Risk management activities
Capital risk management
The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of net debt (borrowings as described in note 25) less cash and cash equivalents (disclosed in note 22) and equity of the Group (comprising issued share capital, reserves, retained earnings and non-controlling interests).
Major categories of financial instruments
The Group’s principal financial liabilities comprise borrowings, other non-current liabilities and trade and other payables. The main purpose of these financial instruments is to finance the Group’s operations. The Group has various financial assets such as accounts receivable and loans advanced, cash and cash equivalents, and promissory notes and other investments.
31 December 2012 2011 Financial assets Financial assets at FVTPL Equity investments in listed companies held for trading 9,276 14,857 Loans and receivables, including cash and cash equivalents Cash and cash equivalents 959,932 657,448 Bank deposits 68,286 12,175 Trade and other receivables 45,369 24,712 Loans receivable 2,748 3,643 Loan Participation Notes accounted for at amortised cost 13,286 - AFS financial assets, carried at fair value AFS investments - 34,744 Total financial assets 1,098,897 747,579 Financial liabilities Borrowings 348,347 798,680 Trade payables 41,204 30,980 Other payables 242,519 154,443 Other non-current liabilities 524 4,772 Total financial liabilities 632,594 988,875
F-50 46 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
32. Risk management activities (continued)
The main risks arising from the Group’s financial instruments are the price of equity investments, foreign currency, credit and liquidity risks. Due to the fact that the Group has a sufficient positive net position in respect of the outstanding balance of borrowings and cash and cash equivalents available to settle these obligations within a short period if conditions would become unfavourable, management believes the Group is not significantly exposed to interest rate risk. If the interest rate was 1% higher/lower during the year ended 31 December 2012 interest expense for the year 2012 would increase/decrease by USD 3,039 thousand.
The Group does not enter into any hedging contracts or use other financial instruments to mitigate the commodity price risk.
Equity investments price risk
The Group is exposed to equity investments price risk. Presented below is the sensitivity analysis illustrating the Group’s exposure to equity investments price risks at the reporting date. Management of the Group has decided to use the range of market prices of 10% higher/lower for the sensitivity analysis as the effect of such variation is considered to be significant and appropriate in the current market situation.
If market prices for equity investments had been 10% higher/lower, the profit before tax as a result of changes in fair value of financial assets at FVTPL would increase/decrease as follows:
31 December 2012 2011 Profit before tax 928 1,486 Investment revaluation reserve - 3,474
The Group normally places its excess cash into deposits in top rated Russian banks.
Fair value measurements recognised in the statement of financial position
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
x Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. x Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly; and. x Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
As at 31 December 2012, the Group held the following financial instruments measured at fair value:
Level 1 Level 2 Total Equity investments in listed companies held for trading 9,276 - 9,276 Total 9,276 - 9,276
F-51 47 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
32. Risk management activities (continued)
As at 31 December 2011, the Group held the following financial instruments measured at fair value:
Level 1 Level 2 Total Available for sale equity investments - 34,744 34,744 Equity investments in listed companies held for trading 14,857 - 14,857 Total 14,857 34,744 49,601
During the reporting periods, there were no transfers between Level 1 and Level 2.
The fair value of financial assets and liabilities is determined as follows:
x the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; and x the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing model based on discounted cash flow analysis using prices from observable current market transactions.
Management believes that the carrying values of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values.
Foreign currency risk
Currency risk is the risk that the financial results of the Group will be adversely affected by changes in exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies. Prices for gold are quoted in USD based on international quoted prices, and paid in local currencies, RUB or Tenge. The majority of the Group’s expenditures are denominated in RUB, accordingly, operating profits are adversely impacted by appreciation of RUB against USD. In assessing this risk management takes into consideration changes in gold price.
The carrying amounts of monetary assets and liabilities denominated in foreign currencies other than functional currencies of the individual Group entities were as follows:
Assets 31 December 2012 2011
USD 348,508 62,809 EURO 1,888 222
Total 350,396 63,031
31 December Liabilities 2012 2011
USD 381,499 888,405 EURO 14,087 680
Total 395,586 889,085
F-52 48 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
32. Risk management activities (continued)
Currency risk is monitored on a monthly basis by performing sensitivity analysis of foreign currency positions in order to verify that potential losses are at an acceptable level.
The table below details the Group’s sensitivity to changes of exchange rates by 10% which is the sensitivity rate used by the Group for internal analysis. The analysis was applied to monetary items at the reporting dates denominated in respective currencies.
31 December 2012 2011
Profit or loss (RUB to USD) 3,852 61,910 Profit or loss (RUB to EURO) 1,612 64 Profit or loss (KZT to USD) (553) 20,650
Credit risk
Credit risk is the risk that a customer may default or not meet its obligations to the Group on a timely basis, leading to financial losses to the Group. Credit risk arises from cash, cash equivalents and deposits kept with banks, loans granted, advances paid, promissory notes and trade and other receivables, and other investments in securities.
In order to mitigate the credit risk, the Group conducts its business with creditworthy and reliable counterparties, minimises the advance payments to suppliers, and actively uses letters of credit and other trade finance instruments.
The Group employs a methodology for in-house financial analysis of banks and non-banking counterparties, which enables the management to estimate an acceptable level of credit risk with regard to particular counterparties and to set appropriate individual risk limitations. Within the Group’s core companies the procedures for preparing new agreements include analysis and contemplation of credit risk, estimation of the aggregate risk associated with a counterparty (arising both from an agreement under consideration and from previously existing contracts, if any) and verifying compliance with individual credit limits.
The Group’s credit risk profile is regularly observed by management in order to avoid undesirable increase in risk, limit concentration of credit and to ensure compliance with above mentioned policies and procedures.
Although the Group sells more than 84% of the gold produced to three major customers, the Group is not economically dependent on these customers because of the high level of liquidity in the gold commodity market. A substantial portion of gold sales are made to banks on advance payment or immediate payment terms, therefore credit risk related to trade receivables is minimal. The outstanding receivables for gold sales are presented as follows:
31 December 2012 2011
Trade receivables for gold sales 20,284 4,869
F-53 49 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
32. Risk management activities (continued)
Gold sales to the Group’s three major customers, individually exceeding 9% of the Group’s gold sales are presented as follows:
31 December 2012 2011 Gold sales to three major customers exceeding 9% of the Group’s gold sales 2,336,743 2,060,107
Other receivables include amounts receivable in respect of sale of electricity, transportation, handling and warehousing services and other services. The procedures of accepting a new customer include check by a security department and responsible on-site management for a business reputation, licenses and certification, credit worthiness and liquidity.
Management of the Group believes that there is no other significant concentration of credit risk.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group’s liquidity position is carefully monitored and managed. The Group manages liquidity risk by maintaining detailed budgeting and cash forecasting processes and matching the maturity profiles of financial assets and liabilities to help ensure that it has adequate cash available to meet its payment obligations.
Historically the Group has not relied extensively on external financing. Following the development of new capital projects during the year 2012 the Group arranged certain external finance facilities with the banks, see note 25 (xi).
Management believes that, in case of need, the Group would be able to raise sufficient funding within a reasonable timeframe, and on favourable terms, due to its strong historical operations and positive operating cash flow.
The Group’s cash management procedures include medium-term forecasting (budget approved each financial year and updated on a quarterly basis), short-term forecasting (monthly cash-flow budgets are established for each business unit and a review of each entity’s daily cash position using a two- week rolling basis).
Presented below is the maturity profile of the Group’s financial liabilities as at 31 December 2012 based on undiscounted contractual payments, including interest payments:
Borrowings Other Trade non-current and other Principal Interest liabilities payables Total Due within three months 11,481 2,053 524 282,997 297,055 Due within three to nine months 61,235 4,526 - - 65,761 Due within nine to twelve months 115,294 2,673 - - 117,967 Due in the second year 52,811 4,080 - - 56,891 Due in the third year 108,366 659 - - 109,025 Due in the fourth year 290 2 - - 292 Due in thereafter - - - - - Total 349,477 13,993 524 282,997 646,991
F-54 50 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
32. Risk management activities (continued)
Presented below is the maturity profile of the Group’s financial liabilities as at 31 December 2011 based on undiscounted contractual payments, including interest payments:
Borrowings Other Trade non-current and other Principal Interest liabilities payables Total Due within three months 664,688 11,084 - 181,705 857,477 Due within three to nine months - 1,504 - - 1,504 Due within nine to twelve months 11,112 711 895 - 12,718 Due in the second year 44,444 1,983 895 - 47,322 Due in the third year 75,469 21,595 895 - 97,959 Due in the fourth year - - 895 - 895 Due in the fifth year - - 895 - 895 Due in thereafter - - 3,588 - 3,588 Total 795,713 36,877 8,063 181,705 1,022,358
33. Events after the reporting date
On 28 February 2013, Polyus Gold International Limited completed the transaction for the sale of all its subsidiaries in Kazakhstan and Kyrgyzstan to a consortium of independent third party companies consisting of Institute Project B.V., Financial Services B.V. and Folkstand Consortium Limited for a total consideration of USD 297,282 thousand (see note 31).
There have been no material reportable events since 31 December 2012 and the date of signing this report except for mentioned above.
F-55 51 Polyus Gold International Limited
Notes to the consolidated financial statements for the year ended 31 December 2012 (in thousands of US Dollars)
34. Investments in significant subsidiaries
Effective % held1 31 December # Subsidiaries Nature of business 2012 2011
Incorporated in Russian Federation 1 OJSC “Polyus Gold” 2 Management company 95 95 2 CJSC “Gold Mining Company Polyus” Mining 95 95 3 OJSC “Aldanzoloto GRK” Mining 95 95 4 OJSC “Lenzoloto” Market agent 61 61 5 CJSC “ZDK Lenzoloto” Mining 63 63 6 CJSC “Lensib” 3 Mining 38 38 7 CJSC “Svetliy” Mining 53 53 8 CJSC “Marakan” Mining 53 53 9 CJSC “Dalnaya Taiga” Mining 52 52 10 CJSC “Sevzoto” 3 Mining 41 41 11 OJSC “Matrosov Mine” Mining (development stage) 95 95 12 CJSC “Tonoda” Mining (exploration stage) 95 95 13 OJSC “Pervenets” Mining 95 95 14 OJSC “South-Verkhoyansk Mining Company” Mining (development stage) 95 95 15 LLC “Polyus Stroy” Construction 95 95
Incorporated in British Virgin Islands 16 Polyus Exploration Limited Geological research 95 95
Incorporated in Republic of Kazakhstan 17 JSC “MMC Kazakhaltyn” Mining 100 100
Incorporated in British Virgin Islands 18 Jenington International Inc. Market agent 95 95
Incorporated in Cyprus 19 Polyus Investments Limited Market agent 95 95
1. Effective % held by the Company, including holdings by other subsidiaries of the Group. 2. Effective % includes 92.95% of ordinary shares held directly by the Company as at 31 December 2012 and 2011. 3. The Company maintains control of these entities as it continues to govern their financial and operating policies through its ability to appoint the Board of Directors. A majority of the Board members for these entities are representatives of the Company and are therefore consolidated even though the effective interest is less than 50% as at 31 December 2012 and 2011.
F-56 52
Polyus Gold International Limited
Consolidated financial statements for the year ended 31 December 2011
F-57 POLYUS GOLD INTERNATIONAL LIMITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011
INDEX PAGE
STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 1
INDEPENDENT AUDITORS’ REPORT 2
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011:
Consolidated income statement 3
Consolidated statement of comprehensive income 4
Consolidated statement of financial position 5
Consolidated statement of changes in equity 6
Consolidated statement of cash flows 7
Notes to the consolidated financial statements 8-57
F-58
POLYUS GOLD INTERNATIONAL LIMITED
STATEMENT OF DIRECTORS’ RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011
The following statement, which should be read in conjunction with the independent auditor’s responsibilities stated in the independent auditor’s report, set out at page 3, is made with a view to distinguish the responsibilities of the Board of Directors and those of the independent auditors in relation to the consolidated financial statements of Polyus Gold International Limited.
The Board of Directors is responsible for the preparation of the consolidated financial statements that present fairly the financial position of the Group as of 31 December 2011, and the results of its operations, cash flows and changes in equity for the year then ended, in compliance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
In preparing the consolidated financial statements, the Board of Directors is responsible for: x properly selecting and applying accounting policies; x presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; x providing additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group’s consolidated financial position and financial performance; and x making an assessment of the Group’s ability to continue as a going concern.
The Board of Directors is also responsible for: x designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; x maintaining adequate accounting records that are sufficient to show and explain the Group’s transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; x maintaining statutory accounting records in compliance with legislation and accounting standards in the jurisdictions in which the Group operates; x taking such steps as are reasonably available to them to safeguard the assets of the Group; and x preventing and detecting fraud and other irregularities.
The consolidated financial statements of the Group for the year ended 31 December 2011 were approved on 30 March 2012 by the Board of Directors.
On behalfbehe alf ofo thethee BBoardoao rdd ooff DiDDirectors:rerectctororss:
______Pikhoyahoyya G.R. Chiefef ExecutiveExxecutu ivive OfficerOfOffificeer
London 30 March 2012
F-59 1 ZAO “Deloitte & Touche CIS” 5 Lesnaya Street Moscow, 125047 Russia
Tel: +7 (495) 787 06 00 Fax: +7 (495) 787 06 01 www.deloitte.ru
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Polyus Gold International Limited:
We have audited the accompanying consolidated financial statements of Polyus Gold International Limited and its subsidiaries (hereinafter the “Group”), which are comprised of the consolidated statement of financial position as at 31 December 2011 and the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended 31 December 2011 and a summary of significant accounting policies and other explanatory information. Director’s responsibility for the consolidated financial statements
The Directors are responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as the Directors determine is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the Directors, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at 31 December 2011, and its financial performance and its cash flows for the year ended 31 December 2011 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Moscow, Russia 30 March 2012
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. Please see www.deloitte.com/ru/about for a detailed description of the legal structure of Deloitte CIS. © 2012 ZAO “Deloitte & Touche CIS”. All rights reserved. F-60 2 Member of Deloitte Touche Tohmatsu Limited POLYUS GOLD INTERNATIONAL LIMITED
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER (in thousands of US Dollars, except for earnings per share data)
Year ended 31 December Notes 2011 2010
Gold sales 7 2,340,650 1,711,298 Other sales 62,060 37,506
Total revenue 2,402,710 1,748,804
Cost of gold sales 8 (1,162,019) (895,555) Cost of other sales (46,343) (33,424)
Gross profit 1,194,348 819,825
Selling, general and administrative expenses 9 (225,618) (194,549) Impairment of stockpiles 21 (25,209) - Impairment of exploration and evaluation assets 17 (54,708) (13,584) Impairment of property, plant and equipment (23,501) (27,179) Research expenses (2,581) (2,412) Other expenses, net 10 (24,077) (35,101)
Operating profit 838,654 547,000
Finance costs 11 (71,403) (42,717) Income/(loss) from investments, net 12 3,630 (23,711) Foreign exchange (loss)/gain (5,814) 765
Profit before income tax 765,067 481,337
Income tax 13 (207,052) (124,840)
Profit for the year 558,015 356,497
Attributable to:
Shareholders of the Company 468,998 332,169 Non-controlling interests 89,017 24,328
558,015 356,497
Earnings per share
Basic and diluted (US Cents) 15 16 11
F-61 3 POLYUS GOLD INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER (in thousands of US Dollars)
Year ended 31 December Notes 2011 2010
Profit for the year 558,015 356,497
Available for sale financial assets: (Loss)/gain from change in fair value of available-for-sale investments (8,976) 33,340 Losses recycled to profit or loss on disposal or impairment of available-for-sale investments 12 (17,023) (20,289)
(25,999) 13,051
Effect of translation to presentation currency (194,307) (32,803)
Other comprehensive loss for the year (220,306) (19,752)
Total comprehensive income for the year 337,709 336,745
Attributable to:
Shareholders of the Company 304,309 316,968 Non-controlling interests 33,400 19,777
337,709 336,745
F-62 4 POLYUS GOLD INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT 31 DECEMBER (in thousands of US Dollars)
31 December ASSETS Notes 2011 2010
Non-current assets Property, plant and equipment 16 2,056,417 2,058,636 Exploration and evaluation assets 17 399,846 442,316 Deferred stripping costs 18 64,460 61,023 Inventories 21 207,789 201,030 Investments in securities and other financial assets 20 3,643 50,273 Other non-current assets 35 1,860
2,732,190 2,815,138
Current assets Inventories 21 543,023 455,144 Deferred expenditures 19 18,512 18,282 Trade and other receivables 22 24,712 21,244 Advances paid to suppliers and prepaid expenses 29,636 22,968 Investments in securities and other financial assets 20 63,468 177,332 Taxes receivable 23 150,022 167,161 Cash and cash equivalents 24 657,448 326,905
1,486,821 1,189,036
TOTAL ASSETS 4,219,011 4,004,174
EQUITY AND LIABILITIES
Capital and reserves Share capital 25 482 519 Additional paid-in capital 2,189,240 2,087,978 Treasury shares (765,013) (626,313) Investments revaluation reserve 4,557 30,556 Translation reserve (258,426) (119,736) Retained earnings 1,424,516 1,810,641
Equity attributable to shareholders of the Company 2,595,356 3,183,645 Non-controlling interests 235,317 56,886
2,830,673 3,240,531
Non-current liabilities Site restoration and environmental obligations 26 149,876 136,410 Borrowings 27 123,048 29,686 Deferred tax 28 180,741 182,948 Other non-current liabilities 24,008 19,666
477,673 368,710
Current liabilities Borrowings 27 675,632 173,762 Trade, other payables and accrued expenses 29 192,077 169,037 Taxes payable 30 42,956 52,134
910,665 394,933
TOTAL LIABILITIES 1,388,338 763,643
TOTAL EQUITY AND LIABILITIES 4,219,011 4,004,174
F-63 5 POLYUS GOLD INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER (in thousands of US Dollars)
Equity attributable to shareholders of the Company Investments Share Additional Treasury revaluation Translation Retained Non-controlling Notes capital paid-in capital shares reserve reserve earnings Total interests Total
Balance at 31 December 2009 519 2,087,978 (626,313) 17,505 (91,484) 1,549,792 2,937,997 59,874 2,997,871
Profit for the year - - - - - 332,169 332,169 24,328 356,497 Other comprehensive income/(loss) - - - 13,051 (28,252) - (15,201) (4,551) (19,752)
Total comprehensive income - - - 13,051 (28,252) 332,169 316,968 19,777 336,745
Increase of ownership in subsidiary - - - - - 33,023 33,023 (11,068) 21,955 Dividends to shareholders of the Company 14 - - - - - (104,343) (104,343) - (104,343) Dividends to shareholders of non-controlling interests ------(11,697) (11,697)
F-64 Balance at 31 December 2010 519 2,087,978 (626,313) 30,556 (119,736) 1,810,641 3,183,645 56,886 3,240,531
Profit for the year - - - - - 468,998 468,998 89,017 558,015 Other comprehensive loss - - - (25,999) (138,690) - (164,689) (55,617) (220,306)
Total comprehensive income - - - (25,999) (138,690) 468,998 304,309 33,400 337,709
Effect of reorganisation 2 (37) 220,885 (258,323) - - (417,460) (454,935) 417,460 (37,475) Increase of ownership in subsidiary 2 (119,623) 119,623 (365,336) (365,336) (223,480) (588,816) Dividends declared 14 - - - - - (72,327) (72,327) - (72,327) Dividends to shareholders of non-controlling interests ------(48,949) (48,949)
Balance at 31 December 2011 482 2,189,240 (765,013) 4,557 (258,426) 1,424,516 2,595,356 235,317 2,830,673
6
POLYUS GOLD INTERNATIONAL LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEARS ENDED 31 DECEMBER (in thousands of US Dollars)
Year ended 31 December Notes 2011 2010
Net cash generated from operating activities 31 765,405 445,307
Investing activities
Purchases of property, plant and equipment (343,037) (350,327) Payments for deferred stripping costs 19 (18,270) (9,740) Proceeds on sales of property, plant and equipment 1,911 643 Interest received 15,359 8,351 Purchases of investments in securities and placement of deposits in banks (37,596) (64,996) Proceeds on sales of investments in securities and redemption of bank deposits 121,270 244,955
Net cash utilised in investing activities (260,363) (171,114)
Financing activities
Acquisition of subsidiary’s shares 2 (588,816) - Proceeds from borrowings 27 560,000 - Repayment of borrowings 27 - (10,944) Proceeds from issuance of subsidiary’s shares 2 - 21,955 Dividends paid to shareholders of the Company 14 (73,191) (104,801) Dividends paid to non-controlling shareholders (26,225) (12,226) Other (6,726) (4,967)
Net cash utilised in financing activities (134,958) (110,983)
Net increase in cash and cash equivalents 370,084 163,210
Cash and cash equivalents at beginning of the year 24 326,905 173,360
Effect of foreign exchange rate changes on cash and cash equivalents (39,541) (9,665)
Cash and cash equivalents at end of the year 24 657,448 326,905
F-65 7 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
1. GENERAL
Polyus Gold International Limited ( “PGIL” or the “Company”) and its controlled entities is the resultant group of companies arising from the completed reorganisation of Open Joint Stock Company (“OJSC”) Polyus Gold (“Polyus Gold”), together with its subsidiaries ( the “Polyus Gold Group”) and KazakhGold Group Limited (“KazakhGold”), together with its subsidiaries (the “KazakhGold Group”) (the “Reorganisation” – see Note 2). The Reorganisation was effected through the acquisition of substantially all of the share capital of Polyus Gold by KazakhGold (previously a subsidiary 65% owned by Polyus Gold), through a series of transactions, including a private exchange offer for ordinary shares and American Depositary Receipts (“ADRs”) of Polyus Gold and the exercise of options to acquire shares and ADRs of Polyus Gold held by Polyus Gold’s principal shareholders.
The principal activities of the Company and its controlled entities (the “Group”) are the extraction, refining and sale of gold. Mining and processing facilities of the Group are located in the Krasnoyarsk and Irkutsk regions and Sakha Republic of the Russian Federation and in the Republic of Kazakhstan,
The Group also performs research, exploration and development works, primarily at the Natalka license area located in the Magadan region, Nezhdaninskoe license areas located in the Sakha Republic, Kyrgyzstan, Romania and the Republic of Kazakhstan. Further details regarding the nature of the business and of the significant subsidiaries of the Group are presented in note 36.
2. REORGANISATION
During the year ended 31 December 2011, the Group completed the Reorganisation of the shareholding structure of the Group. The Boards of Directors of both KazakhGold and Polyus Gold approved the Reorganisation in June 2011. The final conditions were satisfied on 25 July 2011. The effect of the reorganisation has been accounted for in these consolidated financial statements.
The Reorganisation comprised several transactions including:
x A conditional option agreement between KazakhGold and entities under the beneficial ownership of the principal shareholders of Polyus Gold, to acquire their holdings of Polyus Gold securities in exchange for shares in KazakhGold. The option agreement was exercised and KazakhGold acquired 139 million shares in Polyus Gold through the issuance of 2.4 billion KazakhGold shares. x A conditional option agreement between KazakhGold and Jenington International Inc. (“Jenington”) (a subsidiary of Polyus Gold, and 65% shareholder of KazakhGold), to acquire Jenington’s shareholding of Polyus Gold securities in exchange for shares in KazakhGold. The option agreement was exercised, and KazakhGold acquired 10.7 million shares in Polyus Gold through the issuance of 185 million KazakhGold shares). x A conditional Private Exchange Offer (“PEO”) to eligible Polyus Gold security holders for 16% of the issued Polyus Gold securities of which 11% was accepted. x The renaming of KazakhGold to Polyus Gold International Limited (“PGIL”).
As a result of the transactions comprising the Reorganisation, KazakhGold acquired Polyus Gold ordinary shares and ADRs representing in aggregate 89.14% of Polyus Gold’s issued share capital. The result of the transactions is that previous Polyus Gold shareholders held approximately 96% of the issued and outstanding shares of PGIL. After finalisation of the Reorganisation, as presented in note 25, the issued share capital of the Company constitutes 3,032,149,962 ordinary shares at par value of GBP of 0.0001 (including 262,448,816 treasury shares).
F-66 8 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
2. REORGANISATION (continued)
The effect of the Reorganisation on the share capital of Polyus Gold is explained below.
The Company’s shareholding structure before the Reorganisation was as follows:
Number of shares ‘000 % Jenington 77,745 65.0 GDR holders 31,263 26.1 Other shareholders 10,600 8.9 119,608 100.0
Polyus Gold’s shareholding structure before the Reorganisation is presented below as having been converted into the Company share capital at a rate of 1 Polyus Gold share for 17.14 Company’s shares:
Number of shares ‘000 % Principal shareholders 2,390,109 73.1 ADR holders 522,778 16.0 Other shareholders 169,770 5.2 Treasury shares held by Jenington 184,703 5.7 3,267,360 100.0
The effect of the Reorganisation on the Company’s shareholding structure was as follows:
Number of shares ‘000 % Principal shareholders of Polyus Gold 2,390,109 78.8 Existing Company ADR holders and other shareholders 41,862 1.4 Polyus Gold ADR holders who accepted the PEO 337,730 11.1 Treasury shares held by Jenington 262,449 8.7 3,032,150 100.0
The effect of the Reorganisation on the Group’s consolidated financial statements was as follows:
Additional Non- paid-in Treasury Retained controlling Share capital capital shares earnings interest Presentation of share capital of legal parent (note 25) (37) 37 - - - Conversion of Jenington’s shareholding in KazakhGold into treasury shares (note 25) - 220,848 (220,848) - - Classification of call options over KazakhGold shares to treasury shares (note 25) - - (37,475) - - Non-controlling interests in Polyus Gold after Reorganisation - - - (417,460) 417,460 (37) 220,885 (258,323) (417,460) 417,460
F-67 9 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
2. REORGANISATION (continued)
Significant transactions post the Reorganisation date
Increase in ownership in Polyus Gold
On 29 July 2011, and following the closing of PEO described above, the Group, through its subsidiary Jenington International Inc., launched an additional Private Exchange Offer (“Jenington PEO”) to enable those eligible Polyus Gold security holders who did not participate in PEO to exchange their securities substantially on the same terms.
The Jenington PEO closed on 15 August 2011 resulting in the acquisition of 4,141,089 ADRs (equivalent of 2,070,545 ordinary shares) of Polyus Gold (or 1.09% of the issued Polyus Gold securities) in exchange for 35,489,133 treasury shares of the Company for the total value of USD 119,623 thousand. In addition, by the end of August 2011, Jenington purchased 4,854,770 ADRs (equivalent of 2,427,385 ordinary shares) of Polyus Gold (or 1.27% of the issued Polyus Gold securities) for a total consideration of USD 142,713 thousand.
As the result of the aforementioned transactions, the aggregated number of issued Polyus Gold securities held by the Company and Jenington International Inc. increased to 91.5% of the total issued capital of Polyus Gold with the corresponding decrease in non-controlling interest of USD 86,560 thousand.
Mandatory tender offer
In accordance with the Russian Federal Law “On Open Joint Stock Companies” a company that has acquired over 30 per cent of the total number of the shares of an open joint stock company is obliged within 35 days from taking legal ownership of the shares as determined under Russian legislation, to send to the shareholders possessing the remaining shares a public offer to acquire their shares (“Mandatory Tender Offer”). The company is required to establish the price of the shares to be acquired which may not be less than the weighted average market price for the nine months prior to sending the Mandatory Tender Offer (“MTO”) to the Federal Service for Financial Markets.
On 30 August 2011 a MTO for the acquisition of the non-controlling interests in Polyus Gold was made at the price of RUB 1,900.27 or USD 65.85 (at 30 August 2011 exchange rate) per share. The price established exceeded the average weighted price per share of Polyus Gold as determined by reference to all publicly traded securities of Polyus Gold over a period of at least nine months preceding the date of submission of this MTO to Federal Service for Financial Markets.
On 16 December 2011 Polyus Gold International Limited completed the acquisition of the ordinary registered shares of OJSC Polyus Gold. In the MTO the Company acquired 7,263,644 shares for USD 446,103 thousand, constituting approximately 3.81% of the issued and outstanding shares of OJSC Polyus Gold. After the completion of the MTO, Polyus Gold International Limited became the holder of 177,190,246 shares, representing approximately 92.95% of the issued and outstanding shares of OJSC Polyus Gold. This resulted in a decrease in non-controlling interest by USD 136,920 thousand.
Increase of ownership in KazakhGold in 2010
On 1 July 2010, KazakhGold issued 66,666,667 new ordinary shares at a placement price of USD 1.50 per share for a total consideration of USD 98,747 thousand, net of expenses. Polyus Gold, through its subsidiary Jenington International Inc., purchased 51,194,922 of the shares, thus increasing Polyus Gold’s ownership in KazakhGold to 65% of its issued share capital. As a result of this transaction, the Group recognised a decrease in non-controlling interest of USD 11,068 thousand.
F-68 10 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
3. BASIS OF PREPARATION AND PRESENTATION
Going concern
In assessing its going concern status, the Directors have taken account of the Group’s financial position, expected future trading performance, its borrowings and available credit facilities, anticipated additional borrowing facilities under negotiation and its capital expenditure commitments and plans, together with other risks facing the Group. After making appropriate enquiries, the Directors consider that the Group has adequate resources to continue in operational existence for at least the next 12 months from the date of these consolidated financial statements and that it is appropriate to adopt the going concern basis in preparing these consolidated financial statements.
Compliance with the International Financial Reporting Standards
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). IFRS includes the standards and interpretations approved by the IASB including International Accounting Standards (“IAS”) and interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”).
The accounting policies set out below have been applied in preparing the consolidated financial statements for the years ended 31 December 2011 and 2010.
Basis of presentation
The entities of the Group maintain their accounting records in accordance with the laws, accounting and reporting regulations of the jurisdiction in which they are incorporated and registered. The accounting principles and financial reporting procedures in these jurisdictions may differ substantially from those generally accepted under IFRS. Accordingly, such financial information has been adjusted to ensure that the consolidated financial statements are presented in accordance with IFRS.
The consolidated financial statements of the Group are prepared on the historical cost basis, except for mark-to-market valuation of certain financial instruments, in accordance with IAS 39.
As described in note 2, the Group completed during the year the Reorganisation of the shareholding structure of the Group. These consolidated financial statements are issued under the name of Polyus Gold International Limited being the new parent entity following the Reorganisation but represent a continuation of the consolidated financial statements of the Polyus Gold Group except for its capital structure. Accordingly:
(a) the assets and liabilities of Polyus Gold and KazakhGold are recognised and measured at their pre-Reorganisation carrying amounts as the transactions are between parties under common control; (b) the consolidated retained earnings and other equity balances are the retained earnings and other equity balances of the Polyus Gold Group immediately before the Reorganisation; (c) the share capital structure reflects the capital structure of Polyus Gold International Limited, which has been presented retroactively; and (d) the comparative statements presented in these consolidated financial statements are that of the Polyus Gold Group.
F-69 11 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
3. BASIS OF PREPARATION AND PRESENTATION (continued)
Standards and Interpretations in issue not yet adopted
At the date of approval of the consolidated financial statements, the following new or amended IFRS standards have been issued by the IASB in the year ended 31 December 2011, but are not mandatory for the current reporting period and therefore have not been applied:
Effective for annual periods beginning on or after
IFRS 7 “Financial Instruments: Disclosures” – amendment 1 January 2013 IFRS 9 “Financial Instruments – Classification and Measurement” 1 January 2013 IFRS 10 “Consolidated financial statements” 1 January 2013 IFRS 11 “Joint arrangements” 1 January 2013 IFRS 12 “Disclosure of interests in other entities” 1 January 2013 IFRS 13 “Fair value measurement” 1 January 2013 IAS 1 “Presentation of financial statements” – amendment 1 July 2012 IAS 12 “Income taxes” – amendment 1 January 2012 IAS 19 “Employee benefits” – amendment 1 January 2013 IAS 27 “Separate financial statements” – amendment 1 January 2013 IAS 28 “Investments in associates and joint ventures” - amendment 1 January 2013 IAS 32 “Financial instruments: Presentation” - amendment 1 January 2014 IAS 34 “Interim Financial Reporting” – amendment 1 January 2013 IFRIC 20 “Stripping costs in the Production Phase of a Surface mine” 1 January 2013
The impact of the adoption of these standards and interpretations in the preparation of the consolidated financial statements in future periods is currently being assessed by Group’s management; however, no material effect on the Group’s financial position or results of its operations is anticipated.
F-70 12 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES
Basis of consolidation
Subsidiaries
The consolidated financial statements of the Group include the financial statements of the Company and all its subsidiaries, from the date that control effectively commenced until the date that control effectively ceased. Control is achieved where the Company has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.
Non-controlling interest in consolidated subsidiaries are identified separately from the Group’s equity therein. The interest of non-controlling shareholders may initially be measured either at fair value or at the non-controlling interest’s proportionate share of the fair value of the acquiree’s identifiable net assets. The choice of measurement basis is made on an acquisition-by-acquisition basis. Subsequent to acquisition, the carrying amount of the non-controlling interest is the amount of those interests at initial recognition plus the non-controlling interest’s share of subsequent changes in net assets since the date of the combination. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interest having a deficit balance.
Changes in the Group’s interests in subsidiaries that do not result in a loss of control are accounted for as equity transactions. The carrying amounts of the Group’s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Company.
When the Group loses control of a subsidiary, the profit and loss on disposal is calculated as the difference between the aggregate of the fair value of the consideration received and the fair value of any retained interest and the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. Amounts previously recognised in other comprehensive income in relation to the subsidiary are accounted for in the same manner as would be required if the relevant assets or liabilities were disposed of. The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under IAS 39 Financial Instruments: Recognition and Measurement or, when applicable, the cost on initial recognition of an investment in an associate or jointly controlled entity.
All intra-group balances, transactions and any unrealised profits or losses arising from intra-group transactions are eliminated on consolidation.
Business combinations
Except for common control transactions, acquisitions of subsidiaries and businesses are accounted for using the acquisition method. The consideration for each acquisition is measured at the aggregate of the fair values (at the date of acquisition) of assets given, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree. Acquisition- related costs are recognised in profit or loss as incurred.
Where applicable, the consideration for the acquisition includes any asset or liability resulting from a contingent consideration arrangement, measured at its acquisition-date fair value. Subsequent changes in such fair values are adjusted against the cost of acquisition where they qualify as measurement period adjustments. All other subsequent changes in the fair value of contingent consideration classified as an asset or liability are accounted for in accordance with relevant IFRS.
F-71 13 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Where a business combination is achieved in stages, the Group’s previously held interests in the acquired entity are remeasured to fair value at the acquisition date (i. e. the date the Group obtains control) and the resulting gain or loss, if any, is recognised in profit or loss. Amounts arising from interests in the acquiree prior to the acquisition date that have previously been recognised in other comprehensive income are reclassified to the consolidated income statement, where such treatment would be appropriate if that interest were disposed of.
The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (2008) are recognised at their fair value at the acquisition date, except that:
x deferred tax assets or liabilities and liabilities or assets related to employee benefit arrangements are recognised and measured in accordance with IAS 12 Income Taxes and IAS 19 Employee Benefits respectively; x liabilities or equity instruments related to the replacement by the Group of an acquiree’s share- based payment awards are measured in accordance with IFRS 2 Share-based Payment; and x assets (or disposal groups) that are classified as held for sale in accordance with IFRS 5 Non- current Assets Held for Sale and Discontinued Operations are measured in accordance with that Standard.
If the initial accounting for a business combination is incomplete by the end of the reporting period in which the combination occurs, the Group reports provisional amounts for the items for which the accounting is incomplete. Those provisional amounts are adjusted during the measurement period, or additional assets or liabilities are recognised, to reflect new information obtained about facts and circumstances that existed as of the acquisition date that, if known, would have affected the amounts recognised as of that date. The measurement period may not exceed one year from the effective date of the acquisition.
Goodwill
Goodwill arising in a business combination is recognised as an asset at the date that control is acquired (the acquisition date). Goodwill is measured as the excess of the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree, and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed.
If the Group’s interest in the fair value of the acquiree’s identifiable net assets exceeds the sum of the consideration transferred, the amount of any non-controlling interests in the acquiree and the fair value of the acquirer’s previously held equity interest in the acquiree (if any), the excess is recognised immediately in profit or loss as a bargain purchase gain.
Goodwill is not amortised but is reviewed for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s cash-generating units expected to benefit from the synergies of the combination. Cash-generating units to which goodwill has been allocated are tested for impairment annually, or more frequently when there is an indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. An impairment loss recognised for goodwill is not reversed in a subsequent period.
On disposal of a subsidiary, the attributable goodwill is included in the determination of the profit or loss on disposal.
F-72 14 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Functional currency
The individual financial statements of the Group’s subsidiaries are each prepared in their respective functional currencies. The functional currency of the Company is US Dollar. The Russian Rouble (“RUB”) is the functional currency of all the subsidiaries of the Group, except for the following subsidiaries operating with significant degrees of autonomy:
Functional Subsidiary currency
Jenington International Inc. US Dollar Polyus Exploration Limited US Dollar Polyus Investments Limited US Dollar JSC “MMC Kazakhaltyn” and its subsidiaries Kazakh Tenge
Presentation currency
The Group has chosen to present its consolidated financial statements in the US Dollar (“USD”), as management believes it is a more convenient presentation currency for international users of the consolidated financial statements of the Group as it is a common presentation currency in the mining industry. The translation of the financial statements of the Group entities from their functional currencies to the presentation currency is performed as follows:
x all assets, liabilities, both monetary and non-monetary are translated at closing exchange rates at each reporting date; x all income and expenses are translated at the average exchange rates for the years presented, except for significant transactions that are translated at rates on the date of such transactions; x resulting exchange differences are included in equity and presented as Effect of translation to presentation currency within the Translation reserve; and x in the statement of cash flows, cash balances at beginning and end of each reporting period presented are translated at exchange rates at the respective dates. All cash flows are translated at the average exchange rates for the years presented, except for significant transactions that are translated at rates on the date of transaction.
Exchange rates used in the preparation of the consolidated financial statements were as follows:
2011 2010 Russian Rouble/US Dollar Year end rate 32.20 30.47 Average for the year 29.39 30.36
Kazakh Tenge/US Dollar Year end rate 148.40 147.40 Average for the year 146.62 147.35
Foreign currencies
Transactions in currencies other than the entity’s functional currencies (foreign currencies) are recorded at the exchange rates prevailing on the dates of the transactions. All monetary assets and liabilities denominated in foreign currencies are translated at the exchange rates prevailing at the reporting date. Non-monetary items carried at historical cost are translated at the exchange rate prevailing on the date of transaction. Non-monetary items carried at fair value are translated at the exchange rate prevailing on the date on which the most recent fair value was determined. Exchange differences arising from changes in exchange rates are recognised in the consolidated income statement.
F-73 15 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, plant and equipment
Mineral rights
Mineral rights are recorded as assets upon acquisition at fair value and are included within mining assets or exploration and evaluation assets.
Mining assets
Mining assets are recorded at cost less accumulated amortisation. Mining assets include the cost of acquiring and developing mining properties, pre-production expenditure, mine infrastructure, processing plant, mineral rights and mining and exploration licenses and the present value of future decommissioning costs.
Mining assets are amortised on a straight-line basis over the estimated economic useful life of the asset, or the remaining useful life of mines of 7 to 21 years per mine operating plans, which call for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code, whichever is shorter. Amortisation is charged from the date a new mine reaches commercial production quantities and is included in the cost of production.
The estimated remaining useful lives of the Group’s significant mines based on the mine operating plans are as follows: Olimpiada 13 years Blagodatnoe 10-21 years Kuranakh 16 years
Non-mining assets
Non-mining assets are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis over the economic useful lives of such assets: Building, structures, plant and equipment 5-50 years Transport 3-11 years Other assets 3-10 years
Capital construction-in-progress
Capital construction-in-progress comprises costs directly related to mine development, construction of buildings, infrastructure, processing plant, machinery and equipment. Amortisation or depreciation of these assets commences when they are in the condition necessary for them to be capable of operating in the manner intended by management.
Leased assets
Leases under which the Group assumes substantially all the risks and rewards of ownership are classified as finance leases. Assets subject to finance leases are capitalised as property, plant and equipment at the lower of fair value or present value of future minimum lease payments at the date of acquisition, with the related lease obligation recognised at the same value. Assets held under finance leases are depreciated over their estimated economic useful lives or over the term of the lease, if shorter. If there is reasonable certainty that the lessee will obtain ownership by the end of the lease term, the period of expected use is useful life of the asset.
Finance lease payments are allocated using the effective interest rate method, between the lease finance cost, which is included in interest paid, and the capital repayment, which reduces the related lease obligation to the lessor.
F-74 16 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of tangible assets, other than exploration and evaluation assets
An impairment review of tangible assets is carried out when there is an indication that those assets have suffered an impairment loss. If any such indication exists, the carrying amount of the asset is compared to the estimated recoverable amount of the asset in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs.
The recoverable amount is the higher of fair value less costs to sell or value-in-use. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. The impairment loss is recognised in the consolidated income statement immediately, unless the relevant asset is carried at revalued amount, in which case the impairment loss is treated as a revaluation decrease.
Where an impairment loss subsequently reverses, the carrying amount of the asset (or cash- generating unit) is increased to the revised estimate of its recoverable amount, but only to the extent that the increased carrying amount does not exceed the original carrying amount that would have been determined had no impairment loss been recognised in prior periods.
A reversal of an impairment loss is recognised in the consolidated income statement immediately, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase.
Exploration and evaluation assets
Exploration and evaluation assets represent capitalised expenditures incurred by the Group in connection with the exploration for and evaluation of gold resources, such as:
x acquisition of rights to explore potentially mineralised areas; x topographical, geological, geochemical and geophysical studies; x exploratory drilling; x trenching; x sampling; and x activities in relation to evaluating the technical feasibility and commercial viability of extracting gold resource.
Exploration and evaluation expenditures are capitalised when the exploration and evaluation activities have not reached a stage that permits a reasonable assessment of the existence of commercially recoverable gold resources. When the technical feasibility and commercial viability of extracting a gold resource are demonstrable and a decision has been made to develop the mine, capitalised exploration and evaluation assets are reclassified to mining assets.
F-75 17 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of exploration and evaluation assets
Exploration and evaluation assets are assessed for impairment when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. The following facts and circumstances, among other, indicate that exploration and evaluation assets must be tested for impairment:
x the term of exploration license in the specific area has expired during the reporting period or will expire in the near future, and is not expected to be renewed; x substantive expenditure on further exploration for and evaluation of gold resources in the specific area is neither budgeted nor planned; x exploration for and evaluation of gold resources in the specific area have not led to the discovery of commercially viable quantities of gold resources and the decision was made to discontinue such activities in the specific area; and x sufficient data exists to indicate that, although a development in the specific area is likely to occur, the carrying amount of the exploration and evaluation asset is unlikely to be recovered in full from successful development or by sale.
For the purpose of assessing exploration and evaluation assets for impairment, such assets are allocated to cash-generating units, being exploration license areas.
Any impairment loss is recognised as an expense in accordance with the policy on impairment of tangible assets set out above.
Deferred stripping costs
The Group accounts for stripping costs incurred using the average life-of-mine stripping ratio. The method assumes that stripping costs incurred during the production phase to remove waste ore are deferred and charged to operating costs on the basis of the average life-of-mine stripping ratio. The average stripping ratio is calculated as the number of cubic meters of waste material removed per tonne of ore mined based on a mine operating plan which calls for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code. The average life-of- mine ratio is revised annually or when circumstances change in the mine’s pit design or in the technical or economic parameters impacting the reserves. Changes to the life-of-mine ratio are accounted for prospectively as changes in accounting estimates.
The cost of excess stripping is capitalised as deferred stripping costs and forms part of the total investment in the relevant cash-generating unit, which is reviewed for impairment if events or changes in circumstances indicate that the carrying value may not be recoverable
Certain of the Group’s surface (alluvial) mining operations are located in regions with extreme weather conditions, and gold at these locations can only be mined during certain months of the year. Costs incurred in preparation for future seasons, usually during winter months, are deferred until the following year when the specific mine is in operation when it is expensed. Such expenditures mainly include excavation costs and mine specific administration costs, and are recognised in the consolidated statement of financial position within deferred expenditures.
F-76 18 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Refined gold and gold-in-process
Inventories including refined metals, metals in concentrate and in process, ore stockpiles and doré are stated at the lower of production cost or net realisable value. Production cost is determined as the sum of the applicable expenses incurred directly or indirectly in bringing inventories to their existing condition and location. Refined metals are valued at the average cost of production per saleable unit of metal. Work-in- process, metal concentrate and doré are valued at the average production costs at the relevant stage of production. Ore stockpiles are valued at the average cost per tonne of mining ore. Net realisable value represents the estimated selling price for product based on prevailing spot metal prices, less estimated costs to complete production and costs necessary to make the sale.
Stores and materials
Stores and materials consist of consumable stores and are stated at the lower of cost and net realisable value. Costs of stores and materials are determined on a weighted average cost basis.
Net realisable value represents the estimated selling price for stores and materials less all costs necessary to make the sale.
Financial assets
Financial assets are recognised on trade date where the purchase or sale of a financial asset is under a contract whose terms require delivery of the financial asset within the timeframe established by the market concerned, and are initially measured at fair value, plus transaction costs, except for financial assets classified as at fair value through profit or loss, which are initially measured at fair value.
The Group’s financial assets are classified into the following categories:
x financial assets at fair value through profit or loss (“FVTPL”); x held-to-maturity investments; x available-for-sale (“AFS”) financial assets; and x loans and receivables.
The classification depends on the nature and purpose of the financial asset and is determined at the time of initial recognition.
Financial assets at FVTPL
Financial assets are classified as at FVTPL where the financial asset is either held for trading or it is designated as at FVTPL.
A financial asset is classified as held for trading if:
x it has been acquired principally for the purpose of selling in the near future; or x it is a part of an identified portfolio of financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or x it is a derivative that is not designated and effective as a hedging instrument.
F-77 19 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if:
x such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or x the financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group’s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or x it forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL.
Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any dividend or interest earned on the financial asset and is included in the (Loss)/income from investments line item in the consolidated income statement. Fair value is determined in the manner described in note 34.
Held-to-maturity investments
Promissory notes with fixed or determinable payments and fixed maturity dates that the Group has the positive intent and ability to hold to maturity are classified as held-to-maturity investments. Held- to-maturity investments are recorded at amortised cost using the effective interest method less impairment, with income recognised on an effective yield basis.
AFS financial assets
AFS financial assets mainly include investments in listed and unlisted shares.
Listed shares held by the Group that are traded in an active market are stated at fair value. Fair value of AFS is determined as follows:
x the fair value of AFS financial assets with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; and x the fair value of other AFS financial assets are determined in accordance with generally accepted pricing model based on discounted cash flow analysis using prices from observable current market transactions.
Gains and losses arising from changes in fair value are recognised directly in equity in the Investments revaluation reserve with the exception of impairment losses, interest calculated using the effective interest method and foreign exchange gains and losses on monetary assets, which are recognised directly in the consolidated income statement. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously recognised in the investment revaluation reserve is included in the consolidated income statement for the period.
Dividends on AFS equity instruments are recognised in the consolidated income statement when the Group’s right to receive the dividends is established.
The fair value of AFS financial assets denominated in a foreign currency is determined in that foreign currency and translated at the exchange rate at the reporting date. The change in fair value attributable to translation differences that result from a change in amortised cost of the asset is recognised in the consolidated income statement, and other changes are recognised in equity.
F-78 20 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans and receivables
Loans and receivables with fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. Loans and receivables are measured at amortised cost using the effective interest method less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial.
Impairment of financial assets
Financial assets, other than those at FVTPL, are assessed for indicators of impairment at each reporting date. Financial assets are impaired where there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been impacted. For financial assets carried at amortised cost, the amount of the impairment is the difference between the asset’s carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate.
The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of trade receivables where the carrying amount is reduced through the use of an allowance account. When a trade receivable is uncollectible, it is written-off against the allowance account. Subsequent recoveries of amounts previously written-off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in the consolidated income statement.
With the exception of AFS equity instruments, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed through the consolidated income statement to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortised cost would have been had the impairment not been recognised. In respect of AFS equity securities, any increase in fair value subsequent to an impairment loss is recognised directly in equity.
Derecognition of financial assets
The Group derecognises a financial asset only when the contractual rights to the cash flows from the asset expire, or it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another entity. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognises its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received.
Effective interest method
The effective interest method is a method of calculating the amortised cost of a financial asset or liability and of allocating interest income or expense, respectively, over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments, as applicable, through the expected life of the financial asset or liability, or, where appropriate, a shorter period.
Income is recognised on an effective interest rate basis for debt instruments other than those financial assets designated as at FVTPL.
F-79 21 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Financial liabilities
Financial liabilities, including borrowings, are initially measured at fair value, net of transaction costs, and subsequently measured at amortised cost using the effective interest method, with interest expense recognised on an effective yield basis within finance cost.
Derecognition of financial liabilities
The Group derecognises financial liabilities when, and only when, the Group’s obligations are discharged, cancelled or they expire.
Finance costs
Finance costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale.
Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the finance costs eligible for capitalisation.
All other finance costs are recognised in the consolidated income statement in the period in which they are incurred.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances, cash deposits and highly liquid investments with original maturities of three months or less, which are readily convertible to known amounts of cash and are subject to an insignificant risk of changes in value.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.
Site restoration and environmental obligations
Site restoration and environmental obligations include decommissioning and land restoration costs. Future decommissioning and land restoration costs, discounted to net present value, are added to respective assets and corresponding obligations raised as soon as the constructive obligation to incur such costs arises and the future cost can be reliably estimated. Additional assets are amortised on a straight-line basis over the useful life of the corresponding asset. The unwinding of the obligation is included in the consolidated income statement as finance costs. Obligations are periodically reviewed in light of current laws and regulations, and adjustments made as necessary to the corresponding item of property, plant and equipment.
Ongoing restoration costs are expensed when incurred.
F-80 22 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Employee benefit obligations
Remuneration to employees in respect of services rendered during a reporting period is recognised as an expense in that reporting period.
Defined contribution plan
The Group contributes to mandatory state pension funds on behalf of all employees of subsidiaries in the Russian Federation and in other jurisdictions where the Group operates. These contributions are recognised in the consolidated income statement when employees have rendered services requiring the contribution.
Defined benefit plans
In 2009, the Group introduced defined benefits plans, which are unfunded. The cost of providing benefits under these defined benefit plans is determined separately for each plan using the projected unit credit method. The past service costs are recognised as an expense on straight-line basis over the average period until the benefits become vested. The past service costs at the introduction of the plans are being deferred and amortised on a straight-line basis over the expected average remaining working lives of the employees participating in the plans.
Income tax
Income tax expense represents the sum of the tax currently payable and deferred tax. Income taxes are computed in accordance with the laws of countries where the Group operates.
Current tax
The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group’s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the reporting date.
Deferred tax
Deferred tax is recognised on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and are accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognised for all taxable temporary differences, and deferred tax assets are generally recognised for all deductible temporary differences to the extent that it is probable that taxable profits will be available against which those deductible temporary differences can be utilised. Such assets and liabilities are not recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences associated with investments in subsidiaries and associates except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets arising from deductible temporary differences associated with investments in subsidiaries and associates are only recognised to the extent that it is probable that there will be sufficient taxable profits against which to utilise the benefits of the temporary differences and they are expected to reverse in the foreseeable future.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered.
F-81 23 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
4. SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the reporting date. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the reporting date, to recover or settle the carrying amount of its assets and liabilities.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set-off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Current and deferred tax for the year
Current and deferred tax are recognised as an expense or income in the consolidated income statement, except when they relate to items that are recognised outside the consolidated income statement, in which case the tax is also recognised outside consolidated income statement, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is taken into account in calculating goodwill or determining the excess of the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities over cost.
Revenue recognition
Gold sales revenue
Revenue from the sale of refined gold and other gold-bearing products is recognised when the risks and rewards of ownership are transferred to the buyer, the Group retains neither a continuing degree of involvement or control over the goods sold, the amount of revenue can be measured reliably, and it is probable that the economic benefits associated with the transaction will flow to the entity. Revenue from gold doré sales is recognised at the time of shipment from the refining plant when the Group has received confirmation of sale to the third party. Revenue from gold-bearing products is recognised when the goods have been delivered to a contractually agreed location. Gold sales are stated at their invoiced value net of value-added tax.
Other revenue
Other revenue comprises mainly sales of electricity, transportation, handling and warehousing services, and other. Revenue from the sales of electricity is recognised when a contract exists, delivery has taken place, a quantifiable price has been established or can be determined and the receivables are likely to be recovered. Delivery takes place when the risks and benefits associated with ownership are transferred to the buyer. Revenue from service contracts are recognised when the services are rendered.
Operating leases
The lease of assets under which all the risks and benefits of ownership are retained by the lessor are classified as operating leases. Costs for operating leases are recognised on a straight line basis over the lease term unless another systematic basis is more representative of the time pattern of the user’s benefit.
Dividends
Dividends and related taxation thereon are recognised as a liability in the period in which they have been declared and become legally payable.
Retained earnings legally distributable by the Company are based on the amounts available for distribution in accordance with the applicable legislation and as reflected in the statutory financial statements of the individual subsidiaries of the Group. These amounts may differ significantly from the amounts calculated on the basis of IFRS.
F-82 24 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
Preparation of the consolidated financial statements in accordance with IFRS requires the Group’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The determination of estimates requires judgments which are based on historical experience, current and expected economic conditions, and all other available information. Actual results could differ from those estimates.
Critical judgments in applying accounting policies
Management considers the determination if exploration and evaluation assets will be recouped by future exploitation or sale, identification and valuation of tangible and intangible assets and liabilities, assessment of the outcome of contingencies and the interpretation of tax legislation as critical judgments made in the process of applying the Group’s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements. All of these critical judgments require estimation of amounts recorded in the consolidated financial statements as described below.
Key sources of estimation uncertainty
The following are the key assumptions concerning the future, and other key sources of estimation uncertainty at the end of the reporting period that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
The most significant areas requiring the use of management estimates and assumptions relate to:
x exploration and evaluation assets x contingencies; x economic useful lives of property, plant and equipment; x deferred stripping costs; x impairment of tangible assets; x site restoration and environmental obligations; and x income taxes.
Exploration and evaluation assets
Management’s judgment is involved in the determination of whether the expenditures which are capitalised as exploration and evaluation assets may be recouped by future exploitation or sale or should be impaired. Determining this, management estimates the possibility of finding recoverable ore reserves related to a particular area of interest. However, these estimates are subject to significant uncertainties. The Group is involved in exploration and evaluation activities, and some of its licensed properties contain gold resources under the definition of internationally recognised mineral resource reporting methodologies. A number of licensed properties have no mineral resource delineation. Many of the factors, assumptions and variables involved in estimating resources are beyond the Group’s control and may prove to be incorrect over time. Subsequent changes in gold resources estimates could impact the carrying value of exploration and evaluation assets.
Contingencies
By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of such contingencies inherently involves the exercise of significant judgments and estimates of the outcome of future events.
F-83 25 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued)
Economic useful lives of property, plant and equipment
The Group’s mining assets, classified within property, plant and equipment, are amortised using the straight-line method over the life-of-mine based on a mine operating plan, which calls for production from estimated proven and probable ore reserves under the Russian Resource Reporting Code. When determining life-of-mine, assumptions that were valid at the time of estimation may change when new information becomes available.
The factors that could affect estimation of life-of-mine include the following:
x change of estimates of proven and probable ore reserves; x the grade of ore reserves varying significantly from time to time; x differences between actual commodity prices and commodity price assumptions used in the estimation of ore reserves; x unforeseen operational issues at mine sites; and x changes in capital, processing and reclamation costs, discount rates and foreign exchange rates possibly adversely affecting the economic viability of ore reserves.
Any of these changes could affect prospective amortisation of mining assets and their carrying value.
Non-mining property, plant and equipment are depreciated on a straight-line basis over their economic useful lives. Management periodically reviews the appropriateness of the assets’ economic useful lives. The review is based on the current condition of the assets and the estimated period during which they will continue to bring economic benefit to the Group.
Deferred stripping costs
The Group defers stripping costs incurred during the production stage of its open-pit operations, on the basis of the average life-of-mine stripping ratio.
The factors that could affect capitalisation and expensing of stripping costs include the following:
x change of estimates of proven and probable ore reserves; x changes in mining plans in the light of additional knowledge and change in mine’s pit design, technical or economic parameters; and x changes in estimated ratio of the number of cubic meters of waste material removed per tonne of ore mined.
Impairment of tangible assets
The Group reviews the carrying amounts of its tangible assets to determine whether there is any indication that those assets are impaired. In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash-generating unit. Management necessarily applies its judgment in allocating assets that do not generate independent cash flows to appropriate cash-generating units, and also in estimating the timing and value of underlying cash flows within the value-in-use calculation. Subsequent changes to the cash-generating unit allocation or to the timing of cash flows could impact the carrying value of the respective assets.
F-84 26 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
5. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY (continued)
Site restoration and environmental obligations
The Group’s mining and exploration activities are subject to various environmental laws and regulations. The Group estimates site restoration and environmental obligations based on the management’s understanding of the current legal requirements in the various jurisdictions, terms of the license agreements and internally generated engineering estimates. A provision is recognised, based on the net present values for decommissioning and land restoration costs as soon as the obligation arises. Actual costs incurred in future periods could differ materially from the amounts provided. Additionally, future changes to environmental laws and regulations, life-of-mine estimates and discount rates could affect the carrying amount of this provision.
Income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the Group’s provision for income taxes due to the complexity of legislation. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Group recognises liabilities for anticipated tax audit issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilised. The estimation of that probability includes judgments based on the expected performance. Various factors are considered to assess the probability of the future utilisation of deferred tax assets, including past operating results, operational plan, expiration of tax losses carried forward, and tax planning strategies. If actual results differ from that estimates or if these estimates must be adjusted in future periods, the financial position, results of operations and cash flows may be negatively affected.
F-85 27 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
6. SEGMENT INFORMATION
For management purposes, the Group is organised in separate business segments defined by a combination of operating activities and geographical area. Separate financial information is available for each segment and reported regularly to the chief operating decision maker (“CODM”) and the Executive Committee. The Group’s seven identified reportable segments are located and described as follows:
x Krasnoyarsk business unit (Krasnoyarsk region of the Russian Federation) – Extraction, refining and sales of gold from the Olimpiada, Blagodatnoe and Titimukhta mines, as well as research, exploration and development work at Olimpiada deposits; x Kazakhstan business unit (Republic of Kazakhstan, Kyrgyzstan and Romania), formed by the Kazakh Gold Group Limited – Extraction, refining and sales of gold from Aksu, Bestobe, Akzhal, Zholymbet mines, as well as exploration and evaluation works in Southern Karaultube; x Irkutsk alluvial business unit (Irkutsk region (Bodaibo district) of the Russian Federation) – Extraction, refining and sales of gold from several alluvial deposits; x Irkutsk ore business unit (Irkutsk region (Bodaibo district) of the Russian Federation) – Extraction, refining and sales of gold from Verninskoe, research, exploration and development works at Pervenetc, Verninskoe and Medvezhiy Ruchei deposits, and electricity and utilities production and sales in the Bodaibo district of the Irkutsk region; x Yakutsk Kuranakh business unit (Sakha Republic of the Russian Federation) – Extraction, refining and sales of gold from the Kuranakh ore field; x Exploration business unit – Comprising two operating segments that are combined into one reportable segment as they satisfy the criteria for aggregation: - Yakutsk (Nezhdaninskoe) business unit (Sakha Republic of Russian Federation) – Research and exploration works at the Nezhdaninskoe deposit; and - (Krasnoyarsk region, Irkutsk region, Amur region, and others) – Research and exploration works in several regions of the Russian Federation; and x Magadan business unit (Magadan region of the Russian Federation) – Represented by OJSC “Matrosov Mine” which performs development works at the Natalka deposit.
The reportable segments derive their revenue primarily from gold sales, and the costs incurred relate to the cost of gold sold for the year. The CODM performs an analysis of the operating results based on these separate business units and evaluates the reporting segment’s results, for purposes of resource allocation, based on the segment measure; segment profit before income tax excluding the finance costs, other sales, costs of other sales and income from investments.
Business segment assets and liabilities are not reviewed by the CODM and therefore are not disclosed in these consolidated financial statements. Segment financial information provided to the CODM is prepared from the management accounts which are based on Russian or Kazakhstan accounting standards, respectively.
F-86 28 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
6. SEGMENT INFORMATION (continued)
The Group does not to allocate segment results of companies that perform management, investing activities and certain other administrative functions within its internal reporting.
Depreciation Segment Capital and Gold sales profit/(loss) expenditures amortisation 31 December 2011
Krasnoyarsk business unit 1,641,380 918,078 236,780 104,821 Irkutsk alluvial business unit 350,213 102,795 22,808 6,550 Yakutsk Kuranakh business unit 184,735 13,797 12,569 8,298 Irkutsk ore business unit 3,497 (13,042) 111,751 7,307 Exploration business unit - (14,107) 11,213 973 Kazakhstan business unit 160,825 5,773 38,583 14,939 Magadan business unit - (16,313) 22,026 3,784
Segment result 2,340,650 996,981 455,730 146,672
31 December 2010
Krasnoyarsk business unit 1,176,392 398,359 194,708 61,651 Irkutsk alluvial business unit 248,254 90,283 17,222 6,246 Yakutsk Kuranakh business unit 149,597 38,923 15,801 5,561 Irkutsk ore business unit 22,607 (4,191) 33,577 6,815 Exploration business unit - (11,855) 21,591 937 Kazakhstan business unit 114,448 (55,943) 36,014 9,437 Magadan business unit - (8,760) 16,420 3,127
Segment result 1,711,298 446,816 335,333 93,774
Gold sales reported above represent revenue generated from external customers. There were no inter-segment gold sales during the years ended 31 December 2011 and 2010.
F-87 29 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
6. SEGMENT INFORMATION (continued)
The segment measure of profit/(loss) reconciles to the IFRS profit before income tax as follows:
Year ended 31 December 2011 2010
Segment result 996,981 446,816
Differences between IFRS and management accounts: Capitalised exploration works (206) 26,801 Provisions and accruals (49,109) (26,196) Additional depreciation charge and amortisation of mineral rights (41,277) (33,081) Calculation of gold-in-process at net production cost (31,918) 4,511 Difference in stripping costs capitalisation 20,711 (10,909) Other (3,219) 7,667
Adjusted segment result 891,963 415,609 Unallocated central costs, results of financing and investing activities and differences in accounting treatment under IFRS (126,896) 65,728
Profit before income tax 765,067 481,337
Segment capital expenditures 455,730 335,333
Differences between IFRS and management accounts: Differences at the moment of recognition of capital expenditures (85,268) 4,574 Reclassification of advances paid for property, plant and equipment and construction works 20,148 15,879 Reclassification of materials related to construction works (9,322) 3,564 Differences in capitalised exploration and evaluation costs (12,635) 30,802 Other (1,821) (8,739)
Adjusted segment capital expenditure 366,832 381,413 Unallocated central capital expenditures 1,307 -
Capital expenditures 368,139 381,413
Segment depreciation and amortisation 146,672 93,774
Additional depreciation charge 27,878 20,115 Amortisation of mineral rights 13,399 12,966
Depreciation and amortisation 187,949 126,855
F-88 30 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
6. SEGMENT INFORMATION (continued)
The Group’s information about its non-current assets other than financial instruments by geographical location is as follows:
31 December 2011 2010 Russian Federation 2,371,841 2,417,329 Republic of Kazakhstan 308,358 294,864 Kyrgyzstan 31,084 35,881 Romania 17,170 16,682 United Kingdom 94 109 Total 2,728,547 2,764,865
The impairment losses under IFRS in relation to Exploration and evaluation assets attributable to each reportable segment are presented as follows:
31 December 2011 2010 Exploration business unit 43,596 - Kazakhstan business unit 1,707 - Krasnoyarsk business unit 5,054 10,369 Irkutsk ore business unit 4,351 - Irkutsk alluvial business unit - 3,215 54,708 13,584
The impairment losses under IFRS in relation to Property, plant and equipment attributable to each reportable segment are presented as follows:
31 December 2011 2010 Kazakhstan business unit 11,417 26,544 Krasnoyarsk business unit 4,891 - Irkutsk ore business unit 7,193 - Irkutsk alluvial business unit - 635 23,501 27,179
7. GOLD SALES
Year ended 31 December 2011 2010 Refined gold 2,179,825 1,596,850 Other gold-bearing products 160,825 114,448 Total 2,340,650 1,711,298
F-89 31 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
8. COST OF GOLD SALES
Year ended 31 December 2011 2010 Fuel, consumables and spares 410,243 365,504 Labour 288,866 237,602 Tax on mining 179,116 130,230 Utilities 55,140 46,043 Outsourced mining services 22,147 8,897 Refining costs 5,067 2,059 Other 75,696 56,866 Total 1,036,275 847,201 Amortisation and depreciation of operating assets (note 16) 181,935 118,559 (Capitalisation)/amortisation of deferred stripping costs, net (7,335) 44,412 Increase in gold-in-process and refined gold inventories (48,856) (114,617) Total 1,162,019 895,555
9. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Year ended 31 December 2011 2010
Salaries 116,295 103,811 Professional services 36,350 28,274 Taxes other than mining and income taxes 42,630 27,528 Amortisation and depreciation (note 16) 4,830 4,217 Other 25,513 30,719
Total 225,618 194,549
10. OTHER EXPENSES, NET
Year ended 31 December 2011 2010
Penalties on tax on mining 8,040 - Change in allowance for reimbursable value added tax 6,602 (294) Loss on disposal of property, plant and equipment 5,933 2,037 Donations 5,468 3,367 Non-recoverable VAT 190 8,600 Other (2,156) 7,039 Tax provision - 14,352
Total 24,077 35,101
11. FINANCE COSTS
Year ended 31 December 2011 2010
Interest on borrowings 31,241 32,308 Debt modification expense (note 27 (i)) 26,928 - Unwinding of discounts 11,999 8,808 Other 1,235 1,601
Total 71,403 42,717
F-90 32 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
12. INCOME/(LOSS) FROM INVESTMENTS, NET
Year ended 31 December 2011 2010
(Loss)/income from financial assets at fair value through profit and loss Loss on derivatives classified as held for trading (8,661) (63,775) (Loss)/income from investments in listed companies held for trading (20,984) 11,446
Income from AFS investments Gain on disposal of AFS investments 17,023 20,289
Interest income on bank deposits 16,252 8,329
Total 3,630 (23,711)
13. INCOME TAX
Year ended 31 December 2011 2010 Current tax expense 200,297 123,492 Deferred tax expense 6,755 1,348 Total 207,052 124,840
The corporate income tax rates in the countries where the Group has a taxable presence vary from 0% to 28%.
A reconciliation of Russian Federation statutory income tax, the location of the Group’s major production entities and operations, to the income tax expense recorded in the consolidated income statement is as follows:
Year ended 31 December 2011 2010 Profit before income tax 765,067 481,337 Income tax at statutory rate applicable to principal operating entities (20%) 153,013 96,267 Tax effect of non-deductible expenses and other permanent differences 25,463 9,868 Effect of different tax rates of subsidiaries operating in other jurisdictions 14,483 8,870 Tax effect of utilisation of tax losses not previously recognised (4,990) (8,446) Unrecognised tax losses 11,109 10,994 Other 7,974 7,287 Income tax expense at effective rate of 27% (2010: 26%) 207,052 124,840
F-91 33 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
14. DIVIDENDS Year ended 31 December 2011 2010 Dividend declared during the year 72,327 104,343
Dividend per share (US cents per share after giving effect to Reorganisation)
31 December 31 December 2011 2010 Dividend declared during the year 0.02 0.04
On 20 May 2011, Polyus Gold declared a dividend of RUB 11.25 or USD 0.40 (at 20 May 2011 exchange rate) per Polyus Gold share relating to the second half of the 2010 year. This represents a dividend of RUB 0.71 or USD 0.02 per PGIL share, after giving effect to the Reorganisation.
15. EARNINGS PER SHARE
The calculation of the basic and diluted earnings per share is based on the following data:
Year ended 31 December Units 2011 2010 Earnings for the purpose of basic and diluted earnings per share being the net profit attributable to equity holders of the parent $’000s 468,998 332,169 Weighted average number of ordinary shares for the purpose of basic and diluted earnings per share ‘000s 2,960,311 3,082,656 Earnings per ordinary share basic and diluted $ cents 16 11
There were no financial instruments or any other instances which could cause antidilutive effect on earnings per share calculation.
F-92 34 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
16. PROPERTY, PLANT AND EQUIPMENT
Capital Non-mining construction- Mining assets assets in-progress Total Cost
Balance at 31 December 2009 1,877,457 61,258 457,286 2,396,001
Additions 225,997 7,776 95,496 329,269 Transfers from capital construction-in-progress 233,648 2,308 (235,956) - Transfers from exploration and evaluation assets (note 17) 4,372 - - 4,372 Change in decommissioning liabilities (note 26) 37,885 - - 37,885 Disposals (7,821) (466) (500) (8,787) Effect of translation to presentation currency (15,165) (563) (4,068) (19,796)
Balance at 31 December 2010 2,356,373 70,313 312,258 2,738,944
Additions 160,674 14,386 161,385 336,445 Transfers from capital construction-in-progress 90,693 (26,523) (64,170) - Transfers from exploration and evaluation assets (note 17) 264 - - 264 Change in decommissioning liabilities (note 26) 7,833 - - 7,833 Disposals (25,698) (468) (460) (26,626) Effect of translation to presentation currency (130,593) (2,519) (21,249) (154,361)
Balance at 31 December 2011 2,459,546 55,189 387,764 2,902,499
Accumulated amortisation, depreciation and impairment
Balance at 31 December 2009 (481,636) (24,442) (9,407) (515,485) Charge for the year (142,729) (5,600) - (148,329) Disposals 5,760 289 - 6,049 Impairment (19,835) - (7,344) (27,179) Effect of translation to presentation currency 4,399 162 75 4,636
Balance at 31 December 2010 (634,041) (29,591) (16,676) (680,308)
Charge for the year (201,023) (4,716) - (205,739) Transfers (10,335) 10,335 - - Disposals 18,172 610 - 18,782 Impairment (23,497) (4) - (23,501) Effect of translation to presentation currency 43,107 997 580 44,684
Balance at 31 December 2011 (807,617) (22,369) (16,096) (846,082)
Net book value
31 December 2010 1,722,332 40,722 295,582 2,058,636
31 December 2011 1,651,929 32,820 371,668 2,056,417
During the year ended 31 December 2011 impairment of mining assets in the amount of USD 12,080 thousand was recognised at Sukhoy Log and Kvartsevaya Gora. The impairment relates to the decision to abandon activities related to the deposits.
In 2011 the Kazakhstan business unit of the Group has reassessed property, plant and equipment requirements and plans for their future use. As the result, certain assets’s net book value and expected economic useful life exceeded the anticipated recoverable value and accordingly an impairment was recorded in the amount of USD 11,417 thousand.
F-93 35 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
16. PROPERTY, PLANT AND EQUIPMENT (continued)
The carrying values of mineral rights included in mining assets at 31 December 2011 were as follows:
31 December 2011 2010 Mineral rights 335,470 368,303
Amortisation and depreciation charge is allocated as follows:
Year ended 31 December 2011 2010 Cost of gold sales (note 8) 181,935 118,559 Selling, general and administrative expenses (note 9) and cost of other sales 6,014 8,296 Capitalised within property, plant and equipment 17,790 21,474 Total 205,739 148,329
The carrying values of property, plant and equipment pledged to a bank guarantee liability were as follows:
31 December 2011 2010 Pledged property, plant and equipment 4,613 3,620
17. EXPLORATION AND EVALUATION ASSETS
Year ended 31 December 2011 2010 Balance at beginning of the year 442,316 410,032 Additions 31,694 52,144 Transfers to mining assets (note 16) (264) (4,372) Impairment (54,708) (13,584) Effect of translation to presentation currency (19,192) (1,904) Balance at end of the year 399,846 442,316
During the year ended 31 December 2011 the Group impaired USD 54,708 thousand of exploration and evaluation assets, because those assets (Kuchyus, Kuzeevskaya, Chai-Yurinskaya, Doroninskoye, Tokichan, Zapadnoe, Mukodek, Kaskabulak, Illigirskaya fields) did not demonstrate any future commercial viability.
18. DEFERRED STRIPPING COSTS
Year ended 31 December 2011 2010 Balance at beginning of the year 61,023 106,088 Deferred stripping costs capitalised 18,270 9,740 Expensed stripping cost (10,935) (54,152) Effect of translation to presentation currency (3,898) (653) Balance at end of the year 64,460 61,023
F-94 36 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
19. DEFERRED EXPENDITURES
Year ended 31 December 2011 2010
Deferred expenditures 18,512 18,282
Deferred expenditures relate to the preparation for the seasonal alluvial mining activities comprised of excavation costs, general production and specific administration costs.
20. INVESTMENTS IN SECURITIES AND OTHER FINANCIAL ASSETS
Year ended 31 December 2011 2010
Non-current Derivative financial assets - 46,136 Loans receivable 3,643 3,825 Other - 312
Total 3,643 50,273
Current AFS equity investments 34,744 99,721 Bank deposits 12,175 39,351 Equity investments in listed companies held for trading 14,857 36,730 Other 1,692 1,530
Total 63,468 177,332
Financial assets at FVTPL
Equity investments in listed companies held for trading are treated as financial assets at FVTPL. In connection with the acquisition of KazakhGold in 2009, the Group obtained call options (derivative financial assets) to acquire all rights and obligations under convertible loan agreements between KazakhGold and its previous major shareholder (note 27 (ii)). The fair value of call options and changes to it are presented as follows:
Year ended 31 December 2011 2010
Balance at beginning of the year 46,136 109,911 Loss from change in fair value of call options (8,661) (63,775) Reclassified call options to treasury shares, at fair value (note 2) (37,475) -
Balance at end of the year - 46,136
As the result of Reorganisation described in note 2, the call options were recognised as treasury shares at an amount equal to the fair value of those call options at 30 June 2011.
F-95 37 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
20. INVESTMENTS IN SECURITIES AND OTHER FINANCIAL ASSETS (continued)
AFS investments, carried at fair value
At 31 December 2011 and 2010, AFS investments primarily comprised of shares owned in Rosfund, SPC (Cayman Islands) acquired in July 2006.
Rosfund, SPC invests in securities and other financial assets. At 31 December 2011 and 2010 Rosfund, SPC included equity investments in listed companies, bonds and depositary receipts.
The changes in fair value of AFS investments recognized in equity within investment revaluation reserve were as follows:
Year ended 31 December 2011 2010 (Loss)/gain from change in fair value of available-for-sale investments (8,976) 33,340
During the year ended 31 December 2011, the Group sold 56 % of the shares owned on1 January 2011 in Rosfund, SPC for USD 56,000 thousand. As a result of this transaction, the Group recognised a gain in the amount of USD 17,023 thousand in the consolidated income statement which was reclassified from the cumulative gain previously accumulated in the investment revaluation reserve.
In 2010, the Group sold 63% of the shares owned on 1 January 2010 in Rosfund, SPC for USD 137,000 thousand. As a result of this transaction, the Group recognised a gain in the amount of USD 20,289 thousand in the consolidated income statement which was reclassified from the cumulative gain previously accumulated in the investment revaluation reserve.
Loans receivable carried at amortised cost
Bank deposits at 2.14 – 8.05% (2010: 3.45-6.5%) per annum are denominated in RUB and mature until June 2012.
21. INVENTORIES 31 December 2011 2010 Inventories expected to be recovered after twelve months Stockpiles 207,789 201,030 Total 207,789 201,030 Inventories expected to be recovered in the next twelve months Gold-in-process at net production cost 163,758 145,332 Refined gold at net production cost 24,757 19,523 Total metal inventories 188,515 164,855 Stores and materials at cost 354,508 290,289 Total 543,023 455,144
During the year ended 31 December 2011, the Group impaired stockpiles located at Zapadnoe in the amount of USD 25,209 thousand. The impairment relates to the decision to abandon activities related to the deposit.
The Group has 5.6 million tonnes of stockpiles (2010: 6.8 million tonnes) which are carried at zero value, as previously these stockpiles were considered as waste materials.
F-96 38 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
22. TRADE AND OTHER RECEIVABLES
31 December 2011 2010
Other receivables 24,984 23,478 Less: Allowance for doubtful debts (5,141) (5,948)
19,843 17,530
Trade receivables for gold sales 4,869 3,714
Total 24,712 21,244
Other receivables include amounts receivable from sales of electricity, transportation, handling, warehousing services and other services. For the year to 31 December 2011 the average credit period for other receivables was 57 days (2010: 62 days). No interest is charged on other receivables.
The procedure for accepting a new customer includes checks by the security department regarding the customer’s business reputation, licenses and certifications. At 31 December 2011, the Group’s largest customers individually exceeding 5% of the total balance represented 15% (31 December 2010: 40%) of the outstanding balance of accounts receivable.
Movement in the allowance for doubtful debts:
Year ended 31 December 2011 2010
Balance at beginning of the year 5,948 3,772 Recognised in the consolidated statement of income 2,006 3,240 Amounts recovered during the year (2,552) (744) Effect of translation to presentation currency (261) (320)
Balance at end of the year 5,141 5,948
The Group generally fully provides for all receivables over 365 days because experience has shown that receivables past due beyond 365 days are not recoverable. The Group does not hold any collateral over these amounts. The average age of past due but not impaired receivables was 124 days (31 December 2010: 232 days).
Ageing of past due but not impaired other receivables:
31 December 2011 2010
Less than 90 days 1,170 2,955 91-180 days 2,816 466 181-365 days 395 2,472 More than 365 days - 3,772
Total 4,381 9,665
Substantially all gold sales are made to banks with immediate payment terms. The average credit period on gold-bearing product sales to customers, other than banks, was 7 days for the year ended 31 December 2011, (2010: 3 to 8 days). No interest is charged on trade receivables.
F-97 39 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
23. TAXES RECEIVABLE
31 December 2011 2010 Reimbursable value added tax 129,493 154,422 Income tax prepaid 17,821 9,347 Other prepaid taxes 2,708 3,392 Total 150,022 167,161
24. CASH AND CASH EQUIVALENTS
31 December 2011 2010 Bank deposits - RUB 487,467 69,847 Current bank accounts - RUB 146,761 182,532 - foreign currencies 21,992 67,204 Other cash and cash equivalents 1,228 7,322 Total 657,448 326,905
Bank deposits are denominated in RUB and bear interest of 4.65-8.05% per annum with original maturity within three months.
25. SHARE CAPITAL
Issued and fully paid up ordinary shares
Number of ordinary shares ‘000 Share capital Issued and fully paid 190,627,747 ordinary shares of Polyus Gold presented as being converted into PGIL shares at a ratio of 17.14 3,267,360 519 Effect of Reorganisation (235,210) (37) Issued and fully paid up ordinary shares of PGIL at 31 December 2011 3,032,150 482
The share capital of Polyus Gold is presented in these consolidated financial statements as having been converted into PGIL share capital at a 17.14 conversion rate at 31 December 2010.
The effect of Reorganisation on the issued and fully paid ordinary shares of PGIL is presented as follows:
Number of ordinary shares ‘000 Issued and fully paid up ordinary shares of PGIL before the Reorganisation 119,608 Decrease in the issued and fully paid up ordinary shares of Polyus Gold as a result of security holders that declined the PEO (354,818) Effect of Reorganisation (235,210)
At 31 December 2011 the authorised share capital of the Company comprised 3,600,000,000 ordinary shares with a par value of GBP 0.0001 per share.
F-98 40 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
25. SHARE CAPITAL (continued)
Treasury shares
As a result of the Reorganisation, shares in KazakhGold held by Jenington, a subsidiary of the Group, became treasury shares of the reorganised Group. In addition, call options to acquire all rights and obligations under convertible loan agreements between KazakhGold and its previous major shareholder, became treasury shares of the reorganised Group. The cost of these shares equals the fair value of the options at 30 June 2011.
All treasury shares are held by a subsidiary of the Group, and have been recorded at cost and presented as a separate component in equity.
26. SITE RESTORATION AND ENVIRONMENTAL OBLIGATIONS
Year ended 31 December 2011 2010 Balance at beginning of the year 136,410 90,518 Change in estimate (note 16) 7,833 37,885 Unwinding of discount on decommissioning obligations (note 11) 11,999 8,808 Effect of translation to presentation currency (6,366) (661) Payment of decommissioning obligations - (140) Balance at end of the year 149,876 136,410
The principal assumptions used for the estimation of site restoration and environmental obligations were as follows:
31 December 2011 2010
Discount rates 6.83-9.28% 6.97-10.0% Inflation rates 3.3%-7.4% 3.3-8.8% Expected mine closure dates 2011-2050 2012-2050
The present value of cost to be incurred for settlement of the site restoration and environmental obligations is as follows:
31 December 2011 2010
Due from second to fifth year 7,322 3,699 Due from sixth to tenth year 49,012 65,427 Due from eleventh to fifteenth year 27,534 14,432 Due from sixteenth to twentieth year 7,719 26,646 Due thereafter 58,289 26,206
Total 149,876 136,410
F-99 41 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
27. BORROWINGS
31 December 2011 31 December 2010 Rate Outstanding Rate Outstanding % balance % balance
Guaranteed senior notes (i) 9.875% 204,520 9.37% 173,762 Loans payable to Gold Lion Holding Limited (ii) 10.00% 34,160 10.00% 29,686 Societe Generale credit facility 1 months USD (iii) LIBOR + 1.95% 230,000 - - VTB credit facility 3 months USD (iv) LIBOR + 2.25% 230,000 - - Societe Generale credit facility 3 months USD (OJSC "Pervenets") (v) LIBOR + 2.4% 100,000 - -
Total 798,680 203,448
Less: current portion due within twelve months 675,632 173,762
Long-term borrowings 123,048 29,686
Summary of borrowing agreements
(i) Guaranteed senior notes
In November 2006, PGIL (formerly KazakhGold) issued guaranteed senior notes at par with interest payable semi-annually in arrears on 6 May and 6 November of each year, and with the principal due on 6 November 2013. The guaranteed senior notes are unconditionally and irrevocably guaranteed by Kazakhaltyn, a wholly owned subsidiary of the Company, and its subsidiaries.
In November 2011 nominal interest rate was increased by 0.5% to 9.875%.
According to the guaranteed senior notes initial terms, redemption was possible at the choice of the issuer on or after 6 November 2011 at a price of 102.344% of the nominal value. In December 2011 the Board of Directors of the Company decided that the guaranteed senior notes should be redeemed when refinancing facilities were available. Prior to 31 December 2011, the Group arranged a USD 100 million credit facility with Unicredit Bank (see (vi) below) and on 10 February 2012 a further USD 100 million credit facility was arranged with HSBC (note 35). Management considered that early redemption of the guaranteed senior notes was probable at 31 December 2011. An expense of USD 26,928 thousand (note 11) was recognized in the consolidated income statement as the underlying future cash flows had significantly changed.
The effective interest rate is 9.875% as of 31 December 2011 (16% as of 31 December 2010).
(ii) Loans payable
On 11 June 2009, PGIL (formerly KazakhGold) signed two loan agreements with Gold Lion Holdings Limited, an entity that was, at that time, a related party. The loan agreements have a 10% interest rate per annum. Principal amounts of USD 21,650 thousand and USD 9,375 thousand together with accrued interest are payable on 6 November 2014 and wholly or in part are convertible into PGIL’s (formerly KazakhGold) ordinary shares at a rate of USD 1.50 per one share. Conversion is subject to several restrictions, including Republic of Kazakhstan regulatory approval and approval from the Company. In September 2009, Gold Lion Holdings Limited granted a call option to Jenington, or any other direct or indirect subsidiary of Polyus Gold, to acquire all the rights and interests under these loan agreements, including the conversion right.
The effective interest rate on these loans was 16%.
F-100 42 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
27. BORROWINGS (continued)
(iii) Societe Generale credit facility
On 6 September 2011, PGIL entered into a USD 500,000 thousand bridge facility agreement with Societe Generale as a lender for a dollar term loan facility to fund consideration payable under the MTO. Under the original terms of the facility agreement the repayment of the facility was to be made on 28 March 2012, refer to Note 35.
As of 31 December 2011 USD 230,000 thousand had been drawn down. The remainder of the bank's commitment under the facility was voluntary cancelled by the Company.
(iv) VTB credit facility
On 2 September 2011, PGIL entered into a USD 300 million bridge facility agreement with VTB Bank as a lender for a dollar term loan facility to fund consideration payable under the MTO. Under the original terms of the facility agreement the repayment of the facility was to be made on 15 March 2012, refer to Note 35.
As of 31 December 2011 USD 230,000 thousand had been drawn down.
(v) Societe Generale credit facility to OJSC “Pervenets”
On 4 October 2011, OJSC "Pervenets", a subsidiary of the Group, entered into a USD 100 million term loan facility agreement with Societe Generale as a lender for a dollar term loan facility to fund general corporate purposes.
As of 31 December 2011 USD 100,000 thousand had been drawn down. The facility is to be repaid in nine equal instalments in intervals of three months starting from 4 October 2012.
(vi) Unused credit facilities
On 21 October 2011, CJSC “Gold Mining Company Polyus”, a subsidiary of the Group, entered into a USD 67,502 thousand export financing credit facility agreement with Societe Generale as a lender for making available the extension of financing to be used for the purchase of goods and services and related exposure fees. The establishment of the facility is for facilitation of exports from the United States of America and guaranteed by Export-Import Bank of the United States. As of 31 December 2011 the facility was not used.
On 29 December 2011, PGIL entered into a USD 100 million facility agreement arranged by ZAO Unicredit Bank. Interest rate was set at LIBOR + 2.95% to fund general corporate purposes and/or repayment of outstanding indebtedness under guaranteed senior notes. As of 31 December 2011 the facility was not used.
VTB and Societe Generale credit facilities contain certain financial covenants. The Group believes that it was in compliance with these covenants as of 31 December 2011.
F-101 43 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
28. DEFERRED TAX
The movement in the Group’s deferred taxation position was as follows:
Year ended 31 December 2011 2010
Net liability at beginning of the year 182,948 182,660 Recognised in the consolidated income statement 6,755 1,348 Effect of translation to presentation currency (8,962) (1,060)
Net liability at end of the year 180,741 182,948
Deferred taxation is attributable to the temporary differences that exist between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. The temporary differences that give rise to deferred taxation are presented below:
31 December 2011 2010
Property, plant and equipment 162,704 160,851 Inventory 54,383 51,482 Deferred stripping costs 11,897 11,153 Investments 1,370 1,642 Receivables (1,596) (871) Accrued operating expenses (48,017) (41,309)
Total 180,741 182,948
The unrecognised deferred tax asset in respect of tax losses carried forward available for offset against future taxable profit of certain subsidiaries within the Group is presented as follows:
31 December 2011 2010
Unrecognised deferred tax asset 40,019 28,910
Such tax losses expire in periods up to ten years, and are not recognised as management does not believe it is probable that future taxable profit will be available against which the respective entities can utilise the benefits.
The unrecognised deferred tax liability for taxable temporary differences associated with investments in subsidiaries is presented as follows:
31 December 2011 2010
Unrecognised deferred tax liability 61,839 31,207
The deferred tax liability presented above was not recognised because the Group is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
F-102 44 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
29. TRADE, OTHER PAYABLES AND ACCRUED EXPENSES
31 December 2011 2010
Trade payables to third parties 30,980 38,715
Other payables, including:
Dividends payable 39,004 2,925 Wages and salaries payable 61,977 51,317 Mining tax provision - 14,302 Bank guarantee liability - current 37 5,996 Interest payable 3,718 2,877 Other accounts payable and accrued expenses 24,973 21,079
Total other payables 129,709 98,496
Accrued annual leave 31,388 31,826
Total 192,077 169,037
The average credit period for payables at 31 December 2011 was 14 days, (2010: 11 days). No interest was charged on the outstanding payables balance during the credit period. The Group has financial risk management policies in place, which include budgeting and analysis of cash flows and payments schedules to ensure that all amounts payable are settled within the credit period.
30. TAXES PAYABLE
31 December 2011 2010
Income tax payable 2,721 22,698 Value added tax 6,262 4,188 Social taxes 12,958 7,839 Tax on mining 13,260 10,665 Property tax 4,703 4,778 Other taxes 3,052 1,966
Total 42,956 52,134
F-103 45 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
31. NOTES TO THE CONSOLIDATED STATEMENT OF CASH FLOWS
Year ended 31 December Note 2011 2010
Profit before income tax 765,067 481,337
Adjustments for: Amortisation and depreciation 16 187,949 126,855 Finance costs 11 71,403 42,717 Expensed stripping cost 18 10,935 54,152 Impairment of inventories 21 25,209 - Impairment of exploration and evaluation assets 17 54,708 13,584 Impairment of property, plant and equipment 16 23,501 27,179 Loss on disposal of property, plant and equipment 10 5,933 2,037 Change in allowance for reimbursable value added and tax provision 10 6,602 14,058 Income/(loss) from investments 12 (3,630) 23,711 Change in allowance for doubtful debts 22 (546) 2,496 Foreign exchange gain, net 5,814 (765) Other 3,971 4,385
1,156,916 791,746 Movements in working capital Inventories 21 (168,688) (206,079) Trade and other receivables 22 (5,811) (7,595) Advances paid to suppliers and prepaid expenses (354) (718) Taxes receivable 8,029 (46,315) Deferred expenditures (230) (1,364) Trade and other payables and accrued expenses 29,813 24,412 Other non-current liabilities 4,026 15,208 Other taxes payable (4,130) (12,437)
Cash flows from operations 1,019,571 556,858
Interest paid (23,423) (23,213) Income tax paid (230,743) (88,338)
Net cash generated from operating activities 765,405 445,307
F-104 46 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
32. RELATED PARTIES
Related parties include shareholders, entities under common ownership and control with the Group and members of key management personnel. The Company and its subsidiaries, in the ordinary course of business, enter into purchase and service transactions with related parties. The terms of these transactions would not necessarily be on similar terms had the Group entered into the transactions with third parties.
The Group had no transactions with its shareholders in 2011 or 2010, other than the Reorganisation (note 2).
Entities under common ownership
The Group had the following outstanding balances with entities under common control:
31 December 2011 2010 Cash and cash equivalents at Bank “Mezhdunarodniy finansoviy club” 76,799 23,304 Investments in securities and other financial assets at “Mezhdunarodniy finansoviy club” 74,077 - Advances and prepaid expenses paid to suppliers 216 227
The amounts outstanding at 31 December 2011 are unsecured and expected to be settled in cash. No expense has been recognised in the reporting period for bad or doubtful debts in respect of the amounts owed by related parties. All trade payable and receivable balances are expected to be settled on a gross basis.
The Group entered into the following transactions with entities under common control:
Year ended 31 December 2011 2010
Purchase of goods and services 2,224 1,763 Interest income 5,136 300
Key management personnel
Year ended 31 December 2011 2010
Short-term compensation of key management personnel amounted to 24,495 21,858
F-105 47 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
33. COMMITMENTS AND CONTINGENCIES
Commitments
Capital commitments
The Group’s contracted capital expenditure commitments are as follows:
31 December 2011 2010 Contracted capital expenditure commitments 107,019 24,304
Operating leases: Group as a lessee
The land in the Russian Federation on which the Group’s production facilities are located is owned by the state. The Group leases this land through operating lease agreements, which expire in various years through 2060.
Future minimum lease payments due under non-cancellable operating lease agreements at the end of the year were as follows:
31 December 2011 2010 Due within one year 4,275 3,256 From one to five years 7,629 8,308 Thereafter 17,199 18,880 Total 29,103 30,444
Contingencies
Litigations
In the ordinary course of business, the Group is subject to litigation in a number of jurisdictions, the outcome of which is uncertain and could give rise to adverse outcomes. At the date of issuance of these consolidated financial statements the Group was party to a number of claims and litigation, most of which are not material, except:
x A lawsuit against Kazakhaltyn MMC JSC with a potential exposure of USD 15,000 thousand. The lawsuit is at the initial stage of investigation. Management believes that this claim will not have a material adverse impact on the Group; x A dispute between the former and current principal shareholders of PGIL is described in paragraph “KazakhGold dispute” below.
F-106 48 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
33. COMMITMENTS AND CONTINGENCIES (CONTINUED)
KazakhGold dispute
A dispute between the former and current principal shareholders of PGIL, whereby the current shareholders were asserting that the former shareholders were negligent in their fiduciary responsibilities related to KazakhGold, herewith the sequence of events, to date:
x on 10 April 2011, the Group entered into a Restated and Amended Principal Agreement (the “RAPA”), and a Settlement Deed in respect of the claims which provides for a conditional settlement and release of the orders, judgments and claims, whether in litigation, arbitration or otherwise, initiated, inter alia in the UK, Jersey, the BVI, or Jenington and Kazakhaltyn, on the one hand, and the Assaubayev family, on the other hand, and all of their respective subsidiaries and affiliates, relating to the matters referred to in those proceedings or otherwise arising in respect of the original acquisition of 65 percent of KazakhGold by Jenington, without any admission of liability on either part (the “Settlement Deed”). Pursuant to the RAPA, AltynGroup agreed to acquire the Company’s operating subsidiaries in Kazakhstan, Romania and Kyrgyzstan in tranches. The aggregate transaction price for all the shares is USD 509 million, as well as the provision of funds required to repay the loan provided to KazakhGold by Jenington. The sale of the operating subsidiaries is subject of numerous conditions, most of which are outstanding, and uncertain as to resolution at the date of these consolidated financial statements; x in May 2011, the Ministry of Industry and New Technologies of Kazakhstan (the “MINT”) granted its approval to the proposed Reorganisation of KazakhGold and Polyus Gold and to the sale of 100% of the shares in Kazakhaltyn MMC JSC to AltynGroup. MINT has also revoked its previous letters, which annulled the waiver obtained for the partial offer by Jenington International Inc. for 50.1% of shares in KazakhGold, which was completed in August 2009, and the waivers obtained in September 2010 for the proposed Reorganisation between Polyus Gold and KazakhGold and the US$100 million equity placing completed by KazakhGold on 1 July 2010; x in May 2011, criminal investigations by the Agency on Economic and Corruption Crimes of the Republic of Kazakhstan ("AECC") against three members of KazakhGold's Board of Directors were terminated. x On 12 September 2011, the Company entered into a deed of amendment (the “RAPA Amendment”) to the RAPA dated 10 April 2011 for the sale of its operating subsidiaries in Kazakhstan, Romania and Kyrgyzstan with AltynGroup, under which the parties have agreed to extend the date of the First Tranche Completion until 12 October 2011 and made a number of consequential changes to reflect a corresponding extension of other deadlines set forth in the RAPA and the documentary stand-by letter of credit for USD 100,000,000 obtained by the Company pursuant to the terms of the RAPA. x On 13 October 2011, the Group announced that it entered into a second deed of amendment to the RAPA dated 10 April 2011 for the sale of its operating subsidiaries and related matters, as amended by the deed of amendment dated 12 September 2011, with AltynGroup, under which the parties agreed to further extend the date of the First Tranche Completion until 12 December 2011 and made a number of consequential changes to reflect a corresponding extension of other deadlines set forth in the RAPA and the documentary stand-by letter of credit for USD 100,000,000 obtained by the Company pursuant to the terms of the RAPA. x The First Tranche Completion under the RAPA did not occur by the extended First Tranche Cut-Off Date of 12 December 2011. The RAPA continues to be in effect, but is now terminable by either party.
F-107 49 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
33. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Insurance
The insurance industry is not yet well developed in the Russian Federation and Republic of Kazakhstan and many forms of insurance protection common in more economically developed countries are not yet available on comparable terms. The Group does not have full insurance coverage for its mining, processing and transportation facilities, for business interruption, or for third party liabilities in respect of property or environmental damage arising from accidents on the Group’s property or relating to the Group’s operations, other than limited coverage required by law.
The Group, as a participant in exploration and mining activities may become subject to liability for risks that cannot be insured against, or against which it may elect not to be insured because of high premium costs. Losses from uninsured risks may cause the Group to incur costs that could have a material adverse effect on the Group’s business and financial condition.
Taxation contingencies in the Russian Federation
Commercial legislation of Russian Federation, including tax legislation, is subject to varying interpretations and frequent changes. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management’s judgment of the Group’s business activities, was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest.
Generally, taxpayers are subject to tax audits with respect to three calendar years preceding the year of the audit. However, completed audits do not exclude the possibility of subsequent additional tax audits performed by upper-level tax inspectorates reviewing the results of tax audits of their subordinate tax inspectorates. Also according to the clarification of the Russian Constitutional Court the statute of limitation for tax liabilities may be extended beyond the three year term set forth in the tax legislation, if a court determines that the taxpayers has obstructed or hindered a tax inspection.
The management of the Group is confident that applicable taxes have all been accrued and, consequently, creation of respective provisions is not required.
In terms of Russian tax legislation, authorities have a period of up to three years to re-open tax declarations for further inspection. Changes in the tax system that may be applied retrospectively by authorities could affect the Group’s previously submitted and assessed tax declarations.
With regards to matters where practice concerning payment of taxes is unclear, management estimated the tax exposure at 31 December 2011 to be approximately USD 2,607 thousand (31 December 2010: USD 3,040 thousand). This amount had not been accrued at 31 December 2011 as management does not believe the payment to be probable.
Environmental matters
The Group is subject to extensive federal, local environmental controls and regulations in the regions in which it operates. The Group’s operations involve the discharge of materials and contaminants into the environment, disturbance of land that could potentially impact on flora and fauna, and give rise to other environmental concerns.
The Group’s management believes that its mining and production technologies are in compliance with the existing environmental legislation in the countries in which it operates. However, environmental laws and regulations continue to evolve. The Group is unable to predict the timing or extent to which those laws and regulations may change. Such change, if it occurs, may require that the Group modernise technology to meet more stringent standards.
F-108 50 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
33. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Group is obliged in terms of various laws, mining licenses and ‘use of mineral rights’ agreements to decommission mine facilities on cessation of its mining operations and to restore and rehabilitate the environment. Management of the Group regularly reassesses site restoration and environmental obligations for its operations. Estimations are based on management’s understanding of the current legal requirements and the terms of the license agreements. Should the requirements of applicable environmental legislation change or be clarified, the Group may incur additional site restoration and environmental obligations.
Bank guarantee
On 12 August 2011, VTB Bank provided the Company with a bank guarantee to pay for the Polyus Gold securities to be acquired under the MTO for the amount not exceeding RUB 39,338,000 thousand or USD 1,337,254 thousand (at 12 August exchange rate). CJSC Polyus Gold guaranteed certain liabilities of the Company under bank guarantee. The guarantee commenced on 24 November 2011 and remains valid until 18 June 2012.
34. RISK MANAGEMENT ACTIVITIES
Capital risk management
The Group manages its capital to ensure that entities of the Group will be able to continue as a going concern while maximising the return to the shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists of net debt (borrowings as described in note 27) less cash and cash equivalents (disclosed in note 24) and equity of the Group (comprising issued share capital, reserves, retained earnings and non-controlling interests).
Major categories of financial instruments
The Group’s principal financial liabilities comprise borrowings, other non-current liabilities and trade and other payables. The main purpose of these financial instruments is to finance the Group’s operations. The Group has various financial assets such as accounts receivable and loans advanced, cash and cash equivalents, and promissory notes and other investments.
31 December 2011 2010 Financial assets Financial assets at FVTPL Derivative financial asset - 46,136 Equity investments in listed companies held for trading 14,857 36,730 Loans and receivables, including cash and cash equivalents Cash and cash equivalents 657,448 326,905 Bank deposits 12,175 39,351 Trade and other receivables 24,712 21,244 Loans receivable 3,643 3,825 AFS financial assets, carried at fair value AFS investments 34,744 99,721 Total financial assets 747,579 573,912 Financial liabilities Borrowings 798,680 203,448 Trade payables 30,980 38,715 Other payables 154,443 116,020 Other non-current liabilities 4,772 4,458 Total financial liabilities 988,875 362,641
F-109 51 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
34. RISK MANAGEMENT ACTIVITIES (continued)
The main risks arising from the Group’s financial instruments are equity investments price, foreign currency, credit and liquidity risks. Due to the fact that the Group has sufficient positive net position in respect of the outstanding balance of borrowings and cash and cash equivalents available to settle these obligations within a short period if conditions would become unfavourable, management believes the Group is not significantly exposed to interest rate risk. If the interest rate was 1% higher/lower during the year ended 31 December 2011 interest expense for the year 2011 would increase/decrease by USD 611 thousand.
Despite vulnerability of the Group to the changes in the spot gold price the Group does not enter into any hedging contracts or use other financial instruments to mitigate the commodity price risk.
Equity investments price risk
The Group is exposed to equity investments price risk. Presented below is the sensitivity analysis illustrating the Group’s exposure to equity investments price risks at the reporting date. Management of the Group has decided to use the range of market prices of 10% higher/lower for the sensitivity analysis as the effect of such variation is considered to be significant and appropriate in the current market situation.
If market prices for equity investments had been 10% higher/lower, the profit before tax as a result of changes in fair value of financial assets at FVTPL and the investment revaluation reserve as a result of changes in fair value of AFS securities would increase/decrease as follows:
31 December 2011 2010 Profit before tax 1,486 8,287 Investment revaluation reserve 3,474 9,972
The Group normally places its excess cash into deposits in top rated Russian banks or into investments under asset management agreements with asset management companies who, in turn, utilise a variety of risk management activities in relation to the investments.
Fair value measurements recognised in the statement of financial position
The following table provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
x Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities. x Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly; and. x Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
As at 31 December 2011, the Group held the following financial instruments measured at fair value:
Level 1 Level 2 Total Available for sale equity investments - 34,744 34,744 Equity investments in listed companies held for trading 14,857 - 14,857 Total 14,857 34,744 49,601
F-110 52 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
34. RISK MANAGEMENT ACTIVITIES (continued)
As at 31 December 2010, the Group held the following financial instruments measured at fair value:
Level 1 Level 2 Total
Available for sale equity investments - 99,721 99,721 Equity investments in listed companies held for trading 36,730 - 36,730 Derivative financial asset - 46,136 46,136
Total 36,730 145,857 182,587
During the reporting periods, there were no transfers between Level 1 and Level 2.
The fair value of financial assets and liabilities is determined as follows:
x the fair value of financial assets and financial liabilities with standard terms and conditions and traded on active liquid markets are determined with reference to quoted market prices; and x the fair value of other financial assets and financial liabilities are determined in accordance with generally accepted pricing model based on discounted cash flow analysis using prices from observable current market transactions.
Management believes that the carrying values of financial assets and financial liabilities recorded at amortised cost in the consolidated financial statements approximate their fair values due to their short-term nature, except for the fair value of the Gold Lion loan payable, which had a fair value at the reporting date of USD 39,133 thousand.
Foreign currency risk
Currency risk is the risk that the financial results of the Group will be adversely affected by changes in exchange rates to which the Group is exposed. The Group undertakes certain transactions denominated in foreign currencies. Prices for gold are quoted in USD based on international quoted prices, and paid in local currencies, RUB or Tenge. The majority of the Group’s expenditures are denominated in RUB, accordingly, operating profits are adversely impacted by appreciation of RUB against USD. In assessing this risk management takes into consideration changes in gold price.
The carrying amounts of monetary assets and liabilities denominated in foreign currencies other than functional currencies of the individual Group entities were as follows:
Assets 31 December 2011 2010
USD 62,809 162,021 EURO 222 2,551
Total 63,031 164,572
31 December Liabilities 2011 2010
USD 888,405 291,577 EURO 680 555
Total 889,085 292,132
F-111 53 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
34. RISK MANAGEMENT ACTIVITIES (continued)
Currency risk is monitored on a monthly basis by performing sensitivity analysis of foreign currency positions in order to verify that potential losses are at an acceptable level.
The table below details the Group’s sensitivity to changes of exchange rates by 10% which is the sensitivity rate used by the Group for internal analysis. The analysis was applied to monetary items at the reporting dates denominated in respective currencies.
31 December 2011 2010 USD ‘000 USD ‘000
Profit or loss (RUB to USD) 61,910 12,956 Profit or loss (RUB to EURO) 64 (200) Profit or loss (KZT to USD) 20,650 28,386
Credit risk
Credit risk is the risk that a customer may default or not meet its obligations to the Group on a timely basis, leading to financial losses to the Group. Credit risk arises from cash, cash equivalents and deposits kept with banks, loans granted, advances paid, promissory notes and trade and other receivables, and other investments in securities.
In order to mitigate the credit risk, the Group conducts its business with creditworthy and reliable counterparties, minimises the advance payments to suppliers, and actively uses letters of credit and other trade finance instruments.
During 2010, the Group introduced a methodology for in-house financial analysis of banks and non- banking counterparties, which enables the management to estimate an acceptable level of credit risk with regard to particular counterparties and to set appropriate individual risk limitations. Within the Group’s core companies the procedures for preparing new agreements include analysis and contemplation of credit risk, estimation of the aggregate risk associated with a counterparty (arising both from an agreement under consideration and from previously existing contracts, if any) and verifying compliance with individual credit limits.
The Group’s credit risk profile is regularly observed by management in order to avoid undesirable increase in risk, limit concentration of credit and to ensure compliance with above mentioned policies and procedures.
Although the Group sells more than 88% of the gold produced to three major customers, the Group is not economically dependent on these customers because of the high level of liquidity in the gold commodity market. A substantial portion of gold sales are made to banks on advance payment or immediate payment terms, therefore credit risk related to trade receivables is minimal. The outstanding receivables for gold sales are presented as follows:
31 December 2011 2010 USD ‘000 USD ‘000
Trade receivables for gold sales 4,869 3,714
F-112 54 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
34. RISK MANAGEMENT ACTIVITIES (continued)
Gold sales to the Group’s three major customers, individually exceeding 10% of the Group’s gold sales are presented as follows:
31 December 2011 2010 Gold sales to three major customers exceeding 10% of the Group’s gold sales 2,060,107 1,403,365
Other receivables include amounts receivable in respect of sale of electricity, transportation, handling and warehousing services and other services. The procedures of accepting a new customer include check by a security department and responsible on-site management for a business reputation, licenses and certification, credit worthiness and liquidity.
Management of the Group believes that there is no other significant concentration of credit risk.
Liquidity risk
Liquidity risk is the risk that the Group will not be able to settle all liabilities as they are due. The Group’s liquidity position is carefully monitored and managed. The Group manages liquidity risk by maintaining detailed budgeting and cash forecasting processes and matching the maturity profiles of financial assets and liabilities to help ensure that it has adequate cash available to meet its payment obligations.
Historically the Group has not relied extensively on external financing. Management is currently in discussions with major Russian and International banks to establish additional lending facilities to finance new exploration and production projects.
The Group strives to establish business relations with export credit agencies in order to benefit from their financial support when purchasing foreign goods and particularly equipment. Please refer to Note 35 for details of credit facilities and financing that were arranged post year-end.
Management believes that, in case of need, the Group would be able to raise sufficient funding within a reasonable timeframe, and on favourable terms, due to its strong historical operations and positive operating cash flow.
The Group’s cash management procedures include medium-term forecasting (budget approved each financial year and updated on a quarterly basis), short-term forecasting (monthly cash-flow budgets are established for each business unit and a review of each entity’s daily cash position using a two- week rolling basis).
Presented below is the maturity profile of the Group’s financial liabilities as at 31 December 2011 based on undiscounted contractual payments, including interest payments:
Other Trade non-current and other Borrowings liabilities payables Principal Interest Principal Principal Total Due within three months 664,688 11,084 - 181,705 857,477 Due within three to nine months - 1,504 - - 1,504 Due within nine to twelve months 11,112 711 895 - 12,718 Due in the second year 44,444 1,983 895 - 47,322 Due in the third year 75,469 21,595 895 - 97,959 Due in the fourth year - - 895 - 895 Due in the fifth year - - 895 - 895 Due in thereafter - - 3,588 - 3,588 Total 795,713 36,877 8,063 181,705 1,022,358
F-113 55 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
34. RISK MANAGEMENT ACTIVITIES (continued)
The contractual maturity of guaranteed senior notes is 6 November 2013. As described in note 27, the Group has taken an option to redeem the notes in March 2012 at 102.344% of nominal value.
Presented below is the maturity profile of the Group’s financial liabilities as at 31 December 2010 based on undiscounted contractual payments, including interest payments:
Other Trade non-current and other Borrowings liabilities payables Principal Interest Principal Principal Total
Due within three months 200,000 - - 101,149 301,149 Due within three to nine months - 2,865 - - 2,865 Due within nine to twelve months - - - 6,891 6,891 Due in the second year - - 1,199 - 1,199 Due in the third year - - 899 - 899 Due in the fourth year 31,025 20,980 899 - 52,904 Due in the fifth year - - 899 - 899 Due in thereafter - - 4,496 - 4,496
Total 231,025 23,845 8,392 108,040 371,302
35. SUBSEQUENT EVENTS
On 7 February 2012, the USD 300 million VTB credit facility was extended by three months, until 15 May 2012, with an extension fee paid in the amount of USD 460 thousand.
On 20 February 2012, the USD 500 million Societe Generale credit facility was extended by 3 month, until 28 May 2012, with an interest rate increase to 1 months USD LIBOR+2.25% and an extension fee paid in the amount of USD 840 thousand.
On 10 February 2012, the Group entered into a three year USD100 million credit facility with HSBC. The interest rate is set at 3 months USD LIBOR+3%. The facility was utilised as described below.
On 15 March 2012, 200 million USD guaranteed senior notes were redeemed at 102.344% of nominal value funded by two 100 million USD loans from HSBC and Unicredit banks.
On 15 March 2012, CJSC “Gold Mining Company Polyus”, a subsidiary of the Company, entered into a three year RUR 10 billion (USD 311 million) VTB credit line to fund its general corporate purposes. The interest rate is subject for a separate agreement under each of the credit line drawdowns but could not exceed 20% or MosPrime Rate + 6.5% for RUR denominated drawdown and 14% or LIBOR/EURIBOR + 13.5% – for USD/EURO denominated drawdown. The line was not utilized.
On 30 March 2012, Board of Directors approved dividends in the amount of USD 0.041 per ordinary share at a total cost of USD 115,013 thousand.
F-114 56 POLYUS GOLD INTERNATIONAL LIMITED
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2011 (in thousands of US Dollars)
36. INVESTMENTS IN SIGNIFICANT SUBSIDIARIES
Effective % held1 31 December Subsidiaries Incorporation Nature of business 2011 2010
OJSC “Polyus Gold” Russian Federation Management company 95.3 - 2 CJSC “Gold Mining Company Polyus” Russian Federation Mining 95.3 100.0 OJSC “Aldanzoloto GRK” Russian Federation Mining 95.3 100.0 OJSC “Lenzoloto” Russian Federation Market agent 61.1 64.1 LLC “Lenskaya Zolotorudnaya Russian Federation Market agent Company” 3 n/a - 100.0 CJSC “ZDK Lenzoloto” Russian Federation Mining 63.0 66.2 CJSC “Lensib” 4 Russian Federation Mining 38.4 40.4 CJSC “Svetliy” Russian Federation Mining 52.9 55.6 CJSC “Marakan” Russian Federation Mining 52.9 55.6 CJSC “Dalnaya Taiga” Russian Federation Mining 51.7 54.3 CJSC “Sevzoto” 4 Russian Federation Mining 40.9 43.0 CJSC “GRK Sukhoy Log”3 Russian Federation Mining - n/a 100.0 OJSC “Matrosov Mine” Russian Federation Mining (development stage) 95.3 100.0 CJSC “Tonoda” Russian Federation Mining (exploration stage) 95.3 100.0 OJSC “Pervenets” Russian Federation Mining (development stage) 95.3 100.0 OJSC “South-Verkhoyansk Mining Russian Federation Mining Company” (development stage) 95.3 100.0 Polyus Exploration Limited British Virgin Islands Geological research 95.3 100.0 JSC “MMC Kazakhaltyn” Republic of Mining Kazakhstan 100.0 65.0 Jenington International Inc. British Virgin Islands Market agent 95.3 100.0 Polyus Investments Limited Cyprus Market agent 95.3 100.0
1 Effective % held by the Company, including holdings by other subsidiaries of the Group.
2 The parent of the Group before 25 July 2011, refer to Note 2.
3 The entities were merged into OJSC “Pervenets” during the year 2011.
4 The Company maintains control of these entities as it continues to govern their financial and operating policies through its ability to appoint the Board of Directors. A majority of the Board members for these entities are representatives of the Company and are therefore consolidated even though the effective interest is less than 50% as at 31 December 2011 and 2010.
F-115 57 REGISTERED OFFICE OF THE ISSUER Polyus Gold International Limited Queensway House, Hilgrove Street St. Helier, Jersey JE1 1ES Channel Islands
REGISTERED OFFICE OF THE GUARANTOR Closed Joint-Stock Company “Gold-Mining Company “Polyus” Ulitsa Belinskogo 2 B Severo-Eniseyskiy townside, Krasnoyarsk region 663280 Russia
REGISTRAR TRUSTEE PRINCIPAL PAYING AGENT AND A TRANSFER AGENT BNY Mellon Corporate The Bank of New York Mellon, The Bank of New York Mellon Trustee Services Limited London Branch (Luxembourg) S.A. One Canada Square One Canada Square Vertigo Building – Polaris London E14 5AL London E14 5AL 2-4 Rue Eugene Ruppert United Kingdom United Kingdom L-2453 Luxembourg
U.S. REGISTRAR, U.S. PAYING AGENT AND A TRANSFER AGENT The Bank of New York Mellon, New York Branch 101 Barclay Street New York NY 10286 United States of America
LEGAL ADVISERS To the Issuer To the Issuer, To the Joint Lead Managers and the Guarantor and the Guarantors as and the Trustee as to English and U.S. law to Jersey law as to English and U.S. law Debevoise & Plimpton LLP Mourant Ozannes Linklaters LLP Tower 42 22 Grenville Street One Silk Street Old Broad Street St. Helier London EC2Y 8HQ London EC2N 1HQ Jersey JE4 8PX United Kingdom United Kingdom Channel Islands
To the Issuer To the Joint Lead Managers and the Guarantor and the Trustee as to Russian law as to Russian law Debevoise & Plimpton LLP Linklaters CIS Business Center Mokhovaya Linklaters CIS Ulitsa Vozdvizhenka, 4/7 Stroyeniye 2 Paveletskaya sq.2 bld. 2 Moscow, 125009 Moscow 115054 Russian Federation Russia
225 INDEPENDENT AUDITORS Deloitte LLP ZAO Deloitte & Touche CIS 2 New Street Square 5 Lesnaya Street London EC4A 3BZ Moscow 125047 United Kingdom Russian Federation
LISTING AGENT Arthur Cox Listing Services Limited Earlsfort Centre Earlsfort Terrace Dublin 2, Ireland
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