Annual Report 2015 About Petropavlovsk We are one of Russia’s most established and experienced gold mining companies Since 1994, Petropavlovsk has evolved into the largest vertically integrated gold producer in the Russian Far East. Our people have led our four open pit gold mines to deliver an impressive record of production growth. Drawing upon an established mining tradition, our strategy focuses on creating value for shareholders via stable, low-cost production from quality assets. In line with this, we are creating a technologically innovative Pressure Oxidation Hub which, supported by solid infrastructure, is designed to process refractory ore concentrates from multiple deposits in the area. 4 open pit gold mines located in the Russian Far East c.8.5Moz of Reserves within c.23.7Moz of Resources c.15Mtpa of processing capacity Successful development of innovative technologies Skilled workforce with local knowledge and expertise Part of FTSE SmallCap Index Go to page 10 for more on our business model. Contents Inside this report Strategic report Strategic Strategic report report Strategic About Petropavlovsk IFC Environmental, Safety 24 Exploration Report, 50 and Social Report Reserves and Resources 01 Chairman’s Statement 04 Risks to Our Performance 26 Future Development 60 Chief Executive Offi cer’s 06 Statement Where We Operate 40 Other Projects 62 Gold Market Overview 8 Operational Performance: 42 IRC 65 Pioneer Our Business Model 10 Chief Financial Offi cer’s 66 Operational Performance: 44 Statement Our Core Strengths 12 Albyn Our Strategy 14 Operational Performance: 46 Our Strategic Objectives 16 Pokrovskiy Key Performance Indicators (KPIs) 17 Operational Performance: 48 Malomir Governance Governance Governance Board of Directors 80 02 Corporate Governance Report 82 Nomination Committee Report 88 Audit Committee Report 89 Directors’ Remuneration Report 95 Directors’ Repor t 111 Directors’ Responsibilities 118 Statement Independent Auditor’s Report 119 to the Members of Petropavlovsk PLC Financial statements statements Financial Consolidated Income Statement 128 Company Statement 177 of Changes in Equity 03 Consolidated Statement 129 of Comprehensive Income Notes to the Company 178 Financial Statements Consolidated Balance Sheet 130 Appendix, Glossary 181 Consolidated Statement 131 and Defi nitions of Changes in Equity Shareholder Information 185 Consolidated Cash 132 Flow Statement Notes to the Consolidated 133 Financial Statements Company Balance Sheet 176 Petropavlovsk Annual Report 2015 1 Strategic report In this section Chairman’s Statement 04 Chief Executive Offi cer’s Statement 06 Gold Market Overview 08 Our Business Model 10 Our Core Strengths 12 Our Strategy 14 Our Strategic Objectives 16 Key Performance Indicators (KPIs) 17 Environmental, Safety and Social Report 24 Risks to Our Performance 26 Where We Operate 40 Operational Performance 42 Exploration Report, Reserves and Resources 48 Future Development 60 Other Projects 62 IRC 65 Chief Financial Offi cer’s Statement 66 2 Petropavlovsk Annual Report 2015 Strategic report Governance Financial statements PetropavlovskPetropavlovsk Annual Annual Report Report 2015 2015 33 Chairman’s Statement Peter Hambro 2015 was a year of significant change and As the year progressed, however, it became This will be achieved through a new joint- development for Petropavlovsk and marked apparent that debt reduction was not to be a venture company, initially a 100% subsidiary the beginning of a shift in our strategic sufficient overall objective and our enhanced of Petropavlovsk and finally a 49-51% transformation. We are focused on ensuring strategy entails a fundamental shift away from collaboration with GMD Gold, which will that the Group is positioned to provide the aspiration to achieve the maximum levels unlock the potential of the world-class sustained profitability and generate of production as a first priority. Instead we will refractory gold deposit at Malomir and take us meaningful cash flow, giving investors focus on growing the margin and improving through the processing of Pioneer’s refractory leverage to the price of gold by producing free cash flow – without compromising the gold when its non-refractory ores are high-margin ounces at sustainable levels. long term sustainability of our mines. We exhausted. We expect that at full capacity needed to change and to re-instate the production from our share of the Pox Hub will In 2015 we completed a major refinancing of growth of Petropavlovsk in response to a be in the 200,000 to 300,000 oz range and the company, thanks in part to the willingness world where gold had, once again, become that the cost of production from the Malomir of our convertible bond holders to accept a an attractive investment medium. We need to ore through this process will be much in line debt-for-equity exchange and in part to the focus on the excellent reserves and resources with the costs we have experienced in willingness of Pavel Maslovsky, Andrei Vdovin that we have and to do so faster than we had producing gold from the non-refractory and I to invest some $30 million into new originally planned. In order to deliver on this ore at Pioneer. equity. Many of our individual shareholders we focused on three areas: finding a partner also took up their rights and I am extremely to help us to restart the all-important pressure Looking ahead, we have adjusted our strategy grateful to them for the faith that they showed oxidation project to deal with the refractory to target accretive acquisitions, which will in the future of the company. ore at Malomir and Pioneer, increasing the improve the quality of our portfolio on a free size of the Group with a suitable acquisition, cash flow per ounce basis, and bring medium This new equity funding and the underlying and developing the underground potential of to long term cash flow benefits, offer short cash flow that we have managed to generate the high grade mineralisation at Pioneer. and long term growth potential, and have during the year enabled us to reduce the Happily the 2015 refinancing and debt synergies with our existing operations. We are level of Net Debt to $610 million by reduction put us in a good position to start on very happy to report that we are making 31 December 2015. all three projects. significant progress in implementing this strategic objective. As it was announced We identified the gold at Malomir, which is separately today, we have entered into an easy to mine but hard to process, as the agreement to acquire AZ, an established gold fastest route and we were fortunate in finding company with production and development a partner with whom to develop it without assets in the Khabarovsk Region in the Far having to invest more or give up any rights to East of Russia. Based on preliminary due the reserves and resources that a royalty diligence we expect that Amur Zoloto (“AZ”) streaming finance option would demand. This will add to our total gold output without any is possible because our partner has its own extra capital expenditure, and bring an uplift supply of refractory concentrate and our to our high grade non-refractory mineral facilities are large enough and have the resources and ore reserves base. In line with flexibility to cater for both. In order to access this strategic objective of seeking more the embedded value of the Group’s refractory immediate returns, we are also planning to reserve base, we are accelerating the POX dispose of our Visokoe deposit located in the Hub’s development, under the critical Krasnoyarsk region and have received an condition that this will not increase Group indicative offer of $20million. debt levels. 4 Petropavlovsk Annual Report 2015 Both of these elements have already had a Recent news from IRC, our investment in iron Since the year end, the Renova Group, from report Strategic signifi cant effect on our relationship with our ore production on the Russo-Chinese border, Moscow, has become the largest shareholder principal lenders, Sberbank and VTB, and I has also improved. ICBC and its credit insurer, in the Company and we look forward to am pleased to say that we have made Sinosure, have agreed to substantial fi nding a way in which we can work together. substantial progress in renegotiating the relaxation of covenants and repayment terms terms of the fi nancial covenants and debt for IRC contingent on some conditions It goes without saying that we could not have repayments ahead of the next covenant precedent including the Debt Restructuring of achieved as much as we have done without measurement date, 30 June 2016. Petropavlovsk, and this also extends to the hard work and goodwill of all the members covenants on Petropavlovsk in connection of both Petropavlovsk’s workforce and its We have launched a comprehensive with its guarantee. shareholders. The Board and I extend our programme of exploration and development thanks to them all. of our existing projects in order to maximise All in all then, as we recovered from the turmoil their net present value (NPV). This programme of the restructuring and the higher volatility of I have spoken in my shareholder letters in the envisages increases in the quality and the gold price and the relevant foreign- past about the turbulence in the world’s quantity of our mineral resources not only exchange rates, we have weathered the fi nancial markets and it seems that there is no through exploration of fl anks and satellite storm reasonably well and can, I think, look end to this in sight. Accordingly I believe that deposits of our producing mines but also by forward with some certainty to much gold, our principal product, will remain much introducing new methods, in particular improved business in the near future. in favour with investors of all sorts for its role underground mining, to maximise production as “wealth insurance” and thus that its price margins and optimise production schedules.