Annual Report 2017 Our Values Responsibility We place people first. Responsible practices are our highest priority and we aim to operate safely, efficiently and transparently, continually seeking new ways to ensure an injury-free workplace. We are committed to preventing pollution, minimising waste, increasing carbon efficiency and optimising natural resource usage. We develop innovative solutions to mitigate environmental risks and welcome an active dialogue with local communities. Innovation We challenge ourselves and others to constantly improve in line with the most recent scientific and engineering developments worldwide. Our aim is to be an industry leader in safety and environmental practices, whilst realising the full potential of our assets through ingenuity, drive, and innovation. Integrity We believe that honest communication, sound business ethics and respect for people are the foundation of our business and deal with all our stakeholders in a respectful, responsible way. We are guided by our Code of Ethics in every situation, at all levels of the Company, to preserve dignity and self-worth in all our interactions. Excellence We are focused on delivering results and on doing what we say we will do. We accept responsibility and hold ourselves accountable for our work, behaviour, ethics and actions. We aim to deliver high performance outcomes and undertake to deliver on our commitments to our colleagues, business and social partners, and our investors. Sustainability Sustainable development has been a key focus for the Group since its foundation. At Petropavlovsk, our objective is to act in the interests of our stakeholders, including shareholders, employees and the communities in which we operate, by ensuring all our activities are efficient, responsible, transparent and sustainable. Annual Report 2017 Petropavlovsk is one of Russia’s major gold report Strategic mining companies, in terms of both production and Reserves and Resources. It is amongst the most established and the most experienced vertically integrated gold producers in the Far East of Russia. The Company focuses on creating value for its shareholders, employees and other stakeholders by safely and responsibly exploring, mining and producing a stable output of low-cost gold. Governance Financial statements Financial Download a digital copy This report is available to download from our corporate website. www.petropavlovsk.net You can also now access key highlights of the report online. www.petropavlovsk-2017.net Petropavlovsk Annual Report 2017 1 Highlights Petropavlovsk’s key area of focus Key 2017 financial figures is the Amur region in the Russian Far East, where it has operated Revenue since 1994. The Company is one of the leading employers and US$ 5 87.4 m contributors to the development (2016: US$540.7m) of the local economy in the Total Cash Costs◆ region, which benefits from well-developed infrastructure, US$ 741/oz access to hydroelectric power (2016: US$660/oz) and a strong mining tradition. All-in Sustaining Costs◆ US$ 963/oz (2016: US$807/oz) Underlying EBITDA◆ US$ 196.8m (2016: US$200.1m) Net Profit US$ 41.5m (2016: US$31.7m) Russia Operating mine IRC Limited Operations Amur region Albyn Underground R&D POX Offices Malomir Analytical Labs Pioneer Pokrovskiy Pioneer: Albyn: Pokrovskiy: Malomir: St Petersburg - RDC Hydrometallurgy IRC Limited Yamal - Amur region – Kuranakh mine region - Jewish autonomous region – K&S mine Moscow - Petropavlovsk Moscow - PHM Engineering (Tech) Krasnoyarsk region Amur region Blagoveshchensk - Petropavlovsk Amur Region Irkutsk - Regis Exploration - Irgiredmet Institute - Kapstoi Construction ◆ Throughout this document, when discussing the Group's financial performance, reference is made to a number of financial measures, known as Alternative Performance Measures (APM), which are not defined or calculated in accordance with IFRS. Go to pages 197 to 203 for more information on our APMs. 2 Petropavlovsk Annual Report 2017 At a Glance Strategic report Strategic 3 open pit gold mines, 20.86Moz JORC c.6.8Moz of gold Resources including produced to date 8.15Moz Reserves Governance c.15.5Mtpa of plant Production of processing capacity c.440koz p/a For information on our operations go to pages 32 to 41 and for information on our Reserves and Resources go to pages 53 to 57. Financial statements Financial Untapped POX Hub staged Experienced c.US$350m market cap exploration potential commissioning management team scheduled from Q4 2018 and skilled workforce Petropavlovsk Annual Report 2017 3 4 Petropavlovsk Annual Report 2017 Contents Inside this report Strategic report report Strategic Petropavlovsk online 1 Operational Performance: Reserves and Resources 53 Key Performance Indicators (KPIs) 33 01 Highlights 2 Exploration Update 61 Operational Performance: At a Glance 3 IRC 63 Pioneer 34 Contents 5 Sustainability: Operational Performance: Key Performance Indicators (KPIs) 65 Chairman’s Statement 6 Albyn 36 Approach to Sustainability 69 Interim CEO's Statement 10 Operational Performance: Malomir 38 Sustainability Policy Our Business Model 12 and Action Plan 70 Operational Performance: Our Strategy 14 Pokrovskiy 40 Financial Performance: Market Overview 16 Key Performance Indicators (KPIs) 81 The POX Hub 42 Risks to Our Performance 18 Chief Financial Officer’s Underground 52 Statement 84 Governance Governance Board of Directors 94 02 Governance Report 96 Nomination Committee Report 106 Audit Committee Report 108 Directors’ Remuneration Report 115 Directors’ Report 133 Directors’ Responsibilities Statement 141 Independent Auditor’s Report to the Members of Petropavlovsk PLC 142 Financial statements statements Financial Consolidated Income Statement 149 Company Statement of Changes in Equity 193 03 Consolidated Statement of Comprehensive Income 150 Notes to the Company Financial Statements 194 Consolidated Balance Sheet 151 The Use of Application of Consolidated Statement Alternative Performance of Changes in Equity 152 Measures (APMs) 197 Consolidated Cash Appendix, Glossary Flow Statement 153 and Definitions 204 Notes to the Consolidated Shareholder Information 208 Financial Statements 154 Company Balance Sheet 192 Petropavlovsk Annual Report 2017 5 Chairman’s Statement Ian Ashby Tragically, during 2017 three workers lost During the year, the Company made good This year marks the beginning of a new era their lives at our operations. On behalf of the progress with its development plans whilst for Petropavlovsk with the closure of our Board, I extend our sincere condolences to achieving solid operational results and Pokrovskiy mine, as the site is being the families, friends and work colleagues maintaining continued financial discipline. transformed into a key component of the POX affected. We have an intractable commitment Group production was almost 440,000oz Hub, our core organic growth development. to ensuring a safe work environment for all in 2017, a 10% increase on the previous year The POX Hub will enable us to unlock the people that participate in our business. To this and in line with guidance. Both of the value otherwise inaccessible in the end, we will be launching a program during Company’s flagship mines, Pioneer and approximate 4Moz of refractory gold 2018 that will identify the key fatality risks to Albyn, significantly outperformed the previous reserves. Construction progress at the our business, around which we will develop year’s production. This result is even more POX Hub is at 80% as of the publishing of actions to either eliminate or definitively impressive considering that in general the these results and remains on schedule for control these risks. I will be taking personal team treated lower grade material than in the commissioning in the fourth quarter of 2018. interest in this initiative. previous year, and that Pioneer, Pokrovskiy and Malomir had decreased recovery rates The POX Hub is a unique project. Notwithstanding the general uplift in prices due to the more refractory nature of the ores Our scientists and engineers have worked for mineral commodities over the last twelve mined. These factors also put upward enthusiastically to optimise the POX process months, the gold price has experienced pressure on our costs. technology to match the types of ores we are volatility, starting the year at US$1,151/oz, planning to process. In the course of this work rising to US$1,346/oz in September and We continued the transition to underground we have patented several of our technological falling back to US$1,291/oz at year end, which operations at both Pioneer and Malomir in findings, which are being implemented at was related to the general uncertainty around 2017. These simultaneous developments Petropavlovsk for the first time. Distinctive the overall trajectory of the global economy. proved to be challenging and led to some features of the POX plant are its robust design The volatility continued into 2018 with gold delays with the original commissioning with four autoclave units in parallel, and flow hitting US$1,350/oz in January 2018. Against timetable. Initial development delays at sheet flexibility, which allows the processing this backdrop, Petropavlovsk underwent a Malomir were driven by subcontractor of gold concentrates with different chemical year of substantial transformation, focusing mobilisation being longer than planned and metallurgical characteristics at the same on the timely delivery of the Company’s stated but the impact was well mitigated by time. This flexibility was extensively