annual report 2006 » gold resource 3 Contents COMPANY OVERVIEW MARKET POSITION Company Profile _______________________________________ 4 Silver Market Overview ________________________________ 61 Summary Consolidated Financial and Other Information ______ 5 Gold Market Overview__________________________________ 65 KEY MILESTONES AND HIGHLIGHTS ENGENEERING AND INNOVATIONS ________________ 68 2006 Highlights _______________________________________ 8 2006 Milestones _______________________________________ 9 CORPORATE GOVERNANCE Dividend Policy _______________________________________ 73 LETTER TO SHAREHOLDERS ______________________ 11 Directors and Management _____________________________ 74 STRATEGY HUMAN RESOURCES ___________________________ 80 Key Strengths ________________________________________ 14 Strategy ____________________________________________ 16 HEALTH AND SAFETY POLICY ____________________ 87 Corporate History and Structure ________________________ 20 ENVIRONMENTAL POLICY_______________________ 88 PROPERTIES AND MINING OPERATIONS Map of Operations ____________________________________ 21 COMMUNITY AND SOCIAL Asset Portfolio_______________________________________ 22 PROGRAMS __________________________________ 92 RESERVES AND RESOURCES CONSOLIDATED FINANCIAL STATEMENTS Ore Reserves and Mineral Resources Statement ____________ 23 AND REPORT OF INDEPENDENT ACCOUNTANTS FOR THE YEARS ENDED DECEMBER 31, OPERATIONAL OVERVIEW _______________________ 25 2006 AND 2005 _______________________________97 Dukat _______________________________________________ 28 Lunnoye _____________________________________________ 32 CONTACT INFORMATION________________________120 Khakanjinskoye ______________________________________ 36 Vorontsovskoye ______________________________________ 40 EXPLORATION AND DEVELOPMENT Strategy ____________________________________________ 42 Stand-Alone Exploration Projects _______________________ 43 Regional Exploration Campaigns _________________________ 46 Exploration Program __________________________________ 47 EXPANSION PROJECTS Dukat _______________________________________________ 48 Vorontsovskoye ______________________________________ 48 Albazino ____________________________________________ 49 STRATEGIC ALLIANCE AND JOINT VENTURE Strategic Alliance with AngloGold Ashanti_________________ 52 FINANCIAL OVERVIEW Revenues ____________________________________________ 53 Liquidity and Capital Resources _________________________ 58 Cash Flows___________________________________________ 59 gold resource 4 5 _ Since its inception, the Company has designed, built and man- 2006 2005 2004 Company overview aged eight mines in Russia, three of which have since been di- vested. The Company has built up its mine portfolio by developing US$ in thousands (except as indicated) greenfield mines or by entirely rebuilding mines from inactive operations. Polymetal has achieved strong growth in recent years Consolidated income statement data in its production levels for both silver and gold. Silver produc- Revenues 315,596 238,973 204,487 tion has grown at a compound annual growth rate of 13.6% during the period from 2003 to 2006, and gold production has grown at a Sales of silver 161,056 136,520 117,695 compound annual growth rate of 23.2% over the same period. The Company profile _ In addition to its five operating mines, Polymetal has a sig- Company has achieved much of this growth by managing the tran- Sales of gold 153,849 100,472 85,959 nificant pipeline of exploration and development projects that is sition of many of its operating mines from development projects Cost of sales (171,283) (136,173) (92,850) Polymetal is a market leader in the precious metals mining indus- expected to continue to fuel the Company’s growth. In particu- into full scale, producing operations, leveraging the considerable try. In 2006, the Company was the world’s fifth largest producer of lar, the Company recently acquired the Albazino deposit in the in-house expertise of its employees. Income from mining silver, according to GFMS, and the largest primary silver producer Khabarovsk Territory to add to its current portfolio of twelve operations 144,313 102,800 111,637 globally, according to CRU. During the same year, the Company was development and exploration projects. According to an audit of _ The table below sets out Polymetal production output, revenues, also Russia’s third largest producer of gold, according to the As- mineral resources conducted by Snowden, Albazino contained 769 EBITDA and Adjusted EBITDA for the years ended 31 December Operating income 94,755 67,265 88,969 sociation of Russian Gold Producers. thousand ounces of indicated gold mineral resources at Novem- 2006, 2005 and 2004. Income from continuing ber 7, 2006. Of its stand-alone exploration projects, the Company operations before income _ The Company was incorporated as Polymetal (Open Joint Stock currently expects to bring two projects (Fevralskoye and Khaka- tax and minority interest 93,703 31,607 62,930 Company Polymetal) in Saint Petersburg, Russia in 1998 by ICT rinskiy) to feasibility study or pre-feasibility study by the end 2006 2005 2004 Group. Today Polymetal operates through a vertically integrated of 2008, and to upgrade mineralization at Aprelkovskoye-Peshko- Income from continuing Silver Production (Moz.) 17.3 18.9 17.3 organisational structure comprising production units, in-house vskiy Unit (APU) to mineral resource status by the end of 2007 and operations before minority interest 67,948 22,588 45,098 engineering, stand-alone exploration and development projects to bring the Galkinskiy field to pre-feasibility study till the third Gold Production (Koz.) 256 243 212 and regional exploration subsidiaries. quarter of 2008. The Company also has three grassroots regional Income from continuing exploration programs around the Dukat, Khakanjinskoye (Khakan- Revenues (US$, mln) 315.6 239.0 204.5 operations 61,687 14,705 27,732 _ At present, Polymetal actively mines at five sites: Dukat, Lun- ja) and Vorontsovskoye mines aimed at extending the economic EBITDA (US$, mln) 154.9 78.3 93.5 noye, Arylakh, Khakanjinskoye and Vorontsovskoye. The operating life and increasing the production capacity of the existing mines Income (loss) on discon- tinued operations — 2,894 44,712 lives of its mines range from ten to twenty years based on current and finding deposits with stand-alone economic significance. The Adjusted EBITDA (US$, mln) 134.3 93.0 102.1 ore reserves. Dukat and Lunnoye, mines situated in the vicinity Company’s exploration portfolio includes sixteen licenses cover- Net income 61,687 17,599 72,444 of Magadan in the Northeast of Russia, are primary silver mines ing an area of approximately 3,100 sq. km. with significant by-product gold production. Dukat is currently _ In September 2006, Polymetal entered into a preliminary agree- the world’s second largest primary silver deposit by ore reserves _ The table below sets out the ore reserves at each of the Com- ment to establish a joint-venture with AngloGold Ashanti, an in- 2006 2005 2004 and the third largest silver mine by production according to data pany’s operating mines as at 31 December 2006. The table also ternational gold producer with operations on four continents, in published by the Silver Institute. Khakanjinskoye, located in the includes information on ore reserves and mineral resources at order to identify, explore and develop gold mining opportunities US$ in thousands (except as indicated) Khabarovsk Territory, and Vorontsovskoye, situated in the Sver- Lunnoye’s satellite deposit (Arylakh) and the satellite deposit of in Russia. Initially, the proposed strategic alliance will involve dlovsk region, are both gold mines, with the former also produc- Khakanja (Yurievskoye). four sites located in the Krasnoyarsk and Chita regions: the An- Non-GAAP measures, operational and other data ing significant quantities of silver. Arylakh is the satellite deposit enskiy and APU sites (contributed by Polymetal) and the Bogunay Silver production of Lunnoye and Yurievskoye is the satellite deposit of Khakanjin- and Veduga sites (contributed by AngloGold Ashanti). Polymetal (in millions of ounces) 17.3 18.9 17.3 skoye. believes that this proposed alliance will benefit the Company both in terms of opportunities generated and access to best-in-class Gold production geological expertise and processing technology. (in thousands of ounces) 256 243 212 Ore Reserves Proved&Probable Tonnage (Kt) Grade (Au, g/t) Grade (Ag, g/t) Content Au (Koz.) Content Ag (Koz.) Average silver sales price (US$ per ounce) 9.33 7.22 6.80 Dukat 18,385 1.1 542.8 642 320,817 Summary consolidated financial Lunnoye&Arylakh 4,481 1.4 393.2 201 56,648 and other information Average gold sales price (US$ per ounce) 603.3 429.4 403.6 Khakanja&Yurievskoye 5,287 5.6 212.1 945 36,056 This summary consolidated financial and other information sets EBITDA 154,872 78,334 93,502 Voro 21,855 2.8 4.0 1,957 2,797 forth the Company’s historical consolidated financial information and other operating information as of and for the years ended 31 Adjusted EBITDA 134,349 93,043 102,143 Total 50,008 2.3 258.9 3,745 416,317 December 2006, 2005 and 2004. The financial information as of and for the years ended 31 December 2006, 2005 and 2004 was de- Total cash costs per ounce (US$ per ounce of silver) Notes: _ The estimates for ore reserves (Proved and Probable) presented above are based on the following economic cut- rived from, and should be read in conjunction with,