Delivering on our promises Annual Report 2012 www.polymetalinternational.com WorldReginfo - 6468c4f2-9115-41e3-b43b-e1ee7df3bdf5 Overview Polymetal has a simple objective – Our approach is underpinned by Overview to deliver sustainable value to all a commitment to high standards Contents our stakeholders. of corporate governance, corporate responsibility and Our aim is to become the leading sustainable development. precious metals mining group in Russia and the CIS, benefiting from our competitive advantages – strong track record, capital discipline and high quality assets. A conversation Business model Overview 2 Polymetal at a glance with the Chief Executive Our business model remains at the heart 4 Performance highlights Delivering on of our ability to maintain competitive 12 14 6 Where we operate In this section we hear from our advantage and consequently to deliver Chief Executive, Vitaly Nesis, regarding sustainable value. Here we discuss See more on pages 12-13 See more on pages 14-15 his views and our strategy relating in more detail how our business model Business review our promises to the issues and activities that continues to drive our performance. we are asked about most often. 8 Chairman’s statement 10 Chief Executive’s review 12 Chief Executive’s Q&A We set ourselves demanding 14 Business model exemplary g exemplary g exemplary g 16 Strategy update targets and have a consistent ing ove ing ove ing ove ain rn ain rn ain rn 18 Delivering on our promises nt an nt an nt an ai on c ai on c ai on c rati e rati e rati e 22 Operating review M lo F M lo Fo M lo Fo record of achieving them. During p oc p c p c x u x u x u e s e s e s n n i n i 22 Overview i in i n i n g g g g g g in o in o in o t t t 28 Dukat hub the year we have continued to n n n s s s e h e h e h v i v i v i g g g 32 Omolon hub n n n h h I h I I - - Delivering - Delivering Delivering g g deliver on these targets and this g 36 Amursk POX hub r r r a a a d d d e sustainable sustainable e sustainable e 40 Albazino L L L a a a e e e s s report illustrates our commitment s s s v s v v 44 Mayskoye value value value e e e e e e t t r t r r s s a s a a g g g 48 Khakanja to strategy, business model and the in in in g g g ou ou ou 52 Voro M r M r M r hub tem e hub tem e hub tem e ai -based sys c ai -based sys c ai -based sys c 56 Varvara culture of excellence throughout nt an nt an nt an ain rn ain rn ain rn 60 Standalone exploration projects ing ove ing ove ing ove our operations. exemplary g exemplary g exemplary g 62 Financial review 76 Risks and risk management 80 Sustainability What we said Delivering on Corporate responsibility In our last annual report, our focus for the future Governance As always, building a responsible business was specifically about operational excellence and our promises 88 Board of Directors effectiveness; a commitment to our strategic objectives; 18 continues to be at the core of our thinking 80 We report on the progress that 89 Senior management building a responsible business; upholding the highest and this section details our approach we’ve made, and describe how this and achievements. 90 Corporate governance governance standards; and a continuing dedication forms part of our ongoing development See more on pages 18-21 See more on pages 80-87 95 Audit and Risk Committee report to the support and motivation of our workforce. in the context of our longer-term 99 Directors’ report growth strategy. 102 Remuneration report Financial statements 110 Directors’ responsibility statement 111 Independent auditor’s report 112 Consolidated income statement 112 Consolidated statement of comprehensive income 113 Consolidated balance sheet 114 Consolidated statement of cash flows 115 Consolidated statement of changes in equity 116 Notes to the consolidated financial statements Appendices 160 Reserves and Resources 166 Glossary 168 Shareholder information Annual Report 2012 Polymetal International plc 1 WorldReginfo - 6468c4f2-9115-41e3-b43b-e1ee7df3bdf5 Overview Overview +Anadyr Polymetal at a glance Locations Russia Magadan Region Sverdlovsk Region Finland Magadan+ Khabarovsk Territory Chukotka Autonomous Territory Estonia A year of robust progress Latvia St. Petersburg Lithuania Kazakhstan Belarus Kostanay Region +Moscow Russia Ukraine + Ekaterinburg Khabarovsk+ +Kostanay China Georgia Kazakhstan Japan Armenia Mongolia North Azerbaijan Uzbekistan Korea China South Korea Key achievements Key financial figures Production Our portfolio (as at 31 December 2012) ■■ Polymetal demonstrated strong operational performance throughout the year. Total gold Revenue structure (%) equivalent production of 1,063 Koz was up 31% compared to 2011, exceeding the original projection 1, 8 5 4 918 1,0 6 3 Koz Copper 1 6 of 1 Moz. This reflects stable operations at all Sales revenue (US$ million) Adjusted EBITDA – of gold equivalent 3% Mining operations: of our mature mines, with a notable improvement 2011: US$1,326 million total (US$ million) 2011: 810 Koz at Dukat and growth at Omolon and Albazino. 2011: US$624 million Dukat hub Albazino/Amursk/Mayskoye POX hub ■■ Metal sales for the full year exceeded production Omolon hub for both gold and silver. +31% Voro standalone mine ■■ The Amursk POX, the first operating POX plant 703 401 increase of gold equivalent Varvara standalone mine in Russia’s gold industry, has been slower than Total cash cost Profit for the year production on 2011 Khakanja hub planned to come online, but the ramp-up (US$/GE oz)2 (US$ million) is progressing and we expect it to reach full 2011: US$701/GE oz 2011: US$290 million Silver Gold capacity by the end of 2013. 42% 55% ■■ There has been a dramatic increase of the resource 54 base at Albazino and potential new growth assets Licences have been identified through successful exploration How we’ve performed at Kutyn and Svetloye. We have demonstrated strong financial performance for the year, How we’ve delivered driven by excellent operational performance and tight cost and capital Our original objective for 2012 was to deliver on track, we are confident that we will achieve ■■ We have implemented a new dividend policy, discipline. We remain committed to delivering value to shareholders 1.0 Moz of gold equivalent, and we are production of 1.2 Moz in 2013 and 1.4 Moz raising the payout ratio to 30% and introducing by proposing a final dividend which, combined with special dividends, naturally pleased to have exceeded this of gold equivalent in 2014. will result in sector-leading yield combined with solid growth profile. target. Since our operating activities remain 10,722 special dividends. The first special dividend in the Total licence area (km2) Company’s history of US$0.50 per share was paid in January 2013; a final dividend for 2012 3 of US$0.31 per share is proposed. Reserves and Resources Share price Gold equivalent Performance versus FTSE 100/FTSE Gold Mines (%) 1 The Company defines adjusted EBITDA (a non-IFRS measure) as profit for the period adjusted for ■ Polymetal ■ FTSE Gold Mines Index ■ FTSE 100 depreciation expense, rehabilitation expenses, writedown of inventory to net realisable value, share-based compensation, listing expenses, 140 15.1 Moz additional mining tax, penalties and accrued Ore Reserves (GE oz) interest, income on disposal of subsidiaries, bargain 120 purchase gain, foreign exchange gain/(loss), change in fair value of derivatives, change in fair value of 100 contingent consideration, finance income, finance costs, and income tax expense. Adjusted EBITDA 80 margin is adjusted EBITDA divided by revenue. See Note 6 to the financial statements. 2 Total cash costs comprise cost of sales of the 60 18.7 Moz operating assets (adjusted for depreciation expense, Mineral Resources (GE oz) rehabilitation expenses and write-down of inventory 40 to net realisable value) and general, administrative and selling expenses of the operating assets. 20 Gold equivalent sales volume is calculated based Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec on average realised metal prices in the relevant 11 11 11 12 12 12 12 12 12 12 12 12 12 12 12 period. Total cash cost per gold equivalent ounce sold is calculated as total cash costs divided 3.9/3.3 by total gold equivalent unit ounces sold. Average reserve/resource grade 3 Mineral Resources and Ore Reserves are estimated in accordance with the JORC Code (2004). (GE g/t) Mineral Resources are additional to Ore Reserves. 2 Polymetal International plc Annual Report 2012 Annual Report 2012 Polymetal International plc 3 WorldReginfo - 6468c4f2-9115-41e3-b43b-e1ee7df3bdf5 Overview Overview Performance highlights Capital projects completed in 2012 Capital expenditure1 (US$m) > Full ramp-up of the Albazino concentrator -24% > Commissioning of the Merrill-Crowe section Sustaining strong 444 462 at the Kubaka plant (Omolon hub), with hub reaching design capacity 351 performance > First gold poured at Amursk POX plant; ramp-up is continuing 2010 2011 2012 1 Cash flow basis. Financial highlights Operational highlights Revenue Total cash cost Adjusted EBITDA Ore mined Ore processed Gold equivalent production (US$m) (US$/GE oz) (US$m) (Kt) (Kt) (Koz) +40% 0% +47% +14% +13% +31% 1,854 701 703 918 12,591 9,925 1,063 11,002 8,821 810 555 7,845 753 1,326 624 7,474 925 425 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 Net income Basic EPS Dividends Average gold equivalent Resources growth Lost time injury (US$m) (US$/share) (US$/share) grade processed (g/t) (GE oz) frequency rate (LTIFR) +38% +30% +15% +35% -6% 401 1.03 0.70 4.4 18.7 1.9 3.8 3.8 290 0.79 13.5 13.8 239 0.66 0.311 0.63 0.59 0.00 2010 2011 2012 2010 2011 2012 2011 2012 2013 2010 2011 2012 2010 2011 2012 2010 2011 2012 1 Final dividend for 2012 proposed.