196 Moscow 2009 Content 1. Short description of OJSC Polyus Gold 4 2. Key features of 2008 8 3. Letter from the Chairman of the Board of Directors of OJSC Polyus Gold 10 4. Letter from the General Director of OJSC Polyus Gold 12 5. Development of new projects 18 6. Results of operations 28 7. Results of geological exploration 42 7.1. Ore reserves and mineral resources 54 8. Innovations 60 9. Capital market activities 62 10. Polyus Gold in the Russian and international gold mining industry 68 11. Gold market 76 12. The structure of the Polyus Gold Group 80 13. Corporate governance report 84 14. Sustainable development 102 15. Management report (Management’s discussion and analysis of the financial condition and results of operations) for 2008 115 15.1. The Polyus Group’s operating results 116 15.2. Non-GAAP financial measures 126 15.3. Summary table of performance results by business units 129 15.4. Review of financial sustainability and solvency 132 15.5. Description of principle risks 140 16. Consolidated financial statements for the year ended 31 December 2008 144 17. List of terms and abbreviations 192 1. SHORT DESCRIPTION OF OJSC POLYUS GOLD 4 In this Annual Report the terms OJSC Poly- us Gold, Polyus Gold, Company, Polyus Group and Group refer to the Open Joint-Stock Com- pany Polyus Gold and its subsidiary and de- pendent companies, performance results of which are consolidated by OJSC Polyus Gold in accordance with the International Financial Re- porting Standards (IFRS). OJSC Polyus Gold was incorporated in March, 2006, as a result of allocation of gold mining as- sets of OJSC «MMC Norilsk Nickel» (in this Re- port the information of the Company’s activity before March, 2006 refers to CJSC Polyus and its subsidiary and dependent companies). OJSC Polyus Gold is the largest gold pro- ducer in the Russian Federation and is in- cluded into the list of the largest gold min- ing companies of the world by the volume of production and the raw material base. The Company is engaged in gold mining and ex- ploration in 5 regions of Russia: • Krasnoyarsk; • Irkutsk; • Republic of Sakha (Yakutia) • Magadan; • Amur. 5 Shares of OJSC Polyus Gold are traded at Strategic vision of the Company: • Reliable company noted for unconditional leading stock exchanges of Russia: RTS • International public company with shares performance of plans and fulfillment of and MICEX. American Depositary Receipts quoted at leading stock exchanges of the partnership obligations, having long-term («ADRs») for the Company shares are traded at world. prospects of production and raw material the Main Board of the London Stock Exchange • The leader of the gold mining industry of base growth. («LSE»), as well as at the over-the-counter Russia, and a global top-5 gold mining («OTC») market in the USA. Shares of the Com- company by market capitalization, vol- pany are included into the calculation of Rus- umes of reserves and production. sian stock indices of RTS and MICEX, and also • Modern company complying with high of world stock indices of FTSE Gold Mines, standards of corporate management, an FTSE Russia and MSCI Emerging Markets. Mar- attractive investment target. ket capitalization of the Company as of 31 De- • Socially responsible company caring cember, 2008, was USD 4.9 billion1. about environment and local communi- ties in the regions of its operations. Among most admired employers in the regions of The Mission of the Company – to develop its presence. nature’s and human values for the benefit • Innovative company that strives to con- of shareholders and investors, employees stantly improve its technologies. and the community. The Company holds licenses for 6 out of 10 largest gold deposits in Russia. OJSC Polyus Gold also has a large portfolio of exploration proj- ects and licenses for prospective exploration areas located in the territory of the Russian Federation. 1 Net of 6.5% of shares at the balance of Jenington International Inc., which is a subsidiary company of CJSC Polyus Gold. 6 Table 1. Key assets of OJSC Polyus Gold Status of the asset Share of OJSC Polyus development Gold production Gold in the license Region/deposit Owner as of 31 December, in 2008, k oz owner as 2008 of 31 December, 2008 KRASNOYARSK REGION Olimpiada Production 873 CJSC Polyus 100 Blagodatnoye Construction - CJSC Polyus 100 Titimukhta Construction - CJSC Polyus 100 IRKUTSK REGION Group of alluvial deposits Production 181 40.4-66.22 Zapadnoye Production 25 LLC LZRK 100 Verninskoye Construction - LLC LZRK 100 Feasibility study Chertovo Koryto - LLC LZRK 100 preparation REPUBLIC OF SAKHA (YAKUTIA) Kuranakh Production 144 OJSC Aldanzoloto GRK 100 Exploration/Feasibility Nezhdaninskoye OJSC SVMC 100 study preparation MAGADAN REGION Feasibility study Natalka - OJSC Matrosov mine 100 preparation 2 Licenses for alluvial deposits are at the balance of various entities that do not directly belong to OJSC Polyus Gold. Crossholding constitutes from 40.4% to 66.2%. However for the purpose of accounting (IFRS 27), as well as for the purpose of reserve estimation the Company entirely consolidates financial results of these companies and entirely accounts their reserves in the reserves of the Group. 7 Location of the main assets of OJSC Polyus Gold Operating hard-rock deposits 1 – Blagodatnoe, Titimukhta A – Olimpiada Projects 2 – Verninskoye, Chertovo Koryto B – Zapadnoye Alluvial deposits 3 – Nezhdaninskoye C – Kuranakh 4 – Natalka 2. KEY FEATURES OF 2008 8 PRODUctION AND FINANCE • Production plan was fulfilled: 1.2 million ounces of refined gold; • The entire volume of metal was sold on the domestic market; • The average sales price of gold amounted to USD 867; • Revenues from gold sales grew 25% to USD 1,062 million; • EBITDA grew 32% to USD 436 million; • Total cash costs per ounce of produced metal amounted to USD 392 as compared with USD 306 in 2007; • Capital expenditures amounted to USD 630 million as compared with USD 459 million in 2007. PRODUctION DEVElopmENT AND NEW PRojEcts • Mill number 3 at Olimpiada mine achieved its designed capacity (410-420 thousand tonnes of ore per month); • In-house production of explosives at Olimpiada mine was established; • Reconstruction of Mill-1 at Olimpiada mine for processing of the Titimukhta deposit ores was performed; • Essential progress was achieved in construction of Blagodatnoye mine and Verninskoye mine; • Pilot plant at Natalka deposit constructed. EXploRATION AND GROWTH OF RESERVES • Proved and probable reserves (P&P, JORC) grew by 8% up to 74.1 million ounces; • Total growth of reserves (Russian В+С1+С2) amounted to 137 tonnes (4.4 million ounces); as of 01 January, 2009, total reserves base according to the Russian classification amounted to 3,129 tonnes (100.6 million ounces); • Drilling volume amounted to 291.2 thousand meters. Gold production of the Group in 2004-2008, Proved and probable reserves (P&P, JORC) of the Group million ounces in 2004-2008, million ounces* 68.6 74.1 1.2 1.2 1.2 50.8 1.1 1.0 13.3 2004 2005 2006 2007 2008 2005 2006 2007 2008 *The first JORC audit of reserves was performed in 2005. Revenues of the Group in 2004-2008, USD million EBITDA of the Group in 2004-2008, USD million 1,062 436 331 735 849 301 226 441 473 191 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Total cash costs and cash margin of the Group in 2004-2008, USD/ounce 475 321 396 230 242 117 209 283 306 392 2004 2005 2006 2007 2008 TCC Cash margin 3. LETTER FROM THE CHAIRMAN OF THE BOARD OF DIRECTORS OF OJSC POLYUS GOLD 10 Dear shareholders of Polyus Gold, The year 2008 clearly demonstrated that we were right having chosen gold as the area The year 2008 was the third year of OJSC Poly- of our business. The interest towards gold min- us Gold existence as an independent player ing industry in Russia continues growing both in on the global gold mining market. For sever- the country and abroad. Under the conditions al years of its work OJSC Polyus Gold has re- of the global financial crisis many investors asserted its status of the indisputable leader turned to gold as «the safe haven». Demand for of Russian gold mining industry, and took a de- the metal is growing all over the world, as well served place among the leading world produc- as for everything, that is related to it: from gold ers of the metal. exchange trading funds (ETF) to shares of gold mining companies. In the late 2008 – early 2009 we saw a growing interest towards Polyus Gold shares among international investors. We can proudly state that in spite of complicat- ed global macroeconomic situation the long- term strategy of the Company has not changed. OJSC Polyus Gold is still focusing on becom- ing a global top-5 gold mining company by 2015, and it confidently proceeds with realiza- tion of all its projects approved by the Strategic Program in 2006. In 2008, the Company made a number of sub- stantial steps in the sphere of realization of the program aimed at expansion of existing pro- duction facilities and construction of new mines. In 2008, the targeted volume of works of all new projects of the Company was entirely accomplished. 11 Within the reporting period the Company Titimukhta project; in 2010 we expect the new kept increasing its holdings in the subsidiar- large mining enterprise, the Blagodatnoye mine ies. At present we own 100% stakes practically in Krasnoyarsk region, to be commissioned. in all our production assets. Besides, we shall continue to study the M&A In the period under review, Polyus continued to opportunities available in the market, taking grow its reserves through extensive exploration, into consideration the favourable market con- as well as acquisition of new license areas, en- ditions.