ANNUAL REPORT 2016 IMPLEMENTING A COMPELLING GROWTH STRATEGY ABOUT US CONTENTS STRATEGIC REPORT POLYMETAL IS A PRECIOUS METALS Chairman’s statement 02 MINING GROUP WITH A STRONG TRACK Group Chief Executive’s review 04 RECORD OF CONSISTENT OPERATING At a glance 06 Business model 08 PERFORMANCE AND DELIVERING Market overview 10 ON NEW PROJECTS. Our strategy 11 Performance highlights 20 Operating review 22 OUR ROBUST OPERATING AND Sustainability 42 Financial review 52 FINANCIAL RESULTS REFLECT THE Risks and risk management 64 SUCCESS OF OUR STRATEGY FOCUSED GOVERNANCE ON GROWTH AND DELIVERING VALUE Board of Directors 70 TO OUR STAKEHOLDERS. Senior management 71 Corporate governance 72 Audit and Risk Committee report 78 Remuneration report 83 Directors’ report 100 Directors’ responsibility statement 103 FRONT COVER IMAGE FINANCIAL STATEMENTS Kyzyl, Kazakhstan Independent auditor’s report 104 We have made considerable progress at Kyzyl, our flagship project, which is on track to go into production in late 2018, Consolidated income statement 109 ramping up to full capacity in 2019. One of the highest Consolidated statement grade and largest untapped gold deposits in the Former of comprehensive income 110 Soviet Union, with a long mine life and low-capital intensity, Consolidated balance sheet 111 it is set to become the main source of medium-term Consolidated statement of cash flows 112 growth for Polymetal and will create significant returns for our shareholders. Consolidated statement of changes in equity 113 Notes to the consolidated FIND OUT MORE ON OUR WEBSITE financial statements 114 www.polymetalinternational.com APPENDICES Operational statistics 158 Reserves and Resources 165 SEE OUR SUSTAINABILITY REPORT Glossary 176 Shareholder information 179 www.polymetalinternational.com/sustainable-development POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016 01 CHAIRMAN’S STATEMENT Dear fellow stakeholders ATTRACTIVE INVESTMENT OPPORTUNITY I am pleased to report on Polymetal’s robust financial performance and consistent operational delivery throughout the year. In 2016, Adjusted EBITDA grew by 15% to Within its sector, Polymetal is a remarkable example of a We have a portfolio of high-grade US$759 million, and underlying net earnings increased company that is both able to acquire and explore attractive assets generating free cash flow by 31% to US$382 million. In the meantime, the Company investment opportunities, and deliver on them. Our set through the cycle. We employ a delivered strong free cash flows and paid its shareholders of strategic competitive strengths is unparalleled: selective processing hub strategy to ensure significant dividends. mining, processing refractory ores, trading precious metals high returns on invested capital and concentrates and an in-depth knowledge of the precious reduce execution risks. By the middle of 2016, there was an air of optimism and hope metals mining space in the Former Soviet Union. Together, that the down-cycle in the precious metals market was finally these allow us to select individually attractive assets – We continue to invest in greenfield at an end. However, this turned out to be short-lived as the whether large, high grade, synergistic or a suitable exploration and review opportunistic unexpected results of the US elections had a strong impact combination – and then leverage these strengths for M&A ideas with a focus on reserve on markets and asset types across the globe towards the future growth. quality or low-capital intensity. year-end. We have ambitious growth plans, projecting 40% production Unpredictable geopolitical developments continued to growth by 2020 combined with strong cash flow generation We are committed to capital drive high volatility in all of Polymetal’s key markets: directly from existing mines, which should allow us to pay dividends discipline and provide a substantial POLYMETAL CONTINUED TO DELIVER in the gold and silver markets, where we sell our product, to shareholders throughout the cycle. This is backed by dividend yield while maintaining ON ITS STRATEGY OF BUILDING and in the oil market, a key component of our cost base, our strong track record of meeting, and often exceeding, a strong balance sheet. but also indirectly through the exchange rates in Russia our operating and cost guidance, as well as the excellence THE LONG-TERM FUTURE OF THE and Kazakhstan which are closely linked to oil. of our project execution. COMPANY, WHILE GENERATING However, more recently, we have begun to see an SIGNIFICANT FREE CASH FLOW improvement in the development of macroeconomic AND CREATING VALUE FOR ITS conditions, with exchange rates stabilising and inflation a sector-leading dividend yield and provide cash returns social and governance (ESG) matters. These challenges, STAKEHOLDERS. going down. There has also been a certain relaxation in to our shareholders through regular and special dividends faced by every company in our sector, are a priority and cross-border tensions, which has led to increased investor while maintaining a strong balance sheet. the Board will ensure that they are addressed effectively. interest in Russian assets, alongside significantly better cost and availability of debt funding. Our Group Chief Executive, Vitaly Nesis, expands on this On a strategic level, we will concentrate our efforts and other activities in his detailed report on Polymetal’s on progressing with the construction of Kyzyl within Despite ongoing global and local challenges, Polymetal operating performance on the following pages. the approved budget and timeline. We will also continue continued to deliver on its strategy in the reporting year. to explore other strategic opportunities within the We further expanded our operations into Armenia, adding DIVIDENDS DELIVER VALUE Former Soviet Union, such as the recently formed joint another geologically and economically attractive asset Polymetal continues to maintain a track record of substantial venture for the development of the Nezhda deposit. to our portfolio within the Former Soviet Union, which dividends payments and delivering meaningful cash we view as our home market. I am also pleased to say returns to its shareholders. The Company has consistently The Board remains committed to ensuring prudent liquidity that this was among several important steps made implemented its dividend policy, re-affirming our commitment management and a sound approach to leverage while towards building the long-term future of the Company. to capital allocation discipline and value distribution, while maintaining cash returns to our shareholders in the retaining the flexibility to invest in attractive projects. In 2016, continuing complex macroeconomic environment. PERFORMANCE IN 2016 dividend pay-outs totalled US$158 million and the dividend Sadly, there were four fatalities at our operations during 2016. yield over the last five years has averaged 4.1%. The Board As Chairman of the Polymetal Board, I commend the While this is fewer than in 2015, it is still four more than it proposes a final dividend for 2016 of US$0.18 per share, dedication and skills of the management and employees should be. I send my personal condolences to the families subject to approval at the Annual General Meeting (AGM), of the Company and their contribution to the outstanding affected and the assurance that the Board and executive in May 2017. success of the business during 2016. With their continued management are placing ever-greater focus on this matter, support, we look forward to another year of delivering determined to achieve a major improvement in the health This was underpinned by a healthy free cash flow generation consistent growth and value creation. NET PROFIT and safety of our employees in 2017 and beyond. in both 2016 and 2015, which remains a key differentiator for Polymetal. We remain fully committed to translating this Our production performance across the portfolio was solid, into cash returns for our investors. US$395 million allowing us to meet our production guidance for the fifth year (2015: US$221 million) in a row, notwithstanding the increased production target set THE YEAR AHEAD in May following the acquisitions in Armenia and Kazakhstan. Given Polymetal’s track record, I am confident that the Delivering on our promises has become a distinguishing strength of our operating performance will enable us to DIVIDEND YIELD (5-YEAR AVERAGE) feature of Polymetal in the sector. Bobby Godsell deliver on our production plans for 2017 and make good Chairman progress with our project pipeline for the ambitious future We are fully on track with the construction of Kyzyl, our growth of the Company. 4.1% flagship development project. We also acquired new assets 14 March 2017 during the year: Kapan and Komar through M&A activities At all of our operating mines, particularly given the increased and Nezhda through a joint venture. At the same time, proportion of underground mining, there will be a greater our strong operating performance and low costs enabled focus on health and safety issues. The dedicated Safety us both to finance these projects and to generate a and Sustainability Committee, formed in 2015, has already meaningful free cash flow of US$257 million during 2016 started a broader review of safety and other environmental, (2015: US$263 million). This in turn allowed us to sustain 02 POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016 POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016 03 GROUP CHIEF EXECUTIVE’S REVIEW