Petropavlovsk PLC Annual Report 2015

Plain-text annual report

Annual Report 2015 About Petropavlovsk We are one of Russia’s most established and experienced gold mining companies Since 1994, Petropavlovsk has evolved into the largest vertically integrated gold producer in the Russian Far East. Our people have led our four open pit gold mines to deliver an impressive record of production growth. Drawing upon an established mining tradition, our strategy focuses on creating value for shareholders via stable, low-cost production from quality assets. In line with this, we are creating a technologically innovative Pressure Oxidation Hub which, supported by solid infrastructure, is designed to process refractory ore concentrates from multiple deposits in the area. 4 open pit gold mines located in the Russian Far East c.8.5Moz of Reserves within c.23.7Moz of Resources c.15Mtpa of processing capacity Successful development of innovative technologies Skilled workforce with local knowledge and expertise Part of FTSE SmallCap Index Go to page 10 for more on our business model. Contents 01 02 03 Inside this report Strategic report About Petropavlovsk Chairman’s Statement Chief Executive Ofﬁ cer’s Statement Gold Market Overview Our Business Model Our Core Strengths Our Strategy Our Strategic Objectives IFC 04 06 8 10 12 14 16 Key Performance Indicators (KPIs) 17 Environmental, Safety and Social Report Risks to Our Performance Where We Operate Operational Performance: Pioneer Operational Performance: Albyn Operational Performance: Pokrovskiy Operational Performance: Malomir 24 26 40 42 44 46 48 Exploration Report, Reserves and Resources Future Development Other Projects IRC Chief Financial Ofﬁ cer’s Statement 50 60 62 65 66 Governance Board of Directors Corporate Governance Report Nomination Committee Report Audit Committee Report 80 82 88 89 Directors’ Remuneration Report 95 Directors’ Report Directors’ Responsibilities Statement Independent Auditor’s Report to the Members of Petropavlovsk PLC 111 118 119 Financial statements Consolidated Income Statement 128 Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements 129 130 131 132 133 Company Balance Sheet 176 Company Statement of Changes in Equity Notes to the Company Financial Statements Appendix, Glossary and Deﬁ nitions Shareholder Information 177 178 181 185 i i S S t t r r a a t t e e g g c c r r e e p p o o r r t t G G o o v v e e r r n n a a n n c c e e i i F F n n a a n n c c a a i i l l s s t t a a t t e e m m e e n n t t s s Petropavlovsk Annual Report 2015 1 Strategic report In this section Chairman’s Statement Chief Executive Ofﬁ cer’s Statement Gold Market Overview Our Business Model Our Core Strengths Our Strategy Our Strategic Objectives Key Performance Indicators (KPIs) Environmental, Safety and Social Report Risks to Our Performance Where We Operate Operational Performance Exploration Report, Reserves and Resources Future Development Other Projects IRC Chief Financial Ofﬁ cer’s Statement 04 06 08 10 12 14 16 17 24 26 40 42 48 60 62 65 66 2 Petropavlovsk Annual Report 2015 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 Petropavlovsk Annual Report 2015 3 3 Chairman’s Statement Peter Hambro 2015 was a year of significant change and development for Petropavlovsk and marked the beginning of a shift in our strategic transformation. We are focused on ensuring that the Group is positioned to provide sustained profitability and generate meaningful cash flow, giving investors leverage to the price of gold by producing high-margin ounces at sustainable levels. In 2015 we completed a major refinancing of the company, thanks in part to the willingness of our convertible bond holders to accept a debt-for-equity exchange and in part to the willingness of Pavel Maslovsky, Andrei Vdovin and I to invest some $30 million into new equity. Many of our individual shareholders also took up their rights and I am extremely grateful to them for the faith that they showed in the future of the company. This new equity funding and the underlying cash flow that we have managed to generate during the year enabled us to reduce the level of Net Debt to $610 million by 31 December 2015. As the year progressed, however, it became apparent that debt reduction was not to be a sufficient overall objective and our enhanced strategy entails a fundamental shift away from the aspiration to achieve the maximum levels of production as a first priority. Instead we will focus on growing the margin and improving free cash flow – without compromising the long term sustainability of our mines. We needed to change and to re-instate the growth of Petropavlovsk in response to a world where gold had, once again, become an attractive investment medium. We need to focus on the excellent reserves and resources that we have and to do so faster than we had originally planned. In order to deliver on this we focused on three areas: finding a partner to help us to restart the all-important pressure oxidation project to deal with the refractory ore at Malomir and Pioneer, increasing the size of the Group with a suitable acquisition, and developing the underground potential of the high grade mineralisation at Pioneer. Happily the 2015 refinancing and debt reduction put us in a good position to start on all three projects. We identified the gold at Malomir, which is easy to mine but hard to process, as the fastest route and we were fortunate in finding a partner with whom to develop it without having to invest more or give up any rights to the reserves and resources that a royalty streaming finance option would demand. This is possible because our partner has its own supply of refractory concentrate and our facilities are large enough and have the flexibility to cater for both. In order to access the embedded value of the Group’s refractory reserve base, we are accelerating the POX Hub’s development, under the critical condition that this will not increase Group debt levels. This will be achieved through a new joint- venture company, initially a 100% subsidiary of Petropavlovsk and finally a 49-51% collaboration with GMD Gold, which will unlock the potential of the world-class refractory gold deposit at Malomir and take us through the processing of Pioneer’s refractory gold when its non-refractory ores are exhausted. We expect that at full capacity production from our share of the Pox Hub will be in the 200,000 to 300,000 oz range and that the cost of production from the Malomir ore through this process will be much in line with the costs we have experienced in producing gold from the non-refractory ore at Pioneer. Looking ahead, we have adjusted our strategy to target accretive acquisitions, which will improve the quality of our portfolio on a free cash flow per ounce basis, and bring medium to long term cash flow benefits, offer short and long term growth potential, and have synergies with our existing operations. We are very happy to report that we are making significant progress in implementing this strategic objective. As it was announced separately today, we have entered into an agreement to acquire AZ, an established gold company with production and development assets in the Khabarovsk Region in the Far East of Russia. Based on preliminary due diligence we expect that Amur Zoloto (“AZ”) will add to our total gold output without any extra capital expenditure, and bring an uplift to our high grade non-refractory mineral resources and ore reserves base. In line with this strategic objective of seeking more immediate returns, we are also planning to dispose of our Visokoe deposit located in the Krasnoyarsk region and have received an indicative offer of $20million. 4 Petropavlovsk Annual Report 2015 Both of these elements have already had a signiﬁ cant effect on our relationship with our principal lenders, Sberbank and VTB, and I am pleased to say that we have made substantial progress in renegotiating the terms of the ﬁ nancial covenants and debt repayments ahead of the next covenant measurement date, 30 June 2016. We have launched a comprehensive programme of exploration and development of our existing projects in order to maximise their net present value (NPV). This programme envisages increases in the quality and quantity of our mineral resources not only through exploration of ﬂ anks and satellite deposits of our producing mines but also by introducing new methods, in particular underground mining, to maximise production margins and optimise production schedules. We have also made some considerable progress in planning the start of our underground mining at Pioneer, thanks to some excellent work by the Australian specialists and we are now in the process of ﬁ tting their ideas into the Russian scheme of mine planning and development. We have received some very encouraging results from drill-holes into the underground ore body from the surface and look forward to completing the exploration of the underground potential from within the portal, once it has been completed. Recent news from IRC, our investment in iron ore production on the Russo-Chinese border, has also improved. ICBC and its credit insurer, Sinosure, have agreed to substantial relaxation of covenants and repayment terms for IRC contingent on some conditions precedent including the Debt Restructuring of Petropavlovsk, and this also extends to covenants on Petropavlovsk in connection with its guarantee. All in all then, as we recovered from the turmoil of the restructuring and the higher volatility of the gold price and the relevant foreign- exchange rates, we have weathered the storm reasonably well and can, I think, look forward with some certainty to much improved business in the near future. I should like to welcome the two new Non-Executive Directors, Andrew Vickerman and Alexander Green and thank them for the conﬁ dence they have shown in the company by agreeing to join the Board. I should also like to thank Sir Roderic Lyne, who, after more than 10 years involvement with Petropavlovsk and IRC, has reached the point where corporate governance judges him no longer to be independent and he will, accordingly, stand down as a Director at the annual general meeting. We will be seeking to replace him as Senior Independent Director at that time. Since the year end, the Renova Group, from Moscow, has become the largest shareholder in the Company and we look forward to ﬁ nding a way in which we can work together. It goes without saying that we could not have achieved as much as we have done without the hard work and goodwill of all the members of both Petropavlovsk’s workforce and its shareholders. The Board and I extend our thanks to them all. I have spoken in my shareholder letters in the past about the turbulence in the world’s ﬁ nancial markets and it seems that there is no end to this in sight. Accordingly I believe that gold, our principal product, will remain much in favour with investors of all sorts for its role as “wealth insurance” and thus that its price will remain buoyant. i S t r a t e g c r e p o r t G o v e r n a n c e Peter Hambro Chairman i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 5 Chief Executive Ofﬁ cer’s Statement Pavel Maslovskiy Strengthening our Balance Sheet In 2015, we focused on further strengthening our balance sheet by decreasing our outstanding debt and adjusting its maturity schedule. Operational performance together with the reﬁ nancing and sale of our non-core assets generated cash during 2015 that enabled the Group to signiﬁ cantly reduce its net debt by US$320 million to US$610 million at the end of 2015, with repayment to our main lenders in line with the maturity schedules. It remains our medium term objective to reduce net debt to a ratio of not more than 1.5 EBITDA allowing for a balanced development of the Group and its further growth. The Group is in discussions with its principal lenders to amend the maturity proﬁ le and revise certain covenants associated with its banking facilities. Focusing on Cash Generation and Free Cash Flow Margin Cost control is a critical pillar of our cash- generating strategy and the Group made further considerable progress in this area during the year. We achieved a 13% decline in hard-rock TCC per ounce, on top of a 12% decline in TCC during 2014. In total, this brings cumulative cost reductions to 23% between 2013 and 2015. We have also delivered a sustainable step reduction in other costs, regardless of which metric is looked at – operating costs, overheads, capital expenditure or exploration. Of these the most impressive is a 20% decrease in our central administration costs, on top of a 17% reduction in the previous year due to the systematic and careful work of our team. At US$874/oz, our all-in sustaining costs for 2015 represent a 10% drop from US$972/oz in 2014, and our all-in costs fell 14% to US$932/oz over the same period. Besides our ongoing cash optimisation programme, a number of other factors were key to achieving this: – Moving away from marginal mining at various operations – Restructuring and rightsizing our corporate, regional and operational structures, including an 11% reduction in our workforce – Rationalising and prioritising capital expenditure and deferring non-essential capital, whilst preserving the sustainability of our mines – General cost savings driven by ongoing business process re-engineering 6 Petropavlovsk Annual Report 2015 – A comprehensive programme of procurement optimisation intersections have not been followed up by deeper drilling in a down-dip direction. – Outsourcing – Implementing new cost-saving technologies. These efforts are continuing and will do so throughout 2016, with a view to protecting and further increasing the Group’s margins in the current low gold price environment. Effective cost management will also prove beneﬁ cial to our margin when the gold price eventually recovers. Protecting Long-Term Sustainability To ensure our business has a strong future and that we achieve a maximum value from our producing assets, we have prioritised continued exploration and development of our underground and surface ore bodies. At the same time we have carried out further exploration activities at the ﬂ anks and satellites of our existing mines. During 2015, our brownﬁ eld exploration delivered c.100,000oz of non-refractory reserves and c.1, 000, 000oz of resources compensating the resource depletion in 2015 production. We expect the new ounces to become part of our production output in the near future. We have also proved that the Elginskoye deposit, which was considered as an additional resource base for the Albyn mine, is a much more sizeable deposit than expected and is currently evaluated at c.3.0Moz of reserves and resources. Whilst production planning is at an initial stage it is scheduled to become a source of ore to feed the Albyn plant, and we expect to be able to develop it into a signiﬁ cant standalone project in the future. The project economics are going to be substantially improved by a recent state grant to the Group of an equivalent to c.US$100 million funding to develop a local electric power line allowing a substantial expansion of both Albyn and Malomir. Another way of unlocking shareholder value without substantial investment is revising the production schedules of our existing ore bodies to optimise further development and increase production margins. For example, several ore columns at Pioneer are high-grade and remain open at depth, offering potential for signiﬁ cant resource and reserve expansion. Until recently, exploration at Pioneer was targeting exclusively open pit resources and reserves – these high grade In 2015 we completed extensive exploration targeting deeper high grade mineralisation at Pioneer and Malomir. The results of this have been extremely encouraging permitting us: – to carry out an engineering study on underground development at Pioneer and Malomir, conﬁ rming that both underground projects are technically viable and proﬁ table – to conclude a pre-feasibility study by an independent consultant for Pioneer’s North East Bakhmut and Andreevskaya and Malomir’s Quartzitovoye deposits The full feasibility study is expected to complete in 2016 and underground mining is expected to start in 2016 at North-East Bakhmut and in 2018 at Quartzitovoye. Currently our specialist estimate pre-production capital cost for Pioneer and Malomir underground mines as c.US$25-30 million with total contribution from both mines up to c.130,000oz – 180,000oz. Initial resources for underground mining estimated via surface drilling in excess of 0.4Moz at an average c.8.3g/t would justify commencement of ﬁ rst underground working and to continue exploration and reserves deﬁ nition with the use of underground drilling which is expected to further increase reserves for underground mining. The Group has carried out a surface exploration programme establishing enough mineral resources to justify the development of underground mining operations. The detailed exploration and active project development are scheduled to commence this year. Unlocking value from our Refractory Reserves I am pleased to report that the Group has made substantial progress in this area and has entered into a conditional agreement to create a joint venture with GMD Gold, an operator in the Krasnoyarsk region founded by reputable industry players, to complete development of the processing plant for treatment of refractory gold ores and concentrates. GMD Gold has an operation that produces refractory concentrate and has been seeking a way to extract gold from these assets. The JV, a toll-treatment alliance, stands to unlock the value embedded in the Group’s refractory resources enabling Petropavlovsk to increase total gold production by a target of 30 – 50% by 2020. Under the terms of the agreement, Petropavlovsk will contribute to the JV some existing assets and the property rights as required to establish the POX Hub – a hydrometallurgical facility for processing refractory gold ores and concentrates – in return for a 49% equity stake in the JV. Our collaborator GMD Gold will contribute the equivalent of US$120 million in exchange for 51%, becoming an owner and operator of the POX Hub. The hub is expected to start production in 2018. GMD Gold is associated with Novoangarskiy and Gorevskiy mining and metallurgical plants, which are established enterprises in Russia. The plants are involved in the treatment of lead-zinc ores from the Gorevsky deposit (one of the world’s largest polymetallic deposits), are owners of licences for the gold and antimony deposit of Udereyskoye in the Krasnoyarsk region, and own licences for the Bagbora and Bogolubovskoye refractory gold deposits. In order to start refractory concentrate production for the POX Hub, Petropavlovsk will need to invest an estimated U$30 – US$40 million to complete and expand the existing ﬂ otation plant at Malomir to 5.6Mtpa. Flotation and POX commissioning is set to contribute an additional 200,000-300,000oz (depending on quality of the concentrate) of yearly output to the Group’s gold production at TCC levels similar to the Group’s current costs of production. This project will enable us to unlock the value of our refractory mineral resource base without causing any additional strain to our balance sheet. Any proﬁ ts, arising at JV level will be shared on a 50:50 basis. With the current refractory reserve and resource base of 9.31Moz (including 3.95Moz of JORC reserves at Malomir and Pioneer), we expect the prospective JV to unlock a signiﬁ cant value for our shareholders and ensure sustainable production from refractory assets for at least 20 years with excellent growth potential. The POX Hub design allows for separate and simultaneous processing of refractory concentrates with a wide range of metallurgical properties. In line with the agreement, if necessary the POX Hub could be used as a processing base for third parties on an off-take agreements basis. In addition, once the POX Hub is operational, Petropavlovsk will sell to GMD on market terms an amount of concentrate for processing constituting at least 25% of the POX Hub throughput capacity. Petropavlovsk’s new strategy has a direct bearing on our approach to growth. Not only does it mean that we must scrutinise every dollar spent on this, it deﬁ nes the quality of the assets that we seek to acquire. As a result, we have adopted an active portfolio management approach. This requires ongoing assessment of our existing assets and potential targets for acquisition, as well as identifying and disposing of projects not aligned with Group objectives, with a view to improving the quality of our overall portfolio. As a result of the above and in line with our new strategic objective of growing organically as well as through accretive acquisitions, we are happy to announce that we have announced an agreement to acquire Amur Zoloto (AZ), a leading gold mining company in the Russian Far East that has clear synergies with Petropavlovsk. The acquisition promises to increase the quality and quantity of our mineral resource base, and will enable us to increase production. It would be paid for in shares and therefore would not increase Group debt. We are excited to be connecting with such reputable mining partners and look forward to working together as the projects progress. Divestment of Non-Core Projects The Group’s strategy is to focus on its core producing assets in the short-term. For this reason, Petropavlovsk did not allocate signiﬁ cant capital expenditure for its non-core projects, although we frequently review ways to realise value from these assets. In line with this plan, in 2015, we ﬁ nalised the sale of our non-core high cost alluvial gold deposits through the sale of Koboldo – the holder of our alluvial licences in the Amur Region, allowing us to focus on new and existing high margin assets. We are also planning to dispose of assets of LLC Ilyinskoye – a holder of the Visokoe deposit and Verhnetisskaya GRK CJSC. The total consideration amounts to US$20 million, expected to be paid in July 2016. Although US$32.5 million of impairment charges have been recorded against associated exploration and evaluation costs for these assets, we consider that this disposal is a successful implementation of our enhanced strategy allowing us to focus on our priority projects. Our Strategic Priorities for 2016 During the current ﬁ nancial year, Petropavlovsk will continue to build on the strategies it has implemented over the last two years. The ﬁ ve strategic priorities for 2016 reﬂ ect this continued focus: i S t r a t e g c r e p o r t – Improving cash ﬂ ow and margins: making money at current prices through further decrease in TCC/oz to c.US$700/oz and Capex at c.US$70 million in line with the previous year – Improving our balance sheet: further Net debt reduction to c.US$570 million and completion of restructuring of the debt to our senior lenders – Providing medium-term sustainability: development of underground mining at Pioneer and further brownﬁ eld exploration – Unlocking long-term value: creation of the proposed JV for the development of the POX Hub – Growth through acquisitions: progress Amur Zoloto acquisition as well as identifying other producing or brownﬁ elds assets with the potential to accelerate the unlocking of value for all stakeholders Beyond 2016 The sustainability of our business is ensured by understanding the linkages between all of the inputs and outputs of our operations. This enables us to maximise the beneﬁ ts for all stakeholders and reduce the risks to the business. The new strategic objectives support our long-term vision for Petropavlovsk, a leading Russian gold mining company with highly proﬁ table and sustainable gold production. We expect that implementing these strategic objectives will ensure a long-term, 10-20% annual increase in Group gold production, and a sustained increase in proﬁ tability at the current gold price. Depending on success of the deals announced today this forecast may substantially improve. Pavel Maslovskiy Chief Executive Ofﬁ cer Petropavlovsk Annual Report 2015 7 G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Gold Market Overview supply should not come as a surprise as miners continue to adjust to a new era of lower gold prices, with tighter controls on operating costs and less exploration and development. In the longer term, a lack of substantial new discoveries alongside a trend towards lower grades is likely to continue to affect industry output. Should prices continue their downward course, supply side adjustments will begin to feed through, providing price support and helping gold to ﬁ nd an equilibrium. How has gold performed in 2016? Gold’s status as a wealth preservation, insurance and diversiﬁ cation tool received renewed attention in Q1. This was encouraged by global macroeconomic concerns, particularly fears of a hard landing in China, ongoing commodity price weakness, credit concerns and ensuing stock market volatility. These factors resulted in a strong performance for gold, which appreciated by 17% during the quarter, outperforming the major global stock market indices (Shanghai Composite -15%, NIKKEI 225 -12%, DAX -7%, FTSE 100 -1%, S&P 500 +1%, MICEX +6%) as well as palladium (+3%), silver (+11%) and platinum (+12%). What is the outlook for the remainder of the year? Material deterioration in the macroeconomic environment would be positive for gold demand as central banks may respond with rate cuts (the ECB, Switzerland, Sweden, Denmark and Japan have all adopted negative interest rates) or more quantitative easing, helping to fuel the possibility of longer-term inﬂ ation, asset bubbles and greater uncertainty. Weak economic data and lacklustre growth is likely to cause market volatility, driving some investors out of risky assets and into gold. On the other hand, gold’s ‘safe haven’ status might be negatively affected if the US Federal Reserve continues to raise interest rates on the basis of continuing strength in the US economy. In such an environment, equity markets are likely to continue their upward trend, which will encourage investors to rotate money out of gold and into riskier assets. Since gold is dollar denominated, it can be negatively affected by dollar strength because buying gold in local currency becomes more expensive. Should the dollar continue to appreciate as it did in 2015, gold demand may soften. A weaker dollar is likely to have the opposite effect. Gold is attractive to those who might be concerned about the possible effects of currency debasement and are looking for real, hard assets. How did gold perform in 2015? The Gold PM Fix price declined by 12% in 2015, commencing the year at US$1,206/oz and closing at US$1,060/oz. The precious metal traded within a range of US$1,049/oz – US$1,296/oz, averaging US$1,160 for the year, an 8% reduction when compared to 2014. How does that compare to some of the other commodities? On a relative basis, gold outperformed its precious metals peers, including silver (-13%), platinum (-28%) and palladium (-32%), as well as the Bloomberg Commodity Index (-25%). What were some of the noticeable events in 2015 that might have impacted on the gold price? Uncertainty around the sustainability of global economic growth, depressed commodity prices, political uncertainty in Greece (the possibility of ‘Grexit’), geopolitical tensions (Russia, Middle East) and concerns over low to negative interest rates outside of the US did lead to some upside in gold. However, the impact was limited in its magnitude and duration. One explanation for this is that, following multiple bailouts and last minute resolutions, investors have become more complacent over time about uncertainty and elevated levels of risk. Investors also considered possible action from the US Federal Reserve and its perceived willingness to hike rates in the face of an improved and growing American economy. The prospect of higher interest rates in an environment of benign inﬂ ation is perceived as a negative for gold. What was physical demand like during the year? Total gold demand was broadly ﬂ at in 2015, totalling 135Moz. The jewellery segment accounted for c.78Moz of the total ﬁ gure, with India and China the most prominent buyers, together accounting for c.60%. Purchases in 8 Petropavlovsk Annual Report 2015 H2 were particularly strong, notwithstanding the apparent slowing economic growth in China. In contrast, demand amongst Russian consumers collapsed as the rouble continued to weaken against the dollar. Meanwhile, industrial demand declined by 5% in 2015 to c.11Moz, with the electronics sector affected as manufacturers looked to substitute gold with other materials. What about investment demand in 2015? The investment segment primarily consists of bar and coin demand and bullion accumulated by Exchange Traded Funds (ETFs). Bar and coin demand climbed 1% vs. 2014 to c.33Moz, with strong demand out of Europe (c.7Moz), China (c.6Moz) and India (c.6Moz). While at their peak in Dec 2012 – Jan 2013, gold held by the world’s top 20 ETFs came in at close to 90Moz; by the end of 2015, holdings declined to 50Moz, 8% (c.4Moz) less than 2014. Some suggest that the deceleration in ETF outﬂ ows since 2013 (when the top 20 gold ETFs declined by 29Moz / 32% that year) shows that much of the adjustment has already taken place and holders who intended to sell have already done so. It is also worth noting that ETF holdings are now more geographically diversiﬁ ed, away from the US. Did central banks continue to purchase gold? Central banks around the world continued to buy gold, with net purchases totalling c.18Moz in 2015, an increase on 2014 levels. Gold is typically recognised as an asset class to help diversify reserves. As in previous years, Russia was a signiﬁ cant buyer, acquiring more than 6Moz. China and Kazakhstan also added to their existing gold holdings. And on the supply side? Total mine supply declined by 2% to c.102Moz in 2015, while recycling dropped 7% to c.35Moz in line with a weaker gold price. Decreasing The average annual gold price declined 8% in 2015 to US$1,160/oz (in US$/oz) 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 1,160 1,265 1,410 1,668 1,570 1,224 973 872 697 604 Source: The London Gold Market Fixing Limited. Data provided for information purposes only. Gold declined by 12% in 2015, although looking back over a period of 10 years, the price has doubled (in US$/oz) 2,000 1,600 1,200 800 400 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: The London Gold Market Fixing Limited. Data provided for information purposes only. Gold ETF’s finished 2015 with combined holdings of approximately 50Moz, down 8% on the year (in Moz) i S t r a t e g c r e p o r t G o v e r n a n c e 100 80 60 40 20 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: UBS. Petropavlovsk Annual Report 2015 9 i F n a n c a i l s t a t e m e n t s Our Business Model Who we are Petropavlovsk is one of the leading and most established Russian gold producers. Our purpose is to deliver sustainable value for the beneﬁ t of all our stakeholders. We aim to achieve this by adhering to our strategy and business model, maintaining a culture of excellence and engagement in all our activities. Our values are – responsibility: operating safely and caring about people – integrity: working honestly and ethically – sustainability: leaving a positive footprint – innovation and problem solving: realising the full potential of our assets through advanced practices and technologies – excellence: harnessing our skills and resources to drive our business. 10 Petropavlovsk Annual Report 2015 How we do it Since inception in 1994, we have developed a business model designed to implement our strategy and create value for all stakeholders while adhering to our values. Sustainable development is embedded at every stage of our business model. We produce gold by applying our expertise across the whole mining lifecycle, from identifying prospective areas to exploration, development, mining and processing. Identify Explore & evaluate Develop Mine & process = Gold Our in-house expertise and vast local knowledge based on historic mining traditions where we operate allows us to comprehensively analyse geological information. This enables us to identify the most prospective licence areas for which we can apply. Our experienced in-house exploration team has a proven track record of exploring and evaluating the highest-value deposits that are proﬁ table throughout the commodity cycle. We aim to replenish, expand and improve our resource base in order to sustain our growth, particularly in areas close to our existing processing facilities. Go to pages 50 to 59 for more on our exploration programme in 2015 We aim to use in-house expertise to develop our mines for long-term value delivery on time and on budget, efﬁ ciently converting our reserves into gold bars to maximise returns. We create value by safely and competently operating assets that ﬁ t with our Group strategy. When we mine and process our ore, we aim to employ operational efﬁ ciency and technological expertise in order to achieve healthy proﬁ t margins. Doré gold bars are our end product. These are sent to one of our two reﬁ neries, one located in the Krasnoyarsk region of Russia and the other in the town of Kasimov (Ryazan region). The bars are sold predominantly to Russian banks. Go to pages 40 to 49 for more on how our operations performed in 2015 Go to page 70 for a mine-by-mine breakdown of physical volumes of gold sold in 2015. Close down & rehabilitate We integrate closure planning throughout an asset’s life cycle, from the earliest stages of project development. Our approach helps us to maintain a positive reputation for sustainable development and ensures we meet the expectations of our current and future stakeholders. i S t r a t e g c r e p o r t G o v e r n a n c e Operating responsibly = Developing a sustainable future We aim to operate in an efﬁ cient, safe, responsible and transparent way throughout the life of our mines. In doing so, we are supported by a talented and motivated workforce. We welcome a positive, active dialogue with local communities in the regions in which we operate. For us, operating responsibly is also providing ﬁ nancial support and assistance to these local communities, particularly in the areas of education and healthcare. We do this through the Petropavlovsk Foundation for Social Investment. Operating responsibly ensures the impact of our operations is positive and can be sustained into the future. We provide new employment opportunities, improved infrastructure and tax revenues for the areas we operate in. The support of our employees and local communities is instrumental to our future success together. Effective risk management and governance An effective system of risk management and comprehensive corporate governance safeguards the success of the Company and the interests of all its stakeholders, including its employees and shareholders. The Group has internal control systems in place to evaluate, monitor and mitigate risks which could impact our performance at all stages of the business model. Our Directors and management teams have a breadth of knowledge and experience, which they seek to use to enable us to achieve our strategic objectives. Go to pages 26 to 39 for more on how we manage the key risks to our business Go to pages 82 to 87 for the Corporate Governance Report Petropavlovsk Annual Report 2015 11 i F n a n c a i l s t a t e m e n t s Our Core Strengths Our core strengths Our business model is supported by strategic resources essential to the effective execution of the business – the long-standing business relationships, a well-balanced, experienced team of industry-leading specialists and other inputs necessary for sustainable growth. We consider these inputs to be our core strengths. They are integral to the way in which we operate. Quality of assets Go to pages 40 to 41 for more on our assets In-house expertise Go to pages 50 to 59 for exploration, reserves and resources Skilled and motivated workforce Go to pages 24 to 25 for more on our workforce 12 Petropavlovsk Annual Report 2015 We operate some of the largest gold mines in Russia in terms of the volume of gold produced, the capacity of their processing facilities and the size of their mineral resource base. Our core assets are located on and around a major belt of gold mineralisation in the Russian Far East with an excellent infrastructure. Many of our licence areas remain under-explored and thus offer potential for further growth. At the date of publishing, the Group had entered into an agreement to acquire Amur Zoloto LLC (“AZ”), an established gold company with production and development assets in the Khabarovsk Region in the Far East of Russia. Go to page 60 for more information. Our team of highly qualiﬁ ed specialists and wide range of modern technical equipment support the efﬁ cient development and operation of our gold mines across the mining lifecycle. We have the ability to rapidly fast- track newly-discovered, non-refractory reserves at our mines into doré gold bars and the ﬂ exibility to adjust our mine plans efﬁ ciently in line with external factors. We aim to be an employer of choice. Our main focus is on talent management – attracting, hiring and retaining talented employees who want to work for us. We align our talent management with company strategy, deﬁ ning consistent leadership criteria across all functional areas and identifying speciﬁ c competencies to cultivate continuing growth. We offer employee beneﬁ ts as well as safe working conditions and are committed to advancing career development opportunities. Knowledge and experience Go to pages 24 to 25 for more on our workforce and 80 to 81 for Directors’ biographies Location and infrastructure Go to pages 40 to 41 for a map of our operations Responsible mining We have operated in Russia since 1994. Our management team are predominantly Russian nationals. Many have been with the Group since inception and possess a range of skills across the mining spectrum. This includes knowledge of the Russian gold mining industry, the legislative and regulatory environment and an understanding of local conditions. Russia has an established mining tradition and a comprehensive legislative framework for the mining sector, alongside a wide pool of highly-qualiﬁ ed individuals. Most of our operations are based in the Amur region. The region’s developed infrastructure includes railways, roads and access to hydroelectric power. i S t r a t e g c r e p o r t G o v e r n a n c e We aim to make a transformative, positive effect on socio-economic development in the areas we operate in. We value the support of, and welcome an open dialogue with, communities local to our operations. It is essential to safeguard our employees’ welfare and minimise and mitigate the negative impact of our operations on the environment, in line with Russian legislation and international best practice. i F n a n c a i l Go to pages 24 to 25 for our approach to sustainability and sustainability performance s t a t e m e n t s Our core strengths assist us in pursuit of our strategic objectives Petropavlovsk Annual Report 2015 13 Our Strategy Our mission Our aim is to create and preserve value by: – harnessing our core strengths to drive our business forward – becoming a leading centre in Russia for processing refractory ores – adhering to our values of responsibility, integrity, sustainability, excellence, innovation and problem solving – achieving responsible and sustainable growth through geological exploration of new and existing areas and using technology to take our group into the future 14 Petropavlovsk Annual Report 2015 This mission translates into a strategy that reﬂ ects different stages of our development In the near-term, our strategic plan is to produce optimal cash ﬂ ows by extracting gold from existing non-refractory reserves, aiming to achieve the deleveraging targets set up by the Board, speciﬁ cally to: Our near-term strategy – continue to extract gold from – continue an optimal production non-refractory ores at our four hard-rock mines in the Amur region – continue to explore areas at, near or adjacent to the Pioneer, Malomir and Albyn mines to ﬁ nd new non-refractory resources, in order to expand and improve the quality of the Group’s mineral base and upgrade all existing non-refractory resources into JORC-compliant Ore Reserves Our medium-term strategy schedule at Pokrovskiy and Malomir, carrying out essential care and maintenance in view of the POX Hub base and preparing the project for commissioning in the near future, in line with recent developments. Please refer to Future Development pages 60 to 61 for more information on our conditional joint venture agreement (JV) with GMD Gold to fi nance the completion of the POX Hub, announced 28 April 2016. In the medium-term, our strategic plan is to continue generating optimal cash ﬂ ows by extracting gold from non- refractory reserves, to introduce new methods and technologies and enable and implement the processing of refractory material, speciﬁ cally to: – continue to extract gold from – ﬁ nalise the construction of the non-refractory ores at the Albyn and Pioneer hard-rock mines in the Amur region – review and potentially develop underground mining at the current mines where feasible – review and potentially develop projects that are currently considered to be non-core POX Hub at Pokrovskiy and the ﬂ otation plant at Malomir to enable the processing of the Group’s refractory Reserves – continue exploration of areas at, near or adjacent to the Pioneer, Malomir and Albyn mines to expand and further improve the Group’s non-refractory and refractory mineral Resources base. i i S S t t r r a a t t e e g g c c r r e e p p o o r r t t G G o o v v e e r r n n a a n n c c e e Our long-term strategic plan is to continue generating cash ﬂ ows by producing gold from non-refractory material at existing mines and refractory material by using the POX Hub, speciﬁ cally to: Our long-term strategy – continue to extract gold from refractory and refractory mineral non-refractory ores at the Albyn and Pioneer hard-rock gold mines in the Amur region using new technologies – continue to extract gold from refractory ores at the Malomir and Pioneer hard-rock mines in the Amur region – continue to explore areas at, near or adjacent to the Pioneer, Malomir and Albyn mines to expand and improve the Group’s non- i i F F n n a a n n c c a a i i l l resources base – enable and implement the treatment of refractory concentrate from third parties at the POX Hub s s t t a a t t e e m m e e n n t t s s – consider opportunities to form partnerships or joint-ventures with other participants in the Russian gold mining industry using the facilities and expertise at the POX Hub such as the conditional JV agreement with GMD Gold. Petropavlovsk Annual Report 2015 15 Petropavlovsk Annual Report 2015 15 Our Strategic Objectives Our strategic objectives In order to fulﬁ l our strategic plans, we have ﬁ ve strategic objectives: 1 Value-adding exploration: extend mine life at all assets 2 Asset development using in-house expertise: seek opportunities to enhance the application of latest technologies 3 Operational efﬁ ciencies: improve performance of all the operations to control and reduce costs 4 Enhance monitoring and evaluation systems to strengthen ﬁ nancial resources and to achieve all ﬁ nancial targets 5 Operate responsibly and safely: sustainable management of all natural resources and rigorous safety procedures to maintain the highest health and safety standards Risks to strategy implementation and strategic objectives constantly monitored 16 Petropavlovsk Annual Report 2015 KPIs are a tool to monitor progress in implementing strategy and adhering to strategic objectives Key Performance Indicators (KPIs) Petropavlovsk’s core objectives and strategy deﬁ ne key performance indicators (KPIs) that the Group monitors, targets and measures. The KPIs fulﬁ l the following roles: – To give senior management a measurable and objective standard to evaluate the Group’s overall performance and to track its progress from an operational, growth and sustainable development perspective – To provide managers and their teams with a benchmark by which they can measure current performance and enable them to focus on the areas that are critical for successful achievement of the Group’s goals – To give guidance to the Remuneration committee to maximise employee retention rates. 1 Operational Efﬁ ciencies What this means and why it is important to us In order to meet our business aim, we need to generate healthy gold sales at competitive margins. To achieve this, it is essential that we operate efﬁ ciently by employing careful mine planning and focusing on ways to reduce costs and boost proﬁ tability. Key highlights from 2015 – Full year 2015 gold production of 504.1koz in line with the Company’s revised strategy – Signiﬁ cant decrease in mining and processing costs per unit at each of the Group’s mines – Continued disclosure of All-In Sustaining Costs (‘AISC’) and All-In Costs (‘AIC’) demonstrated further reductions due to a number of cost-saving measures – 10% reduction in AISC (US$972/oz for 2015 and US$874/oz for 2014) and 14% reduction in AIC (US$932/oz in 2015 and US$1087/oz in 2014). – 13% reduction in Total Cash Costs per ounce (‘TCC/oz’) to US$749/oz compared with 2014 (US$860/oz) – Decrease achieved mainly due to the continued implementation of our cost- optimisation programme and a 59% average depreciation of the rouble against the US dollar KPIs Total attributable gold production (’koz) – 24% reduction in TCC/oz at Pioneer compared with 2014 (US$625/oz vs. US$818/oz) – 10% reduction in TCC/oz at Albyn compared with 2014 (US$747/oz vs. US$830/oz) – 2015 TCC/oz for Pokrovskiy and Malomir of US$871/oz and US$1,092/oz respectively in line with the previous year (2014:US$885/oz and US$1,031/oz respectively). TCC at Pokrovskiy and Malomir achieved in spite of 10% and 31% respective decreases in processed grades at both mines and a 26% increase in the stripping ratio at Malomir – Cash costs at Malomir were affected by the scattered positioning of multiple deposits mined in the ﬁ rst half of the year. 2016 plans – Targeted gold production of 460-500koz in line with the Group’s new strategy – TCC/oz of gold produced scheduled to decrease further to c.US$700/oz – Further implementation of our cost-cutting programme in 2016 using systematic analyses of operating processes – Optimised capital allocation. Additional future plans – The production plan for 2017-2020 envisages a 10-20% increase in annual average production – Development of underground operations using the latest technologies – Development of POX project in JV with third party – Selective, accretive acquisitions. Deﬁ nition Measured in troy ounces, attributable gold production is the total of the gold produced from the Group’s four hard-rock mines, as well as shares in any joint ventures and investments, for the applicable years. The gold production ﬁ gure consists of gold recovered during the period and is adjusted for the movement of gold still in circuit. Relevance Gold production underpins our ﬁ nancial performance as the majority of Group revenue is attributable to the sale of the gold produced by the Group. The indicator also demonstrates the strength of our operational and managerial teams to deliver against the mine plan. Performance in 2015 In 2015, the Group produced 504.1koz of gold, in line with the Company’s revised strategy. This was lower than the 624.5koz of gold produced in 2014, in part due to the decrease in the grades processed through the mills and absence of the alluvial production due to the sale of alluvial assets. Production from all assets in the fourth quarter of 2015 was 149.4koz (in the fourth quarter 2014: 168,200koz). Going forward The Group is targeting production of 460-500koz of gold in 2016. For the years 2017-2020, the Group is budgeting annual gold production of c.650koz – 700koz from both refractory and non-refractory ores, with some year-on-year variations. In line with the new strategy, the production plans are based on maximising proﬁ tability and optimising the Group’s cash ﬂ ows. In line with our strategy, at the date of publishing the Group had entered into an agreement to acquire Amur Zoloto, discussed further on pages 60 to 61 of this report. The acquisition would add signiﬁ cant scale to Petropavlovsk’s reserve and resource base in the Far East of Russia. Petropavlovsk Annual Report 2015 17 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Key Performance Indicators (KPIs) continued KPIs Operating Expenses Total average costs (US$/oz) Total cash costs per ounce of gold produced for hard-rock mines (US$/oz) Going forward The Group expects a signiﬁ cant decrease in its total average cash costs of production in 2016 to lower than US$700/oz, due to its cost-cutting programme and the devaluation of the rouble. Go to pages 69 to 70 for further information on 2015 cash costs Deﬁ nition The total cash cost per ounce is the cost of producing and selling an ounce of gold from the Group’s hard-rock operations. All-In Sustaining Costs All-In Costs Deﬁ nition All-in sustaining cash costs (“AISC”) include both operating and capital costs required to sustain gold production on an ongoing basis. All-in costs (“AIC”) are comprised of AISC as well as capital expenditures for major growth projects or enhancement capital for signiﬁ cant improvements at existing operations. AISC and AIC are calculated in accordance with guidelines for reporting AISC and AIC published by the World Gold Council in June 2013. For a calculation of AISC and AIC, please refer to the section AISC and AIC of the Chief Financial Ofﬁ cer’s Statement on page 71 of this report. Relevance In 2014, following the publication of the World Gold Council’s guidelines for reporting AISC and AIC, the Group took the decision to monitor its AIC and AISC, in addition to TCC/ oz. This enables the Group to track and benchmark the ongoing efﬁ ciency and effectiveness of its operations to ensure it maintains healthy margins. Performance in 2015 Following industry best practices, the Group calculated and disclosed its AISC and AIC for the ﬁ rst time for the period of 2014, which have since demonstrated a continuous decrease. In 2015, AISC decreased to US$874/oz from US$972/oz in 2014. This reﬂ ects the reduction in TCC as well as lower central administration expenses and sustaining capital expenditure related to existing mining operations. AIC decreased from US$1,087/oz in 2014 to US$932/oz in 2015, reﬂ ecting the decrease in all-in sustaining costs explained above as well as decreases in exploration expenditure and capital expenditure related to new projects. Cash costs for hard-rock mines are the cost of producing and selling an ounce of gold from the Group’s hard-rock mines (Pokrovskiy, Pioneer, Malomir and Albyn). The Group’s four hard-rock mines are its key assets, in 2015 producing 100% of the Group’s total gold production for the year. The Board and Executive Committee constantly monitor cash costs at the Group’s hard-rock mines and work on their improvement. The key components of operating cash expenses are wages, electricity, diesel, chemical reagents and consumables. The key cost drivers affecting the operating cash expenses are stripping ratios, production volumes of ore mined and processed, recovery rates, cost inﬂ ation and ﬂ uctuations in the rouble to US dollar exchange rate. Reﬁ nery and transportation costs are variable costs dependent on the production volume and comprise approximately 0.5% of the gold price. Mining tax, comprising 6% of the gold price, is also a variable cost dependent on the production volume and the realised gold price. Relevance The Group closely monitors its current and projected costs to track and benchmark the ongoing efﬁ ciency and effectiveness of its operations. This monitoring includes analysing ﬂ uctuations in the components that constitute cash costs and cost per tonne mined and processed to identify whether and where efﬁ ciencies may be made. Performance in 2015 Total cash costs for the Group’s mines decreased from US$860/oz in 2014 to US$749/oz in 2015, primarily reﬂ ecting the effect of cost optimisation measures undertaken by the Group in the declining gold price environment and further rouble depreciation. 18 Petropavlovsk Annual Report 2015 2 Optimising Financial Return What this means and why it is important to us To further develop the business it is essential that we strive to allocate cash resources wisely, employ careful ﬁ nancial planning and achieve safe levels of net debt. Key highlights from 2015 – Reﬁ nancing plan completed on 18 March 2015 reducing Group debt by c.US$200 million, consisting of: – A pre-emptive 157 for 10 Rights Issue at £0.05 per Ordinary Share – A new, ﬁ ve-year US$100 million convertible bond – Positive contribution from hedging activities of US$20/oz to the average realised gold price of US$1,178/oz (2014: US$1,331/oz) – Further 20% reduction in central administration costs to US$30.4 million (2014: US$38.2 million) – Further c.66% reduction in total gold capital expenditure to US$32.6 million (2014: US$97 million) in line with guidance – Underlying EBITDA of US$173 million (2014: US$252 million) – a decrease due to a lower year on year average realised gold price and production – Further decrease in working capital of US$43.5 million as a result of continued optimisation, mainly due to decreases in ore stockpiles and in stores and spares – Net cash ﬂ ow from operating activities (continuing operations) of US$111 million (2014: US$169 million) – Net debt as of 31 December 2015 of c.US$610 million, down 34% from US$930 million as at 31 December 2014 – Forward contracts to sell 71,551oz of gold at an average price of US$1,116/oz outstanding as at 31 December 2015. 2016 plans – Continued focus on net debt reduction by maximising operating margins and free cash fl ows. In line with this strategy, net debt is expected to decrease below US$570 million by the end of 2016, assuming an average gold price of US$1,200/oz for the rest of 2016 – Conservative borrowing policy with a medium-term Net Debt/EBITDA target of 1.5:1 – Further work on reduction in operating costs in 2016 using a systematic analysis of operating processes and capabilities to develop an optimal, sustainable operating model for each mine – Optimised capital allocation – A comprehensive control over total capital expenditure for gold projects in 2016 of US$70 million (US$10 million exploration programme and US$60 million development and maintenance) – Forward contracts to sell an aggregate of 37,850 ounces of gold at an average price of US$1,116 per ounce are outstanding as at 28 April 2016 – A review of the pressure oxidation (POX) project, taking into account progress with the conditional JV agreement with GMD Gold, announced 28 April 2016. Capital expenditure for the fi nalisation of construction of the POX plant is currently estimated at c.US$140 million due to the depreciation of the rouble. Please refer to pages 60 to 61, for more information on our conditional JV agreement with GMD Gold to fi nance the completion of the POX Hub, announced 28 April 2016. Additional future plans – Continued focus on net debt reduction by maximising operating margins and free cash flows. KPIs Average realised gold sales price (US$/oz) Definition The average gold sales price is the mean price at which the Group sold its annual gold production output throughout the year. It is calculated by dividing total revenue received from gold sales by the total quantity of gold sold in the period. Relevance As gold is the key commodity produced and sold by the Group, the average realised gold sales price is a key driver behind the Group’s revenues. Performance in 2015 2015 saw a positive contribution of US$20/oz to the average realised gold price of US$1,178/oz (2014: US$1,331/oz) from forward-sales contracts of 178,449oz, which matured during the year. Going forward Forward contracts to sell 71,551oz of gold at an average price of US$1,116/oz outstanding as at 31 December 2015. The Group acquired 150,000oz of gold put options with a strike price of US$1,150/oz in October 2014 as part of a downside protection strategy and maturing over the period from January 2015 to June 2015. Further details on the components of Group revenue, cash fl ow and hedge arrangements may be found on pages 66 to 67 Capital expenditure (US$m) Definition Capital expenditure is the funds required by the Group to explore and develop its gold assets and keep its current plants and other equipment at its gold mines in good working order. Relevance Capital expenditure is necessary in order to both maintain and develop the business, however gold capex requirements need to be balanced in line with the Group’s strategy and provide an optimal allocation of the Group’s funds. Performance in 2015 The Group’s estimated development and maintenance capital expenditure for 2015 was c.US$32.6 million, representing a 7% improvement on the original estimate and a 66% decrease compared to the previous year. Exploration works were the key focus of expenditure, predominantly at Pioneer and Albyn, to enlarge and improve their mineral reserve bases in order to increase their profitability and to prolong their mine life. Going forward The Group’s capital expenditure requirements are estimated to be around US$70 million in 2016. This will be split between continuing the Group’s exploration programme (US$10 million) and development and maintenance (US$60 million). The development works will focus predominantly on constructing underground operations at Pioneer and fi nalising the POX Hub at Pokrovskiy. i S t r a t e g c r e p o r t A breakdown of 2015 capital expenditure may be found on page 75 G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Net debt (US$m) Definition Net debt is set out in note 30 to the consolidated fi nancial statements. Net debt is incurred in order to assist with the fi nancing of project development. Relevance Net debt is a measure of a company’s ability to repay its debts if they were all due today and thus, it helps the management to estimate whether a company is appropriately leveraged. Performance in 2015 In 2015, the Company achieved a reduction in net debt as forecast to make c.US$610 million as at 31 December 2015 due to refinancing, focus on financial discipline and cash optimisation. Going forward Going forward, the Group will focus on reducing net debt by maximising operating margins and free cash flows. In the near-term, this target will be assisted by a disciplined allocation of funds towards capital expenditure, steady gold production using existing processing facilities, and a planned systematic analysis of operating processes and capabilities. This is in order to develop an optimal, sustainable operating model for each mine to secure a further reduction in operating costs in 2016. The Group is forecasting its net debt to decrease to c.US$570 million by the end of 2016 (assuming an average gold price of US$1,200/oz for the remainder of 2016). Net debt is set out in note 30 to the consolidated fi nancial statements. Petropavlovsk Annual Report 2015 19 Key Performance Indicators (KPIs) continued Earnings Underlying EBITDA (US$m) Deﬁ nition Underlying EBITDA is the proﬁ t / (loss) for the period before ﬁ nancial income, ﬁ nancial expenses, foreign exchange gains and losses, fair value changes, taxation, depreciation, amortisation and impairment charges. Relevance Underlying EBITDA is an indicator of the Group’s ability to generate operating cash ﬂ ows, which are the source of funding for the Group’s working capital requirements, capital expenditure and debt service obligations. Performance in 2015 For 2015, the Group generated underlying EBITDA of US$173 million compared with US$252 million in 2014. This reduction was mainly due to a decrease in the average realised gold price from US$1,331/oz in 2014 to US$1,178/oz in 2015 and a decrease in physical ounces sold. This effect was partially mitigated by the improvement in total cash costs, which had a net US$53.5 million positive contribution to underlying EBITDA in 2015. Going forward The Group aims to continue to produce and sell gold at competitive margins, which will, amongst other factors, inﬂ uence the Group’s future EBITDA levels. A reconciliation of loss for the period from continuing operations and underlying EBITDA is set out in note 35 to the consolidated ﬁ nancial statements Proﬁ t /(loss) for the period (US$m) Deﬁ nition Proﬁ t / (loss) for the period is calculated by deducting operating and net ﬁ nance expenses, taxation and any relevant share of results in associates and joint ventures for the applicable years from total revenue. Relevance Proﬁ t / (loss) for the period is often referred to as the ‘bottom line’ of the income statement and is the income attributable on a per share basis when it is divided by the weighted average number of shares outstanding during the reporting period. Performance in 2015 Net loss for 2015 was US297.5$/oz million, compared with a net loss of US$347.7 million in 2014. Net loss from continuing operations amounted to US$190 million, compared to net loss of US$182.2 million in 2014. Going forward The Group aims to continue to produce and sell gold at competitive margins, which will, amongst other factors, inﬂ uence the Group’s future proﬁ t / (loss) for the Period. A reconciliation of loss for the period from continuing operations and underlying EBITDA is set out in note 35 to the consolidated ﬁ nancial statements Basic earnings/(loss) per share (US$) Deﬁ nition Basic earnings per share (‘EPS’) is the proﬁ t or loss for the period attributable to equity holders of Petropavlovsk PLC divided by the weighted average number of ordinary shares during the period. 3 Value-adding exploration What this means and why it is important to us Our exploration strategy remains the same as in the last two years. We aim for sustainable, organic growth at our existing operations, using our in-house exploration team to identify quality gold reserves. Our team are well-practised in assessing the highest-value deposits, proﬁ table throughout the commodity cycle. In order to prolong the life of our mines and fast track what we ﬁ nd into doré gold bars with minimum capital expenditure, we are continuing to explore our mine sites and look for quality resources that could be processed in our existing facilities. We intend to maximise the value of our current operational mines. In the longer term, we plan to seek out resources that could be suitable for processing in the POX Hub, once commissioned. Key highlights from 2015 Relevance Basic EPS is an indicator of the Group’s proﬁ tability and the value per Ordinary Share. – Successful exploration identiﬁ ed c.100koz of additional non-refractory JORC Ore Reserves, offsetting 2015 mine depletion The total number of Ordinary Shares in issue as at 31 December 2015 was 3,300,561,697 (31 December 2014: 197,638,425). Performance in 2015 Basic loss per share for 2015 was US$0.09 compared with US$1.33 in 2014. Basic loss per share from continuing operations for 2015 was US$0.07 compared to US$0.94 basic loss per share for 2014. The key factor affecting the basic loss per share was the increase of the weighted average number of Ordinary Shares from 196,423,244 for 2014 to 2,657,332,030 for 2015. Going forward The Group aims to continue to sell gold at competitive margins, which will, amongst other factors, inﬂ uence the Group’s future EPS. A reconciliation of loss for the period from continuing operations and Underlying EBITDA is set out in note 35 to the consolidated ﬁ nancial statements. – All new Reserves and Resources discovered close to existing processing facilities – Drilling discovered, extended or conﬁ rmed mineralisation in several areas of the Pioneer, Malomir and Albyn mine sites, notably at North-East Bakhmut, Andreevskaya, Alexandra and Brekchievaya (Pioneer), at Berezoviy, Quartzitovoe (Malomir) and at Elginskoye and Afanasevskoe (Albyn) – At non-refractory zones Andreevskaya and North East Bakhmut, high-grade down dip extensions discovered adding c.160koz to JORC Mineral Resources at an average grade of 9.4g/t for potential underground mining – JORC Resource of c.266koz at an average grade of 7.41g/t for potential underground mining established at Quartzitovoe (Malomir). This resource is still open in a down-dip direction, offering potential for further increase 20 Petropavlovsk Annual Report 2015 20 Petropavlovsk Annual Report 2015 – C.140koz of additional JORC Probable Ore Reserves established, which are suitable for processing through the Albyn processing plant including sampling. Mineral Resources are sub-divided, in order of increasing geological conﬁ dence, into Inferred, Indicated and Measured categories. – New non-refractory deposit Afanasevskoe conﬁ rmed c.17km south-west of the Albyn processing plant – Technical studies conﬁ rmed the feasibility of developing high-grade, underground mines at Pioneer and Malomir – Highly prospective Sosnovaya license acquired at government auction in December 2015. 2016 plans – Continued exploration of areas potentially suitable for processing in existing plants and/or heap-leaching facilities, minimising immediate capital expenditure outlay – Continued work to classify new ﬁ ndings as JORC Mineral Resources with continued focus on the high-grade areas at Pioneer and Malomir mines – Continued work to upgrade Mineral Resources into Ore Reserves – Exploration of deep high-grade extensions below Pioneer and Malomir’s operational open pits in order to expand mineral resource for the underground mines. Mid to Long Term Plans – Recommence exploration for refractory resources once the POX Hub has been commissioned (the project is currently on hold). The Group is proposing a Joint Venture (“JV”) with GMD Gold, a reputable Russian mining operator, to accelerate and complete the development of the POX Hub. Please refer to Future Development on page 60 to 61 for more information on the proposed joint venture. Mineral Resources Deﬁ nition A Mineral Resource is a concentration or occurrence of solid material of economic interest in or on the Earth’s crust in such form, grade (or quality), and quantity that there are reasonable prospects for eventual economic extraction. The location, quantity, grade (or quality), continuity and other geological characteristics of a Mineral Resource are known, estimated or interpreted from speciﬁ c geological evidence and knowledge, Relevance JORC Mineral Resources are a measure of the size of the Group’s mining and exploration assets, indicating medium to long-term production growth potential. In line with its strategy, the Group has been placing emphasis on ﬁ nding Mineral Resources through exploration at sites at or close to current operating plants. Implementing this has enabled the Group to replenish gold Resources depleted from its operations in recent years and increase its Mineral Resource base. Progress in 2015 During 2015, due to the success of the Group’s exploration programme, Mineral Resources for the Albyn project area increased by c.370koz, despite depletion of c.170koz from mining, providing a net increase of c.540koz. c.160koz and c.266koz of high grade Mineral Resources, expected to be suitable for underground mining were established at Pioneer and Malomir. A new non-refractory deposit, Afanasevskoe, was conﬁ rmed near the Albyn processing plant. Going forward Going forward, the Group is striving to continue to develop a high quality non- refractory resource base for both open pit and underground mining, and in the longer term to develop its refractory resource base. Ore Reserves Deﬁ nition An Ore Reserve is the economically mineable part of a Measured or Indicated Mineral Resource. It includes diluting materials and allowances for losses which may occur when the material is mined. Appropriate assessments, which may include feasibility studies, have been carried out and include consideration of and modiﬁ cation by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. These assessments demonstrate at the time of reporting that extraction could be reasonably justiﬁ ed. Ore Reserves are sub-divided in order of increasing conﬁ dence into Proven and Probable. Relevance JORC Ore Reserves are a measure of the size and quality of the Group’s mining assets and its ability to support the life of operating mines at proﬁ table levels. The Group has been placing a strong emphasis on ﬁ nding new Ore Reserves through exploration in line with its strategy. By implementing this, the Group has been able to replenish the majority of its Ore Reserves depleted from its operations. i S t r a t e g c r e p o r t Progress in 2015 During 2015, the Group was able to offset mine depletion of c.605koz. Ore reserve estimates for Elginskoe (Albyn) and for underground mining at Pioneer and Albyn currently being prepared are expected to increase Group JORC Ore Reserves during 2016. Going forward Going forward, the Group is striving to continue to establish a high quality non- refractory reserve base for both open pit and underground mining and, in the longer term, add to its refractory reserves. G o v e r n a n c e 4 Asset development using in-house expertise and innovative processing technologies Our in-house expertise is key to our development strategy. Within the Group, various companies operate that specialise in speciﬁ c areas of mine development. Their work has enabled the Group to convert its assets into producing mines and optimise processing parameters there. By working with third parties these companies have also had a broader positive effect on the Russian mining industry as a whole. It is difﬁ cult to quantify the work of our in-house teams by using metrics such as key performance indicators. For us, acknowledging the contribution they are making to Group development and the recognition our in-house teams have received from third-parties is a better way to measure our success. Petropavlovsk Annual Report 2015 21 i F n a n c a i l s t a t e m e n t s Key Performance Indicators (KPIs) continued Relevance To guarantee that the Group’s occupational health and safety policies are successful, which includes providing protective measures and equipment and mitigating risks, the health and safety team continues to strive to maintain a safe environment at the Group’s operations. One of the key indicators that the Group relies upon to identify trends and areas of focus is the LTIFR. This is an integral part of a complex system covering the database of statistics, training programmes and operating parameters used for regular analysis and control. The measure ensures the Group’s compliance with Russian legislation and provides the Group with a basis for continuous improvement. Performance in 2015 For the year ended 31 December 2015, Group operations recorded a LTIFR of 2.63 accidents per million man hours worked. Regrettably there was one fatal accident during the year, which took place at the Malomir mine in October 2015. This was due to an employee inhaling sodium cyanide gas while performing repair works at the process plant. The Group, which is striving to achieve zero fatal accidents, took the following action: – Special purpose training was conducted with all of the process plant workers regarding the handling and use of highly toxic substances, measures and actions in the event of spillage and ﬁ rst aid in case of poisoning 2.63 2.50 – Safety meetings were held with the workers of all subsidiaries to bring to their attention the causes and circumstances of the fatal accident 3.27 – The Group Fatal Accidents List, which covers all fatal accidents since the company’s inception, has been included into the safety induction lecture in order to try to prevent those types of accidents in the future. – 100% of the Group’s analytical needs Key highlights from 2015 – Lost-time injury frequency rate (LTIFR) in 2015 of 2.63 accidents per million man hours worked – Improved health and safety training schemes to raise HS awareness – Modiﬁ ed accident alert system to embrace a wider range of employees – Strict compliance with local legislation to provide for high-quality environmental performance. Additional future plans – Various social projects to support local communities via the Petropavlovsk Foundation – Continued and extended training for current and prospective employees through the on-site and Zeya mining college programmes – Continued regular monitoring and control of health and safety performance across the Group at all sites – Rigorous control in the sphere of environmental protection to maintain high level performance – Continued monitoring of greenhouse gas emissions and other potential externalities with the view to mitigate any effect. Lost Time Injury Frequency Rate LTIFR (per million man hours worked) 2015 2014 2013 2012 2011 2.40 1.90 Deﬁ nition Lost Time Injury Frequency Rate (LTIFR ) is the number of accidents, including fatalities, taking place on Group premises within the reported period, measured against the number of man hours worked during that period per million man hours worked. LTIFR for the Group excludes IRC, which has separate HSE management systems. are met by its laboratory network, from assaying samples collected by ﬁ eld geologists, to monitoring work for the Group’s ecological department – Group laboratories also conduct work for third-parties, having a wide-range of analytical methods at their disposal including ﬁ re assaying, atomic absorption, spectroscopy and mineralogical analysis, x-ray crystallography and physical property determinations – Our R&D company Gidrometallurgiya has particular expertise with refractory ores and has provided scientiﬁ c research into the POX Hub. It also conducts third party work. Future plans – Plans for the construction of underground mines at Pioneer and Malomir, which will produce gold from high-grade, non- refractory reserves. 5 Operating Responsibly What it means and why it is important to us Petropavlovsk has always made employee health and safety a major priority. Our dedication to providing safety in the workplace is supplemented by our environmental protection measures, which include rigorous environmental monitoring of all sites and nearby territories. Additionally, the Group supports constructive dialogue with local communities and ensures that local areas beneﬁ t from our presence. This is achieved through direct investments and support from our social and economic development department, who provide education and job opportunities to local people and communities via joint venture projects. 22 Petropavlovsk Annual Report 2015 Going forward In the effort to lower the LTIFR across subsidiaries and achieve zero fatalities, the Group is constantly introducing new concepts and improving existing systems. The following measures were undertaken in 2015, resulting from on-site and joint meetings and discussions embracing health and safety ofﬁ cers and company management: – The Fatal Accidents List was incorporated into the Safety Induction for new employees and became part of the refresher course for returning employees – The updated accident alert system ensures that information about an accident occurring is communicated to all relevant employees, including heads of departments across the Group, in a timely fashion – The implementation of a “near-miss” accident reporting system was successfully merged with the Russian three-stage reporting system to prevent potential accidents and eliminate dangerous circumstances. – As a result of the introduction of the near-miss/three-stage system, preventative discussions are held regularly to make workers aware of the most important areas of focus Federation. We have used one of the formulae, as approved under this legislation, for calculating the CO2 equivalent (CO2e) associated with our consumption of Diesel, Kerosene, Benzene, and Coal. i S t r a t e g c r e p o r t – Among the stricter actions are verbal and written warnings upon health and safety violations and compulsory safety training. Greenhouse Gas (‘GHG’) Emissions Methodology We have reported on all of the emission sources required under the Companies Act 2006 (Strategic Report and Directors’ Reports) Regulations 2013. These sources fall within our consolidated ﬁ nancial statement. The Group is not responsible for any emission sources that are not included in our consolidated statement. We have adopted methodology for planning and reporting Green House Gases (GHG) according to the laws of the Russian Under Russian legislation, the GHG emission associated with grid electricity is reported by the generator. However, for transparency purposes, the GHG emission associated with our consumption of electricity has been reported below. This is measured in tonnes of carbon dioxide and calculated using the DEFRA 2015 Scope 2 electricity conversion factor for the Russian Federation of 0.44982 kilograms of CO2 per kilowatt hour. All emissions quoted below are Gross, as no deductions for exporting renewable energy or purchasing certiﬁ ed emission reduction are applicable. As a producer of gold, our prime metric is the amount of gold produced in a calendar year, measured in ounces. In 2015, Petropavlovsk produced 504,100ozs and we have used this ﬁ gure to calculate our intensity metric. G o v e r n a n c e Global GHG emissions data for period 1 January 2015 to 31 December 2015 Emissions from: Combustion of fuel and operation of facilities (Tonnes of CO2e) Electricity, heat, steam and cooling purchased for own use. (Tonnes of CO2) Emissions reported above normalised per ounce of gold produced. (Tonnes of CO2e / oz) Source of Emissions Emissions come from the following sources: Diesel – as used in our ﬁ xed equipment including crushers, screens and pumps, and mobile equipment including excavators, trucks, bulldozers and cars. Kerosene – as used in our helicopters. Benzene – as used in our cars. Coal – as used in our heating plants. All heat produced is used for our own consumption. Veriﬁ cation / Assurance Quarterly reports of emissions are sent to the Russian Environmental Agency Rosprirodnazor against an approved plan. Relevance Monitoring GHG emissions enables the Group to look for opportunities to minimize its carbon footprint. Reducing emissions may also help decrease operating expenditure. Going forward The Group continues to monitor GHG emissions and reviews all relevant data in order to identify opportunities for improvement. Reporting year Comparison year 01.01.2015 – 31 12.2015 260,194.9 276,144.1 1.07 01.01.2014 – 31 12.2014 281,657.7 268,066.0 0.88 i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 23 Environmental, Safety and Social Report Introduction At Petropavlovsk, we operate in line with ﬁ ve core values: responsibility, integrity, sustainability, innovation and problem solving and excellence. As a Group, we pride ourselves in maintaining solid relationships with those we work with. This means approaching development together with local communities and authorities, addressing any feedback or concerns. It means understanding that our people are a key asset and investing in them accordingly. It means ensuring that our operations meet the highest environmental standards. The Group believes this approach has contributed to its success to date. In Q1 2015, independent mining consultants Wardell Armstrong (WAI) reported that environmental and social performance at the Petropavlovsk assets is managed well and to a high standard. All four projects are fully permitted and each aspect has been reviewed and approved by State expertise. Social and community management is well established and WAI understands there is almost universal support for the operations within the local community. All four projects are fully permitted with each aspect reviewed and approved by state expertise. Contribution to the local economy The Group remains one of the largest employers in the Amur region and a major tax payer. We provide additional job opportunities by investing in education and training, using local suppliers where possible to help stimulate the local economy. Working hours and conditions All employees are issued with contracts detailing their working hours, paid annual leave and other guarantees, in line with Russian or UK legislation (as applicable). At the mines, employees work to speciﬁ c shift patterns of either a fortnight, a month, or 45 days; as the mines are located in remote areas, it would not be practical to commute. Once each shift is complete, they have the same amount of time off work. Employees stay in purpose-built accommodation on-site, with recreational facilities and modern conveniences. The shift patterns enable employees to better maintain their family commitments whilst ensuring the mines can operate throughout the year. 24 Petropavlovsk Annual Report 2015 Safety Petropavlovsk is committed to providing its employees with a safe working environment and fully complies with Russian labour legislation, the most signiﬁ cant of which is the Labour Code of the Russian Federation. The Group has health and safety systems in place that support the Code and as required conducts regular reviews of labour protection in the workplace. Petropavlovsk regularly examines all internal policies and procedures to ensure they remain robust and effective. Occupational health and safety (OHS) risks are identiﬁ ed, reviewed and evaluated to mitigate their impact. All accidents are recorded and reported to the Executive Committee and Board. A Board-level Health, Safety and Environmental Committee meets regularly and one of their duties is to assess and evaluate OHS management systems. Petropavlovsk also conducts regular on-site inspections to ensure all operations comply with regulations. Human rights The Group operates in accordance with the Constitution of the Russian Federation, which details the rights and freedoms of citizens. Anti-bribery and corruption The Company has a zero-tolerance approach to corruption and bribery. The Group has adopted policies and procedures on preventing, combating and dealing with bribery and corruption, including a Code of Conduct and Business Ethics (the ‘Code’). The Code, which has been circulated to all employees, sets out the procedures that employees are expected to follow. The Company holds meetings with employees, in London, Moscow, Blagoveshchensk and directly at the mines, to provide training and answer questions from employees on these matters, ensuring that the Group’s policies are embedded throughout its operations. Any amendments to anti-corruption legislation of the Russian Federation and the Company’s policy in this regard are also discussed at meetings with the Group’s stakeholders. For the purpose of conﬁ dentiality and to protect the rights of employees who may be subordinates of members of senior management or may be dependent on them in other ways, two Group representatives in Russia have been appointed as points of contact for any employees of the Group who wish to discuss, on a conﬁ dential basis, the subject of compliance with the rules and regulations of the Code. Any matters of concern will then be raised with the Company Chairman. Ms Anna Makhina, Head of Legal, Moscow, was invited to speak at the 2015 ‘Anti- Corruption in Russia and CIS’ annual conference, a high-proﬁ le compliance event, held in Moscow. This gave her the opportunity to share her experience with others and obtain their views on how to successfully implement anti-corruption policies in Russian companies. The Group Head of Legal Affairs and the Company Secretary attend global anti-corruption seminars in the UK. The Board considers it important that representatives of the Company are involved in this important area of compliance and this way we can both learn from and share their knowledge and experience. Given the importance of anti-bribery matters they are now considered by the Executive Committee, which meets frequently. The responsibility for actions proposed as appropriate is taken by the Company Chairman, who reports on this formally to the Board. Equal opportunities The Group is committed to providing equal opportunities and pay in all aspects of employment, regardless of gender or background, an approach that Russian and UK legislation also requires. Despite this, the Company has a disproportionately high number of male employees compared to female employees, a reﬂ ection of the fact that the mining sector has been historically male-dominated. As at 31 December 2015, 1,813 employees were female, representing c.22% of the Group’s total workforce. Women have the opportunity to reach the highest levels of senior management. The Board considers its senior management to be the Executive Committee, which is responsible for managing the company day-to-day, and comprises three Executive Directors and six members of senior management. As at 31st December 2015, two of its members were female, representing 22% of total membership. The Board is mindful of the continuing focus on the value of gender diversity, though it has not and does not intend to set a target for the number of female Board members it has. It aims to appoint the best candidate available for any role. As discussed in further detail in the Nomination Committee report, Alya Samokhvalova was a Board member until 30 April 2015, when she resigned following the restructuring of the Board. Alya remains with the company in her joint role as Strategic Director and Group Head of External Communications. The Pokrovskiy Mining College Based near to our Pokrovskiy mine, the Pokrovskiy Mining College offers a range of residential and day college programmes. The Group established the college in 2008 with the aim of providing future employees with bespoke specialised training. The college aims to offer graduates employment opportunities and as such has regional beneﬁ ts outside the Group. Since its inception, the college has trained more than 4,100 people and today offers 72 different courses. Charitable foundation The Group’s commitment to promoting development in the Amur region led it to establish the Petropavlovsk Foundation in 2010. The Foundation aims to provide local communities with social, economic and cultural opportunities. Alongside improving quality of life, the Foundation’s efforts are aimed at encouraging investment in the region by contributing to its appeal as a place to live and work. In organising its activities, the Foundation works closely with regional stakeholders, from federal groups to small businesses. One of its principal efforts, the Foundation’s Albazino archaeological project was developed with the aim of researching, preserving and promoting cultural heritage in the Amur region. 2015 was a landmark year for the project. It received funding from both the Ministry of Culture and Russian Geographical Society, along with a certiﬁ cate presented by Russian President Vladimir Putin, who chairs the Society’s Board of Trustees. A number of federal ministers also visited the archaeological site to attend the reburial of 17th century pioneers uncovered by the project. During the year, the Foundation supported a range of causes that fall under its six target areas of strategic investment, a combination of sustained commitments and one-off donations: Breakdown of total number of employees as at 31 December 2015 1,813 Female employees Male employees – Education – Child development – Research and development – Culture – Quality of life – Sport. Public Consultations Petropavlovsk ensures that local communities are actively involved in its development plans. If issues are raised, they are addressed through public consultation. None of these were held in 2015 but the Group continued to monitor circumstances in line with its commitment to maintaining good relationships with local communities and authorities. Environmental management The Group is committed to effectively managing environmental issues, operating in line with international best practice and upholding the highest standards as required by Russian law. Certain Group activities require licences and permits from Russian authorities, such as mining and exploration, construction, handling hazardous waste and using local water supplies. These may detail limits and conditions to help protect the environment – on containing harmful substances, for example. In addition, Russian legislation requires the Group to draw up environmental impact assessments in order for mining project permits to be considered. Throughout the life of each mine, the environment is monitored to identify any impact its activities might have on the surrounding ecosystem. Data is collected according to state-approved schedules and samples analysed in state-accredited laboratories. All Group operations hold licences with water usage quotas, which detail where water may or may not be used from. Pit water is puriﬁ ed before it is discharged and local water is continuously monitored. The Group’s RIP plants use recycled water, which reduces the demand from local sources. 6,417 Breakdown of members of the executive committee as at 31 December 2015 Female members Male members 2 7 Waste management programmes are agreed with regulatory authorities in compliance with Russian legislation. The programmes detail standards and limits on what can be produced or disposed of. Data on waste is collected, logged and sent to regulatory authorities for review. A number of Russian laws that govern the Group are designed to limit industrial impact on local ecosystems. Land may only be cleared within the limits of licenses and permits. Fishing, hunting, poaching and driving vehicles outside designated areas are forbidden. To prevent harmful substances entering the atmosphere, the Group uses puriﬁ cation systems, anti-dust equipment and other protective facilities. Gas puriﬁ cation equipment is at all emission points and is monitored on a regular basis. Air quality monitoring includes carbon monoxide and dust emissions and is performed according to mining and environmental monitoring programmes, which are agreed in advance with federal authorities. The Group has systems in place for the handling of cyanide. Petropavlovsk Annual Report 2015 25 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Risks to Our Performance The Group’s risk management process was considered by the ‘new’ Board in December 2015. Following this review it was agreed, that the Executive Committee should evaluate which of the risks detailed in the risk matrices constitute the material risks for the Group, in terms of potential impact and ﬁ nancial cost, with reference to its strategy and the operating environment. Those risks with the highest potential impact will then be presented to the Board. The ﬁ nancial risk matrix continues to be reviewed on a regular basis by the Audit Committee who reports formerly to the Board. The Executive Committee also focuses on any new and emerging risks. The Board is responsible for overseeing the effectiveness of the internal control environment of the Group. Introduction Following completion of the Reﬁ nancing and, as detailed in last year’s Report, the Committee structure and composition of the Committee was reviewed by the Board to ensure that it was appropriate. Given the reduced size of the Board and the new obligation introduced in the 2014 UK Corporate Governance Code to conﬁ rm that the Directors have carried out a robust assessment of the principal risks facing the Company, including those that would threaten its business model, future performance, solvency or liquidity it was decided that the Board should no longer delegate the review of principal risks to a Risk Committee, but should itself undertake this assessment with the exception of principal ﬁ nancial risks, which would continue to be reviewed by the Audit Committee. The Audit Committee reports formally to the Board on its assessment of the Company’s ﬁ nancial risks. Details of the Group’s risk management structure and controls are provided below and on pages 90 to 94 of this Report. Risk management is the responsibility of the Board and is integral to the ability of the Group to deliver on its strategic objectives. The Board is responsible for establishing and maintaining appropriate systems and controls to manage risk within the Group and to ensure compliance with regulation. The Group’s risk management system is monitored by the Board, with the exception of ﬁ nancial risks which are monitored by the Audit Committee under delegation by the Board. The risk management system aims to ensure that the Board’s focus is on those risks with the highest potential impact. Risks that could impact the business are considered in the broad categories detailed in the table above. Responsibility for each category is delegated to a ‘Risk Owner’ within the Executive Committee. Each Risk Owner is responsible for identifying risks in their risk area and the most signiﬁ cant risks are recorded in risk registers. The likelihood of occurrence and potential impact on the Group is assessed and mitigating controls which seek to remove or minimise the likelihood and impact of the risks before they occur are implemented. Risks are then re-assessed once appropriate mitigation is in place, although some risks by their nature cannot be mitigated by the Company. Risk management framework Petropavlovsk PLC Board Audit Committee Executive Committee Categorisation of risks and risk owners Operational Financial Factors which impact output such as inadequate or failed internal processes, systems or people or external events Financial risks include market, credit and liquidity risks, the ability to raise ﬁ nance or meet loan covenants or foreign exchange exposure etc Health, Safety and Environmental (‘HSE’) Workplace hazards that could result in liability for the Group or have an adverse impact on output Legal and Regulatory Human Resources Risks associated with the recruitment and ongoing management of people Risks that create potential for loss arising from uncertainty due to legal actions or uncertainty in the application of laws or regulations CEO/COO Chief Financial Ofﬁ cer CEO/COO Group Head of Legal Affairs Chief Executive Ofﬁ cer Investor Relations and External Communications Includes risks such as poor management of market expectations and false investor perception Group Head of External Communications 26 Petropavlovsk Annual Report 2015 Principal risks relating to the Group The most signiﬁ cant risks that may have an adverse impact on the Group’s ability to meet its strategic objectives and to deliver shareholder value are set out on pages 28 to 39. The Group seeks to mitigate these risks wherever possible. Summarised alongside each risk is a description of its potential impact on the Group. Measures in place to manage or mitigate against each speciﬁ c risk, where this is within the Group’s control, are also described. The risks set out below should not be regarded as a complete or comprehensive list of all potential risks and uncertainties that the Group may face which could have an adverse impact on its performance. Additional risks may also exist that are currently unknown to the Group and certain risks which are currently believed to be immaterial could turn out to be material and signiﬁ cantly affect the Group’s business and ﬁ nancial results. Petropavlovsk’s principal risks and uncertainties are supported by the robust risk management and internal control systems and procedures noted on pages 26 to 39. Changes from principal risks identiﬁ ed in the 2014 Annual Report The risk relating to IRC’s classiﬁ cation as an ‘asset held for sale’ and the possibility that the IRC assets may need to be reclassiﬁ ed at a future balance sheet date out of ‘held for sale’ as detailed in the 2014 Principal Risks table is no longer a risk to the Group. On 7 August 2015, IRC ceased being an ‘asset held for sale’ following the completion of IRC’s open offer, which raised net proceeds of c.US$50 million and diluted the Company’s interest in IRC to 35.83%. IRC is now accounted for as an associate of the Group. Consequently there is no longer a risk that IRC will be re-consolidated on the balance sheet on a line-by-line basis, as detailed in the 2014 Annual Report. However, Petropavlovsk continues to provide a guarantee to the Industrial and Commercial Bank of China (‘ICBC’) in respect of the US$340 million loan facility, of which c.US$276.25 million was outstanding at 31 December 2015, provided to Kimkano- Sutarsky Mining and Beneﬁ ciation Plant LLC (‘K&S’) by ICBC (the ‘ICBC Facility’) to fund the construction of IRC’s mining operations at K&S. Please see page 34 for further information. Other risks relating to IRC have been updated to reﬂ ect the revised status of IRC from a subsidiary and an asset held for sale to an associate. In addition, the Group is currently in constructive negotiations with the Groups’ Senior Lenders to reschedule its debt, further details of which are included in the ‘Financial Risks’ on page 32 and on page 92 of the Audit Committee Report. The Executive Committee and management still monitor the risk that the Group is unable to attract key personnel who have the requisite skills and experience to satisfy the speciﬁ c requirements of the business. However this is not currently considered as a ‘Principal’ risk to the Group, given the cost-cutting exercise undertaken by both the Group and many of its mining peers which has included a decrease in the Group’s workforce and within the mining sector generally. A new ‘execution’ risk has been included in the table due to the Group’s strategy to recommence the construction of the POX Hub via a joint venture arrangement, and develop the underground mining project. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 27 Risks to Our Performance continued Table of principal risks Operational risks Risk Description and potential impact Mitigation 1. The Group is dependent on production from its operating mines in order to generate revenue and cash ﬂ ow and comply with the production and sales covenants in certain of its borrowing facilities. Factors which may impact the level of production include: Severe weather conditions; and Availability and failure of equipment or services. Additional information Where We Operate pages 40 to 41 Operational Performance pages 42 to 49 The Group’s assets are located in the Russian Far East, a remote area that can be subject to severe climatic conditions. Severe weather conditions, such as cold temperatures in winter and torrential rain, potentially causing ﬂ ooding in the region could have an adverse impact on operations, including the delivery of supplies, equipment and fuel; and exploration and extraction levels may fall as a result of such climatic factors. The Group relies on the supply and availability of various services and equipment in order to successfully run its operations. For example, timely delivery of mining equipment and jaw crushers and their availability is essential to the Group’s ability to extract ore from the Group’s assets and to crush the mined ore prior to production. Delay in the delivery or the failure of mining equipment could signiﬁ cantly delay production and impact the Group’s proﬁ tability. Preventative maintenance procedures are undertaken on a regular and periodic basis to ensure that machines will function properly under extreme cold weather conditions; heating plants at operational bases are regularly maintained and operational equipment is ﬁ tted with cold weather options which could assist in ensuring that equipment does not fail as a result of adverse weather conditions. Pumping systems are in place and tested periodically to ensure that they are functioning. Management monitor natural conditions in order to pre-empt any disaster and in order that appropriate mitigating action can be taken expediently. The Group aims to stock several months of essential supplies at each site. The Group has a number of contingency plans in place to address any disruption to services. The Group has high operational standards and maintenance of equipment is undertaken on a regular basis. Equipment is inspected at the beginning and end of every shift and sufﬁ cient stocks of spare parts are available. Equipment is ordered with adequate lead time in order to prevent delays in the delivery of equipment. Change from 2014 No change 28 Petropavlovsk Annual Report 2015 The symbols indicate how the Company considers that these risks have changed since 2014. Increased risk New risk No change Operational risks continued Risk Description and potential impact Mitigation 2. Failure to execute various construction and development projects including the completion and the commissioning of the Pressure Oxidation (POX) Hub and the underground mining project Additional information Future Development pages 60 to 61 The Group’s long-term strategy relies on the successful completion of various projects including the successful commissioning of POX and the implementation of the underground mining project. Failure to deliver these projects within the agreed budget and timeframes may have an adverse impact on the Group’s growth plans and its future proﬁ tability. Failure to deliver these projects would also reduce the Group’s ability to extract value from high quality Reserves, but difﬁ cult to extract, gold at Malomir. An active maintenance program has been on-going, since the Board’s decision in May 2013, to defer the start-up of the POX Hub, to preserve equipment at completed sections of the plant and to keep facilities on standby so that full scale development could be recommenced in the future. The POX Hub will be delivered together with an excellent team of specialists. The Group has a pilot plant in Blagoveshchensk where it has previously undertaken bulk sample testing. As detailed in the Strategic report, the Board has approved a joint undertaking with a reputable industry player to complete construction of the POX Hub and provide the processing plant for reﬁ ning refractory gold ores and ﬂ oat concentrates extracted by both parties. This is subject to shareholder approval. An engineering study was carried out on underground mining at Pioneer and a detailed proposal prepared. Based on the initial results of the study, these projects are expected to be highly proﬁ table. The Group will continue to work with professional and reliable consultants as necessary to ensure that the underground project can be delivered within the agreed budget and timeframes. The Executive Committee and the Board will closely monitor these projects. Change from 2014 New risk i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 29 Change from 2014 No change Risks to Our Performance continued Table of principal risks Operational risks continued Risk Description and potential impact Mitigation 3. The Group’s activities are reliant on the quantity and quality of the Mineral Resources and Ore Reserves available to it. Additional information Exploration Report, Reserves and Resources pages 50 to 59 Exploration activities are speculative, time-consuming and can be unproductive. In addition, these activities often require substantial expenditure to establish reserves through drilling and metallurgical and other testing, determine appropriate recovery processes to extract gold from the ore and construct or expand mining and processing facilities. Once deposits are discovered it can take several years to determine whether Reserves exist. During this time, the economic viability of production may change. As a result of these uncertainties, the exploration programmes in which the Group is engaged in may not result in the expansion or replacement of the current production with new Reserves or operations. The Group is using modern geophysical and geochemical exploration and surveying techniques. The Group employs a world class team of geologists with considerable regional expertise and experience. They are supported by a network of fully accredited laboratories capable of performing a range of assay work to high standards. The Group’s exploration budget is ﬁ xed for each asset at the start of each ﬁ nancial year depending upon previous results. In 2015, the Group continued to focus its exploration programme on areas at or close to its four existing operating mines and in particular, on ﬁ nding new, non-refractory resources. 2015 exploration results were reviewed by independent mining experts Wardell Armstrong International. Signiﬁ cant progress has made towards developing Ore Reserves for underground mining from Q3 2015. An engineering study was carried out by external consultants during the year on Pioneer underground mining. Based on the initial results of the study the Board expects that these projects will be highly proﬁ table with the potential to contribute high-margin ounces to the Group’s production schedule. As detailed in the Strategic Report, the Board has approved a joint undertaking with a reputable industry player to complete construction of the POX Hub, which will provide the processing plant for reﬁning refractory gold ores and ﬂoat concentrates extracted by both parties. This is subject to shareholder approval. 30 Petropavlovsk Annual Report 2015 Operational risks continued Risk Description and potential impact Mitigation 4. The Group’s Mineral Resource and Ore Reserves are estimates based on a range of assumptions. Additional information Exploration Report, Reserves and Resources pages 50 to 59 The Group’s Mineral Resources and Ore Reserves are estimates based on a range of assumptions, including the results of exploratory drilling, ongoing sampling of the ore bodies; past experience with mining properties; and the experience of the expert engaged to carry out the reserve estimates. Other uncertainties inherent in estimating Reserves include subjective judgements and determinations based on available geological, technical, contractual and economic information. Some assumptions may be valid at the time of estimation but may change signiﬁ cantly when new information becomes available. Changes to any of these assumptions, on which the Group’s Reserve and Resource estimates are based, could lead to the reported Reserves being restated. Changes in the Reserves and Resources could adversely impact the economic life of deposits and the proﬁ tability of the Group’s operations. The ﬁ rst stage of assurance of the accuracy of reserves and resources is by detailed analysis of geological samples in the Group’s laboratories. These laboratories have the capacity to conduct assaying, metallurgical testing and sample analysis to establish the gold grade, mineralogical composition and geotechnical properties of the ore. The Mineral Resource and Ore Reserve estimates included in this Report for the Group’s four principal gold deposits located in the Amur region, Far East Russia, prepared in accordance with the guidelines of the JORC Code (2012) were reviewed and signed-off by Wardell Armstrong International (“WAI”) in April 2016. WAI is an independent consultancy that has provided the mineral industry with specialised geological, mining, and processing expertise since 1837. WAI has considerable knowledge of the Group’s assets located at Malomir, Albyn, Pioneer and Pokrovka, having previously been the Independent Technical Engineer reporting Mineral Resources and Ore Reserves on an annual basis. In addition, WAI completed a comprehensive independent review of all gold exploration assets held by the Group in 2011 and again in 2014. As part of the 2015 review WAI conducted a detailed assessment at each of the Group’s mines. In addition, the Company has adopted a gold price assumption of US$1,100/oz for Ore Reserve estimates, which is lower than the current market price, broker forecasts and assumptions used by some of the Group’s peers. Change from 2014 No change i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 31 Risks to Our Performance continued Change from 2014 Increased risk Table of principal risks Financial risks Risk Description and potential impact Mitigation 1. Lack of funding and liquidity to allow the Group to: i. Support its existing operations; ii. Invest in and develop its exploration projects; iii. Extend the life and capacity of its existing mining operations; and iv. Reﬁ nance/repay the Group’s debt as it falls due. If the operational performance of the business declines signiﬁ cantly the Group will breach one or more of the ﬁ nancial and production covenants as set out in various ﬁ nancing arrangements. Additional information Chief Executive’s Statement on pages 6 to 7 Chief Financial Ofﬁ cer’s Statement on pages 66 to 77 Audit Committee Report on pages 89 to 94 Adverse events or uncertainties affecting the gold price and/or the global ﬁ nancial markets could affect the Group’s ability to reﬁ nance existing debt or raise additional ﬁ nance in the capital markets. It could also in future lead to higher borrowing costs. The Group needs ongoing access to liquidity and funding in order to (i) reﬁ nance its existing debt as required, (ii) support its existing operations and (iii) invest in new projects and exploration. There is a risk that the Group may be unable to obtain the necessary funds when required or that such funds will only be available on unfavourable terms. The Group may therefore be unable to develop and/or meet its operational or ﬁ nancial commitments. The Group’s borrowing facilities include a requirement to comply with certain speciﬁ ed covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a signiﬁ cant proportion of the Group’s borrowings becoming repayable immediately. The Reﬁ nancing was completed on 18 March 2015 and secured the immediate future of the Group. Net debt was reduced from US$930 million at the start of 2015 to c.US$610 million as at 31 December 2015, as forecast, due to the Reﬁ nancing and focus on ﬁ nancial discipline and cash optimisation. The Group is in advance negotiations with VTB and Sberbank (the “Senior Lenders”) to extend and revise the maturity of its existing bank debt and to obtain relaxation of certain ﬁ nancial covenants. The Group continues to maintain its available cash with several reputable major Russian and international banks and does not keep disproportionately large sums on deposit with a single bank. Strong relationships are maintained between the Company and existing and potential equity and debt providers. Details of the IRC ﬁ nancial related risk are provided on page 34. 32 Petropavlovsk Annual Report 2015 Financial risks continued Risk Description and potential impact Mitigation 2. The Group’s results of operations may be affected by changes in the gold price Additional information Gold Market Overview pages 8 to 9 Chief Financial Ofﬁ cer’s Statement on pages 66 to 77 The Group’s ﬁ nancial performance is highly dependent on the price of gold. A sustained downward movement in the market price for gold may negatively affect the Group’s proﬁ tability and cash ﬂ ow. The market price of gold is volatile and is affected by numerous factors which are beyond the Company’s control. These factors include world production levels, global and regional economic and political events, international economic trends, inﬂ ation, currency exchange ﬂ uctuations and the political and economic conditions of major gold- producing countries. Additionally the purchase and sale of gold by central banks or other large holders or dealers may also have an impact on the market. The Executive Committee monitors the gold price and inﬂ uencing factors on a daily basis and consults with the Board as appropriate. The Executive and the Board review the Group’s hedging position on a regular basis. During 2015, the average realised gold price achieved by the Group of US$1,178oz included US$20oz as a result of hedging. During 2015, the Board decided to curtail production from marginally proﬁ table sources of gold. The successful cost-cutting programme, together with the continued weakness of the Rouble against the US Dollar, enabled the Group to achieve TCC/oz of US$749/oz during 2015. The new strategy of the Group envisages an increase in production of high-margin ounces in the short-term and ensures sustainability of production in the medium- to long-term, whilst continuing to focus on cash cost optimisation. As at 28 April 2016, the Group had outstanding forward contracts totalling 37,850oz at an average price of US$1,116oz. Change from 2014 No change i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 33 Risks to Our Performance continued Table of principal risks Financial risks continued Risk Description and potential impact Mitigation The Group reports its results in US Dollars, which is the currency in which gold is principally traded and therefore in which most of the Group’s revenue is generated. Signiﬁ cant costs are incurred in and/or inﬂ uenced by the local currencies in which the Group operates, principally Russian Roubles. The appreciation of the Russian Rouble against the US Dollar tends to result in an increase in the Group’s costs relative to its revenues, whereas the depreciation of the Russian Rouble against the US Dollar tends to result in lower Group costs relative to its revenues. In addition, a portion of the Group corporate overhead is denominated in Sterling Therefore, adverse currency movements may materially affect the Group’s ﬁ nancial condition and results of operations. In addition, if inﬂ ation in Russia were to increase without a corresponding devaluation of the Russian Rouble relative to the US Dollar, the Group’s business, results of operations and ﬁ nancial condition may be adversely affected. The Company has a 35.83% interest in IRC, a Hong Kong Listed iron ore producer. Petropavlovsk has provided a guarantee against a US$340 million project loan facility provided to K&S by ICBC to fund the construction of IRC’s iron ore mining operation at K&S, of which c.US$276.25 million was outstanding at 31 December 2015. This loan is supported by Sinosure, the Chinese export credit insurance agency. In the event that K&S was to default on its loan, Petropavlovsk may be liable to repayment of the outstanding loan under the terms of the guarantee and other Group indebtedness may become repayable under cross-default provisions However, under the terms of the Company’s banking facilities with VTB and Sberbank, the Company is unable to provide any funds to IRC without the prior consent of these lenders. 3. Currency ﬂ uctuations may adversely affect the Group. Additional information Chief Financial Ofﬁ cer’s Statement on page 76 4. IRC Related risks Funding may be demanded from Petropavlovsk under a guarantee in favour of ICBC Additional information Audit Committee Report on pages 90 to 94 IRC 2015 Annual Report, which can be obtained at http://www.ircgroup. com.hk 34 Petropavlovsk Annual Report 2015 Change from 2014 No change The Group has adopted a policy of holding a minimum amount of cash and monetary assets or liabilities in non US Dollar currencies and operates an internal funding structure which seeks to minimise foreign exchange exposure. The Russian Rouble also exhibits a high positive correlation with crude oil prices as Russia exports a large quantity of crude oil and is dependent on export revenues related to crude oil prices. As a consequence and due to other factors currently affecting the Russian economy, the outlook for the Russian Rouble remains weak. The Group’s operations beneﬁ tted from the continuing weakness of the Russian Rouble during 2015 and it is expected that it will continue to beneﬁ t during 2016, although crude oil prices may increase. No change On 19 April 2016, IRC announced that ICBC had granted waivers in respect of IRC’s project ﬁ nance facility with ICBC, including obligations to maintain certain cash deposits with ICBC, and the obligations of IRC and Petropavlovsk to comply with certain ﬁ nancial covenants. The waiver from the obligations of IRC and Petropavlovsk to comply with certain ﬁ nancial covenants will be effective immediately upon fulﬁ lment of certain conditions precedent and up to and including 31 December 2017. Effective immediately upon fulﬁ lment of the conditions precedent, ICBC has also granted IRC a waiver from the obligations to maintain cash deposits of c.US$26 million with ICBC during the period from 20 June 2016 to 30 June 2018 (both dates inclusive). IRC’s K&S facility is expected to be fully commissioned by the end of June 2016. Once commissioned K&S is expected to generate an operating margin even in the current lower price iron ore environment to generate sufﬁ cient cash to meet its borrowing obligations. Financial risks continued Risk Description and potential impact Mitigation 5. IRC’s results of operations may be affected by changes in the iron ore price Additional information IRC 2015 Annual Report, which can be obtained at http://www.ircgroup.com.hk The market price of iron ore can be volatile. Iron ore prices continued to decline during 2015. The iron ore price at the end of 2015 remained weak. The spot price of benchmark 62% iron content delivered to the Chinese port of Quingdao ended 2015 at US$43 per tonne although the iron ore price has recently seen an increase. The global oversupply of the raw material persists whilst the appetite of China, the largest bulk commodities consumer in the world, is getting smaller as its economy has entered into a “new normal” of slower growth pace. The IRC Board announced on 14 December 2015 that it had decided that the Kuranakh mine should be put on temporary ‘care and maintenance.’ The hot commissioning of the second and ﬁ nal phase of crushing and screening facilities at K&S has completed allowing production of pre-concentrate. The processing plant is scheduled for handing over to IRC, from the contractor, by the end of June 2016. The processing plant will upgrade pre-concentrate to IRC’s premium high grade 65.8% Fe concentrate for commercial sales. Once commissioned K&S is expected to generate an operating margin even in the current depressed iron ore markets. Change from 2014 No change i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 35 Change from 2014 No change Risks to Our Performance continued Table of principal risks Health, safety and environmental risks Risk Description and potential impact Mitigation 1. Failures in the Group’s health and safety processes and/or breach of Occupational Health & Safety legislation. Additional information Our Business Model on pages 10 to 11 Environmental, Safety and Social Report on pages 24 to 25 The Group’s employees are one of its most valuable assets. The Group recognises that it has an obligation to protect the health of its employees and that they have the right to operate in a safe working environment. Certain of the Group’s operations are carried out under potentially hazardous conditions. Group employees may become exposed to health and safety risks which may lead to the occurrence of work-related accidents and harm to the Group’s employees. These could also result in production delays and ﬁ nancial loss. Health and Safety management systems are in place across the Group to ensure that the operations are managed in accordance with the relevant health and safety regulations and requirements. Board level oversight of health and safety issues occurs through the work of the HSE Committee. The Group has an established health and safety training programme under which its employees undergo initial training on commencement of employment and take part in refresher training on a regular basis. The Group continually reviews and updates its health and safety procedures in order to minimise the risk of accidents and improve accident response, including additional and enhanced technical measures at all sites, improved ﬁ rst aid response and the provision of further occupational, health and safety training. The Group operates a prompt incident reporting system to the Executive Committee and the Board. There was one fatality during 2015 (2014: three). This fatality was reported immediately to the Chairman and to the Health, Safety and Environmental (“HSE”) Committee. The incidents in both 2015 and 2014 were investigated by the Russian authorities who have conﬁ rmed that no action will be taken against the Group as the Group was not found to be at fault for any of these accidents. The HSE Committee discussed each of the fatalities in detail to identify whether any actions should be taken or further training provided to mitigate against any reoccurrence of a similar accident. The HSE Committee received a report from the General Director of Malomir, regarding the fatality in 2015, this included details of all actions and training that was undertaken at the plant following the fatality to ensure that a similar type of accident does not happen. Details of any fatality or major accident are discussed by senior managers and HSE Ofﬁ cers across the Group to ensure that training is applied Group-wide. In addition, the 2016 Annual Bonus Scheme for the Executive Directors and Executive Committee has been designed by the Remuneration Committee to recognise the importance of HSE issues. 36 Petropavlovsk Annual Report 2015 Health, safety and environmental risks continued Risk Description and potential impact Mitigation 2. The Group’s operations require the use of hazardous substances including cyanide and other reagents. Additional information Environmental, Safety and Social Report on pages 24 to 25 Accidental spillages of cyanide and other chemicals may result in damage to the environment, personnel and individuals within the local community. Cyanide and other dangerous substances are kept in secure storages with limited access only to qualiﬁ ed personnel, with access closely monitored by security staff. During the year an employee died as a result of an accident involving cyanide poisoning. This accident, the ﬁ rst in the Group’s history to involve cyanide, was investigated thoroughly by the authorities and the Company was not found to be at fault. An internal investigation also took place involving mine management and specialists in order to ascertain the reasons for this fatality, which arose from the employee conducting unauthorised works. As a consequence of the internal investigations further training has been provided to all relevant employees at the Group’s mines and additional procedures have been implemented to prevent a further accident occurring. Please also refer to page 22 for further information. Legal and regulatory risks Risk Description and potential impact Mitigation There are established processes in place to monitor the required and existing licences and permits on an on-going basis and processes are also in place to ensure compliance with the requirements of the licences and permits. Schedules are presented to the Executive Committee detailing compliance with the Group’s licences and permits. 1. The Group requires various licences and permits in order to operate. The Group’s principal activity is the mining of precious and non-precious metals which require it to hold licences which permit it to explore and mine in particular areas in Russia. These licences are regulated by Russian governmental agencies and if a material licence was challenged or terminated, this would have a material adverse impact on the Group. In addition, various government regulations require the Group to obtain permits to implement new projects or to renew existing permits. Failure to comply with the requirements and terms of these licenses may result in the subsequent termination of licenses crucial to operations and cause reputational damage. Alternatively, ﬁ nancial or legal sanctions could be imposed on the Group. Failure to secure new licences or renew existing ones could lead to the cessation of mining at the Group’s operations or an inability to expand operations. i S t r a t e g c r e p o r t G o v e r n a n c e Change from 2014 No change Change from 2014 No change i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 37 Change from 2014 No change Risks to Our Performance continued Table of principal risks Legal and regulatory risks continued Risk Description and potential impact Mitigation 2. The Group is subject to risks associated with operating in Russia. Actions by governments or changes in economic, political, judicial, administrative, taxation or other regulatory factors or foreign policy in the countries in which the Group operates or holds its major assets could have an adverse impact on the Group’s business or its future performance. Most of the Group’s assets and operations are based in Russia. Russian foreign investment legislation imposes restrictions on the acquisition by foreign investors of direct or indirect interests in strategic sectors of the Russian economy, including in respect of gold reserves in excess of a speciﬁ ed amount or any occurrences of platinum group metals. The Group’s Pioneer and Malomir licences have been included on the list of subsoil assets of federal signiﬁ cance, maintained by the Russian Government (“Strategic Assets”). The impact of this classiﬁ cation is that changes to the direct or indirect ownership of these licences may require obtaining clearance in accordance with the Foreign Strategic Investment law of the Russian Federation. To mitigate the Russian economic and banking risk the Group strives to use the banking services of several ﬁ nancial institutions and not keep disproportionately large sums on deposit with a single bank. The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted legislation in order to adapt to the changing regulatory environment in the countries in which it operates and speciﬁ cally in Russia. It also relies on the advice of external counsel in relation to the interpretation and implementation within the Group of new legislation. The Group closely monitors its assets and the probability of their inclusion into the Strategic Assets lists published by the Russian Government. The Company’s Articles of Association include a provision which allows the Board to impose such restrictions as the Directors may think necessary for the purpose of ensuring that no ordinary shares in the Company are acquired or held or transferred to any person in breach of Russian legislation, including any person having acquired (or who would as a result of any transfer acquire) ordinary shares or an interest in ordinary shares which, together with any other shares in which that person or members of their group is deemed to have an interest for the purposes of the Strategic Asset Laws, carry voting rights, exceeding 50 per cent. (or such lower number as the Board may determine in the context of the Strategic Asset Laws) of the total voting rights attributable to the issued ordinary shares without such acquisition having been approved, where such approval is required, pursuant to the Strategic Asset Laws. This risk cannot be inﬂ uenced by the management of the Company. However, the Group monitors changes in the political environment and reviews changes to the relevant legislation, policies and practices. 38 Petropavlovsk Annual Report 2015 Legal and regulatory risks continued Risk Description and potential impact Mitigation The Group has no assets or operations in Ukraine. The Group produces gold from its Russian mines and sells this gold to Russian licensed banks. The Board and Executive continue to monitor the position. The Company maintains an ongoing dialogue with its shareholders and potential investors. 3. The Group may be subject to risks arising from the political uncertainty within Russia Financial and economic sanctions imposed in 2014 by the United States and the EU on certain businesses and individuals in Russia increased political tensions and economic instability. In February 2016, the European Parliament passed a resolution which made it clear that EU economic restrictions against Russia will remain in place until Crimea is returned to Ukrainian rule. In response to the sanctions Russia enforced certain import restrictions on Russian companies in respect of products supplied from countries that have imposed sanctions, which have a negative impact on Russia’s economy, which could have a material adverse effect on the value of investments relating to Russia and on the Group’s business, results of operations and ﬁ nancial condition. The perceived risk of investing in Russia could also be detrimental to the Group. Change from 2014 No change i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 39 Where We Operate Our gold mines Introduction As a Russian gold producer, Petropavlovsk beneﬁ ts from an established mining tradition with a historic focus on technical development. It is ten years since Petropavlovsk acquired Irgiredmet, the research and consulting institute for precious/rare metals and diamonds, which represents 145 years of research. Russian Federation Today, Petropavlovsk remains committed to exploring ways to develop its operations by investing in advanced technologies, such as pressure oxidation, to maximise the output of its extensive resource portfolio. In line with progress made in 2015, the POX Hub project is being revisited and talks with potential partners have been successful. The Group has announced that it has entered into a conditional agreement to create a joint venture (JV) with Limited Liability Company GMD Gold. The JV is being created in order to ﬁ nance the completion of the construction and commissioning of the Company’s Pressure Oxidation Hub Project at its Pokrovskiy mine in the Amur Region of the Russian Federation. Please refer to Future Development on pages 60 to 61 for more information on our proposed joint venture Russia’s established mining tradition has also contributed to the creation and development of legislation to support miners and the communities in which they operate. This allows mining companies to explore, develop and generate returns from their assets in a responsible, sustainable way. Amur region Petropavlovsk is a leading employer and contributor to economic development in Russia’s Amur region, where its core operations are based. The Amur region is roughly 361,900km² with a population of c.805,770, the majority of whom live in regional capital Blagoveshchensk. The region lies across one of the world’s major mineralisation belts and as such has long been an attractive prospect for miners. It offers well-developed infrastructure, including access to low-cost hydroelectric power. All Petropavlovsk’s operational mines are connected to a combination of Trans-Siberian and Baikal-Amur Mainline (BAM) railways as well as with local capital Blagoveshchensk via all-seasonal roads. Petropavlovsk has operated there since 1994. City or major town St Petersburg Moscow Yamal region Krasnoyarsk region Yamal region Krasnoyarsk region Gold mine City or major town Railway Federal highway Amur region Blagoveschensk Amur region Blagoveschensk Irkutsk Irkutsk Albyn Malomir Zeya Pioneer Pokrovskiy Blagoveschensk 40 Petropavlovsk Annual Report 2015 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s The Group’s key mining assets Pioneer, Albyn, Pokrovskiy, Malomir and their satellites are all located in the Amur region. All of the mines have RIP plants, which are designed to operate 24 hours a day, 365 days of the year. The Pioneer and Pokrovskiy mines also have lower-cost heap-leach facilities, processing low-grade oxidised ore. These facilities only operate during warmer months, typically from April to November. Pioneer Pioneer is one of the largest gold mines in Russia and is also the Group’s ﬂ agship mine, accounting for c.46% of the Group’s total gold production in 2015. Pioneer was acquired as a greenﬁ eld site in 2001 and was explored, developed and built using in-house expertise. Since commissioning in 2008, the resin-in-pulp (RIP) plant has been expanded in phases to reach its current processing capacity of c.6.6Mtpa. As at 31 December 2015, Pioneer had produced c.2,130koz of gold, and had c.5.3Moz of Mineral Resources, of which c.2.6Moz were Ore Reserves. In late 2015, with the acquisition of a new exploration license for Sosnovaya, the Pioneer project area was more than doubled. It is still being actively explored and has high potential for increases in reserves to be identiﬁ ed. Albyn Albyn is the Group’s newest mine, commissioned in 2011. The Group acquired its ﬁ rst licence for Albyn in 2005, when the project area was still a greenﬁ eld site. The project was subsequently explored, developed and built using in-house expertise. Late in 2010 and 2013, three adjacent licenses were acquired – also as greenﬁ eld sites, making the total project area 1,160km². Subsequent exploration identiﬁ ed two substantial satellite deposits: Elginskoye and Unglichikanskoye. Albyn’s RIP plant was commissioned in the fourth quarter of 2011 and has since produced c.570koz of gold up to 31 December 2015. As at 31 December 2015, the Albyn project – including its satellites, had 5.0Moz of Mineral Resources, of which c.1.4Moz were Ore Reserves. Large areas adjacent to the mine remain under-explored and Group geologists consider Albyn to be highly prospective for further, signiﬁ cant gold discoveries. Pokrovskiy Pokrovskiy is the Group’s oldest mine. Since commissioning in 1999, it has produced c.1,960koz of gold. Despite being a mature project with declining production, Pokrovskiy remains one of the Group’s key assets, due to its strategic location near the Trans-Siberian Railway and developed infrastructure. As the mine gradually comes towards the end of its life, the Group plans to turn the Pokrovskiy site into a Pressure Oxidation (POX) Hub, which is expected to be the largest and most advanced of its kind in Russia. Crucially, it will enable the Group to process refractory ore reserves, including refractory reserves from third-party deposits. As at 31 December 2015, Pokrovskiy (including Burinda) had 1.4Moz of Mineral Resources, of which c.0.4Moz were Ore Reserves. Malomir Malomir was acquired by the Group as a greenﬁ eld site and is now one of the largest gold mines in Russia, in terms of its mineral resources. Once the POX Hub is commissioned, the mine will become a major contributor to group gold production. As at 31 December 2015, Malomir’s Mineral Resources stood at 7.0Moz, of which 2.7Moz were Ore Reserves. As at 31 December 2015, Malomir had produced c.485koz of gold since commissioning in mid-2010. Most of Malomir’s resources and reserves are refractory, requiring ﬂ otation and pressure oxidation for efﬁ cient gold recovery. In 2013, following the gold price decline and changes in market conditions, development of Malomir’s ﬂ otation plant and Pokrovskiy’s POX Hub was slowed down. The Group has been working to resume this development and, following successful discussions, has announced a conditional JV agreement with GMD Gold to accelerate and complete the development of the POX Hub. Please visit the future development section, page 60, for more information. Turn to page 42 to 43 for more information about Pioneer. Turn to page 44 to 45 for more information about Albyn. Turn to page 46 to 47 for more on information about Pokrovskiy. Turn to pages 48 to 49 for more on information about Malomir. Petropavlovsk Annual Report 2015 41 Operational Performance Pioneer Introduction Pioneer is one of the largest gold mines in Russia. It was acquired by the Group in 2001 as a greenﬁ eld site. Since then it has been developed into a mine with a capacity to process c.6.6Mt of ore per year. It also has a seasonal heap-leach facility. Since the RIP plant’s commissioning in 2008, Pioneer has produced c.2,130koz of gold. 2015 gold production c.231.4koz – 46% of total Group gold production for the year. Gold mine City or town Railway Federal highway Trans-Siberian Railway Pioneer production Other Group mines BAM Railway Zeya Pioneer Blagoveschensk CHINA Zlatoustovsk Khabarovsk Birobidjan Key facts Progress against strategic priorities Location and infrastructure Value-adding exploration Further positive results from exploration of high-grade ore bodies required researching the option of underground mining. Initial results suggest an underground project at Pioneer would be technically viable and highly proﬁ table. The geological assessment and a full feasibility study should be completed during 2016 when, subject to Russian authority approval, the access ramp can be opened. Pioneer is located in the Amur region between the BAM Railway and the Trans-Siberian Railway. The closest station on the Trans-Siberian Railway is c.40km away. Pioneer is c.35km from the Pokrovskiy mine. Asset development Continued emphasis on developing reserves for underground mining. High-grade mineralisation is conﬁ rmed at least 160m below Pioneer’s open pits and remains open in a down-dip direction. 2015 operational efﬁ ciencies A 24% decrease in total cash cost of US$625/oz was achieved (2014: US$818/oz). Operating responsibly and safely At Pioneer, the LTIFR was 1.50 per million man hours worked. Deposit type Hard-rock with both non-refractory and refractory ore. Mining Currently open pit. The decision has been made to develop an underground mine. Processing RIP plant and seasonal heap-leach facility on-site. Currently only non-refractory ore processed. Development history Acquired in 2001 as a greenﬁ eld project. Developed in-house into one of Russia’s largest gold mines. Reserves and resources 2.6Moz of Ore Reserves and 5.3Moz of Mineral Resources. 42 Petropavlovsk Annual Report 2015 Reserves and Resources (as at 31 December 2015) (WAI, April 2016 in Accordance with JORC Code 2012) Proven and Probable Reserves Measured and Indicated Resources Inferred Resources The Group continues to explore potential to further develop the Pioneer mine, with particular focus on underground mining in line with the recent ﬁ ndings. Following the acquisition of a new license in December 2015 (Sosnovaya), the total license area for the Pioneer project increased to c.1,300km². Group geologists expect that many areas within the outline of Pioneer’s license area have the potential to contribute to its overall reserve base. Geology Gold mineralisation at Pioneer was formed near a contract between a multiphase granitoid massif and Jurassic county rocks as a result of hydrothermal activity associated with volcanism during the late Mesozoic Period. The mine is located on the south side of the Mongolo-Okhotskiy fold/thrust line, within the belt of mineralisation associated with the collision of the Eurasian and Amur plates. The Pioneer deposit consists of several ore zones, most of which are steep-dipping. Of these, Andreevskaya and North-East (NE) Bakhmut are high-grade and have signiﬁ cantly contributed to the mine’s production proﬁ le to date. Group geologists subsequently identiﬁ ed several further sequential ore zones, of which Alexandra and Shirokaya are the most signiﬁ cant. Deeper extensions of NE Bakhmut and Andreevskaya zones are being successfully explored with a view to start underground mining. c.50% of Pioneer’s Ore Reserves are non-refractory and can be processed at the mine’s existing facilities. The remaining ore is refractory and is not suitable for direct cyanidation processing methods due to its mineralogy. The Group currently expects that this material will be processed into ﬂ otation concentrate, which will then be trucked c.35km by existing roads to the Pokrovskiy site for processing at the POX Hub, once its facilities are commissioned. Mining and processing The Group’s ﬂ agship mine, Pioneer accounts for the largest portion of Group gold production. Currently mining at Pioneer is entirely open pit and only its non-refractory ore is mined and processed. The majority of ore is processed at the mine’s RIP plant, which operates throughout the year. Some Non-Refractory Refractory Total Tonnage (kt) 48,996 78,992 21,702 Grade (g/t Au) Gold (Moz Au) 0.69 0.67 0.65 1.08 1.72 0.45 Tonnage (kt) 73,763 99,878 37,810 Grade (g/t Au) Gold (Moz Au) 0.91 0.76 0.58 1.49 2.43 0.71 Tonnage (kt) 99,793 178,870 59,512 Grade (g/t Au) Gold (Moz Au) 0.80 0.72 0.61 2.57 4.16 1.16 Pioneer mining operations Total material moved Ore mined Average grade Gold content Pioneer processing operations Resin-in-pulp (‘RIP’) plant Total milled Average grade Gold content Recovery rate Gold recovered Heap leach operations Ore stacked Average grade Gold content Recovery rate Gold recovered Total gold recovered low-grade material is processed in an on- site heap-leaching facility. The decision to develop an underground mine has been made and is currently being reviewed by the Company. 2015 performance In 2015, Pioneer produced 231.4koz, around 46% of total Group gold production for the year (2014: c.263.0koz). Despite delays in its stripping, which put pressure on production, c.84.1koz of gold were produced at the mine in Q4. Costs For the year ended 31 December 2015, TCC/ oz for Pioneer were US$625/oz, a c.24% reduction compared with 2014 (US$818/oz), in spite of a 16% decrease in grades processed through the mill, a slight decrease in recovery rates and some inﬂ ation of Rouble-denominated costs. Units m3 ’000 t ’000 g/t oz. ’000 Year ended 31 December 2015 Year ended 31 December 2014 23,980 6,016 1.28 248.4 26,226 7,104 1.40 319.9 Units Year ended 31 December 2015 Year ended 31 December 2014 t ’000 g/t oz. ’000 % oz. ’000 t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 6,582 1.25 264.5 85.0 224.7 800 0.56 14.5 46.2 6.7 231.4 6,626 1.49 316.6 81.1 257 791 0.60 15.8 39.6 6.2 263.0 i S t r a t e g c r e p o r t G o v e r n a n c e Outlook The 2016 plan for Pioneer is based on the Group’s new strategy of cash ﬂ ow optimisation. It provides for a similar production proﬁ le through cost reduction measures. All production from the mine is expected to come from non-refractory, open pit ore in 2016, sourced mainly from Alexandra and Andreevskaya. To extend Pioneer’s production proﬁ le for the longer term, mining of our high-grade underground resources is planned – particularly those at NE Bakhmut and Andreevskaya, as well as processing of a large refractory reserve base. i F n a n c a i l Turn to page 57 for more on exploration at Pioneer. Turn to page 60 for more on the POX Hub and the development of an underground mining proposal at Pioneer. s t a t e m e n t s Notes to the above Ore Reserves and Mineral Resources table: – A cut off grade has been applied of 0.3g/t for both non-refractory and refractory open pit Mineral Resources and Ore Reserves; 1.5g/t cut off grade was applied to the Mineral Resources reported for the potential underground extraction; – Mineral Resources for potential open pit extraction are constrained by US$1,500/oz conceptual pit shell; Mineral Resources reported for the potential underground extraction have been deﬁ ned as those below the pit designs used in the Ore Reserve estimate; – Ore Reserves are limited by a mine design based on an optimal pit shells at US$1,100/oz gold price; – Mineral Resources are inclusive of Ore Reserves and include Mineral Resources for potential underground extraction; – Figures may not add up due to rounding Petropavlovsk Annual Report 2015 43 Operational Performance continued Albyn Introduction Petropavlovsk has developed the deposit into its second largest producing mine since acquiring its ﬁ rst license in 2005. It has produced c.570koz of gold since the RIP plant was commissioned in 2011. 2015 gold production c.157.6koz – 31% of total Group gold production for the year. Gold mine City or town Railway Federal highway Trans-Siberian Railway Albyn production Other Group mines Albyn Khabarovsk Birobidjan BAM Railway Zeya Blagoveschensk CHINA Key facts Progress against strategic priorities Location and infrastructure Deposit type Hard-rock with non-refractory ore. Mining Open pit. Processing RIP plant on-site. Development history Acquired in 2005 as a greenﬁ eld project. Explored, developed and commissioned in-house. Reserves and resources 1.4Moz of Ore Reserves and 5.0Moz of Mineral Resources. Value-adding exploration New satellite Afanasevskoe deposit identiﬁ ed and explored. Focus on continued exploration drilling at 3+Moz resource Elginskoye deposit. Assessment of the Unglichikan deposit’s underground mining potential. Asset development The Albyn project has a substantial non-refractory reserves and resources base. It does not rely on the POX project being completed to sustain production. The current development plan details a gradual shift of mining works to Albyn satellite deposits and potential underground mining. 2015 operational efficiencies 2015 operational efﬁ ciencies A 10% decrease in total cash cost of US$747/oz was A 10% decrease in total cash cost of US$747/oz was achieved (2014: $830/oz). achieved (2014: $830/oz). Operating responsibly and safely At Albyn, the LTIFR was 1.06 per million man hours worked. Operating responsibly and safely At Albyn, the LTIFR was 1.06 per million man hours worked. Albyn is located in the Amur region’s north-eastern Selemdja district. The traditional gold mining area beneﬁ ts from infrastructure established to support alluvial operations, which were previously more extensive. Albyn is c.150km from Malomir and c.2km from the nearest village, Zlatoustovsk, with its direct road connection to the BAM Railway. 44 Petropavlovsk Annual Report 2015 44 Petropavlovsk Annual Report 2015 Reserves and Resources (as at 31 December 2015) (WAI, April 2016 in Accordance with JORC Code 2012) Proven and Probable Reserves Measured and Indicated Resources Inferred Resources Along with the main, 40km² Albyn license area, the Group has acquired three further license areas: Kharginskoye, Elginskoye and Afanasievskaya. All of them are close to the main Albyn site and are part of the Albyn project, giving it a combined total area of more than 1,160km². The Group’s geologists consider the area to be underexplored and to have signiﬁ cant potential to further expand the Group’s mineral reserves and resources base. Geology The Albyn deposit is situated within the Mongolo-Okhotskiy mineralised belt, further east from Malomir. The mineralisation at Albyn comprises a series of gently dipping sub-parallel metasomatic zones, which appear to be open in a down-dip direction. They show variable thickness and grade, extending for c.4.5km in strike length. Metallurgical tests, together with approximately four years of industrial scale processing, have shown with conﬁ dence that the mineralisation at Albyn is entirely non-refractory, achieving high recovery rates of 90-95% when using the conventional direct cyanidation method for processing ore. All Albyn’s current Ore Reserves are suitable for processing in the mine’s operational RIP plant. In addition to the Albyn mine, the Group has explored three satellite deposits: Elginskoye (within the Elginskoye licence area), Unglichikan and Afanasevskoye (both within the Afanasievskaya licence area). Substantial JORC Mineral Resources and Ore Reserves were established within these areas. Exploration results obtained from other exploration targets within the Albyn project to date have been promising. Mining and processing Mining at Albyn is open pit and ore is processed at an RIP plant. Underground mining scenarios are currently being evaluated. The entire project reserve is non-refractory. Non-Refractory Refractory Total Tonnage (kt) 40,751 48,961 76,263 Grade (g/t Au) Gold (Moz Au) Tonnage (kt) Grade (g/t Au) Gold (Moz Au) 1.03 1.28 1.06 1.35 2.01 2.61 – – – – – – – – – Tonnage (kt) 40,751 48,961 76,263 Grade (g/t Au) Gold (Moz Au) 1.03 1.28 1.06 1.35 2.01 2.61 Albyn mining operations Total material moved Ore mined Average grade Gold content Albyn processing operations Resin-in-pulp (‘RIP’) plant Total milled Average grade Gold content Recovery rate Gold recovered Total gold recovered Units m3 ’000 t ’000 g/t oz. ’000 Year ended 31 December 2015 Year ended 31 December 2014 36,722 4,906 1.15 181.5 29,821 4,510 1.29 187.4 Units Year ended 31 December 2015 Year ended 31 December 2014 t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 4,600 1.14 168.8 93.3 157.6 157.6 4,609 1.33 197.6 94.1 186.0 186.0 2015 performance In 2015, Albyn produced 157.6koz – around 31% of total Group gold production for the year (2014: 186.0koz). As one of the Group’s largest producing mines, it has been a key target for cost reduction. In H1, mining generally focused on the main pit with some stripping carried out at the east pit. The original 2015 schedule for Albyn was adjusted during the year so that main body and satellite ores were no longer blended together, as tests showed that this depressed processing recovery rates. This had a positive impact on recovery rates compared to the beginning of 2015 (90.8% in Q1) and the average recovery rate of 93% was achieved for the year, which placed downward pressure on costs. In H2, the pilot processing of ore from a new satellite pit, Afanasevskaya, was successfully carried out. However, the decision was taken to defer production from this satellite in order to maximise the proﬁ tability of the Albyn mine. Total mass moved in 2015 was c.37 million cubic metres, up from c.30 million in 2014. Costs Albyn is one of the Group’s largest producing mines and as such has been a key target for cost reduction. Total cash costs at Albyn for the year were US$747/oz, an approximate 10% decrease compared with 2014 (US$830/oz). This was achieved in spite of a 14% increase in the stripping ratio compared with the previous year and some inﬂ ation of Rouble-denominated costs. The costs improvement was a result of a combination of several factors: a 14% increase in grades processed through the mill, a slight improvement in recovery rates, the cost- optimisation programme and Rouble devaluation. Outlook 2016 exploration is mainly planned at the Elginskaya area. In-ﬁ ll drilling should allow the Group to evaluate additional reserves there by converting Inferred into Measured and Indicated Resources. Plans are also in place to evaluate the extent of high-grade mineralisation below the Albyn and Unglichikan pits that may be suitable for underground mining. Turn to page 58 for more on exploration at Albyn. Notes to the above Ore Reserves and Mineral Resources table: – a cut-off grade 0.3 g/t has been applied; – Mineral Resources are constrained by a US$1,500/oz conceptual pit shell; – Ore Reserves are limited by a mine design based on an optimal pit shell at US$1,100/oz gold price; – Mineral Resources are inclusive of Ore Reserves; – Figures may not add up due to rounding. Petropavlovsk Annual Report 2015 45 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Operational Performance continued Pokrovskiy Introduction The Group’s ﬁ rst producing asset, Pokrovskiy is the backbone of the Group. It was acquired by Pavel Maslovskiy when it was in the early stages of exploration, and the Group was created in 1994 to ﬁ nance its development. The ﬁ rst gold was produced at the mine in 1999 from its heap-leach facilities; RIP plant production commenced in 2002. 2015 gold production c.56koz – 11% of total Group gold production for the year. Gold mine City or town Railway Federal highway Trans-Siberian Railway Pokrovskiy production Other Group mines BAM Railway Zeya Pokrovskiy Blagoveschensk CHINA Zlatoustovsk Khabarovsk Birobidjan Key facts Progress against strategic priorities Location and infrastructure Deposit type Hard-rock with non-refractory ore. Mining Open pit. Processing RIP plant and seasonal heap-leach facility on-site. Plans to ﬁ nish developing site into POX Hub. Development history Acquired in 1994 and developed into an operational mine in-house. Commissioned heap-leach facility in 1999 and RIP plant in 2002. Reserves and resources 0.4Moz of Ore Reserves and 1.4Moz of Mineral Resources inc. Burinda satellite deposit. 46 Petropavlovsk Annual Report 2015 Value-adding exploration Focus on efﬁ ciency and cost reduction to maintain site for future POX Hub role. Successful exploration works during 2015 extended the operational life of Pokrovskiy’s non- refractory facilities. The plans for further exploration in 2016 at Pokrovskiy satellite deposits Bazoviy and Vodorazdelniy were made in order to expand the deposit’s non-refractory reserves and resources base. Pokrovskiy is located in the Amur region, c.10km from the Trans-Siberian Railway. Burinda is a gold deposit within the Taldan license area, c.115km from the mine. Burinda ore is scheduled to be processed using Pokrovskiy’s RIP plant facilities. Asset development In 2015, discussions commenced on a potential partnership to further develop the POX Hub at Pokrovskiy, and on 28 April, the Group announced a conditional JV agreement with GMD Gold to accelerate and complete this development. Please refer to Future Development on page 60 for more information on the conditional JV agreement. 2015 operational efﬁ ciencies Total cash cost of US$871/oz was in line with the previous year (2014:US$885/oz). Operating responsibly and safely At Pokrovskiy, the LTIFR was 3.04 per million man hours worked. Reserves and Resources (as at 31 December 2015) (WAI, April 2016 in Accordance with JORC Code 2012) Proven and Probable Reserves Measured and Indicated Resources Inferred Resources Pokrovskiy has produced c.1,960koz of gold to date since commissioning in 1999 but today its main pits are almost depleted. To prolong the life of the mine, mining has gradually been shifting to satellite deposits. Pokrovskiy is an integral part of the Group’s future plans as a base for the POX Hub. Geology Pokrovskiy is located on the south side of the Mongolo-Okhotskiy regional belt, some 35km south of Pioneer. Similarly to Pioneer, gold mineralisation at Pokrovskiy and its satellites is associated with volcanism during the late Mesozoic Period and appears to sit near the eastern contact of large multiphase granitoid massif with the Jurassic metasedimentary and Cretaceous volcanic rocks. The Pokrovskiy deposit consists of a set of several large, irregular, but mostly ﬂ at-lying ore bodies. Gold-bearing zones at Zheltunak and Bazoviy have a similar morphology, but are much smaller in size and lower in gold grades. Some other zones at Zheltunak also have a high-grade, narrow- vein morphology and therefore may be potentially suitable for underground mining. Vodorazdelniy is a low-grade linear stockwork suitable for an open pit extraction. The ore bodies at Burinda are elongated in the N-S and NE-SW directions, hosted by a surrounding zone of metasomatism and characterised by pinch-and-swell structures. Mineralisation at Burinda is open to the depth and there is a potential for underground mining of high-grade areas. Mining and processing Mining at Pokrovskiy is open pit. Ore is processed on-site – higher-grade ore at the RIP plant, lower-grade ore at the heap-leach facility. 2015 performance In 2015, Pokrovskiy produced c.56.0koz, around 11% of total Group gold production for the year (2014: c.64.2koz). As with Malomir, the focus at Pokrovskiy was site maintenance and preservation for its future POX Hub role. Non-Refractory Refractory Total Tonnage (kt) 9,031 39,668 10,393 Grade (g/t Au) Gold (Moz Au) Tonnage (kt) Grade (g/t Au) Gold (Moz Au) 1.23 0.86 1.00 1.35 1.10 0.33 – – – – – – – – – Tonnage (kt) 9,031 39,668 10,393 Grade (g/t Au) Gold (Moz Au) 1.23 0.86 1.00 1.35 1.10 0.33 Pokrovskiy mining operations Total material moved Ore mined Average grade Gold content Units m3 ’000 t ’000 g/t oz. ’000 Year ended 31 December 2015 Year ended 31 December 2014 5,169 933 1.41 42.2 4,665 623 1.79 35.9 Pokrovskiy processing operations (incl. Burinda) Resin-in-pulp (‘RIP’) plant Total milled Average grade Gold content Recovery rate Gold recovered Heap leach operations Ore stacked Average grade Gold content Recovery rate Gold recovered Total gold recovered Units Year ended 31 December 2015 Year ended 31 December 2014 t ’000 g/t oz. ’000 % oz. ’000 t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 1,791 1.04 59.7 84.3 50.4 541 0.53 9.2 60.6 5.6 56.0 1,864 1.15* 68.8 84.2 57.9 533 0.60 9.7 65.5 6.3 64.2 i S t r a t e g c r e p o r t G o v e r n a n c e In H1, a main source of ore for production was extracted from the expanded part of the Pokrovka-1 pit. Some high-grade ore came from the Burinda satellite deposit, and from stockpiles. Pokrovka 3 and Zheltunak also contributed to production. Plans for other satellite deposits, Bazoviy and Vodorazdelniy, were also made. Costs For the year ended 31 December 2015, TCC/ oz at Pokrovskiy were US$871/oz, in line with 2014 (US$885/oz), in spite of a 10% decrease in the average grades processed through the mill and some inﬂ ation of Rouble-denominated costs. This was achieved due to the success of the Group’s cost-optimisation programme and the 59% average depreciation of the Rouble against the US Dollar. Outlook The Group continues to review its plans for Pokrovskiy in line with the ongoing development of the POX Hub. Future production at the Pokrovskiy mine depends on the POX project’s timings. Currently it is envisaged that the Pokrovskiy mine will continue to process non-refractory gold at the current capacity until the POX plant is commissioned. After POX commissioning, only the heap-leach facilities will remain able to treat non-refractory ore. The Group announced a conditional Joint Venture with GMD Gold on 28 April 2016. Turn to page 59 for more on exploration at Pokrovskiy. Turn to page 60 for more on the POX Hub. i F n a n c a i l s t a t e m e n t s Notes to the above Ore Reserves and Mineral Resources table: – a cut-off grade 0.3 g/t has been applied for Mineral Resources; a cut off grade of 0.4g/t was applied for Ore Reserves at all areas except Burinda where a cut off 0.9g/t was used; – Mineral Resources are constrained by a US$1,500/oz conceptual pit shell; – Ore Reserves are limited by a mine design based on an optimal pit shell at US$1,100/oz gold price; – Mineral Resources are inclusive of Ore Reserves; – Figures may not add up due to rounding. Petropavlovsk Annual Report 2015 47 Operational Performance continued Malomir Introduction Malomir is one of Russia’s largest gold mines in terms of its JORC Reserves and Resources. The mine was developed from a greenﬁ eld site license the Group acquired in 2003. It has produced c.485koz of gold since commissioning in mid-2010. 2015 gold production c.59.1koz – 12% of total Group gold production for the year. Gold mine City or town Railway Federal highway Zlatoustovsk BAM Railway Malomir Zeya Trans-Siberian Railway Malomir production Other Group mines Blagoveschensk CHINA Khabarovsk Birobidjan Key facts Progress against strategic priorities Location and infrastructure Malomir is in the north east of the Amur region, c.670km from Pokrovskiy. It has direct connection to Pokrovskiy and to Fevralsk, a town on the BAM Railway. Deposit type Hard-rock with both non-refractory and refractory ore (mostly refractory). Mining Currently open pit. Underground mining project under development. Processing RIP plant on-site. Currently only non-refractory ore is being processed. Development history Acquired in 2003 as a greenﬁ eld project. Today one of the largest gold mines in Russia in terms of mineral resources. Reserves and resources 2.7Moz of Ore Reserves and 7.0Moz Mineral Resources. Value-adding exploration Deep drilling successfully proved down-dip extensions of the high-grade Quartzitovoye zone 230m below the bottom of the existing pit. The orebody remains open below this depth, with morphology, grade and thickness to justify underground extraction. Asset development The 2015 exploration results conﬁ rmed the viability of underground mining scenarios for Quartzitovoye. Internal estimates suggest these will be technically viable and highly proﬁ table. The detailed geological assessment and full feasibility study should be completed by Q2-Q3 2016. Once the POX construction timetable is ﬁ nalised, it is expected that Malomir’s large refractory reserve base will be processed through the new facilities. 2015 operational efﬁ ciencies Total cash cost of US$1,092/oz was in line with the previous year (2014:US$1,031/oz). Operating responsibly and safely At Malomir, the LTIFR was 7.35 per million man hours worked. 48 Petropavlovsk Annual Report 2015 Reserves and Resources (as at 31 December 2015) (WAI, April 2016 in Accordance with JORC Code 2012) Proven and Probable Reserves Measured and Indicated Resources Inferred Resources The Malomir project area is under continuous exploration with a number of prospective targets that may add to the overall reserve base. Geology The Malomir deposit is situated along and above a major thrust zone within the Mongolo-Okhotskiy mineralised belt. It is hosted by upper Palaeozoic meta-sediments, mainly carbonaceous shales, which are affected by low-grade regional metamorphism and locally intense metasomatic alteration (mainly siliﬁ cation), with associated hydrothermal mineralisation. In addition to the Malomir deposit, Group exploration has conﬁ rmed the existence of two further major deposits at Malomir: Ozhidaemoye and Quartzitovoye. Subsequently, this exploration conﬁ rmed the smaller Magnetitovoe zone as well as a number of promising exploration targets. The Malomir and Ozhidaemoye deposits contain signiﬁ cant refractory ore reserves. However, Quartzitovoye and Magnetitovoe consist of high-grade, non-refractory ore reserves. Mining and processing Currently mining at Malomir is open pit. The Group recovers gold from Malomir’s non-refractory ore in an on-site RIP plant. Plans are in place to mine the large refractory reserve to recover gold using the POX Hub (at Pokrovskiy), when completed. This relies on the construction of a ﬂ otation plant at Malomir, currently 90% complete – work was slowed down in 2013 but may recommence in 2016, subject to the approval of the GMD Gold Joint Venture, discussed further in the Future Development section on page 60. The ﬂ otation plant will convert the refractory reserves into higher-grade ﬂ otation concentrate, which will be sent to the POX Hub for processing. 2015 performance In 2015, Malomir produced 59.1koz, around 12% of total Group gold production for the year (2014: 82.2koz). The Group’s focus on production and cash cost optimisation resulted in mining operations mainly concentrating on the Non-Refractory Refractory Total Tonnage (kt) 7,235 13,233 8,182 Grade (g/t Au) Gold (Moz Au) 1.06 1.12 1.35 0.25 0.48 0.36 Tonnage (kt) 73,763 126,613 107,671 Grade (g/t Au) Gold (Moz Au) 1.04 0.91 0.70 2.46 3.72 2.44 Tonnage (kt) 80,998 139,846 115,853 Grade (g/t Au) Gold (Moz Au) 1.04 0.93 0.75 2.71 4.20 2.79 Malomir mining operations Total material moved Ore mined Average grade Gold content Malomir processing operations Resin-in-pulp (‘RIP’) plant Total milled Average grade Gold content Recovery rate Gold recovered Total gold recovered Quartzitovoe and Magnetitovoe areas of Malomir, whilst work at the others was rescheduled. Due to perceived challenges in mining at the Magnetitovoe zone, in H1 mining was carried out at some of the smaller Malomir satellite pits. This did not prove cost efﬁ cient due to the long distance between these pits and the plant. To optimise efﬁ ciency, the mining plan was adjusted to move mining of some reserves – mainly those at these distant satellite deposits, to later years. The new plan allows the pits to be mined in a timely manner, whilst Malomir is developed into a main producer of refractory concentrate for the future POX Hub. Currently, works at the deposit are focused on producing steady cash ﬂ ows, in order to maintain the mine and preserve its machinery while the large scale refractory operations are being developed. Costs 2015 total cash costs/oz for Malomir were US$1,092/oz in line with the previous year (2014: US$1,031/oz), in spite of a 32% decrease in processed grades and some inﬂ ation of Rouble-denominated costs due to the cost optimisation programme and a 59% average depreciation of the Rouble against the US Dollar. Cash costs at Malomir are Units m3 ’000 t ’000 g/t oz. ’000 Year ended 31 December 2015 Year ended 31 December 2014 8,904 2,105 1.01 68.5 7,433 2,164 1.32 92.2 Units Year ended 31 December 2015 Year ended 31 December 2014 t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 2,937 0.93 88.0 67.2 59.1 59.1 2,594 1.36 113.8 72.2 82.2 82.2 affected by the scattered positioning of multiple deposits and high stripping coefﬁ cients. Outlook In 2015, we adjusted our operational plans to focus on optimal production. We expect 2016 production to be at similar levels as in 2015, in line with management’s focus on cash cost optimisation. Our medium to long-term plans for Malomir remain in place – to develop it into a main producer of refractory concentrate for the future POX Hub. Moving forward, production at Malomir will rely on remaining lower-grade non-refractory reserves, refractory reserves and high-grade resources for potential extraction using underground mining methods, which were identiﬁ ed in 2015. Exploration works carried out at Malomir so far indicate potential to identify additional non-refractory resources. Turn to page 58 for more on exploration at Malomir. Turn to page 60 for more on the POX Hub. Notes to the above Ore Reserves and Mineral Resources table: – A cut off grade has been applied of 0.4g/t to non-refractory and 0.3g/t for refractory Ore Reserves; 0.3g/t cut off was applied to open pit non-refractory and refractory Mineral Resources; 1.5g/t cut off grade was applied to the Mineral Resources reported for the potential underground extraction; – Mineral Resources for potential open pit extraction are constrained by US$1,500/oz conceptual pit shell; Mineral Resources reported for the potential underground extraction have been deﬁ ned as those below the pit designs used in the Ore Reserve estimate; – Ore Reserves are limited by a mine design based on an optimal pit shells at US$1,100/oz gold price; – Mineral Resources are inclusive of Ore Reserves and include Mineral Resources for potential underground extraction – Figures may not add up due to rounding; Petropavlovsk Annual Report 2015 49 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Exploration Report, Reserves and Resources In line with the approach adopted in previous years, the Group reports its Mineral Resources and Ore Reserves in accordance with JORC Code. The assets are subdivided into ‘core’ and ‘non-core’ projects. ‘Core projects’ refers to the Group’s four operational mines: Pokrovskiy, Pioneer, Malomir, Albyn and all their satellites. Mineral Resource and Ore Reserve estimates for these assets have been audited by WAI in accordance with JORC Code (2012). The Group considers its ‘non-core’ projects to be assets with potential to be developed into production at some point in future, though they are not located near current processing facilities. These include Tokur (Amur Region), Visokoe (Krasnoyarsk) and Yamal assets (the Petropavlovskoe- Novogodnee Monto deposits). Mineral Resources and, where appropriate, Ore Reserves for these projects have not changed since 2011. These estimates have not been updated and therefore reported in accordance with JORC Code (2004 – the current version at the time of the estimates). The estimates were reviewed and signed off by WAI in March 2011 (Yamal, Tokur) and February 2012 (Visokoe). The set of tables below provide a summary and an asset-by-asset breakdown of Mineral Resources and Ore Reserves. Total Group Ore Reserves for Core and Non-Core Projects are presented in this ﬁ rst table. Ore Reserves for open pit extraction (as at 31 December 2015) (in accordance with JORC Code) Total Ore Reserves Non-Refractory Ore Resources Refractory Ore Resources Note: Figures may not add up due to rounding. Category Tonnage (Kt) Grade (g/t Au) Gold (Moz Au) Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable 37,127 231,471 268,598 16,528 127,510 144,038 20,599 103,961 124,560 1.03 0.96 0.97 0.91 0.97 0.96 1.14 0.96 0.99 1.24 7.17 8.41 0.48 3.98 4.46 0.75 3.20 3.95 The table below provides a summary of gold Ore Reserves for the Group’s Core Projects, which comprise Pioneer, Pokrovskiy, Malomir, Albyn and Burinda. These Reserves are also included in the table above and are not additional. Ore Reserves for open pit extraction at Core Group Assets in the Amur Region (as at 31 December 2015) (WAI April 2016, in accordance with JORC Code 2012) Category Tonnage (Kt) Grade (g/t Au) Gold (Moz Au) Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable 35,099 195,474 230,573 14,500 91,513 106,013 20,599 103,961 124,560 1.01 0.93 0.94 0.83 0.90 0.89 1.14 0.96 0.99 1.14 5.85 6.99 0.39 2.65 3.04 0.75 3.20 3.95 Total Ore Reserves Non-Refractory Ore Resources Refractory Ore Resources Note: Figures may not add up due to rounding. 50 Petropavlovsk Annual Report 2015 In addition to the Ore Reserves scheduled for open pit extraction, the Group is working on a formal reserve estimate for underground mining. At the time of publishing this annual report the estimate has not been completed and it yet to undergo an independent technical audit. Group expects to be in position to publish it later in 2016. Total Group Mineral Resources for Core and Non-Core Projects are presented in the table below. Mineral Resources for potential open pit extraction (as at 31 December 2015) (in accordance with JORC Code) Total Mineral Reserves Non-Refractory Mineral Resources Refractory Mineral Resources Note: Figures may not add up due to rounding. Category Tonnage (Kt) Grade (g/t Au) Gold (Moz Au) Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred 67,099 481,296 548,395 312,650 40,495 281,409 321,904 167,169 26,604 199,887 226,491 145,481 1.05 0.86 0.88 0.77 1.05 0.89 0.91 0.85 1.04 0.82 0.85 0.67 2.26 13.31 15.57 7.72 1.37 8.04 9.41 4.57 0.89 5.27 6.16 3.15 Mineral Resources for potential open pit extraction at core Group assets in the Amur Region (as at 31 December 2015) (WAI April 2016, in accordance with JORC Code 2012) i S t r a t e g c r e p o r t G o v e r n a n c e Total Mineral Reserves Non-Refractory Mineral Resources Refractory Mineral Resources Note: Figures may not add up due to rounding. Category Tonnage (Kt) Grade (g/t Au) Gold (Moz Au) Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred 45,565 413,840 459,405 261,040 18,961 213,953 232,914 115,559 26,604 199,887 226,491 145,481 0.94 0.82 0.83 0.72 0.81 0.82 0.82 0.77 1.04 0.82 0.85 0.67 1.38 10.90 12.28 6.03 0.50 5.63 6.12 2.88 0.89 5.27 6.16 3.15 Petropavlovsk Annual Report 2015 51 i F n a n c a i l s t a t e m e n t s Exploration Report, Reserves and Resources continued In addition to the Mineral Resources potentially suitable for open pit extraction, the Group estimates high-grade Mineral Resources potentially suitable for underground mining at Pioneer and Malomir. The estimate totals 0.42Moz. There is a detailed breakdown on page 56. Summary of Ore Reserves for open pit extraction by asset (as at 31 December 2015) Pokrovskiy & Burinda, Amur Region Pokrovskiy & Burinda, Amur Region WAI 2016, in accordance with JORC Code 2012 (WAI 2016, in accordance with JORC Code 2012) Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Tonnage (Kt) 2,469 6,563 9,031 2,469 6,563 9,031 – – – Tonnage (Kt) 21,410 78,382 99,793 8,374 40,621 48,996 13,036 37,761 50,797 Tonnage (Kt) 7,588 73,410 80,998 24 7,210 7,235 7,563 66,200 73,763 Grade (g/t Au) 1.53 1.11 1.23 1.53 1.11 1.23 – – – Grade (g/t Au) 0.94 0.76 0.80 0.76 0.67 0.69 1.06 0.86 0.91 Grade (g/t Au) 1.27 1.02 1.04 1.21 1.06 1.06 1.27 1.01 1.04 Gold (Moz Au) 0.12 0.23 0.36 0.12 0.23 0.36 – – – Gold (Moz Au) 0.65 1.92 2.57 0.21 0.88 1.08 0.44 1.04 1.49 Gold (Moz Au) 0.31 2.40 2.71 0.00 0.25 0.25 0.31 2.15 2.46 Total Non-Refractory Refractory Pioneer, Amur Region Pioneer, Amur Region (WAI 2016, in accordance with JORC Code 2012) WAI 2016, in accordance with JORC Code 2012 Total Non-Refractory Refractory Malomir, Amur Region Malomir, Amur Region WAI 2016, in accordance with JORC Code 2012 (WAI 2016, in accordance with JORC Code 2012) Total Non-Refractory Refractory 52 Petropavlovsk Annual Report 2015 52 Petropavlovsk Annual Report 2015 Albyn, Amur Region Albyn, Amur Region (WAI 2016, in accordance with JORC Code 2012) WAI 2016, in accordance with JORC Code 2012 Total Non-Refractory Refractory Visokoe, Krasnoyarsk Region Visokoe, Krasnoyarsk Region (WAI 2012, in accordance with JORC Code 2004) WAI 2012, in accordance with JORC Code 2004 Total Non-Refractory Refractory Tokur, Amur Region Tokur, Amur Region (WAI 2011, in accordance with JORC Code 2004) WAI 2011, in accordance with JORC Code 2004 Total Non-Refractory Refractory Notes: Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Tonnage (Kt) 3,633 37,119 40,751 3,633 37,119 40,751 – – – Tonnage (Kt) – 33,802 33,802 – 33,802 33,802 – – – Tonnage (Kt) 2,028 2,195 4,223 2,028 2,195 4,223 – – – Grade (g/t Au) 0.51 1.09 1.03 0.51 1.09 1.03 – – – Grade (g/t Au) – 1.13 1.13 – 1.13 1.13 – – – Grade (g/t Au) 1.47 1.44 1.45 1.47 1.44 1.45 – – – Gold (Moz Au) 0.06 1.30 1.35 0.06 1.30 1.35 – – – Gold (Moz Au) – 1.22 1.22 – 1.22 1.22 – – – Gold (Moz Au) 0.10 0.10 0.20 0.10 0.10 0.20 – – – (1) Group Ore Reserves statements are prepared by WAI; Pokrovskiy, Pioneer, Malomir and Albyn reserves are prepared in April 2016 in accordance with JORC Code 2012; Visokoe Ore Reserves prepared in January 2012 in accordance with JORC Code 2004; Tokur Reserves are prepared in 2010 in accordance with JORC Code 2004. (2) Ore Reserves estimations are for open pit extraction. Pokrovskiy, Pioneer, Malomir and Albyn areas are reported within economical pit shells using a $1,100/oz gold price assumption. Visokoe has been based on a $1,250/oz gold price assumption and Tokur has been based on a $1,000/oz gold price assumption, together with the operating costs assumptions relevant at the time of the estimates. (3) Ore Reserve estimation cut-off grades for reporting varies from 0.3 to 0.9g/t Au, depending on the asset and processing method. (4) Figures may not add up due to rounding. Petropavlovsk Annual Report 2015 53 Petropavlovsk Annual Report 2015 53 i i S S t t r r a a t t e e g g c c r r e e p p o o r r t t G G o o v v e e r r n n a a n n c c e e i i F F n n a a n n c c a a i i l l s s t t a a t t e e m m e e n n t t s s Exploration Report, Reserves and Resources continued Summary of Mineral Resources for potential open pit extraction by asset (as at 31 December 2015) Pokrovskiy & Burinda, Amur Region Pokrovskiy & Burinda, Amur Region WAI 2016, In accordance with JORC Code 2012 (WAI 2016, in accordance with JORC Code 2012) Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources Pioneer, Amur Region Pioneer, Amur Region WAI 2016, In accordance with JORC Code 2012 (WAI 2016, in accordance with JORC Code 2012) Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources Malomir, Amur Region Malomir, Amur Region (WAI 2016, in accordance with JORC Code 2012) WAI 2016, in accordance with JORC Code 2012 Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources 54 Petropavlovsk Annual Report 2015 54 Petropavlovsk Annual Report 2015 Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Tonnage (Kt) 6,626 33,042 39,668 10,393 6,626 33,042 39,668 10,393 – – – – Tonnage (Kt) 26,677 151,778 178,455 59,368 8,600 69,977 78,577 21,558 18,077 81,801 99,878 37,810 Tonnage (Kt) 8,593 130,814 139,407 115,176 66 12,728 12,794 7,505 8,527 118,086 126,613 107,671 Grade (g/t Au) 1.04 0.82 0.86 1.00 1.04 0.82 0.86 1.00 – – – – Grade (g/t Au) 0.89 0.67 0.71 0.58 0.76 0.62 0.64 0.58 0.95 0.71 0.76 0.58 Grade (g/t Au) 1.21 0.90 0.92 0.71 0.92 0.93 0.93 0.76 1.21 0.89 0.91 0.70 Gold (Moz Au) 0.22 0.88 1.10 0.33 0.22 0.88 1.10 0.33 – – – – Gold (Moz Au) 0.77 3.28 4.05 1.11 0.21 1.40 1.61 0.40 0.55 1.88 2.43 0.71 Gold (Moz Au) 0.33 3.77 4.11 2.62 0.002 0.38 0.38 0.18 0.33 3.39 3.72 2.44 Albyn, Amur Region Albyn, Amur Region (WAI 2016, in accordance with JORC Code 2012) WAI 2016, in accordance with JORC Code 2012 Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources Tokur, Amur Region Tokur, Amur Region (WAI 2011, in accordance with JORC Code 2004) WAI 2011, in accordance with JORC Code 2004 Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources Visokoe, Krasnoyarsk Region Visokoe, Krasnoyarsk Region WAI 2012, in accordance with JORC Code 2004 (WAI 2012, in accordance with JORC Code 2004) Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Tonnage (Kt) 3,669 98,206 101,875 76,103 3,669 98,206 101,875 76,103 – – – – Tonnage (Kt) 11,952 16,096 28,048 10,706 11,952 16,096 28,048 10,706 – – – – Tonnage (Kt) 5,623 38,512 44,135 24,200 5,623 38,512 44,135 24,200 – – – – Grade (g/t Au) 0.51 0.94 0.92 0.80 0.51 0.94 0.92 0.80 – – – – Grade (g/t Au) 1.30 1.06 1.16 1.09 1.30 1.06 1.16 1.09 – – – – Grade (g/t Au) 1.37 1.18 1.21 1.00 1.37 1.18 1.21 1.00 – – – – Gold (Moz Au) 0.06 2.97 3.03 1.96 0.06 2.97 3.03 1.96 – – – – Gold (Moz Au) 0.50 0.55 1.05 0.38 0.50 0.55 1.05 0.38 – – – – Gold (Moz Au) 0.25 1.47 1.71 0.78 0.25 1.47 1.71 0.78 – – – – Petropavlovsk Annual Report 2015 55 Petropavlovsk Annual Report 2015 55 i i S S t t r r a a t t e e g g c c r r e e p p o o r r t t G G o o v v e e r r n n a a n n c c e e i i F F n n a a n n c c a a i i l l s s t t a a t t e e m m e e n n t t s s Exploration Report, Reserves and Resources continued Petropavlovskoye & Monto, Yamal Region Petropavlovskoye & Monto, Yamal Region WAI 2011, in accordance with JORC Code 2004 (WAI 2011, in accordance with JORC Code 2004) Total Mineral Resources Non-Refractory Mineral Resources Refractory Mineral Resources Notes: (1) Mineral Resources include Ore Reserves Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Tonnage (Kt) 3,959 12,623 16,582 16,704 3,959 12,623 16,582 16,704 – – – – Grade (g/t Au) 1.03 0.97 0.99 1.00 1.03 0.97 0.99 1.00 – – – – Gold (Moz Au) 0.13 0.40 0.53 0.54 0.13 0.40 0.53 0.54 – – – – (2) Mineral Resources for Pokrovskiy, Pioneer, Malomir and Albyn were audited in April 2015 by WAI in accordance with JORC Code 2012 with a further review of changes in April 2016; Mineral Resources for Visokoe, Tokur and Yamal were reviewed by WAI in 2011, 2010 and 2010 respectively in accordance with JORC Code 2004 (3) The cut-off grade varies from 0.30 to 0.35g/t depending on the type of mineralisation and proposed processing method (4) Mineral Resources for the Core Projects including Pokrovskiy, Pioneer, Malomir and Albyn are constrained by open pit shells at a long-term gold price of US$1,500/oz. For these areas, where Mineral Resources for underground mining are evaluated (Andreevskaya and NE Bakhmut at Pioneer and Quartzitovoye at Malomir), open pit Mineral Resources are constrained by the pit designs used to deﬁ ne Ore Reserves. Mineral Resources for Visokoe are constrained by a conceptual open pit shell at a long-term gold price assumption of US$1,800/oz; Tokur and Yamal Mineral Resources have no open pit constraints. Summary of Non-Refractory Mineral Resources for potential underground extraction by asset (as at 31 December 2015) (WAI April 2016, in accordance with JORC Code) Pioneer Malomir Total Underground Notes: Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Tonnage (Kt) 0 415 415 144 0 439 439 677 0 854 854 821 Non-Refractory Grade (g/t Au) – 8.15 8.15 10.38 – 6.73 6.73 7.86 – 7.42 7.42 8.30 Gold (Moz Au) 0 0.11 0.11 0.05 0 0.10 0.10 0.17 0 0.20 0.20 0.22 (1) Mineral Resources for potential underground extraction were audited by WAI in accordance with JORC Code 2012 in April 2016 (2) Cut-off grade is 1.5g/t is used to report Mineral Resource for potential underground mining. (3) Mineral Resources reported for the potential underground extraction have been deﬁ ned as those below the pit designs used in the Ore Reserve estimate. 56 Petropavlovsk Annual Report 2015 56 Petropavlovsk Annual Report 2015 Pioneer During 2015, exploration at Pioneer continued to pursue two main objectives: – Find and explore further non-refractory resources for potential open pit mining – Explore the deeper-sitting non-refractory resources that are suitable for eventual underground extraction. Regarding the ﬁ rst objective, work in 2015 concentrated on the Alexandra area (Alexandra, Shirokaya and Brekchievaya zones) where a signiﬁ cant amount of in-ﬁ ll drilling was completed. This drilling improved conﬁ dence in the Alexandra Mineral Resource and Ore Reserve estimates. In addition, exploration identiﬁ ed high-grade intersections in drill hole C-8909, c.500m north from the Alexandra zone: 2.3m at 7.97g/t and 2.1m at 17.5g/t. The extent, morphology, true thickness and orientation of this high-grade mineralisation is unclear and the area warrants follow-up drilling. Drilling at the Brekchievaya zone resulted in the discovery of a new orebody and a small increase in the non-refractory Mineral Resources there. Exploration targeting open pit resources continued at the Pioneer license, south of the Nikolaevskaya zone. Re-interpretation of the IP geophysical survey revealed several anomalies that correlate well with the known Pioneer gold-bearing structures. Exploration drilling completed during 2015 intersected mostly low-grade mineralisation. The best intersections include 9.9m at 1.63g/t, 27.9m at 0.56g/t (both drill hole C-2409), 67m at 0.60g/t (drill hole C-2422) and 31.1m at 0.97g/t (drill hole C-2400). Although some of the mineralisation discovered is oxidised and non-refractory, a signiﬁ cant proportion of the deeper primary material is expected to be refractory. Nevertheless, Group geologists continue to believe the area may be prospective for the discovery of high-grade non-refractory resources and exploration is expected to continue here into 2016. The Group made signiﬁ cant progress in exploring deeper extensions of the Andreevskaya and NE Bakhmut high-grade pay shoots. The Andreevskaya East pay shoot was conﬁ rmed further down to c.285m below the surface, which is c.95m below the expected depth of the open pit mining there. The mineralisation was drilled at c.20 by 20m centres, modelled and included into Group JORC Mineral Resource and Ore Reserve statements. It remains open below this depth. Another pay shoot has been conﬁ rmed at a depth of up to 210m below the surface (and c.40m below the expected depth of the open pit mining) in the Andreevskaya West area, by 2 drill holes (true thickness of c.1.4m at 10.65g/t, C-5606 and true thickness of c.1.1m at 62.7g/t, C-5607). i S t r a t e g c r e p o r t At NE Bakhmut, the Group completed 30 drill holes that intersected high-grade mineralisation as deep as 370m below the surface and c.145m below the existing open pit (NE Bakhmut No.3). The best intersections include 7.2m at 35.2g/t, 19.8m at 7.92g/t and 9.4m at 86.26g/t. The pay shoot is still open in a down-dip direction with the last intersection received in Q1 2016 is 2.0m and 5.15g/t. There remains potential for high-grade discoveries at NE Bakhmut Nos 1, 2 and 5. Pay shoot No. 1 (Bakhmut) was intersected by 11 drill holes and traced to an elevation of +40, c.160m below the existing pit. The thickness of drill intersections varies between 5.2 and 22.4m at a grade between 2.0 and 19.46g/t. The strike length of the pay shoot is up to 70m and, similar to the NE Bakhmut pay shoot, it is open in depth. The Promezhutochnaya pay shoot is also located within the Bakhmut trend, close to conjunction with the Yuzhnaya zone. It is not as well-explored as the ﬁ rst two pay shoots; nonetheless, it has been intersected by drilling c.240m below the existing open pit, with an intersection width of 1.5m at 47.8g/t. Further drilling was carried out on Pay Shoot No. 1 and Promezhutochnaya in Q1 2016. The assay results from this drilling are still pending. G o v e r n a n c e Overall, the total Mineral Resources at Pioneer slightly decreased (by c.200,000oz), mostly due to mine depletion of c.280,000oz Pioneer total Ore Reserves decreased c.340,000oz, mainly due to mine depletion. i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 57 Exploration Report, Reserves and Resources continued Malomir The key areas of exploration at Malomir during 2015 were Berezoviy (earlier in the year) and the deeper extensions of No. 55, the high-grade Quartzitovoye orebody, for potential underground mining. Exploration was also carried out at Razlomniy (south side of the Pogranichnaya license) but with no signiﬁ cant results to report. At Berezoviy, the Osennee zone – the principal zone of mineralisation in that area discovered to date, was subject to detailed exploration and trial mining. Exploration was ﬁ nalised, resulting in c.22koz being included in the Mineral Resource statement and c.17koz being added to its Ore Reserves. Exploration at the other mineralised zones within the Berezoviy area – Zapadnaya and Uspenskaya, to date has only resulted in the discovery of scattered mineralisation that is not continuous and could not be included into a formal JORC Resource estimate. Exploration there has been paused whilst the exploration targets are re-evaluated and the further exploration program is re-considered. Results of the exploration completed at the Razlomniy area in 2015 were also below expectations. Exploration there has stopped until the exploration concept and targets are re-evaluated considering 2015 results. All of these other zones are treated as low priority. In H2 2015, deep drilling commenced to explore deeper extensions of the high-grade ore body 55 (Quartzitovoye deposit). Four drill holes were completed, one of which is still awaiting assay results. Two drill holes intersected high-grade mineralisation as deep as 150m below the expected depth of the ﬁ nal pit at this zone. Two drill holes intersected high-grade mineralisation interpreted as an extension of the main ore body 55. The drill intersections are c.14.5m at c.6.7g/t (drill hole 900-1) and c.2.8m at c.38.3g/t (drill hole 900-4). Other signiﬁ cant intersections, currently interpreted as belonging to smaller sub-parallel satellite structures and/or apophysis, include 2.7m at 36.2g/t (drill hole 900-4). The quoted intersections used a 1.5g/t cut-off grade and true thickness. At a cut-off grade of 1.0 g/t, intersections in 900-4 are joining in a single interval of c.20m (true thickness) at c.7.7g/t. The resource model indicates that Quartzitovoe has c.266koz of gold in high grade resources (c.7.4 g/t, c.1,116kt of ore) below the ﬁ nal open pit. This resource is potentially suitable for underground mining and still open in a down–dip direction, as well as along the strike. Exploration here is planned to continue into 2016. Group specialists expect to estimate and report JORC Reserve of 200-300koz here during 2016. Malomir’s total Mineral Resources increased by c.120,000oz mostly due to success of exploration at Quartzitovoe. Malomir Ore Reserves decreased by c.350,000oz due to a depletion of c.90,000oz of gold as well as due to the use of more conservative modifying factors for the refractory reserves, in line with the JORC Code 2012. Albyn Elginskoye area An extensive in-ﬁ ll drilling program commenced in H2 2015 at Elginskoye. This was in order to upgrade some of its large Inferred Resources to the Indicated category and subsequently increase Ore Reserves there, as well as to better deﬁ ne its high-grade areas. This work is still in progress with drilling scheduled to ﬁ nish in Q2 2016. The preliminary results of this work have been included in the Q1 2016 Mineral Resources and Reserves update – all the results will be incorporated later in 2016 once the drill program is complete. This additional drilling will enable the Group to obtain formal approval of the Elginskoye reserves from Russian authorities (GKZ) and a full mining permit for the deposit. In 2015, exploration work also continued at the Afanasevskoe deposit (west of Albyn’s Afanasevskaya license). Podarochnoe, a principal known zone of mineralisation there, was drilled at 40 by 40m centres. This allowed us to estimate Measured and Indicated Mineral Resources as well as Probable Ore Reserves in accordance with JORC Code 2012. Approximately 40koz (in 1,380kt of ore at c.0.95g/t average grade) of Mineral Resource was estimated, of which c.20koz (c.560kt at 1.23g/t) has been converted into Probable Reserves . Approximately 5koz of this reserve has been depleted during 2015. 58 Petropavlovsk Annual Report 2015 Zheltunak East, ‘Suhoi’ Zone Drilled in H1, the Zheltunak East ‘Suhoi’ zone displayed patchy mineralisation mainly within zones of siliciﬁ cation, with quartz veinlets and minor breccia. High-grade intersections were found in two adjacent boreholes (80m apart) at a depth of 25m each, showing an 8m thickness at 6g/t Au. It is possible that these two intersections represent the same thrust surface as in the Cross (Criest) zone. If so then this should be conﬁ rmed by some limited, shallow (less than 50m depth) inﬁ ll drilling between these two holes, as well as drilling on adjacent sections. Pokrovskiy mineral resources increased by c.130,000oz with the depletion offset by new additions at Vodorazdelnoe. Ore Reserves decreased by only c.30,000oz, despite mine depletion of c.69,000oz. New Sosnovaya license The new Sosnovaya license covering area north-east from Pokrovskiy and south-west from Pioneer was acquired at government auction in December 2015. This new license covers geological contact between Cretaceous granitoids and Jurassic host rocks, believed to be favourable for the formation of gold deposits. The Sosnovaya license joins the two sites (Pioneer and Pokrovskiy) together and the Group now has control over the entire length of the eastern segment (c.80km long) of this prospective contact. Preparation of the exploration program for Sosnovaya is under way with ﬁ eld work expected to start later in 2016. WAI has reviewed the exploration potential of this license and believes it is possible that substantial new gold deposits may be discovered there. Albyn’s Mineral Resources increased by c.370,000oz despite depletion of c.170,000oz, giving a gross increase of c.540,000oz. The increase is mainly attributable to the evaluation of new Mineral Resources at the Albyn satellite deposits Unglichikan and Elginskoye. Albyn’s Ore Reserves decreased slightly by c.30,000oz despite the depletion. The gross increase taking depletion into account is c.140,000. The increase is mainly at Elginskoye, Unglichkanskoe and Afanasevskoe satellite deposit. Group specialists envisage the extensive drilling program together with the comprehensive technical studies currently being undertaken by the Group on Elginskoe should result in evaluation of JORC Ore Reserve in excess of 1Moz. Pokrovskiy Vodorazdelniy In 2015, exploration resumed at the Vodorazdelniy prospect, situated c.2km south-east from the Pokrovskiy processing plant. Vodorazdelniy has been known for some years but was a low priority due to its low grade. Drilling completed in 2015, together with exploration results from before 2011, allowed estimation of the Mineral Resources and Ore Reserves there in accordance with JORC Code 2012. Though low-grade, Vodorazdelniy is expected to provide c.30koz of gold (mostly for heap-leach), extending Pokrovskiy’s non-refractory operational life. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 59 Future Development The Pokrovskiy Pressure Oxidation (POX) Processing Hub Background In 2010, Petropavlovsk decided to convert the Pokrovskiy mine into a regional hub for processing refractory concentrates. Refractory ore makes up c.50% of the Group’s total JORC Reserves, all of which is at Pioneer and Malomir. Group operations cannot currently process it as the gold it contains is trapped in sulphide minerals, such as pyrite or arsenopyrite. These ‘lock in’ the gold particles and make the ore resistant to cyanide-based processing. With the hub in place, ore would ﬁ rst be processed into high-grade ﬂ otation concentrate at on-site plants. It would then be trucked to Pokrovskiy and treated using pressure oxidation. This is a high temperature and pressure process whereby gold-bearing sulphides are exposed to extreme heat in a pressurised autoclave. The process would break down the sulphides present in the ﬂ otation concentrate, making the gold amenable to cyanide leaching using Pokrovskiy’s RIP plant. The ultimate aim is to smelt gold into doré bars at an on-site facility. At present, the Pokrovskiy POX plant comprises of four autoclaves, installed in 2013. Each autoclave is 15m long and 4m tall, weighs 116.5t and has an effective volume of 66m3. Having four separate autoclave vessels allows operations to be more ﬂ exible, as concentrates with different properties and sources can be separately processed at the same time, without compromising productivity or gold recovery. It is expected that once commissioned, the POX Hub would be the largest of its kind in Russia, able to process 400,000t of ﬂ otation concentrate a year. The Group also estimates that it would be Russia’s most technologically- advanced POX facility for processing gold, able to extract from a wide range of refractory ores. This would support long-term, sustainable gold production from Malomir and Pioneer. Given the scale of the POX Hub and the large amount of undeveloped refractory gold mineralisation in the Russian Far East, the hub opens a new dimension for the Group’s future growth. In addition to the Group’s current assets, the hub could treat ores from deposits available for acquisition in the region, especially those with signiﬁ cant reserves and resources but abandoned during the Soviet Era due to a lack of technology. There is also 60 Petropavlovsk Annual Report 2015 potential to process concentrate from third parties without access to such technology and expertise. In order to conserve capital expenditure following the decline in the gold price, the Group decided to slow down the POX Hub’s development. In 2014, development was conducted solely to fulﬁ l existing contracts, and in 2015 only essential maintenance work took place. 2015 Update During 2015, the Group held discussions with a reputable industry player on a potential partnership to further develop the POX project. These talks were based on the current low rouble environment, in which budgeted capital and operational expenditures have been reduced signiﬁ cantly. On 28 April 2016, Petropavlovsk announced that it has entered into a conditional agreement to create a joint venture (“JV”) with Limited Liability Company GMD Gold. The agreement is subject to shareholder approval. The JV is being created in order to ﬁ nance the completion of the construction and commissioning of the Company’s Pressure Oxidation Hub Project at its Pokrovskiy mine in the Amur Region of the Russian Federation. The POX Hub will be capable of processing refractory gold concentrates sourced from the Company’s Malomir and Pioneer mines and concentrates produced at GMD Gold afﬁ liates’ operations, as well as third parties’ gold bearing concentrates. Any proﬁ ts arising at JV level will be shared on a 50:50 basis. Petropavlovsk commenced development of the POX Hub in 2011 but, following the fall in gold price in 2013, development was suspended at a time when the Project was more than 50% completed. This joint venture agreement provides the Group with an opportunity to complete the POX Hub and to monetise the Group’s refractory gold reserves and secures a substantial increase in mid-term production increase Petropavlovsk’s total gold production. It should ensure sustainable production from refractory assets for at least 20 years with excellent growth potential. The Group will contribute the Project to the JV in its current state of construction in return for a 49% equity stake in the JV whilst in exchange for 51% GMD Gold will contribute US$120 million, which is the estimated cost required to bring the Project to completion and commissioning. Commissioning of the POX Hub will enable the start of processing of the Group’s refractory ores and the commencement of gold production from refractory reserves starting in 2018, with the plant achieving its full capacity in 2019. The POX Hub construction is expected to re-commence in 2016 and take approximately 18 months to complete. The two line at the Malomir ﬂ otation plant is more than 90% complete and is expected to be commissioned before the POX Hub is, in order to generate sufﬁ cient quantity of concentrate for a sustainable start up. The Group is considering investment into the expansion of the Malomir ﬂ otation plant, adding a third ﬂ otation line and expanding Malomir’s refractory capacity to 5.6Mt of ore a year. It is estimated this expansion will require between US$30 and US$40 million of capital expenditure in 2016. The expansion, together with the commissioning of the POX Hub, is set to add an additional 200,000 – 300,000oz (depending on quality of the concentrate) of yearly output to the Group’s gold production schedule at TCC levels similar to the Group’s current costs of production. Underground Mining Background In 2014, Group geologists began to evaluate the opportunity to maximise the value of the Pioneer and Malomir deposits by developing underground mining operations. As a result of this evaluation, the Group identiﬁ ed two areas at Pioneer potentially suitable for underground mining – Andreevskaya and NE Bakhmut, as well as the Quartzitovoye deposit at Malomir and the Pokrovka 1 deposit at Pokrovskiy. Preliminary estimates by Group geologists indicated that an underground mine at Pioneer could potentially have a high economic return at a gold price above US$800/oz. In 2015, independent mining consultants Wardell Armstrong International (WAI) reviewed the Group’s assessment of Pioneer and suggested that developing its underground mining operations would take 12-18 months from the project’s commissioning to its ﬁ rst production. Within four years from commissioning, the operation is expected to work at its full capacity of 0.9-2 million tonnes of ore per year, which will lead to an increase in Pioneer RIP production. Initial estimates indicate the project will require capital expenditure of c.US$50 million. 2015 Update In 2015, the Group carried out an engineering study on underground development at Pioneer and Malomir mines, with the support of Russian and foreign experts. The ﬁ rst results have given conﬁ dence that both underground projects should be technically viable and highly proﬁ table, with the potential to contribute high margin ounces to the Group’s production schedule within 12-16 months, sooner than previously expected. After a more detailed evaluation, the Pokrovka 1 orebody was removed from the underground proposals and Unglicikan (part of the Albyn project) was considered instead. Mineralisation is open at depth in most instances. At Pioneer, deep drill holes completed during 2015 conﬁ rmed the anticipated continuation of Pioneer’s high-grade mineralisation to 100-240m below the open pits. Resources potentially suitable for underground mining have been identiﬁ ed at Pioneer’s Bakhmut and Andreevskaya trends. At the Bakhmut trend, there are three proven pay shoots – one under NE Bakhmut pit 6.3 (mined from open pit to a depth of 230m), one at the Bakhmut Zone itself (pay shoot no.1) and another high-grade shoot at the Promezhutochnaya zone. At NE Bakhmut pit 6.3, high-grade mineralisation remained at the bottom of the pit, with a 60m strike length and a thickness of 15m at an average grade of 25.0g/t. This mineralisation has been traced c.145m below the existing pit to an elevation of 170m via 25 drill holes. The known high-grade mineralization is open in a down-dip direction and the Group anticipates that continued drilling should extend this further down. Pay shoot no.1 (Bakhmut) was intersected by 11 drill holes and traced to an elevation of +40m, c.160m below the existing pit. The thickness of drill intersections varies between 5.2 and 22.4m at a grade between 2.0 and 19.46g/t. The strike length of the pay shoot is up to 70m and, similar to the NE Bakhmut pay shoot, it is open in depth. The Promezhutochnaya pay shoot is also located within the Bakhmut trend, close to conjunction with the Yuzhnaya zone. It is not as well-explored as the ﬁ rst two pay shoots, though it has been intersected by drilling c.240m below the existing open pit, with an intersection width of 1.5m at 47.8g/t. At Andreevskaya, which has historically been a source of exceptionally high-grade ore, Group geologists identiﬁ ed 3 pay shoots that they believe may support an underground mine. The Andreevskaya East shoot has been the most explored by 20x20m drilling (40 drill holes) to an elevation of -10m, some 130m below the planned open pit. The main high-grade zone has a thickness between 1.5 and 4.8m with the grade varying between 34.7 and 90.6g/t. At least two higher grade shoots are anticipated at Andreevskaya central and western sections. These require further drilling to be conﬁ rmed, which is budgeted for 2016. At the Quartzitovoye zone (Malomir), 2015 drilling conﬁ rmed high-grade mineralisation at minable grades and thickness to a depth of c.150m below the expected depth of the ﬁ nal pit. The high grade orebody has a strike length of 220m, with thickness that varies between 2.8 and 15m, at grades of 6.8 to 38.3g/t. In February 2016, the Group employed a Russian engineering ﬁ rm to undertake a pre-feasibility study and mine design on underground mines at NE Bakhmut, Andreevskaya, Quartzitovoye and Unglichikan. The study concluded that underground mining should be technically feasible and economically viable at all locations besides Unglichikan, for which they recommended further exploration. Known high-grade resources outside of the planned open pit are insufﬁ cient to justify an underground mine there, however there is potential to identify more through additional drilling. WAI has reviewed this study in accordance with JORC Code 2012 and estimated Ore Reserves for underground mining. The Group is in preliminary talks with a mining subcontractor who has undertaken a site visit to assess the project. The full feasibility study for this project is expected to be completed in 2016 when, subject to Russian authority approval, the underground access ramp portal can be opened. The Group is planning to start underground mining at Pioneer in 2017. Underground mining at Quartzitovoye is anticipated to begin in 2020. Alongside developing the ramp, the Group also plans to ﬁ nish the geological assessment of technical and economic parameters at deeper levels. This would mean further exploration drilling from within the underground workings. Acquisition of Amur Zoloto As part of our new strategy we have adopted a portfolio management approach to growth. This requires ongoing assessment of our existing assets and potential targets for acquisition, as well as identifying and disposing of projects not aligned with Group objectives, with a view to improving the quality of our overall portfolio. i S t r a t e g c r e p o r t In line with this, Petropavlovsk PLC announced on the 28th April that it has entered into an agreement with Russia’s Alliance Mining Group and Lexor Group S.A. to acquire Amur Zoloto LLC, an established gold company with production and development assets in the Khabarovsk region in the Far East of Russia. The transaction is subject to shareholder approval. The acquisition promises to increase the quality and quantity of our mineral resource base, and will enable us to increase production. It would be paid for in shares and therefore would not increase Group debt. Under the terms of the Agreement, Petropavlovsk will issue, as consideration for the acquisition, 1,434,303,624 new shares to the Contributors, which are ultimately controlled by Mr Musa Bazhaev and his associates (which new shares will represent approximately 30.3% of the Company’s enlarged issued share capital). Based on an agreed issue price for the new Petropavlovsk shares of 6.89 pence per share, and the current US:GBP exchange rate of 1.4537:1, the aggregate value of the gross consideration payable on closing is approximately US$144 million. In addition, AZ currently has approximately US$16 million of net debt which will be assumed by the Group upon closing. The Agreement is subject to the fulﬁ lment of certain conditions, including the completion of due diligence by Petropavlovsk. AZ is currently undergoing a restructuring and, prior to completion of the proposed acquisition, will be ultimately 100% beneﬁ cially owned by the Contributors. Petropavlovsk Annual Report 2015 61 G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Other Projects The Group considers Pioneer, Albyn, Malomir and Pokrovskiy to be its key mining assets. Its Visokoe and Tokur assets are at an advanced stage of development but are currently treated as lower priorities. Nimanskaya is an early stage exploration asset, while Yamal is not currently being considered for development, though it remains under Group control. The Group keeps the Tokur, Yamal and Nimanskaya licenses in good order and can start development work when and if it chooses to. Visokoe (Krasnoyarsk region) Visokoe is a signiﬁ cant non-refractory gold deposit, currently not in production. It is located on the Yenisey Ridge area of the Krasnoyarsk region, home to some of Russia’s largest and best-known gold deposits. It has been a key area for Russian gold mining for many decades. The Visokoe site itself is located c.50km north-west of the village of Teya and c.70km from the town of Severo-Yeniseysk. Extensive exploration and test work has indicated that ore at Visokoe is non-refractory and suitable for economic processing in an RIP plant or through heap-leaching. The deposit is at an advanced stage of development and contains c.1.2Moz of JORC gold Reserves and c.1.3Moz of Mineral Resources. A feasibility study on a possible heap-leach operation was completed by Irgiredmet in 2015 and is currently under review and approval by the relevant Russian authorities. As part of the Group’s strategy to focus on its core producing assets, the Group is expected to dispose of assets of LLC Ilyinskoye – a holder of the Visokoe deposit and Verhnetisskaya GRK CJSC. Total proceeds will amount to US$20 million to be paid in July 2016. A US$32.5 million impairment charge has been recorded against associated exploration assets. Please see Note 12 to the Financial Please see Note 13 to the Financial Statements, page 152, for more information. Statements, page 153, for more information. Mineral resources and ore reserves for Visokoe (as at 31 December 2015) (WAI, April 2012 in accordance with JORC Code 2004) Proven Ore Reserves Probable Ore Reserves Total Proven and Probable Ore Reserves Measured Mineral Resources Indicated Mineral Resources Measured and Indicated Mineral Resources Inferred Mineral Resources Non-Refractory Refractory Tonnage (kt) – 33,802 33,802 5,623 38,512 44,135 24,200 Grade (g/t Au) – 1.13 1.13 1.37 1.18 1.21 1.00 Gold (Moz Au) – 1.22 1.22 0.25 1.47 1.71 0.78 Tonnage (kt) – – – – – – – Grade (g/t Au) – – – – – – – Gold (Moz Au) – – – – – – – Tonnage (kt) – 33,802 33,802 5,623 38,512 44,135 24,200 Total Grade (g/t Au) – 1.13 1.13 1.37 1.18 1.21 1.00 Gold (Moz Au) – 1.22 1.22 0.25 1.47 1.71 0.78 Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding. – a cut off grade of 0.3 g/t has been applied; – Ore Reserve limited by an optimal pit shell at US$1,200/oz gold price. 62 Petropavlovsk Annual Report 2015 62 Petropavlovsk Annual Report 2015 Tokur (Amur region) Tokur is a hard-rock, non-refractory gold deposit located in the north-eastern part of the Amur region, approximately halfway between the Malomir and Albyn mines. Being a former Soviet-era mine based in an area of intensive, historical alluvial mining, Tokur beneﬁ ts from developed infrastructure, including all-weather roads and power supply. This led it to become a base for the Group’s expansion into the area. The project’s facilities, which include mechanical workshops, dormitories and a canteen, are in regular use both by the company workers passing through and by third parties for a fee. The chemical and ﬁ re analysis laboratory located at Tokur is fully employed by the Group’s exploration division. Tokur is at an advanced stage of development and potentially suitable for re-opening as an open pit mine. While the deposit is not currently in commercial production, it contains signiﬁ cant JORC Mineral Resources and Ore Reserves, suitable for processing in a RIP plant. At this stage, the asset’s development into a full-scale mining operation has been put on hold to minimise the Group’s capital expenditure in the current gold price environment. In line with the Group’s plan to focus on existing producing assets in the short-term, no signiﬁ cant capital expenditure was allocated to this project during 2015. Tokur has been fully impaired and the Group intends to review its development plans in the medium-term. Mineral resources and ore reserves for Tokur (as at 31 December 2015) (WAI, March 2011 in accordance with JORC Code 2004) Proven Ore Reserves Probable Ore Reserves Total Proven and Probable Ore Reserves Measured Mineral Resources Indicated Mineral Resources Measured and Indicated Mineral Resources Inferred Mineral Resources Non-Refractory Refractory Total Tonnage (kt) 2,028 2,195 4,223 11,952 16,096 28,048 10,706 Grade (g/t Au) Gold (Moz Au) Tonnage (kt) Grade (g/t Au) Gold (Moz Au) 1.47 1.44 1.45 1.30 1.06 1.16 1.09 0.10 0.10 0.20 0.50 0.55 1.05 0.38 – – – – – – – – – – – – – – – – – – – – – Tonnage (kt) 2,028 2,195 4,223 11,952 16,096 28,048 10,706 Grade (g/t Au) Gold (Moz Au) 1.47 1.44 1.45 1.30 1.06 1.16 1.09 0.10 0.10 0.20 0.50 0.55 1.05 0.38 Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding. Yamal (Yamal region) The Group’s interest in the Yamal region, an area in the north of Russia, is centred on the development of two gold ore bodies: Petropavlovskoye and Novogodnee Monto. The two adjacent, small hard-rock, non- refractory gold deposits are potentially suitable for open pit mining. However, following the decline in the gold price and the Group adopting a strategic focus on production from its four existing mines, plans to develop Yamal assets into production were postponed and Yamal JORC gold Reserves were written off and removed from the Group’s Reserves statement. The Group has been evaluating alternative development plans to realise the value of these assets and still quotes JORC Mineral Resources for them. There is currently no active development taking place at Yamal. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l Mineral resources for the Yamal assets (as at 31 December 2015) (WAI, March 2011, JORC Code 2004) Proven and Probable Ore Reserves Measured Mineral Resources Indicated Mineral Resources Measured and Indicated Mineral Resources Inferred Mineral Resources Non-Refractory Refractory Total Tonnage (kt) – 3,959 12,623 16,582 16,704 Grade (g/t Au) Gold (Moz Au) Tonnage (kt) Grade (g/t Au) Gold (Moz Au) – 1.03 0.97 0.99 1.00 – 0.13 0.40 0.53 0.54 – – – – – – – – – – – – – – – Tonnage (kt) – 3,959 12,623 16,582 16,704 Grade (g/t Au) Gold (Moz Au) – 1.03 0.97 0.99 1.00 – 0.13 0.40 0.53 0.54 Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding. s t a t e m e n t s Petropavlovsk Annual Report 2015 63 Other Projects continued Nimanskaya (Khabarovsk region) The Nimanskaya license area is located c.90km south of Albyn in the Khabarovsk region. Although it does not have JORC- compliant Mineral Resources, exploration to date (trenching and some surface sampling) has indicated potential to discover a large mineral resource. The latest signiﬁ cant exploration ﬁ eld work was conducted at the Nimanskaya area during the ﬁ rst six months of 2013, when some trenching and surface sampling was completed, sample assays were performed and interpretations were made from data collected during 2012. Due to its remote location and lack of a usable road, Nimanskaya is considered a lower priority target. However, exploration may resume in the future as the Group considers the area to be highly prospective. Disposal of Koboldo (Amur region) of its 95.7% interest in OJSC ZDP Koboldo. The disposal was completed on 22 April 2015. The total cash consideration for the transaction was RUB 942 million (c.US 18.7 million) plus reimbursement of VAT for Q4 2014, payable within prescribed timeframes from the date of entering into the SPA. The transaction was completed before the start of the production season and as such no alluvial production was attributable to Petropavlovsk in 2015. Koboldo is an alluvial operation in the Amur region. Alluvial mining, the washing of gold-bearing gravels using a sluice or dredge, is seasonal. Operations normally run from April to November due to weather conditions, which contributes to the typical skew of the Group’s gold production to the second half of the year. Through its Koboldo subsidiary, the Group held licences to mine and conduct alluvial gold exploration for a number of small alluvial operations in the Amur region of Russia. Due to the high cost and the relatively small contribution to total Group production (only c.5% of total 2014 Group production), the Directors considered the Koboldo assets to be non-core. As a result, on 16 April 2015 the Group entered into an SPA relating to the sale 64 Petropavlovsk Annual Report 2015 IRC IRC produces and develops industrial commodities. Based in the Russian Far East, it beneﬁ ts from low production costs and proximity to the Chinese border, China being the world’s largest consumer of IRC’s main product, iron-ore. IRC was Petropavlovsk’s Non-Precious Metals Division before it was listed on the Hong Kong Stock Exchange in late 2010 (stock code 1029). The Group currently holds a 35.83% stake in IRC. IRC assets IRC’s key mining assets are Kuranakh, K&S and Garinskoye: – Kuranakh. An iron-ore/ilmenite concentrate mine located in the Amur region, Russian Far East – K&S. An ongoing project at an advanced stage of construction and development into a working mine. It is located in the Jewish Autonomous Region (EAO) of the Russian Far East – Garinskoye. This project is at an advanced stage of exploration with Probable Ore Reserves as well as Indicated and Inferred Mineral Resources. Like Kuranakh, it is located in the Amur region. IRC’s non-core mining assets – those that are not expected to contribute substantially to revenue in the short to medium term, are Bolshoi Seym, the Garinskoye ﬂ anks, Kostenginskoye and the Molybdenum Exploration Projects. – Bolshoi Seym. An ilmenite deposit with Indicated and Inferred Mineral Resources, located North of Kuranakh – The Garinskoye ﬂ anks. An area surrounding Garinskoye at an early stage of exploration – Kostenginskoye. An area 18km south of K&S at an early stage of exploration – The Molybdenum Exploration Projects. These projects are located in the Amur region, and – like Garinskoye and Kostenginskoye, are at early stages of exploration. The Garinskoye Flanks, Kostenginskoye and the Molybdenum Exploration Projects are yet to have JORC-compliant Mineral Resources and Ore Reserves. In addition to these assets, IRC also operates: – Giproruda. Based in St Petersburg, a technical mining and research consultancy – SRP. A steel slag reprocessing plant located in North East China. It is a joint venture between IRC, which owns 46%, and one of its largest iron-ore customers. Operational performance in 2015 Kuranakh Kuranakh produced 1,114,153 tonnes of iron-ore concentrate in 2015. This represents a 10% increase from 2014. The iron (Fe) content was 62.5%. It also produced 193,236 tonnes of ilmenite concentrate, up 8% from the previous year, with a 48% titanium dioxide content. In December 2015, IRC announced its decision to move Kuranakh to care and maintenance due to the low iron-ore and ilmenite price environment. Despite efforts to reduce costs at the mine, IRC decided that it would be most economical to focus its resources on K&S. K&S Phase One K&S is expected to be able to produce 3.2 million tonnes of iron-ore concentrate with a 65.8% iron (Fe) content, once completed and at full capacity. In October 2015, IRC reported that CNEEC, its main contractor for the development of K&S, had notiﬁ ed IRC that there would be a further delay to the project’s commissioning. IRC later signed an agreement with CNEEC and was advised that the operational plant of K&S will be handed over by 30 June 2016. Since December 2015, IRC had been in discussion with its project lender, ICBC, regarding waivers to maintain cash deposits at ICBC’s debt service reserve account, and to comply with certain ﬁ nancial covenants. On 19 April 2016, the waivers were granted, subject to the fulﬁ lment of certain conditions precedent. Garinskoye Garinskoye remains an attractive, low-cost, large-scale, DSO-style green-ﬁ eld project. Due to the depressed commodities environment and capital constraints, IRC did not develop it in 2015, but continues to monitor market conditions for future opportunities. Investment in IRC In January 2013, IRC entered into conditional agreements for a US$238 million subscription for new IRC Shares by General Nice Development Limited (‘General Nice’), a member of a group of companies which collectively is one of the largest Chinese iron-ore importers, and Minmetals Cheerglory, a wholly-owned subsidiary of China Minmetals Corporation. Liquidity constraints have resulted in General Nice, to date, completing c.80% of its planned investment. Investment from Minmetals Cheerglory can only occur once the subscription by General Nice has been completed. Although full completion of the investment from General Nice and Minmetals has been delayed, General Nice has agreed to commence paying interest on the outstanding investment amount of US$38 million from December 2014 onwards, although no interest payments have been made by General Nice to IRC as at 31 December 2015. IRC continues to be in discussions with General Nice, Mr Cai Sui Xin (Chairman of General Nice) and Minmetals Cheerglory about completion of General Nice’s subscription obligations and the settlement of the interest due to date and other potential alternative options. On 5 August 2015, IRC announced the successful completion of a fully-underwritten open offer to investors involving the issue of 1,295,976,080 new IRC shares (the ‘Open Offer’), on the basis of 4 offer shares for every 15 existing shares at the subscription price of HK$0.315 per offer share. The underwriters are Pine River, Sothic Capital and JABCAP respectively. As a result of the Open Offer, Petropavlovsk’s stake in IRC reduced from 45.39% to 35.83%. The Group remains a major shareholder. Consequently, IRC is now an associate of Petropavlovsk and not a subsidiary. Further information on the presentation of IRC may be found in note 27 of the Financial Statements. Further information may be obtained from the website of IRC, www.ircgroup.com.hk. Petropavlovsk Annual Report 2015 65 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Chief Financial Ofﬁ cer’s Statement For the year ended 31 December 2015 Andrey Maruta Financial Highlights Continuing operations Total attributable gold production (’000oz) Gold sold (’000oz) Group revenue Average realised gold price (US$/oz) Average LBMA gold price afternoon ﬁ xing (US$/oz) Total average cash costs (US$/oz) (a),(b) All-in sustaining costs (b), (c) Underlying EBITDA (d) Loss for the period From continuing operations From discontinued operations Basic loss per share From continuing operations From discontinued operations Net cash from operating activities From continuing operations From discontinued operations 2015 US$ million 2014 US$ million 504.1 481.9 599.9 1,178 1,160 749 874 172.8 (297.5) (190.5) (107.0) (US$0.09) (US$0.07) (US$0.02) 103.4 111.0 (7.6) 624.5 617.2 865.0 1,331 1,266 860 972 251.8 (347.7) (182.2) (165.5) (US$1.33) (US$0.94) (US$0.39) 133.2 168.8 (35.6) (a) Calculation of total cash costs (“TCC”) is set out in the section Hard-rock mines below. (b) The Group disposed its alluvial operations in April 2015. The comparative data for the year ended 31 December 2014 was restated accordingly to ensure comparability. (c) All-in sustaining costs (“AISC”) and all-in costs (“AIC”) are calculated in accordance with guidelines for reporting all-in sustaining costs and all-in costs published by the World Gold Council. Calculation is set out in the section All-in sustaining costs and all-in costs below. (d) Reconciliation of loss for the period and underlying EBITDA is set out in note 35 to the consolidated ﬁ nancial statements. Cash and cash equivalents Loans Convertible bonds (f) Net Debt 31 December 2015 US$ million 31 December 2014 US$ million 28.2 (e) (552.8) (85.5) 610.0 48.1 (664.5) (313.3) (929.7) (e) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development. (f) US$100.0 million convertible bonds due on 18 March 2020 at amortised cost (31 December 2014: US$310.5 million convertible bonds due on 18 March 2015 at amortised cost). Note: Figures may not add up due to rounding. Revenue Revenue from hard-rock mines Revenue from alluvial operations Revenue from other operations Total 66 Petropavlovsk Annual Report 2015 2015 US$ million 2014 US$ million 568.7 – 31.2 599.9 786.9 38.6 39.5 865.0 Physical volumes of gold production and sales Gold sold from hard-rock mines Gold sold from alluvial operations Movement in gold in circuit and doré-bars Total attributable production Group revenue during the period was US$599.9 million, 31% lower than the US$865.0 million achieved in 2014. Revenue from hard-rock mines was US$568.7 million, 28% lower than the US$786.9 million achieved in 2014. Gold remains the key commodity produced and sold by the Group, comprising 95% of total revenue generated in 2015. The physical volume of gold sold from hard-rock mines decreased by 18% from 588,231 ounces in 2014 to 481,884 ounces in 2015. The average realised gold price decreased by a 11% from US$1,331/oz in 2014 to US$1,178/oz in 2015. The average realised gold price was above the average market price of US$1,160/oz, reﬂ ecting the positive effect of hedge arrangements. Hard-rock mines sold 68,075 ounces of silver in 2015 at an average price of US$15/oz, compared to 190,573 ounces in 2014 at an average price of US$19/oz. Revenue generated as a result of third-party work by the Group’s in-house service companies contributed US$31.2 million to group revenue in 2015 compared to US$39.5 million in 2014. This was primarily attributable to sales generated by Group’s engineering and research institute, Irgiredmet, of US$28.6 million in 2015 compared to US$34.1 million in 2014, principally from engineering services and the procurement of materials, consumables and equipment for third parties. Cash ﬂ ow hedge arrangements In order to increase certainty in respect of a signiﬁ cant proportion of its cash ﬂ ows, the Group continued its hedging arrangements through gold forward contracts. Forward contracts to sell an aggregate of 178,449 ounces of gold matured during the year and contributed US$12.6 million to cash revenue (2014: US$42.3 million from forward contracts to sell an aggregate of 364,253 ounces of gold). Forward contracts to sell an aggregate of 71,551 ounces of gold at an average price of US$1,116 per ounce were outstanding as at 31 December 2015. In October 2014, the Group also purchased a number of gold put options for an aggregate of 150,000 ounces of gold with a strike price of US$1,150/oz as part of a downside protection strategy. The option contracts matured over the period from January 2015 to June 2015. The aggregate premium paid was US$4.8 million. Forward contracts and a US$3.2 million decrease in options fair value contributed US$20/oz to the average realised gold price. The Group constantly monitors gold price and hedges some portion of production for periods of up to 12 months as considered necessary. Forward contracts to sell an aggregate of 37,850 ounces of gold at an average price of US$1,116/oz are outstanding as at 28 April 2016. 2015 oz 481,884 – 481,884 22,216 504,100 2014 oz 588,231 28,982 617,213 7,287 624,500 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 67 Chief Financial Ofﬁ cer’s Statement continued For the year ended 31 December 2015 Underlying EBITDA and analysis of operating costs Loss for the period from continuing operations Add/(less): Interest expense Investment income Other ﬁ nance gains Foreign exchange losses Taxation Depreciation Reversal of impairment of mining assets Impairment of exploration and evaluation assets Impairment of ore stockpiles Impairment of investments in associates Write-down to adjust the carrying value of Koboldo’s net assets to fair value less cost to sell Share of results of associates (a) Underlying EBITDA 2015 US$ million (190.5) 2014 US$ million (182.2) 71.5 (1.0) (9.1) 12.0 48.9 129.1 – 37.4 17.4 – – 57.0 172.8 67.7 (1.7) – 31.3 167.9 144.0 (28.9) 22.0 10.1 9.7 11.9 – 251.8 (a) Group’s share of interest expense, investment income, other ﬁ nance gains and losses, foreign exchange losses, taxation, depreciation and impairment recognised by an associate (IRC). Underlying EBITDA as contributed by business segments is set out below. 2015 US$ million 2014 US$ million 118.6 16.1 5.7 66.5 206.9 – (34.1) 172.8 131.5 29.5 25.7 90.8 277.5 10.0 (35.7) 251.8 Pioneer Pokrovskiy Malomir Albyn Total Hard-rock mines Alluvial operations Corporate and other Underlying EBITDA 68 Petropavlovsk Annual Report 2015 Hard-rock mines During 2015, hard-rock mines generated underlying EBITDA of US$206.9 million compared to US$277.5 million underlying EBITDA in 2014. Total cash costs for hard-rock mines decreased from US$860/oz in 2014 to US$749/oz in 2015, primarily reﬂ ecting the effect of cost optimisation measures undertaken by the Group in response to the declining gold price environment and scheduled decrease in grades processed as well as the positive effect of Rouble depreciation. The decrease in the average realised gold price from US$1,331/oz in 2014 to US$1,178/oz in 2015 and the decrease in physical ounces sold resulted in US$124.1 million decrease in the underlying EBITDA. This effect was partially mitigated by the reduction in the total cash costs which had a net US$53.5 million positive contribution to the underlying EBITDA in 2015. The key components of operating cash expenses are wages, electricity, diesel, chemical reagents and consumables, as set out in the table below. The key cost drivers affecting operating cash expenses are stripping ratios, production volumes of ore mined and processed, grades of ore processed, recovery rates, cost inﬂ ation and ﬂ uctuations in the Rouble to US Dollar exchange rate. Compared with 2014 there was no signiﬁ cant inﬂ ation of Rouble denominated costs, in particular, electricity costs in Rouble increased by up to 1% (decreased by up to 37% in US Dollar terms), the cost of chemical reagents increased by up to 6% (decreased by up to 50% in US Dollar terms), consumables prices increased by up to 2% (decreased by up to 37% in US Dollar terms) and cost of diesel decreased by up to 1% (decreased by up to 38% in US Dollar terms). The impact of low Rouble price inﬂ ation was reinforced by the 59% average depreciation of the Rouble against the US Dollar, with the average exchange rate for the period going from 38.4 Roubles per US Dollar in 2014 to 61.30 Roubles per US Dollar in 2015. Reﬁ nery and transportation costs are variable costs dependent on the production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The mining tax rate is 6%. Staff cost Materials Fuel Electricity Other external services Other operating expenses Movement in ore stockpiles, work in progress and bullion in process attributable to gold production (a) Total operating cash expenses 2015 US$ million 61.8 129.9 55.3 25.0 27.4 29.8 329.2 (17.8) 311.4 % 19 39 17 8 8 9 100 2014 (b) US$ million 88.6 148.6 71.6 35.1 19.9 37.2 401.0 26.4 427.4 % 22 37 18 9 5 9 100 (a) Excluding deferred stripping (b) The Group disposed its alluvial operations in April 2015. The comparative data for 2014 was restated accordingly to ensure comparability. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 69 Chief Financial Ofﬁ cer’s Statement continued For the year ended 31 December 2015 Revenue Gold Silver Expenses Operating cash expenses Reﬁ nery and transportation Other taxes Mining tax Deferred stripping costs Depreciation and amortisation Reversal of impairment of mining assets Impairment of exploration and evaluation assets Impairment of ore stockpiles Operating expenses Result of precious metals operations Segment EBITDA Physical volume of gold sold, oz Cash costs Operating cash expenses Reﬁ nery and transportation Other taxes Mining tax Deferred stripping costs Operating cash costs Deduct: co-product revenue Total cash costs Average TCC/oz, US$/oz Hard-rock mines Pioneer US$ million Pokrovskiy US$ million Malomir US$ million Albyn US$ million 2015 Total US$ million 2014 (a) Total US$ million 253.9 0.6 254.6 118.3 0.5 2.5 14.7 – 45.9 – – 11.9 193.7 60.8 118.6 61.0 0.2 61.2 40.8 0.1 0.5 3.7 – 12.3 – 2.3 (0.9) 58.9 2.3 16.1 71.0 0.1 71.1 59.0 0.1 2.1 4.1 – 18.2 – 0.1 6.1 89.8 (18.7) 5.7 181.7 0.1 181.8 93.3 0.3 2.6 10.7 8.4 50.8 – – 0.3 166.4 15.4 66.5 567.6 1.0 568.7 311.4 1.1 7.7 33.1 8.4 127.2 – 2.5 17.4 508.9 59.8 206.9 783.2 3.7 786.9 427.4 2.9 13.5 45.5 20.1 138.2 (28.9) 3.6 10.1 632.3 154.6 277.5 216,319 51,573 59,831 154,160 481,884 588,231 118.3 0.5 2.5 14.7 – 135.9 (0.6) 135.3 625 40.8 0.1 0.5 3.7 – 45.1 (0.2) 44.9 871 59.0 0.1 2.1 4.1 – 65.4 (0.1) 65.3 93.3 0.3 2.6 10.7 8.4 115.3 (0.1) 115.2 311.4 1.1 7.7 33.1 8.4 361.8 (1.0) 360.7 427.4 2.9 13.5 45.5 20.1 509.4 (3.7) 505.7 1,092 747 749 860 (a) The Group disposed its alluvial operations in April 2015. The comparative data for 2014 was restated accordingly to ensure comparability. 70 Petropavlovsk Annual Report 2015 All-in sustaining costs and all-in costs AISC decreased from US$972/oz in 2014 to US$874/oz in 2015, reﬂ ecting the reduction in TCC as well as lower central administration expenses and sustaining capital expenditure related to the existing mining operations. AIC decreased from US$1,087/oz in 2014 to US$932/oz in 2015, reﬂ ecting the decrease in all-in sustaining costs explained above, decrease in exploration expenditure and decrease of capital expenditure related to new projects, which was limited to fulﬁ lling existing contractual commitments relating to POX. Hard-rock mines Pioneer US$ million Pokrovskiy US$ million Malomir US$ million Albyn US$ million 2015 Total US$ million 2014 (a) Total US$ million Physical volume of gold sold, oz 216,319 51,573 59,831 154,160 481,884 588,231 Total cash costs Average TCC/oz, US$/oz Impairment of ore stockpiles Adjusted operating costs Central administration expenses Capitalised stripping at end of the period Capitalised stripping at beginning of the period Close-down and site restoration Sustaining capital expenditure All-in sustaining costs All-in sustaining costs, US$/oz Exploration expenditure Capital expenditure Impairment of ore stockpiles (b) All-in costs All-in costs, US$/oz 135.3 625 9.5 144.8 13.7 – – (0.5) 4.7 162.7 752 7.1 0.4 2.4 172.6 798 44.9 871 (0.9) 44.0 3.3 – – (0.1) 0.1 47.3 918 1.0 – – 48.3 937 65.3 115.2 360.7 505.7 1,092 0.3 65.6 3.8 – – (0.1) 1.2 70.6 1,180 4.2 0.6 5.8 81.2 1,357 747 0.3 115.5 9.7 18.0 (8.4) (1.1) 6.7 140.3 910 6.6 – – 146.9 953 749 9.2 369.9 30.4 18.0 (8.4) (1.7) 12.7 420.9 874 18.9 1.0 8.2 449.0 860 14.5 520.2 36.4 8.4 (20.1) 3.9 23.2 572.0 972 33.2 38.4 (4.4) 639.3 932 1,087 (a) The Group disposed its alluvial operations in April 2015. The comparative data for 2014 was restated accordingly to ensure comparability. (b) Refractory ore stockpiles to be processed at the POX Hub. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 71 Chief Financial Ofﬁ cer’s Statement continued For the year ended 31 December 2015 Corporate and other The Group has corporate ofﬁ ces in London, Moscow and Blagoveschensk which together represent the central administration function. Central administration expenses decreased by US$7.8 million from US$38.2 million in 2014 to US$30.4 million in 2015, primarily reﬂ ecting depreciation of the Rouble against the US Dollar. During 2015, corporate and other operations contributed US$(34.1) million to the underlying EBITDA vs. US$(35.7) million in 2014. Impairment review The Group undertook an impairment review of the tangible assets attributable to the gold mining projects and the supporting in-house service companies and concluded no impairment was required as at 31 December 2015. The forecast future cash ﬂ ows are based on the Group’s current mining plan. The other key assumptions which formed the basis of forecasting future cash ﬂ ows and the value in use calculation are set out below: Long-term gold price Discount rate (a) RUB/US$ exchange rate Year ended 31 December 2015 Year ended 31 December 2014 US$1,150/oz 8% US$1,200/oz 9.5% RUB65.0/US$ RUB60.0/US$ (a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 10.1% (2014: 11.8%) Impairment of exploration and evaluation assets The Group performed a review of its exploration and evaluation assets and recorded the following impairment charges: – Taking into consideration the alternative means for realising value of from the Visokoe asset through a sale, and referring to the indicative aggregate consideration from the potential buyer of US$20 million for Visokoe asset and equity investment in Verkhnetisskaya Ore Mining Company, a US$32.5 million impairment charge has been recorded against associated exploration and evaluation costs previously capitalised within exploration and evaluation assets; – US$4.0 million impairment charges have been recorded against associated exploration and evaluation costs previously capitalised within intangible assets following the decision to suspend exploration at various license areas, located in the Amur region; and – A further US$0.9 million impairment charge has been recorded against exploration and evaluation assets in Guyana. Impairment of ore stockpiles The Group assessed the recoverability of the carrying value of ore stockpiles and recorded impairment charges/ reversals of impairment as set out below: Pokrovskiy Pioneer Malomir Albyn Year ended 31 December 2015 Year ended 31 December 2014 Pre-tax impairment charge/ (reversal of impairment) US$ million Post-tax impairment charge/ (reversal of impairment) US$ million Pre-tax impairment charge/ (reversal of impairment) US$ million Taxation US$ million Post-tax impairment charge/ (reversal of impairment) US$ million Taxation US$ million (0.9) 11.9 6.1 0.3 17.4 0.2 (2.4) (1.2) (0.1) (3.5) (0.7) 9.6 4.9 0.2 13.9 (3.4) 7.1 (3.2) 9.6 10.1 0.7 (1.4) 0.6 (1.9) (2.0) (2.7) 5.7 (2.5) 7.7 8.1 72 Petropavlovsk Annual Report 2015 Interest income and expense Investment income The Group earned US$1.0 million interest income on its cash deposits with banks. Interest expense Less interest capitalised Other Total 2015 US$ million 1.0 2014 US$ million 1.7 2015 US$ million 2014 US$ million 71.3 – 0.2 71.5 80.6 (13.4) 0.5 67.7 Interest expense for the period was comprised of US$13.6 million effective interest on the Convertible Bonds and US$57.7 million interest on bank facilities (2014: US$25.4 million and US$55.2 million, respectively). During 2015, no interest expense was capitalised as part of mine development costs within property, plant and equipment (2014: US$13.4 million). Other ﬁ nance gains Gain on settlement of the Existing Bonds Fair value gains on derivative ﬁ nancial instruments Guarantee fee in connection with IRC’s ICBC facility Total Taxation Tax charge 2015 US$ million 2014 US$ million 0.5 6.4 2.2 9.1 – – – – 2015 US$ million 48.9 2014 US$ million 167.9 i S t r a t e g c r e p o r t G o v e r n a n c e The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The average statutory tax rate for 2015 was 20.25% in the UK and 20% in Russia. The tax charge for the period arises primarily in relation to the Group’s precious metals operations and is represented by a current tax of US$31.8 million in 2015 (2014: US$34.5 million) and a deferred tax charge, which is a non-cash item, of US$17.1 million (2014: deferred tax charge of US$133.4 million). Included in the deferred tax charge in 2015 is a US$40.3 million foreign exchange effect which primarily arises because the tax base for a signiﬁ cant portion of the future taxable deductions in relation to the Group’s property, plant and equipment are denominated in Russian Rouble whilst the future depreciation charges associated with these assets will be based on their US$ carrying value. During the period, the Group made corporation tax payments in aggregate of US$32.9 million in Russia (2014: corporation tax payments in aggregate of US$34.0 million in Russia). Loss per share Loss for the period from continuing operations attributable to equity holders of Petropavlovsk PLC Weighted average number of Ordinary Shares Basic loss per ordinary share from continuing operations 2015 2014 US$190.2 million US$184.3 million 196,423,244 US$0.94 2,657,332,030 US$0.07 Basic loss per share for 2015 was US$0.07 compared to US$0.94 basic loss per share for 2014. The key factor affecting the basic loss per share was the increase of weighted average number of Ordinary Shares from 196,423,244 for 2014 to 2,657,332,030 for 2015. The total number of Ordinary Shares in issue as at 31 December 2015 was 3,300,561,697 (31 December 2014: 197,638,425). Petropavlovsk Annual Report 2015 73 i F n a n c a i l s t a t e m e n t s Chief Financial Ofﬁ cer’s Statement continued For the year ended 31 December 2015 Discontinued operations and investment in associate – IRC On 7 August 2015, IRC completed an Open Offer resulting in the issue of 1,295,976,080 shares. The Group did not subscribe for the Offer Shares to which it was entitled and the Group’s interest in the share capital of IRC was diluted to 35.83%. With other signiﬁ cant shareholder blocks in place following the completion of the Open Offer and despite the Group’s continuing guarantee of IRC’s facility with ICBC, the Group is no longer considered to be exercising de facto control over IRC and, accordingly, IRC ceased being a subsidiary of the Group and is recognised as an associate to the Group from 7 August 2015. IRC share price was HK$0.35 as at 7 August 2015 and the gain from disposal of IRC was US$0.7 million. During the period to 7 August 2015, IRC generated US$10.7 million operating losses. The Group also recorded a further US$96.6 million write-down to adjust the carrying value of IRC’s net assets to fair value less costs to sell, based on IRC’s share price of HK$0.35 as at 7 August 2015, and reﬂ ect the change in the market share price of IRC shares. With effect from 7 August 2015, the Group accounts for IRC as an associate under the equity accounting method as required by IAS 28 “Investments in Associates and Joint Ventures”. Under this method, the fair value of the Group’s interest in IRC on 7 August 2015 of US$99.6 million became the deemed historical cost of the associate, which was recognised within the investments in associate line as a single amount following de-recognition of the separate “asset held for sale”, “liability held for sale” and “non-controlling interest” at that date. During the period from 7 August 2015 to 31 December 2015, the Group recognised its 35.83% share of IRC loss for the period as a loss from an associate of US$60.4 million, including US$49.7 million attributed to a further impairment of K&S Project. Financial position and cash ﬂ ows Cash and cash equivalents Loans Convertible bonds (a) Net Debt 31 December 2015 US$ million 31 December 2014 US$ million 28.2 (552.8) (85.5) (610.0) 48.1 (664.5) (313.3) (929.7) (a) US$100.0 million convertible bonds due on 18 March 2020 at amortised cost (31 December 2014: US$310.5 million convertible bonds due on 18 March 2015 at amortised cost). 2015 US$ million 2014 US$ million 111.0 (7.6) 103.4 (23.2) (43.0) (66.2) (110.6) 74.2 (36.4) 168.8 (35.6) 133.2 (91.4) (95.9) (187.3) (161.8) 89.8 (72.0) Net cash from operating activities: Continuing operations Discontinued operations Net cash used in investing activities: Continuing operations Discontinued operations Net cash used in ﬁ nancing activities: Continuing operations Discontinued operations 74 Petropavlovsk Annual Report 2015 Key movements in cash and net debt from continuing operations As at 1 January 2015 Net cash generated by operating activities before working capital changes Decrease in working capital Income tax paid Capital expenditure on Gold Division projects and in-house service companies Exploration expenditure on Gold Division projects Proceeds from Rights issue Amounts repaid under bank facilities Settlement of the Existing Bonds Interest accrued Interest paid Reﬁ nancing costs Proceeds from disposal of subsidiaries, net of cash disposed and net of liabilities settled Funds received under investment agreement with the Russian Ministry of Far East Development Foreign exchange losses Other As at 31 December 2015 (a) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development Cash US$ million 48.1 167.0 43.5 (32.9) (13.7) (18.9) 156.2 (114.0) (135.5) (66.6) (34.4) 6.5 15.1 (4.7) 12.5 28.2 (a) Debt US$ million (977.8) Net Debt US$ million (929.7) 114.0 225.1 (71.3) 66.6 5.1 (638.3) (610.0) i S t r a t e g c r e p o r t G o v e r n a n c e The decrease in working capital reﬂ ects the efforts undertaken by the Group to optimise the working capital structure and effect of Rouble depreciation, including: – an aggregate US$11.6 million decrease in ore stockpiles primarily due to the partial processing of ore stockpiles at Pioneer, Pokrovskiy and Malomir which contributed US$3.2million, US$5.0 million and US$6.3 million, respectively, partially offset by the increase in ore stockpiles at Albyn (US$2.9 million); – US$24.2 million decrease in store and spare parts and construction materials; As at 31 December 2015, there were no undrawn facilities available to the continuing operations. Capital expenditure The Group invested an aggregate of US$32.6 million on its gold projects compared to US$96.8 million invested in 2014. The key areas of focus this year were on fulﬁ lling existing contractual commitments in relation to the POX Hub project, expansion of tailing dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group’s main mining operations. POX Pokrovskiy and Pioneer Malomir Albyn Upgrade of in-house service companies Other Exploration expenditure US$ million Development expenditure and other CAPEX US$ million Total US$ million – 7.8 4.1 6.4 – 0.6 18.9 1.0 4.2 1.1 6.3 1.1 – 13.7 1.0 12.0 5.2 12.7 1.1 0.6 32.6 Petropavlovsk Annual Report 2015 75 i F n a n c a i l s t a t e m e n t s Chief Financial Ofﬁ cer’s Statement continued For the year ended 31 December 2015 Foreign currency exchange differences The Group’s principal subsidiaries have a US Dollar functional currency. Foreign exchange differences arise on translation of monetary assets and liabilities denominated in foreign currencies, which for the principal subsidiaries of the Group are the Russian Rouble and GB Pounds Sterling. The following exchange rates to the US Dollar have been applied to translate monetary assets and liabilities denominated in foreign currencies. GB Pounds Sterling (GBP: US$) Russian Rouble (RUB : US$) The Rouble depreciated by 30% against the US Dollar during 2015, from RUB56.26 : USD1 as at 31 December 2014 to RUB72.88 : USD1 as at 31 December 2015. The average year-on-year depreciation of the Rouble against the US Dollar was approximately 59%, with the average exchange rate for 2015 being RUB61.30 : USD1 compared to RUB38.44 : USD1 for 2014. As a result of the signiﬁ cant volatility of the Russian Rouble, the Group recognised foreign exchange losses of US$12 million in 2015 (2014: US$31.3 million) arising primarily on Rouble denominated net monetary assets. The Reﬁ nancing On 2 February 2015, the Group announced a proposed Reﬁ nancing which was completed on 18 March 2015. The Reﬁ nancing consisted of the following: – Rights issue pursuant to which 3,102,923,272 new Ordinary Shares were issued at subscription price of £0.05 per Ordinary Share as set out below: – 2,114,460,594 Ordinary Shares were issued for cash consideration raising £105.7 million (equivalent to US$156.2 million) gross cash proceeds; and – 988,462,678 Ordinary Shares were issued in exchange for the Existing Bonds as part of settlement of the Existing Bonds (please refer to the details set out below). – Issue of the new convertible bonds: On 18 March 2015, the Group issued US$100 million convertible bonds due on 18 March 2020 (the ‘New Bonds’). The New Bonds were issued pursuant to the completion of the exchange offer of the Existing Bonds as set out below. The New Bonds were issued by the Group’s wholly owned subsidiary Petropavlovsk 2010 Limited and are guaranteed by the 31 December 2015 31 December 2014 0.68 72.88 0.64 56.26 Company. The New Bonds carry a coupon of 9.00% payable quarterly in arrears and are convertible into redeemable preference shares of Petropavlovsk 2010 Limited which are guaranteed by and will be exchangeable immediately upon issuance for Ordinary Shares in the Company. The conversion price has been set at £0.0826 per Ordinary Share, subject to adjustment for certain events, and the conversion exchange rate has been ﬁ xed at US$1.5171: £1. The New Bonds were admitted to listing on the Ofﬁ cial List of the UK Listing Authority and admitted to trading on the Professional Securities Market of the London Stock Exchange on 18 March 2015. – Settlement of the Existing Bonds: The Existing Bonds with a par value of US$310.5 million were settled as follows: Portion settled in cash from the net cash proceeds of the Rights Issue Portion settled in equity through the debt-for-equity exchange commitments Portion settled through the issuance of the New Bonds Par value of the Existing Bonds Par value US$ million 135.5 75.0 100.0 310.5 – Bank Waivers: The Group obtained waivers and relaxation of certain ﬁ nancial covenants for the period until 31 December 2015, inclusive. The aggregate transaction costs of US$42.8 million, out of which US$7.8 million were paid as at 31 December 2014, were primarily allocated to equity (US$33.4 million) and to the New Bonds (US$5.1 million). Disposal of alluvial operations On 16 April 2015, the Group entered into a conditional Sales and Purchase Agreement relating to the sale of its 95.7% interest in JSC ZDP Koboldo (‘Koboldo’). The disposal was completed on 22 April 2015. Koboldo is an alluvial gold operation located in the Amur region in the Far East of Russia and represents an alluvial operations business segment. The net assets of Koboldo were written down to fair value based on the indicative cash consideration as at 31 December 2014. Accordingly, the disposal did not result in signiﬁ cant gains or losses on disposal in 2015. Disposal of investments in associates On 7 April 2015, the Group entered into a Share Purchase Agreement to sell its 25% interest in JSC ZRK Omchak (“Omchak”) for a total cash consideration of US$1 million. Investment agreement with the Russian Ministry of Far East Development On 14 December 2015, the Group entered into an investment agreement with the Russian Ministry of Far East Development (the ‘Investment Agreement’). The Investment 76 Petropavlovsk Annual Report 2015 Agreement involves provision of RUB5.5billion (an equivalent to c.US$75 million as at 31 December 2015) funding towards the construction of the electricity power line in the North-East of the Amur Region of Russia, where the Group’s Albyn and Malomir mines and adjacent licence areas are operated, during the period 2015 – 2019. The funds are advanced to the Group and then should be transferred to the joint-stock company Far East Grid Distribution Company (‘DRSK’), who is to engage a contractor to build the relevant power supply infrastructure. The Group’s responsibility under the Investment Agreement will be to monitor the progress and to report to the Russian Ministry of Far East Development. The Group will be taking ultimate responsibility for the construction of the power line. Upon completion, the Group will get access to the enhanced capacity of the power supply infrastructure in the region. Under the terms of the Investment Agreement, the Group has certain capital commitments, including further development of Albyn and Malomir mines. As at 31 December 2015, the Group received RUB1.1billion (an equivalent to US$15.1 million) funds under the Investment Agreement. POX JV On 27 April 2016, the Group entered into an agreement with LLC GMD Gold (‘GMD Gold’) to set up a new enterprise whereby the Group will contribute the existing POX Hub assets and GMD Gold will provide US$120 million ﬁ nance towards completion of the POX Hub development. Upon completion of the POX Hub development, each party will have the right to use the 50% capacity of the POX Hub. This transaction will require shareholder approval. Acquisition of Amur Zoloto On 28 April 2016, the Group entered into a contribution agreement to acquire 100% share in the LLC Amur Zoloto, a gold company with production and development assets in the Khabarovsk Region in the Far East of Russia. Upon completion, consideration for the transaction will be satisﬁ ed by the issue of new ordinary shares in the Company. This transaction will require shareholder approval. Going concern The Group monitors and manages its liquidity risk on an ongoing basis to ensure that it has access to sufﬁ cient funds to meet its obligations. Cash forecasts are produced regularly based on a number of inputs including, but not limited to, forecast commodity prices and impact of hedging arrangements, Group mining plan, forecast expenditure and debt repayment schedules. Sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, cost inﬂ ation, different production rates from the Group’s producing assets and the timing of expenditure on development projects. This is done to identify risks to liquidity and covenant compliance and enable management to develop appropriate and timely mitigation strategies. The Group meets its capital requirements through a combination of sources including cash generated from operations and external debt. The Group performed an assessment of the forecast cash ﬂ ows and covenant compliance in relation to bank facilities for the period of 12 months from the date of approval of the 2015 Annual Report and Accounts. As at 31 December 2015, the Group had sufﬁ cient liquidity headroom and complied with related ﬁ nancial covenants. The Group’s projections demonstrate that although the Group expects to have sufﬁ cient working capital liquidity over the next 12 months, these projections indicate that, unless mitigating actions can be taken, there will be insufﬁ cient liquidity to meet its debt repayment schedule on 20 June 2016 and a breach of certain ﬁ nancial covenants, being leverage and interest service ratios, within the bank facilities as at the next measurement date, being 30 June 2016, is likely to arise. In view of the above, the Group is in negotiations with its principal lenders with a view to obtaining satisfactory modiﬁ cations and temporary waivers regarding the existing covenants ahead of the testing period and the current repayment schedule (“Debt Restructuring”). The Group has received written comfort from their principal lenders intending to support the Debt Restructuring. If an agreement with the Group’s principal lenders in relation to the Debt Restructuring cannot be reached, and as a result a covenant breach and/ or missed debt repayment occurs, this would result in events of default which, through cross-defaults and cross-accelerations, could cause all other Group’s debt arrangements to become repayable on demand. The Group has guaranteed the outstanding amounts IRC owes to ICBC. The outstanding loan principal was US$276.25 million as at 31 December 2015. The assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is another key element of the Group’s overall going concern assessment. The Directors of IRC have forecast that certain ﬁ nancial covenants under the ICBC facility are likely to be breached at the next testing date of 30 June 2016 and IRC will not have sufﬁ cient liquidity to facilitate a debt repayment of US$21.5 million due on 21 June 2016, which will cause the related facility to become immediately due and payable. However, IRC has obtained from ICBC approved waivers of the ﬁ nancial covenants until and inclusive of 31 December 2017, conditional, among others, on approval of the Debt Restructuring by the Group’s principal lenders, a result of which is that approval of the Debt Restructuring must be completed and approved by 20 June 2016 to facilitate IRC’s debt repayment schedule being met. The risk that the Group will be unable to achieve appropriate mitigating actions prior to 20 June 2016 or secure an appropriate relaxation or amendment of its ﬁ nancial covenants in order to avoid a breach of covenants is a material uncertainty which may cast signiﬁ cant doubt upon the Company’s ability to continue to apply the going concern basis of accounting. i S t r a t e g c r e p o r t G o v e r n a n c e Nevertheless, after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation, after taking into account the aforementioned factors, that the Group will have adequate resources to continue in operational existence for the foreseeable future, being at least the next 12 months from the date of approval of the 2015 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated ﬁ nancial statements. 2016 Outlook The Group is on track to achieve 2016 production guidance of 460-500Koz. The Group’s operating cash expenses are substantially Rouble denominated. The Group expects its total average cash costs of production in 2016 to be c.US$700/oz at current exchange rate. Net debt is expected to decrease to c.US$570 million by the end of 2016, assuming an average gold price of US$1,200/oz for the remainder of 2016. The Strategic Report was approved by the Board on 28 April 2016 and signed on its behalf by: Peter Hambro Chairman Petropavlovsk Annual Report 2015 77 i F n a n c a i l s t a t e m e n t s Governance In this section Board of Directors Corporate Governance Report Nomination Committee Report Audit Committee Report Directors’ Remuneration Report Directors’ Report Directors’ Responsibilities Statement Independent Auditor’s Report to the Members of Petropavlovsk PLC 80 82 88 89 96 111 118 119 78 Petropavlovsk Annual Report 2015 78 Petropavlovsk Annual Report 2015 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 79 Petropavlovsk Annual Report 2015 79 Board of Directors Mr Peter Hambro Chairman Dr Pavel Maslovskiy Chief Executive Ofﬁ cer Mr Andrey Maruta Chief Financial Ofﬁ cer Sir Roderic Lyne Senior Independent Director Mr Hambro is one of the co-founders of the Company and has been Chairman of the Group since its formation in 1994. Experience: Mr Hambro started his career with his family bank and became joint Managing Director of Smith St. Aubyn Holdings Ltd before joining the Mocatta Group, the world’s largest bullion traders, as Deputy Managing Director of Mocatta & Goldsmid Limited. External appointments: Non-Executive Chairman of Sundeala Limited, Peter Hambro Limited and Tidal Transit Limited, all of which are family companies and he is a Partner in Heads Farm Partnership. Committee membership: Chairman of the Nomination and Executive Committees One of the co-founders of the Company. Dr Maslovskiy held directorships within the Group including the position of Chief Executive Ofﬁ cer from the Group’s inception in 1994 until December 2011, when he relinquished all remunerated positions following his appointment as a Senator- Member of the Federation Council (Upper House of the Russian Parliament). Dr Maslovskiy retired as a Senator-Member in October 2014 and was re-appointed as Chief Executive Ofﬁ cer, in November 2014. Dr Maslovskiy acted as Honorary President during 2012 to November 2014. Experience: Prior to embarking on his business career, Dr Maslovskiy was a Professor of Metallurgy at the Moscow Aircraft Technology Institute. External appointments: None. Committee membership: Dr Maslovskiy is a member of the Executive Committee. Mr Maruta was appointed to the Board as Finance Director – Russia in January 2011, and promoted to the position of Chief Financial Ofﬁ cer in April 2012. Sir Roderic Lyne was appointed as Senior Independent Director on 1 November 2015. He was appointed to the Board in 2009 upon the Company’s merger with Aricom plc. Experience: Mr Maruta qualiﬁ ed as a Chartered Certiﬁ ed Accountant at Moore Stephens in 2001 and joined the Group in 2003 as Group Chief Accountant. He was appointed Deputy Finance Director in 2005 and Finance Director in 2006. Mr Maruta is a fellow member of The Association of Chartered Certiﬁ ed Accountants. External appointments: None. Committee membership: Mr Maruta is a member of the Executive Committee. Experience: Sir Roderic Lyne was previously a Non-Executive Director of Aricom plc, a position he had held since 2006. Sir Roderic served as British Ambassador to Russia from January 2000 until August 2004. External Appointments: Deputy Chairman of the Council of the Royal Institute of International Affairs (Chatham House) and a member of the Committee of the Iraq Inquiry. In addition, Sir Roderic is a Non-Executive Director of JP Morgan Bank International LLC. Committee membership: Sir Roderic is Chairman of the Company’s Remuneration and HSE Committees. 80 Petropavlovsk Annual Report 2015 Mr Robert Jenkins Non-Executive Director Mr Alexander Green Non-Executive Director Mr Andrew Vickerman Non-Executive Director Mr Robert Jenkins was appointed as a Non-Executive Director on 30 April 2015. Experience: Mr Jenkins is a chartered accountant, having qualiﬁ ed with KPMG in the UK, and has over 20 years of Russia-related investment experience, including in the natural resources sectors. He is also a ﬂ uent Russian speaker. Mr Jenkins was Finance Director of Eurasia Mining, a Russia focused mining exploration company, admitted to the AIM market of the London Stock Exchange, and chief ﬁ nancial ofﬁ cer of Urals Energy, a Russia-based oil exploration and production company, prior to that company’s admission to AIM. Mr Jenkins has an MA in Modern History and Modern Languages from Oxford University. External appointments: Mr Jenkins is a partner at NorthStar Corporate Finance, which specialises in advising companies on Russia related as well as other European acquisition and ﬁ nancing transactions. He is also the Senior Independent Director and Audit Committee Chairman of Ruspetro plc, a UK Stock Exchange-listed, Russia focused independent oil and gas production company. Committee membership: Mr Jenkins is Chairman of the Company’s Audit Committee. Mr Alexander Green was appointed as a Non-Executive Director on 27 August 2015. Experience: Mr Green has two decades of experience in the resources industry. From 2003 to 2012, he was a Marketing Director at BHP Billiton, a leading global resources company. Mr Green has a wealth of experience including risk management, development of business strategy and corporate governance. Mr Green holds a Master’s degree in Global History from the London School of Economics and Political Science and a Bachelor’s degree in Civil Engineering from the University of Salford. External appointments: Mr Green focuses on angel investing, academic study and mentoring to young entrepreneurs, social enterprises and charities. Mr Green is a Board Observer with Fluidic Analytics Limited, a company that builds tools for protein characterisation. Mr Green was a Non-Executive Director of Torm A/S Copenhagen, a Danish shipping company listed on the Nasdaq Copenhagen Stock Exchange, from January 2013 until August 2015 when he retired from the board following the company’s ﬁ nancial restructuring. Committee membership: Mr Green is a member of the Company’s Audit, Remuneration and HSE Committees. Mr Andrew Vickerman was appointed as a Non-Executive Director on 22 October 2015. Experience: Mr Vickerman spent 20 years with Rio Tinto, one of the world’s leading mining companies, the last ten as a member of the Operations and Executive Committees with responsibility for global communications and external relations. An economist by background he has previously worked for The World Bank and other international agencies. Mr Vickerman holds BA, MA and PhD degrees in Economics from Cambridge University. External appointments: Mr Vickerman is a member of the Board of Traﬁ gura Group Pte Ltd., an independent commodity trading and logistics house, Chairman of Alva Group, a technology company that provides business intelligence and Chairman of Direct Nickel Limited, an Australian business that has developed technology for processing nickel laterite deposits. Committee membership: Mr Vickerman is a member of the Company’s Audit, Remuneration and HSE Committees. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 81 Corporate Governance Report The Board of Directors: Areas of focus in 2015 – Reﬁ nancing of the Group’s outstanding US$310.5 million Convertible Bonds due 2015 (the “Bonds”) – Delivering against the Group’s ﬁ nancial targets – reduction in net debt and total cash costs – Rebalancing the skills and experience of the Board. Areas of focus in 2016 – Delivery of the Group’s operational and ﬁ nancial targets – Development of the Group’s underground mining potential – Recommencement of the construction of the POX plant. Chairman’s introduction Dear shareholder 2015 was a year of signiﬁ cant change for both the Company and the Board. The year commenced with the Reﬁ nancing of the Group’s outstanding Bonds. This completed successfully on 18 March 2015. During the Reﬁ nancing and as communicated to our shareholders at that time, it was agreed that given the reduced size of the Company’s market capitalisation relative to its previous levels, the size of the Board would be reduced from twelve to seven members. This has been achieved and the reduced Board now comprises three Executive Directors: myself as Chairman, Dr Pavel Maslovskiy (Chief Executive Ofﬁ cer) and Mr Andrey Maruta (Chief Financial Ofﬁ cer) and four independent Non-Executive Directors: Sir Roderic Lyne and Messrs Robert Jenkins, Alexander Green and Andrew Vickerman. As envisaged, the new streamlined Board led us to review our Board Committee structure to ensure that it remains appropriate, providing a strong corporate governance framework to ensure that the Board continues to act responsibly and with accountability at all times and with consideration for all of our stakeholders. The new Committee structure is already strengthening our governance procedures, with the Board challenging the manner in which it assesses the Group’s risks to ensure that its focus is on those with the highest potential impact. Further details of this 82 Petropavlovsk Annual Report 2015 review are provided in the Risks to Our Performance on pages 26 and 39. Details of the new Committee structure are provided below. Executives on our strategy for, and management of, the business. Following the Reﬁ nancing and given the continued subdued gold price environment during 2015, we decided to focus on the mining and production of ounces with the highest possible proﬁ t margin while enabling us to achieve our deleveraging programme targets. As detailed in the Strategic Review, the Board has approved a joint undertaking to complete construction of POX and provide the processing plant for reﬁ ning refractory gold ores and ﬂ oat concentrates extracted by both parties. This is subject to shareholders approval. In addition, the Board is progressing the Group’s underground mining potential. These are both critically important projects for the Group and, as such, they will remain a key focus of the Board during 2016. The recent appointments of Robert, Alexander and Andrew, with their wealth of relevant experience, will assist us in delivering our objectives. Directors’ independence As previously advised, the appointment of both Alexander Green and Andrew Vickerman was supported by representatives of the former Bondholders, in accordance with the information provided in the rights issue Prospectus. However, neither Alexander nor Andrew has any additional responsibility to the former Bondholders in their capacity as new shareholders, beyond the duty that they owe to all shareholders. They are considered as “independent” Non-Executive Directors by the Company and also meet the “independence” criteria of the UK Corporate Governance Code (the “Code”). Shareholders may be aware that Sir Roderic Lyne has served on the Board of the Company for a continuous period of more than nine years, including his service as a director of Aricom plc, from October 2006 to April 2009. As an independent Non-Executive Director, Sir Roderic played a pivotal role throughout the Reﬁ nancing, particularly given that both Pavel and I participated in the underwriting of the rights issue. Sir Roderic, together with his independent colleagues on the Board, helped to ensure that the Company adhered to good corporate governance throughout this transaction and during what was a particularly challenging period for the Executive team. In addition, he continues to offer a regular, substantive and intellectual challenge to the Given that all of Sir Roderic’s former non- executive colleagues retired following the approval of the 2014 Annual Report, his prior knowledge of the Group was considered critical for both continuity and a smooth transition to the “new” Board. Taking these factors into account along with the fact that he is well-known to many of our major shareholders, the Board was pleased to appoint Sir Roderic as Senior Independent Director with effect from 1 November 2015. All eligible Directors will stand for election or re-appointment at the forthcoming Annual General Meeting (AGM). The Board considers that all of the Non-Executive Directors are independent. Shareholders may wish to note that I was not considered “independent” under the terms of the Code at the date of my appointment as Chairman, nor do I satisfy the required independent criteria now. However, the Board is satisﬁ ed that my role as Chairman is clearly separated from that of the Chief Executive Ofﬁ cer. Further details of these roles are provided on page 80 to 81 of this Report. Board evaluation The Board is satisﬁ ed that each of the Directors continues to be effective, demonstrates commitment to the role and that their election or re-appointment is in the Company’s best interest. However, as the “new” Board has only been in operation since October 2015, we did not consider that a Board evaluation was appropriate, given that it was unlikely to be either meaningful or provide any beneﬁ t. This will be carried out in the latter part of 2016, allowing sufﬁ cient time for the “new” Board to become fully established. The results of this evaluation will be detailed in the 2016 Annual Report. Annual General Meeting (AGM) The AGM is recognised as an opportunity for all shareholders to engage with the Board and I look forward to welcoming shareholders to the next meeting, which is to be held on 28 June 2016. Peter Hambro Chairman 28 April 2016 Corporate governance framework The following sections of this report detail the work and operation of the Board and the corporate governance framework within which the Company operates, including further reporting required under the Code, the UK Listing Rules and the Disclosure & Transparency Rules, all of which the Company is subject to. Application of the UK Corporate Governance Code The latest revision of the UK Corporate Governance Code (the ‘Code’) was published by the Financial Reporting Council in September 2014, together with Guidance on Risk Management, Internal Control and Related Financial and Business Reporting. The 2014 amendments are applicable to reporting periods beginning on or after 1 October 2014. Throughout the accounting period the Company has complied with the requirements of the Code, including the 2014 amendments, other than in respect of the following. Provision A.4.1 of the Code requires that the Board should appoint one of the independent non-executive directors to be the senior independent director. Following the retirement of Dr Graham Birch as Senior Independent Director and as a Director of the Company on 30 April 2015 and until the appointment of Mr Alexander Green on 27 August 2015, the Board only had two independent non- executive directors and it was not deemed necessary to appoint one as a senior independent director given the transition to a “new” Board. Following the constitution of the “new” Board in October 2015, Sir Roderic Lyne was appointed as Senior Independent Director with effect from 1 November 2015. Provision B.1.1. of the Code requires that the Board should state its reasons for determining that a director is independent notwithstanding the existence of relationships or circumstances which may appear relevant to its determination, including if the director has served on the board for more than nine years from the date of their ﬁ rst election. Sir Roderic Lyne has served on the Board of the Company for a continuous period of more than nine years including his service as a Director of Aricom plc. However, as explained in the Chairman’s introduction, on page 82, the Board considers Sir Roderic to be independent. In addition, Mr Jenkins, who was identiﬁ ed by external consultants during 2014 as an excellent candidate for the position of a Non-Executive Director, provided assistance to the Company, principally to the Audit Committee and the Non-Executive Directors, during the period of the Reﬁ nancing, and prior to his appointment. The Board does not deem that this constituted a material business relationship with the Company. Accordingly, the Board considers that Mr Jenkins was independent at the date of his appointment and continues to be an independent director of the Company. In accordance with the requirement of the Code in respect of smaller companies, the Board comprised of at least two independent directors at all times during 2015. Provision B.6 of the Code states that the Board should undertake a formal and rigorous annual evaluation of its own performance and that of its committees. As stated in the Chairman’s introduction on page 4, a Board evaluation was not undertaken during 2015 given that Messrs Jenkins, Green and Vickerman were not appointed as Directors until 30 April 2015, 27 August 2015 and 22 October 2015 respectively. The Board The role of the Board: The Board is responsible to shareholders for the long-term sustainable success of the Company. The Group’s near-term, medium- term and long-term strategy, set by the Board, are fully described in the Strategic Report on page 15. The Board’s role is to ensure that the Company follows this strategy and that a ﬁ nancial and operational structure is in place to enable the Group to meet its goals. The Board has adopted a formal schedule of matters reserved for the Board’s decision, a copy of which is available on the Company’s website or can be obtained from the Company Secretary. These matters include responsibility for the determination and monitoring of the Company’s strategic aims, budgets, major items of capital expenditure and senior appointments. Board composition and roles The Chairman and the Chief Executive Ofﬁ cer: Mr Peter Hambro and Dr Pavel Maslovskiy Whilst retaining a close working relationship, the Chairman and Chief Executive Ofﬁ cer have clearly deﬁ ned and separated responsibilities. The Chairman provides the leadership to the Board, necessary to promote the success of the Company and create value for shareholders in the long-term, whilst ensuring that sound, effective corporate governance practices are embedded in the Group and in its decision-making processes. i S t r a t e g c r e p o r t Supported by the Chief Financial Ofﬁ cer and the Executive Committee, the Chief Executive Ofﬁ cer has day-to-day responsibility for the Group’s operations within Russia, for developing the Group’s objectives and strategy and for the successful achievement of objectives and execution of strategy, following approval by the Board. Chief Financial Ofﬁ cer: Mr Andrey Maruta The Chief Financial Ofﬁ cer supports the Chief Executive Ofﬁ cer in implementing the Group’s strategy, in addition to his speciﬁ c responsibilities as CFO. Non-Executive Directors: Mr Robert Jenkins Mr Alexander Green Mr Andrew Vickerman The Non-Executive Directors are responsible for bringing independent and objective scrutiny to all matters before the Board and its Committees, using their substantial and wide-ranging experience. They bring to the Board a diverse range of business and ﬁ nancial expertise, which complements the experiences of the Executive Directors. The Non-Executive Directors meet periodically with the Chairman without the Executives being present. Senior Independent Director: Sir Roderic Lyne The Senior Independent Director provides an independent point of contact to shareholders on Board matters or any matters of concern that shareholders have been unable to resolve through the normal channels of chairman, chief executive or other executive director or for which such contact is inappropriate. As the Senior Independent Director during the Reﬁ nancing period, Dr Graham Birch held a number of meetings with the Non-Executive Directors and the Company’s advisors to consider speciﬁ c aspects of the Reﬁ nancing, including the participation of Mr Hambro and Dr Maslovskiy in the underwriting of the Rights Issue, without the Chairman or the Executive Directors being present. Dr Birch retired as a Director and as the Company’s Senior Independent Director on 30 April 2015. Petropavlovsk Annual Report 2015 83 G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Corporate Governance Report continued Board Committees The Board is responsible for the Group’s system of corporate governance and is ultimately responsible for the Group’s activities, strategy, risk management and ﬁ nancial performance. The Board has established a number of Committees and provides sufﬁ cient resources to enable them to undertake their duties. Please see pages 86 to 87 for further details of these Committees. Director’s induction and professional development, information ﬂ ow and professional advice Induction and professional development Each Director has an induction programme upon appointment. They are expected to update their skills and knowledge and develop the familiarity with the Group’s operations needed to fulﬁ l their roles on the Board and any Committees. The Board considers that visits to the Group’s gold mining operations are an important part of a Director’s induction and their understanding of the size and scale of the Group’s operations. Mr Jenkins visited the Group’s operations in the Far East Amur Region of Russia in October 2015, as part of his induction. This included a visit to the Group’s laboratories, the POX Hub and the pilot POX plant in Blagoveshchensk. He also met with operational management, including Mr Nikolai Vlasov, the Group’s Chief Geologist. All Directors have visited the Group’s mines with the exception of Messrs Green and Vickerman, who were recently appointed to the Board. However, a Board visit to the Group’s mining operations is scheduled for all of the Directors in July 2016. The Non-Executive Directors are invited at the Company’s expense to attend conferences and seminars on the mining industry. The Directors receive brieﬁ ngs on regulatory and corporate governance issues from the Company Secretary and the Company’s advisors. Effectiveness and accountability of the Board The graphs on this page illustrate the collective business experience of the Directors outside that acquired at Petropavlovsk as at the date of this report, Director Independence as determined by the Board, nationality and language skills. Detailed knowledge of the gold mining industry, Russia and the Group’s operations are considered critical to the Board’s ability to lead the Company Board activities during the year In 2015, the Board met on six scheduled occasions, with a number of additional meetings held during the year principally due to the Reﬁ nancing and consideration of matters relating to IRC. Many of these additional meetings were called at short notice and were accommodated as conference calls. Further Board meetings were held to deal with matters of a routine or administrative nature. In addition to the standard agenda items, the Board considered the following matters during the year: – Reﬁ nancing including: – Issuance of a £100m convertible bond – Approval of the Prospectus for a £155.1million Rights Issue – Repayment of the outstanding US$310.5 million 4% Convertible Bonds due 2015 – The disposal of the Group’s 95.7% interest in OJSC ZDP Koboldo, a non-strategic alluvial asset, which was announced on 20 April 2015 – The classiﬁ cation of IRC as an asset ‘held for sale’ and its change to an associate of the Company with effect from 7 August 2015 – The composition of the Board, including the appointment of three new Non-Executive Directors – The feasibility of the proposed underground mining project – The proposed recommencement of the construction of the POX plant, including initial consideration of a potential joint venture arrangement – A review of the Company’s Committee structure. Board balance of Directors Chairman (1) Independent Non- Executive Directors (4) Executive Directors (2) Directors of other quoted companies Finance Fund management/ banking Diplomatic/political Metals & mining Business experience within Russia Independent (4) Non-independent (3) Business experience Independence Nationality Russian (2) British (5) Language skills – Russian Native Fluent Basic or none Language skills – English Native Fluent 84 Petropavlovsk Annual Report 2015 Information ﬂ ow Prior to each Board meeting the Directors receive detailed information on operational and ﬁ nancial performance, activities of the Board Committees, investor relations and projects that are being progressed by the Executive team. The Board receives presentations and verbal updates from the Executive Directors and members of the Executive Committee at Board meetings as appropriate. All Directors are encouraged to make further enquiries as they feel appropriate, of the Executive Directors or management, and the Non-Executive Directors are expected to provide objective and constructive challenge. All Directors have access to the services of a professionally-qualiﬁ ed and experienced Company Secretary, who is responsible for information ﬂ ows to the Board and its committees and between senior management and Non-Executive Directors, facilitating induction and assisting with professional development as required, ensuring compliance with Board procedure and applicable laws and regulation. Professional advice There is an agreed procedure for Directors to take independent professional advice if considered necessary to discharge their responsibilities as Directors, and at the Company’s expense. Investor engagement The Company maintains an active dialogue with all of its shareholders as well as potential shareholders. The Investor Relations department manages the interaction with these audiences and ensures that full and comprehensive information is available to all shareholders. Shareholders are welcome to contact the Company’s Investor Relations department during the year with any speciﬁ c queries regarding the Company. Regular presentations or conference calls take place at the time of interim and ﬁ nal results as well as during the rest of the year. During the year there were presentations to, and meetings with, institutional investors and sell-side analysts as well as potential shareholders in the UK, Russia and Europe to communicate the Group’s strategy, operational and ﬁ nancial performance and educate potential investors on the areas in which the Group operates. During the year, the Company welcomed several new major shareholders to the share register as a result of the Reﬁ nancing, and the Executive team undertook a number of ‘roadshows’ in which the new shareholders participated. The Reﬁ nancing was approved by shareholders at a general meeting held on 26 February 2015 and the Company is particularly grateful to individual shareholders for voting to approve this transaction. Copies of all presentations made on these ‘roadshows’ or to institutional shareholders are available on the Company’s website at www.petropavlovsk.net – a hard copy can also be obtained by contacting the Group’s Investor Relations department in London. The website is regularly updated and provides the latest news and historical ﬁ nancial information, details about forthcoming events for shareholders and analysts, and other information regarding the Group. Individual shareholders are equally as important to the Company as its institutional shareholders. The Board encourages as many shareholders as possible to attend the Company’s Annual General Meeting, during which shareholders are given the opportunity to discuss matters with the Board. Shareholders are kindly asked to read the accompanying notes to the Notice of Annual General Meeting to ensure that they have the correct documentation with them should they wish to attend the meeting on 28 June 2016. Mr Robert Jenkins, Chairman of the Audit Committee and Sir Roderic Lyne, Chairman of the Remuneration and the HSE Committees will be available, at the forthcoming AGM, to answer any questions relating to those committees. The Company Chairman will be available to answer any questions relating to the work of the Nomination Committee. The Chairman ensures that any signiﬁ cant concerns raised by a shareholder in relation to the Company are communicated to the Board. Feedback from meetings held between the Executive team and institutional shareholders is also communicated to the Board. Annual re-election of Directors In accordance with the recommendations of the Code, all eligible Directors will be offering themselves for re-election or appointment at the AGM on 28 June 2016. The re-election of each of the Directors has been reviewed by the Nomination Committee. The Board recommends that shareholders vote in favour of the resolutions to appoint or re-elect all of the eligible Directors of the Company and the reasons for this recommendation will be set out in the Appendix to the Notice of the Annual General Meeting. Board Committees A diagram detailing the corporate governance framework established by the Board, including the principal role of each Board Committee, is shown on page 86. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 85 Corporate Governance Report continued The Board and its Committees Board The Board is responsible for the Group’s system of corporate governance and is ultimately accountable for the Group’s activities, strategy, risk management (including anti-bribery matters) and ﬁ nancial performance. Board Committees and how they support the Board The Board has established a number of Committees and provides sufﬁ cient resources to enable them to undertake their duties. Audit Committee Remuneration Committee Nomination Committee HSE Committee Executive Committee – Determines and agrees with – Reviews structure, – Reviews Audit Report on the interim review and full year audit – Reviews appropriateness of accounting standards – Oversees relationships with external auditors the Board the format and broad policy for the remuneration of the Company Chairman, Executive Directors, members of the Executive Committee and the Company Secretary – Overseas external audit process – Reviews the on-going appropriateness of the policy – Reviews the ﬁ nancial risks – Ensures that the Company – Reviews internal audit plans. maintains contact with shareholders regarding the Company’s remuneration policy. size and composition of the Board and its Committees and makes recommendations to the Board as appropriate – Considers succession planning issues for Directors and senior executives – Evaluates the skills and experience of the Board before any Board appointment is made. – Reviews the Group’s health, safety, environmental and community relations (“Sustainability”) strategy – Evaluates the effectiveness of the Group’s policies and systems for managing Sustainability issues and risks – Assesses the performance of the Group with regard to the impact of Sustainability decisions and actions. – Responsible for the day-to-day management of the Group – Recommends strategy and direction to the Board – Acts as a conduit between management and the Board. Committee membership is detailed below. Strategic Committee – Responsible for the evaluation of projects from a strategic perspective – Reviews the Group’s exploration assets as part of the Group’s full year and interim results procedure. The Report of the Audit Committee is on pages 89 to 94 of this Report. The Report of the Remuneration Committee is on pages 95 to 110 of this Report. The Report of the Nomination Committee is on page 88 of this Report. Please see pages 24 to 25. The Strategic Committee is chaired by Dr Alya Samokhvalova, Strategic Director. The Company Secretary acts as secretary to the Audit, Remuneration, Nomination, HSE, and Executive Committees. All Committees are authorised to obtain legal or other professional advice as necessary and to secure the attendance of external advisers at their meeting. Members of the HSE Committee are: Sir Roderic Lyne, Chairman Dr Pavel Maslovskiy, Chief Executive Ofﬁ cer who may rotate attendance with Mr Dmitry Chekashkin, Chief Operating Ofﬁ cer Mr Alexander Green, Non-Executive Director Mr Andrew Vickerman, Non-Executive Director Dr Alya Samokhvalova, Strategic Director and Group Head of External Communications Members of the Executive Committee are: The Chairman and Executive Directors Mr Valery Alexseev, Group Head of Construction and Engineering Mr Dmitry Chekashkin, Chief Operating Ofﬁ cer Mr Sergey Ermolenko, General Director Management Company Petropavlovsk Mr Alexey Maslovskiy, Business Development Manager Dr Alya Samokhvalova, Strategic Director and Group Head of External Communications Mrs Anna-Karolina Subczynska, Group Head of Legal Affairs Mr Andrei Tarasov, Deputy General Director Management Company Petropavlovsk 86 Petropavlovsk Annual Report 2015 Meetings of the Board, Board Committees and attendance Peter Hambro Pavel Maslovskiy Graham Birch 3,6 Dmitry Chekashkin 4 Sir Malcolm Field 3,6,7 Alexander Green 5,6,7,8 Lord Charles Guthrie 3,6 David Humphreys 3,6,9 Robert Jenkins 5,6,7 Sir Roderic Lyne 6 Andrey Maruta Charles McVeigh 3,6 Alya Samokhvalova 4 Martin Smith 3 Andrew Vickerman 5,6,7,8 Key: C= Chairman, M= Member Board Audit Remuneration Nomination HSE Risk10 C M M M M M M M M M M M M M M 6/6 6/6 2/2 2/2 2/2 2/2 2/2 0/2 5/5 6/6 6/6 2/2 2/2 2/2 2/2 – – M – C M – – M/C M – M – – M 4 2 1/1 – 1/1 2/2 – – 4/4 1/1 4 1/1 – 1 2/2 – – – – M M M M – C – – – – M 2/2 – – – 1/1 1/1 1/1 1/1 – 2/2 – – – – 1/1 C – M – M – – – M M – M – – – 3/3 – 1/1 – 1/1 – – – 2/2 2/2 – 1/1 – – – – – – – – M M M M C – – M M M 4 2 – – – 2/2 1/1 0/1 2/2 4/4 1 – 4/4 1/1 2/2 – – M – – – C M – M – – – M – 1 1 1/1 – – – 1/1 0/1 – 1/1 1/1 – 1 1/1 – 1 Additional Board meetings were held during the year, principally relating to the Reﬁ nancing and matters relating to IRC. Further Board and Board Committee meetings were held to deal with matters of a routine or administrative nature. 2 Directors who are not members of the Audit, Remuneration, HSE and Risk Committees may attend meetings at the invitation of the Chairman of that Committee. 3 Dr Graham Birch, Sir Malcolm Field, Lord Charles Guthrie, Dr David Humphreys, Mr Charles McVeigh and Mr Martin Smith retired as Directors of the Company on 30 April 2015 following the release of the Company’s full year results for the year ended 31 December 2014 and the successful conclusion of the Reﬁ nancing. 4 Mr Dmitry Chekashkin and Dr Alya Samokhvalova resigned as Directors of the Company on 30 April 2015. Mr Chekashkin and Dr Samokhvalova are still employed by the Group as Chief Operating Ofﬁ cer and Strategic Director/Group Head of External Communications respectively. They are both members of the Executive Committee. Dr Samokhvalova is also a member of the HSE Committee. 5 Mr Robert Jenkins, Mr Alexander Green and Mr Andrew Vickerman were appointed as Non-Executive Directors of the Company with effect from 30 April 2015, 27 August 2015 and 22 October 2015 respectively. 6 Director who the Board has determined to be independent. 7 Sir Malcolm Field was Chairman of the Audit Committee until 30 April 2015, when he retired as a Director of the Company, at which time Mr Robert Jenkins was appointed as the Audit Committee Chairman. Sir Roderic Lyne was a member of the Audit Committee from 30 April 2015 until 22 October 2015, at which date Mr Alexander Green and Mr Andrew Vickerman were appointed as members of the Committee. 8 Mr Alexander Green and Mr Andrew Vickerman were appointed as members of the HSE Committee with effect from 22 October 2015. 9 Dr David Humphreys was unable to attend two Boards, one HSE Committee and one Risk Committee meeting during the year due to a previous overseas commitment. 10 Due to the reduced size of the Board it was agreed that, with the exception of ﬁ nancial risks, which will continue to be reviewed and monitored by the Audit Committee, the risk review should be a duty of the full Board and not delegated to a Committee. The Audit Committee reports its ﬁ ndings on its review of ﬁ nancial risks to the Board. The last meeting of the Risk Committee was held on 22 April 2015. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 87 Nomination Committee Report Letter from the Nomination Committee Chairman A short-list of candidates was then developed and the best candidates for the role were interviewed by myself, Dr Maslovskiy, Group Chief Executive and Sir Roderic Lyne. The Bondholders’ Representatives also had the opportunity to meet with these candidates. The process resulted in the appointment of Mr Alexander Green and Mr Andrew Vickerman as Non-Executive Directors, who I was pleased to welcome to the Board on 27 August 2015 and 22 October 2015 respectively. Alexander has two decades of experience in the resources industry and has a wealth of experience including risk management, development of business strategy and corporate governance. Whilst Andrew brings a wealth of international experience across ﬁ nance, operations and external affairs in addition to his extensive mining industry experience. Full biographical details of Alexander and Andrew together with those of our other Directors are provided on pages 80 and 81 of this Report. Given the reduced size of the Board, Alexander and Andrew met with the majority of the Directors during the selection process, following which their appointment, supported by the Bondholders’ Representatives, was formally recommended to the Board. Both Alexander and Andrew meet the independence criteria of the UK Corporate Governance Code and neither has any additional responsibility to the former Bondholders, in their capacity as new shareholders, beyond the duty that they owe to all shareholders. Following these appointments, the Board believes that the refreshed Board collectively has the necessary skills and experience to implement the next stage of the Group’s strategy. I am pleased to conﬁ rm that the new Board is working well. Diversity statement It is disappointing that, following the restructuring of the Board and resignation of Dr Alya Samokhvalova as a Director on 30 April 2015, the Company no longer has any women on the Board. However, Dr Samokhvalova remains with the Company in her joint role as Strategic Director and Group Head of External Communications. Alya has retained her membership of the Executive Committee and she remains the most senior woman of Executive management. She continues to attend Board meetings, at my request, to report to the Board on strategic and investor relations matters. Mrs Anna-Karolina Subczynska, Group Head of Legal Affairs is also on the Group’s Executive Committee and attends Board meetings at my request. Ms Amanda Whalley is the Company Secretary and in this capacity provides advice to the Board on corporate governance matters. The Group has a strong representation of women in professional roles at our ofﬁ ces in Moscow, London and Blagoveshensk. Whilst mindful of the value of gender diversity, the Committee’s principal goal during our recent search for new Non-Executive Directors was to appoint candidates with the correct skills and experience to complement our existing Directors, in order that the Board has the right balance to take the Group forward into the next stage of its strategy. The Committee believes that this is in the best interest of the Company and its shareholders. Consequently the Board did not set, and does not intend to set, a speciﬁ c target for the number of female members of the Board as it wishes to continue to appoint the best candidate available to it for any particular role. Details of the other activities of the Committee during the year are provided below. I will be available at the forthcoming Annual General Meeting to answer any questions that shareholders may wish to ask on the work of the Committee. Peter Hambro Chairman, Nomination Committee 28 April 2016 Additional activities during the year: – Evaluation of each of the eligible Directors in respect of their re-election and subsequent recommendation to the Board – Approval of the 2014 Nomination Committee Report. Dear shareholder The composition of the Board and indeed the Nomination Committee (the “Committee”) changed signiﬁ cantly during 2015. Consequently it has been a year of much activity for the Committee, which I continue to chair. Membership of the Committee Sir Malcolm Field, Dr Graham Birch and Mr Charles McVeigh retired as Directors and members of the Committee on 30 April 2015. I thank them for their valuable support and advice during their tenure on the Committee. I was pleased to welcome Sir Roderic Lyne and Mr Robert Jenkins, both independent Non-Executive Directors, as members of the Committee with effect from 1 May 2015. The Committee met four times during the year, with regular contact between meetings to progress the changes to the Board’s composition. Board changes and composition Given the reduced size of the Company’s market capitalisation relative to its previous levels, and as advised to shareholders at the time of the Reﬁ nancing, the size of the Board has reduced from twelve to seven members. Details of these changes, and of the revised Board, which now consists of myself as Chairman, two Executive Directors and four independent Non-Executive Directors, are provided in the Corporate Governance Report on page 82. The appointment of Mr Robert Jenkins as a Non-Executive Director on 30 April 2015, which was approved by shareholders at the Company’s 2015 Annual General Meeting (AGM), is fully detailed in the 2014 Nomination Committee report. Consequently this report focuses on the process undertaken by the Committee during the year to appoint two additional Non-Executive Directors to the Board, with the requisite skillset to ensure an appropriate mix and diversity of experience. The appointment process was managed by external consultants who identiﬁ ed suitable candidates for these roles, based on a detailed brief provided by the Committee specifying the skills and experience required. In addition, and as previously advised, representatives of the former holders of the Group’s 4% Convertible Bonds due 2015 (the “Bondholders’ Representatives”) were given the opportunity to propose individuals to be included in this process. A long-list of names was proposed by the external consultants. 88 Petropavlovsk Annual Report 2015 Audit Committee Report Letter from the Audit Committee Chairman Dear shareholder I am pleased to introduce this, my ﬁ rst report as Audit Committee Chairman. The change in the composition of the Board, following the successful completion of the Reﬁ nancing in March 2015, resulted in a number of changes to the membership of the Committee, which are detailed below, including my appointment as Committee Chairman on 30 April 2015 following the retirement of Sir Malcolm Field. I would like to thank Sir Malcolm for the tireless way he led the Committee during the Reﬁ nancing. I was pleased to welcome Alexander Green and Andrew Vickerman to the Committee in October 2015. They both bring valuable expertise in the areas of ﬁ nancial reporting and risk management. As part of their induction both Alexander and Andrew had a detailed brieﬁ ng with Andrey Maruta, Chief Financial Ofﬁ cer to ensure that they were quickly brought up-to-speed on matters within the Committee’s remit. We have met with both the audit partner on behalf of Deloitte LLP (“Deloitte”) and also VenmynDeloitte (“Venmyn”), who review operational factors and contribute to the overall audit process. These meetings have assisted in improving the Committee’s understanding in this critical area. The Committee remains a fully independent body, comprising only of independent Non-Executive Directors. The Committee continues to challenge and engage with the Executive, Internal Audit and the external auditor and, indeed, as a result of the “new” Committee membership, a different perspective has been added to the Committee’s deliberations. Not only has there been change to its membership but also to the responsibilities of the Committee, which have been expanded to include the Committee’s role in reviewing and challenging the Company’s longer term viability statement and providing relevant advice to the Board thereon. This has been an important additional new area of focus for the Committee. Notwithstanding the success of the Group’s Reﬁ nancing and the US$50m rights issue by IRC in August 2015, both of which improved the Group’s liquidity, 2015 remained a challenging year for the Group, as it has been for many of our mining peers. As a consequence, the most signiﬁ cant judgement for the Committee in respect of the 2015 ﬁ nancial statements related to the assessment of the “going concern” basis of accounting and details of the Committee’s consideration of this, together with judgements on other signiﬁ cant matters are provided on pages 92 to 93. During the year the Committee continued to devote signiﬁ cant time to reviewing the Group’s ﬁ nancial risks, the integrity of the Group’s ﬁ nancial reporting and the effectiveness of both internal and external audit. The Committee continues to assist the Board in its review of the Group’s internal control systems and oversees the reporting process in order to ensure that the information provided to shareholders in this Annual Report taken as a whole is ‘fair, balanced and understandable’ and allows assessment of the Company’s performance, business model and strategy. A more detailed review of the Committee’s work during the year is provided in this Report. I hope that you will ﬁ nd this informative. Robert Jenkins Audit Committee Chairman 28 April 2016 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 89 Audit Committee Report continued Committee membership Sir Malcolm Field, Dr Graham Birch and Mr Charles McVeigh retired as Directors and members of the Committee with effect from 30 April 2015. Mr Robert Jenkins was appointed as a Non-Executive Director and as Committee Chairman on 30 April 2015, at which time Sir Roderic Lyne was appointed as a member of the Committee. Messrs Alexander Green and Andrew Vickerman were both appointed as a member of the Committee on 22 October 2015, following their appointment as Non-Executive Directors on 27 August 2015 and 22 October 2015 respectively and Sir Roderic Lyne resigned from the Committee on this date. All members of the Committee are independent. Governance Prior to his retirement, Sir Malcolm Field was considered by the Company as having the requisite recent and relevant ﬁ nancial experience required by the provision of the 2014 revision of the UK Corporate Governance Code (the “Code”) due to his past employment in ﬁ nance or comparable experience in corporate activities, as was Mr Charles McVeigh. Mr Jenkins was appointed as Audit Committee Chairman on 30 April 2015. He is considered by the Board as having the requisite and relevant ﬁ nancial experience due to his profession as a Chartered Accountant and his previous roles as Chief Financial Ofﬁ cer of two Russia focussed natural resource companies, including a UK AIM listed mining exploration company. Mr Jenkins is also the Senior Independent Director and Audit Committee Chairman of Ruspetro plc, an independent oil and gas production company, listed on the London Stock Exchange. The Company’s Chairman, the Chief Executive Ofﬁ cer, the Chief Financial Ofﬁ cer, the Internal Auditor and Group Head of Corporate Reporting and representatives of the external auditors are invited to attend all Committee meetings, with Deloitte LLP attending all Committee meetings in 2015. In addition, the Committee Chairman meets on a regular basis with the Company Chairman and the Chief Financial Ofﬁ cer to discuss any issues and with the lead partner of the external auditor on a regular basis and prior to each Committee meeting. Mr Timothy Biggs, the leader of Deloitte’s UK metals and mining sector, was appointed as lead audit partner in 2014, following the completion of the audit for the year ended 31 December 2013. The Committee met on four occasions during the ﬁ nancial year to align with the Group’s ﬁ nancial reporting calendar. Summary of the Committee’s responsibilities The Committee’s terms of reference set out its main responsibilities and are available to view on the website. The Committee is responsible for: – The integrity of the Group’s ﬁ nancial statements and the signiﬁ cant reporting judgements contained in them – The appropriateness of the Group’s relationship with the external auditors, including auditor independence, fees and provision of non-audit services – The effectiveness of the external audit process, making recommendations to the Board on the appointment of the external auditors – The effectiveness of the Group’s internal control and ﬁ nancial and tax risk management systems – Where requested by the Board, providing advice on how, taking into account the Company’s position and principal risks, the Company’s prospects have been assessed, over what period and why the period is regarded as appropriate – Advising the Board on whether there is a reasonable expectation that the Company will be able to continue in operation and meet its liabilities as they fall due over the said period, drawing attention to any qualiﬁ cations or assumptions as necessary. 90 Petropavlovsk Annual Report 2015 In carrying out its responsibilities, the Committee has full authority to investigate all matters within its terms of reference. Accordingly, the Committee may: – Obtain independent professional advice in the satisfaction of its duties at the cost of the Company – Have direct access to the resources of the Group as it may reasonably require including the external and internal auditors. Activity during the year The following matters were amongst those considered by the Committee during the year: Financial statements and reports – Reviewed the 2014 Annual Report and Accounts and the six months’ Half Year report ended 30 June 2015 before recommending their adoption by the Board. As part of these reviews the Committee received reports from the external auditor, reviewed accounting policies, estimates and judgements applied by management in preparing the relevant statements and the transparency and clarity of disclosure contained within them – Considered whether the 2014 Annual Report and Accounts, taken as a whole, was fair, balanced and understandable and reported to the Board on its conclusion. Risk management – Considered the output from the Group’s ﬁ nancial and tax review process undertaken to identify, evaluate and mitigate risks, advising the Board of changes in these risks as appropriate. See pages 26 to 39 of the Risks to Our Performance section which describes the Group’s principal ﬁ nancial risks during the year and actions taken to mitigate against them. Internal audit – Evaluated the effectiveness and the scope of work to be undertaken by Group Internal Audit during 2015, which included audits to be performed at the Group’s mining operations and the Group’s ofﬁ ces in both Moscow and Blagoveshchensk. The Group Head of Internal Audit presented his ﬁ ndings to the Audit Committee during the year in London from various assignments internal audit had been requested to undertake by the Audit Committee. Audits undertaken during the year, amongst others, were audits of the Group’s procurement and supply process, ﬁ xed assets, expense accounting and audits undertaken of the group service companies. In addition internal audit conducted a follow up of the working capital management audit carried out in 2014 – Reviewed management responses to audit Governance – The Committee reviewed proposed new Terms of Reference for the Committee, following changes in the Code, and recommended their adoption to the Board. Subsequent to 2015, the Committee has reviewed, in particular, the following matters in relation to the 2015 ﬁ nancial statements: – The going concern assumption – The carrying value of the Group’s mining assets including POX – The carrying value of the Group’s Exploration and Evaluation assets – The carrying value of the Group’s ore stockpiles, deferred stripping and gold-in-circuit. The Committee has also advised the Board on: reports issued during the year. – whether the 2015 Annual Report and External auditor and non-audit work – Reviewed, considered and agreed the scope and methodology of the audit work to be undertaken by the external auditor – Evaluated the independence and objectivity of the external auditor – Agreed the terms of engagement for the audit of the 2015 ﬁ nancial statements. Independent experts – In April 2015, the Committee met with Mr Martin Smith, Deputy Chief Executive, who advised the committee on the Reserves & Resources review undertaken by Wardell Armstrong International, independent mining experts, in early 2015 – In February 2016, the Committee met with the mining experts used by Deloitte LLP as part of their overall audit process. Venmyn Deloitte summarised the work that they undertake at the Group’s operations on behalf of Deloitte LLP. Accounts taken as a whole is fair, balanced and understandable and the Directors’ statement in this respect is set out on page 118 – the viability statement of the Company required in accordance with provision C.2.2 of the Code. Signiﬁ cant issues considered by the Committee in the context of the 2015 ﬁ nancial statements: The Committee identiﬁ ed the issues below as signiﬁ cant in the context of the 2015 ﬁ nancial statements. The Committee considers these areas to be signiﬁ cant taking into account the level of materiality and the degree of judgement exercised by management. The Committee has debated these issues in detail to ensure that the approaches taken were appropriate. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 91 Audit Committee Report continued Audit Committee Report continued Issue Issue Committee action Committee action Conclusion Conclusion The going concern assumption The going concern assumption The key judgement for the Committee for the 2015 The key judgement for the Committee for the 2015 financial statements related to the appropriateness financial statements related to the appropriateness of the basis of accounting. of the basis of accounting. [The successful completion of the Refinancing and The successful completion of the Refinancing and completion of a c.US$50m open offer by IRC in completion of a c.US$50 million open offer by IRC in August 2015 improved the Group’s financial position. August 2015 improved the Group’s financial position. In addition on 7 August 2015, following its open offer, In addition, following its open offer, IRC became an associate of the Company on 7 August 2015. IRC became an associate of the Company. However, However, the Company continues to provide a the Company continues to provide a guarantee over guarantee over IRC’s debt with ICBC. The Group IRC’s debt with ICBC. The outstanding loan principal was US$276.25 million as at 31 December 2015. is also in negotiations with with its bank lenders in Russia, Sberbank and VTB (the “Senior Lenders”) to extend the maturity of its debt finance. As at 31 December 2015, the Group had sufficient liquidity headroom and complied with related [The Group’s going concern assessment is sensitive, financial covenants in relation to its bank facilities for in particular, to: the period of 12 months from the date of approval of the 2015 Annual Report and Accounts. (i) obtaining certain covenant waivers or relaxation of covenants from Senior Lenders and ICBC However, the Group’s projections demonstrate that although the Group expects to have sufficient (ii) the deferral of repayments due under the facility working capital liquidity over the next 12 months, agreements with the Senior Lenders. these projections indicate that, unless mitigating actions can be taken, there will be insufficient liquidity [On 19 April 2016, IRC announced that ICBC had to meet its debt repayment schedule on 20 June granted waivers in respect of IRC’s project finance 2016 and a breach of certain financial covenants, facility with ICBC, including obligations to maintain being leverage and interest service ratios, within the certain cash deposits with ICBC, and the obligations bank facilities as at the next measurement date, of IRC and Petropavlovsk to comply with certain being 30 June 2016, is likely to arise. financial covenants. The waiver from the obligations of IRC and Petropavlovsk to comply with certain In addition, the assessment of whether there is any financial covenants will be effective immediately upon material uncertainty that IRC will be able to repay this fulfillment of certain conditions precedent and up to facility as it falls due is another key element of the and including 31 December 2017. Effective Group’s overall going concern assessment. immediately upon fulfillment of the conditions precedent, ICBC has also granted IRC a waiver from the obligations to maintain cash deposits of c.US$26 million with ICBC during the period from 20 June 2016 to 30 June 2018 (both dates inclusive). [Negotiations with the Senior Lenders are progressing constructively.] 92 Petropavlovsk Annual Report 2015 The Committee has addressed this matter through: The Committee has addressed this matter through: – receiving regular updates from management on – Receiving regular updates from management on negotiations with the Senior Lenders and in relation negotiations with VTB and Sberbank (the “Senior to IRC and the terms of its credit facilities with ICBC Lenders”), including a summary of the and its insurance agent correspondence received from the Senior Lenders on this matter. – reviewing the terms and conditions that have been agreed with ICBC and are being negotiated with – Receiving a paper from management on the going the Senior Lenders in respect of the covenant concern assessment, challenging the key waivers and the rebalancing of the Group’s debt assumptions used, in particular in relation to finance production, gold price and the Russian rouble US dollar exchange rate directors in the IRC accounts for the year ended 31 December 2015 in Note 2 to the notes to the – Considering mitigating actions proposed by consolidation financial statements, “Basis of management Preparation of Consolidated Financial Statements”] – Noting that on 19 April 2016, ICBC granted waivers – receiving a paper from management on the – [considering the statement made by the IRC in respect of IRC’s project finance facility with going concern assessment, challenging the key ICBC, including obligations of IRC to maintain assumptions used, in particular in relation to certain cash deposits with ICBC, and the production, gold price to the Russian rouble to US obligations of IRC and Petropavlovsk to comply dollar exchange rate with certain financial covenants until and inclusive of 31 December 2017. The waiver from the obligations of IRC and Petropavlovsk to comply with certain financial covenants is conditional upon Petropavlovsk obtaining covenant waivers from the Senior Lenders. – [Project Botmoor?] – [•] The Committee has advised The Committee has advised the Board that given the the Board that given the terms current status of negotiations agreed with the Senior with the Senior Lenders and Lenders and ICBC, [•], it is ICBC and other mitigating reasonable for the Directors to actions that can be taken by expect that the Group will: the Group, it is reasonable for the Directors to expect that the (i) be able to obtain the Group will: waivers or relaxation of covenants from ICBC and the Group’s Senior Lenders waivers or relaxation of prior to the 30 June 2016 covenants from the Senior testing date and will Lenders prior to 30 June therefore be able to avoid 2016; a covenant breach (ii) be able to extend the (ii) be able to extend the (i) be able to obtain the maturity of its debt finance maturity of its debt finance in order to enable the Group in order to enable the Group to meet its commitments to meet its commitments under its loan facilities. under its loan facilities In addition, as detailed in the These actions will resolve the Strategic Report, the Group material uncertainty that the has entered into a joint venture Group will have adequate arrangement with GMD Gold resources to continue in to complete the POX Hub operational existence for which will improve the forecast the foreseeable future and liquidity position of the Group. accordingly, the going concern This transaction is subject to basis is the appropriate basis shareholder approval. of preparation for the 2015 financial statements. The Committee has a reasonable expectation that [Shareholders will note the these actions will resolve the “emphasis of matter” due to material uncertainty regarding material uncertainties that exist the Group’s ability to at the date of signing the renegotiate its banking financial statements contained covenants and repayment within Deloitte LLP’s audit schedule ahead of the next opinion.] measurement date and as a conclusion the Group will have adequate resources to continue in operational existence for the foreseeable future and accordingly, the going concern basis is the appropriate basis of preparation for the 2015 financial statements. Shareholders will note the “emphasis of matter” due to material uncertainties that exist at the date of signing of the financial statements contained within Deloitte LLP’s audit opinion. Issue Issue Committee action Committee action Conclusion Conclusion Carrying value of mining assets including POX Carrying value of mining assets including POX Carrying value of mining assets including POX (see note x to the financial statements) (see note x to the ﬁ nancial statements) (see note 6 to the financial statements) In 2014 the inclusion of GKZ reserves together with In 2014 the inclusion of GKZ reserves together with the depreciation of the Russian rouble resulted in an the depreciation of the Russian rouble resulted in an increase of the Net Present Value of several projects. increase of the Net Present Value of several projects. This led to the reversal of US$29m of previously This led to the reversal of US$29m of previously recognised impairments at Albyn as at 31 December recognised impairments at Albyn as at 31 December 2014. No further impairments or reversals of 2014. No further impairments or reversals of impairments were recognised at 30 June 2015. impairments were recognised at 30 June 2015. However, the carrying value of the Group’s mining However, the carrying value of the Group’s mining assets remains particularly sensitive to the forecast assets remains particularly sensitive to the forecast long-term gold price and the Russian rouble US long-term gold price and the Russian rouble US dollar exchange rate, the sustainability and success dollar exchange rate, the sustainability and success of the cost cutting program and the completion of the of the cost-cutting program and the completion of POX plant. Consequently, the assessment of the the POX plant. Consequently, the assessment of the carrying value of the Group’s mining assets, including carrying value of the Group’s mining assets, including POX, requires significant judgement. POX, requires signiﬁ cant judgement. Carrying value of Evaluation and Exploration assets (E&E) assets (see notes x and x to the financial statements) The judgements in relation to the carrying value and potential impairment of the Group’s E&E assets include an assessment of the prospectivity of the Carrying value of Evaluation and Carrying value of Evaluation and exploration activities, future plans for each licence Exploration assets (E&E) assets Exploration assets (E&E) assets and their strategic importance to the future of the (see notes 6 and 12 to the financial statements) (see notes x and x to the ﬁ nancial statements) Group. The assessment of each asset’s future prospectivitiy requires significant judgement. The judgements in relation to the carrying value and potential impairment of the Group’s E&E assets The Strategic Committee undertakes periodic include an assessment of the prospectivity of the detailed reviews of the exploration assets held by exploration activities, future plans for each licence the Group and assesses them in different categories. and their strategic importance to the future of the Those assets that are considered as non-core Group. The assessment of each asset’s future projects, which the Group has no intention of prospectivity requires signiﬁ cant judgement. developing in the near future, are subject to impairment. The Strategic Committee undertakes periodic detailed reviews of the exploration assets held by the Group and assesses them in different categories. Those assets that are considered as non-core projects, which the Group has no intention of developing in the near future, are subject to impairment. The Committee has addressed this issue through: The Committee has addressed this issue through: – receiving reports from management outlining – Receiving reports from management outlining the basis for the assumptions used, including the basis for the assumptions used, including assumptions on gold price, the discount rate used assumptions on gold price, the discount rate used for the projects and the Russian rouble US dollar for the projects and the Russian rouble US dollar exchange rate, and understanding and challenging exchange rate, and understanding and challenging these assumptions. The long term mine models these assumptions. The long term mine models which form the basis of the long term mining plan, which form the basis of the long term mining plan, which is approved by the Board, are used by which is approved by the Board, are used by management to perform the impairment management to perform the impairment assessment. assessment – Discussions were held with Venmyn, mining – Reviewing the report prepared by Venmyn, mining – Noting the report issued by Wardell Armstrong experts, engaged by Deloitte to assist them in their International, mining experts, to management assessment of this issue. As part of their review in April 2016, following their review of Mineral Venmyn again visited the Group’s principal mines. Resources and Ore Reserves for the Venmyn’s report concluded that the POX assets Group’s assets have been well-maintained and are in a suitable condition to recommence the construction of POX experts, regarding their report. Venmyn who were in accordance with the Group’s mining plan. engaged by Deloitte, assisted Deloitte, in their – Discussing with the external auditor their view on assessment of this issue. As part of their review the impairment testing procedure including the key Venmyn again visited the Group’s principal mines. assumptions used by management. Venmyn’s report concluded that the POX assets have been well-maintained and are in a suitable condition to recommence the construction of POX The Committee has addressed this issue through in accordance with the Group’s mining plan – Considering the exercise undertaken by the – Discussing with the external auditor their view on Strategic Committee which has been subject the impairment testing procedure including the key to Executive Committee review. assumptions used by management. – Enquiring of management and challenging – Considering the exercise undertaken by the their assumptions used, including the long term The Committee has addressed this issue through gold price assumptions for Ore Reserves and Mineral Resources Strategic Committee which has been subject – Discussing with the external auditors their work to Executive Committee review in respect of the impairment review of the Group’s E&E assets and obtaining their view in relation to management’s assessment. their assumptions used, including the long term gold price assumptions for Ore Reserves and Mineral Resources – Enquiring of management and challenging – Discussing with the external auditor their work in respect of the impairment review of the Group’s E&E assets and obtaining their view in relation to management’s assessment. Taking the above into account Taking the above into account, the Committee is satisfied the Committee is satisﬁ ed with the thoroughness of the with the thoroughness of the approach and judgements approach and judgements taken. taken. The review of the carrying The review of the carrying value of mining assets value of mining assets including POX did not result including POX did not result in any impairment. in any impairment. Taking these matters into account the Committee is satisfied with the thoroughness of the approach and judgements taken. The review of the carrying Taking these matters into value of exploration and account, the Committee evaluation assets undertaken is satisﬁ ed with the by management has resulted thoroughness of the approach in an impairment of c.US$5m and judgements taken. for the year ending 31 December 2015 (2014: The review of the carrying US$22) in the carrying value value of exploration and of the Group’s E&E assets. evaluation assets undertaken by management has resulted in an impairment of c.US$37.4m for the year ending 31 December 2015 (2014: US$22) in the carrying value of the Group’s E&E assets. Petropavlovsk Annual Report 2015 93 Petropavlovsk Annual Report 2015 93 i i S S t t r r a a t t e e g g c c r r e e p p o o r r t t G G o o v v e e r r n n a a n n c c e e i i F F n n a a n n c c a a i i l l s s t t a a t t e e m m e e n n t t s s Audit Committee Report continued External auditor The Committee has evaluated the effectiveness of the external auditor and as part of this assessment, has considered: – Deloitte’s fulﬁ lment of the agreed audit plan for the year ending 31 December 2014, the quality and robustness of their audit, identiﬁ cation of and response to areas of risk and the experience and expertise of the audit team, including the lead audit partner – Deloitte’s proposed audit fee for the 2015 interim and year-end audits and after consideration recommending these to the Board for approval – The non-audit fees payable to Deloitte, having regard to the policy on the provision of non-audit services – Deloitte’s publication entitled ‘Brieﬁ ng on audit matters’ published in June 2015 which explains the key concepts behind the Deloitte Audit methodology including audit objectives and materiality – Deloitte’s “2015 Audit Transparency Report’ in respect of the year ended 31 May 2015. This sets out Deloitte’s approach to ensuring audit quality, robust governance and ethics, by reference to the Professional Oversight Board of the Financial Reporting Council – The conﬁ rmation from Deloitte that they remain independent and objective within the context of applicable professional standards – The deep knowledge of the Company that enhances Deloitte’s ability to perform as external auditor and the proven stability that is gained from their continued engagement. As a result of the above actions, the Committee determined that Deloitte remains effective in their role as external auditor. The Committee has therefore recommended to the Board that Deloitte be appointed as external auditor for a further year and a resolution will be proposed to this effect at the 2015 Annual General Meeting. Under the new provisions on audit tendering, the Committee will be required to tender the audit prior to 2019 but does not consider it necessary to undertake a tender process for the Group’s external auditor at the current time, particularly given the change of lead audit partner in 2014. Until a decision is made to tender the audit, the Committee will continue to evaluate the performance of Deloitte, as the Company’s external auditor each year. 94 Petropavlovsk Annual Report 2015 Non-audit services Non-audit service provided by Deloitte were in line with the Company’s policy on the provision of non-audit services approved by the Committee. A copy of this policy is available on the Company’s website or can be obtained from the Company Secretary. Deloitte Hong Kong is the auditor of IRC Ltd, an associate of the Group. A breakdown of non-audit fees paid in 2015 is set out in note 7 on page 150 of this Report. Assurance – ﬁ nancial and internal controls and risk management The Committee operates within the following assurance framework established by the Board. The Board has delegated authority to the HSE and Executive Committees in addition to the Audit Committee, details of which are as follows. – The Board (which receives advice from the Audit, HSE and Executive Committees) has overall responsibility for the system of internal control and risk management in the Group. On behalf of the Board, the Committee has considered the effectiveness of the Group’s system of internal control. Following this review the Committee considers the internal controls of the Group to have operated effectively throughout 2015 and up to the date of this report. The Committee has also considered and reviewed the Group’s ﬁ nancial risks and the mitigating action being taken to address these and has reported its ﬁ ndings to the Board. The system of controls is designed to manage, but may not eliminate, the risks of failure to achieve the Group’s objectives. Oversight is provided by the Executive Committee, which meets regularly to review the results of the Group’s operations. – For IRC, the Company operates controls over the inclusion of its ﬁ nancial data but places reliance upon the systems of internal control operating within IRC and the obligations upon IRC’s Board relating to the effectiveness of its own systems. IRC ceased to be a subsidiary of the Company and became an associate on 7 August 2015. Internal controls system Some key features of the internal controls system, not detailed above, are: – A deﬁ ned management structure with clear accountabilities. There is a clear deﬁ ned delegation of authorities, which covers all expenditure – Board approval of a detailed annual budget, with monthly re-forecasts being made subsequently – Formal review by the Executive Committee of detailed management accounts including variance analysis against the approved annual budget, a copy of which is provided to the Board following this review – Appropriate segregation of duties throughout the Group, in particular separating the purchasing and ordering function from the processing and payments function – A centrally directed treasury function which manages the Company’s cash and debt on a daily basis – Speciﬁ c approval procedures have been established for approval of all related party transactions. A Committee of independent Non-Executive Directors approves all signiﬁ cant related party transactions as appropriate and a schedule of all of these transactions is presented to the Board for formal approval. Risk management The Company has adopted a formal risk management framework with the Board having ultimate responsibility for setting the Group’s risk appetite and the Executive Committee having responsibility for on-going risk review and management. Following the reduction in the size of the Board from twelve to seven Directors it was agreed that, with the exception of ﬁ nancial risks, review of risks should be a duty of the full Board and should not be delegated to a committee. The last meeting of the Risk Committee was held on 22 April 2015. The Audit Committee retains responsibility for reviewing ﬁ nancial risks and reporting its ﬁ ndings and recommendations to the Board. The Risks to Our Performance section, which has been reviewed by the Audit Committee, summarises the risk management framework together with details of the principal risks of the Group and is on pages 23 to 39 of this Report. Overview As a result of the Committee’s work during the year, the Committee has concluded that it has acted in accordance with its terms of reference. Directors’ Remuneration Report Annual statement from the Chairman of the Remuneration Committee (the “Committee”) Remuneration highlights The Committee continued to align the implementation of its policy with the Group’s focus on ﬁ nancial discipline within the lower gold price environment, and decided as follows: – No salary increases for the Chairman, Executive Directors and members of the Executive Committee in 2016 – Basic Non-Executive Directors’ fees reduced by c.18.5% with effect from 1 May 2015, following three years of no increases – Approving the Chairman’s voluntary waiver of his 2015 bonus payment and his recommendation that no bonus be paid to the Executive Directors or members of the Executive Committee for 2015 – No Long-Term Incentive Awards granted during 2015, the fourth year in succession and no Award proposed in 2016 – Committee’s review of the Company’s remuneration policy undertaken; no changes proposed at the current time. Dear shareholder Introduction On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2015. Following the successful conclusion of the Reﬁ nancing and, as previously advised to our shareholders, Sir Malcolm Field, Lord Charles Guthrie and Dr David Humphreys, my colleagues on the Committee, retired as Directors and members of the Committee on 30 April 2015. The “newly” constituted Committee comprises three independent Directors; myself as Chairman and Messrs Alexander Green and Andrew Vickerman. The Committee continues to recognise the Group’s need for strong ﬁ nancial discipline and for a focus on optimising cash ﬂ ows, which was emphasised during the Reﬁ nancing, and this has been reﬂ ected in our decisions throughout the year. We determined that, with the exception of the incoming Chief Executive Ofﬁ cer and the reinstatement of the Chairman’s salary to his 2012 level, 2015 salary levels should be maintained for the Executive Directors and members of the Executive Committee. In addition, no salary increases have been awarded in 2016. For the majority of our Executive team this is the fourth year in succession in which they have received no increase. The Non-Executive Directors proposed to the Company Chairman a substantial reduction in their fees with effect from 1 May 2015, which was accepted by the Board. In summary, there have been no substantial changes to the remuneration of Directors during 2015. The Board was reduced from twelve to seven members following the Reﬁ nancing with no termination payment made to any retiring Director. The reduction in the size of the Board together with the c.18.5% decrease in Non-Executive Directors’ fees has resulted in a considerable annual saving for the Company of c.£627,000. 2015 annual bonus The Committee, together with the Company Chairman, ensures that the performance criteria for the annual bonus plan are strongly linked to the Group’s strategy and budget. For 2015, bonus targets related to production, reduction in both net debt and average total cash costs, and the success of our exploration programme. The revised strategy during the year, to focus on the mining and production of ounces with the highest possible proﬁ t margin, directly impacted on the Executives’ ability to achieve the Group’s production target and, as a consequence, the average total cash costs target and no bonus is therefore justiﬁ ed in respect of these objectives. Although the Group’s total net debt has been signiﬁ cantly reduced, the challenging bonus target was not met. The ﬁ nal bonus objective, which related to the Group’s JORC Reserves and Resources, was achieved, justifying a bonus of 30% of annual salary for the Company Chairman and the Executive team. However, given that the Group continues to operate within a very difﬁ cult environment, the Chairman did not consider it appropriate for the Executive team to accept the bonus. The Committee appreciated the reasons for the Chairman’s recommendation and decided that no bonus would be paid for 2015. Shareholders may wish to note that this is the second year in succession that the Chairman has recommended that both he and the Executive team waive payment of their bonus. The Committee, whilst fully supportive of this important gesture, acknowledges the commitment of the Executives and their exceptional efforts and loyalty throughout another challenging year. Remuneration policy review As envisaged in the 2014 Directors’ Remuneration Report, the Committee undertook a review of the Company’s remuneration policy in 2015. The Committee does not propose any changes at the current time, given volatile market conditions. The Committee does, however, intend to revisit this issue towards the end of 2016, at which time the revised guidance of The Investment Association, relating to executive remuneration, will be available. The Committee hopes that, as expected, this will lead to a simpliﬁ cation of executive remuneration, and that this can be reﬂ ected in the Company’s remuneration policy. We intend to consult with our major shareholders in advance of making signiﬁ cant changes, as appropriate. Whilst the market capitalisation of the Company has decreased compared to its previous levels, the complexity of the Group remains. In addition, the Board’s approval of the POX joint venture undertaking, as detailed in the Strategic Report, which is subject to shareholder approval, and the Board’s decision to develop the Group’s underground mining potential necessitate that the Company is able to retain its skilled Executive team. Whilst acknowledging the challenging external environment for both the Company and its mining peers, these factors are recognised by the Committee and they will be considered during the proposed remuneration policy review. In the current climate the Committee will again consider carefully the Group’s position, the gold price environment and the outcome for 2016 in deciding whether, and at what level, to award bonuses for that year. Any bonus paid will be based on the achievement of the 2016 performance targets set out in general terms on page 107, whilst recognising the importance of safety. Given the critical importance of the underground mining and POX projects to the Group, these are included as bonus objectives. For reasons of commercial sensitivity, detailed information and ﬁ gures on the various bonus objectives are not given on a prospective basis. Our intention is to publish these retrospectively, together with the outcome, in the Annual Report on Remuneration for 2016. We have disclosed the performance targets and achievement against these targets for the 2015 annual bonus on page 106. Details of the other key decisions taken by the Committee during the year are set out in the Annual Report on Remuneration on pages 107 to 107. Last year’s Directors’ Remuneration Report received a vote in favour of 88.4% of votes cast at the 2015 Annual General Meeting. We appreciate the support given by shareholders and the Committee hopes that the decisions outlined Petropavlovsk Annual Report 2015 95 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Directors’ Remuneration Report continued in this Directors’ Remuneration Report will meet with the approval of shareholders. As the Company’s remuneration policy, which was approved by shareholders in 2014, remains unchanged, there is no requirement for further shareholder approval in 2016. The Committee continues to operate within the parameters of the existing policy. I will be in attendance at the Company’s 2016 Annual General Meeting and will be pleased to discuss any remuneration matters with you. If you are unable to attend or have a query or comment prior to this date please email the Company Secretary, Amanda Whalley at aw@petropavlovsk.net and we will be pleased to address any issues. Sir Roderic Lyne Remuneration Committee Chairman Contents of this Report: This report sets out details of the remuneration policy for Executive and Non-Executive Directors, describes the implementation of that policy and discloses the amounts paid relating to the year ended 31 December 2015. The report complies with the provisions of the Companies Act 2006 and Schedule 8 of The Large and Medium-sized Companies and Groups (Accounts and Reports) (Amendment) Regulations 2013. The report has been prepared in line with the recommendations of the UK Corporate Governance Code and the requirements of the UKLA Listing Rules. The Directors’ remuneration policy (set out on pages 96 to 103) was approved by Shareholders on 17 June 2014 and is included for ease of reference. The report below is as disclosed in the 2013 Directors’ Remuneration Report, save for a number of non-signiﬁ cant changes (as permitted under the terms of the approved policy), as follows: – Reference to ﬁ nancial years updated – Reward scenario charts updated for 2016 salaries The Statement from the Chairman of the Remuneration Committee (set out on page 95) and the Annual Report on Remuneration (set out on pages 104 to 110) will be subject to an advisory vote at the 2016 Annual General Meeting. Remuneration policy report The Group’s remuneration policy is designed to provide remuneration packages to retain and motivate high calibre executives and to attract new talent as required. The Committee takes into account the principles of sound risk management when setting pay and takes action to ensure that the remuneration structure at Petropavlovsk does not encourage undue risk. The tables below summarise the main elements of the remuneration packages for the Executive Directors. Information on how the Company intends to implement the policy for the current ﬁ nancial year is set out in the Statement of Implementation of Policy in 2016 on pages 107 and 108. Remuneration element Base salary Purpose and link to strategy Paying a market competitive level of guaranteed cash earnings should assist the Company to attract and retain executives of suitably high calibre to manage and execute the Board’s strategic plans. Operation Salary is paid monthly in arrears in cash. Whilst the obligation of the Company is in sterling, the Executive Directors may receive a proportion of their pay in Russian roubles or US dollars. The Committee reviews base salaries annually, taking into consideration any recommendation from the Company Chairman regarding the Executive Directors. Salary increases typically take effect from 1 January each year, unless there is a signiﬁ cant change in the responsibilities of the role. Reviews take account of: – the individual performance of the Executive Director, his or her experience, skills and potential – the challenges intrinsic to that individual’s role – market competitiveness within the Group’s sector – salary increases across the wider employee population – the wider pay environment. There is no prescribed maximum salary or maximum rate of increase. The Committee would only expect to award an increase higher than inﬂ ation where this reﬂ ected and was justiﬁ ed by additional responsibilities, promotion, exceptional performance or any similar factors which the Committee judged relevant within the context of the Group’s overall policy. Maximum opportunity 96 Petropavlovsk Annual Report 2015 Performance metrics Not applicable, although the individual’s contribution and overall performance is one of the considerations in determining the level of any salary increase. Remuneration element Beneﬁ ts Purpose and link to strategy Offering market competitive beneﬁ ts enables the Company to retain and attract suitably high calibre executives to manage the Board’s strategic plans. Operation Executives are entitled to private medical insurance for the Executive and his/her family, which is treated as a beneﬁ t in kind for UK tax resident Directors. Maximum opportunity Performance metrics Remuneration element Purpose and link to strategy Operation Maximum opportunity Beneﬁ ts may include (but are not limited to): – Life assurance up to 4x salary, subject to underwriting – Ill health income protection – Travel insurance whilst on Company business. The cost of these beneﬁ ts to the Company is dependent upon market rates and availability of the respective beneﬁ ts. None. Pension To provide market competitive pension beneﬁ ts that are in line with the wider workforce whilst ensuring no undeﬁ ned liability on the Company. All Executive Directors receive contributions from the Company into a personal pension plan or similar savings vehicle with the exception of Messrs Hambro and Chekashkin and Dr Maslovskiy. A Company contribution of up to 12.5% of salary, depending on length of service, is made to a personal pension arrangement with a minimum contribution from the Executive Directors of 3%. Cash in lieu of pension may also be made by way of a salary supplement, or a combination of both. These arrangements depend on the individual circumstance and residence of the Executive Director concerned. Performance metrics None. Remuneration element Annual Bonus Purpose and link to strategy The Committee uses the annual bonus to create a focus and ﬁ nancial incentive for the delivery of the annual budget and short term ﬁ nancial strategic imperatives. Operation Annual performance targets are set by the Committee at the beginning of the year, with the bonus payable determined by the Committee after the year-end, based on the Group’s achievement against pre-determined targets. Maximum opportunity Maximum bonus opportunity is 100% of salary. For target level performance, the bonus earned is 60% of maximum. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 97 Directors’ Remuneration Report continued Performance metrics Performance is assessed against a range of strategically important measures which may vary each year depending upon the annual priorities of the Group and on the achievement of certain elements of the annual budget. 100% of the bonus is linked to the achievement of Group bonus objectives. These are set by the Committee and include measures such as: – Annual gold production – Total cash costs – Net debt – Delivery of capital expenditure projects on time and within budget – Exploration success – Safety. The bonus scheme is not a contractual entitlement and the bonus is payable at the discretion of and subject to the approval of the Remuneration Committee. The Remuneration Committee may take into consideration the overall relative success of the Group when assessing the achievement of bonus targets and bonus payments. Bonus payments may be deferred, paid in the form of Deferred Bonus Awards (see Long-Term Incentive Plan below), and may be subject to ‘clawback’ in certain circumstances including material misconduct, material misstatement of the results, a calculation error and/or poor information when calculating the reward outcome. Remuneration element Long-Term Incentive Plan (“LTIP”) The long-term incentive arrangement reinforces effective risk management by aligning Executive Directors’ interests with the long-term interests of shareholders through regular awards of performance shares vesting only on the satisfaction of challenging long-term performance conditions. Awards of performance shares are made which are based on performance over 3 years, with vesting on the third anniversary of grant subject to (i) the satisfaction of performance targets and (ii) continued service (“Performance Share Awards”). There is no opportunity to retest the performance conditions. The Committee, in its absolute discretion, may increase the number of shares that have vested by an amount equivalent to the amount of dividends paid on the vested shares from the date of grant until the date of vesting, calculated in accordance with the rules of the plan. In addition the Committee may grant deferred bonus awards, being an award of shares in lieu of annual bonus and conditional upon continuing service (“Deferred Bonus Awards”). At the time this policy was approved, it was the Committee’s intention to grant Performance Share Awards over the term of the policy. However, no Performance Share Awards were granted in 2014 or 2015 or are proposed during 2016. Deferred Bonus Awards may be granted in relation to the 2016 bonus subject to the achievement of speciﬁ c targets relating to the 2016 Annual Bonus Scheme. The Committee will consider the appropriateness of Deferred Bonus Awards for 2017 at the relevant time. The maximum award is 100% of salary. However, in exceptional circumstances, such as to facilitate the recruitment of an external hire, this may be exceeded to a maximum of 200% of salary. Threshold performance will result in 30% vesting. The Committee will regularly review the performance conditions and targets to ensure that they are aligned to the Group’s strategy and that they remain challenging. The relevant metrics and the respective weightings may vary each year based upon the Company’s strategic priorities. Purpose and link to strategy Operation Maximum opportunity Performance metrics 98 Petropavlovsk Annual Report 2015 1. Notes to the policy table The Committee reserves discretion to make minor changes to this Policy, which do not have a material advantage to Directors, to aid in its operation or implementation taking into account the interests of shareholders but without the need to seek shareholder approval. Any such changes will be reported to shareholders in the following year’s Annual Report on Remuneration. Explanation of performance metrics chosen Performance targets are set to be stretching and achievable, taking into account the Group’s strategic priorities and the environment within which the Group operates. In setting these performance targets the Committee will take into account a number of different reference points, which may include the Group’s long-term mining plan, budgets and operational plans. Annual Bonus Strategic bonus objectives are set for the Executive Directors and Executive Committee members, achievement of which will ensure the delivery of the Company’s immediate policy objectives within the wider context of the Group’s long-term strategy and corporate responsibilities. Short term bonus objectives may therefore reﬂ ect key ﬁ nancial objectives of the Company, exploration success, delivery of speciﬁ c investment projects and health and safety objectives and rewards delivery against these. LTIP The LTIP performance targets reﬂ ect the Company’s strategic objectives and therefore the decisions which ultimately determine the success of the Group. The Committee intends to consult with Shareholders regarding the proposed targets for the next LTIP Award. The Committee retains the discretion to adjust the performance targets and measures where it considers it appropriate to do so (for example, to reﬂ ect changes in the structure of the business and to assess performance on a fair and consistent basis from year to year). 2. Remuneration policy for other employees A large percentage of the Group’s employees are based at the Group’s mines in the Amur Region in the Far East of Russia, while corporate, administrative and support staff are based at the Group’s ofﬁ ces in Blagoveshchensk, Moscow and London. The Board aims to ensure that employees are paid competitively within the region. Employees based at the Group’s mines receive basic salary, shift and production related bonuses where applicable to their role, together with certain beneﬁ ts. 3. Shareholding guidelines There is no formal requirement for Directors’ to own shares in the Company. However Mr Hambro and Dr Maslovskiy as founding shareholders and having participated as underwriters in the Rights Issue have an interest, together with their associates, in 4.65% and 4.57% of the voting rights over ordinary shares in the Company respectively. In value terms, the shareholding of both Mr Hambro and Dr Maslovskiy currently equates to approximately 17 times their annual salaries. All other Executive Directors and Non-Executive Directors who were Directors at the time participated in the Rights Issue. The Committee is mindful that, given the signiﬁ cant shareholdings of Mr Hambro and Dr Maslovskiy, the introduction of minimum shareholding guidelines for the Company’s Executive Directors will only impact on the Chief Financial Ofﬁ cer. Given that there have been no LTIP Awards for four years the Committee does not consider that the introduction of shareholding guidelines at this time would be equitable. The Committee will continue to monitor market trends with respect to minimum shareholding guidelines for the Company’s Executive Directors and to keep this matter under review. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 99 Directors’ Remuneration Report continued 4. Reward scenarios The Company’s policy results in a signiﬁ cant proportion of remuneration received by Executive Directors being dependent on Company performance. The graphs below illustrate how the total pay opportunities for the Executive Directors vary under three different performance scenarios: minimum, target and maximum. When reviewing the graphs, it should be noted that they have been prepared on the policy detailed above and ignore, for simplicity, the potential impact of future share price growth. The graphs have been prepared on the basis that no LTIP Awards will be granted during 2016. Executive Chairman (£) 1,310,000 Chief Executive Ofﬁ cer (£) Chief Financial Ofﬁ cer (£) 1,310,000 1,048,000 1,048,000 655,000 655,000 841,508 683,508 446,508 Minimum Target Maximum Minimum Target Maximum Minimum Target Maximum Fixed pay 100% Variable pay 0% 62.5% 37.5% 50% 50% Fixed pay 100% Variable pay 0% 62.5% 37.5% 50% 50% Fixed pay 100% Variable pay 0% 65.33% 34.67% 53.06% 46.94% Key Annual bonus Salary, pension & beneﬁ ts Assumptions: Minimum = ﬁ xed pay only (base, salary, beneﬁ ts and pension where applicable) Target = 60% payable of the 2016 annual bonus Maximum = 100% payable of the 2016 annual bonus. Salary levels (on which other elements of the package are calculated) are based on levels as at 1 January 2016. The value of taxable beneﬁ ts is based on the cost of supplying those beneﬁ ts (as disclosed on page 106) for the year ending 31 December 2015. The pension value for Mr Maruta is set at 12.5% of basic salary. 100 Petropavlovsk Annual Report 2015 5. Recruitment and promotion policy The Committee’s policy is to set pay for new Executive Directors within the existing remuneration policy in order to provide internal consistency. The Committee aims to ensure that the Company pays no more than is necessary to appoint individuals of an appropriate calibre. i S t r a t e g c r e p o r t Remuneration Element Policy Base salary Beneﬁ ts Pensions Annual bonus Long-term incentives Buy-out awards Salary for a new hire (or on promotion to Executive Director) would be set at a level sufﬁ cient to attract the best candidate available to ﬁ ll the role, taking into account the Group’s position and strategy, market conditions and country of residence. The Committee would be prepared to set the salary of a new hire at a premium to those paid to the predecessor if this was necessary to attract and appoint a candidate with the requisite experience, seniority and calibre. Beneﬁ ts will be set in accordance with the Company’s remuneration policy. In addition, where necessary, the Committee may approve the payment of relocation expenses to facilitate recruitment. Flexibility is retained to pay for legal fees and other costs incurred by the individual in relation to his or her appointment. A deﬁ ned contribution or cash supplement up to 12.5% of salary subject to any particular considerations for a recruit who will be principally based outside of the UK. The annual bonus will operate as outlined for current Executive Directors save that the Committee reserves the discretion to apply the maximum bonus payable of 200% of base salary for the appointment of an Executive Director, if this is considered necessary to recruit the preferred candidate. Depending on the timing of the appointment and responsibilities of the appointee, it may be necessary to set different performance measures and targets initially. G o v e r n a n c e LTIP awards will be granted in line with the policy outlined for the current Executive Directors. An award may (and would usually) be made upon appointment (subject to the Company not being prohibited from doing so). For an internal hire, existing awards would continue over their original vesting period and remain subject to their terms as at the date of grant and further awards may also be considered. The maximum award for a new hire (or on promotion to Executive Director) is 200% of salary. In the case of an external hire, the Committee may offer additional cash and/or share-based elements when it considers these to be in the best interests of the Company (and therefore shareholders) to facilitate the buy-out of value forfeit on joining the Company. Such payments would take account of remuneration relinquished when leaving a former employer and would reﬂ ect (as far as possible) the nature and time horizons attaching to that remuneration and the impact of any performance conditions. Any such buy-out would not have a fair value higher than that of awards forfeited. The Committee will use the components of the Remuneration Policy when suitable but may also avail itself of Rule 9.4.2 of the Listing Rules. Shareholders will be informed of any such payments at the time of appointment. i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 101 Directors’ Remuneration Report continued 6. Details of service contracts Executive Directors have service contracts with the Company which provide for a twelve month notice period, from both the Company and the Executive Director. Termination and loss of ofﬁ ce payments If the Company terminates the employment of the Executive Director with immediate effect, in the absence of a breach of the service agreement by the Director, a payment in lieu of notice may be made. This may include base salary, pension and beneﬁ ts. Beneﬁ ts may also include, but are not limited to, legal fees. Unvested LTIP Awards Outstanding awards under the LTIP will normally lapse if an executive leaves the Company before the vesting date. However, in “good leaver” scenarios these may vest. Good leaver scenarios include injury, ill-health, disability, retirement, death, the participants employing company or business being sold out of the Group, or any other reason that the Committee determines appropriate. 7. Non-Executive Directors’ policy A good leaver’s unvested Performance Share Awards will vest on such date as determined by the Committee, subject to the achievement, or likely achievement, of any relevant performance condition, with a pro-rata reduction to reﬂ ect the proportion of the vesting period remaining. A good leaver’s unvested Deferred Bonus Award will vest on such date as determined by the Committee subject to a pro-rata reduction to reﬂ ect the proportion of the vesting period remaining. Upon a change of control, LTIP Awards will usually vest on the date of the change of control, subject to the achievement or likely achievement of any relevant performance conditions with a pro-rata reduction to reﬂ ect the proportion of the vesting period remaining. Annual bonus Any annual bonus payment will be at the discretion of the Committee on an annual basis and the decision whether or not to award a bonus in full or in part will depend upon a number of factors, including the circumstances of the Executive’s departure and their contribution to the Group during the bonus period in question. Any bonus amount paid will typically be pro-rated for time in service to termination and will, subject to performance, be paid at the usual time. Termination without notice Executive Directors’ service contracts may be terminated without notice for certain events, such as gross misconduct. No payment or compensation beyond sums accrued up to the date of termination will be made if such an event occurs. Other arrangements The Committee will retain discretion to approve new contractual arrangements with departing Executive Directors including settlement, conﬁ dentiality agreements, providing the provision of outplacement services, agreement of restrictive covenants and consultancy arrangements. The Committee will use its discretion in this respect sparingly and will only enter into such arrangements where the Committee believes that it is in the best interests of the Company and its Shareholders to do so. Non-Executive Directors do not receive beneﬁ ts from the Company and they are not eligible to receive pension contributions or participate in any bonus or incentive plan. Any reasonable expenses that they incur in the deliverance of their duties are reimbursed by the Company. Details of the policy on Non-Executive Director fees are set out in the table below. Remuneration element Fees Purpose and link to strategy To attract and retain high performing independent Non-Executive Directors by ensuring that fees are competitive. Operation Maximum opportunity Paid monthly in arrears and reviewed annually by the Board, after recommendation from the Chairman. Fee increases, if applicable are normally effective from 1 January. There is no prescribed maximum annual increase although fees are determined by reference to time commitment and relevant benchmark market data. The Chairman of the Audit Committee, the Remuneration Committee and the Senior Independent Director may also receive an additional fee in recognition of the greater time commitment. The aggregate annual fees are limited to £1.0 million under the Company’s Articles of Association. Performance metrics The performance of each Non-Executive Director is assessed as part of the Board evaluation process. In recruiting a new Non-Executive Director, the Board will use the policy as set out in the table above. Non-Executive Directors are appointed for an initial term of three years and have formal letters of appointment setting out their duties and responsibilities. The appointment can be terminated by paying in lieu of the notice period with such pay being limited to the Non-Executive Director’s basic fees. 102 Petropavlovsk Annual Report 2015 8. Differences in remuneration policy for Executive Directors compared to other employees The Committee may consider the level of salary increases that have been made to the Group’s employees when considering salary increases for the Executive Directors and members of the Executive Committee, whilst taking into consideration the diverse nature of the roles, responsibilities, and geographic locations and economies of the Group’s workforce. The Company does not actively consult with employees on executive remuneration. Executive Committee members and selected employees in London, Moscow and Blagoveshchensk also participate in the Company’s annual bonus scheme. Executive Committee members and a number of senior employees, principally based within Russia, participated in the last LTIP Award grant in 2011. It is the intention that any future LTIP Awards will also be granted to senior employees of the Group in order that they have the opportunity to share in the Group’s success, aligning their interest with those of the Executive Directors and shareholders. LTIP performance conditions are the same for all participants, while award sizes vary accordingly to level of seniority. The key difference between Executive Directors’ and Executive Committee members’ remuneration and that of other employees is that, overall, the remuneration policy for these groups is more heavily weighted towards variable pay. The Company does not have an all-employee share ownership plan and does not consider that such a plan would be appropriate given that share ownership is not a common concept within Russia. The Board believes it more appropriate and beneﬁ cial to the general workforce to reward employees, below senior employee level, with bonus payments, based on the achievement of targets that are relevant to their positions and which they can inﬂ uence. Further information on the Group’s employment policies are provided in the Environmental, Safety and Social Report on pages 24 and 25 of this Annual Report. 9. How the views of shareholders are taken into account The Committee considers shareholder feedback and comment from corporate governance bodies received in relation to the AGM each year. The Committee will take these comments into consideration when reviewing remuneration policy. The Committee will consult with its major shareholders on any material changes to remuneration. 10. Policy on external directorships Executive Directors may accept an external non-executive appointment with the approval of the Board. Any fees earned are retained by the executive. i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2015 103 Directors’ Remuneration Report continued Annual Report on Remuneration The following section provides details of how the Company’s remuneration policy was implemented during the ﬁ nancial year ended 31 December 2015, and how it will be implemented in 2016. 1. The Remuneration Committee Role of the Committee The principal role of the Committee is to recommend to the Board the framework and policy for the remuneration of the Company’s Chairman, the Executive Directors, any newly appointed Executive Director, the Company Secretary and members of the Executive Committee. In addition, and in consultation with the Chairman and Chief Executive Ofﬁ cer as appropriate, the Committee is responsible for reviewing the total individual remuneration package of each Executive Director and for reviewing annual proposals for the Executive Committee members. The Committee’s terms of reference are available on the Company’s website at www.petropavlovsk.net. The activities of the Committee in 2015 The Committee held three formal meetings during the year under review in which certain matters relating to the Reﬁ nancing were also considered. The Company Chairman attended parts of these meetings at the Committee Chairman’s invitation to provide advice on speciﬁ c questions raised by the Committee. The Company Secretary attended each meeting as Secretary to the Committee. During the year the Committee: – Considered the outcome of the 2014 Bonus Objectives, approving the Chairman’s proposal that with the exception of the incoming Chief Executive Ofﬁ cer no bonuses should be paid – Considered and approved the 2015 Bonus Objectives – Reviewed the base salary of the Executive Directors in respect of the annual salary review due 1 January 2016, and based 3. Shareholder voting at the 2015 AGM on the Company Chairman’s recommendation, concluded that given the Group’s focus on strong ﬁ nancial discipline, no salary increases should be awarded to the Executive Directors and members of the Executive Committee guidance of The Investment Association on executive remuneration will be available. The Committee hopes that this will lead to a simpliﬁ cation of executive remuneration which can be reﬂ ected in the Company’s remuneration policy. – Reviewed and approved the 2014 Directors’ Remuneration Report. As envisaged following the conclusion of the Reﬁ nancing, Sir Malcolm Field, Lord Charles Guthrie and Dr David Humphreys retired as Non-Executive Directors and members of the Committee. Mr Robert Jenkins was appointed to the Committee with effect from 1 May 2015. However given Mr Jenkins’ additional responsibilities as Audit Committee Chairman, it was agreed that he would retire from the Committee upon the appointment of Messrs Alexander Green and Andrew Vickerman, which took effect from 22 October 2015. Remuneration policy review Given that the “new” Committee was not constituted until October 2015, the Committee did not undertake its planned review of the Company’s remuneration policy until March 2016. The Committee sought advice from Kepler, independent remuneration advisers to the Committee, during its review which concluded that: – No changes in the Company’s policy should be proposed to shareholders at the current time – With the Chairman’s agreement, given the continued challenging environment in which the Group operates, no Long-Term Incentive Award should be made during 2016 – The Committee should revisit the Company’s remuneration policy towards the end of 2016, at which time the revised It is the Committee’s intention to consult with its major shareholders on any signiﬁ cant proposed changes to the Company’s remuneration policy, following the proposed review, prior to seeking approval of the revised policy at the 2017 Annual General Meeting. 2. External advisers Kepler (part of the MMC group of companies), independent remuneration consultants appointed by the Committee after consultation with the Board, continued to act as the remuneration adviser to the Committee during the year. Kepler provides advice on remuneration for executives, analysis on all elements of the remuneration policy and regular market and best practice updates. Kepler is a signatory to the Code of Conduct for Remuneration Consultants of UK-listed companies (which can be found at www. remunerationconsultantsgroup.com). In 2015, Kepler provided independent advice on the proposed bonus payment to the Chief Executive Ofﬁ cer and support in drafting the Directors’ remuneration report. Kepler reports directly to the Committee Chairman and, with the exception of Marsh, who act as insurance broker to the Company, neither Kepler nor any other part of the MMC group of companies provides any other services to the Company. Kepler’s total fees for the provision of remuneration services to the Committee in 2015 were £4,068 on the basis of time and materials, excluding expenses and VAT. The table below sets out the results of the vote on the Remuneration Report at the 2015 AGM: For (including Chairman’s discretion) Against Total votes cast (excluding withheld votes but including third party discretion) Votes withheld Notes: Annual Report on Remuneration Total number of votes 1,381,606,136 176,095,046 1,563,593,995 4,242,872 % of votes cast 88.36% 11.26% i) Third party proxies were appointed in respect of 5,892,813 shares, at the discretion of the third party proxy. As the voting intention was unknown these votes were not counted in the votes “For” or “Against.” ii) A “Vote withheld” is not a vote in law and is not counted in the calculation of the votes “For” or “Against” a resolution. 104 Petropavlovsk Annual Report 2015 Directors’ remuneration as a single ﬁ gure (audited information) The table below reports the total remuneration receivable in respect of qualifying services by each Director during the ﬁ nancial periods ended 31 December 2015 and 31 December 2014: Year Salary & fees Taxable Beneﬁ t (i) Annual Bonus Pension Pay in lieu of notice (iv) Single Figure Remuneration Total £ Single Figure Remuneration US$ Executive Director Peter Hambro Pavel Maslovskiy (ii) Andrey Maruta Sergey Ermolenko(iii) Dmitry Chekashkin (iv) Alya Samokhvalova (iv) Martin Smith (v) Total Total Non-Executive Director Graham Birch (v) Sir Malcolm Field (v) Lord Charles Guthrie (v) David Humphreys (v) Sir Roderic Lyne Charles McVeigh (v) Robert Jenkins (vi) Alexander Green (vii) Andrew Vickerman (viii) Total Total 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 2015 2014 655,000 555,000 655,000 80,938 395,000 395,000 – 341,667 100,000 300,000 126,667 380,000 126,667 380,000 2,058,334 2,432,605 26,803 80,410 31,533 94,600 30,667 92,000 30,667 92,000 80,667 92,000 30,667 92,000 56,667 – 25,865 – 12,500 – 326,036 543,010 – – – – 2,133 22,788 – – – – 1,435 3,791 3,698 6,104 7,266 32,683 – – – – – – – – – – – – – – – – – – – – – – – 555,000 – – – – – – – – – – – 555,000 – – – – 49,375 49,375 – – – – 15,833 47,500 15,833 47,500 81,041 144,375 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 655,000 555,000 655,000 635,938 446,508 467,163 – 341,667 100,000 300,000 143,935 431,291 146,198 433,604 2,146,641 3,164,663 26,803 80,410 31,533 94,600 30,667 92,000 30,667 92,000 80,667 92,000 30,667 92,000 56,667 – 25,865 – 12,500 – 326,036 543,010 1,002,150 915,750 1,002,150 1,049,297 683,158 770,819 – 563,750 153,000 495,000 220,221 711,630 223,682 715,447 3,284,361 5,221,693 41,009 132,676 48,246 156,090 46,920 151,800 46,920 151,800 123,420 151,800 46,920 151,800 86,700 – 39,574 – 19,125 – 498,834 895,966 (i) Beneﬁ ts are in respect of private medical insurance for the Director, their spouse and any children under the age of 18 years of age and for 2014 only, included pay in lieu of holiday entitlement. (ii) Dr Pavel Maslovskiy was appointed as a Director and as Chief Executive Ofﬁ cer on 5 November 2014. Dr Maslovskiy was awarded a bonus of £555,000 in respect of the year ended 31 December 2014 of which 50% was payable in cash and 50% in the form of a Deferred Bonus Award (see page 110). (iii) Mr Sergey Ermolenko resigned as a Director and as Chief Executive Ofﬁ cer on 5 November 2014. Mr Ermolenko returned to his previous position as General Director of Management Company Petropavlovsk. (iv) Dr Alya Samokhvalova and Mr Dmitry Charles Chekashkin resigned as Directors of the Company on 30 April 2015 but remain with the Company as Strategic Director/Group Head of External Communications and Chief Operating Ofﬁ cer respectively. They are both members of the Executive Committee. (v) Mr Martin Smith, Dr Graham Birch, Sir Malcolm Field, Lord Charles Guthrie, Dr David Humphreys and Mr Charles McVeigh III retired as Directors of the Company on 30 April 2015. (vi) Mr Robert Jenkins was appointed as a Non-Executive Director of the Company on 30 April 2015. (vii) Mr Alexander Green was appointed as a Non-Executive Director of the Company on 27 August 2015. (viii) Mr Andrew Vickerman was appointed as a Non-Executive Director of the Company on 22 October 2015. (ix) Rates of exchange used: 2015: £0.65:US$1, 2014: £0.61:US$1 (average exchange rate throughout the year). Petropavlovsk Annual Report 2015 105 i S t r a t e g c r e p o r t G o v e r n a n c e i F n a n c a i l s t a t e m e n t s Directors’ Remuneration Report continued Additional disclosures 1. Salary and fees No salary increases were awarded to the Executive Directors during the year, recognising the low rate of inﬂ ation in the UK and the ongoing cost reduction programme in the lower gold price environment. On 1 January 2015, Mr Hambro’s salary was reinstated to that prior to his voluntary reduction on 1 June 2012 (£655,000). Due to the ﬁ nancial situation of the Company at the time of Dr Maslovskiy’s return, he agreed to accept an annual salary of £555,000, £69,000 lower than his former salary of £624,000. Given the successful conclusion of the Reﬁ nancing, in which Dr Maslovskiy played a central role, and his importance to the next stage of the Group’s development, the Committee decided that Dr Maslovskiy’s salary should be increased to £655,000 with effect from 1 January 2015. Fees for the Non-Executive Directors were reduced by c.18.5% with effect from 1 May 2015, from £92,000 to £75,000. This reduction in fees was volunteered to the Chairman by the Non-Executive Directors, to reﬂ ect the lower market capitalisation of the Company, and accepted by the Board. In addition the Chairman of the Audit Committee and the Senior Independent Director are entitled to an additional payment of £10,000 and £7,500 per annum respectively, in respect of these additional responsibilities. At his request, Sir Roderic Lyne did not receive the additional payment due to him for his role as Senior Independent Director. 2. Pension The Group makes contributions into a personal pension scheme on behalf of Mr Andrey Maruta and Dr Alya Samokhvalova. A rate of 12.5% of base salary (paid partly as a pension contribution and partly as a taxable cash supplement) is payable in return for a minimum personal contribution of 3% on pension payments. For the period ended 31 December 2015, the Group’s pension contribution for Mr Maruta and Dr Samokhvalova for the period that she was Director of the Company, was £49,375 and £15,833 respectively. Dr Samokhvalova resigned as a Director of the Company on 30 April 2015 but retained her roles as Strategic Director and Group Head of External Communications and her membership of the Executive Committee. As a non UK-resident, Director Mr Martin Smith received a contribution of 12.5% of base salary until the date of his retirement on 30 April 2015, in respect of a pension entitlement which he was able to use to provide retirement provisions via a savings vehicle. Messrs Hambro, Chekashkin and Dr Maslovskiy received no payment from the Company in respect of pension entitlements. 3. Annual Bonus in 2015 Objective Total Group production Total Cash Costs per oz Net Debt JORC Reserves & Resources Bonus earned Target 680,000oz US$700oz US$600m Same as at 1/1/2015 after depletion Payout for target performance (% of max) 6% 18% 18% 18% Stretch target 700,000oz

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