Petropavlovsk PLC
Annual Report 2016

Plain-text annual report

l P e t r o p a v o v s k P L C A n n u a l R e p o r t 2 0 1 6 Petropavlovsk PLC 11 Grosvenor Place London SW1X 7HH T +44 (0)20 7201 8900 F +44 (0)20 7201 8901 E contact@petropavlovsk.net www.petropavlovsk.net Annual Report 2016 Investment case Solid foundations. Building for the future. Petropavlovsk PLC is an established, bulk tonnage, low cost gold exploration, development and mining company listed on the London Stock Exchange. Near term strategy Medium term strategy Long term strategy 1 Assuming completion of the POX Hub, scheduled for commissioning from Q4 2018. The underlying objective is to transfer enterprise value from debt to equity holders, deleveraging via production growth, resource growth and disciplined cost structure. Maximising free cash flow from our solid and stable producing non-refractory operations to fund future growth development and generate shareholder returns. –4 x open pit gold mines –6.3Moz produced since 1999 –20.16Moz of JORC Resources including 7.95Moz of Reserves –implying a greater than 15 year life of mine1 –Sustainable long term production >450,000 ounces per annum – 16.2Mtpa of RIP capacity (4 x RIP plants)Optimal extraction from accessing our full asset base. Sustainable long term refractory and non-refractory production from the POX Hub and RIP plants respectively, with ongoing resource and production growth upside from high grade underground operations and highly prospective exploration prospects within the combined 3,600km² license holding. –3 x open pit mines –2 x underground mines –14.5Mtpa of RIP capacity (3x RIP plants) –500ktpa POX Hub processing refractory concentrate –Malomir and Pioneer combined 11.4Mtpa flotation capacity POX Hub – Our Refractory Growth Story Shareholder Information Solid foundations for sustainable growth Pox highlights Building for the future Petropavlovsk’s POX Hub will be the second of its kind in Russia. 2016 was a landmark year with the recommencement of this core growth project. With our existing 4.1Moz refractory ore reserves, the scheduled commissioning of POX in Q4 2018 will be transformative for the Group, as demonstrated by the robust updated project economics as of end of 2016, in line with current assumptions and development capex. Project construction is currently 65% complete and we look forward to updating you on key milestones throughout the project build and commissioning. Project highlights Capacity No. of Autoclaves 500Ktpa 4 (design commissioning Q418) Refractory Reserves and Resources 4.1Moz Reserves and 9.3Moz Resources Project NPV (10%) Project IRR Project Payback US$603m 65% 3.25 years (Assuming LT avg gold price US$1,200/ oz, FX USD:RUR 60) Operating Parameters (based on Malomir concentrate) Mass pull Concentrate grade Sulphur content Total avg gold recovery 5.5% mass 24 g/t Au 24.9% 79% Operating Parameters (based on Pioneer concentrate) Mass pull Concentrate grade Sulphur content Total avg gold recovery 2.9% mass 24 g/t Au 21.0% 80% Est. cash cost (Malomir) Est. cash cost (Pioneer) US$615-675/oz US$785-865/oz Please refer to Development Projects on pages 44 to 47, for more information. Managing your shares online Shareholders can manage their holdings online by registering with Capita’s share portal service. This is an online service provided by Capita which enables you to view and manage all aspects of your shareholding securely. The service is free and available 24/7 at your convenience. Shareholders, whose shares are registered in their own name, can: – view holdings plus indicative price and valuation – view movements on your holdings – view dividend payment history – change your address – register or change your email address – sign up to receive communications by email instead of post – access the online voting service. Shareholder queries The Company’s share register is maintained by the Company’s Registrar, Capita Asset Services. Shareholders with queries relating to their shareholding should contact Capita directly using one of the methods listed below. Capita Asset Services The Registry 34 Beckenham Road Beckenham Kent BR3 4TU Telephone Helpline: 0871 664 0300 If shareholders have any questions, please call Capita on 0871 664 0300. Calls cost 12 pence per minute plus the phone company’s access charge. Shareholders outside the United Kingdom, should call +44 371 664 0300. Calls outside the United Kingdom will be charged at the applicable international rate. The Capita helpline is open between 9.00am to 5.30pm, Monday to Friday excluding public holidays in England and Wales. Online: shareholderenquiries@capita.co.uk (from here you will be able to email Capital with your enquiry). For more general queries, shareholders should consult the ‘Investors’ section of the Company’s corporate website. 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 Useful contacts Petropavlovsk Registered Office 11 Grosvenor Place Belgravia London SW1X 7HH Telephone +44 (0) 20 7201 8900 Registered in England and Wales (no.4343841) Online for general queries: contact@petropavlovsk.net Head of Investor Relations Alexandra Carse Company Secretary Amanda Whalley ACIS Additional documents Shareholders are encouraged to sign up to receive news alerts by email. These include all of the financial news releases throughout the year that are not sent to Shareholders by post. The Directors are responsible for the maintenance and integrity of the financial information on our website. This information has been prepared under the relevant accounting standards and legislation. Annual General Meeting 2016 This year’s Annual General Meeting (AGM) will be held at 3 More London Riverside, London SE1 2AQ. The meeting is on 20 June 2017, commencing at 10 a.m. Shareholders who wish to attend the AGM are asked to read the accompanying notes to the Notice of the Meeting which explain the documentation required by Shareholders in order for them to gain entry to the meeting. i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2016 173 Highlights Key financial figures Revenue Total Cash Costs All In Sustaining Costs Underlying EBITDA Net Profit/(loss) US$540.7m (2015: US$599.9m) Our core assets Pioneer US$660/oz US$807/oz US$200.1m US$31.7m (2015: US$749/oz) (2015: US$874/oz) (2015: US$172.8m) (2015: US$(297.5m) Albyn Malomir Pokrovskiy Licence area: c. 1,280km2 Licence area: c. 1,168km2 Licence area: c. 821km2 Licence area: c. 336km2 R&R: 5.52Moz >15year LOM R&R: 4.77Moz >15year LOM R&R: 7.06Moz implied >16 year LOM R&R: 1.39Moz Transitioning into the strategic location for the POX Hub FY16 142koz Au @ AISC US$789/oz FY16 180koz Au @ AISC US$719/oz FY16 57koz Au @ AISC US$1,004/oz FY16 38koz Au @ AISC US$988/oz Open pit (underground development) Open pit Open pit (underground development) Open pit Processing capacity: 6.7Mtpa RIP plant and heap leach Processing capacity: 4.7Mtpa RIP plant Processing capacity: 3.0Mtpa RIP plant Processing capacity: 1.8Mtpa RIP plant and heap leach Development projects POX Hub Transformative growth project unlocking 9.3Moz Mineral Resource base. POX Hub construction currently 65% complete. Malomir flotation plant (Stage 1) construction 90% complete. Key contracts have been signed with Outotec and critical long lead item orders placed. Staged commissioning from Q4 2018. Russian Federation Underground Mine Development Pioneer, NE Bakhmut Total 299koz underground Mineral Resource, a 300% increase from 2015. 675m decline development completed, including ventilation decline. First production Q2 2017. Malomir, Quartzitovoye Total 283koz underground Mineral Resource, including 207koz Ore Reserve. Development has commenced Q1 2017. First production H2 2017. Exploration projects Pioneer: NE Bakhmut underground resource and exploration drilling. Sosnovaya greenfield anomalies identified. Albyn: Elginskoye in fill drilling, Unglichikan resource drilling and Yasnoye exploration surveying. Malomir: Quartzitovoye underground resource and exploration drilling. Amur region Albyn Malomir Pioneer Pokrovskiy St Petersburg - RDC Hydrometallurgy Moscow - Petropavlovsk Moscow - PHM Engineering (Tech) Yamal region Krasnoyarsk region IRC Limited - Amur region – Kuranakh mine - Jewish autonomous region – K&S mine Pioneer: Albyn: Pokrovskiy: Malomir: Amur region Irkutsk - Irgiredmet Institute Blagoveschensk - Petropavlovsk Amur Region - Regis Exploration - Kapstoi Construction Operating mine IRC Limited Operations Underground POX Analytical Labs R&D Offices Petropavlovsk Annual Report 2016 1 Strategic reportFinancial statementsGovernance2 Petropavlovsk Annual Report 2016 Contents 01 02 03 Inside this report Strategic report Highlights Contents Our Business Model Our Business Cycle Chairman’s Statement Chief Executive Officer’s Statement Market Overview Our Strategy 1 3 4 5 6 8 10 12 Key Performance Indicators (KPIs) 14 Governance 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 70 72 79 80 87 104 111 112 Financial statements Consolidated Income Statement 120 Consolidated Statement of Comprehensive Income Consolidated Balance Sheet Consolidated Statement of Changes in Equity Consolidated Cash Flow Statement Notes to the Consolidated Financial Statements 121 122 123 124 125 Company Balance Sheet 164 Risks to Our Performance 20 POX Hub Environmental, Safety and Social Report Operational Performance: Pioneer Operational Performance: Albyn Operational Performance: Malomir Operational Performance: Pokrovskiy Development Projects 34 Reserves and Resources IRC Chief Financial Officer’s Statement 36 38 40 42 44 46 48 56 58 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 Company Statement of Changes in Equity Notes to the Company Financial Statements Appendix, Glossary and Definitions Shareholder Information 165 166 169 173 i F n a n c a i l s t a t e m e n t s Petropavlovsk Annual Report 2016 3 Our Business Model Our Values Innovation Responsibility Integrity Sustainability Excellence Strategic Objectives Sustainable cash generation Focus on optimisation and cost control Growth via exploration and development HSE and Social Responsibility Our Strengths Quality of assets Knowledge and experience Highly skilled workforce Location and infrastructure Responsible mining 4 Petropavlovsk Annual Report 2016 Our Business Cycle Explore & Evaluate Develop Mine and Process Gold Mine Closure and Rehabilitation We aim to replenish, expand and improve our resource base through brownfield and greenfield exploration. Our experienced exploration team has a proven track record of identifying, exploring and appraising high value deposits. We create value and drive future growth by developing our mines in a responsible and efficient manner, using our extensive in house expertise to maximise return on investment. Our operating experience allows us to achieve optimal gold extraction, which coupled with industry leading expertise in processing technologies is conducive to healthy profit margins. Gold doré bars are our end product. These are sent to refineries for smelting into bullion. Currently all our production is sold to Russian banks. We integrate closure planning throughout the asset life cycle, ensuring prudent valuing and responsible environmental compliance. We have a strong reputation for sustainable and responsible development of mines throughout the production cycle. Petropavlovsk Annual Report 2016 5 Strategic reportFinancial statementsGovernanceChairman’s Statement Reserves and resources, tonnes and grade are the watchwords of the gold mining industry and we have updated you accordingly. 2016 exploration has brought considerable infill success, including a 340% increase in Reserves at the Elginskoye/Albyn complex, approximately a 200% increase in underground Resource at Pioneer, as well as a brand new greenfield discovery between Pokrovskiy and Pioneer. 2016 was also a significant year for IRC, the iron ore producer on the Chinese border in which our company holds a 31% stake, and whose borrowings from ICBC we guarantee. Following a challenging period, I am delighted to say that, as of its first quarter’s results, it is now a cash generative operation and our shareholding in IRC is, in my view, of significant potential value to the Company. I am very grateful to our team, the financiers at ICBC and Sinosure, and the contractor CNEEC, for the way in which the issues were finally resolved. The POX Hub remains our core organic growth development project and key value driver for the business. The bank refinancing, while increasing near term capex for the Company, means that we no longer needed to give away part of the value in the POX Hub. Construction is 65% complete and scheduled for commissioning in Q4 2018. In 2016, we also took our first steps underground, a natural progression for us as a hitherto open pit operation with a vast refractory reserve and resource base. Both Pioneer and Malomir licences host sources of high grade ore and the feasibility work supported operations. Our corporate strategy is to create value for equity investors by growing our sustainable cash flows and to do this by continuing our efficient and successful exploration and development programmes. It remains our intention to deliver a meaningful share of the cash flow to shareholders as soon as the debt burden is substantially reduced. The advent of our underground operations in the nearest future and that of our production from refractory ore is scheduled to do this. The team needs us to maximise the benefits inherent in our high quality assets – both material and personal, using the excellence and experience that is demonstrated by management’s track record. Peter Hambro At the end of another busy year, it is a pleasure to be able to say that Petropavlovsk has achieved in 2016 many of the goals that I set out in my Chairman’s Statement for 2015, and a pleasure to introduce you to our 2016 Annual Report and Accounts. It was, indeed, a transformative year, not least because the Group returned to profitability. Our net profit increased by 111%, much of which was accomplished thanks to a 4th consecutive year of cost reduction in addition to reduction in impairment losses in IRC, and, with IRC becoming an associate to the Group, limiting exposure to their results to our ownership. We must thank the efforts of all concerned to maintain a disciplined focus on cost control, in turn enabling us to maximise the margin on which our success depends, though cost control by itself will not deliver profit. I am pleased to note that production from our established open pit operations was in line with our revised guidance, delivering the sustainable cash flow that my 2015 statement hoped for. Following the 2015 capital restructure, our team began the refinancing process with our Russian lenders. In this task, we needed to get the banks to extend the maturity profile of their loans to us so that the new maturity profile would match our production. I am pleased to say that this was achieved successfully and that the banks, understanding the importance of our plans to restart the POX Hub project for the treatment of refractory ore, agreed to encompass the capital expenditure that this would involve in nearby years. This allows us to unlock 100% of the value otherwise encapsulated in the c.4 million ounces of gold reserves in the quartz/ sulphur matrix that is refractory ore. We continue to expect that the cost per ounce to produce this will not be significantly different from those we have seen in our non-refractory operations. 6 Petropavlovsk Annual Report 2016 I should like to thank Robert Jenkins for taking over the role of Senior Independent Director from Sir Roderic Lyne and also to thank my other colleagues on the Board for the time and effort they have devoted to the company during the year. In addition, and on behalf of my colleagues, I want to thank the executives, the managers and all the teams that have contributed to the success of 2016. Peter Hambro Chairman With the refinancing and rescheduling of our bank debt behind us and the excellent prospects for underground mining, the pressure oxidation of refractory ore and the new discoveries of gold ahead of us, I feel confident about our long term plans; particularly so at today’s higher gold prices, even though we have protected ourselves by some 600,000 ounces of price hedging. Indeed so confident am I that the Board and I have felt it appropriate now to address the succession planning issues that our Board Review has highlighted. Petropavlovsk is unique in being a British company with a London Board and with all its assets located in the Russian Federation and managed and operated by local people. Having managed the London end of this business for 23 years, with Pavel Maslovskiy running the Russian end, in good times and in bad, I have a clear understanding of what is involved and realise that passing on the baton will not be an easy task. As is usual in such matters, the Board has decided that the task of advancing succession matters should be undertaken by the Nomination Committee. This is in progress: Alex Green has joined Andrew Vickerman and Robert Jenkins on this Committee and I will retire from the Committee and as its Chairman. “ Our corporate strategy is to create value for equity investors by growing our sustainable cash flows and to do this by continuing our efficient and successful exploration and development programmes.” Petropavlovsk Annual Report 2016 7 Strategic reportFinancial statementsGovernance Chief Executive Officer’s Statement Pavel Maslovskiy 2016 was a transformational year for Petropavlovsk shaped by the refinancing of our bank debt, enabling the construction ramp up of our landmark POX Hub. The business returned to profitability, as supported by a fourth consecutive year of cost reductions and the operational progression into underground mining as we access the high grade reserve and resource potential that extends below our existing pits, further sustaining our long life of mine. Solid Foundation Our established, bulk tonnage, open pit non-refractory operations enabled us to deliver total annual production of 416koz, in line with revised guidance. Unexpected weather conditions experienced throughout the year intermittently impaired mining and in particular access to scheduled high grade ore at Andreevskaya. These ounces were deferred to the 2017 mine plan and require increased blending of lower grade stockpile material. This resulted in a 20% reduction in average processed grade from 2015. Cost control and operational efficiencies remain critical to our strategy. Without these we would not have been able to deliver another year of reduced costs: – TCC of US$660/oz, a 12% reduction on 2015 and below our US$700/oz 2016 guidance – AISC of US$807/oz, an 8% reduction on 2015 and in line with 2016 guidance. This marked the fourth consecutive annual reduction in TCC and AISC representing a 35% reduction since 2013, due to cost optimisation measures and the positive effect of Rouble depreciation. In 2016, the Resin-in-Pulp (RIP) plants operated at full capacity with Group throughput of 16.2Mt, a 2% increase on 2015. The responsible optimisation of productivity and operational efficiency remains central to our way of working. As such, following extensive research and testing throughout the year, we implemented a dedicated resin treatment facility at Pokrovskiy designed to improve the processing efficiency of the resin sorption at the Group “RIP” plants. We expect this to significantly reduce the impact of gold in circuit, thereby increasing productivity. In 2016, our solid and stable asset base and operational excellence allowed us to generate positive operational cash flows and return to profitability. We achieved net profit of US$31.7m, resulting to a large extent from the higher profitability of our operations and the reduced impact from IRC. Underlying EBITDA was US$200.1 million, an improvement of 16% on 2015 due to maximised margins. Underpinning our business model is our exploration success in unlocking the abundant gold potential within our 3,600km2 licence holding. Our current 20.2Moz Resource, supporting a greater than a 15 year life of mine, demonstrates our value in investing in our long term sustainability. Targeted exploration on replenishing depleted ounces, resource to reserve conversion and exploring brownfield near term non-refractory potential was very successful in 2016. We converted 1.6Moz of Resources to Reserves of which the majority were at our 100% non-refractory Albyn mine, Elginskoye deposit. Instrumental to our strategic growth objectives, we defined our first underground Reserve of 370koz, underpinning an initial 6 year life of mine at both Pioneer and Malomir. Building for the Future It is important to remember that Petropavlovsk’s foundations lie at Pokrovskiy, acquired in the early stages of exploration in 1994 and which subsequently became the backbone of the Group. As the mine nears the end of its reserve life, we made the strategic decision to develop it into the base for the POX Hub. Its excellent operational infrastructure, skilled labour, proximity to regional infrastructure and access to naturally occurring limestone drove our decision. The refinancing of our $530m bank debt was paramount to the achievements of 2016 and has opened up future opportunities. With the agreement that Petropavlovsk retained 100% of the value of our core growth project, the POX Hub, my colleagues and our partners, Sberbank and VTB, successfully extended the debt maturity profile in line with our production profile thereby enabling us to fund development out of free cash flows (assuming a prevailing gold price of $1,250/oz). Unlocking the 4Moz refractory Reserves embedded within our existing asset base, equivalent to approximately 50% of our current Ore Reserves, represents meaningful value to Petropavlovsk. Following the refinancing, together with independent consultants, we updated our project economics, giving an IRR of 65% and NPV10 of US$603 million, adding a minimum of 200koz per annum to our production profile at a steady rate. At Malomir, currently our smallest mine by production (57koz in 2016), completing the POX Hub will grow its production profile to make it the largest contributing Group asset by 2019 with a falling cost trajectory in line with current group operating costs of c. US$700/oz. Development progresses at full scale and is currently under budget. In 2016, Outotec contracts were reinitiated and orders for long lead items placed. Flotation concentrate production is scheduled to commence at Malomir from H1 2018 for trucking and stockpiling ahead of the POX Hub commissioning from Q4 2018. 8 Petropavlovsk Annual Report 2016 Positioning for Growth With the development of our POX Hub and underground firmly underway, as we emerge from a period of introspection and optimistically look ahead, 2017 is set to be another pivotal building block towards achieving our vision of being a mid tier producer of refractory and non-refractory ore from 2019. I would like to thank the Board and our stakeholders for their guidance in 2016. Further, I would like to thank the management team for their commitment, strength of character and ability to effectively navigate the challenges of the last few years enabling us to reach this juncture. We look forward to sharing our key milestones throughout this next phase of growth, while maintaining our devoted commitment to maximising sustainable margins in 2017. Pavel Maslovskiy Chief Executive Officer Expanding our Expertise Prior to 2016, Petropavlovsk was an exclusively open pit operation. Following successful feasibility studies, the development of our first underground mine at Pioneer began in 2016, with development at Malomir scheduled to commence early 2017. First production is scheduled for H2 2017. We have appointed contractors and development is under way, with 675m of decline development completed at Pioneer by year end. By and large, Petropavlovsk has utilised an owner operator business model. However, given underground is a new mining method, with start up execution risk, we have utilised well respected local contractors to mitigate this risk during the development growth phase. Notwithstanding the long history of underground mining in the Amur region, access to highly skilled labour and existing expertise within the Group, we intend to bring the underground operational function in house over time. Our extensive regional experience in gold mining, not only within Russia but specifically the Amur region, gives us a competitive edge in a complex marketplace. We have established our presence as a leading employer and contributor to the local economy, nurturing the talent of its people, who in turn have built Petropavlovsk into the business it is today. Senior management, a number of whom have worked for Petropavlovsk for more than a decade, have extensive technical expertise. Together with our larger in house exploration, construction, research and engineering capabilities, we have established our strategic vision of being a fully integrated operating gold miner. “ The responsible optimisation of productivity and operational efficiency remains central to our way of working.” Petropavlovsk Annual Report 2016 9 Strategic reportFinancial statementsGovernanceMarket Overview Oil prices recovered from a 13 year low of US$26/bbl to close the year at over US$50/bbl The oil price was under great pressure at the start of the year, dipping to well below US$30/bbl. This was due to persistently high inventories, caused by continuous shale production, and rising output from OPEC as it continued to pump oil to compete with shale producers for market share. Petropavlovsk benefited from the lower oil price, which translated into lower fuel costs, an expense which accounts for approximately 15% of our total operating cash expense figure (c.US$40m in 2016, a decrease of 27% / c.US$55m vs. 2015). The RUB strengthened by 15% against the USD in 2016 While Petropavlovsk’s gold sales are denominated in US$, approximately 80% of the Group’s costs are RUB based. A weaker RUB is beneficial for the business because operating costs are lower when translated into our reporting currency. The RUB traded within a range of 60.2RUB to 82.3RUB per US$, commencing the year at 72.5RUB and closing at 61.5RUB, appreciating by c.15%. A strengthening oil price alongside the possibility of reduced sanctions helped the RUB to strengthen. 2017 outlook for gold prices For the first three months of 2017, gold was up 8%. What happens next will partly be determined by levels of macro uncertainty and real rates, hence what ultimately matters is the impact of politics on economic growth and US Federal policy. For instance, if economic growth remains weak and inflation stays low, it is likely that interest rates will remain lower for longer – a positive for gold. On the other hand, should we see acceleration in US and global growth or a large fiscal package with measures that have a high growth impact, this will likely push real rates higher. This would mean a greater opportunity cost to holding gold, while its safe haven appeal would be expected to diminish. A positive albeit unremarkable performance for gold in 2016 Gold returned +8% in 2016, starting the year at US$1,060/oz and closing at US$1,146/oz. The precious metal traded in a range between US$1,060/oz – US$1,366/oz, averaging US$1,248/oz during the year, +8% vs. 2015 (US$1,160/oz). On a relative basis, although gold outperformed platinum (+3%), its performance could not match the gains achieved by silver (18%), palladium (21%) and the Bloomberg Commodity Index (+11%). Lower jewellery and tech demand easily balanced by higher investment demand Global gold demand amounted to c.139Moz in 2016, up 2% vs. 2015 (c.136Moz), with lower jewellery and technology demand more than offset by investment demand. On a combined basis, China (down 17% vs. 2015) and India (down 22% vs. 2015), accounted for over half of global jewellery demand. One possible explanation is that a rising gold price, combined with local currency depreciation vs. the US$, made buying gold more expensive, dampening its appeal. In India specifically, Q1 2016 demand was affected by a six week nationwide jewellers’ strike due to the government’s proposal to impose a 1% tax on gold jewellery sales, followed by the surprise demonetisation of 1,000 and 500 rupee notes announced in Q4 2016, further disrupting economic activity. Investment demand for gold has overshadowed the weakness in physical demand this year Investment demand jumped 70% in 2016, driven primarily by robust Exchange Traded Funds (ETF) inflows, although appetite for bars and coins did not change materially from 2015. According to data compiled by UBS, ETFs added c.15Moz to their holdings, finishing 2016 at c.65Moz. The market saw strong ETF demand in H1, slowing in H2 with some outflows seen towards the end of Q4, in part due to some post-US election profit taking. Nonetheless, the robust ETF demand lends support to the view that a lot of the flow this year represents strategic allocation into gold, hinged on the view of lower rates for longer. Investment demand drivers included negative interest rates, sluggish global growth, unknown Brexit consequences, uncertainty surrounding the US elections, heightened macro uncertainty, as well as deteriorating confidence towards central banks. This combination of factors lent upward support to price action well into Q3 2016, suggesting that gold is still considered an effective portfolio diversification tool. 10 Petropavlovsk Annual Report 2016 China saw its share of bar and coin demand increase by 25% vs. 2015 to c.9Moz as consumers digested the impact of a weakening Yuan and as new restrictions on property purchases highlighted gold’s appeal as an alternative asset. In contrast, demand in the Middle East shrunk by 71% to its lowest levels on record, as a slowdown in oil driven economies and higher local prices dampened demand. Central bank purchases slowed in 2016 Traditionally viewed as an asset class to help diversify reserves, central bank buying continued in 2016, albeit at a slower pace. Purchases amounted to c.12Moz, approximately a third lower vs. 2015 (c.19Moz). Whilst the buying was led by Russia, China and Kazakhstan, the overall slowdown in purchases can be attributed to sales stemming from pressure on FX reserves. As at the end of December 2016, Russia held c.52Moz as part of its reserves, an increase of 14% on the year. Slight increase in overall gold supply year on year, big increase in recycled gold Total mine supply increased by 5% to c.147Moz,with recycled supply jumping 17% to c.42Moz. The bulk of the recycling took place in the first three quarters, as the price rallied from c.US$1,060/oz in January to just over US$1,350/oz by August (before beginning to lose momentum from October onwards), encouraging consumers to cash in their physical gold. Since gold peaked in 2011, miners have been adjusting to a lower gold price environment by focusing on core operations, cutting back on development / exploration spend and controlling costs. 2016 saw a possible turning point in investment allocation by companies as the gold price showed signs of stabilising above the psychologically important US$1,000/oz level, which allowed gold miners to reconsider their capital allocation plans, with renewed appetite to invest and explore. However, due to the time lag involved between initial exploration and first production, increased exploration spend is unlikely to make an immediate and meaningful impact on supply. Hedging activity is up on last year, but appears to be mainly related to protecting operating margins while specific new projects are developed, as opposed to sizeable hedging from major producers, seen in the previous cycle. The average annual gold price increased 8% in 2016 to US$1,248/oz (in US$/oz) 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 1,160 1,248 1,265 1,224 1,410 1,668 1,570 973 872 697 Source: The London Gold Market Fixing Limited. Data provided for information purposes only. Gold appreciated by 8% in 2016 (in US$/oz) 2,000 1,600 1,200 800 400 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: The London Gold Market Fixing Limited. Data provided for information purposes only. Gold ETFs finished 2016 with combined holdings of approximately 65Moz, up 30% on the year (in Moz) 100 80 60 40 20 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: UBS. Petropavlovsk Annual Report 2016 11 Strategic reportFinancial statementsGovernanceOur Strategy Our strategy is to create value for equity investors by growing sustainable cash flows, and via expansion due to successful exploration and development. It is based on the quality of our assets, our focus on operational and development excellence, and our experience, demonstrated by management’s track record of driving meaningful organic growth. Our Strategic Objectives Sustainable cash generation Overview 2016 Progress 2016 KPIs Sustainable growth in cash generation is a key strategic driver for us. We are focusing on expanding margins using our solid and stable producing asset base and applying our operational excellence. We operate one 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. From the first stages of development, our highly qualified team ensures that each of our mines is correctly engineered based on optimal mine planning, and designed to deliver maximum cash flow. – A total of 16,166kt combined total Total Attributable Gold production material processed – Implementation of centralised procurement system, significantly improving the Company’s ability to negotiate purchase pricing. 416.3koz (2015: 504.1koz) Average Realised Gold Sales Price US$1,222/oz (US$1,178/oz) 2017 Targets Key Risks – Targeted gold production of 420- – Gold Price Risk 460koz – Securing cash flow through partial hedging of gold output. – Production Related Risk – Exploration Related Risk *Please refer to the Risk section on pages 20 to 33. Growth via Exploration and Development Overview 2016 Progress 2016 KPIs Our in house expertise is key to our development strategy. While generating free cash flow from existing operations, we secure high quality sources of long term growth through our own exploration programme, and develop assets using the latest technologies. Our 3,600km2 licence footprint lies around a major belt of gold mineralisation and remains under explored, which together with our local knowledge and highly qualified geological team allows for significant additions to our mineral reserve and resource base every year. Our solid in house research and technology capabilities enable us to unlock the value of technologically complex ores by using modern and efficient methods of gold recovery. – 1.0 Moz uplift in Probable Ore Mineral Resources Reserves at the Elginskoye deposit – 76% increase in Mineral Resources for underground mining at Pioneer and Malomir. 20.16 Moz (2015: 23.29Moz) Ore Reserves 7.95 Moz (2015: 8.41Moz) 2017 Targets Key Risks – To improve short and midterm cash flow by discovering and bringing non-refractory reserves into production that are suitable for rapid access and extraction via underground and open pit mining – To better facilitate long term sustainability by adding high quality open pit refractory and non-refractory underground resources to Group totals. – Project Related Risk – Legal and Regulatory Risk – Exploration Related Risk *Please refer to the Reserves and Resources section on pages 48 to 55. 12 Petropavlovsk Annual Report 2016 Focus on Optimisation and Cost Control Overview 2016 Progress Our approach to operational management is underpinned by the optimal extraction of gold reserves. We plan to achieve highly competitive operational costs and expand margins steadily, leveraging efficiencies resulting from full capacity utilisation, continued operational improvement and comprehensive cost control. We will implement these plans to achieve our production targets and generate healthy gold sales at competitive margins. – 12% reduction in total cash costs and 8% reduction in all-in sustaining costs (most substantially at Albyn, by greater than 20%. 2016 KPIs Total Cash Costs US$660/oz (2015: US$749/oz) All-in Sustaining Costs US$807/oz (2015: US$874/oz) 2017 Targets – Commence mining from underground, optimising the extraction of high grade reserves at Pioneer and Malomir. Key Risks – FX Risk – Legal and Regulatory Risk – Production Related Risk HSE and Social Responsibility Overview 2016 Progress 2016 KPIs We aim to have a transformative, positive effect on socioeconomic development in the areas we operate in as we build our successful and responsible mining business. Petropavlovsk is committed to providing its employees with a safe working environment. It is essential for us to safeguard the welfare of our people. We are minimising our environmental footprint, upholding the highest standards as required by Russian law and going beyond operating in line with international best practice, in order to mitigate the negative impact of our operations. We value the support of all our stakeholders – whether they are investors, NGOs, governments or local communities and maintain an open dialogue to constantly improve and grow our business, maximising the positive effect on every group. – Maintained excellence in training and raising awareness GHG Emissions: Combustion of fuel and operation of facilities (Tonnes of CO2e) – Enhanced monitoring tools to ensure a safe environment for employees 182,407.9 (2015: 260,194.9) – Proved compliance with local legislation and exceeded requirements by implementing global best practices. Electricity, heat, steam and cooling purchased for own use (Tonnes of CO2e) 222,847.3 (2015: 276,144.1) Emissions reported above normalised per ounce of gold produced (Tonnes of CO2e /oz) 0.97 (2015: 1.07) 2017 Targets Key Risks – Further developing training systems – Health, Safety and Environmental Risk to enrich our HSE culture – Maximizing efforts to lower the LTIFR (Lost Time Injury Frequency Rate) across sites – Improving our holistic approach in localizing incidents and accidents. Petropavlovsk Annual Report 2016 13 Strategic reportFinancial statementsGovernanceKey Performance Indicators (KPIs) Total Attributable Gold Production (koz) Total Cash Costs per Ounce of Gold for Hard Rock Mines (US$/oz) All in Sustaining Costs All in Costs 416 504 2016 2015 660 749 2016 2015 807 2016 838 874 2015 932 625 2014 860 2014 972 2014 1,087 2016 2015 2014 Definition Measured in troy ounces, attributable gold production is the total of the gold produced from the Group’s four hard rock mines for the applicable years. The gold production figure consists of gold recovered during the period and is adjusted for the movement of gold still in circuit. Relevance Gold production underpins our financial 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 2016 The Group produced 416.3koz of gold in 2016, in line with guidance revised due to adverse weather conditions during the second half of the year. In part due to these conditions, production was lower than the 504.1koz of gold produced in 2015. Going Forward Gold production for 2017 is forecast between 420,000-460,000oz, predominantly from open pit operations as underground production is scheduled to commence in H2 2017. Petropavlovsk remains focused on optimising its current asset base whilst continuing to drive its key growth projects, the POX Hub and the development of underground operations, to first production. 14 Petropavlovsk Annual Report 2016 Definition The total cash cost per ounce is the cost of producing and selling an ounce of gold from the Group’s hard rock operations. 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 2016 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 inflation and fluctuations in the rouble to US dollar exchange rate. Refinery and transportation costs are variable costs dependent on production volume. Mining tax, comprising 6% of the gold price, is also a variable cost dependent on production volume and the realised gold price. Relevance The Group closely monitors its current and projected costs to track and benchmark the ongoing efficiency and effectiveness of its operations. This monitoring includes analysing fluctuations in the components that constitute cash costs and cost per tonne mined and processed to identify whether and where efficiencies may be made. Performance in 2016 Total cash costs for the Group’s mines decreased from US$749/oz in 2015 to US$660/ oz in 2016. This primarily reflects the effect of cost optimisation measures undertaken by the Group in response to the lower gold price environment as well as the positive effect of Rouble depreciation. Going Forward The Group expects its total average cash costs in 2017 to be c.US$700/oz at current exchange rates. Go to pages 61 to 63 for further information on cash costs. Definition 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 significant 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 Officer’s Statement on page 63 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 efficiency and effectiveness of its operations to ensure it maintains healthy margins. Performance in 2016 Following industry best practices, the Group calculated and disclosed its AISC and AIC for the first time for the period of 2014, which have since demonstrated a continuous decrease. In 2016, AISC decreased to US$807/oz from US$874/oz in 2015. This reflects the reduction in TCC as well as lower sustaining capital expenditure related to the existing mining operations. AIC decreased from US$932/oz in 2015 to US$838/oz in 2016, reflecting the decrease in all-in sustaining costs explained above, reversal of impairment of refractory ore stockpiles due to gold price recovery and decrease in exploration expenditure. Going Forward The Group expects its All in Sustaining Costs of production in 2017 to be c.US$900/oz at current exchange rates. Go to pages 61 to 63 for further information on cash costs. Average Realised Gold Sales Price (US$/oz) Capital Expenditure (US$m) Net Debt (US$m) 2016 2015 2014 1,222 2016 29.4 1,178 2015 32.6 1,331 2014 96.8 (930) (599) (610) 2016 2015 2014 Definition The average realised 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 2016 In 2016, the average realised gold sales price was US$1,222/oz, including US$(21)/oz effect from forward sales contracts, compared to US$1,178/oz in 2015. Going Forward Forward contracts to sell an aggregate of 50,006 ounces of gold at an average price of US$1,303 per ounce were outstanding as at 31 December 2016. Forward contracts to sell an aggregate of 546,968oz of gold at an average price of US$1,253/oz are outstanding as at 26 April 2017. Further details on the components of Group revenue, cash flow and hedge arrangements may be found on pages 59. 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. Definition Net debt is set out in note 29 to the consolidated financial statements. Net debt is incurred in order to assist with the financing 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 2016 Net debt was reduced to US$599 million in 2016 from US$610 million in 2015. Going Forward Net debt is expected to decrease to c.US$550 million by the end of 2017, assuming an average gold price of US$1,200/oz for the remainder of 2017. Net debt is set out in note 29 to the consolidated financial statements. 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 2016 The Group invested an aggregate of US$29.4 million in its gold projects compared to US$32.6 million invested in 2015. The key areas of focus this year were on fulfilling existing contractual commitments in relation to the POX Hub project, exploration to support the underground mining at Pioneer, 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. Going Forward The Group’s capital expenditure requirements are estimated to be around c.US$105 million in 2017. This will be split between continuing the Group’s exploration programme (c. US$17 million) and development and maintenance (c. US$85 million). The development works will focus predominantly on constructing the POX Hub, the Malomir flotation plant, and underground operations at Pioneer and Malomir. A breakdown of 2016 capital expenditure may be found on page 67. Petropavlovsk Annual Report 2016 15 Strategic reportFinancial statementsGovernanceKey Performance Indicators (KPIs) continued Earnings/Underlying EBITDA (US$m) Profit/(Loss) for the Period (US$m) Basic Earnings/(Loss) per Share (US$) 2016 2015 2014 200.1 172.8 (298) 251.8 (348) 2016 32 2015 2014 (1.33) 2016 0.01 (0.09) 2015 2014 Definition Underlying EBITDA is the profit/(loss) for the period before financial income, financial expenses, foreign exchange gains and losses, fair value changes, taxation, depreciation, amortisation and impairment charges. Definition Profit/(loss) for the period is calculated by deducting operating and net finance expenses, taxation and any relevant share of results in associates and joint ventures for the applicable years from total revenue. Definition Basic earnings per share (‘EPS’) is the profit or loss for the period attributable to equity holders of Petropavlovsk PLC divided by the weighted average number of ordinary shares during the period. Relevance Underlying EBITDA is an indicator of the Group’s ability to generate operating cash flows, which are the source of funding for the Group’s working capital requirements, capital expenditure and debt service obligations. Performance in 2016 In 2016, the Group generated underlying EBITDA of US$200 million, compared with US$173 million in 2015. That represents a 16% improvement on 2015 primarily due to the contribution from hard rock mines as a result of the higher realised gold price achieved and the improvement in TCC. Going Forward The Group aims to continue to produce and sell gold at competitive margins, which will, amongst other factors, influence the Group’s future EBITDA levels. A reconciliation of profit for the period from continuing operations and underlying EBITDA is set out in note 34 to the consolidated financial statements. Relevance Profit/(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. Relevance Basic EPS is an indicator of the Group’s profitability and the value per Ordinary Share. The total number of Ordinary Shares in issue as at 31 December 2016 was 3,303,768,532 (31 December 2015: 3,300,561,697). Performance in 2016 Net profit of US$31.7m compared to a net loss of US$297.5 million for 2015, which reflects the improvement in underlying EBITDA, substantially lower losses from IRC (reflecting the fact that no substantial impairments were required in 2016) and deferred tax credit (primarily as a result of foreign exchange effects). Going Forward The Group aims to continue to produce and sell gold at competitive margins, which will, amongst other factors, influence the Group’s future profit/ (loss) for the Period. Performance in 2016 Basic profit per share for 2016 was US$0.01 compared with a basic loss of US$0.09 in 2015. Basic profit per share from continuing operations for 2016 was US$0.01 compared to the US$0.07 basic loss per share from continuing operations for 2015. The key factor affecting the basic profit per share was the increase of the profitability of the Group’s operations. Going Forward The Group aims to continue to sell gold at competitive margins, which will, amongst other factors, influence the Group’s future EPS. A reconciliation of profit for the period from continuing operations and underlying EBITDA is set out in note 34 to the consolidated financial statements. A reconciliation of profit for the period from continuing operations and Underlying EBITDA is set out in note 34 to the consolidated financial statements. 16 Petropavlovsk Annual Report 2016 Mineral Resources Ore Reserves 2016 2015 2014 20.2 23.3 23.3 2016 2015 2014 7.8 8.4 9.2 Definition 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 specific geological evidence and knowledge, including sampling. Mineral Resources are sub divided, in order of increasing geological confidence, into Inferred, Indicated and Measured categories. 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 finding 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 2016 During 2016, due to the success of the Group’s exploration programme, Mineral Resources for potential underground mining increased by c.320koz (76%). New Mineral Resources for potential open pit extraction were established at Quartzitovoye, an increase of 106koz (24%). A total of 3.55Moz of Mineral Resources were disposed of with the undeveloped, potentially capital intensive Visokoye and Yamal projects. This was the main driver for the resource decrease. Definition 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 modification 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 justified. Ore Reserves are sub divided in order of increasing confidence 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 profitable levels. The Group has been placing a strong emphasis on finding 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. Progress in 2016 Successful exploration and technical studies increased Ore Reserves at the Elginskoye deposit (Albyn) by 340% to 1.24Moz. Maiden high grade Ore Reserves of 0.37Moz for underground mining were estimated at Pioneer and Malomir, supporting a 6 year underground mine plan. A total of 1.22Moz of Ore Reserves were disposed of with Visokoye which is an undeveloped project in Krasnoyarsk, far from the Amur region where the Group operates. The disposal was the main reason for the Reserve decrease. Going Forward Going forward, the Group is striving to continue to develop a high quality non-refractory and refractory resource base for both open pit and underground mining. Going Forward Going forward, the Group is striving to continue to establish a high quality non-refractory and refractory reserve base for both open pit and underground mining at their operational mines. Petropavlovsk Annual Report 2016 17 Strategic reportFinancial statementsGovernanceKey Performance Indicators (KPIs) continued 2.64 2.63 2.50 The Group is striving towards a zero fatal accident target. In order to eliminate the root causes of similar fatalities, the following action was undertaken with the full support of the HSE Committee: – Safety meetings were held at all levels, across all sites, mines and ancillary entities, to discuss the reasons and circumstances behind the accident – Training sessions were conducted with all appropriate employees across the Group to refresh their knowledge of the relevant procedures and regulations – Random testing was conducted amongst this group of employees to ensure that they were working in accordance with the Group’s procedures. Going Forward The Group has a duty to provide a safe environment for its employees and is constantly looking for ways in which to improve our performance and achieve zero fatalities. The following actions were put in place during 2016: – An improved accident alert system to better facilitate communication between employees in order to locate accidents and provide necessary assistance – A successful merging of the Russian three stage reporting system with global best practices to reduce the probability of accidents, identifying and removing potential danger – Meetings and discussions were held on a regular basis between health and safety officers to share information and raise awareness – Rigorous control and monitoring of compliance with the Group’s health and safety regulations to ensure a safe environment is promoted – The Fatal Accidents List, as part of the safety induction and refresher course, is a tragic reminder of the importance to obey health and safety rules at all times with no exclusions. LTIFR 2016 2015 2014 Definition 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. 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 2016 For the year ended 31 December 2016, Group operations recorded a LTIFR of 2.64 accidents per million man hours worked. Regrettably there was one fatal accident during the year, which took place at Pokrovskiy in May. The accident was immediately reported to the HSE Committee and the Board. Following a full investigation by the Russian authorities with the full support of management at the site and of the Group, the Company was found to have acted properly and was not responsible for the accident. Unfortunately the employee had not followed proper procedures in this case which had led to this unfortunate accident. Following the investigation and a full report and review by both management and the HSE Committee, further training was provided to all employees. It is the Company’s practice to ensure that any such incidences are communicated to all relevant employees within the Group in order that lessons can be learned and to prevent such incidences reoccurring. 18 Petropavlovsk Annual Report 2016 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 financial statement. We do not have responsibility for any emission sources that are not included in our consolidated statement. We have adopted methodology for the planning and reporting of Green House Gases (GHG) according to the laws of the Russian Federation and 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. Under Russian legislation, the GHG emissions associated with grid electricity are reported by the generator. However, for transparency purposes, the GHG emissions associated with our consumption of electricity have been reported below. This is measured in tonnes of carbon dioxide and calculated using the 2016 IEA electricity conversion factor for the Russian Federation of 0.37959 kilograms of CO2 equivalent per kilowatt hour. All emissions quoted below are Gross as no deductions, for export of renewable energy or purchase of certified 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 2016, Petropavlovsk produced 416,300ozs and has used this figure to calculate our intensity metric. Source of Emissions Emissions come from the following sources: Diesel – as used in our fixed 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. Verification / Assurance Quarterly reports of emissions against an approved plan are sent to the Russian Environmental Agency Rosprirodnazor. 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. Global GHG emissions data for period 1 January 2016 to 31 December 2016 Emissions from: Combustion of fuel and operation of facilities (Tonnes of CO2e) Electricity, heat, steam and cooling purchased for own use. (Tonnes of CO2e) Emissions reported above normalised per ounce of gold produced. (Tonnes of CO2e / oz) Reporting year 01.01.2016 – 31 12.2016 Comparison year 01.01.2015 – 31 12.2015 182,407.9 260,194.9 222,847.3 276,144.1 0.97 1.07 Petropavlovsk Annual Report 2016 19 Strategic reportFinancial statementsGovernanceRisks to Our Performance Introduction 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. 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. wherever possible, although some, such as political risks, are largely beyond the Group’s control. Summarised alongside each risk is a description of its potential impact on the Group. Measures in place to manage or mitigate against each specific risk, where this is within the Group’s control, are also described. The Group’s risk management system is monitored by the Board, with the exception of (i) financial risks which are monitored by the Audit Committee and (ii) health, safety and environmental (‘HSE’) risks which are monitored by the HSE Committee. Financial risks and HSE risks are monitored 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 below. The Executive Committee evaluates which of the risks detailed in the risk matrices constitute the material risks for the Group, in terms of potential impact and financial cost, with reference to its strategy and the operating environment. Those risks with the highest potential impact are then presented 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. 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 significant risks are recorded in risk registers. The likelihood of occurrence and Principal risks relating to the Group The most significant 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 22 to 33. The Group seeks to mitigate these risks 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 significantly affect the Group’s business and financial results. Petropavlovsk’s principal risks and uncertainties are detailed in the table on the following pages and are supported by the robust risk management and internal control systems and procedures outlined on pages 85 to 86. Risk management framework Petropavlovsk PLC Board Audit Committee HSE 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 finance or meet loan covenants or foreign exchange exposure 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 Officer CEO/COO Group Head of Legal Affairs Chief Executive Officer Investor Relations and External Communications Includes risks such as poor management of market expectations and false investor perception Group Head of External Communications 20 Petropavlovsk Annual Report 2016 Major changes from risks identified in the 2015 Annual Report IRC Related Risks: 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$234million principal was outstanding as at 31 December 2016. On 31 March 2017, IRC announced that ICBC has waived the obligation of K&S to repay all loan principal instalments due in 2017 totalling US$42.5million. This amount will be spread equally between the five subsequent repayment instalments due under the project finance facility. In addition, with its commissioning, K&S is successfully operating at 75% production capacity and the iron ore price has increased considerably during the year. The above factors represent a significant reduction in the risk that there will be a claim on the Company’s guarantee in the immediate future and hence represent a significant reduction in the Company’s risk profile. All IRC’s risks, including the potential impact of a decrease in the iron ore price, are included as one risk in the table below for ease of reference. Political risk due to operating in Russia The Group’s operations are based in Russia. Details regarding the financial and economic sanctions imposed on Russia in 2014 by the United States and the EU on certain businesses and individuals and the subsequent response by Russia are well known. There have recently been further developments regarding the political situation between Russia and the West which have been widely reported in the media. The Board and the Executive monitor the relevant issues on a continual basis. However it is recognised that this and other geopolitical risks cannot be influenced by the Company. The Board has decided that given that these issues are widely known and the Company is unable to influence this risk, it should be removed from the table of Principal Risks provided in this report. The Board will continue to monitor this risk. As detailed above the following table includes the most significant risks that may have an adverse impact on the Group’s ability to meet its strategic objectives. More focus is therefore provided in the table on the risks related to the construction of the POX Hub and the underground mining project given that these are the most critical to the future growth and the financial viability of the Group. Group’s Mineral Resource and Ore Reserves: The Group’s activities are reliant on the quantity and quality of its Mineral Resources and Ore Reserves. However these 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 Reserves estimates. The Group has a detailed process of assuring the accuracy of its Mineral Resources and Ore Reserves. In addition, the Mineral Resources and Ore Reserves estimates which are included in this Report for the Group’s existing mining licences have been prepared in accordance with the guidelines of the JORC Code (2012) and have been reviewed and signed off by Wardell Armstrong International (“WAI”) in April 2017. WAI is an independent consultancy that provides the mineral industry with specialised geological, mining, and processing expertise. The Group also adopts a prudent gold price assumption when estimating its Ore Reserves, with an assumed long term gold price assumption of US$1,200oz used for the current estimates. Given the assurance programme undertaken by the Group when estimating its Mineral Resources and Ore Reserves the ongoing inclusion of this risk as a ‘Principal Risk’ is no longer considered appropriate for inclusion in this report although it will continue to be monitored by the Board to ensure that the assurance programme remains appropriate. Consequently this risk is no longer included in the table of Principal Risks. Petropavlovsk Annual Report 2016 21 Strategic reportFinancial statementsGovernance Risks to Our Performance continued Table of principal risks Operational risks PRODUCTION RELATED RISK – Failure to achieve the Group’s production plan Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 Risk to production from: – Severe weather conditions. – The availability of suitable machinery, equipment and consumables. – Logistics for the delivery of equipment and services. Operational performance on pages 36 to 43. 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 flooding 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 significantly delay production and impact the Group’s profitability. The Group is dependent on production from its operating mines in order to generate revenue and cash flow and comply with the production and sales covenants in certain of its borrowing facilities. High Preventative maintenance procedures are Flooding and unusually cold weather prevented undertaken on a regular and periodic basis to the Group delivering on the original 2016 mine ensure that machines will function properly under schedule resulting in a lower average processed extreme cold weather conditions; heating plants grade for 2016 and lower production. However at operational bases are regularly maintained and with strong capital discipline and dedicated cost operational equipment is fitted with cold weather control the Group achieved TCC of US$660oz, 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 improving the Group margin per ounce. The Executive team and operational management responded well to the bad weather at Pioneer’s Andreevskaya deposit. A full impact assessment periodically to ensure that they are functioning. including detailed mapping, recording and 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 maintain monitoring of rock fractures was carried out. Whilst any available mining fleet was temporarily utilised at Pioneer’s other operating pits. However the Company’s overriding commitment several months of essential supplies at each site. to the safety of its employees meant that delays in Equipment is ordered with adequate lead time in production at Pioneer were inevitable. order to prevent delays in their delivery. The Group has a number of contingency plans in place to address any disruption to services. EXPLORATION RELATED RISK Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Group’s activities are reliant on the quantity and quality of the Mineral Resources and Ore Reserves available to it. Exploration activities are high risk, 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 current production with new Reserves or mining operations. Operational performance on pages 36 to 43. The Group uses modern geophysical and geochemical exploration and surveying Defined within Petropavlovsk’s substantial 20.16Moz JORC Resource (7.95Moz JORC techniques. The Group employs a world class Reserve) is a 9.26Moz refractory gold Resource team of geologists with considerable regional (4.07Moz refractory Ore Reserve), with under expertise and experience. They are supported by explored resource upside within the highly a network of fully accredited laboratories capable prospective 3,600km2 licence areas. High of performing a range of assay work to high standards. The completion of the POX Hub will unlock the 9.26Moz refractory Resource which supports The Group’s exploration budget is fixed for each Petropavlovsk’s long term growth objectives in asset at the start of each financial year depending upon previous results. doubling the average life of mine and sustaining its production profile. During 2016 the Group continued to explore the potential for further mine life extension and production expansion. – At Malomir, exploration work has identified several highly prospective satellite refractory targets for further exploration work, including Ozhidaemoe. – At Pioneer, refractory targets have been identified south of the main Pioneer orebody zone. The Alexandra zone and Sosnovaya licence are also expected to provide further refractory resource upside. 22 Petropavlovsk Annual Report 2016 The symbols indicate how the Company considers that these risks have changed since 2015. Increased risk New risk No change Decreased risk Operational risks PRODUCTION RELATED RISK – Failure to achieve the Group’s production plan Risk to production from: – Severe weather conditions. – The availability of suitable machinery, equipment and consumables. – Logistics for the delivery of equipment factors. and services. The Group’s assets are located in the Russian Far East, a remote area Operational that can be subject to severe climatic conditions. Severe weather conditions, such as cold temperatures in winter and torrential rain, potentially causing flooding 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 performance on pages 36 to 43. 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 significantly delay production and impact the Group’s profitability. The Group is dependent on production from its operating mines in order to generate revenue and cash flow and comply with the production and sales covenants in certain of its borrowing facilities. Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 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 fitted 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 maintain several months of essential supplies at each site. Equipment is ordered with adequate lead time in order to prevent delays in their delivery. The Group has a number of contingency plans in place to address any disruption to services. High Flooding and unusually cold weather prevented the Group delivering on the original 2016 mine schedule resulting in a lower average processed grade for 2016 and lower production. However with strong capital discipline and dedicated cost control the Group achieved TCC of US$660oz, improving the Group margin per ounce. The Executive team and operational management responded well to the bad weather at Pioneer’s Andreevskaya deposit. A full impact assessment including detailed mapping, recording and monitoring of rock fractures was carried out. Whilst any available mining fleet was temporarily utilised at Pioneer’s other operating pits. However the Company’s overriding commitment to the safety of its employees meant that delays in production at Pioneer were inevitable. EXPLORATION RELATED RISK Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Group’s activities are reliant on the quantity and quality of the Mineral Resources and Ore Reserves available to it. Exploration activities are high risk, time consuming and can be Operational unproductive. In addition, these activities often require substantial performance on pages expenditure to establish Reserves through drilling and metallurgical and 36 to 43. 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 current production with new Reserves or mining operations. The Group uses 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 fixed for each asset at the start of each financial year depending upon previous results. High Defined within Petropavlovsk’s substantial 20.16Moz JORC Resource (7.95Moz JORC Reserve) is a 9.26Moz refractory gold Resource (4.07Moz refractory Ore Reserve), with under explored resource upside within the highly prospective 3,600km2 licence areas. The completion of the POX Hub will unlock the 9.26Moz refractory Resource which supports Petropavlovsk’s long term growth objectives in doubling the average life of mine and sustaining its production profile. During 2016 the Group continued to explore the potential for further mine life extension and production expansion. – At Malomir, exploration work has identified several highly prospective satellite refractory targets for further exploration work, including Ozhidaemoe. – At Pioneer, refractory targets have been identified south of the main Pioneer orebody zone. The Alexandra zone and Sosnovaya licence are also expected to provide further refractory resource upside. Petropavlovsk Annual Report 2016 23 Strategic reportFinancial statementsGovernance Risks to Our Performance continued Table of principal risks Operational risks continued PROJECT RELATED RISKS – Failure to deliver various construction and development projects The Group’s long term strategy relies on the successful commissioning of the POX Hub and the delivery of the underground mining project. Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 1. Pressure Oxidation (POX) Hub. If the Group is unable to commission POX within the projected budget and timeframes this may have an adverse impact on the Group’s growth plans and its future profitability. Development Projects on pages 44 to 47. 2. The underground mining project. If the Group is unable to deliver underground mining production within the agreed budget and timeframes this may have an adverse impact on the Group’s growth plans and its future profitability. Development Projects on pages 44 to 47. The Group has entered into a management contract with Outotec a world leader in the design and construction of pressure oxidation and flotation plants. Outotec will oversee the manufacture, installation and commissioning of the equipment and has guaranteed certain operating parameters. The Group’s pilot plant in Blagoveshchensk during 2013-2015 confirmed the feasibility of POX processing for Malomir and Pioneer concentrates. POX has a special procurement process with a separate budget and expenditure schedule, monitored and signed off by the CEO, COO and CFO based on the approved budget. – During 2016 the Company renewed key High contracts with Outotec. – As part of the recommencing of the POX Hub development Outotec (alongside the Company) ran checks on the major equipment in situ and commenced work on the automation and control systems. – Tests at the pilot plant continued. Under the refinancing agreements with VTB and Sberbank (see page 109), the Group is required to complete the construction of POX out of its free cash flow. The Group employed a Russian engineering firm – An experienced firm of contractors commenced High to undertake a pre-feasibility study and mine design on underground mining. The study the underground mining works at Pioneer working closely with the Group’s in house concluded that underground mining should be underground operations team. technically feasible and economically viable. The Executive Committee and the Board closely monitor both the POX and underground mining projects. 24 Petropavlovsk Annual Report 2016 PROJECT RELATED RISKS – Failure to deliver various construction and development projects The Group’s long term strategy relies on the successful commissioning of the POX Hub and the delivery of the Operational risks continued underground mining project. Risk 1. Pressure Oxidation (POX) Hub. If the Group is unable to commission POX within the projected budget Development Projects and timeframes this may have an adverse impact on the Group’s growth on pages 44 to 47. plans and its future profitability. 2. The underground mining project. If the Group is unable to deliver underground mining production within Development Projects the agreed budget and timeframes this may have an adverse impact on on pages 44 to 47. the Group’s growth plans and its future profitability. Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Group has entered into a management contract with Outotec a world leader in the design and construction of pressure oxidation and flotation plants. Outotec will oversee the manufacture, installation and commissioning of the equipment and has guaranteed certain operating parameters. The Group’s pilot plant in Blagoveshchensk during 2013-2015 confirmed the feasibility of POX processing for Malomir and Pioneer concentrates. POX has a special procurement process with a separate budget and expenditure schedule, monitored and signed off by the CEO, COO and CFO based on the approved budget. The Group employed a Russian engineering firm to undertake a pre-feasibility study and mine design on underground mining. The study concluded that underground mining should be technically feasible and economically viable. – During 2016 the Company renewed key High contracts with Outotec. – As part of the recommencing of the POX Hub development Outotec (alongside the Company) ran checks on the major equipment in situ and commenced work on the automation and control systems. – Tests at the pilot plant continued. Under the refinancing agreements with VTB and Sberbank (see page 109), the Group is required to complete the construction of POX out of its free cash flow. – An experienced firm of contractors commenced High the underground mining works at Pioneer working closely with the Group’s in house underground operations team. The Executive Committee and the Board closely monitor both the POX and underground mining projects. Petropavlovsk Annual Report 2016 25 Strategic reportFinancial statementsGovernance Risks to Our Performance continued Table of principal risks Financial risks FUNDING AND LIQUIDITY RELATED RISKS Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Group needs ongoing access to liquidity and funding in order to (i) refinance 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 financial commitments. The Group’s borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a significant proportion of the Group’s borrowings becoming repayable immediately. Chief Financial Officer’s Statement on pages 58 to 69. Detailed annual budgets are approved by the On 20 December 2016 the Group completed the Board and monthly forecasts provided. refinancing of US$430 million of its debt with its High A successful cost reduction programme was lending banks Sberbank and VTB. undertaken to offset the effect of a reduction in the gold price. The approved terms include a revised maturity profile from May 2018 to September 2022 The Group continues to progress its internal KPI (inclusive of an option to extend the 2019 maturity to reduce total cash costs by 50% during the payment to 2022 subject to certain conditions period 2013-2018. being satisfied) and an effective average interest rate of c.8%. The Group is currently completing the final documentation for the Sberbank US$100m commodity linked loan facility. Once this has been completed the Group’s entire bank debt of c.US$530m will have been refinanced. The financial and operational covenants were renegotiated during 2016 as part of the refinancing of the Group’s total debt. Lack of funding and liquidity to allow the Group to i. Support its existing operations; ii. Invest in and develop its exploration and underground mining projects; iii. Complete the construction of the POX Hub; iv. Extend the life and capacity of its existing mining operations; v. Refinance/repay the Group’s debt as it falls due; and vi. Complete the construction of the POX Hub out of its free cash flow. If the operational performance of the business declines significantly the Company may breach one or more of the financial and production covenants as set out in various financing arrangements. GOLD PRICE RISK Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Group’s operational results may be affected by changes in the gold price. The Group’s financial performance is highly dependent on the price of gold. A sustained downward movement in the market price for gold may negatively affect the Group’s profitability and cash flow and consequently its ability to fund the construction of the POX Hub. The market price of gold is volatile and is affected by numerous factors which are beyond the Company’s control. Chief Financial Officer’s Statement on pages 58 to 69. The Executive Committee constantly monitors In order to increase certainty in respect of a the gold price and influencing factors on a daily significant proportion of its cash flows, the Group basis and consults with the Board as entered into a number of gold forward contracts High appropriate. The Group has a hedging policy and hedges a portion of production as the Executive Committee and Board deem appropriate. during 2016. Forward contracts to sell an aggregate of 134,545oz of gold matured during the year and resulted in US$(8.5) million net settlement paid by the Group. Forward contracts to sell an aggregate of 50,006oz of gold at an average price of US$1,303 per oz were outstanding as at 31 December 2016. During 2017 the Company has continued to hedge a portion of its gold production in order to protect itself from volatility in the price. 26 Petropavlovsk Annual Report 2016 Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 Lack of funding and liquidity to allow the The Group needs ongoing access to liquidity and funding in order to (i) refinance its existing debt as required, (ii) support its existing Chief Financial Officer’s Statement on pages 58 operations and (iii) invest in new projects and exploration. There is a risk to 69. i. Support its existing operations; ii. Invest in and develop its exploration and 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 underground mining projects; operational or financial commitments. The Group’s borrowing facilities include a requirement to comply with certain specified covenants in relation to the level of net debt and interest cover. A breach of these covenants could result in a significant proportion of the Group’s borrowings becoming repayable immediately. Detailed annual budgets are approved by the Board and monthly forecasts provided. A successful cost reduction programme was undertaken to offset the effect of a reduction in the gold price. The Group continues to progress its internal KPI to reduce total cash costs by 50% during the period 2013-2018. On 20 December 2016 the Group completed the refinancing of US$430 million of its debt with its lending banks Sberbank and VTB. High The approved terms include a revised maturity profile from May 2018 to September 2022 (inclusive of an option to extend the 2019 maturity payment to 2022 subject to certain conditions being satisfied) and an effective average interest rate of c.8%. The Group is currently completing the final documentation for the Sberbank US$100m commodity linked loan facility. Once this has been completed the Group’s entire bank debt of c.US$530m will have been refinanced. The financial and operational covenants were renegotiated during 2016 as part of the refinancing of the Group’s total debt. Financial risks FUNDING AND LIQUIDITY RELATED RISKS Risk Group to iii. Complete the construction of the POX Hub; iv. Extend the life and capacity of its existing mining operations; v. Refinance/repay the Group’s debt as it falls due; and vi. Complete the construction of the POX Hub out of its free cash flow. If the operational performance of the business declines significantly the Company may breach one or more of the financial and production covenants as set out in various financing arrangements. GOLD PRICE RISK Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Group’s operational results may be affected by changes in the gold price. The Group’s financial performance is highly dependent on the price of gold. A sustained downward movement in the market price for gold Chief Financial Officer’s Statement on pages 58 may negatively affect the Group’s profitability and cash flow and to 69. consequently its ability to fund the construction of the POX Hub. The market price of gold is volatile and is affected by numerous factors which are beyond the Company’s control. The Executive Committee constantly monitors the gold price and influencing factors on a daily basis and consults with the Board as appropriate. The Group has a hedging policy and hedges a portion of production as the Executive Committee and Board deem appropriate. High In order to increase certainty in respect of a significant proportion of its cash flows, the Group entered into a number of gold forward contracts during 2016. Forward contracts to sell an aggregate of 134,545oz of gold matured during the year and resulted in US$(8.5) million net settlement paid by the Group. Forward contracts to sell an aggregate of 50,006oz of gold at an average price of US$1,303 per oz were outstanding as at 31 December 2016. During 2017 the Company has continued to hedge a portion of its gold production in order to protect itself from volatility in the price. Petropavlovsk Annual Report 2016 27 Strategic reportFinancial statementsGovernance Risks to Our Performance continued Table of principal risks Financial risks FX RISK Risk Currency fluctuations may affect the Group. Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 Chief Financial Officer’s Statement on pages 58 to 69. The Group has adopted a policy of holding a The Group does not undertake any foreign minimum amount of cash and monetary assets currency transaction hedging although this is High or liabilities in non US Dollar currencies and operates an internal funding structure which seeks to minimise foreign exchange risk exposure. kept under review. The Russian Rouble depreciated against the US Dollar during 2016, with an average exchange rate for 2016 of 67.18 Rouble per US Dollar compared with 61.30 Roubles per US dollar during 2015. The Company 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. Significant costs are incurred in and/or influenced 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 financial condition and results of operations. In addition, if inflation 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 financial condition may be adversely affected. IRC Related RISKS – The Company has a 31.10% interest in IRC, a Hong Kong Listed iron ore producer Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 Risk that funding may be demanded from Petropavlovsk under a guarantee in favour of ICBC arising from: Inability of K&S to service the interest and meet the repayments due on the ICBC loan due to insufficient funds arising from: 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$234million is outstanding (2015: c.US$276million). This loan is supported by Sinosure, the Chinese export credit 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 IRC on page 56. Audit Committee Report on pages 80-86. The Board and the Executive Committee maintain close communication with IRC’s Executive. IRC and the Company continue to consider various options available to them, both separately and jointly, regarding the restructuring of IRC’s On 31 March 2017, IRC announced that ICBC has High waived the obligation of K&S to repay all loan principal instalments due in 2017 totalling US$42.5million. This amount will be spread equally between the five subsequent repayment instalments due under the project finance facility. debt and the potential removal of the guarantee. In addition K&S is successfully operating at 75% – Late commissioning of K&S – Decrease in iron ore price A further delay in the commissioning of K&S and/or a decrease in the iron ore price could result in a decrease in the value of the Company’s shareholding in IRC. Under the terms of the Company’s banking facilities with Sberbank and VTB, the Company is unable to provide any funds to IRC without the prior consent of these lenders. production capacity and the iron ore price has increased considerably during 2017, rising to US$100 per tonne in March 2017. Based on IRC’s cost optimisation analysis the estimated unit cash cost of K&S is c.US$34 per tonne for product delivered to the Chinese border. The above factors represent a significant reduction in the risk that there will be a claim on the Company’s guarantee in the immediate future and hence represents a significant reduction in the Company’s risk profile. The Company’s interest in IRC was valued at US$36.140 million as at 31 December 2016 (2015: US$39.163 million). 28 Petropavlovsk Annual Report 2016 Financial risks FX RISK Risk Group. Currency fluctuations may affect the The Company reports its results in US Dollars, which is the currency in which gold is principally traded and therefore in which most Chief Financial Officer’s Statement on pages 58 of the Group’s revenue is generated. Significant costs are incurred in to 69. and/or influenced 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 financial condition and results of operations. In addition, if inflation 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 financial condition may be adversely affected. IRC Related RISKS – The Company has a 31.10% interest in IRC, a Hong Kong Listed iron ore producer Risk that funding may be demanded from Petropavlovsk under a guarantee in favour of ICBC arising from: Inability of K&S to service the interest and meet the repayments due on the ICBC loan due to insufficient funds arising from: – Late commissioning of K&S – Decrease in iron ore price A further delay in the commissioning of K&S and/or a decrease in the iron ore price could result in a decrease in the value of the Company’s shareholding in IRC. Petropavlovsk has provided a guarantee against a US$340 million IRC on page 56. Audit Committee Report on pages 80-86. 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$234million is outstanding (2015: c.US$276million). This loan is supported by Sinosure, the Chinese export credit 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 Under the terms of the Company’s banking facilities with Sberbank and VTB, the Company is unable to provide any funds to IRC without the prior consent of these lenders. Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 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 risk exposure. The Group does not undertake any foreign currency transaction hedging although this is kept under review. High The Russian Rouble depreciated against the US Dollar during 2016, with an average exchange rate for 2016 of 67.18 Rouble per US Dollar compared with 61.30 Roubles per US dollar during 2015. Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 The Board and the Executive Committee maintain close communication with IRC’s Executive. IRC and the Company continue to consider various options available to them, both separately and jointly, regarding the restructuring of IRC’s debt and the potential removal of the guarantee. High On 31 March 2017, IRC announced that ICBC has waived the obligation of K&S to repay all loan principal instalments due in 2017 totalling US$42.5million. This amount will be spread equally between the five subsequent repayment instalments due under the project finance facility. In addition K&S is successfully operating at 75% production capacity and the iron ore price has increased considerably during 2017, rising to US$100 per tonne in March 2017. Based on IRC’s cost optimisation analysis the estimated unit cash cost of K&S is c.US$34 per tonne for product delivered to the Chinese border. The above factors represent a significant reduction in the risk that there will be a claim on the Company’s guarantee in the immediate future and hence represents a significant reduction in the Company’s risk profile. The Company’s interest in IRC was valued at US$36.140 million as at 31 December 2016 (2015: US$39.163 million). Petropavlovsk Annual Report 2016 29 Strategic reportFinancial statementsGovernance Risks to Our Performance continued Table of principal risks Health, safety and environmental risk Risk that our employees or those visiting our operations may be injured Risk Mining: – is subject to a number of hazards and risks in the workplace – requires the use of hazardous substances including cyanide and other reagents. Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 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 financial loss. Accidental spillages of cyanide and other chemicals may result in damage to the environment, personnel and individuals within the local community. Environmental, Safety and Social Report on pages 34 to 35. Legal and regulatory risks Risks that legal or regulatory issues may impact the ability of the Group to operate Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 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 licences may result in the subsequent termination of licences crucial to operations and cause reputational damage. Alternatively, financial 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. 30 Petropavlovsk Annual Report 2016 Board level oversight of health and safety issues The Group operates a prompt incident reporting occurs through the work of the Health, Safety system to the Executive Committee and the and Environmental Committee (‘HSE’) which is Board. There were 34 lost time accidents during chaired by Mr Alexander Green, Independent 2016 with a Lost Time Injury Frequency Rate Non-Executive Director. Health and Safety management systems are in place across the Group to ensure that the (‘LTIFR’) for 2016 of 2.64 accidents per 1 million manhours worked compared with 36 accidents in 2015 and a LTIFR of 2.63. operations are managed in accordance with the There was one fatality during 2016 (2015: 1). This Medium/High relevant health and safety regulations and requirements. 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 first aid response and the provision of further occupational, health and safety training. Cyanide and other dangerous substances are kept in secure storages with limited access only to qualified personnel, with access closely monitored by security staff. H&S targets are included in the annual bonus scheme for Executive Directors and the Executive Committee. fatality was reported immediately to the Chairman of the HSE Committee. A full investigation of this incident was conducted by the Russian authorities which concluded that the Company was not at fault for the accident. Records confirmed that the individual concerned had received all relevant training from the Company. The HSE Committee discussed this matter in detail to identify whether any actions should be taken or further training provided to mitigate against any reoccurrence of a similar accident. Action was taken by the Group’s management and H&S officers to reinforce correct behaviour to employees. At the request of the HSE Committee the Group commenced a new ‘health and safety’ campaign specifically aimed at preventing accidents involving vehicles. There were no accidents involving cyanide or other dangerous substances during 2016. 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. Medium/High Health, safety and environmental risk Risk that our employees or those visiting our operations may be injured Risk Mining: – is subject to a number of hazards and risks in the workplace – requires the use of hazardous substances including cyanide and other reagents. 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 Environmental, Safety and Social Report on and that they have the right to operate in a safe working environment. pages 34 to 35. 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 financial loss. Accidental spillages of cyanide and other chemicals may result in damage to the environment, personnel and individuals within the local community. Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 Medium/High Board level oversight of health and safety issues occurs through the work of the Health, Safety and Environmental Committee (‘HSE’) which is chaired by Mr Alexander Green, Independent Non-Executive Director. 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. 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 first aid response and the provision of further occupational, health and safety training. Cyanide and other dangerous substances are kept in secure storages with limited access only to qualified personnel, with access closely monitored by security staff. H&S targets are included in the annual bonus scheme for Executive Directors and the Executive Committee. The Group operates a prompt incident reporting system to the Executive Committee and the Board. There were 34 lost time accidents during 2016 with a Lost Time Injury Frequency Rate (‘LTIFR’) for 2016 of 2.64 accidents per 1 million manhours worked compared with 36 accidents in 2015 and a LTIFR of 2.63. There was one fatality during 2016 (2015: 1). This fatality was reported immediately to the Chairman of the HSE Committee. A full investigation of this incident was conducted by the Russian authorities which concluded that the Company was not at fault for the accident. Records confirmed that the individual concerned had received all relevant training from the Company. The HSE Committee discussed this matter in detail to identify whether any actions should be taken or further training provided to mitigate against any reoccurrence of a similar accident. Action was taken by the Group’s management and H&S officers to reinforce correct behaviour to employees. At the request of the HSE Committee the Group commenced a new ‘health and safety’ campaign specifically aimed at preventing accidents involving vehicles. There were no accidents involving cyanide or other dangerous substances during 2016. Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 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. Medium/High Legal and regulatory risks Risks that legal or regulatory issues may impact the ability of the Group to operate The Group requires various licences and The Group’s principal activity is the mining of precious and non-precious permits in order to operate. 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 licences may result in the subsequent termination of licences crucial to operations and cause reputational damage. Alternatively, financial 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. Petropavlovsk Annual Report 2016 31 Strategic reportFinancial statementsGovernance Risks to Our Performance continued Table of principal risks Legal and regulatory risks continued Risks that legal or regulatory issues may impact the ability of the Group to operate Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 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 specified 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 significance, maintained by the Russian Government (“Strategic Assets”). The impact of this classification 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 This risk cannot be influenced by the management risk the Group strives to use the banking services of the Company. However, the Group continues to High of several financial institutions and not keep monitor changes in the political environment and disproportionately large sums on deposit with reviews changes to the relevant legislation, a single bank. policies and practices. The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted legislation to adapt to the changing regulatory environment in the countries in which it operates and specifically 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. 32 Petropavlovsk Annual Report 2016 Legal and regulatory risks continued Risks that legal or regulatory issues may impact the ability of the Group to operate 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. metals. 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 specified amount or any occurrences of platinum group The Group’s Pioneer and Malomir licences have been included on the list of subsoil assets of federal significance, maintained by the Russian Government (“Strategic Assets”). The impact of this classification 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. Risk Description and potential impact Additional information Mitigation/comments 2016 Progress Potential impact Change since 2015 To mitigate the Russian economic and banking risk the Group strives to use the banking services of several financial institutions and not keep disproportionately large sums on deposit with a single bank. This risk cannot be influenced by the management of the Company. However, the Group continues to monitor changes in the political environment and reviews changes to the relevant legislation, policies and practices. High The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted legislation to adapt to the changing regulatory environment in the countries in which it operates and specifically 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. Petropavlovsk Annual Report 2016 33 Strategic reportFinancial statementsGovernance Environmental, Safety and Social Report “Our job as senior leaders within the Company is not complete until we have returned unharmed each and every one of our employees to their families and friends after each shift rotation. As such, we are committed to continual improvement in the Group’s health and safety record.” Alexander Green, HSE Committee Chair 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. Alya Samokhvalova was a Board member until 30 April 2015, when she resigned following the restructuring of the Board. She remains with Petropavlovsk and in 2016 was promoted to the position of Deputy CEO, Strategic Development. Occupational health and safety (OHS) risks are identified, 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. It is Petropavlovsk’s duty as employer to ensure that employees are issued with contracts detailing their working hours, paid annual leave and other guarantees, in line with Russian or UK legislation (as applicable). In Russia, the Group operates in accordance with the Constitution of the Russian Federation, which details the rights and freedoms of citizens. The Group has a zero tolerance approach to corruption and bribery and 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 notified to all employees, both in the UK and in Russia, sets out the procedures that employees are expected to follow. At the mines, shift patterns help employees to maintain their family commitments whilst ensuring operations can run throughout the year. Employees work to shift patterns of a fortnight, month, or 45 days. Once each shift is complete, employees have the same amount of time off work. Commuting is impractical due to the remote location of the mines. Employees stay in purpose built accommodation on site, with recreational facilities and modern conveniences. Operating Responsibly Petropavlovsk is committed to providing its employees with a safe working environment. The Group fully complies with Russian labour legislation, the most significant of which is the Labour Code of the Russian Federation, and has health and safety systems in place that support the Code. Petropavlovsk conducts regular reviews of labour protection in the workplace and regularly examines all internal policies and procedures to ensure they remain robust and effective. Given the importance of anti bribery matters they are 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. Engaging with Communities Petropavlovsk communicates its development plans to local communities and ensures they are actively involved in the process. If issues are raised, they are addressed through public consultation. No public consultations were held in 2016. The Group continues to monitor circumstances in line with its commitment to maintaining good relationships with local communities and authorities. The Petropavlovsk Foundation was established in 2010 to support the Group in promoting development in the Russian Far East, with particular focus on the Amur region. The Foundation aims to provide local communities with social, economic and cultural opportunities, improving quality of life and encouraging investment in the region. It works closely with regional stakeholders, from federal groups to small businesses. Petropavlovsk understands the importance of maintaining solid relationships with its many stakeholders and is proud of the progress made since inception in 1994. The Group believes its approach has contributed to its success to date. In 2016, independent technical auditors Wardell Armstrong confirmed 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 it is understood that there is almost universal support for the operations within the local community. Working at Petropavlovsk Petropavlovsk recognises the socioeconomic influence it has as a major employer and taxpayer in the Amur region. The Group understands that its employees are a key asset and invests in them accordingly, leveraging their expertise and providing continuous development. The Pokrovskiy Mining College, which aims to offer employment opportunities to graduates, was established in 2008 to provide future employees with specialised training, tailored to the needs of the Group. The Group is proud to provide equal opportunities and pay in all aspects of employment, regardless of gender or background, as required by both Russian and UK legislation. Women have the opportunity to reach the highest levels of senior management – that the Group has a disproportionately high ratio of male to female employees is a reflection of historic trends in the mining sector. As at 31 December 2016, 1,857 employees were female, representing c.23% of the Group’s total workforce. The Board considers its senior management to be the Executive Committee, which is responsible for managing the company day to day. This comprises three Executive Directors and seven members of senior management. As at 31 December 2016, two of its members were female, representing c.29% of total membership. 34 Petropavlovsk Annual Report 2016 The Foundation supports a range of causes that fall beneath its five areas of strategic investment: – Future Generations (Child Development) – Research and Development The environment is monitored throughout the line of each mine 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. Breakdown of total number of employees as at 31 December 2016 1,857 Female employees Male employees 6,364 Breakdown of members of the executive committee as at 31 December 2016 2 Female members Male members 8 All Group operations hold licences with water usage quotas detailing where water may or may not be used from. Pit water is purified before it is discharged and local water is continuously monitored. The Group’s RIP plants use recycled water, reducing demand from local sources. 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. The Group is governed by laws designed to limit industrial impact on ecosystems. Land may only be cleared within the limits of licences and permits, for instance, and in designated areas it is forbidden to fish, hunt, poach or drive vehicles. Petropavlovsk uses purification systems, anti dust equipment and other protective facilities to prevent harmful substances entering the atmosphere. Gas purification 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 modern systems in place for the handling of cyanide. – Culture – Quality of Life – Sport. In 2016, the Foundation received funding from the Civic Chamber of the Russian Federation for a sociological research project into wellbeing in the Amur region. The results contributed to important work on demographic policy in the Russian Far East. Alongside this it continued to make significant progress with its Albazino archaeological project, which became a finalist for the national Crystal Globe award. In 2015, the project received funding from both the Ministry of Culture and the Russian Geographical Society, along with a certificate presented by Russian President Vladimir Putin, who chairs the Society’s Board of Trustees. Managing the Environment Petropavlovsk is committed to effectively managing environmental issues, upholding the highest standards as required by Russian law, and operating in line with international best practice. In 2016, all Group Mines adopted the Declarations on the Technical Regulation TR TS 030/2012 concerning lubricants, oils and speciality fluids, based on the Customs Union agreement (Russia, Kazakhstan, Belarus), and following ratification and introduction into Russian legislation. These declarations are adopted at all our sites and are aimed at minimizing the potential negative effects of such materials. Also in 2016, the Group prepared to renew certification for ISO:14000 amid updated interstate ratification, finalisation and approval processes. The Group requires licences and permits from Russian authorities for some operational activities (mining and exploration, construction, handling hazardous waste and using local water supplies). These may detail limits and conditions to help protect the environment. The Group must also draw up environmental impact assessments for mining project permits to be considered, in line with Russian legislation. Petropavlovsk Annual Report 2016 35 Strategic reportFinancial statementsGovernanceOperational Performance Pioneer Acquired as greenfield licence in 2001 Developed into one of Russia’s largest gold operations Produced 2.3Moz ounces of gold since 2008 Expected +15year life of mine Introduction Pioneer is one of the Group’s most prospective assets, providing near term growth potential from underground non-refractory exploration and development, and regional exploration (Pioneer flanks). Long term growth potential includes bringing forward the flotation plant (6.0Mtpa) development, currently scheduled for 2021, and the untapped greenfield exploration potential within its 1,375km2 total licence area. Operating Mine Underground Lime deposit POX Analytical Labs Hydro Plant Railway Federal highway Core assets Blagoveschensk Pokrovskiy POX Hub Pioneer 2016 gold production 141.9koz – 34% of total Group gold production for the year. Key facts 2016 Progress 2017 Targets – Located in the south of the Amur region, 450km from – Maintained total cash costs – Commence mining from Production as a % of total group Blagoveshchensk, the China border trade city and regional business hub – Situated between the BAM and Trans-Siberian Railway, with the nearest station approximately 40km away – 63km from the largest regional hydropower station (5GW) – Hard rock non-refractory and refractory deposit – Reserves and Resources 5.52Moz – 44% non-refractory Mineral Resource – 27% of total Group Mineral Resource – Open pit mining – Underground mining to commence Q2 2017 – 6.7Mtpa RIP plant and seasonal heap leach facility on site – Annual LTIFR of 3.4 per million man hours worked. below US$650/oz – Commenced development of our maiden underground mine at NE Bakhmut in Q3 – First ore from underground scheduled to be mined in Q2 2017 – Significantly increased existing underground Mineral Resource and defined first Ore Reserve at NE Bakhmut – Enhanced understanding of high grade underground zones and continuity of mineralisation at depth – Discovery of new Katrin orebody within the Sosnovaya licence. underground, ramping up to 200ktpa throughout the year – Progress underground development into the deeper NE Bakhmut 3 higher grade main area – Maintain open pit mining and operating excellence – Reduce LTIFR. 36 Petropavlovsk Annual Report 2016 Geology Gold mineralisation at Pioneer was formed near a contact between a multiphase granitoid massif and Jurassic country 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 thrust line, within the belt of mineralisation associated with the collision of the Eurasian and Amur plates. The Pioneer deposit consists of multiple identified orebodies, most of which are steep dipping and remain open in a down dip direction. Pioneer orebodies comprise of high grade shoots and lower grade halo mineralisation. The high grade shoots are normally 1 to 8 metres in thickness with a strike length up to 400m. The more moderate grade halos are up to 200m thick with a strike length of up to 2km. Mining and Processing Pioneer is a multiple open pit, bulk tonnage, owner operator mine. The mining fleet consists of approximately 100 pieces of major mining equipment. Mining productivity and equipment utilisation is optimised by operating two daily shifts, throughout the year. Underground development commenced at NE Bakhmut in Q3 2016 by a reputable Russian mining contractor, with ore mining to commence in Q2 2017. The Pioneer orebodies include both non- refractory and refractory ore. Non-refractory ore is processed at the 6.7Mtpa RIP plant, which operates throughout the year. Refractory ore does not respond to standard RIP processing methods – specifically it is not suitable for direct cyanidation processing. The Group is currently developing a processing plant, the POX Hub, to treat its significant refractory ore reserve base. The POX Hub is due to be completed and commissioned from Q4 2018, with Pioneer concentrate scheduled to be processed from 2023. Low grade non-refractory ore (<0.5g/t) is processed via an onsite seasonal heap leach operation. Operational Performance Pioneer open pits produced 141.9koz, representing 34% of the Group consolidated annual gold production. This was a 39% decrease from 2015 (2015: 231.4koz). Ore was mined from Alexandra, Bakhmut, Vostochnaya and taken from stockpiles. Following extensive waste stripping Pioneer mining operations Total material moved Ore mined Average grade Gold content Processing operations (Resin-in-pulp 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 m3 ’000 t ’000 g/t oz. ’000 Year ended 31 December 2016 17,360 3,266 0.95 99.4 Year ended 31 December 2015 23,980 6,016 1.28 248.4 Units t ’000 g/t oz. ’000 % oz. ’000 t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 Year ended 31 December 2016 6,700 0.74 159.8 85.5% 136.6 Year ended 31 December 2015 6,582 1.25 264.5 85.0 224.7 701 0.53 12.0 44.1% 5.3 141.9 800 0.56 14.5 46.2 6.7 231.4 throughout the year, high grade ore was expected from the Andreevskaya East pit in Q4 2016. However, unusual weather conditions resulted in disruptions and ultimately deferred access to the high grade zone (into 2017) resulting in an average grade mined of 0.95g/t, 35% lower than 2015. Underground development has commenced, with stope mining scheduled to start in Q2 2017. Including the ventilation decline, a total of 675m of decline development was completed in 2016. The RIP plant processed 6.7Mtpa of ore, a 2% increase on 2015. Metallurgical recovery averaged 85.5%, a 1% increase on 2015. The heap leach operation produced 5.3koz, a 21% decrease from 2015 (2015: 6.7koz). The plant performed as expected, delivering on all technological performance indicators. Total cash costs were US$631/oz, a 1% increase on 2015. All in sustaining costs were US$789/oz, a 5% increase from 2015. Exploration Overview The brownfield exploration programme focused primarily on near mine resource expansion and NE Bakhmut underground resource to reserve conversion. Limited deep level surface drilling at Bakhmut, Promezhutochnaya and Andreevskaya focused on identifying potential underground high grade mineralisation below the reserve pits.’ 2017 Outlook The 2017 Pioneer production profile is expected to be in line with 2016, underpinned by open pit operations at Alexandra, Yuzhnaya, Promezhutochnaya and NE Bakhmut 4 and 5, in addition to deferred high grade material from Andreevskaya East, as a result of the mining disruptions late in 2016. Operations are due to begin in 2017 at the maiden underground mine at NE Bakhmut, which is set to provide production upside. High grade underground mining is scheduled to commence in H2 2017. In addition, the underground exploration drilling programme is to begin at the deeper extensions below the defined resource, where deep surface drilling has intersected high grade mineralisation. Petropavlovsk Annual Report 2016 37 Strategic reportFinancial statementsGovernanceOperational Performance continued Albyn Acquired as greenfield licence in 2005 Developed into Petropavlovsk’s largest producing mine Produced 749koz ounces gold since 2011 Expected +15 year life of mine Introduction Albyn is currently the Company’s largest producing mine with a 100% non-refractory defined resource base. The highly prospective 1,100km2 licence area is largely under explored, presenting potential near term upside from high grade, non-refractory resources to be discovered. The main orebodies at Albyn are open in a down dip direction beyond of the feasible depth of open pit mining, offering longer term growth potential to establish resources and reserves for underground mining. Operating Mine Analytical Labs Hydro Plant Railway Federal highway Core assets Blagoveschensk 2016 gold production 180.0koz – 43% of total Group gold production for the year. Albyn Production as a % of total group Key facts 2016 Progress 2017 Targets – Located in the north east of the Amur region, 720km from – Reduced total cash costs and – Commence mining at Blagoveshchensk, the China border trade city and regional business hub. 2km away from town of Zlatoustovsk – a center of local alluvial gold mining. – BAM railway 280km away – Hard rock non-refractory deposit – Reserves and Resources 4.77Moz – 100% non-refractory – 24% of total Group Mineral Resource – Open pit mining –4.7Mtpa RIP plant on site – Annual LTIFR of 2.6 per million man hours worked. all-in sustaining costs by greater than 20% Unglichikan to provide additional high grade ore for Albyn plant – Significantly increased Ore Reserves at Elginskoye, demonstrating sustainable production and extended life of mine potential – Encouraging initial results showing 3km strike extension at Yasnoye – Completed infill drill programme on the southern end of Unglichikan deposit in preparation for mining to commence in 2017. – Drill deeper targets below Albyn pit to model and assess underground potential – Exploration programme at Unglichikan and Afanasevskoye to further expand Albyn’s non-refractory reserve and resource base and subsequent life of mine – Sustain open pit mining and operating excellence. 38 Petropavlovsk Annual Report 2016 Geology The mine is located on the Mongolo- Okhotskiy thrust zone, within the belt of mineralisation associated with the collision of the Eurasian and Amur plates. 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. The Albyn licence area consists of multiple orebodies within four key deposits: Albyn, Elginskoye, Unglichikan and Afanasevskoye. All these orebodies are open in down dip direction. Elginskoye, Unglichikan and Afanasevskoye are also open along strike. In addition to these four proven deposits there are number of known exploration targets of which Ulgen, Yasnoye and Leninskoe are the most significant. The majority of the 1,100km2 licence area remains under explored and highly prospective. Mining and Processing Albyn is a large (2.2km in length), open pit, bulk tonnage operation. The mining fleet consists of 101 pieces of major mining equipment. Mining productivity and equipment utilisation is optimised by operating two daily shifts throughout the year. The Albyn licence includes multiple defined orebodies. All are non-refractory and can be treated at the 4.7Mtpa RIP plant, which operates throughout the year. Operational Performance Albyn produced 180.0koz, representing 43% of the Group’s consolidated annual gold production. This was a 14% increase on 2015 (2015: 157.6koz). Ore was mined throughout the year from Eastern and Northern sections of the pit and processed from stockpiles. The average annual mined grade was 1.25 g/t, a 9% increase on 2015, due to reduction in dilution and mining from the thicker main zone. The RIP plant processed 4.68Mtpa of ore, a 2% increase on 2015. Metallurgical recovery averaged 93.5%, a marginal improvement on 2015. Albyn mining operations Total material moved Ore mined Average grade Gold content Processing operations (Resin-in-pulp 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 2016 31,763 4,970 1.25 199.5 Year ended 31 December 2015 36,722 4,906 1.15 181.5 Units t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 Year ended 31 December 2016 4,675 1.28 192.5 93.5% 180.0 180.0 Year ended 31 December 2015 4,600 1.14 168.8 93.3 157.6 157.6 2017 Outlook The 2017 Albyn production profile continues to be underpinned by open pit operations at Albyn, with a moderate contribution from the Unglichikan deposit (as a new pit). Based on recent successes extending mine life at Albyn with Elginskoye, the key focus for 2017 is on further exploration at Unglichikan and Afanasevskoye, to expand the non- refractory reserve and resource base and subsequent life of mine. In 2017, the Group plans to surrender the Kharginskoye licence as the decision has been made to concentrate exploration at better targets within other Albyn licences. The plant performed as expected, delivering on all technological performance indicators. Now the Group’s largest producing mine, Albyn has successfully been a key target for cost reduction. Total cash costs of US$581/oz were achieved, a 22% improvement on 2015, with all-in sustaining costs of US$719/oz, a 21% improvement on 2015. This was primarily due to higher processed grades and higher operational recoveries. Exploration Overview The Exploration programme was successful in the conversion of resources to reserves at Elginskoye. Mining preparation drilling at Unglichikan resulted in an increase in resources. Earlier stage exploration surveying and trenching yielded encouraging results for potential resource expansion at Yasnoye, Ulgen, and Sergeevskaya. Exploration Performance Exploration results obtained from other exploration targets within the Albyn project to date have been promising. The main orebodies at Albyn are open in a down dip direction beyond of the feasible depth of open pit mining. This offers exploration potential to establish mineral resource and ore reserves for underground mining. Petropavlovsk Annual Report 2016 39 Strategic reportFinancial statementsGovernanceOperational Performance continued Malomir Acquired as greenfield licence in 2003 Developed into Petropavlovsk’s largest asset by Reserve & Resource Produced 542koz ounces gold since mid 2010 Expected +16 year life of mine. Introduction Malomir is the Group’s largest asset by Reserves and Resources with approximately 90% of the Reserve base categorised as refractory ore. Completing the POX Hub, which is scheduled for the end of 2018, will unlock material value embedded with the existing defined asset base and extend the expected life of mine to greater than 16 years, with untapped resource potential within the 964km2 licence area. Operating Mine Underground Lime deposit POX Analytical Labs Hydro Plant Railway Federal highway Core assets Blagoveschensk Malomir Pokrovskiy POX Hub 2016 gold production 56.8koz – 14% of total Group gold production for the year. Key facts 2016 Progress 2017 Targets Production as a % of total group – Located in the north-east of the Amur region, 550km from Blagoveshchensk, the China border trade city and regional business hub – BAM railway 130km away – Hard rock non-refractory and refractory deposit – Reserves and Resources 7.06Moz – 13% non-refractory Mineral Resource – 35% of total Mineral Rroup resource – Open pit mining – Underground mining to commence H2 2017 – 3.0Mtpa RIP plant on site – Annual LTIFR of 4.5 per million man hours worked. – Reduced total cash cost by 25% – Complete and commission the – Completed underground feasibility study at Quartzitovoye and appointed underground contractor – Increased existing underground Mineral Resource and defined first Ore Reserve at Quartzitovoye – Enhanced understanding of high grade underground zones and continuity of mineralisation at depth. 3.6Mtpa (Stage 1) flotation plant, with production and stockpiling of refractory concentrate from early 2018 ahead of the POX Hub commissioning – Commenced underground development at Quartzitovoye – mining scheduled to start from H2 2017 – Prepare underground drill chambers ahead of exploration drill programme to delineate the extent and continuity of the high grade mineralisation – Sustain open pit mining and operating excellence – Reduce LTIFR. 40 Petropavlovsk Annual Report 2016 Geology The Malomir licence 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 with associated hydrothermal mineralisation. The Malomir project includes multiple identified orebodies of which Malomir, Quartzitovoye, Ozhidaemoye and Magnetitovoye are the most significant. Mining and Processing Malomir is an open pit operation. The mining fleet consists of 52 pieces of major mining equipment. Mining productivity and equipment utilisation is optimised by operating two daily shifts throughout the year. Underground development commenced at Quartzitovoye, with ore mining due to begin in H2 2017. The Malomir licence includes multiple orebodies, which contain both refractory and non-refractory ore. The higher grade non-refractory ore at Quartzitovoye and Magnetitovoye is processed at the 3.0Mtpa RIP plant, operational throughout the year. The refractory ore from Ozhidaemoye does not respond to standard RIP processing methods – specifically it is not suitable for direct cyanidation. The Group is currently developing a processing plant, the POX Hub, to treat the Group’s significant refractory reserve base. This includes a 5.4Mtpa flotation plan at Malomir, which will be constructed in two stages. Stage 1 (3.6Mtpa) is expected to be commissioned by the end of 2017. The POX Hub is due to be completed and commissioning from Q4 2018. Planned production from refractory reserves relies on the completion of a flotation plant at Malomir, currently 90% complete and scheduled to be commissioned in Q4 2017. The flotation plant will convert the refractory reserves into higher grade flotation concentrate, which will be sent to the POX Hub for processing. Malomir concentrate is scheduled to be processed from 2018. Malomir mining operations Total material moved Ore mined Average grade Gold content Processing operations (Resin-in-pulp 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 2016 8,115 1,535 1.11 54.9 Year ended 31 December 2015 8,904 2,105 1.01 68.5 Units t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 Year ended 31 December 2016 3,000 0.86 82.5 68.9% 56.8 56.8 Year ended 31 December 2015 2,937 0.93 88.0 67.2 59.1 59.1 Deep drilling from the surface (up to 200m below the current pit floor) has successfully defined additional underground resource and first reserve, supporting a sustainable 6 year production plan at Quartzitovoye. The orebody remains open at depth. 2017 Outlook The 2017 Malomir production profile is expected to be in line with 2016, with sustainable production upside from underground mining operations commencing in H2 2017. In Q4 2017, Malomir will begin to transition into the Group’s flagship asset in line with the scheduled completion and commissioning of the Stage 1 3.6Mtpa flotation plant to process refractory ore. From 2018, Malomir concentrate production and stockpiling will continue to ensure the POX Hub commissioning, scheduled for Q4 2018, runs smoothly. Operational Performance Malomir produced 56.8koz, representing 14% of the Group consolidated annual gold production. This was 4% lower than 2015 (2015: 59.1koz). Ore was mined throughout the year from Quartzitovoye 2, Magnetitovoye, and stockpiles. The average annual mined grade was 1.11g/t, a 10% improvement on 2015. This takes into account waste stripping at Quartzitovoye 1 throughout most of the year, in order to prepare access to ore for 2017. The RIP plant processed 3.0Mtpa of ore, a 2% increase on 2015. Metallurgical recovery averaged 68.9%, a 3% improvement on 2015. The plant performed as expected in 2016, delivering on all technological performance indicators. Total cash costs of US$824/oz were achieved, a 25% improvement on 2015, with all-in sustaining costs of US$1004/oz, a 15% improvement on 2015, primarily due to improved operational recoveries. Exploration Overview Drilling confirmed high grade mineralisation continues at depth, with the deepest holes greater than 440m below the surface (245m below the reserve pit) intersecting potentially economical grades and thicknesses. The orebody remains open in a down dip direction offering potential to increase resources further through additional exploration, which will be continued from the underground workings. Petropavlovsk Annual Report 2016 41 Strategic reportFinancial statementsGovernanceOperational Performance continued Pokrovskiy Acquired by Pavel Maslovskiy, CEO in early exploration stage Petropavlovsk (formerly Peter Hambro Mining) was created in 1994 to finance the project Produced 2.01Moz ounces gold since 1999 Strategic location to the transformative POX Hub. Introduction Pokrovskiy is the licence on which the Group was built. Today, as it nears the end of its mine life having produced 2.01Moz since 1999, the mine will transition into the POX Hub, currently under full scale production. The POX Hub is an integral part of the Group’s future plans and Pokrovskiy provides the ideal strategic location, not only due to its excellent onsite and regional infrastructure, but also its close proximity to Pioneer’s limestone deposit, limestone being a key ingredient for the pressure oxidation process. Operating Mine Underground Lime deposit POX Analytical Labs Hydro Plant Railway Federal highway Core assets Blagoveschensk Malomir Pokrovskiy POX Hub Pioneer 2016 gold production 37.6 – 9% of total Group gold production for the year. Key facts 2016 Progress 2017 Targets – Located in the south of the Amur region, 450km from – Maintained total cash costs – Infrastructure adapted and Production as a % of total group transitioned where appropriate for the POX Hub – Workforce utilised and transitioned to the POX Hub. – Reduction in sustaining capex as the mine prepares to be harvested from 2019 – In line with our development strategy to transition Pokrovskiy mine into the POX Hub, there was no material exploration in 2016 – Completed and implemented resin cleansing facility. Blagoveshchensk, the China border trade city and regional business hub. – Situated between the BAM and Trans-Siberian Railway, with the nearest station approximately 40km away – 88km from the largest regional hydropower station (5GW) – Hard rock non-refractory and refractory deposit – Reserves and Resources 1.39Moz – 7% total Group Mineral Resource – Open pit mining – 1.8Mtpa RIP plant and seasonal heap leach facility on site – Annual LTIFR of 0.5 per million man hours worked. 42 Petropavlovsk Annual Report 2016 Geology Pokrovskiy is located on the south side of the Mongolo-Okhotskiy regional belt, approximately 40km south of Pioneer, which in addition to gold hosts a significant limestone deposit. Mining and Processing Pokrovskiy is a multiple open pit operation. The Pokrovskiy licence includes multiple defined orebodies. All are non-refractory and can be treated at the 1.8Mtpa RIP plant, which operates throughout the year. Low grade ore (<0.5g/t) is processed via an onsite heap leach operations. Operational Performance Pokrovskiy produced 37.6koz (2015: 56koz) representing 9% of the Group’s consolidated annual gold production. Ore was mined from Pokrovka 1, Pokrovka 2, satellite deposit Zheltunak and from stockpiles. Despite the unusual weather conditions causing some delays to the heap leach operations, successful scheduling adjustments meant target stacking and production were achieved as planned. The heap leach operation produced 4.1koz. The RIP plant processed 1.79Mtpa of ore, unchanged from 2015. Metallurgical recovery at the plant averaged 90.1%, a 7% improvement on 2015 despite a 38% decrease in head grades from 1.04 to 0.65g/t. The plant performed as expected, delivering on all technological performance indicators. Total cash costs of US$878/oz were achieved, a 1% increase on 2015, with all-in sustaining costs of US$988/oz, an 8% increase on 2015. Outlook As Pokrovskiy is coming to the end of its reserves, RIP production is scheduled to stop at the end of 2017. The heap leach will remain operational throughout 2018 to process remaining stockpiles. The Group is actively developing the POX Hub, which is scheduled to commence producing refractory concentrate from Q4 2018. Pokrovskiy will continue its life as the POX Hub, Petropavlovsk’s strategic processing centre for refractory concentrates. Pokrovskiy mining operations Total material moved Ore mined Average grade Gold content Processing operations (Resin-in-pulp 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 m3 ’000 t ’000 g/t oz. ’000 Year ended 31 December 2016 4,709  1,027  0.79  26.0 Year ended 31 December 2015 5,169 933 1.41 42.2 Units t ’000 g/t oz. ’000 % oz. ’000 t ’000 g/t oz. ’000 % oz. ’000 oz. ’000 Year ended 31 December 2016 1,791  0.65  37.1  90.1%  33.5  Year ended 31 December 2015 1,791 1.04 59.7 84.3 50.4 440  0.45  6.3  64.8%  4.1  37.6 541 0.53 9.2 60.6 5.6 56.0 Following the successful debt restructuring in 2016, the Group resumed development of the Pressure Oxidation Facility (POX Hub) at Pokrovskiy. Utilising and adapting existing infrastructure (including the 1.8Mtpa RIP plant) has a beneficial impact on capital costs, with US$90million gross value for buildings and equipment being incorporated directly into the POX Hub facility. Other projects 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 benefits 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 fire 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 reopening as an open pit mine. While the deposit is not currently in commercial production, it contains significant 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 significant capital expenditure was allocated to this project during 2016. Tokur has been fully impaired (in a previous year) and the Group intends to review its development plans in the medium term. Petropavlovsk Annual Report 2016 43 Strategic reportFinancial statementsGovernanceDevelopment Projects 44 Petropavlovsk Annual Report 2016 FUTURE DEVELOPMENT OPERATIONS Pioneer/ Pokrovskiy Mines Malomir Mine Albyn Mine EXPLORATION ENGINEERING CONSTRUCTION NPGF Regis LLC PHM Engineering Kapstroi R&D/SCIENTIFIC INSTITUTES Irgiredmet JSC RDC Hydrometallurgy HIGHLY QUALIFIED TEAM PETROPAVLOVSK PLC (POG:LN) Underground In 2016, following successful feasibility studies, it was concluded that underground operations at Pioneer and Malomir would be economically viable and provide access to considerably higher grade, non-refractory ore with which to further support sustainable long term production. The successful implementation of underground operations would support Petropavlovsk’s strategy by further simplifying cost structure and by maximising cash generation via improved access to the Group asset base. Pioneer – NE Bakhmut Underground Mine Development 2016 Progress Appointed underground contractor for immediate mobilisation of personnel and equipment. The construction of access and ventilation decline portals was completed in H2. Development of the declines has progressed well throughout the period. A total of 675m decline had been completed. Successful deep level surface drilling, targeting high grade down dip extensions confirmed the continuation of mineralisation at depth and resulted in a maiden Ore Reserve of 165koz. Total Mineral Resource of 299koz, a 300% increase from 2015, including a 340% increase in Indicated Resource category. 2017 Priorities The mine plan schedules for first stope mining from the moderate grade Bridge area in Q2 2017. The higher grade areas are within the NE Bakhmut 2 and NE Bakhmut 3 zones. NE Bakhmut 3 is scheduled to be accessed in H2 2017. Development and preparation of underground drill platforms to commence underground exploration drill programme to delineate the extent and continuity of the high grade mineralisation that remains open in multiple directions. Malomir – Quartzitovoye Underground Mine Development 2016 Progress In Q4, appointed underground contractor for mobilisation of personnel and equipment in Q1 2017. Successful deep level surface drilling, targeting high grade down dip extensions confirmed the continuation of mineralisation at depth and resulted in a defined maiden Ore Reserve of 207koz @ 5.85 g/t, underpinning a five year life of mine production plan. The total Mineral Resource is 283koz, including a 236% increase in the Indicated Resource category. 2017 Priorities Commencement of development. The mine plan schedules for first stope mining in H2 2017. Petropavlovsk Annual Report 2016 45 Strategic reportFinancial statementsGovernancePOX Hub Petropavlovsk’s POX Hub will be the second of its kind in Russia. The successful 2016 refinancing enabled the Company to recommence development works, which will be self funded through free cash flow. With key contracts renewed and key equipment assessed, solid progress is now being made towards commissioning. Why POX? Over 50% of Petropavlovsk’s existing Reserve base consists of refractory ore – ore that cannot easily be processed via traditional cyanide based methods. The POX Hub will unlock this value, equating to c.15 years of sustainable refractory production. Further upside potential exists in several forms. Exploration work has identified multiple refractory targets at Pioneer and Malomir, as well as mineralisation at Albyn. The Hub was designed so that two additional autoclaves could be installed in the future, which would increase processing capacity by 30% to 650ktpa. This could prove especially lucrative if the Group were able to treat refractory ore from third parties, given the large amount of undeveloped refractory mineralisation in the region. Petropavlovsk could also use the Hub to assess ore from deposits available for acquisition, perhaps most meaningfully those abandoned during the Soviet era with rich reserve and resource potential due to a lack of technology. Finally, there is the possibility of selling concentrate to generate revenue in the near term ahead of the POX Hub being commissioned. Construction at Malomir (Stage 1) is 90% complete, and at the POX Hub is 65% complete. 46 Petropavlovsk Annual Report 2016 Project Economics In 2016, as part of the bank debt refinancing, the Company updated the 2010 feasibility project economics ahead of the development reboot. – Total outstanding POX hub pre production estimated capex – c.US$120million, inc. contingency. This includes total outstanding estimated capex for Malomir flotation plant – US$32million (at 31.12.16) – Updated operating cost estimates – US$615-675/oz for Malomir/ US$785-865/oz for Pioneer. The updated project economics account for updated operating and capital costs: Base case Project NPV (10%) 603 Project IRR (%) 65 Project payback (years) 3.25 Revenue 2018 - 2032 (US$m) 3,965 Average production 2018 - 2032 (koz pa) 220 (Assuming LT avg gold price US$1,200/oz, FX USD:RUR 60). The project economics are unaudited. Refinancing The refinancing of the Group’s bank debt totalling c.US$430 million (December 2016) required 100% self funding of the POX Hub from internal cash flow generated by the Group’s current non refractory operations. This was modelled based on an average US$1250/oz gold price throughout the construction and ramp up phase. The Sberbank US$100million commodity linked loan facility remains on schedule for completion of final documentation effective Q2 2017. As at 26 April 2017, the Company has hedged 547koz of gold at US$1,253/oz over 2017-2019. Malomir Project Parameters(1) Malomir Flotation Plant Ore Processed Flotation Recovery Sulphur Content Concentrate Yield Concentrate Grade POX Hub Concentrate Processed Gold Recovery Total POX Hub Recovery Total Operating Costs (inc. Flotation) kt % % mass % g/t kt % % US$/oz Malomir 5,400 86% 25% 5.50% 24 300-330 93% 79% 615-675 Project economics includes production concentrate from Pioneer, which is scheduled to commence from 2023. Key Construction Milestones 2017 2018 – POX Hub: the oxygen plant, supporting POX Hub infrastructure and all piping, welding and assembly works are scheduled for completion – Malomir flotation: Stage 1 (3.6Mtpa) is scheduled for completion and commissioning. – Malomir: concentrate production and stockpiling will be ongoing throughout 2018 ensuring a smooth ramp up – POX Hub: the completion of the autoclave plant, RIP refurbishment and Hub integration are to be completed by Q3 2018 – Scheduled to commence a staged dry and wet commissioning, one autoclave at a time. The ramp up to commercial production is due to occur throughout 2019. Upside Potential Marketing Optionality 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 beyond its own existing reserves and potential reserves. Exploration At Malomir, exploration work has identified several highly prospective satellite refractory targets for further exploration work, including Ozhidaemoe. At Pioneer, refractory targets have been identified south of the main Pioneer orebody zone. Initial exploration drill results included: 68.4m@0.65g/t, 48.1m@0.74g/t and 30.9m@0.79g/t. The Alexandra zone and Sosonovaya licence are also expected to provide further refractory resource upside. There is also known refractory mineralisation with the Albyn licence holding. The Company continues to explore the potential for further mine life extension and production expansion. Capacity The autoclave plant was designed and constructed to allow for an additional two autoclaves to be installed, increasing processing capacity by 30% to 650ktpa. Selling Concentrate Market analysis is being carried out to explore the possible economic benefit of selling concentrate to generate near term revenue stream ahead of the POX Hub commissioning. Third Party Tolling The POX Hub could treat third party refractory ore under a tolling arrangement. As part of running optimisation scenarios on our production plan, upside opportunities exist for increasing the concentrate grade of the feed to the POX Hub organically within our own assets or in cooperation with third party high grade ore. Regional Licence Acquisition The POX Hub also creates opportunities to treat ores from deposits available for acquisition in the Amur region, especially those with significant reserves and resources but abandoned during the Soviet Era due to a lack of technology. Petropavlovsk Annual Report 2016 47 Strategic reportFinancial statementsGovernanceReserves and Resources Since 2008 and in accordance with best industry practices, the Group has been reporting its Mineral Resources and Ore Reserves in accordance with JORC Code. Following the strategic disposal of the non core projects Visokoye, Yamal and Nimanskaya in 2016, all the Group’s remaining mining assets are located in the Amur Region. Total Mineral Resource ounces (including Reserves) as of 31 December 2016 amounted to 20.16Moz, compared to 23.29Moz in 2015, with a total Ore Reserve of 7.95Moz compared to 8.41Moz the previous year. The decrease was mainly driven by the disposals of capital intensive non-core assets and to a lesser extent by mine depletion. A total of 1.22Moz of Ore Reserves were disposed of with Visokoye, whilst 3.55Moz of Mineral Resources (including Ore Reserves) were disposed of with the Visokoye and Yamal projects. Full Mineral Resource and Ore Reserve statements for Visokoye and Yamal can be found in the Petropavlovsk Annual Report and Accounts 2015. During 2016, the Group made exceptionally good progress developing Ore Reserves at Elginskoye, one of the significant satellite orebodies within the Albyn project area. Successful exploration and a feasibility study resulted in an increase in JORC Ore Reserves at Elginskoye from 0.28 to 1.24Moz (a 340% increase), providing a solid foundation for Albyn’s long term production. We also achieved a remarkable 76% increase in Mineral Resources for underground mining from 0.42 to 0.74Moz, and received our first maiden underground Ore Reserve estimate amounted to 0.37Moz. This includes a new Pioneer NE Bakhmut underground Ore Rreserve of 0.17Moz @ 4.46g/t, and 0.21Moz @ 5.85g/t at Malomir Quartzitovoe 1. The new Ore Reserve will support 6 year life of mine (LOM) for both mines with strong potential for resource, reserve and consequent LOM expansion. Overall, we successfully converted c.1.55Moz of Mineral Resources into Ore Reserves during 2016. Pioneer, Albyn, Malomir and Pokrovskiy Mineral Resource and Ore Reserve statements were prepared by Wardell Armstrong International in April 2017 in accordance with JORC Code (2012). A summary of their technical audit can be found on the company web site. The tables below provide a summary and an asset by asset breakdown of Mineral Resources and Ore Reserves. Total Ore Reserves for open pit and underground extraction (as at 31 December 2016) (in accordance with JORC Code) Total Non-Refractory Refractory Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Tonnage (kt) 32,032 229,667 261,699 22,177 95,632 117,809 9,854 134,036 143,890 Grade (g/t Au) 0.82 0.96 0.95 0.69 1.10 1.03 1.11 0.86 0.88 Gold (Moz Au) 0.84 7.11 7.95 0.49 3.39 3.88 0.35 3.72 4.07 Note: Figures may not add up due to rounding. Total Ore Reserves for open pit extraction (as at 31 December 2016) (in accordance with JORC Code) Total Non-Refractory Refractory Note: Figures may not add up due to rounding. 48 Petropavlovsk Annual Report 2016 Category Tonnage (kt) Grade (g/t Au) Gold (Moz Au) Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable 32,032 227,415 259,446 22,177 93,379 115,557 9,854 134,036 143,890 0.82 0.92 0.91 0.69 1.01 0.95 1.11 0.86 0.88 0.84 6.74 7.58 0.49 3.02 3.51 0.35 3.72 4.07 Total Ore Reserves for underground extraction (as at 31 December 2016) (WAI April 2017, in accordance with JORC Code 2012) Total Non-Refractory Refractory Note: Figures may not add up due to rounding. Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Tonnage (kt) – 2,253 2,253 – 2,253 2,253 – – – Total Mineral Resource for potential open pit and underground extraction (as at 31 December 2016) (in accordance with JORC Code) Total Non-Refractory Refractory Category Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding. Total Mineral Resource for potential open pit extraction (as at 31 December 2016) (in accordance with JORC Code) Total Non-Refractory Refractory Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding. Category Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Tonnage (kt) 51,859 418,167 470,026 257,409 33,654 207,117 240,771 115,328 18,205 211,050 229,255 142,081 Tonnage (kt) 51,859 415,393 467,252 256,155 33,654 204,343 237,997 114,074 18,205 211,050 229,255 142,081 Grade (g/t Au) – 5.14 5.14 – 5.14 5.14 – – – Grade (g/t Au) 0.94 0.89 0.90 0.80 0.91 0.96 0.95 0.96 0.99 0.82 0.84 0.67 Grade (g/t Au) 0.94 0.85 0.86 0.79 0.91 0.88 0.88 0.93 0.99 0.82 0.84 0.67 Gold (Moz Au) – 0.37 0.37 – 0.37 0.37 – – – Gold (Moz Au) 1.57 11.96 13.53 6.63 0.99 6.36 7.35 3.55 0.58 5.60 6.18 3.08 Gold (Moz Au) 1.57 11.37 12.94 6.48 0.99 5.78 6.76 3.40 0.58 5.60 6.18 3.08 Petropavlovsk Annual Report 2016 49 Strategic reportFinancial statementsGovernanceReserves and Resources continued Total Mineral Resource for potential underground extraction (WAI April 2017, as at 31 December 2016) (in accordance with JORC Code 2012) Total Non-Refractory Refractory Category Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding. Summary of Ore Reserves by asset (as at 31 December 2016) Pioneer (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Open Pit Non-Refractory Underground Subtotal Non-Refractory Open Pit and Underground Refractory Open Pit Subtotal Non-Refractory and Refractory Open Pit Category Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Tonnage (kt) – 2,774 2,774 1,254 – 2,774 2,774 1,254 – – – – Tonnage (kt) 15,585 86,876 102,460 14,122 30,243 44,366 – 1,154 1,154 14,122 31,398 45,520 1,462 55,478 56,940 15,585 85,721 101,306 Grade (g/t Au) – 6.56 6.56 3.92 – 6.56 6.56 3.92 – – – – Grade (g/t Au) 0.68 0.82 0.80 0.65 0.73 0.70 – 4.46 4.46 0.65 0.86 0.80 0.87 0.80 0.80 0.68 0.77 0.76 Gold (Moz Au) – 0.59 0.59 0.16 – 0.59 0.59 0.16 – – – – Gold (Moz Au) 0.34 2.29 2.63 0.30 0.71 1.00 – 0.17 0.17 0.30 0.87 1.17 0.04 1.42 1.46 0.34 2.13 2.46 50 Petropavlovsk Annual Report 2016 Albyn (WAI, April 2017, in accordance with JORC Code 2012) Total Mineral Resources Non-Refractory Open Pit Refractory Open Pit Note: All Albyn Ore Reserve is for open pit extraction. Summary of Ore Reserves by asset (as at 31 December 2016) Malomir (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Open Pit Non-Refractory Underground Subtotal Non-Refractory Open Pit and Underground Refractory Open Pit Subtotal Non-Refractory and Refractory Open Pit 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 Proven Probable Proven+Probable Proven Probable Proven+Probable Proven Probable Proven+Probable Tonnage (kt) 4,952 52,302 57,254 4,952 52,302 57,254 – – – Tonnage (kt) 8,416 86,755 95,171 24 7,100 7,124 – 1,098 1,098 24 8,198 8,222 8,392 78,557 86,949 8,416 85,657 94,073 Grade (g/t Au) 0.51 1.18 1.12 0.51 1.18 1.12 – – – Grade (g/t Au) 1.15 0.97 0.98 1.16 0.83 0.83 – 5.85 5.85 1.16 1.50 1.50 1.15 0.91 0.93 1.15 0.90 0.93 Gold (Moz Au) 0.08 1.98 2.06 0.08 1.98 2.06 – – – Gold (Moz Au) 0.31 2.70 3.01 0.001 0.19 0.19 – 0.21 0.21 0.001 0.40 0.40 0.31 2.30 2.61 0.31 2.49 2.80 Petropavlovsk Annual Report 2016 51 Strategic reportFinancial statementsGovernanceReserves and Resources continued Pokrovskiy & Burinda (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Open Pit Refractory Open Pit Note: All Pokrovskiy&Burinda Ore Reserve is for open pit extraction. Tokur (WAI, 2010, in accordance with JORC Code 2004) Total Non-Refractory Open Pit Refractory Open Pit Note: All Tokur Ore Reserve is for open pit extraction Notes on Ore Reserve statement: 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) 1,051 1,540 2,590 1,051 1,540 2,590 – – – Tonnage (kt) 2,028 2,195 4,223 2,028 2,195 4,223 – – – Grade (g/t Au) 0.55 0.74 0.66 0.55 0.74 0.66 – – – Grade (g/t Au) 1.47 1.44 1.45 1.47 1.44 1.45 – – – Gold (Moz Au) 0.02 0.04 0.06 0.02 0.04 0.06 – – – 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 2017 in accordance with JORC Code 2012; Tokur Reserves are prepared in 2010 in accordance with JORC Code 2004 (2) Pioneer, Malomir Albyn and Pokrovskiy Ore Reserves for open pit extraction are estimated within economical pit shells using a $1,200/oz gold price assumption and applying other modifying factors based on projected performance of these operating mines.Tokur Reserves have been based on a $1,000/oz gold price assumption, together with the operating costs assumptions relevant at the time of the estimate. (3) Open Pit Reserve cut off grade for reporting varies from 0.3 to 0.5g/t Au, depending on the asset and processing method. (4) Underground Ore Reserve estimates use mine design with decline access and trackless mining equipment; variants of open stoping with predominantly uncemented back fill are used; Ore Reserve figures have been adjusted for anticipated dilution and mine recovery. (5) Underground Reserve cut off grade for reporting is 1.5g/t Au for Pioneer and 1.7g/t Au for Malomir. (6) Figures may not add up due to rounding. 52 Petropavlovsk Annual Report 2016 Summary of Mineral Resources by asset (as at 31 December 2016) Pioneer (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Open Pit Non-Refractory Underground Sub total Non-Refractory (Open Pit and Underground) Refractory Open Pit Sub total Open Pit (Refractory and Non-Refractory) Albyn (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Refractory Note: All Albyn Mineral Resources is for open pit extraction Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Category Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Measured Indicated Sub total (M+I) Inferred Tonnage (kt) 19,520 160,670 180,190 57,058 9,842 64,520 74,362 21,883 – 1,924 1,924 765 9,842 66,444 76,286 22,648 9,678 94,226 103,904 34,410 19,520 158,746 178,266 56,293 Tonnage (kt) 5,049 74,025 79,074 60,442 5,049 74,025 79,074 60,442 – – – – Grade (g/t Au) 0.68 0.75 0.74 0.66 0.58 0.63 0.62 0.66 – 5.82 5.82 4.05 0.58 0.78 0.75 0.77 0.79 0.74 0.74 0.58 0.68 0.69 0.69 0.61 Non-Refractory Grade (g/t Au) 0.52 1.13 1.09 1.02 0.52 1.13 1.09 1.02 – – – – Gold (Moz Au) 0.43 3.89 4.32 1.20 0.18 1.30 1.48 0.46 – 0.36 0.36 0.10 0.18 1.66 1.84 0.56 0.25 2.23 2.48 0.64 0.43 3.53 3.95 1.10 Gold (Moz Au) 0.09 2.69 2.78 1.99 0.09 2.69 2.78 1.99 – – – – Petropavlovsk Annual Report 2016 53 Strategic reportFinancial statementsGovernanceReserves and Resources continued Malomir (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Open Pit Non-Refractory Underground Sub total Non-Refractory (Open Pit and Underground) Refractory Open Pit Sub total Open Pit (Refractory and Non-Refractory) Note: All Albyn Mineral Resources is for open pit extraction Pokrovka & Burinda (WAI, April 2017, in accordance with JORC Code 2012) Total Non-Refractory Refractory Note: All Albyn Mineral Resources is for open pit extraction 54 Petropavlovsk Annual Report 2016 Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred 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) 8,558 135,865 144,423 118,944 31 18,191 18,222 10,784 – 850 850 489 31 19,041 19,072 11,273 8,527 116,824 125,351 107,671 8,558 135,015 143,573 118,455 Tonnage (kt) 6,780 31,511 38,291 10,259 6,780 31,511 38,291 10,259 – – – – Non-Refractory Grade (g/t Au) 1.21 0.91 0.93 0.71 1.19 0.68 0.68 0.68 – 8.23 8.23 3.72 1.20 1.02 1.02 0.81 1.21 0.90 0.92 0.70 1.21 0.87 0.89 0.70 Non-Refractory Grade (g/t Au) 1.01 0.83 0.86 0.99 1.01 0.83 0.86 0.99 – – – – Gold (Moz Au) 0.33 3.99 4.33 2.73 0.001 0.40 0.40 0.24 – 0.23 0.23 0.06 0.001 0.62 0.63 0.29 0.33 3.37 3.70 2.44 0.33 3.77 4.10 2.68 Gold (Moz Au) 0.22 0.84 1.06 0.33 0.22 0.84 1.06 0.33 – – – – Tokur WAI, 2010, in accordance with JORC Code 2004) Total Non-Refractory Refractory Note: All Tokur Mineral Resources is for open pit extraction Notes to Mineral Resource Statement: (1) Mineral Resources include Ore Reserves. Category Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Measured Indicated Measured+Indicated Inferred Tonnage (kt) 11,952 16,096 28,048 10,706 11,952 16,096 28,048 10,706 – – – – Non-Refractory Grade (g/t Au) 1.30 1.06 1.16 1.09 1.30 1.06 1.16 1.09 – – – – Gold (Moz Au) 0.50 0.55 1.05 0.38 0.50 0.55 1.05 0.38 – – – – (2) Mineral Resources for Pokrovskiy, Pioneer, Malomir and Albyn are audited by WAI in accordance with JORC Code 2012 in April 2015 with a further review of changes in April 2016 and April 2017; Mineral Resources for Tokur reviewed by WAI in 2010 in accordance with JORC Code 2004. (3) Open Pit Mineral Resources for Pokrovskiy, Pioneer, Malomir and Albyn are constrained by conceptual open pit shells at a US$1,500/oz long term gold price.; Tokur Mineral Resources have no open pit constraints. (4) The cut off grade for the Mineral Resource for open pit mining varies from 0.30 to 0.4g/t depending on the type of mineralisation and proposed processing method. (5) Minimum mining widths dependant on reconciliation have been applied to the open pit Mineral Resource. (6) Mineral Resources for potential underground extraction were audited by WAI in accordance with JORC Code 2012 in April 2017. (7) Cut off grade is 1.5g/t is used to report Mineral Resource for potential underground mining. (8) Mineral Resources are not Reserves until they have demonstrated economic viability based on a feasibility or pre-feasibility study. (9) Grade represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery. Petropavlovsk Annual Report 2016 55 Strategic reportFinancial statementsGovernanceIRC IRC produces and develops industrial commodities. Based in the Russian Far East, it benefits 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 31.1% stake in IRC. IRC assets IRC’s key mining assets are K&S, Kuranakh and Garinskoye: – K&S. An ongoing project at an advanced stage of development, which started trial production in 2016. The project has two phases and is located in the Jewish Autonomous Region (EAO) of the Russian Far East – Kuranakh. An iron ore/ilmenite concentrate mine located in the Amur region, 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 flanks and Kostenginskoye. – Bolshoi Seym. An ilmenite deposit with Indicated and Inferred Mineral Resources, located North of Kuranakh – The Garinskoye flanks. 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 Garinskoye Flanks and Kostenginskoye are yet to have JORC compliant Mineral Resources and Ore Reserves. 56 Petropavlovsk Annual Report 2016 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 2016. 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. In addition, near the end of 2016, IRC completed the issuance of new shares to a new core investor, with an additional new member joining the Board. Tiger Capital Fund injected c. US$25 million into IRC for newly issued IRC shares, giving them a 13.22% shareholding, and Mr Cheng Chi Kin (representing Tiger Capital Fund) joined the Board of IRC as Non Executive Director, providing further diversity, expertise and experience to the Board. As a result of the above, Petropavlovsk’s stake in IRC reduced from 35.83% to 31.10%. The Group remains a major shareholder. IRC remains 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. In addition to these assets, IRC also operates: – Giproruda. 70% owned by IRC, 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 2016 K&S During the year, Phase One K&S commenced final hot commissioning and in H2 entered a trial production phase. Phase One K&S is expected to be able to produce 3.2 million tonnes of iron ore concentrate with a 65% iron (Fe) content, once completed and at full capacity. At the end of 2016, it had produced over 160,000 tonnes of iron ore concentrate. IRC also reached an amicable settlement with CNEEC, of which IRC received cash compensation of US$4.5 million, as well as a smaller outstanding construction payment liability (US$3.9 million less). IRC reserves the right to claim for further penalties from the contractor. Regarding the K&S loan, ICBC has agreed to restructure the remaining repayments under the Project Finance Facility. Accordingly, the two repayment instalments originally due in 2017, which amounted to a total of c. US$43 million, shall be repayable in the five subsequent repayment instalments. For details, please refer to IRC’s announcements dated 27 February and 21 March 2017. Kuranakh Kuranakh was moved to care and maintenance in the beginning of 2016 in response to a difficult operating environment. IRC considered the process to be satisfactory throughout 2016 with only minimal costs necessary to maintain security and equipment. During the year, the annual sales volume was 219,352 tonnes for the remaining iron ore concentrate, and the sales volume of ilmenite concentrate was 60,044 tonnes. The segmental revenue of the mine was US$15.6 million. Garinskoye Garinskoye remains an attractive, low cost, large scale, DSO style greenfield project. IRC did not develop it in 2016 due to capital constraints, but continues to monitor market conditions for future opportunities.  Petropavlovsk Annual Report 2016 57 Strategic reportFinancial statementsGovernanceChief Financial Officer’s Statement For the year ended 31 December 2016 Andrey Maruta Financial Highlights Continuing operations Total attributable gold production (’000oz) Gold sold (’000oz) Group revenue Average realised gold price (US$/oz) Average LBMA gold price afternoon fixing (US$/oz) Total average cash costs (US$/oz) (a) All-in sustaining costs (b) Underlying EBITDA (c) Profit/(loss) for the period From continuing operations From discontinued operations Basic profit/(loss) per share From continuing operations From discontinued operations Net cash from operating activities From continuing operations From discontinued operations (a) Calculation of total cash costs (“TCC”) is set out in the section Hard rock mines below. (b) 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. (c) Reconciliation of profit/(loss) for the period and underlying EBITDA is set out in note 34 to the consolidated financial statements. Cash and cash equivalents Loans Convertible bonds (e) Net Debt (d) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development. (e) US$100.0 million convertible bonds due on 18 March 2020 at amortised cost. Note: Figures may not add up due to rounding. Revenue Revenue from hard rock mines Revenue from other operations 58 Petropavlovsk Annual Report 2016 2016 US$ million 2015 US$ million 416.3 399.9 540.7 1,222 1,250 660 807 200.1 31.7 31.7 – US$0.01 US$0.01 – 37.0 37.0 – 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$0.02) 103.4 111.0 (7.6) 31 December 2016 US$ million 31 December 2015 US$ million 12.6 (522.8) (88.4) (598.6) 28.2 (d) (552.8) (85.5) (610.0) 2016 US$ million 490.0 50.7 540.7 2015 US$ million 568.7 31.2 599.9 2016 oz 399,858 16,442 416,300 2015 oz 481,884 22,216 504,100 Physical volumes of gold production and sales Gold sold from hard rock mines Movement in gold in circuit and doré bars Total attributable production Group revenue during the period was US$540.7 million, 10% lower than the US$599.9 million achieved in 2015. Revenue from hard rock mines was US$490.0 million, 14% lower than the US$568.7 million achieved in 2015. Gold remains the key commodity produced and sold by the Group, comprising 90% of total revenue generated in 2016. The physical volume of gold sold from hard rock mines decreased by 17% from 481,884 ounces in 2015 to 399,858 ounces in 2016. The average realised gold price increased by 4% from US$1,178/oz in 2015 to US$1,222/oz in 2016. Average realised gold price includes US$(21)/oz effect from hedge arrangements (2015: US$20/oz). Hard rock mines sold 98,231 ounces of silver in 2016 at an average price of US$16/oz, compared to 68,075 ounces in 2015 at an average price of US$15/oz. Revenue generated as a result of third party work by the Group’s in house service companies was US$50.7 million in 2016, a US$19.5 million increase compared to US$31.2 million in 2015. This revenue is substantially attributable to sales generated by Group’s engineering and research institute, Irgiredmet, primarily through engineering services and the procurement of materials, consumables and equipment for third parties, which comprised US$44.8 million in 2016 compared to US$28.6 million in 2015. Cash flow hedge arrangements In order to increase certainty in respect of a significant proportion of its cash flows, the Group has entered into a number of gold forward contracts. Forward contracts to sell an aggregate of 134,545 ounces of gold matured during the year and resulted in US$(8.5) million net cash settlement paid by the Group (2015: US$12.6 million contribution to cash revenue from forward contracts to sell an aggregate of 178,449 ounces of gold). The Group constantly monitors gold price and hedges some portion of production as considered necessary. Forward contracts to sell an aggregate of 50,006 ounces of gold at an average price of US$1,303 per ounce were outstanding as at 31 December 2016. In February - March 2017, the Group entered into forward contracts to sell an aggregate of 549,994 ounces of gold during the years 2017 - 2019 at an average price of US$1,252/oz, thus, satisfying bank debt refinancing conditions. Forward contracts to sell an aggregate of 546,968 ounces of gold at an average price of US$1,253 per ounce are outstanding as at 26 April 2017. Petropavlovsk Annual Report 2016 59 Strategic reportFinancial statementsGovernanceChief Financial Officer’s Statement continued For the year ended 31 December 2016 Underlying EBITDA and analysis of operating costs Profit/(loss) for the period from continuing operations Add/(less): Interest expense Investment income Other finance gains Other finance losses Foreign exchange losses Taxation Depreciation Impairment of exploration and evaluation assets Impairment of ore stockpiles Share of results of associates (a) Underlying EBITDA 2016 US$ million 31.7 2015 US$ million (190.5) 61.0 (0.6) (11.9) 1.5 5.2 (4.7) 105.3 9.2 1.2 2.4 200.1 71.5 (1.0) (9.1) – 12.0 48.9 129.1 37.4 17.4 57.0 172.8 (a) Group’s share of interest expense, investment income, other finance 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. Pioneer Pokrovskiy Malomir Albyn Total Hard rock mines Corporate and other Underlying EBITDA 2016 US$ million 79.2 13.2 22.0 110.4 224.7 (24.6) 200.1 2015 US$ million 118.6 16.1 5.7 66.5 206.9 (34.1) 172.8 60 Petropavlovsk Annual Report 2016 Hard rock mines This period, hard rock mines generated underlying EBITDA of US$224.7 million compared to US$206.9 million underlying EBITDA in 2015. Total cash costs for hard rock mines decreased from US$749/oz in 2015 to US$660/oz in 2016, primarily reflecting the effect of cost optimisation measures undertaken by the Group in response to the lower gold price environment as well as the positive effect of Rouble depreciation. The increase in the average realised gold price from US$1,178/oz in 2015 to US$1,222/oz in 2016 and the improved total cash costs had US$53.2 million positive contribution to underlying EBITDA in 2016. This effect was offset by the decrease in physical ounces sold which resulted in a US$35.2 million decrease in underlying EBITDA. The key components of the operating cash expenses are wages, electricity, diesel, chemical reagents and consumables, as set out in the table below. The key cost drivers affecting the operating cash expenses are stripping ratios, production volumes of ore mined and processed, grades of ore processed, recovery rates, cost inflation and fluctuations in the Rouble to US Dollar exchange rate. Compared with 2015 there was no significant inflation of Rouble denominated costs, in particular, electricity costs increased by up to 3% in Rouble terms (decreased by up to 6% in US Dollar terms) while the cost of diesel remained at the same level (decreased by up to 9% in US Dollar terms). The impact of Rouble price inflation was mitigated by the 10% average depreciation of the Rouble against the US Dollar, with the average exchange rate for the period increasing from 61.30 Roubles per US Dollar in 2015 to 67.18 Roubles per US Dollar in 2016. Refinery and transportation costs are variable costs dependent on the production volume. Mining tax is also a variable cost dependent on production volume and the gold price realised. The mining tax rate is 6%. Since the second half of 2016, the Group applies two year mining tax concession. Staff cost Materials Fuel Electricity Other external services Other operating expenses Movement in ore stockpiles, work in progress and bullion in process attributable to gold production (a) Total operating cash expenses (a) Excluding deferred stripping 2016 2015 US$ million 54.7 97.4 40.3 23.3 22.1 28.2 266.0 (40.5) 225.6 % 21 37 15 9 8 10 100 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 Petropavlovsk Annual Report 2016 61 Strategic reportFinancial statementsGovernanceChief Financial Officer’s Statement continued For the year ended 31 December 2016 Hard rock mines Pioneer US$ million Pokrovskiy US$ million Malomir US$ million Albyn US$ million 2016 Total US$ million 2015 Total US$ million Revenue Gold Silver Expenses Operating cash expenses Refinery and transportation Other taxes Mining tax Deferred stripping costs Depreciation Impairment of exploration and evaluation assets Impairment /(reversal of impairment) of ore stockpiles Operating expenses Result of precious metals operations Add/(less): Depreciation Impairment of exploration and evaluation assets Impairment/(reversal of impairment) of ore stockpiles Segment EBITDA 163.5 1.0 164.5 77.9 0.2 1.9 5.2 – 38.8 – 6.1 130.2 34.3 38.8 – 6.1 79.2 46.7 0.3 47.0 31.9 0.1 0.5 1.3 – 6.6 – 1.0 41.4 5.6 6.6 – 1.0 13.2 67.1 0.1 67.2 41.6 0.1 1.6 1.9 – 13.6 – (5.8) 53.0 14.2 13.6 – (5.8) 22.0 211.2 0.2 211.4 74.2 0.3 2.2 6.3 18.0 45.7 9.2 (0.1) 155.7 55.6 45.7 9.2 (0.1) 110.4 488.5 1.5 490.0 225.6 0.7 6.3 14.7 18.0 104.7 9.2 1.2 380.3 109.7 104.7 9.2 1.2 224.7 567.6 1.0 568.7 311.4 1.1 7.7 33.1 8.4 127.2 2.5 17.4 508.9 59.8 127.2 2.5 17.4 206.9 Physical volume of gold sold, oz Cash costs Operating cash expenses Refinery and transportation Other taxes Mining tax Deferred stripping costs Operating cash costs Deduct: co-product revenue Total cash costs Average TCC/oz, US$/oz 133,605 38,151 54,760 173,342 399,858 481,884 77.9 0.2 1.9 5.2 – 85.3 (1.0) 84.3 631 31.9 0.1 0.5 1.3 – 33.8 (0.3) 33.5 878 41.6 0.1 1.6 1.9 – 45.2 (0.1) 45.1 824 74.2 0.3 2.2 6.3 18.0 101.0 (0.2) 100.8 225.6 0.7 6.3 14.7 18.0 265.3 (1.5) 263.7 311.4 1.1 7.7 33.1 8.4 361.8 (1.0) 360.7 581 660 749 62 Petropavlovsk Annual Report 2016 All-in sustaining costs and all-in costs AISC decreased from US$874/oz in 2015 to US$807/oz in 2016, reflecting the reduction in TCC as well as lower sustaining capital expenditure related to the existing mining operations. AIC decreased from US$932/oz in 2015 to US$838/oz in 2016, reflecting the decrease in AISC explained above, reversal of impairment of refractory ore stockpiles due to a higher gold price and decrease in exploration expenditure. Hard rock mines Pioneer US$ million Pokrovskiy US$ million Malomir US$ million Albyn US$ million 2016 Total US$ million 2015 Total US$ million Physical volume of gold sold, oz 133,605 38,151 54,760 173,342 399,858 481,884 Total cash costs Average TCC/oz, US$/oz Impairment /(reversal of impairment) of ore stockpiles Adjusted operating costs Central administration expenses Capitalised stripping at end of the period Capitalised stripping at beginning of the period Close down and site restoration Sustaining capital expenditure All-in sustaining costs All-in sustaining costs, US$/oz Exploration expenditure Capital expenditure (Reversal of impairment)/impairment of ore stockpiles (a) All-in costs All-in costs, US$/oz (a) Refractory ore stockpiles to be processed at the POX Hub. 84.3 631 6.3 90.6 10.9 – – 0.1 3.9 105.5 789 8.5 1.0 (0.2) 114.8 859 33.5 878 1.0 34.5 3.1 – – – 0.1 37.7 988 0.1 – – 37.8 990 45.1 824 (0.0) 45.1 4.5 3.6 – – 1.7 55.0 1,004 1.9 0.8 (5.8) 51.9 948 100.8 263.7 360.7 581 660 749 (0.1) 100.6 14.1 22.6 (18.0) 0.1 5.2 124.7 719 6.2 – – 130.8 755 7.2 270.9 32.6 26.2 (18.0) 0.2 10.9 322.8 807 16.6 1.9 (6.0) 335.3 838 9.2 369.9 30.4 18.0 (8.4) (1.7) 12.7 420.9 874 18.9 1.0 8.2 449.0 932 Petropavlovsk Annual Report 2016 63 Strategic reportFinancial statementsGovernanceChief Financial Officer’s Statement continued For the year ended 31 December 2016 Corporate and other The Group has corporate offices in London, Moscow and Blagoveschensk which together represent the central administration function. Central administration expenses increased by US$2.2 million from US$30.4 million in 2015 to US$32.6 million in 2016. During 2016, other operations contributed US$(24.6) million to underlying EBITDA vs. US$(34.1) million in 2015. Included in result of corporate and other operations in 2016 is a US$3.6 million share in losses generated by IRC. 31 December 2016 , with exception of an individual licence impairment referred to below. Impairment review The Group undertook an impairment review of the tangible assets attributable to its gold mining projects, exploration assets adjacent to the existing mines and supporting in house service companies and concluded no impairment was required as at The forecast future cash flows are based on the Group’s current mining plan that assumes POX Hub completion in the year 2018. The other key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below: Long term gold price Discount rate (a) RUB/US$ exchange rate (a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 10.1% (2015: 10.1%) Year ended 31 December 2016 US$1,200/oz 8% Year ended 31 December 2015 US$1,150/oz 8% RUB60.0/US$ RUB65.0/US$ Following the decision to suspend exploration at Kharginskoye ore field, an immediate extension of the Albyn deposit, and to surrender the licence, a US$9.2 million impairment charges were recorded against associated exploration and evaluation costs previously capitalised within exploration and evaluation assets. As at 31 December 2016, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines. Impairment of ore stockpiles The Group assessed the recoverability of the carrying value of ore stockpiles and recorded impairment charges/(reversals of impairment) as set out below: Year ended 31 December 2016 Year ended 31 December 2015 Pre-tax impairment charge/ (reversal of impairment) US$ million 1.0 6.1 (5.8) (0.1) 1.2 Post-tax impairment charge/ (reversal of impairment) US$ million 0.8 4.9 (4.7) (0.1) 0.9 Pre-tax impairment charge/ (reversal of impairment) US$ million (0.9) 11.9 6.1 0.3 17.4 Taxation US$ million (0.2) (1.2) 1.2 – (0.2) Pokrovskiy Pioneer Malomir Albyn Interest income and expense Investment income The Group earned US$0.6 million interest income on its cash deposits with banks. Interest expense Other Post-tax impairment charge/ (reversal of impairment) US$ million (0.7) 9.6 4.9 0.2 13.9 Taxation US$ million 0.2 (2.4) (1.2) (0.1) (3.5) 2016 US$ million 0.6 2015 US$ million 1.0 2016 US$ million 60.8 0.2 61.0 2015 US$ million 71.3 0.2 71.5 Interest expense for the period was comprised of US$11.9 million effective interest on the Convertible Bonds and US$48.9 million interest on bank facilities (2015: US$13.6 million and US$57.7 million, respectively). There was no interest expense capitalised as part of mine development costs within property, plant and equipment. 64 Petropavlovsk Annual Report 2016 Other finance gains and losses Other finance gains for the period comprised US$11.9 million compared to US$9.1 million in 2015. Included in other finance gains is financial guarantee fee of US$4.5 million (2015: US$2.2 million) charged in connection with the ICBC facility and US$7.4 million (2015: US$6.4 million) fair value gain on revaluation of the embedded option for the bondholders to convert into the equity of the Company. The Group also recognised US$1.5 million loss on bank debt refinancing. Taxation Tax (credit)/charge 2016 US$ million (4.7) 2015 US$ million 48.9 The Group is subject to corporation tax under the the UK, Russia and Cyprus tax legislation. The average statutory tax rate for 2016 was 20% in the UK and 20% in Russia. The tax charge for the period arises primarily in relation to the Group’s gold mining operations and is represented by a current tax charge of US$29.8 million in 2016 (2015: US$31.8 million) and a deferred tax credit, which is a non-cash item, of US$34.5 million (2015: deferred tax charge of US$17.1 million). Included in the deferred tax credit in 2016 is a US$26.0 million foreign exchange effect which primarily arises because the tax base for a significant 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 Dollar carrying value. During the period, the Group made corporation tax payments in aggregate of US$35.3 million in Russia (2015: corporation tax payments in aggregate of US$32.9 million in Russia). Profit/(loss) per share Profit/(loss) for the period from continuing operations attributable to equity holders of Petropavlovsk PLC Weighted average number of Ordinary Shares Basic profit/(loss) per ordinary share from continuing operations 2016 2015 US$33.7 million (US$190.2 million) 3,302,148,536 2,657,332,030 (US$0.07) US$0.01 Basic profit per share for 2016 was US$0.01 compared to US$0.07 basic loss per share for 2015. The key factor affecting the basic profit/(loss) per share was the increase of net profit for the period attributable to equity holders of Petropavlovsk PLC from the net loss of US$190.2 million for 2015 to US$33.7 million net profit for 2016. The total number of Ordinary Shares in issue as at 31 December 2016 was 3,303,768,532 (31 December 2015: 3,300,561,697). The Group has a number of potentially dilutive instruments which were anti-dilutive in the 2015 and 2016 and, accordingly, diluted profit/(loss) per share was not different from the basic profit/(loss) per share. Petropavlovsk Annual Report 2016 65 Strategic reportFinancial statementsGovernanceChief Financial Officer’s Statement continued For the year ended 31 December 2016 Financial position and cash flows Cash and cash equivalents Loans Convertible bonds (a) Net Debt (a) US$100.0 million convertible bonds due on 18 March 2020 at amortised cost. Net cash from operating activities: Continuing operations Discontinued operations Net cash used in investing activities: Continuing operations Discontinued operations Net cash used in financing activities: Continuing operations Discontinued operations (b) Including US$29.4 million cash CAPEX and US$19.2 million proceeds from disposal of subsidiaries 31 December 2016 US$ million 12.6 (522.8) (88.4) (598.6) 31 December 2015 US$ million 28.2 (552.8) (85.5) (610.0) 2016 US$ million 2015 US$ million 37.0 – 37.0 (8.7) (b) – (8.7) (b) (46.8) – (46.8) 111.0 (7.6) 103.4 (23.2) (43.0) (66.2) (110.6) 74.2 (36.4) 66 Petropavlovsk Annual Report 2016 Key movements in cash and net debt from continuing operations As at 1 January 2016 Net cash generated by operating activities before working capital changes Increase in working capital Income tax paid Capital expenditure Exploration expenditure Amounts repaid under bank loans, net Interest accrued Interest paid Transaction costs paid in connection with bank loans Bank debt refinancing Proceeds from disposal of subsidiaries, net of cash disposed and net of liabilities settled Funds advanced to the Group under investment agreement with the Russian Ministry of Far East Development Funds transferred under investment agreement with the Russian Ministry of Far East Development Foreign exchange Other As at 31 December 2016 (a) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development Cash US$ million 28.2 (a) Debt US$ million (638.3) Net Debt US$ million (610.0) 189.3 (63.3) (35.3) (12.8) (16.6) (27.0) (53.7) (4.0) 19.2 30.8 (47.7) 2.8 2.7 12.6 27.0 (60.8) 53.7 5.5 1.5 0.2 (611.2) (598.6) The increase in working capital reflects US$25.8 million increase in trade and other receivables and US$37.7 million reduction in trade and other payables. As at 31 December 2016, there were no undrawn facilities available to the continuing operations. Capital expenditure The Group invested an aggregate of US$29.4 million on its gold projects compared to US$32.6 million invested in 2015. The key areas of focus this year were on fulfilling existing contractual commitments in relation to the POX Hub project, exploration to support the underground mining at Pioneer, expansion of tailing dams at Pioneer and Albyn and ongoing exploration related to the areas adjacent to the ore bodies of the Group’s main mining operations. POX Pokrovskiy and Pioneer (b) Malomir Albyn Upgrade of in house service companies Exploration expenditure US$ million – 8.6 1.9 6.1 – 16.6 Development expenditure and other CAPEX(a) US$ million 1.9 3.7 1.6 4.9 0.6 12.8 Total US$ million 1.9 12.3 3.5 11.0 0.6 29.4 (a) Including US$1.9 million of development expenditure in relation to the POX Hub which is considered to be non-sustaining capital expenditure for the purposes of calculating all-in sustaining costs and all-in costs. (b) Including US$5.5 million of exploration expenditure in relation to the underground mining project at Pioneer to be non-sustaining capital expenditure for the purposes of calculating the all-in sustaining costs and all-in costs. Petropavlovsk Annual Report 2016 67 Strategic reportFinancial statementsGovernanceChief Financial Officer’s Statement continued For the year ended 31 December 2016 Foreign currency exchange differences The Group’s principal subsidiaries have a US Dollar functional currency. Foreign exchange differences arise on translation of monetary assets and liabilities denominated in foreign currencies, which for the principal subsidiaries of the Group are the Russian Rouble and GB Pounds Sterling. The following exchange rates to the US Dollar have been applied to translate monetary assets and liabilities denominated in foreign currencies. GB Pounds Sterling (GBP: US$) Russian Rouble (RUB : US$) 31 December 2016 0.81 60.66 31 December 2015 0.68 72.88 The Rouble recovered by 17% against the US Dollar during 2016, from RUB72.88 : US$1 as at 31 December 2015 to RUB60.66 : US$1 as at 31 December 2016. The average year on year depreciation of the Rouble against the US Dollar was approximately 10%, with the average exchange rate for 2016 being RUB67.18 : US$1 compared to RUB61.30 : US$1 for 2015. As a result of the significant volatility of the Russian Rouble, the Group recognised foreign exchange losses of US$5.2 million in 2016 (2015: US$12 million) arising primarily on Rouble denominated net monetary assets. Refinancing of the Group’s bank debt In December 2016, the Group refinanced US$430 million outstanding principal of the Group’s US$530 million bank debt, including a revised maturity profile and renegotiation of the financial and operational covenants. Results of the bank debt refinancing are set out below. December 2016 US$ million 428.2 426.7 3.0 (1.5) 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. During 2016, the Group received further RUB2.0 billion (an equivalent to US$30.8 million) under the Investment Agreement and transferred an aggregate RUB3.1 billion (an equivalent to US$47.7 million) to DRSK. Carrying value of liabilities de recognised Fair value of new liabilities recognised: Bank debt Call option over the Company’s shares Loss on bank debt refinancing Cash settled call option was issued in relation to 3.6 per cent. of the outstanding aggregate ordinary share capital in the Company and is exercisable between December 2019 and March 2023 at strike price of £0.068. Transaction costs of US$4.9 million were further capitalised. The Group is currently completing the final documentation to refinance the remaining US$100 million bank debt. Once this has been completed, the Group’s entire bank debt of US$530 million has been refinanced. Disposal of subsidiaries The Group entered into agreements to sell its wholly owned subsidiary LLC Ilijnskoye and its associate JSC Verkhnetisskaya Ore Mining Company for an aggregate cash consideration of an equivalent to US$20 million, payable in tranches during 2016, out of which US$19.8 million were attributed to the value of Visokoe asset held by LLC Ilijnskoye and the remainder to JSC Verkhnetisskaya Ore Mining Company. The disposal of LLC Ilijnskoye was completed on 11 May 2016. The Group recognised US$0.5 million net loss on this disposal. 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 Agreement involves provision of RUB5.5 billion (an equivalent to c.US$91 million as at 31 December 2016) 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 68 Petropavlovsk Annual Report 2016 2017 Outlook The Group is confident to achieve 2017 production guidance of 460koz. The Group’s operating cash expenses are substantially Rouble denominated. The Group expects its total average cash costs of production in 2017 to be c.US$700/oz at current exchange rate. Net debt is expected to decrease to c. US$550 million by the end of 2017, assuming an average gold price of US$1,200/oz for the remainder of 2017. The Strategic Report was approved by the Board on 26 April 2017 and signed on its behalf by: Peter Hambro Chairman The Group has guaranteed the outstanding amounts IRC owes to ICBC. The outstanding loan principal was US$234 million as at 31 December 2016. 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. IRC has agreed with ICBC to restructure and reschedule two repayment instalments under the ICBC Facility Agreement, which are originally due for payment on 20 June 2017 and 20 December 2017, with next repayment instalment due on 20 June 2018. IRC also obtained waivers from ICBC in respect of obligations to maintain certain cash deposits with ICBC until 30 June 2018 and obligations to comply with certain financial covenants until 31 December 2017 (inclusive). Having taken into account the aforementioned factors, and after making enquiries and considering the uncertainties described above, the Directors have a reasonable expectation 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 2016 Annual Report and Accounts. Accordingly, they continue to adopt the going concern basis of accounting in preparing these consolidated financial statements. Going concern The Group monitors and manages its liquidity risk on an ongoing basis to ensure that it has access to sufficient funds to meet its obligations. Cash forecasts are prepared regularly based on a number of inputs including, but not limited to, forecast commodity prices and impact of hedging arrangements, the Group’s mining plan, forecast expenditure and debt repayment schedules. Sensitivities are run for different scenarios including, but not limited to, changes in commodity prices, cost inflation, 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 flows and covenant compliance in relation to bank facilities for the period of 12 months from the date of approval of the 2016 Annual Report and Accounts. As at 31 December 2016, the Group had sufficient liquidity headroom and complied with related financial covenants. Following the successful completion of the bank debt refinancing, the Group is also satisfied that it has sufficient headroom under a base case scenario for the period to May 2018 and expects to comply with related financial covenants. In the meantime, the Group’s projections under a reasonable downside scenario indicate that, unless mitigating actions can be taken including accessing deposits not currently in the Group’s mining plan, there will be insufficient liquidity and non-compliance with certain financial covenants under a reasonable downside scenario for the relevant period to May 2018. If a missed debt repayment occurs or financial covenant requirements are not met, 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 Directors are confident that, should it be required, relevant mitigating actions could be successfully implemented. Petropavlovsk Annual Report 2016 69 Strategic reportFinancial statementsGovernanceBoard of Directors Mr Peter Hambro Chairman Dr Pavel Maslovskiy Chief Executive Officer Mr Andrey Maruta Chief Financial Officer 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 Officer 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 Officer, in November 2014 having 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 Officer in April 2012. Experience: Mr Maruta qualified as a Chartered Certified 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 Certified Accountants. External Appointments: None. Committee membership: Mr Maruta is a member of the Executive Committee. 70 Petropavlovsk Annual Report 2016 Mr Robert Jenkins Senior Non-Executive Director Mr Alexander Green Non-Executive Director Mr Andrew Vickerman Non-Executive Director Mr Alexander Green was appointed as a Non-Executive Director on 27 August 2015. Experience: Mr Green has twenty five years of experience in the resources industry. From 2003 to 2012, he was a Marketing Director at BHP Biliton, a leading global resources company and from 2013 to 2015 he was a Non-Executive Director of Torm A/S, a Danish shipping 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 is a Board Observer with Fluidic Analytics Limited, a company that builds tools for protein characterisation. Committee membership: Mr Green is Chairman of the HSE Committee and a member of the Company’s Audit and Remuneration 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 Ph.D degrees in Economics from Cambridge University. External Appointments: Mr Vickerman is a member of the Board of Trafigura 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, an Australian business that has developed technology for processing nickel laterite deposits. Committee membership: Mr Vickerman is Chairman of the Remuneration Committee and a member of the HSE, Audit and Nomination Committees. Mr Robert Jenkins was appointed as a Non-Executive Director on 30 April 2015 and as Senior Non-Executive Director on 28 June 2016 Experience: Mr Jenkins is a Chartered Accountant, having qualified with KPMG in the UK, and has over 20 years’ Russia related investment experience, including in the natural resources sectors. He is also a fluent 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 Financial Officer 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 in NorthStar Corporate Finance, which specialises in advising companies on Russia related as well as other European acquisition and financing transactions. He was formerly 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 and a member of the Nomination Committee. Petropavlovsk Annual Report 2016 71 GovernanceFinancial statementsStrategic reportCorporate Governance Report where possible in line with best practice, whilst recognising the individual needs of the business. It is the Board’s intention that appointment of any successful candidate is made with the support of our major shareholders and that the new director, while representing the interest of all shareholders equally, will be fully independent. Management team and diversity The majority of our strong and broadly based executive team have been with the Company for over 12 years, with several of them having been with the Company since its inception in 1994. This longevity ensures an open and honest dialogue which reflects the Group’s collaborative culture. The expertise and wide range of skills of the team gives the Board much comfort, knowing that any issues will be recognised at an early stage and actions taken, with matters being brought to the attention of the full Board as appropriate. Within our finance team Natalia Buynova, Group Head of Corporate Reporting has been with the Company since 2009, having originally joined on secondment from PwC. Natalia regularly attends Audit Committee meetings and presents to the Committee. Zhanna Kirienko, the Group’s H&S Co- ordinator, based in Blagoveshchensk, attends HSE Committee meetings to update the Committee on actions being taken to improve health and safety throughout the Group and to report on any accidents. Zhanna’s promotion to this position followed her successful completion of an MBA in London which was sponsored by the Group. These are just a few examples of the professional women who work within the Group and reflect and demonstrate our diversity and our commitment to the development of our employees. Further details of the Executive Committee are provided on pages 34 and 77. These strengths are acknowledged by the Senior Lenders and the resulting bank refinancing is arranged so as to allow the Company to self fund the completion of the Pressure Oxidation project from free cashflow, provided always that the macro economic environment is as forecast. Board effectiveness review Although not a requirement for the Company under the UK Corporate Governance Code, the assessment of the Petropavlovsk Board was facilitated externally. Further details of this review, which has recently been concluded, are provided on page 76. Annual General Meeting The Annual General Meeting (AGM) is recognised as an opportunity for all shareholders to engage with the Board and I look forward to welcoming them to the AGM to be held on 20 June 2017. Governance at Petropavlovsk is an important element of our Board environment and the following report sets out the details of the Company’s approach to corporate governance. Peter Hambro Chairman 26 April 2017 Although the mining sector is recognised as a male dominated environment, the Group recognises and encourages the development of women in the workplace and this is reflected in the high number of professional women in senior positions throughout the Group. For example there are several very skilled and experienced women in our Executive team. In November 2016, I was pleased to announce the promotion of Dr Alya Samokhvalova to Deputy CEO, Strategic Development and the appointment of Alexandra Carse to replace her as Head of Investor Relations. Anna- Karolina Subczynska, a fully qualified lawyer in both the UK and Russia is our Group Head of Legal Affairs and has been with the Company for over 13 years whilst Anna Makhina is our Head of Legal in Russia. Both Alya and Anna-Karolina attend Board meetings at my request and contribute to the Board’s discussions. Amanda Whalley, the Company Secretary has been with the Company for 6 years. Chairman’s introduction Dear shareholder I am pleased to present the Corporate Governance Report for the year ended 31 December 2016, on behalf of the Board. 2016 was a transformative year for Petropavlovsk, having finalised a two year balance sheet restructuring while maintaining its focus on deleveraging. The refinancing of the Group’s bank debt, focus on the Group’s strategic priorities and the composition of the Board were the principal issues for the Board’s focus during the year. We are committed to good governance throughout the Company. In this introduction, I highlight the depth and diversity of our management team and the steps that we are taking further to strengthen our governance practices. Board structure The Board is currently made up of both British and Russian nationals: – Executive Directors: – Dr Pavel Maslovskiy, Chief Executive Officer – Andrey Maruta, Chief Financial Officer – Non-Executive Directors: – Robert Jenkins, Alexander Green, and Andrew Vickerman, all of whom are independent. – Chairman – My role as Chairman, principally based in London, includes some clearly defined executive responsibilities that are separated from those of the Chief Executive Officer, who is principally based in Russia. There is frequent and open dialogue between the executives and the excellent relationship with the Non-Executives ensures that the full Board is kept informed of all strategic and operational issues on a timely basis. The Board structure is currently compliant with the requirements of the UK Corporate Governance Code. However, the Board believes that its composition could be further strengthened by the appointment of an additional Non-Executive Director. This also aligns with our strategy for continual improvement in our corporate governance practices to ensure that they are robust and 72 Petropavlovsk Annual Report 2016 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. Mr Robert Jenkins provided advice to the Company, principally to the Audit Committee and Non-Executive Directors, during the refinancing of the Group’s 4 per cent Convertible Bonds due 2015 which completed in March 2015 and prior to his appointment as a Director. 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 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 UK Corporate Governance Code, the UK Listing Rules and the Disclosure Guidance & Transparency Rules, all of which the Company is subject to. Application of the UK Corporate Governance Code The UK Corporate Governance Code (the ‘Code’) can be viewed on the website of the Financial Reporting Council at www.frc.org.uk. The Code sets out key corporate governance recommendations for companies, like Petropavlovsk, that have a premium listing of their equity shares on the main market of the London Stock Exchange. It consists of broad principles and specific provisions of good governance in the following areas: leadership, effectiveness, accountability, relations with shareholders and remuneration. This corporate governance report is arranged around these main principles and together with the Audit Committee Report (on pages 80 to 86), the Directors’ Remuneration Report (on pages 87 to 103) and the Nomination Committee Report (on page 79) sets out how the Company has applied the main principles of the Code during 2016. The Company has complied with the requirements of the Code published in September 2014 throughout the year ended 31 December 2016. However the following should be noted: Petropavlovsk Annual Report 2016 73 GovernanceFinancial statementsStrategic reportCorporate Governance Report continued Role of the board Membership: Mr Peter Hambro Dr Pavel Maslovskiy Mr Andrey Maruta Mr Robert Jenkins Mr Alexander Green Mr Andrew Vickerman Further information: – The Group’s near term, medium term and long term strategy, set by the Board, are fully described in the Strategic Report on the inside front cover. – Directors’ Biographies are on pages 70 to 71. The Board is responsible to shareholders for the long term sustainable success of the Company. The Board’s role is to ensure that the Company follows this strategy and that a financial 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 at www.petropavlovsk.net. These matters include responsibility for the determination and monitoring of the Company’s strategic aims, budgets, major items of capital expenditure and senior appointments. Code compliant: The Board comprises three Independent Non-Executive Directors Board changes during the year On 28 June 2016, Sir Roderic Lyne stepped down as a Non-Executive Director, after over nine years of valuable service with the Company, including his service as a director of Aricom plc, from October 2006 to April 2009. Mr Robert Jenkins, a director since April 2015, replaced Sir Roderic in his role as Senior Independent Director. Board composition and roles Chairman: Mr Peter Hambro Chief Executive Officer: Dr Pavel Masvlovskiy The Chairman provides the leadership to and direction of the Board. This is 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 decisions making processes. Supported by the Chief Financial Officer and the Executive Committee, the Chief Executive Officer 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. Code Compliant: The Chairman and Chief Executive Officer have clearly defined and separated responsibilities. Chief Financial Officer: Mr Andrey Maruta The Chief Financial Officer supports the Chief Executive Officer in implementing the Group’s strategy in addition to his specific responsibilities as Chief Financial Officer. Senior Non-Executive Director: Mr Robert Jenkins 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. Non-Executive Directors: Mr Robert Jenkins Mr Alexander Green Mr Andrew Vickerman The Non-Executive Directors are responsible for bringing independent and objective analysis 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 financial expertise which complements the experiences of the Executive Directors. Code compliant: Senior Independent Non-Executive Director The Non-Executive Directors meet periodically with the Chairman without the Executives being present. The Non-Executive Directors hold meetings without the Chairman or Executive Directors being present. 74 Petropavlovsk Annual Report 2016 Effectiveness and Accountability of the Board The Directors Business Experience, Independence and Country of Permanent Residence The adjacent graphs 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 as being critical to the Board’s ability to lead the Company. – Approval of a new share dealing policy and disclosure manual to ensure compliance with the Market Abuse Regulations. During the year and at the request of some of the Company’s major shareholders the Board constituted an independent committee of the Board comprising Andrew Vickerman as Chairman, Robert Jenkins and Alexander Green to review the proposed acquisition of Amur Zoloto LLC. The Independent Committee appointed an external financial adviser to review the terms of the proposed acquisition and to advise on whether they considered these to be ‘fair and reasonable.’ The Independent Committee met on a number of occasions to consider this matter. Board activities during the year In 2016, the Board met on five scheduled occasions, with 17 additional meetings held during the year, principally due to the bank refinancing, strategic issues 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. 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 financial performance. The Board has established a number of Committees and provides sufficient resources to enable them to undertake their duties. Please see pages 77 to 78 for further details of these Committees. Board balance of Directors Chairman (1) Independent Non- Executive Directors (3) Executive Directors (2) Directors of other quoted companies Finance Fund management/ banking Diplomatic/political Metals & mining Business experience within Russia Independent Non-independent Business experience Independence In addition to the standard agenda items, the Board considered the following matters during the year: Directors’ induction and professional development, information flow and professional advice Nationality Russian British – Consideration and approval of the refinancing of the Group’s bank debt with its lending banks Sberbank and VTB (the ‘Senior Lenders’), as announced in December 2016 – Evaluating and approving the proposed acquisition of Amur Zoloto LLC, which as announced on 16 December 2016 is no longer proceeding – Reviewing the proposed joint venture for the completion of the POX Hub with GMD Gold. Following agreement with the Senior Lenders the Group is completing the POX Hub from its free cashflow depending on the gold price – Reviewing the progress of the Group’s underground mining project – Monitoring the progress of the construction of IRC’s K&S Facility and IRC’s negotiations with ICBC regarding the deferral of its two scheduled principal repayments due in 2017 under the ICBC Project Finance Facility – Composition of the Board in relation to a new Non-Executive Director appointment Induction and Professional Development Each Director is provided with an induction programme upon appointment and they are expected to update their skills and knowledge, and develop the familiarity with the Group’s operations needed to fulfil their role on both 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 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. Messrs Green and Vickerman who were appointed to the Board during the latter part of 2015 have not yet visited the mines. However, a Board visit to the Group’s mining operations is proposed for all of the Directors later in this year. Detailed knowledge of the gold mining industry, Russia and the Group’s operations are considered as being critical to the Board’s ability to lead the Company. Language skills – Russian Native Fluent Basic or none Language skills – English Native Fluent Petropavlovsk Annual Report 2016 75 GovernanceFinancial statementsStrategic reportCorporate Governance Report continued The Non-Executive Directors may attend conferences and seminars on the mining industry at the Company’s expense to enhance and update their knowledge. The Directors receive briefings on regulatory and corporate governance issues from the Company Secretary and the Company’s advisers. Information flow Prior to each Board meeting the Directors receive detailed information on operational and financial performance, activities of the Board Committees, investor relations and projects that are being progressed by the Executive management. 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 and request further information as they feel appropriate, of the Executive Directors or management. All Directors are encouraged to participate actively in Board meetings which are chaired in an open and collaborative manner. All Directors have access to the services of a professionally qualified and experienced Company Secretary, who is responsible for information flows 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 during the year We delivered on our communication strategy in 2016 by: – Maintaining an active dialogue with our shareholders, with members of the Executive team meeting with approximately 40 individual investor companies during the year – The Executive team attending investor conferences in the UK, Europe and USA, including London, Moscow and New York – Arranging conference calls for investors and analysts following the Company’s full year and half year results announcements 76 Petropavlovsk Annual Report 2016 – Ensuring copies of all investor presentations are made available on the Company’s website at www.petropavlovsk.net – Organising meetings of the Independent Non-Executive Directors with several of the Company’s major shareholders during the year. The respective chairs of the Audit, Remuneration and 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 Senior Independent Director is also available to discuss matters with the Company’s shareholders. In addition a new Company website, launched in March 2017, was designed to strengthen our communication with our stakeholders. The website provides the latest news, details about forthcoming events for shareholders and analysts, and other information regarding the Group. The Company aims to maintain an active and constructive 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 specific queries regarding the Company. The Chairman ensures that any significant 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. The AGM Individual shareholders are equally as important to the Company as are its institutional shareholders and 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. All resolutions at the 2016 AGM were voted by way of a poll. This follows best practice and allows the Company to count all votes rather than just those of shareholders attending the meeting. As recommended by the Code, all resolutions were voted separately and the final voting results, which included all votes cast for, against and those withheld, together with all proxies lodged prior to the meeting, were released to the London Stock Exchange as soon as practicable after the meeting. Board evaluation outcome A Board evaluation was undertaken in early 2017 which was conducted by an external facilitator. This external consultant have no other connection with the Company. This review entailed a rigorous evaluation of the Board, its Committees and individual members, thus providing the Chairman with an objective means of assessing their performance. The evaluation involved online questionnaires, Board director interviews, interviews with certain members of the Executive Committee, a Board effectiveness report and improvement recommendations. The Board evaluation has now been completed and the Board will be considering the findings in due course and will agree such actions as it considers necessary. Further detail will be included in the 2017 Annual Report. 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 20 June 2017. The re election of each of the eligible Directors has been reviewed by the Nomination Committee and the Board who are satisfied that each of the Directors continues to be effective and demonstrates commitment to the role. The Board recommends that shareholders vote in favour of the resolutions to re elect all of the eligible Directors of the Company and the reasons for this recommendation will be set out in the accompanying letter to the Notice of the Annual General Meeting. The Board is satisfied that each of the Directors continues to be effective and demonstrates commitment to the role; and that re appointment is in the Company’s best interest. 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 77. The Board and its Committees (Membership as at 31 December 2016) 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 financial performance. Board Committees Audit Committee Remuneration Committee Nomination Committee HSE Committee – Reviews Audit Report on the interim review and full year audit – Reviews appropriateness of accounting standards – Oversees relationships with external auditors – Overseas external audit process – Reviews the financial risks – Reviews internal audit plans. Membership Robert Jenkins (Chair) Alexander Green Andrew Vickerman – Determines and agrees with 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 – Reviews the on going appropriateness of the policy – Ensures that the Company maintains contact with shareholders regarding the Company’s remuneration policy. – Reviews structure, 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 appointment is recommended to/made by the Board. – 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 HSE risks – Assesses the performance of the Group with regard to the impact of Sustainability decisions and actions. Membership Membership Peter Hambro (Chair) Alexander Green (Chair) Membership Robert Jenkins Dr Pavel Maslovskiy Andrew Vickerman (Chair) Andrew Vickerman Dr Alya Samokhvalova Alexander Green Dmitry Chekashkin (Alternate for Dr Maslovskiy) The Report of the Audit Committee is on pages 80 to 86 of this Report. The Report of the Remuneration Committee is on pages 87 to 103 of this Report. The Report of the Nomination Committee is on page 79 of this Report. Please see pages 34 to 35. 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. Executive Committee – Responsible for the day to day management of the Company – 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 Strategic Committee is chaired by Dr Alya Samokhvalova, Deputy CEO Strategic Development Members of the Executive Committee as at 31 December 2016: The Chairman and Executive Directors Mr Valery Alexseev, Group Head of Construction and Engineering Mr Dmitry Chekashkin, Chief Operating Officer Mr Sergey Ermolenko, General Director Management Company Petropavlovsk Mr Alexey Maslovskiy, Business Development Manager Dr Alya Samokhvalova, Deputy CEO Strategic Development Mrs Anna-Karolina Subczynska, Group Head of Legal Affairs Mr Andrei Tarasov, Deputy General Director Management Company Petropavlovsk Petropavlovsk Annual Report 2016 77 GovernanceFinancial statementsStrategic reportCorporate Governance Report continued Meetings of the Board, Board Committees and attendance Peter Hambro Pavel Maslovskiy Alexander Green 4,5 Robert Jenkins 3,4 Sir Roderic Lyne 3,4,5 Andrey Maruta Andrew Vickerman 5 Key: C= Chairman, M= Member Board Audit Remuneration Nomination HSE C M M M M M M 5/5 5/5 5/5 5/5 3/3 5/5 5/5 – – M MC M – M 4 2 3/4 4/4 – 4 4/4 – – M – C – MC 2/2 – 2/2 – 1/1 – 2/2 C – – M M – – 2/2 – – 2/2 1/1 – 2/2 – – MC M C – M 5 4/5 5/5 2 3/3 1 5/5 1 Scheduled Board meetings only. Additional Board meetings were held during the year, principally relating to strategic matters including the proposed acquisition of Amur Zoloto LLC and the proposed joint venture arrangement with GMD Gold for the construction of the POX Hub, the refinancing and matters relating to IRC. 2 Directors who are not members of the Audit, Remuneration and HSE Committees may attend meetings at the invitation of the Chairman of that Committee. 3 Sir Roderic Lyne retired as a Director of the Company following the conclusion of the Company’s annual general meeting on 28 June 2016. Mr Robert Jenkins was appointed as Senior Independent Director upon Sir Roderic’s retirement. 4 Director who the Board has determined to be independent. 5 Sir Roderic Lyne was Chairman of the Remuneration Committee and the HSE Committee until 28 June 2016, when he retired as a Director of the Company, at which time Mr Andrew Vickerman and Mr Alexander Green were appointed as Chair of the Remuneration Committee and the HSE Committee respectively. 78 Petropavlovsk Annual Report 2016 Nomination Committee Report Letter from the Nomination Committee Chairman Dear shareholder I am pleased to present this report on behalf of the Nomination Committee. Membership of the Committee I continue to chair the Committee assisted by Mr Robert Jenkins and Mr Andrew Vickerman. Mr Vickerman was appointed to the Committee on 28 June 2016 following the retirement of Sir Roderic Lyne as a Director and as a member of the Committee. The Committee met on two formal occasions during the year, with regular contact between meetings. As detailed in my Chairman’s statement I will retire as Nomination Committee Chairman and as a member of the Committee. Mr Alexander Green, independent Non- Executive Director will be appointed to the Committee. Board appointment process During the year the Committee led the process to identify a suitable candidate to replace Sir Roderic. This involved the appointment of external consultants and discussions with some of the Company’s major shareholders, including at a meeting, to consider what level of skills and experience the replacement candidate should have. The meeting also considered whether it would be appropriate to appoint further additional directors given the stage of the Company’s development. Following these discussions names of potential candidates for inclusion in the appointment process were provided by some of the major shareholders. The external consultants, who have no other connection with the Company, progressed the selection process based on the detailed brief provided by the Committee which specified the skills and experience required having taken into account comments expressed by our major shareholders. A long list of names was then proposed to the Committee and a number of candidates were interviewed during the year by all members of the Nomination Committee with a number also meeting with the Chief Executive Officer and the Chief Financial Officer. Although suitable candidates were identified, the Company has not yet been successful in appointing Sir Roderic’s replacement for a number of reasons, for example due to conflict of interest reasons with the principal employer of a preferred candidate. Whilst recognising that, with three independent Non-Executive Directors, the composition of the Board is fully compliant with the UK Corporate Governance Code, the Nomination Committee and the Board are somewhat disappointed that we have not yet found a suitable replacement for Sir Roderic. We continue to manage the process such that an appointment can be made as soon as possible whilst endeavouring to ensure that the chosen candidate will fully complement the Board. Diversity statement During our current search to date we have met with and considered a number of highly skilled and experienced woman for the above position. Indeed one of our preferred candidates was a woman. However the Committee’s principal goal during our current search for a new Non-Executive Director, is to appoint a candidate 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 this next exciting stage of its strategy. The Committee believes that this is in the best interest of the Company and its shareholders. Consequently the Board has not set, and does not intend to set, a specific 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. The Company values diversity and we have several very skilled and experienced women in our executive team, including Dr Alya Samokhvalova who was promoted to the position of Deputy CEO Strategic Development in December 2016. Further detail of our management team and its diversity are provided in the Corporate Governance Report on page 72 of this Annual Report. Succession planning The Committee notes the focus of shareholders and the Financial Reporting Council on a company’s succession plans and the role that the Nomination Committee is expected to fulfil in this regard. The Committee has dicussed this matter to some extent during 2016 particularly with respect to the Executive Directors and it is intended that this will have a higher profile on the agenda during 2017. We look forward to reporting to shareholders in more detail on this matter in the 2017 Annual Report. Effectiveness of the Committee As detailed on page 76 of this Annual Report, the Board has recently undertaken an evaluation of its effectiveness and that of its Committees facilitated by external consultants. The Committee was found to be acting effectively and in accordance with its terms of reference. 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 26 April 2017 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 2015 Nomination Committee Report. The terms of reference of the Nomination Committee are available on the Company’s website at www.petropavlovsk.net Petropavlovsk Annual Report 2016 79 GovernanceFinancial statementsStrategic reportAudit Committee Report Letter from the Audit Committee Chairman 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. In addition the Committee has again advised the Board on the viability statement required under the UK Corporate Governance Code. A more detailed review of the Committee’s work during the year is provided in this Report. I hope that you will find this informative. Robert Jenkins Audit Committee Chairman 26 April 2017 Dear shareholder I am pleased to introduce this report as Audit Committee Chairman. The challenging environment continued throughout 2016, with further volatility in the gold price and exceptionally adverse weather conditions in the latter part of the year resulting in lower 2016 production than had originally been guided. In addition the uncertainty regarding both the refinancing of the Group’s bank debt and IRC’s ability to reschedule its debt under the ICBC project finance facility resulted in an ‘emphasis of matter’ relating to going concern in the Company’s 2016 Half Year accounts. However, the Group commenced 2017 in a stronger financial position, given the successful refinancing of the Group’s bank debt with its lenders, Sberbank and VTB (the ‘Bank Debt Refinancing’). The extension of the maturity profile allows the Company to focus on its strategic goals and objectives. In addition IRC has made significant progress by i) securing a new investor who has injected US$26 million of new equity, ii) moving towards full production at its K&S iron ore processing facility and iii) obtaining waivers from ICBC for the two scheduled repayments due in 2017 under the IRC project finance facility. The 2017 debt repayment deferral obtained by IRC has reduced the risk to Petropavlovsk as guarantor to IRC’s debt. We consider this to be a significant reduction in our risk profile. These matters, which were the focus of considerable and regular review by the Committee during the year, are discussed in this report. Committee membership There has been no change in the Committee membership throughout the year which remains a fully independent body, comprising only of independent Non-Executive Directors. I have continued as Chair, assisted by Alexander Green and Andrew Vickerman. My colleagues and I continue to meet regularly with Timothy Biggs, from Deloitte LLP lead audit partner of Petropavlovsk. In addition, I accompanied the external audit team on their visit to our mining operations which was also attended by Venmyn Deloitte (“Venmyn”), technical mining experts, who review operational factors and contribute to the overall audit process. During my visits to the mines I have had the opportunity to hold discussions with local management, including the Group’s top geologists, to understand better our processes and operations. This has also given me a more detailed understanding of the issues regarding gold in circuit, which are explained later in this Report on page 84. The Committee continues to engage constructively with the Executive management team, and the external auditor particularly with regards to the significant matters that were considered by the Committee, as detailed on pages 83 to 84. During the year the Committee continued to devote significant time to reviewing the Group’s financial risks, the integrity of the Group’s financial reporting and the effectiveness of both internal and external audit. To develop my understanding I met separately with the Group Head of Internal Audit, who directly reports to the Committee, in both Moscow and London, to discuss the outcome of internal audit reviews and to develop the scope of internal audit to provide further assurance to the Committee on the effectiveness of the Group’s controls. 80 Petropavlovsk Annual Report 2016 Committee membership as at 26 April 2017 and during 2016: Mr Robert Jenkins Mr Alexander Green Mr Andrew Vickerman Governance Mr Jenkins was appointed as Audit Committee Chairman on 30 April 2015, and is considered by the Board as having the requisite and relevant financial experience due to his profession as a Chartered Accountant and his previous roles as Finance Director and Chief Financial Officer of two Russia focussed natural resource companies, including a UK AIM listed mining exploration company. Mr Jenkins was also the Senior Independent Director and Audit Committee Chairman of Ruspetro plc, an independent oil and gas production company, until its’ delisting from the London Stock Exchange in June 2016. Messrs Vickerman and Green also have relevant experience within the mining sector. Mr Vickerman having spent almost 20 years with Rio Tinto, one of the world’s leading mining companies, the last ten as a member of the Operations and Executive Committee with responsibility for global communications and external relations. From 2003 to 2012, Mr Green was a Marketing Director at BHP Billiton, a leading resources company. The Board therefore considers that the Committee as a whole has competence relevant to the sector in which it operates. The Company’s Chairman, the Chief Executive Officer, the Chief Financial Officer, 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 2016. In addition, the Committee Chairman meets on a regular basis with the Company Chairman and the Chief Financial Officer 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. Under independence requirements, he is required to rotate as lead audit partner following the audit for the year ending 31 December 2018. The Committee met on four occasions during the financial year to align with the Group’s financial 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 Company’s website. The Committee is responsible for: – The integrity of the Company’s financial statements and the significant reporting judgements contained in them – The appropriateness of the Company’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 auditor – The effectiveness of the Group’s internal control and financial and tax risk management systems 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 During the year, amongst other matters, the Committee: Financial statements and reports – Reviewed the 2015 Annual Report and Accounts and the six months’ Half Year report ended 30 June 2016 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 2015 Annual Report and Accounts, taken as a whole, was fair, balanced and understandable and reported to the Board on its conclusion. – 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 Bank Debt Refinancing – Closely monitored the Group’s financial position and its compliance with its financial covenants and monitored and reviewed the proposed terms of the Bank Debt Refinancing and negotiation thereof. – 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 qualifications or assumptions as necessary. Risk management – Considered the output from the Group’s financial 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 28 of the Risks to Our Performance section which describes the Group’s principal financial risks during the year and actions taken to mitigate against them. Petropavlovsk Annual Report 2016 81 GovernanceFinancial statementsStrategic reportAudit Committee Report continued Internal audit – Evaluated the effectiveness and the scope of work to be undertaken by Group Internal Audit during 2016, which included audits to be performed at the Group’s mining operations and the Group’s offices in both Moscow and Blagoveshchensk. During the year the Group Head of Internal Audit presented his findings to the Committee from various assignments internal audit had been requested to undertake by the Committee. The presentation included details of issues identified and subsequent actions taken. For example the audit of fuel usage and storage and procedures resulted in improved management controls over fuel inventory, in particular through daily cut off reconciliations. – Audits undertaken during the year, amongst others, were: – Ongoing monitoring of working capital – Group’s warehouse storage facilities – Procurement, storage, use and accounting of spares and tyres – Reviewed and approved the 2017 audit plan which will include an audit of the supply chain management and the testing of the effectiveness of internal controls over purchasing. – Reviewed management responses to audit reports issued during the year. 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 – Agreed the terms of engagement for the audit of the 2016 financial statements. Governance – Evaluated the performance of the Committee – Evaluated the independence and objectivity of the external auditor To date in 2017 the Committee has reviewed, amongst others, the following matters in relation to the 2016 financial statements: – The going concern assumption – The carrying value of the Group’s mining assets including the POX Hub Committee action Given the importance of the Bank Debt Refinancing and IRC’s financial position the Committee continually monitored these matters and considered the appropriateness of the going concern assumption by receiving regular updates from: – The carrying value of the Group’s evaluation – the Executive Directors on the status of and exploration assets negotiations with the principal lenders; and – The recoverability of gold in circuit inventory – IRC’s Executive Directors on the status of – Accounting for the refinancing The Committee has also advised the Board on: – Whether the 2016 Annual Report and Accounts taken as a whole is fair, balanced and understandable and the Directors’ statement in this respect is set out on page 110 – The viability statement of the Company required in accordance with provision C.2.2 of the Code. Significant issues considered by the Committee during 2016 The going concern assumption The key judgement for the Committee during 2016 related to the appropriateness of this basis of accounting. During the year the Group’s assessment was highly sensitive to: – negotiations with its principal lenders, VTB and Sberbank, to obtain satisfactory modifications and temporary waivers regarding the existing covenants and the repayment schedule (the ‘Bank Debt Refinancing’); and – uncertainties in relation to IRC and its ability to have sufficient liquidity to facilitate a debt repayment of US$21.5 million in December 2016 or to renegotiate the terms of the ICBC project finance facility. negotiations with ICBC and the commissioning of K&S. Conclusion When reviewing the half yearly financial statements for the six months’ ended 30 June 2016, the Committee considered the status of the Bank Debt Refinancing and the progress of IRC and noted that whilst there could be no guarantee that the Bank Debt Refinancing and IRC’s discussions would be successful the Directors had a reasonable expectation that they would be and therefore the going concern basis of accounting remained appropriate. In December 2016, the Company refinanced US$430 million of its bank debt with Sberbank and VTB. Significant issues considered by the Committee in the context of the 2016 financial statements: The Committee identified the issues below as significant in the context of the 2016 financial statements. The Committee considers these areas to be significant 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. 82 Petropavlovsk Annual Report 2016 Issue Committee action Conclusion Following careful review the Committee has a reasonable expectation, after taking into account the above mentioned factors, that the Group will have sufficient working capital liquidity to continue in operational existence for the foreseeable future and accordingly, the going concern basis is the appropriate basis of preparation for the 2016 financial statements. The Committee has advised the Board accordingly. The going concern assumption (see note 2.1 to the financial statements) The key judgement for the Committee for the 2016 financial statements related to the appropriateness of the basis of accounting. The Directors perform an assessment of the Company’s ability to continue as a going concern at the end of each reporting period. The period of the assessment covers at least twelve months from the date of signing of the financial statements. As the Company has guaranteed the outstanding amounts that IRC owes to ICBC under the Project Finance Facility (US$234 million as at 31 December 2016), the assessment of whether there is any material uncertainty that IRC will be able to repay this facility as it falls due is a key element of the Group’s overall going concern assessment. Following the successful completion of the Bank Debt Refinancing, the Group is satisfied that it has sufficient headroom under a base case scenario for the period to May 2018 and expects to comply with related financial covenants. However, the Group’s projections under a reasonable downside scenario for the period to May 2018 indicate that, unless mitigating actions can be taken including accessing deposits not currently in the Group mining plan, there will be insufficient liquidity and non-compliance with certain financial covenants. In the event that a debt repayment is missed or financial covenant requirements are not met, this would result in events of default which, through cross defaults and cross accelerations, could cause all other of the Group’s debt arrangements to become repayable on demand. In addition to the twelve month going concern consideration the Directors assessed the Company’s prospects over the longer term, specifically addressing a period of three years as part of the overall viability statement. The viability statement can be found in the Directors’ Report on page 109. The Committee has addressed this matter through: – Reviewing a paper from management on the going concern assessment, challenging the key assumptions used for both the base case and the reasonable downside scenarios, in particular in relation to production, gold price and the Russian Rouble US Dollar exchange rate. – Considering the mitigating actions proposed by management in the event of a reasonable downside scenario. This included a report from the Group Chief Executive, based on recent detailed exploration results, on the likelihood of the Group being able to access identified deposits which are not currently in the Group’s mining plan. – With regards to IRC noting that: – two repayment instalments, originally due for payment on 20 June 2017 and 20 December 2017 by IRC under the Project Finance Facility in an aggregate amount of US$42.5 million have been rescheduled evenly into five subsequent semi annual repayment instalments from 20 June 2018 to 20 June 2020 inclusive. The next principal repayment under the Project Finance Facility is therefore due on 20 June 2018. – ICBC has agreed to grant a waiver of the financial covenants in the Project Finance Facility until 31 December 2017. – IRC’s accounts for the year ended 31 December 2016 as audited by Deloitte Hong Kong are unqualified. – In December 2016 IRC completed a US$25 million equity fund raising from a new core investor. – The development of K&S is advanced with full scale commercial production anticipated in H2 2017. – The iron ore price increased significantly during 2016 and the beginning of 2017. Petropavlovsk Annual Report 2016 83 GovernanceFinancial statementsStrategic reportAudit Committee Report continued Issue Committee action Conclusion Carrying value of mining assets (see note 12 to the financial statements) The carrying value of the Group’s mining assets which includes the tangible assets attributable to the gold mining projects and the supporting in house service companies remains particularly sensitive to the forecast long term gold price, the Russian Rouble US Dollar exchange rate, and the forecast future cash flows for Pioneer and Malomir which assume the POX Hub’s completion. Consequently, the assessment of the carrying value of the Group’s mining assets and whether an impairment or reversal of impairment is necessary requires significant judgement. The recoverability of gold in circuit inventory Inventory is required to be carried at the lower of its cost and net realisable value. The measurement and valuation of gold in circuit included in inventory is complex and there is a risk that the total value of gold in circuit held on the balance sheet at 31 December 2016 is not fully recoverable. (Gold in circuit volume: 2016:91koz, 2015:75koz; monetary value: 2016: US$71 million: 2015: US$50 million). The Committee has addressed this issue through: – Receiving reports from management outlining the basis for the assumptions used, including assumptions on gold price, the discount rate used for the gold mining projects and the Russian Rouble US Dollar exchange rate, and understanding and challenging these assumptions. The long term mine models which form the basis of the long term mining plan, are approved by the Board and, are used by management to perform the impairment assessment. – Reviewing the status of the construction of the POX Taking the above into account the Committee is satisfied with the thoroughness of the approach and judgements taken. The Committee agreed with the conclusion of management that no impairment or reversal of the impairment recognised in 2013 was required. No impairments or reversals of impairments have been recognised at 31 December 2016. Taking these matters into account the Committee is satisfied with the thoroughness of the approach and judgements taken. Consequently the Committee concurs with management’s conclusion that the gold in circuit balance is recoverable. Hub. – Reviewing the report prepared by Venmyn, mining experts, engaged by Deloitte to assist them in their assessment of this issue. As part of their review Venmyn again visited the Group’s principal mines. – Discussing with the external auditor their view on the impairment testing procedure including the key assumptions used by management. The Committee has addressed this issue through: – Enquiring of management the process used for extracting gold from the resin used in processing plants at Pioneer, Pokrovka and Albyn which led to an increase of gold in circuit volumes and understanding the countermeasures taken by management during the year to treat the resin and reduce gold in circuit levels. – Reviewing a paper from the Chief Operating Officer detailing the technical reasons for this matter and the steps and actions taken by management to recover the gold including the recent commissioning of an acid alkali treatment installation for resin at Pokrovskiy mine. – Discussing with the external auditor the work undertaken by: i) Venmyn on their assessment of the reasonableness of the Group’s gold in circuit levels ii) Deloitte CIS, who attended stock counts at key operating locations and reconciled the gold in circuit levels to the production and sales data and iii) discussing with management the monitoring process for tailings in respect of any loss of gold. In addition the Committee noted the work performed by Venmyn which confirmed that the loss of gold in circuit to the tailings dams in immaterial. – A meeting by the Audit Committee Chairman with Venmyn. 84 Petropavlovsk Annual Report 2016 Assurance – financial 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. The Committee reviews the Company’s financial and other internal controls. In addition, as part of the Board’s review of the effectiveness of the Group’s system of internal control the Committee is working with internal audit to broaden its remit and expand its focus on key risks and controls. The Committee has also considered and reviewed the Group’s financial risks and the mitigating action being taken to address these and has reported its findings 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. The Board considers the internal controls of the Group to have operated effectively throughout 2016 and up to the date of this report – For IRC, Petropavlovsk operates controls over the inclusion of its financial 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. External auditor Deloitte was appointed as auditor to the Company in 2009 following the Company’s listing on the main market. The Committee has evaluated the effectiveness of the external auditor and as part of this assessment, has considered: – Deloitte’s fulfilment of the agreed audit plan for the year ending 31 December 2015, the quality and robustness of their audit, identification 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 2016 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 ‘Briefing on audit matters’ published in June 2016 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 2016. 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 confirmation from Deloitte that they remain independent and objective within the context of applicable professional standards – The deep knowledge of the Company which enhances Deloitte’s ability to perform as external auditor and the proven stability that is gained from their continued engagement – In addition Committee members completed questionnaires to individually assess the performance of Deloitte the results of which were discussed at the March 2017 Committee meeting. As a result of the above actions, the Committee determined that Deloitte remains effective in its 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 2017 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, however this will be kept under review. 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. Non-audit services The majority of non-audit fees paid to Deloitte were in respect of their work as reporting accountants on the proposed acquisition of Amur Zoloto LLC and the proposed joint venture with GMD Gold. As explained in this Annual Report neither transaction is proceeding. Deloitte’s appointment as reporting accountant on both of these transactions was in accordance with the Company’s policy on the provision of audit and non-audit services, a copy of which can be located on the Company’s website or obtained from the Company Secretary. The Committee approved the appointment on the basis that it was in accordance with the Company’s policy and that Deloitte would be the most appropriate firm to prepare the requisite working capital report within the time available and for a reasonable fee given their detailed knowledge of the Group, including IRC, of whom Deloitte Hong Kong is the external auditor. This work is typically performed by a company’s external auditor. In addition the non-audit services were provided by a separate team from the audit engagement team. Deloitte has confirmed to the Committee that there are no inconsistencies between APB Ethical Standards for Auditors and the Company’s policy for the supply of non-audit services or that there has been any apparent breach of the Company’s policy. Accordingly, in the opinion of the Committee, the independence and objectivity of Deloitte as external auditor to the Company, has not been impaired by their work in this respect. A breakdown of audit and non-audit fees paid in 2016 is set out in note 7 on page 139 of this Annual Report. Petropavlovsk Annual Report 2016 85 GovernanceFinancial statementsStrategic reportAudit Committee Report continued 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. The Committee retains responsibility for reviewing financial risks and reporting its findings and recommendations to the Board. The Risks to Our Performance section, which has been reviewed by the Audit Committee, summaries the risk management framework together with details of the principal risks of the Group and is on pages 21 to 33 of this Annual 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. Some key features of the internal control system, not detailed above, are: – A defined management structure with clear accountabilities. There is a clear defined 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 – The Group has a detailed procurement policy and a centralised procurement function based in Moscow. The cost of the centralised purchases is c.75% of the Group’s total purchases with lower value orders dealt with locally in Blagoveshchensk. This system provides strengthening purchasing power and ensures strong controls are in place. There is appropriate segregation of duties throughout the Group, in particular separating the purchasing and ordering function from the processing and payments function. In addition there is a documentation and tracking process for purchase items for control purposes including to prevent theft – There is a special procurement process with a separate budget and expenditure schedule for the construction of the POX Hub. This is monitored with expenditure approved by the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer based on the approved budget – There is a centrally directed treasury function which manages the Company’s cash and debt on a daily basis – Specific approval procedures have been established for approval of all related party transactions. A Committee of independent Non-Executive Directors approves all significant related party transactions as appropriate and a schedule of all of these transactions is presented to the Board for formal approval. 86 Petropavlovsk Annual Report 2016 Directors’ Remuneration Report Annual statement from the Chairman of the Remuneration Committee (the “Committee”) The Committee continued to align the implementation of its policy with the Group’s focus on financial discipline and its strategic objectives to (i) develop the underground mining operations and (ii) complete the construction of the Pressure Oxidation Hub, both of which are critical to the future success of the Company. Remuneration highlights: – No salary increases were awarded to the Chairman or the Executive Directors for the year commencing 1 January 2016 – Salary increase of c.1.3% awarded to the Chief Financial Officer for the year commencing 1 January 2017 with no salary increase proposed for the Chairman or Chief Executive Officer – Non-Executive Directors’ fees unchanged for 2017 – Performance against targets for 2016, particularly relating to the satisfaction of specific strategic objectives, resulted in a bonus payable of 20% of salary; 50% of the bonus will be awarded in the form of a Deferred Bonus Award, and 50% will be paid in cash – No awards were granted under the Long term Incentive Plan (‘LTIP’) during 2016. The Committee currently proposes to grant awards following the publication of the Company’s 2017 interim results, and intends to consult with major shareholders on the proposed performance conditions – Best practice changes proposed to the Company’s Remuneration Policy: – Introduction of two year post-vesting holding period for LTIP awards from 2017 onwards – Strengthening of malus and clawback provisions – Reduction of bonus payable for achieving target from 60% to 50% of maximum. Dear shareholder Introduction On behalf of the Board, I am pleased to present the Directors’ Remuneration Report for the year ended 31 December 2016. This report is divided into three parts: the Annual Statement, the Remuneration Policy and the Annual Report on Remuneration. This year we will be asking our shareholders to approve a new Remuneration Policy for Executive Directors at the Annual General Meeting (‘AGM’). The background to, and the reasons for, the proposed changes are set out below. taking, and incentive opportunities that are fair. Review of Remuneration policy Our current Policy was approved by shareholders at the 2014 AGM, receiving over 98.5% support, and will expire at the 2017 AGM. Therefore the Committee has conducted a review of the current Policy to ensure that it continues to meet our aims, which are principally to retain and motivate high calibre executives and to attract new talent as required, with pay outcomes linked to performance against our strategic objectives. In particular, the Committee wishes to ensure that the Policy supports the Group’s strategic goals of progressing the underground mining project, and completing the construction of the pressure oxidation hub which will unlock the value embedded within the Group’s 4Moz reserve of refractory ore base from 2018/19, resulting in the deleveraging of the Company. To meet these strategic goals, the Company needs to retain its highly skilled and experienced Executive team. During our review we have been mindful of developments in investor sentiment on remuneration best practice since the current Policy was approved and, to the extent that they have not already been adopted, we are seeking to include such changes in our revised Policy as we consider appropriate. In concluding its review, the Committee considers that on the whole the current Policy is fit for purpose, well aligned with strategy, and reflects the market capitalisation of the Company whilst acknowledging the complexity of the Group. The proposed 2017 Policy therefore remains broadly unchanged from the 2014 Policy, except for a number of minor amendments to reflect evolving best practice changes, as follows: – Introduction of a two year post-vesting holding period for awards made under the LTIP from 2017 onwards, to further strengthen the alignment between the Executive team and shareholders – Strengthening of malus and clawback provisions to provide appropriate safeguards for shareholders – Reduction of the bonus payable for achieving target from 60% to 50% of maximum. The Committee is satisfied that the revised Remuneration Policy will provide a structure that is aligned with the Group’s strategic objectives without encouraging undue risk Remuneration decisions in 2016 Annual bonus For 2016, the annual bonus performance conditions were strongly linked to the Group’s strategic objectives and its continued focus on financial discipline. 60% of the bonus was linked to the achievement of strategic objectives including in relation to the progress of the underground mining project and the construction of the POX Hub, the success of these projects being critical to the future of the Group. 10% related to each of production and reduction in both net debt and average total cash costs. Given the inherent health and safety risks within our business, 10% of the bonus was based on a Lost Time Injury Frequency rate target, and additionally a health and safety underpin applied to bonus payout. Based on the significant progress made on the underground mining project and on the construction of the POX Hub, the Committee has awarded an annual bonus of 20% of salary for the Executive Directors and members of the Executive Committee. In determining the bonus, the Committee has also taken into consideration the health and safety performance of the Group during the year. Further information is provided on page 19 of this Annual Report. After consultation with the Chairman, the Committee has determined that 50% (as opposed to the 25% as outlined in the 2015 report) of the bonus payable will be awarded in the form of a Deferred Bonus Award, vesting after one year. This conserves the Group’s cash whilst acting as a retention tool, and further aligns the interests of the Executive team with those of our shareholders. Other decisions The Committee did not award any salary increases to the Executive Directors in 2016. For 2017, the Committee awarded an increase of 1.3% to the Chief Financial Officer; no increases were awarded to the Chairman or the Chief Executive Officer. Implementation of the Remuneration Policy in 2017 In 2016, whilst recognising the significant achievements of the Executive team during the year, including the successful refinancing of the Group’s bank debt, the Committee noted the challenging external environment and the continuing need for financial stringency when making its decisions. Petropavlovsk Annual Report 2016 87 GovernanceFinancial statementsStrategic reportDirectors’ Remuneration Report continued Therefore, as explained in the 2015 report, the Committee made a decision again not to make awards under the LTIP in 2016. The Committee reviewed this point in 2017, and is considering making awards this year following the publication of the Company’s 2017 interim results, in order to improve shareholder alignment over the longer term, and to ensure the competitiveness of the remuneration package at a critical time for the Company. Prior to the granting of any such award the Committee intends to discuss this and the proposed performance conditions with our major shareholders. Last year’s Annual Report on Remuneration received a vote in favour of 99.6% of votes cast at the 2016 AGM. We appreciate the continued support given by shareholders and the Committee hopes that both the decisions outlined in this Directors’ Remuneration Report and the revised Remuneration Policy will meet with the approval of shareholders. I will be in attendance at the Company’s 2017 AGM 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. Andrew Vickerman Remuneration Committee Chairman 26 April 2017 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 2016. 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. This revised Directors’ Remuneration Policy will be put to shareholders for approval in a binding vote at the AGM on 20 June 2017. If approved, the revised Policy will take effect from the date of the AGM. The Committee’s current intention is that the revised Policy will operate for the three year period to the AGM in 2020. The Statement from the Chairman of the Remuneration Committee (set out on page 87) and the Annual Report on Remuneration (set out on pages 96 to 103) will be subject to an advisory vote at the AGM. Remuneration policy report The Group’s Remuneration Policy is designed to provide remuneration packages to motivate and retain 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 Policy is unaudited. The table below summarises the main elements of the remuneration packages for the Executive Directors. Remuneration element Base salary Purpose and link to strategy To provide a market competitive level of guaranteed cash earnings in order to attract and retain high calibre Executive Directors to manage and execute the Board’s strategic plans. Operation 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 significant 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; and – The wider pay environment. 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. Maximum opportunity There is no prescribed maximum salary. It is generally expected that increases will be no higher than inflation, though the Committee has discretion to apply a higher increase in exceptional circumstances, e.g. material increase in role size or complexity, promotion, exceptional performance or any other factors the Committee considers relevant within the context of the Group’s overall policy. 88 Petropavlovsk Annual Report 2016 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 Benefits Purpose and link to strategy To provide market competitive benefits in order to enable the Company to retain and attract high calibre Executive Directors to manage and execute the Board’s strategic plans. Operation Benefits may include (but are not limited to): Maximum opportunity Performance metrics Remuneration element Purpose and link to strategy Operation Maximum opportunity Performance metrics Remuneration element Purpose and link to strategy Operation – Private medical insurance for the individual and family; – Life assurance up to 4x salary, subject to underwriting; – Ill health income protection; and – Travel insurance whilst on Company business. The cost of these benefits to the Company is dependent upon market rates and availability of the respective benefits. Not applicable. Pension To provide market competitive pension benefits in line with the wider workforce whilst ensuring no undefined liability for the Company. All Executive Directors receive contributions from the Company into a personal pension plan or similar savings vehicle with the exception of Mr Hambro and Dr Maslovskiy, who do not receive pension benefits. 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. Not applicable. Annual Bonus To ensure a focus on and provide a financial incentive for the delivery of the annual budget and other short term financial and strategic imperatives. 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 achievement against pre-determined targets. Bonus payments, in part or in full, may be awarded in the form of Deferred Bonus Awards, i.e. deferred in shares which vest after one year or longer. The Committee retains the discretion to allow dividends (or equivalent) to accrue over the vesting period in respect of the awards that vest. Malus and clawback provisions may be applied for up to a period of two years post-payment in exceptional circumstances, including but not limited to material misconduct, material misstatement of the results, a calculation error and/or poor information when calculating the reward outcome. Maximum opportunity Maximum bonus opportunity is 100% of salary. For target level performance, the bonus earned is 50% of maximum. Petropavlovsk Annual Report 2016 89 GovernanceFinancial statementsStrategic report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. 100% of the bonus is currently linked to the achievement of Group bonus objectives. These are set by the Committee and may include measures such as: – Health and safety – Annual gold production – Total cash costs – All-in sustaining costs – Net debt – Free cashflow – Delivery of capital expenditure projects on time and within budget – Exploration success Details of the measures applicable for the financial year under review are provided in the Annual Report on Remuneration. 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 Committee may take into consideration the overall relative success of the Group when adjudicating bonus payments. The Committee may also include a discretionary underpin in the annual bonus plan to capture material adverse events, e.g. material events relating to health and safety. Remuneration element Long term Incentive Plan (“LTIP”) Purpose and link to strategy Operation Maximum opportunity Performance metrics 90 Petropavlovsk Annual Report 2016 To reinforce 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 a minimum of three years. Awards vest on no earlier than the third anniversary of grant subject to (i) the satisfaction of performance targets and (ii) continued service. There is no opportunity to retest the performance conditions. The Committee retains the discretion to allow dividends (or equivalent) to accrue over the vesting period in respect of the awards that vest. A two year post-vesting holding period will apply to awards granted in 2017 and subsequent years. For these awards, vested shares may not be sold during the holding period except to cover tax liabilities. The maximum annual 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 vesting of no more than 30% of the award. The Committee will regularly review the performance conditions and targets to ensure that they are aligned to the Group’s strategy and that they are sufficiently challenging. The relevant metrics and the respective weightings may vary each year based upon the Company’s strategic priorities. Details of the measures, weightings and performance targets used for specific LTIP grants are included in the Annual Report on Remuneration as relevant. The Committee may scale back the level of vesting of an award if it considers underlying operational or financial performance over the performance period has been significantly worse than the level of vesting would otherwise indicate. Malus and clawback provisions may be applied for up to a period of two years post-vesting in exceptional circumstances, including but not limited to material misconduct, material misstatement of the results, a calculation error and/or poor information when calculating the reward outcome. Shareholding guidelines There is no formal requirement for Executive 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 in March 2015, have an interest, together with their associates, in 4.64% and 5.81% 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 and 21 times their annual salaries respectively. The Committee is mindful that, given the significant shareholdings of Mr Hambro and Dr Maslovskiy, the introduction of minimum shareholding guidelines for Executive Directors will only have an impact on the Chief Financial Officer at this time. Given that there have been no LTIP awards for five 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 Executive Directors and to keep this matter under review. 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. In respect of the annual bonus, strategic objectives are selected to ensure the delivery of the Company’s immediate policy objectives within the wider context of the Group’s long term strategy and corporate responsibilities. Other supporting annual objectives are selected to reflect key financial objectives of the Company, exploration success, delivery of specific investment projects and health and safety objectives, and to reward delivery against these. The Committee retains the discretion to adjust the performance targets and measures where it considers it appropriate to do so (for example, to reflect changes in the structure of the business and to assess performance on a fair and consistent basis from year to year). 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, whilst corporate, administrative and support staff are based at the Group’s offices 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 base salary, shift and production related bonuses where applicable to their role, together with certain benefits. 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 cycle and received awards in 2011. It is the intention that any future LTIP awards will be granted to senior employees 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 beneficial 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 influence. Petropavlovsk Annual Report 2016 91 GovernanceFinancial statementsStrategic reportDirectors’ Remuneration Report continued Executive Chairman (£) Chief Executive Officer (£) Chief Financial Officer (£) 1,965,000 1,965,000 1,179,000 1,179,000 1,255,225 655,000 655,000 775,225 455,225 Minimum Target Maximum Minimum Target Maximum Minimum Target Maximum Salary 100% Annual bonus 0% LTIP 0% 55.5% 27.8% 16.7% 33.3% 33.3% 33.3% Salary 100% Annual bonus 0% LTIP 0% 55.5% 27.8% 16.7% 33.3% 33.3% 33.3% Salary 100% Annual bonus 0% LTIP 0% 58.7% 25.8% 15.5% 36.2% 31.9% 31.9% Key LTIP Annual bonus Salary Assumptions: Minimum = base salary, benefits and pension where applicable (i.e. fixed remuneration only) Target = fixed remuneration as above, plus annual bonus payout of 50% of maximum and LTIP threshold vesting of 30% of maximum award Maximum = fixed remuneration as above, plus full payout of annual bonus and LTIP 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 an LTIP award will be granted during 2017. Illustrations of pay for performance Under the Company’s Policy a significant proportion of remuneration received by Executive Directors is dependent on Company performance. The graphs above illustrate how the total remuneration opportunities for the Executive Directors vary under three different performance scenarios: minimum, target and maximum. Potential remuneration opportunities are based on the proposed Remuneration Policy, applied to salaries as at 1 January 2017: £655,000 for the Chairman, £655,000 for the Chief Executive Officer, and £400,000 for the Chief Financial Officer. The value of taxable benefits is based on the cost of supplying those benefits (as disclosed on page 97) for the year ending 31 December 2016. The pension value for Mr Maruta is set at 12.5% of basic salary. 92 Petropavlovsk Annual Report 2016 Approach to recruitment and promotion 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. Remuneration Element Policy Base salary Benefits Pensions Annual bonus Long term incentives Salary for a new hire (or on promotion to Executive Director) would be set at a level sufficient to attract the best candidate available to fill 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. Benefits will be set in accordance with the 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 defined 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 in line with the Remuneration Policy 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 in the first year of his or her appointment, 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. LTIP awards will be granted in line with the Remuneration Policy. 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 typically continue over their original vesting period and remain subject to their original terms; further awards may also be considered. The maximum award for a new hire (or on promotion to Executive Director) is 200% of salary. Where an Executive Director is appointed through internal promotion, and the individual has contractual commitments made prior to his or her promotion to the Board, the Company will continue to honour these arrangements. In addition, 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 reflect (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. Petropavlovsk Annual Report 2016 93 GovernanceFinancial statementsStrategic reportDirectors’ Remuneration Report continued Executive Director 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. If the Company terminates the employment of an 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 benefits. Benefits may also include, but are not limited to, legal fees. 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. The Committee will retain discretion to approve new contractual arrangements with departing Executive Directors including settlement, confidentiality 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 enter into such arrangements only where the Committee believes that it is in the best interests of the Company and its shareholders to do so. Dates of Executive Director service contracts are as follows: Executive Director Peter Hambro Dr Pavel Maslovskiy Andrey Maruta Position Chairman Chief Executive Officer Chief Financial Officer Effective date of contract 20 December 2001 5 November 2014 4 January 2011 Leaver and change of control provisions The section below details how outstanding awards under incentive plans are treated in specific circumstances where the Executive Director’s employment has terminated or where there has been a change of control or similar transaction event. Final treatment remains subject to the Remuneration Committee’s discretion. When considering the use of discretion, the Committee reviews all potential incentive outcomes to ensure that any application of discretion is fair to both shareholders and participants. Annual bonus Any annual bonus payment will be at the discretion of the Committee and the decision to award a bonus, in full or in part, will depend on a number of factors including the circumstances of the individual’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. For good leavers (defined as death, injury, ill health, disability, retirement with agreement of the Committee, the employing company or business being sold out of the Group, or any other reason that the Committee determines appropriate), unvested Deferred Bonus Awards will vest on such date as determined by the Committee subject to a pro-rata reduction to reflect the proportion of the vesting period remaining. For all other leavers, awards will lapse. On a change of control or similar transaction event, the Committee will assess the most appropriate treatment for the outstanding bonus period according to the circumstances. Deferred Share Awards will normally vest on the date of change of control subject to a pro-rata reduction to reflect the proportion of the vesting period remaining. LTIP awards For good leavers (defined as death, injury, ill health, disability, retirement with agreement of the Committee, the employing company or business being sold out of the Group, or any other reason that the Committee determines appropriate), unvested LTIP awards will vest on such date as determined by the Committee, subject to the achievement, or likely achievement, of any relevant performance conditions, with a pro-rata reduction to reflect the proportion of the vesting period remaining. For all other leavers, awards will lapse. On a change of control or similar transaction event, unvested LTIP awards will typically 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 reflect the proportion of the vesting period remaining. 94 Petropavlovsk Annual Report 2016 Remuneration Policy for Non-Executive Directors Non-Executive Directors do not receive benefits 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 and fair. 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 Not applicable. 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. Dates of Non-Executive Director appointment letters are as follows: Name Date of original appointment Unexpired term as at 31 December 2016 Date of appointment/last reappointment at AGM Robert Jenkins 30 April 2015 Alexander Green 27 August 2015 Andrew Vickerman 22 October 2015 16 months 20 months 22 months 2016 2016 2016 Notice period 3 months 3 months 3 months Consideration of employment conditions elsewhere in the Company 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 currently actively consult with employees on executive remuneration. Further information on the Group’s employment policies are provided in the Environmental, Safety and Social Report on pages 34 and 35 of this Annual Report. 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 in advance of making any material changes to remuneration. 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. Petropavlovsk Annual Report 2016 95 GovernanceFinancial statementsStrategic reportDirectors’ Remuneration Report continued Annual Report on Remuneration The following section provides details of how the Company’s Remuneration Policy was implemented during the financial year ending 31 December 2016, and how it will be implemented in 2017. Any information contained in this section of the report that is subject to audit is highlighted. The Company Chairman attended parts of meetings in 2016 at the Committee Chairman’s invitation to provide advice on specific questions raised by the Committee. The Company Secretary attended each meeting as Secretary to the Committee. Key activities during the year included: – Review and approval of the 2015 Directors’ Remuneration Report – Review and approval of the 2015 annual bonus outcome – Review and approval of the 2016 annual bonus performance measures and targets – Review of Executive Directors’ total remuneration, including Executive Directors’ salaries for 2016 – Review of the Company’s Remuneration Policy in the context of external market developments and best practice in remuneration. 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, benchmarking analysis, regular market and best practice updates, and support with drafting of the Directors’ Remuneration Report. In 2016, Kepler additionally provided support in reviewing the Remuneration Policy. Kepler is a signatory to the Code of Conduct for Remuneration Consultants of UK listed companies (which can be found at www.remunerationconsultantsgroup.com). Kepler reports directly to the Committee Chairman and neither Kepler nor any other part of the MMC group of companies provides any other services to the Company, with the exception that Marsh Ltd has been appointed as insurance broker for some of the Group’s UK and global policies and Mercer Marsh Benefits has been appointed as broker for the private medical healthcare scheme for the Company’s UK based employees. Kepler’s total fees for the provision of remuneration services to the Committee in 2016 were £9,920 on the basis of time and materials, excluding expenses and VAT. 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 Officer 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 members and activities of the Committee in 2016 The Committee comprises two Independent Non-Executive Directors, Andrew Vickerman, as Chairman, and Alexander Green. Sir Roderic Lyne retired as Chairman and as a member of the Committee on 28 June 2016. It is the intention that the additional Independent Non-Executive Director which the Company is in the process of appointing, will become a member of the Committee. The Committee held two formal meetings during the year, with regular ongoing communication between Committee members to consider and finalise certain matters. Shareholder voting at the 2016 AGM The table below sets out the results of the vote on the 2015 Annual Report on Remuneration at the 2016 AGM: For (including Chairman’s discretion) Against Total votes cast (excluding withheld votes but including third party discretion) Votes withheld Notes: The resolution to approve the 2015 remuneration report was passed on a poll. A “Vote withheld” is not a vote in law and is not counted in the calculation of the votes “For” or “Against” a resolution. Annual Report on Remuneration Total number of votes 1,841,277,767 7,055,454 1,852,971,078 4,637,857 % of votes cast 99.62% 0.38% 96 Petropavlovsk Annual Report 2016 Directors’ remuneration as a single figure (audited information) The table below reports the total remuneration receivable in respect of qualifying services by each Director during the financial periods ended 31 December 2016 and 31 December 2015: Executive Director Peter Hambro Pavel Maslovskiy Andrey Maruta Total Total Non-Executive Director Robert Jenkins (c) Alexander Green (d) Andrew Vickerman (e) Sir Roderic Lyne (f) Total Total Year Salary & fees Taxable Benefit(a) Annual Bonus(b) Pension Single Figure Remuneration Total £ Single Figure Remuneration Total US$ 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 655,000 655,000 655,000 655,000 395,000 395,000 1,705,000 1,705,000 87,500 56,667 75,000 25,865 75,000 12,500 37,500 80,667 275,000 175,699 – – – – 12,958 2,133 12,958 2,133 131,000 – 131,000 – 79,000 – 341,000 – – – – – – – – – – – – – – – – – – – – – – – – – 49,375 49,375 49,375 49,375 – – – – – – – – – – 786,000 655,000 786,000 655,000 536,333 446,508 2,108,333 1,776,508 87,500 56,667 75,000 25,865 75,000 12,500 37,500 80,667 275,000 175,699 1,065,030 1,002,150 1,065,030 1,002,150 726,731 683,158 2,856,791 2,687,408 118,562 86,700 101,625 39,574 101,625 19,125 50,813 123,420 372,625 268,819 (a) Benefits are in respect of private medical insurance for the Director, their spouse and any children under the age of 18 years of age and pay in lieu of holiday entitlement. (b) Value of cash bonuses and Deferred Bonus Awards awarded in respect of the corresponding performance year. For the year ended 31 December 2016, the bonus payable will be paid 50% in cash with the remaining 50% payable as a Deferred Bonus Award under the Company’s LTIP. (c) Mr Robert Jenkins was appointed as a Non-Executive Director of the Company on 30 April 2015. During 2016, Mr Jenkins received additional payments in respect of his chairmanship of the Audit Committee and his appointment as Senior Independent Non-Executive Director. (d) Mr Alexander Green was appointed as a Non-Executive Director of the Company on 27 August 2015. (e) Mr Andrew Vickerman was appointed as a Non-Executive Director of the Company on 22 October 2015. (f) Sir Roderic Lyne retired as a Non-Executive Director of the Company at the conclusion of the Company’s 2016 AGM held on 28 June 2016. (g) Rates of exchange used: 2016: £0.738:US$1, 2015: £0.65:US$1 (average exchange rate throughout the year). Petropavlovsk Annual Report 2016 97 GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued Implementation of the Remuneration Policy in 2016 Executive Directors Salary No salary increases were awarded to the Executive Directors during the year, recognising the low rate of inflation in the UK and the ongoing cost reduction programme in the lower gold price environment. Pension The Group makes contributions into a personal pension scheme on behalf of Mr Andrey Maruta, Chief Financial Officer. 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. Any cash payment is also made to Mr Maruta net of an amount equivalent to the amount of employer’s national insurance contributions payable on the cash payment such that the Company is not disadvantaged by making the payment in cash rather than as a pension payment which is not subject to employer’s national insurance. For the period ended 31 December 2016, the Group’s pension contribution for Mr Maruta was £49,375. Mr Hambro and Dr Maslovskiy received no payment from the Company in respect of pension entitlements. Annual bonus For 2016, the annual bonus was based 60% on strategic objectives, 10% on production, 10% on each of reduction in net debt and average total cash costs, and 10% on health and safety. The maximum bonus opportunity was 100% of salary, and target bonus was 60% of salary. The performance targets and actual achievement during the year, and the resulting bonus outcome, are set out in the table below. Objective Total Group production Total Cash Costs per oz Net Debt Health & Safety – LTIFR Progression of underground mining project to allow production in 2017, within budget Continuing construction of the POX Hub in H2 2016 or entering into a Joint Venture arrangement for the completion of the POX Hub Transactional Total Bonus earned Pay out for target performance (% of max) 6% 6% 6% 6% Stretch target 500,000oz 450,000 ounces per annum – 16.2Mtpa of RIP capacity (4 x RIP plants)Optimal extraction from accessing our full asset base. Sustainable long term refractory and non-refractory production from the POX Hub and RIP plants respectively, with ongoing resource and production growth upside from high grade underground operations and highly prospective exploration prospects within the combined 3,600km² license holding. –3 x open pit mines –2 x underground mines –14.5Mtpa of RIP capacity (3x RIP plants) –500ktpa POX Hub processing refractory concentrate –Malomir and Pioneer combined 11.4Mtpa flotation capacity 

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