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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.
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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.
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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
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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
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Company Statement
of Changes in Equity
Notes to the Company
Financial Statements
Appendix, Glossary
and Definitions
Shareholder Information
165
166
169
173
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Petropavlovsk Annual Report 2016
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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
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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.
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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
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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