Annual
Report
2017
Our Values
Responsibility
Innovation
Integrity
Excellence
Sustainability
We place people first. Responsible practices are our highest priority and we aim to
operate safely, efficiently and transparently, continually seeking new ways to ensure
an injury-free workplace. We are committed to preventing pollution, minimising
waste, increasing carbon efficiency and optimising natural resource usage.
We develop innovative solutions to mitigate environmental risks and welcome
an active dialogue with local communities.
We challenge ourselves and others to constantly improve in line with the most
recent scientific and engineering developments worldwide. Our aim is to be an
industry leader in safety and environmental practices, whilst realising the full
potential of our assets through ingenuity, drive, and innovation.
We believe that honest communication, sound business ethics and respect for
people are the foundation of our business and deal with all our stakeholders in a
respectful, responsible way. We are guided by our Code of Ethics in every situation,
at all levels of the Company, to preserve dignity and self-worth in all our interactions.
We are focused on delivering results and on doing what we say we will do.
We accept responsibility and hold ourselves accountable for our work, behaviour,
ethics and actions. We aim to deliver high performance outcomes and undertake
to deliver on our commitments to our colleagues, business and social partners,
and our investors.
Sustainable development has been a key focus for the Group since its foundation.
At Petropavlovsk, our objective is to act in the interests of our stakeholders,
including shareholders, employees and the communities in which we operate,
by ensuring all our activities are efficient, responsible, transparent and sustainable.
Annual Report 2017
Petropavlovsk is one of Russia’s major gold
mining companies, in terms of both production
and Reserves and Resources. It is amongst
the most established and the most
experienced vertically integrated gold
producers in the Far East of Russia.
The Company focuses on creating value
for its shareholders, employees and other
stakeholders by safely and responsibly
exploring, mining and producing a stable
output of low-cost gold.
Download a digital copy
This report is available to download
from our corporate website.
www.petropavlovsk.net
You can also now access key
highlights of the report online.
www.petropavlovsk-2017.net
Petropavlovsk Annual Report 2017
1
Strategic reportFinancial statementsGovernance Highlights
Petropavlovsk’s key area of focus
is the Amur region in the Russian
Far East, where it has operated
since 1994. The Company is one
of the leading employers and
contributors to the development
of the local economy in the
region, which benefits from
well-developed infrastructure,
access to hydroelectric power
and a strong mining tradition.
Key 2017 financial figures
Revenue
US$
Total Cash Costs◆
US$
All-in Sustaining Costs◆
US$
Underlying EBITDA◆
US$
Net Profit
US$
(2016: US$660/oz)
(2016: US$540.7m)
587.4m
741/oz
963/oz
196.8m
41.5m
(2016: US$200.1m)
(2016: US$807/oz)
(2016: US$31.7m)
Russia
Operating mine
IRC Limited Operations
Underground
POX
Analytical Labs
R&D
Offices
Amur region
Albyn
Malomir
Pioneer
Pokrovskiy
Pioneer:
Albyn:
Pokrovskiy:
Malomir:
St Petersburg
- RDC Hydrometallurgy
Moscow
- Petropavlovsk Moscow
- PHM Engineering (Tech)
Yamal
region
IRC Limited
- Amur region – Kuranakh mine
- Jewish autonomous region – K&S mine
Krasnoyarsk
region
Amur
region
Irkutsk
- Irgiredmet Institute
Blagoveshchensk
- Petropavlovsk Amur Region
- Regis Exploration
- Kapstoi Construction
◆ Throughout this document, when discussing the Group's financial performance, reference is made to a number of financial measures, known as Alternative Performance
Measures (APM), which are not defined or calculated in accordance with IFRS. Go to pages 197 to 203 for more information on our APMs.
2
Petropavlovsk Annual Report 2017
At a Glance
3 open pit gold mines,
c.6.8Moz of gold
produced to date
20.86Moz JORC
Resources including
8.15Moz Reserves
c.15.5Mtpa of plant
processing capacity
Production of
c.440koz p/a
For information on our operations go to pages 32 to 41 and for information on our Reserves and Resources go to pages 53 to 57.
Untapped
exploration potential
POX Hub staged
commissioning
scheduled from Q4 2018
Experienced
management team
and skilled workforce
c.US$350m market cap
Petropavlovsk Annual Report 2017
3
Strategic reportFinancial statementsGovernance 4
Petropavlovsk Annual Report 2017
Contents
Inside this report
53
61
63
Operational Performance:
Key Performance Indicators (KPIs) 33
Reserves and Resources
Exploration Update
Operational Performance:
Pioneer
Operational Performance:
Albyn
Operational Performance:
Malomir
Operational Performance:
Pokrovskiy
The POX Hub
Underground
34
36
38
40
42
52
IRC
Sustainability:
Key Performance Indicators (KPIs) 65
Approach to Sustainability
Sustainability Policy
and Action Plan
69
70
Financial Performance:
Key Performance Indicators (KPIs) 81
Chief Financial Officer’s
Statement
84
01
Strategic report
Petropavlovsk online
Highlights
At a Glance
Contents
Chairman’s Statement
Interim CEO's Statement
Our Business Model
Our Strategy
Market Overview
Risks to Our Performance
02
Governance
Board of Directors
Governance Report
1
2
3
5
6
10
12
14
16
18
94
96
Nomination Committee Report 106
Audit Committee Report
108
Directors’ Remuneration Report 115
Directors’ Report
Directors’ Responsibilities
Statement
Independent Auditor’s Report
to the Members of
Petropavlovsk PLC
133
141
142
03
Financial statements
Consolidated Income Statement 149
Consolidated Statement
of Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement
of Changes in Equity
Consolidated Cash
Flow Statement
Notes to the Consolidated
Financial Statements
Company Balance Sheet
150
151
152
153
154
192
Company Statement
of Changes in Equity
Notes to the Company
Financial Statements
The Use of Application of
Alternative Performance
Measures (APMs)
Appendix, Glossary
and Definitions
Shareholder Information
193
194
197
204
208
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Petropavlovsk Annual Report 2017
Petropavlovsk Annual Report 2017
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Chairman’s Statement
Ian Ashby
Tragically, during 2017 three workers lost
their lives at our operations. On behalf of the
Board, I extend our sincere condolences to
the families, friends and work colleagues
affected. We have an intractable commitment
to ensuring a safe work environment for all
people that participate in our business. To this
end, we will be launching a program during
2018 that will identify the key fatality risks to
our business, around which we will develop
actions to either eliminate or definitively
control these risks. I will be taking personal
interest in this initiative.
Notwithstanding the general uplift in prices
for mineral commodities over the last twelve
months, the gold price has experienced
volatility, starting the year at US$1,151/oz,
rising to US$1,346/oz in September and
falling back to US$1,291/oz at year end, which
was related to the general uncertainty around
the overall trajectory of the global economy.
The volatility continued into 2018 with gold
hitting US$1,350/oz in January 2018. Against
this backdrop, Petropavlovsk underwent a
year of substantial transformation, focusing
on the timely delivery of the Company’s stated
objectives: the development of the POX Hub,
the commissioning of underground mining
operations, and the optimisation of the
Company’s capital structure.
During the year, the Company made good
progress with its development plans whilst
achieving solid operational results and
maintaining continued financial discipline.
Group production was almost 440,000oz
in 2017, a 10% increase on the previous year
and in line with guidance. Both of the
Company’s flagship mines, Pioneer and
Albyn, significantly outperformed the previous
year’s production. This result is even more
impressive considering that in general the
team treated lower grade material than in the
previous year, and that Pioneer, Pokrovskiy
and Malomir had decreased recovery rates
due to the more refractory nature of the ores
mined. These factors also put upward
pressure on our costs.
We continued the transition to underground
operations at both Pioneer and Malomir in
2017. These simultaneous developments
proved to be challenging and led to some
delays with the original commissioning
timetable. Initial development delays at
Malomir were driven by subcontractor
mobilisation being longer than planned
but the impact was well mitigated by
management and did not have a material
impact on total production. By year end,
Malomir was producing at full design
capacity. Issues at Pioneer were due to
unexpected underground water and took
longer to manage, however I am pleased to
report that due to the high quality work of our
engineering team, these problems are now
resolved and Pioneer is expected to ramp
up to full capacity during 2018.
“ Petropavlovsk underwent a year
of substantial transformation,
focusing on the timely delivery of
the Company’s stated objectives:
the development of the POX
Hub, the commissioning of
underground mining operations,
and the optimisation of the
Company’s capital structure.”
This year marks the beginning of a new era
for Petropavlovsk with the closure of our
Pokrovskiy mine, as the site is being
transformed into a key component of the POX
Hub, our core organic growth development.
The POX Hub will enable us to unlock the
value otherwise inaccessible in the
approximate 4Moz of refractory gold
reserves. Construction progress at the
POX Hub is at 80% as of the publishing of
these results and remains on schedule for
commissioning in the fourth quarter of 2018.
The POX Hub is a unique project.
Our scientists and engineers have worked
enthusiastically to optimise the POX process
technology to match the types of ores we are
planning to process. In the course of this work
we have patented several of our technological
findings, which are being implemented at
Petropavlovsk for the first time. Distinctive
features of the POX plant are its robust design
with four autoclave units in parallel, and flow
sheet flexibility, which allows the processing
of gold concentrates with different chemical
and metallurgical characteristics at the same
time. This flexibility was extensively tested at
both laboratory and at bench scale in our
Company owned test facilities. This gives me
confidence that the necessary technical work
has been done to de-risk commissioning,
and facilitate a timely and smooth ramp up
to full capacity.
Petropavlovsk has been successful in its
exploration activities for more than 20 years.
Our geologists have a long history of
exploration success, and in 2017 over one
million ounces of gold were added to total
Group Resources, including over half a million
ounces added to Reserves. It is important to
note that 70% of these new Reserves and
Resources are non-refractory, and can
therefore be treated using our current
processing facilities. This will assist in further
de-risking and smoothing our production
profile as we complete the construction and
commissioning of the POX Hub. The 2018
production schedule provides for about
120,000oz of newly discovered non-refractory
ounces to be treated at our existing resin-in-
pulp plants. These additions to the reserve
base give us further confidence in our ability
to generate positive cash flows during the final
period of the current Capital Expenditure◆
programme.
6
Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
In the medium term, there remains significant
prospectivity at Albyn, Malomir and Pioneer
for the discovery of additional non-refractory
and refractory gold discoveries, which would
add to our existing 20Moz of resources.
The exploration program remains focused
on brownfield activities as an effective way
to maximise the value of Group production
facilities for the longer term, and is focused
on high grade targets as a means of optimising
cash flows, which will assist financial flexibility.
The 26% increase in underground resources
has helped to bolster the current underground
developments. The progress made during the
year provides a strong platform for further
exploration success in 2018, where we have
allocated US$16m to brownfield definition
drilling. We will provide regular updates to the
market as the drilling programme progresses.
In addition to our gold business,
Petropavlovsk also holds a 31.1% equity stake
in the Hong Kong listed iron ore miner IRC,
which produced its first high grade iron ore
concentrate from the K&S deposits during
2017. The K&S project was financed by the
Chinese bank ICBC. In 2017, ICBC agreed to
restructure the remaining K&S project finance
facility repayments of US$234m, of which
Petropavlovsk is guarantor. The resulting debt
service holiday means that two repayment
instalments originally due in 2017 are now to
be repayable as part of five subsequent
instalments.
The Non-Executive Directors (including
myself) are still relatively new to their roles
within the Company following the Board
changes resulting from the 2017 Annual
General Meeting. Bruce Buck, Garrett Soden,
and I were proposed for appointment by
certain shareholders as Independent
Non-Executive Directors, following which
I was appointed by the Board to act as
its Chairman.
“ The POX Hub will enable us
to unlock the value otherwise
inaccessible in the approximate
4Moz of refractory gold reserves.”
Following our appointment the Board’s
priorities have been to:
– ensure that POX is delivered on time and
on budget;
– refinance the Group’s bank debt to provide
medium term financial stability and flexibility
for the business. This has been achieved
through the successful issuance, in
November 2017, of US$500m 8.125%
Guaranteed Notes due 2022;
– ensure the successful ramping up of the
Group’s underground mining operations,
maximising operational efficiency and
cashflow potential, whilst ensuring the
safety of our employees and contractors;
and
– seek new options to resolve the potential
liability of the Company’s guarantee to
ICBC in respect of IRC’s loan facility and
maximise the value of our equity interest
in IRC.
One of the Board’s key focus areas
during 2017 was de-risking the Company’s
development plans, which included focusing
on securing free cash from the operating
business and improving the Company’s
capital structure. As it was mentioned above
in November 2017, we launched a bond issue
to refinance the Company’s bank debt as a
means of improving the maturity profile in line
with our development plans. The bond
issuance was well-received by the investment
community and US$500 million was raised,
demonstrating the market’s confidence in our
development projects. This has provided
greater stability to the Group and significantly
improved our capital profile by optimising our
repayment plan, which is now aligned with our
development plans. The bonds also provide a
lower cost of finance.
During 2018, I have also welcomed Adrian
Coates to the Board as an Independent
Non-Executive Director, and Bektas
Mukazhanov as a Director. These
appointments coincided with the resignation of
Andrey Maruta who is currently Chief Financial
Officer and a member of the Board. Andrey
has been an important part of the
Petropavlovsk Board and senior management
team for a number of years, and will assist in
the transition to the new CFO. We wish Andrey
all the best in his future endeavours.
The Board looks forward to working together
with the augmented team, maintaining a broad
perspective and an appropriate range of skills
and expertise to provide Petropavlovsk
management with the best possible guidance.
I also acknowledge the departure and
contribution of CEO Dr Pavel Maslovskiy,
who resigned in July 2017. In the interim,
group operational activities have been ably
led by Sergey Ermolenko, who stepped in as
Interim CEO and has provided strong support
to the Board during its search for a permanent
replacement. Sergey was uniquely positioned
to assist the Board in its continued focus on
operational performance, and we are grateful
to him and his team for delivering on all our
operational and development targets in 2017.
At the beginning of 2018, following a
comprehensive search, Roman Deniskin was
appointed as CEO, commencing 16 April 2018.
Roman brings all the necessary experience
and leadership skills as we enter a new phase
in the Company's history with the completion
of the POX Hub and the development of our
underground mining operations.
Petropavlovsk Annual Report 2017
7
Strategic reportFinancial statementsGovernance Chairman’s Statement content
“ In 2017, the Group strengthened
its commitment to acting in a
responsible manner, protecting
the environment, safeguarding
the welfare of its employees and
maintaining good relationships
with the communities in which
it operates. We are proud of the
leading role we play in the region.”
Petropavlovsk has a presence in many
communities and remains committed to
carrying out all its activities in a sustainable
manner. The Group’s success to date has
been complemented by its commitment to
act safely and responsibly and to build its team
organically, via internal career development
opportunities and educational programmes.
In 2017, the Group strengthened its
commitment to acting in a responsible manner,
protecting the environment, safeguarding the
welfare of its employees and maintaining good
relationships with the communities in which it
operates. We are proud of the leading role we
play in the region.
I am pleased to report that during the year
our environmental management system was
accredited as compliant with GOST R ISO
14001-2016 (ISO 14001:2015), which is a
globally recognised international standard.
The accreditation applies to each of the
Group’s mines and is a wonderful
acknowledgment for all those involved.
Additionally during the year, and as a means
to improve our relationship with our local
stakeholders, we engaged a third party to
undertake a review of Petropavlovsk’s
relationships with local communities.
Whilst there were no material adverse findings
from the review we have developed an action
plan to better communicate and more
effectively implement our safety and
sustainability policy. We have also developed
a Grievance Procedure, which enables
members of the public and other stakeholders
to raise complaints or issues concerning
Petropavlovsk activities, and that assures
these complaints will receive due consideration
and a written response. The Grievance
Mechanism is currently being discussed with
the view to it being implemented in 2018.
Once in place, individuals will be able to
register complaints online, by post, by phone
or in person. During the year, 1,958 people
were trained at the Pokrovskiy Mining College,
Petropavlovsk’s main educational asset,
which for nine years has prepared qualified
graduates for the Group. Today it is a
progressive, multi-level, innovative educational
institution, implementing a wide range of
educational programs in-house.
Petropavlovsk is the first and so far the only
company in Russia that has decided to follow
the success of Western countries and provide
opportunities for women to work as drivers
of 90-ton haul trucks. They are trained at the
Pokrovskiy Mining College and last year we
had 39 women drivers successfully operating
CAT-777 at our mines. This year, as part of our
commitment to providing equal opportunities,
we reported a 5% increase in female
employment.
Although one of our focus areas in 2017 was
on controlling our cost base, we aim to do so
in a way that reflects our responsibilities to the
communities and the environment in which we
operate. I am therefore delighted with the
demonstrable progress. The Group continued
to maintain a strong record in environmental
management, reporting zero license violations.
There was no air pollution, soil, surface or
ground water contamination during 2017.
The safety of our employees and the
communities in which we work is
Petropavlovsk’s number one priority;
the Group has a zero fatality target across
its operations. As I mentioned previously,
we sustained three fatalities during 2017,
which is unacceptable. Comprehensive
investigations have been conducted and
appropriate corrective measures have been
taken in attempt to ensure that we are not
exposed to these types of events in the future.
As a part of our response to the fatalities at our
operations, a benchmarking study of safety
performance, measured by lost time injury
frequency rate, has been conducted by SLR
Consulting. We are also developing an incident
response plan to support our goal in avoiding
all injuries and improving safety performance
throughout the Group.
8
Petropavlovsk Annual Report 2017
2018 Outlook
As we look ahead into 2018, we see a year in
which the strategic elements of past decisions
should come to fruition. This is a year in which
the Company expects to deliver lower cost
ounces from fully developed underground
operations, and expects to commence
production from sizeable refractory resources.
This provides the platform to steadily increase
gold output, delivering greater cash flows, and
providing investors with significant upside both
from the point of view of increased output and
a longer mine life.
Some of the cost challenges evident in the
Russian gold mining industry recently may
persist in 2018 and this is one reason we
remain committed to our strategy of reducing
costs sustainably, producing profitable ounces
and delivering positive free cash flow through
the cycle. With this approach we expect to
maintain healthy margins and safeguard our
financial strength to the benefit of all of our
stakeholders.
Our production guidance of 420,000-
460,000oz is based on our mining schedules
for open pit and underground operations,
as well as our estimates of the first production
from the POX Hub towards the end of 2018.
This will be the last year of anticipated
significant Capital Expenditure◆ for the Group.
Going forward, with a much-reduced Capital
Expenditure◆ profile, Petropavlovsk is strongly
placed to take advantage of value-accretive
organic and corporate opportunities.
As a final note, I would like to thank all my
colleagues on the Board for the time and effort
they have devoted to the Company during the
year. In addition - and on behalf of the Board,
I want to thank the executive management
and their teams who have contributed to our
success in 2017, and look forward with great
positivity to 2018 and beyond.
Ian Ashby
Chairman
“ Going forward, with a much-
reduced Capital Expenditure◆ profile,
Petropavlovsk is strongly placed to take
advantage of value-accretive organic
and corporate opportunities.”
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017
9
Strategic reportFinancial statementsGovernance Interim CEO’s Statement
Sergey Ermolenko
For the operational team on the ground and I,
2017 was the first full year in Petropavlovsk’s
journey of strategic transformation to turn the
Group into a focused, lean and innovative
gold mining company that generates
meaningful free cash flow and provides
investors with superior returns by processing
refractory and non-refractory ores at
competitive prices. We have made significant
progress in this regard, which is critical to our
development plans and long-term outlook.
From an operational point of view our 2017
focus was on three main areas of activities:
– Delivering on our production targets at
planned margins to create cash flows to
support the Group’s development plans.
– Continuing our development plans on
schedule to ensure the timely
commissioning of the POX Hub in Q4 2018
and preparing our underground operations
to run at full capacity in 2018.
– Replenishing depleted ounces of gold with
material suitable for production through our
current facilities in the near-term to de-risk
our ambitious development plans.
In working hard to fulfil these plans we were
guided by our responsible principles of
performance in every area of our operations.
Production and Operations
During 2017 we managed to achieve a 10%
increase in year on year production. Our target
for the year was a challenge as it did include
production from our underground operations
at Pioneer and Malomir, which we only started
developing at the beginning of the last year.
However, due to our conservative approach to
budgeting and timely adjustments to the initial
mine plan, production for the year fell
comfortably within the guided range of 420 to
460koz. We also benefitted from a one-off
addition to production due to the successful
implementation of a resin treatment facility
at our RIP plants improving operational
efficiencies, specifically reducing the amount
of gold-in-circuit (GIC).
In 2017 our specialists had to manage two key
challenges: declining grades and decreasing
recovery rates at two of our flagship mines,
Pioneer and Albyn. This was due to a larger
portion of transitional material in the blend,
and due to the more refractory nature of the
remaining open pit reserves. In order to
manage this we worked to optimise our
operations and managed to increase overall
RIP throughput by 3%, whilst rock movement
was 7% lower than in 2016, meaning less
mining expenditure.
The Company’s input costs are also heavily
reliant on the Rouble/Dollar exchange rate
dynamic, which has a significant effect on the
Group’s operating costs. This resulted in Total
Cash Costs◆ of US$741/oz for 2017, higher
than the original guidance and due to the 13%
appreciation of the Russian Rouble against
the Dollar, as well as rising domestic prices as
a consequence of the global oil price rally,
lower recoveries at Pioneer, Pokrovskiy and
Malomir and lower grades at Pioneer,
Pokrovskiy and Albyn were the main factors
negatively affecting our costs this year.
In particular, electricity costs and the cost
of diesel increased by 31% and 28%
respectively in US Dollar terms. Energy prices
constitute a significant portion of our costs
(c.25%), and the team worked hard to offset
the negative effect of this increase. A mining
tax concession applied in 2017 was also
beneficial to our cash costs, helping us to
achieve EBITDA♦ in line with the previous year
at US$197m, alongside further optimisation of
our operations and our cost cutting
programme, and with help from increased
gold production volumes and an Average
Realised Gold Price♦ of US$1,262/oz,
offsetting a 12% increase in costs.
Management was also able to deliver a more
than threefold increase in net cash from
operating activities of US$124m, which gives
us further confidence in the execution of the
development projects that are under way.
In 2017, we completed a total of 6,730m of
underground development at Pioneer and
Malomir and commenced stope mining; both
underground mines are now fully operational.
This was achieved in spite of the fact that
developing underground operations is new
to the executive team. However, we also
experienced some initial setbacks. Whilst
carrying out excavation of the underground
mine at North East Bakhmut, Pioneer, we have
encountered challenging geotechnical
conditions and at the Quartzitovoye
underground mine and experienced some
problems with the mobilisation of machinery.
However I am pleased to report that at
Malomir, we achieved the first contribution
to our production from underground mining,
and a total of 110kt of high grade underground
ore was produced during the year.
The underground mine at Malomir is now
working at full capacity and is expected to
contribute a significant amount to Malomir gold
output during 2018, whilst we transition to
flotation and refractory processing there. As of
the beginning of 2018, the NE Bakhmut
underground mine at Pioneer has also reached
sustainable levels of production and is
expected to ramp up slowly to its full planned
capacity during the year. It is expected to
contribute low cost ounces to Pioneer
production over the next six years and beyond.
The input from both underground mines is very
important for our production plans in 2018,
as these areas will be a source of high grade
material, improving average grades and
recoveries of the total blend and thus
decreasing production costs. As such, we are
expecting underground areas at Pioneer to
contribute c.3.7g/t material and c.6.3g/t
material at Malomir.
I would like to take this opportunity to thank
Petropavlovsk’s operational team for their
professionalism and hard work, which led to
goals being achieved in spite of geological
and engineering challenges.
POX Hub Development
2017 was the year that we fully resumed
active construction of the POX plant, which
was placed on hold from 2015 to 2016.
Construction progressed well in 2017, placing
us in a strong position to commence the
commissioning of the POX plant in Q4 2018,
on time and on budget. First gold production
from Malomir concentrate is expected by the
end of the year. With earth and civil
construction works almost complete, and the
autoclave vessels and oxygen plant in place,
the development of the POX Hub is now
entering its final stages. We are now
completing welding work on the high and low
pressure pipes, and receiving outstanding
equipment to be installed prior to the
commissioning of POX.
Stage 1 of the Malomir flotation plant with a
capacity of 3.6Mtpa is almost complete, with
first concentrate production expected in Q2
2018. As part of our cash flow optimisation
programme, we were able to optimise
refractory concentrate production at Malomir,
delaying the start of the flotation plant by
approximately four months compared to
previous plans. This has allowed us to
increase Malomir RIP plant utilisation in 2018,
improving non-refractory production and also
reducing our future concentrate stockpile.
The optimisation of our POX development
plan also resulted in an approximate two
month extension of the Pokrovskiy RIP plant
operations, which were originally scheduled
to stop in January 2018. This meant we were
able to have additional production from the
original Pokrovskiy project in Q1 2018.
Operations at the RIP plant have now stopped
as the site is refurbished and integrated into
the POX Hub.
10 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Exploration, Mineral Resources
and Ore Reserves
Our 2017 exploration programme was a
strong mark of success for our geological
team, resulting in an overall increase in both
Mineral Resources and Ore Reserves in spite
of depletion.
Nearly 1.2Moz of gold Resources were
identified, including nearly 0.7Moz of
Reserves. Notably this includes new open
pit Reserves at Katrin, a recently discovered,
very promising satellite deposit near Pioneer.
It is important that Katrin is a non-refractory
discovery identified south of Pioneer in late
2016 and as such is expected to contribute
to 2018 production. The deposit was further
explored during 2017 and it has been proven
to a strike length of 1km, and the zone of
mineralisation is open in both strike directions.
The material from this deposit is planned to be
processed through the current facilities in the
near to mid-term.
New open pit reserves were also established
at Pioneer’s NE Bakhmut zone, this ore is also
expected to contribute to 2018 production.
Other significant open pit non-refractory
Resource and Reserve additions were at
Albyn’s satellites, where we are planning to
commence production in 2019. These
discoveries are expected to improve mid and
long term production at the Albyn project.
2017 exploration significantly improved the
prospects of our underground operations.
Mineral Resources for potential underground
mining increased by 26% and indicate two
more sites for underground mining at Pioneer,
which can be brought into production by the
end of 2018.
The works carried out in 2017 indicated
a number of very exciting prospects,
which we are planning to follow up in 2018.
high grade pay shoot at the Nikolaevskaya
zone, which was identified in Q4 2017. Some
drill intersections showed very impressive
gold grades, including 2.0m@258g/t,
8.5m@11.8g/t and 3.4m@26.0g/t. Due to
these planned developments, exploration
CAPEX◆ for 2018 is mostly allocated to
Pioneer and Albyn.
Health and Safety
As Interim CEO, the safety of our employees is
my highest priority and obligation, and a zero
injury and fatality target across all our
operations is something we have worked hard
on for many years. Sadly, I regret to report that
we had three fatalities during 2017. This is
discussed in the Chairman’s statement and in
further detail in our sustainability report.
Our urgent response is of paramount
importance as we are actively involved in POX
construction works and the development of
underground mining operations, which are
deemed to be high risk. Health and safety
remains our foremost priority. The
professionalism and dedication of all
employees involved, on whom our health and
safety depends, is clear to me and gives me
confidence that these tasks will be
successfully accomplished in a safe and
responsible manner.
The Future Takes Shape
Our solid operational and exploration results,
together with the progress made in the
construction of the POX Hub during 2017,
will support Petropavlovsk in meeting its 2018
production and development targets, creating
foundations for production growth from
refractory and underground reserves in the
mid and long term. Regarding the longer
term, we are looking forward to first
production from our refractory Reserves
at Pioneer, which is currently scheduled
for 2023.
We are evaluating potential ways to bring
the completion of the Pioneer flotation plant
forward, which would improve our production
profile. Our mid-term plans also include
further expansion of our underground
operations at Pioneer by opening the
Andreevskaya and Nikolaevskaya mines,
and potentially commencing underground
mining at Albyn, where we are planning
exploration in 2018 and 2019.
We continue to invest in innovative
technologies, which should result in further
improvements to our processing capabilities.
One prospective development in this field is
the high temperature pre-treatment of
Malomir concentrate, which our research
facility RDC Hydrometallurgy has been
focusing on. This additional low cost
processing stage could increase POX
recovery from Malomir concentrate by
up to 5% from what is currently budgeted.
With the completion of the POX Hub
approaching and our underground mines
in operation, Petropavlovsk is close to
becoming a truly diversified gold mining
company capable of exploiting sustainably
and responsibly a range of gold deposits,
creating value for all its stakeholders.
Sergey Ermolenko
Interim CEO
“ We continue to invest in innovative
technologies, which should result
in further improvements to our
processing capabilities. ”
This includes the exciting discovery of a new
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 11
Strategic reportFinancial statementsGovernance Our Business Model
1.
Explore &
Evaluate
2.
Develop
3.
Mine &
Process
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.
12 Petropavlovsk Annual Report 2017
The Cycle
Our business model was
designed to implement our
strategy and create value for
all stakeholders, with
sustainable development
embedded at every stage of
the mining lifecycle, from
identifying prospective areas
to exploration, development,
mining and processing.
Our key performance
indicators appear throughout
this report and introduce
the operational, financial
and sustainability sections
respectively (pages 33, 65
and 81).
Petropavlovsk Annual Report 2017 13
4.
Gold
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.
5.
Mine Closure
& Rehabilitation
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.
Strategic reportFinancial statementsGovernance Our Strategy
The Group’s
current strategy
focuses on the
following aspects:
Maintain and
expand reserve
and resource base
Unlock existing
refractory and
underground
gold reserves
Over 50 per cent of the Group’s existing
Reserve base consists of refractory ore,
which requires processing via pressure
oxidation or other methods, and higher grade
underground ore located within the Group’s
existing open pit mines. The POX project and
the Group’s underground operations are
designed to unlock these reserves. Successful
commissioning of the POX Hub and Malomir
and later Pioneer flotation plants is expected
to ensure sustainable refractory production.
The POX project comprises the construction
of the POX Hub, which is expected to be
commissioned in the fourth quarter of 2018,
the refractory ore flotation plant at the Malomir
mine, the first stage of which is expected to be
commissioned by H2 2018, and the refractory
ore flotation plant at the Pioneer mine, which is
currently expected to be commissioned in
2023. These flotation plants will produce
concentrate to be delivered to the POX Hub for
processing. The POX Hub may also process
concentrate sourced from third parties.
In 2016, work commenced on the
development of underground mines at
Pioneer and Malomir and during the first half
of 2017 the Group reached underground high
grade ore at both mines, and commenced
mining in June 2017.
The Group aims, through its exploration and
development programme, to identify and
develop new reserves and resources to offset
depletion and expand the reserve and
resource base to support long term growth.
The Group believes that its licence areas
present potential for further development,
with exploration work to date suggesting the
potential for the discovery of additional
Mineral Resources.
Starting in 2014, the Group initiated a
comprehensive ongoing review of its assets
with a view to optimising its development
pipeline, and identifying additional
prospective and capital efficient growth
opportunities. The review identified a number
of initiatives, including low risk and low cost
development projects located near to current
infrastructure or continuations of known
ore bodies.
The Group’s short-term reserve and
resource strategy is to focus on:
– maintaining non-refractory production to
continue efficient utilisation of the Group’s
current processing capacity, through
exploration on or adjacent to the Group’s
current mining operations; and
– further exploration to expand the reserves
and resources at the existing underground
operations which have been carried out at
Pioneer and Malomir.
The Group’s longer-term reserve and
resource strategy is to focus on:
– further exploration of the identified
refractory targets at Pioneer and Malomir;
– further exploration to seek to establish
underground reserves and resources at
Albyn and its satellites and to identify further
underground targets in the Pioneer and
Malomir areas; and
– potential licence acquisitions adjacent to
existing Group infrastructure to achieve
growth with minimal Capital Expenditure◆.
14 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Continue optimising
costs and
strengthening
profitability
Strengthen the
balance sheet and
liquidity position
Maintain stringent
environmental health
and safety standards
The Group’s strategic plan for the identification
and implementation of operational efficiencies
and cost optimisation focuses on new projects
and continued operations.
Management continues to look for ways to
de-risk the Group’s development plans,
including focusing on improving cash flow
generation and optimising its capital structure.
Petropavlovsk is committed to providing its
employees with a safe working environment
and complying with all applicable environmental
regulations and international working practices.
New project cost initiatives include:
– developing full scale high grade
underground operations;
– optimisation of waste stripping when
mining refractory ore bodies; and
– implementing efficient processing
methods for our refractory reserves
(through the POX project bodies.
The Group is also committed to continuous
operational improvements, aimed in part at
increasing throughput and recovery rates and
comprehensive cost control.
As a complementary measure, management
constantly monitors the gold price and
maintains a hedging position which aims to
ensure that levels of cash generation will meet
development budget needs.
As part of this strategy, the Group expects
(on the basis of the current gold price and
exchange rates) to generate strong and
sustainable net operating cash flows to
enable the Group to meet its planned Capital
Expenditure◆ program of approximately
US$100 million in 2017, approximately
US$110 million in 2018, and approximately
US$50 million in 2019.
The Group 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.
De-risking the Company’s development plans
was a key focus area during 2017. This included
securing free cash from the operating business
and improving the Company’s capital structure,
and in November 2017 we launched a bond
issue to refinance the Company’s bank debt as
a means of improving the maturity profile in line
with our development plans.
As part of its ongoing balance sheet
optimisation, the Group also continues to
assess the ways to realise the value of its
current interest in IRC.
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 the Board, which then
provides an immediate response and action
plan. The Board's 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.
Visual link
Petropavlovsk’s core objectives and
strategy define key performance
indicators (KPIs) that the Group
monitors, targets and measures.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 15
Strategic reportFinancial statementsGovernance Market Overview
Gold price +12% for the year against
falling demand
Starting the year at US$1,151/oz and closing
at US$1,291/oz, gold returned 12% in 2017.
On a relative basis, while gold outperformed
silver (-12%), platinum (0%) and the
Bloomberg Commodity Index (+1%), it could
not quite match the returns generated by
palladium (+50%). Gold traded in a range
of US$1,151/oz to US$1,346/oz, averaging
US$1,257/oz, roughly in line with the previous
year’s average price (US$1,248/oz).
Total global gold demand fell 7% to 130.9Moz,
impacted by a combination of lower ETF and
physical gold purchases and a 5% reduction
in official sector buying. Total gold supply
dropped 4% as a result of lower volumes
of recycled gold coming onto the market,
and whilst mine production reached record
levels, it was not materially higher, suggesting
that a production plateau is in effect.
Overall jewellery demand continues
to be driven by India and China
Total jewellery demand amounted to 68.7Moz,
up 4% on 2016, with India and China together
accounting for 57% of the figure. India’s
jewellery demand climbed 12% to 18.1Moz,
with Chinese demand growing 3% to 20.8Moz.
Gold jewellery purchases in India were
supported by festivals, weddings, improved
rural sentiment and the government’s decision
to remove the application of anti-money
laundering regulation to jewellery. It is also
worth remembering that 2016 was a difficult
year for Indian jewellery demand overall, with
pent up demand carrying over into 2017.
Meanwhile, China benefited from particularly
strong demand in H2 2017, driven by holiday
purchases and retail trade. In contrast, Europe
saw a third consecutive year of soft demand,
with total jewellery demand amounting to
74.0Moz (-3% on 2016), with lacklustre UK
demand a key contributing factor.
Overall investment demand declined year
on year, primarily due to lower ETF demand
and slightly lower bar / coin demand
Inflows into gold ETFs did not quite match
the robust performance witnessed in 2016.
According to data compiled by UBS, gold
ETFs added just 6.5Moz in 2017 (to 71.6Moz),
which by comparison is less than half the
2016 figure (15.0Moz). The pace of ETF
growth slowed notably in H2 2017 and
although towards the year end European and
Asian ETF funds saw inflows, US funds saw
outflows. One possible explanation for the
overall lower investment demand seen in 2017
is that many markets and indices around the
world reached record highs. This factor,
16 Petropavlovsk Annual Report 2017
combined with the prospect of additional
interest rate increases (gold prices are
inversely correlated with interest rates),
may have prompted some investors to
rotate out of gold and into other assets.
Nonetheless, anecdotal evidence from ETF
providers suggests that overall, investors still
view gold as a portfolio diversification tool,
and as an effective hedge against inflation,
negative interest rates, currency devaluation
and political instability.
Total bar and coin demand contracted 2% to
33.1Moz, with physical bar demand relatively
unchanged at 24.8Moz (-1%). However, official
gold coin demand disappointed, falling 10%
to 6.0Moz. US buying was affected by
competition from strong equity markets,
while Indian demand was impacted by the
government’s anti-money laundering and
cash origination policies. Demand in the US
fell 58% from 3.0Moz in 2016 to 1.3Moz in
2017, while the UK experienced a 12% drop.
In contrast, demand in China climbed 8% to
9.9Moz, while India saw more modest growth
of 2% to 5.3Moz.
Although central bank buying was 5%
lower in 2017, it was the eighth consecutive
year of purchases by the official sector
Gold is traditionally viewed as an asset class
to help diversify reserves, and central bank
buying continued in 2017, albeit at a slower
pace. Purchases amounted to 11.9Moz,
compared to 12.5Moz in 2016. Russia, Turkey
and Kazakhstan led the buying.
In 2017, Russian gold reserves grew by
7.2Moz (+14%) to 59.1Moz, Turkey’s reserves
increased by 6.0Moz (+50%) to 18.2Moz,
and Kazakhstan bought 1.4Moz (+17%), to
finish the year at 9.7Moz. With a 50% uplift in
reserves compared to 2016, Turkey’s decision
rests on the government’s view that gold is a
key reserve asset, while the Central Bank of
Russia stated that gold is seen as a key asset
in the face of political and economic
uncertainty. Gold disposals by the central
banking sector were immaterial during 2017.
Total gold supply fell 4% to 141.4Moz,
primarily affected by a reduced quantity
of recycled gold
Although not materially higher than 2016
(104.9Moz), 2017 was a record year for mine
production at 105.1Moz.
Gold production from China, the world’s
largest producer, decreased by 10% in 2017
due to a focus on improved environmental
standards, which resulted in the closing of
some marginal operations, while the ongoing
dispute with the government of Tanzania
affected production at Acacia Mining.
In contrast, Russian gold output was buoyant,
with Q4 2017 seeing the commencement of
Polyus Gold’s Natalka project, which once
fully ramped up in 2018 will boost Russia’s
total future gold output.
While recycled supply fell 10% to 37.3Moz,
it should be viewed in context; 2016 was a
strong year (41.6Moz of recycled supply),
and 2017 figures are being compared to
a high base. In some geographies, 2016
recycling activity was boosted by higher
local prices, an effect which reversed in 2017,
discouraging some consumers from selling
their gold. Q4 2017 was the only period during
the year when there was an increase in
recycling activity when compared to Q4 2016,
with an increase of 8%.
The RUB strengthened by 6% against
the US$ in 2017
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 commenced
2017 at 60.7RUB, closing at 57.6RUB. Since
Russia is a key global oil player, the RUB has
often had a positive relationship with the
direction of oil prices, and as such, firmer oil
prices in 2017 may be one of the factors behind
the RUB’s appreciation.
Oil prices continued their recovery,
closing 2017 at US$60/oz
Oil prices continued moving upward in 2017,
after touching a 13 year low of US$26/bbl in
2016. The primary driver behind improved
price sentiment was the agreement between
OPEC and non-OPEC countries, such as
Russia, to implement production cuts.
While these cuts have been successful to a
degree, they have also led to a resurgence in
the production of US shale, as producers
re-enter the market based on a higher oil price
environment. An additional demand has been
the higher oil consumption from China and
India, driving an increase in daily demand of
1.6m barrels in 2017.
Higher oil prices translate into higher fuel
costs for Petropavlovsk, an expense which
accounts for approximately 14% of our total
operating cash expense figure (US$43.8m,
an increase of 8% vs. US$40.3m in 2016).
2018 outlook for gold prices
During the first two months of 2018, gold
averaged US$1,332/oz, an increase of 10%
on the same period in 2017. How gold
performs for the remainder of the year will
depend on various factors, including the path
of inflation, interest rates, US$ strength, stock
market performance as well as political risk.
A softer US$, heightened political uncertainty
and increased concerns regarding inflation
being higher than expected may encourage
some investors to turn to gold as both a
hedge, a diversification tool and as a store of
value. However, should steady global growth
and stocks continue to outperform, the
opportunity cost of holding gold would
increase, making gold less attractive as an
asset. There is also the issue of interest rates;
the US Fed raised interest rates three times in
2017 (to 1.5%), yet gold proved somewhat
resilient. As such, an additional point to
consider is whether gold can withstand
further rate hikes, due in 2018.
The average annual gold price increased 1% in 2017 to US$1,257/oz (in US$/oz)
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
1,257
1,248
1,265
1,160
1,224
1,410
1,668
1,570
973
872
Source: The London Gold Market Fixing Limited. Data provided for information purposes only
Gold appreciated by 12% in 2017 (in US$/oz)
2,000
1,600
1,200
800
400
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: The London Gold Market Fixing Limited. Data provided for information purposes only
Gold ETFs finished 2017 with combined holdings of approximately 72Moz, up 10% on the year (in Moz)
100
80
60
40
20
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: UBS
Petropavlovsk Annual Report 2017 17
Strategic reportFinancial statementsGovernance Risks to Our Performance
The Board is responsible for overseeing
the effectiveness of the internal control
environment of the Group.
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 20 to
31. The Group seeks to mitigate these risks
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 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 below
and are supported by the robust risk
management and internal control systems
and procedures outlined on page 113.
Changes from risks identified in the 2016
Annual Report
As detailed, the following table includes
the most significant risks that may have an
adverse impact on the Group’s ability to meet
its strategic objectives. There have been no
major changes to the risks identified in 2016,
with the exception of the increase in the risk
related to the Company's guarantee on the
outstanding amounts IRC owes to ICBC,
as detailed below. However the construction
of the POX Hub, which is due to be
commissioned during Q4 2018, and the
ramping up of the Group’s underground
mining operations are critical to the future
growth and the financial viability of the Group
and these are a key focus of the Board.
The risk relating to the Company’s guarantee
against the 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$234m is outstanding remains a
significant issue. The assessment of whether
there is any material uncertainty that IRC will be
able to repay this facility as it falls due is one of
the key elements of the Group's overall going
concern assessment. Further information on
this matter is contained in the Audit Committee
Report on page 111 and in the going concern
statement on page 138.
From a health and safety perspective
the Board is mindful that the continued
development of underground mining and
autoclave technologies which will commence
Q4 2018 are all deemed to be high risk from
a health and safety perspective. The health
and safety of the Group’s employees and
contractors are of paramount importance to
the Board and the Board has approved the
appointment of an HSE Director, a non-Board
role, to raise the profile of this matter within
the Group.
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.
The Group’s risk management system is
monitored by the Board, with the exception of
(i) financial risks which are in the first instance
monitored by the Audit Committee and
(ii) health, safety and environmental (‘HSE’)
risks which are in the first instance monitored
by the HSE Committee. The Audit and HSE
Committees report any material risks to the
Board which considers these risks and
monitors the mitigating action being taken
to address and manage these risks. 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.
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
potential impact on the Group is assessed
and mitigating controls and action plans
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.
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.
18 Petropavlovsk Annual Report 2017
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
Chief Executive
Officer/Chief
Operating Officer
Chief Financial
Officer
Chief Executive
Officer/Chief
Operating Officer
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
Deputy CEO
Strategic
Development
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 19
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
2017 Progress
Potential impact
Change since 2016
Risk to production from:
– severe weather conditions;
– the availability of suitable machinery,
equipment and consumables; and
– logistics for the delivery of equipment
and services.
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. 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.
Operational
Performance on
pages 32 to 41.
Preventative maintenance procedures are
During 2017 the Group delivered production
undertaken on a regular and periodic basis to
in accordance with its mining plan.
High
EXPLORATION RELATED RISK
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
The Group’s activities are reliant on
the quantity and quality of the Mineral
Resources and Ore Reserves available
to it.
Exploration activities are speculative, time-consuming and can be
unproductive. In addition, these activities often require substantial
expenditure to establish Reserves through drilling and metallurgical and
other testing, determine appropriate recovery processes to extract gold
from the ore and construct or expand mining and processing facilities.
Once deposits are discovered it can take several years to determine
whether Reserves exist. During this time, the economic viability of
production may change. As a result of these uncertainties, the
exploration programmes in which the Group is engaged in may not
result in the expansion or replacement of the current production with
new Reserves or operations.
Update on page 61 to 62.
High
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 the delivery of
equipment.
The Group has a number of contingency plans in
place to address any disruption to services.
The Group uses modern geophysical and
geochemical exploration and surveying
Successful near mine exploration completed
during 2017 led to an increase in both JORC
techniques. The Group employs a world class
Mineral Resources and Ore Reserves. It also
team of geologists with considerable regional
identified a number of promising targets that
expertise and experience. They are supported by
warrant further exploration, which may result
a network of fully accredited laboratories capable
in further Mineral Resources and Ore Reserves
of performing a range of assay work to high
discoveries.
standards.
Group Mineral Resource and Ore Reserve
The Group’s Gold Ore Reserves and Mineral
Resources estimated as at 31 December 2017
estimates are prepared by a team of qualified
was prepared by the Group’s Competent Person
specialists following guidelines of JORC Code
in accordance with the JORC Code. Total Mineral
2012, which is one of the most recognised
reporting codes. Mineral Resource and Ore
Reserve estimates are subject to regular
independent reviews and audits. The last full
audit was completed in April 2017 by Wardell
Armstrong International.
In addition, as a part of compliance with The
Subsoil Law Group, the Group also prepares
reserve estimates following Russian GKZ
Resource ounces (including Reserves) as at
31 December 2017 amounted to 20.86Moz,
compared to 20.16Moz in 2016, with a total
Reserve of 8.15Moz compared to 7.95Moz as
at 31 December 2016.
Taking into account the 0.47Moz depletion from
mining operations during 2017, the Group
achieved a 1.17Moz gross increase in Mineral
Resources and a 0.67Moz gross increase in Ore
guidelines. These estimates are subject to GKZ
Reserves, compared to the 2017 Wardell
audits. Where possible, the Group reconciles
Armstrong International estimate prepared in
GKZ and JORC estimates which provides
additional confidence to the Company.
April 2017.
The Group employs a team of qualified mining
9.26Moz refractory Resource which supports
engineers to undertake mine planning, complete
Petropavlovsk’s long-term growth objectives in
open pit and underground mine design and
doubling the average life of mine and sustaining
production scheduling.
its production profile.
The completion of the POX Hub will unlock the
20 Petropavlovsk Annual Report 2017
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; and
– logistics for the delivery of equipment
and services.
The Group’s assets are located in the Russian Far East, a remote area
Operational
Performance on
pages 32 to 41.
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. 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.
EXPLORATION RELATED RISK
Risk
to it.
The Group’s activities are reliant on
the quantity and quality of the Mineral
Resources and Ore Reserves available
Update on page 61 to 62.
Exploration activities are speculative, time-consuming and can be
unproductive. In addition, these activities often require substantial
expenditure to establish Reserves through drilling and metallurgical and
other testing, determine appropriate recovery processes to extract gold
from the ore and construct or expand mining and processing facilities.
Once deposits are discovered it can take several years to determine
whether Reserves exist. During this time, the economic viability of
production may change. As a result of these uncertainties, the
exploration programmes in which the Group is engaged in may not
result in the expansion or replacement of the current production with
new Reserves or operations.
The symbols indicate how the Company
considers that these risks have changed
since 2016.
Increased risk
No change
Decreased risk
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
During 2017 the Group delivered production
in accordance with its mining plan.
High
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 the delivery of
equipment.
The Group has a number of contingency plans in
place to address any disruption to services.
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
High
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.
Group Mineral Resource and Ore Reserve
estimates are prepared by a team of qualified
specialists following guidelines of JORC Code
2012, which is one of the most recognised
reporting codes. Mineral Resource and Ore
Reserve estimates are subject to regular
independent reviews and audits. The last full
audit was completed in April 2017 by Wardell
Armstrong International.
In addition, as a part of compliance with The
Subsoil Law Group, the Group also prepares
reserve estimates following Russian GKZ
guidelines. These estimates are subject to GKZ
audits. Where possible, the Group reconciles
GKZ and JORC estimates which provides
additional confidence to the Company.
The Group employs a team of qualified mining
engineers to undertake mine planning, complete
open pit and underground mine design and
production scheduling.
Successful near mine exploration completed
during 2017 led to an increase in both JORC
Mineral Resources and Ore Reserves. It also
identified a number of promising targets that
warrant further exploration, which may result
in further Mineral Resources and Ore Reserves
discoveries.
The Group’s Gold Ore Reserves and Mineral
Resources estimated as at 31 December 2017
was prepared by the Group’s Competent Person
in accordance with the JORC Code. Total Mineral
Resource ounces (including Reserves) as at
31 December 2017 amounted to 20.86Moz,
compared to 20.16Moz in 2016, with a total
Reserve of 8.15Moz compared to 7.95Moz as
at 31 December 2016.
Taking into account the 0.47Moz depletion from
mining operations during 2017, the Group
achieved a 1.17Moz gross increase in Mineral
Resources and a 0.67Moz gross increase in Ore
Reserves, compared to the 2017 Wardell
Armstrong International estimate prepared in
April 2017.
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.
Petropavlovsk Annual Report 2017 21
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 is dependent on the successful commissioning of POX and the continuing delivery of the
underground mining project.
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Pressure Oxidation (POX) Hub
If the Group is unable to deliver POX within the agreed budget and
timeframes this may have an adverse impact on the Group’s growth
plans and its future profitability.
The POX Hub on pages
42 to 51.
The Group has entered into a management
contract with Outotec a world leader in the
Full scale construction works on the POX Hub
were resumed at the beginning of 2017 with key
High
design and construction of pressure oxidation
construction milestones reached during the year.
Of Petropavlovsk’s 20.86Moz of Resources and Reserves, 9.63Moz is
classified as refractory. Unlike non-refractory ore, refractory ore cannot
be processed via regular processes; in order to unlock the value
embedded in these ounces, alternative methods must be used.
The Company has decided to adopt the pressure oxidation method
to do this. Consequently the Company will not be able to process and
access the value of its refractory ore without the commissioning of the
POX Hub.
The POX Hub is on schedule for commissioning
Q4 2018 with the ramp up to commercial
production due to occur throughout 2019.
The underground mining project
If the Group is unable to achieve planned production within the agreed
capital and operating cost budget this may have an adverse impact on
the Group’s growth plans and its future profitability.
Underground on page 52.
The Group employed a Russian engineering
Planned underground development was
firm to undertake a pre-feasibility study and
substantially completed at Pioneer and Malomir
mine design on underground mining. The study
during 2017 in spite of some delays; production
concluded that underground mining should be
began at both underground mines.
High
and flotation plants. Outotec will oversee the
manufacture, installation and commissioning
of the equipment and has guaranteed certain
operating parameters.
The delivery of the POX project is being led
by an experienced and skilled Project Team.
This includes an experienced scientific team
which is developing the optimal parameters
of the process suitable for the specifics of
Petropavlovsk’s concentrates.
The Group operates a unique POX pilot plant
that replicates principal processing stages of an
industrial POX processing plant on a small scale.
technically feasible and economically viable.
The Group engaged an experienced mining
contractor to undertake underground mining
development and underground mining.
The contractor is supervised by an in-house
team of experienced underground mining
managers and engineers.
The Board closely monitors both the POX and underground mining projects.
22 Petropavlovsk Annual Report 2017
Operational risks continued
PROJECT RELATED RISKS – Failure to deliver various construction and development projects
The Group’s long-term strategy is dependent on the successful commissioning of POX and the continuing delivery of the
underground mining project.
Pressure Oxidation (POX) Hub
If the Group is unable to deliver POX within the agreed budget and
The POX Hub on pages
timeframes this may have an adverse impact on the Group’s growth
42 to 51.
plans and its future profitability.
Of Petropavlovsk’s 20.86Moz of Resources and Reserves, 9.63Moz is
classified as refractory. Unlike non-refractory ore, refractory ore cannot
be processed via regular processes; in order to unlock the value
embedded in these ounces, alternative methods must be used.
The Company has decided to adopt the pressure oxidation method
to do this. Consequently the Company will not be able to process and
access the value of its refractory ore without the commissioning of the
POX Hub.
The underground mining project
If the Group is unable to achieve planned production within the agreed
capital and operating cost budget this may have an adverse impact on
the Group’s growth plans and its future profitability.
Underground on page 52.
The Board closely monitors both the POX and underground mining projects.
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Full scale construction works on the POX Hub
were resumed at the beginning of 2017 with key
construction milestones reached during the year.
High
The POX Hub is on schedule for commissioning
Q4 2018 with the ramp up to commercial
production due to occur throughout 2019.
Planned underground development was
substantially completed at Pioneer and Malomir
during 2017 in spite of some delays; production
began at both underground mines.
High
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 delivery of the POX project is being led
by an experienced and skilled Project Team.
This includes an experienced scientific team
which is developing the optimal parameters
of the process suitable for the specifics of
Petropavlovsk’s concentrates.
The Group operates a unique POX pilot plant
that replicates principal processing stages of an
industrial POX processing plant on a small scale.
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.
The Group engaged an experienced mining
contractor to undertake underground mining
development and underground mining.
The contractor is supervised by an in-house
team of experienced underground mining
managers and engineers.
Petropavlovsk Annual Report 2017 23
Strategic reportFinancial statementsGovernance
Risks to Our Performance continued
Table of principal risks
Financial risks
FINANCIAL RISKS – Excluding financial risks related to IRC
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Lack of funding and liquidity to allow
the Group to:
The Group needs ongoing access to liquidity and funding in order to:
(i) refinance its existing debt as required,
i.
Support its existing operations;
(ii) support its existing operations and
Chief Financial Officer’s
Statement on pages 84
to 93.
(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.
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 free cash flow.
(For financial risks related to IRC please
see page 26.)
Detailed annual budgets are approved by
the Board and monthly forecasts provided.
On 14 November 2017 the Group issued
US$500m 8.125% Guaranteed Notes due 2022
High
A successful cost reduction programme was
(the Notes). Proceeds of the Notes were used to
undertaken to offset the effect of a reduction in
substantially refinance the Group’s loans pursuant
the gold price.
to the banking facilities with Sberbank and
The Group continues to progress its internal KPI
to reduce Total Cash Costs◆ during the period
2013-2018.
VTB Bank.
Please see IRC related
risks on page 26.
The Group’s result of operations 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.
Market Overview on
pages 16 and 17.
Chief Financial Officer’s
Statement on pages 84
to 93.
The Chief Financial Officer 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
High
basis and consults with the Board as
appropriate.
The Group has a hedging policy and hedges a
portion of production as the Chief Financial
Officer and the Board deem necessary.
The Group’s borrowing facilities with Sberbank
and VTB included 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. These covenants have been
removed.
The issuance of the Notes and the refinancing of
the Group’s bank debt has provided medium term
financial stability and flexibility for the business
In addition on 22 March 2018, the Company
signed and fully executed a gold sales agreement
with Gazprombank, for a total volume of 96koz
and for advance payment for up to 12 months.
Advances will be settled using proceeds at the
prevailing gold price at the date of the shipment.
The forward gold sales agreement with
Gazprombank provides flexibility in managing
working capital of the Group.
entered into a number of gold forward contracts
during 2017. Forward contracts to sell an
aggregate 212,501oz of gold matured during the
year, resulting in a gain for the Group of US$0.8m.
Forward contracts to sell an aggregate of
400,000oz of gold at an average price of
US$1,252oz were outstanding as at
31 December 2017.
During 2018 the Company has continued to hedge
a portion of its gold production in order to protect
itself from volatility in the price.
24 Petropavlovsk Annual Report 2017
Financial risks
FINANCIAL RISKS – Excluding financial risks related to IRC
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 free cash flow.
(For financial risks related to IRC please
see page 26.)
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Lack of funding and liquidity to allow
The Group needs ongoing access to liquidity and funding in order to:
the Group to:
(i) refinance its existing debt as required,
i.
Support its existing operations;
(ii) support its existing operations and
ii. Invest in and develop its exploration
(iii) invest in new projects and exploration.
and underground mining projects;
iii. Complete the construction of the
POX Hub;
unfavourable terms.
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
Chief Financial Officer’s
Statement on pages 84
to 93.
The Group may therefore be unable to develop and/or meet its
operational or financial commitments.
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◆ during the period
2013-2018.
The Group’s result of operations may be
affected by changes in the gold price
The Group’s financial performance is highly dependent on the price
Market Overview on
of gold. A sustained downward movement in the market price for gold
pages 16 and 17.
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 84
to 93.
The Chief Financial Officer 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 Chief Financial
Officer and the Board deem necessary.
Please see IRC related
risks on page 26.
High
On 14 November 2017 the Group issued
US$500m 8.125% Guaranteed Notes due 2022
(the Notes). Proceeds of the Notes were used to
substantially refinance the Group’s loans pursuant
to the banking facilities with Sberbank and
VTB Bank.
The Group’s borrowing facilities with Sberbank
and VTB included 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. These covenants have been
removed.
The issuance of the Notes and the refinancing of
the Group’s bank debt has provided medium term
financial stability and flexibility for the business
In addition on 22 March 2018, the Company
signed and fully executed a gold sales agreement
with Gazprombank, for a total volume of 96koz
and for advance payment for up to 12 months.
Advances will be settled using proceeds at the
prevailing gold price at the date of the shipment.
The forward gold sales agreement with
Gazprombank provides flexibility in managing
working capital of the Group.
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 2017. Forward contracts to sell an
aggregate 212,501oz of gold matured during the
year, resulting in a gain for the Group of US$0.8m.
High
Forward contracts to sell an aggregate of
400,000oz of gold at an average price of
US$1,252oz were outstanding as at
31 December 2017.
During 2018 the Company has continued to hedge
a portion of its gold production in order to protect
itself from volatility in the price.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 25
Strategic reportFinancial statementsGovernance
Risks to Our Performance continued
Financial risks continued
FX RISK
Risk
Currency fluctuations may affect
the Group.
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Chief Financial Officer’s
Statement on page 92.
The Group does not undertake any foreign
currency transaction hedging although this
is kept under review.
During 2017, the Russian Rouble appreciated
by 13% against the US Dollar, with the average
exchange rate for the period decreasing from
67.18 Roubles per US Dollar in 2016 to 58.32
Roubles per US Dollar in 2017.
High
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
2017 Progress
Potential impact
Change since 2016
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$234m is
outstanding (2016: cUS$234m). 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 63.
Audit Committee Report
on page 111.
Going concern
statement on page 138.
– further delays in K&S achieving full
production; and
– 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.
Consequently the Group’s going concern status remains highly
sensitive to IRC’s ability to comply with covenants within the ICBC
facility and generate sufficient cash flows from its K&S mine.
The Board and the Chief Financial Officer
maintain close communication with IRC’s
On 31 March 2017, IRC announced that ICBC
had waived the obligation of K&S to repay all
High
Executive whilst the Chairman communicates
loan principal instalments due in 2017 totalling
regularly with the IRC Chairman.
The Company is seeking a nominee on the Board
of IRC.
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.
This is a key focus of the Board.
US$42.5m. This amount will be spread equally
between the five subsequent repayment
instalments due under the project finance facility.
The next scheduled repayment of US$29.75m is
due on 20 June 2018.
Management of the Company and IRC are in
discussions with ICBC regarding an amendment
of the repayment schedule and to obtain waivers
in respect of obligations to comply with certain
financial covenants. IRC is also in advanced
discussions regarding the full refinancing of the
ICBC facility with a leading bank. However, if the
ICBC refinancing is not completed and IRC is
unable to refinance the ICBC facility with another
lender, IRC and/or the Company would then need
to carry out contingency plans including entering
into negotiations with banks or other investors for
additional debt and/or equity financing. As a result
of this issue, the going concern statement, on
page 138 of this Annual Report, includes a material
uncertainty statement.
The Company has proposed the appointment of a
nominee Director on the Board of IRC during 2018.
K&S produced 1,563,066 tonnes of iron ore
concentrate during 2017 and operated at a steady
state capacity of greater than 60% in January 2018.
The Company’s interest in IRC was valued at
c.US$70.9m as at 31 December 2017 (2016:
US$36m). The increase in the Company’s interest
relates principally to a reversal of impairment by IRC
Ltd – please see page 89 for further information.
26 Petropavlovsk Annual Report 2017
Financial risks continued
FX RISK
Risk
Currency fluctuations may affect
the Group.
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.
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Chief Financial Officer’s
Statement on page 92.
The Group does not undertake any foreign
currency transaction hedging although this
is kept under review.
During 2017, the Russian Rouble appreciated
by 13% against the US Dollar, with the average
exchange rate for the period decreasing from
67.18 Roubles per US Dollar in 2016 to 58.32
Roubles per US Dollar in 2017.
High
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
2017 Progress
Potential impact
Change since 2016
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:
– further delays in K&S achieving full
production; and
– 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 63.
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$234m is
outstanding (2016: cUS$234m). 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.
Consequently the Group’s going concern status remains highly
sensitive to IRC’s ability to comply with covenants within the ICBC
facility and generate sufficient cash flows from its K&S mine.
Audit Committee Report
on page 111.
Going concern
statement on page 138.
The Board and the Chief Financial Officer
maintain close communication with IRC’s
Executive whilst the Chairman communicates
regularly with the IRC Chairman.
The Company is seeking a nominee on the Board
of IRC.
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.
This is a key focus of the Board.
High
On 31 March 2017, IRC announced that ICBC
had waived the obligation of K&S to repay all
loan principal instalments due in 2017 totalling
US$42.5m. This amount will be spread equally
between the five subsequent repayment
instalments due under the project finance facility.
The next scheduled repayment of US$29.75m is
due on 20 June 2018.
Management of the Company and IRC are in
discussions with ICBC regarding an amendment
of the repayment schedule and to obtain waivers
in respect of obligations to comply with certain
financial covenants. IRC is also in advanced
discussions regarding the full refinancing of the
ICBC facility with a leading bank. However, if the
ICBC refinancing is not completed and IRC is
unable to refinance the ICBC facility with another
lender, IRC and/or the Company would then need
to carry out contingency plans including entering
into negotiations with banks or other investors for
additional debt and/or equity financing. As a result
of this issue, the going concern statement, on
page 138 of this Annual Report, includes a material
uncertainty statement.
The Company has proposed the appointment of a
nominee Director on the Board of IRC during 2018.
K&S produced 1,563,066 tonnes of iron ore
concentrate during 2017 and operated at a steady
state capacity of greater than 60% in January 2018.
The Company’s interest in IRC was valued at
c.US$70.9m as at 31 December 2017 (2016:
US$36m). The increase in the Company’s interest
relates principally to a reversal of impairment by IRC
Ltd – please see page 89 for further information.
Petropavlovsk Annual Report 2017 27
Strategic reportFinancial statementsGovernance
Risks to Our Performance continued
Health, safety and environmental risk
Health, safety and environmental risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
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.
Sustainability report on
pages 64 to 78.
Sustainability: Key
Performance Indicators
(KPIs) on pages 65 to 67.
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
Legal and regulatory risks
Legal and regulatory risks
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
The Group requires various licences
and permits in order to operate.
The Group’s principal activity is the mining of precious and non-precious
metals which require it to hold licences which permit it to explore and
mine in particular areas in Russia. These licences are regulated by
Russian governmental agencies and if a material licence was
challenged or terminated, this would have a material adverse impact
on the Group. In addition, various government regulations require
the Group to obtain permits to implement new projects or to renew
existing permits.
Failure to comply with the requirements and terms of these licenses
may result in the subsequent termination of licenses crucial to
operations and cause reputational damage. Alternatively, 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.
28 Petropavlovsk Annual Report 2017
Board level oversight of health and safety issues
Mr Vladislav Egorov, HSE Committee Chair visited
occurs through the work of the Health, Safety
the Group’s operations in the Amur Region of
and Environmental Committee (‘HSE’) which
Russia in the latter part of 2017 and met with a
Medium/High
was chaired by Mr Alexander Green,
Independent Non-Executive Director from
1 January 2017 to 22 June 2017 and by
Mr Vladislav Egorov during the period
22 June 2017 to 31 December 2017.
number of HSE personnel in order to promote a
strong health and safety culture within the Group.
The Lost-Time Injury Frequency Rate (LTIFR) for
2017 of 3.11 accidents per 1 million manhours
worked compared with a LTIFR of 2.64 in 2016.
Health and Safety management systems are
Regrettably this included three fatalities which
in place across the Group to ensure that the
are summarised in the Sustainability report on
operations are managed in accordance with
page 65 together with details of the agreed
the relevant health and safety regulations and
actions to ensure that these type of accidents
requirements.
do not reoccur.
The Group continually reviews and updates its
Given the Board’s commitment to improving
health and safety procedures in order to minimise
health and safety of its employees throughout
the Group the Board has also agreed a new
non-Board position of HSE Director. This is
particularly relevant given the Group will continue
to develop underground mining and autoclave
technologies during 2018 which are all deemed to
be high risk from a health and safety perspective.
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.
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.
Medium/High
Health, safety and environmental risk
Health, safety and environmental risk
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
Sustainability report on
recognises that it has an obligation to protect the health of its employees
pages 64 to 78.
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.
Sustainability: Key
Performance Indicators
(KPIs) on pages 65 to 67.
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
Medium/High
Mr Vladislav Egorov, HSE Committee Chair visited
the Group’s operations in the Amur Region of
Russia in the latter part of 2017 and met with a
number of HSE personnel in order to promote a
strong health and safety culture within the Group.
The Lost-Time Injury Frequency Rate (LTIFR) for
2017 of 3.11 accidents per 1 million manhours
worked compared with a LTIFR of 2.64 in 2016.
Regrettably this included three fatalities which
are summarised in the Sustainability report on
page 65 together with details of the agreed
actions to ensure that these type of accidents
do not reoccur.
Given the Board’s commitment to improving
health and safety of its employees throughout
the Group the Board has also agreed a new
non-Board position of HSE Director. This is
particularly relevant given the Group will continue
to develop underground mining and autoclave
technologies during 2018 which are all deemed to
be high risk from a health and safety perspective.
Board level oversight of health and safety issues
occurs through the work of the Health, Safety
and Environmental Committee (‘HSE’) which
was chaired by Mr Alexander Green,
Independent Non-Executive Director from
1 January 2017 to 22 June 2017 and by
Mr Vladislav Egorov during the period
22 June 2017 to 31 December 2017.
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.
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 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.
Medium/High
Legal and regulatory risks
Legal and regulatory risks
The Group requires various licences
and permits in order to operate.
The Group’s principal activity is the mining of precious and non-precious
metals which require it to hold licences which permit it to explore and
mine in particular areas in Russia. These licences are regulated by
Russian governmental agencies and if a material licence was
challenged or terminated, this would have a material adverse impact
on the Group. In addition, various government regulations require
the Group to obtain permits to implement new projects or to renew
existing permits.
Failure to comply with the requirements and terms of these licenses
may result in the subsequent termination of licenses crucial to
operations and cause reputational damage. Alternatively, 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 2017 29
Strategic reportFinancial statementsGovernance
Legal
and
regu-
lartory
risks
Risks to Our Performance continued
Legal and regulatory risks continued
Legal and regulatory risks
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
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
of several financial institutions and not keep
monitor changes in the political environment and
High
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.
30 Petropavlovsk Annual Report 2017
Legal and regulatory risks continued
Legal and regulatory risks
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.
Risk
Description and potential impact
Additional information
Mitigation/comments
2017 Progress
Potential impact
Change since 2016
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 2017 31
Strategic reportFinancial statementsGovernance
Operational Performance
32 Petropavlovsk Annual Report 2017
Key Performance Indicators
Our key performance indicators appear throughout this report and introduce the operational
and sustainability sections and the CFO statement respectively (pages 33, 65 and 81).
Mineral Resources (Moz) (1)
Ore Reserves (Moz) (1)
2017
2016
2015
20.9
20.2
2017
2016
23.3
2015
Total Attributable Gold Production
(koz) (1)
8.2
2017
7.8
2016
8.4
2015
440
400
504
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 2017
A successful exploration campaign in 2017
yielded a 6% increase (before depletion) in
JORC Mineral Resources across the Group’s
assets to 20.86Moz. The increase is mainly
attributable to additions at open pit and
underground targets at Pioneer and Albyn,
including a 26% increase in Resources suitable
for underground mining, from c.0.7 to c.0.9Moz.
Going Forward
Going forward, the Group will continue to
develop a high quality non-refractory and
refractory resource base for both open pit
and underground mining.
Specifically in 2018, Group geologists will
look to delineate further underground
non-refractory reserves to increase the supply
of high grade ore to processing plants in the
near term and improve cash flows. In addition,
the definition of non-refractory resources for
open pit extraction to facilitate production
growth via conventional RIP operations in
the medium-term, will also be a priority.
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 categories.
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 2017
Work completed in 2017 increased total
Group Reserves by c.8% or c.0.7Moz (before
depletion) to 8.15Moz. In particular, successful
exploration and completion of technical
studies increased Ore Reserves for
underground mining by 16% to c.0.4Moz.
This includes high grade underground
Reserves at Pioneer. New open pit Reserves
were also established at Pioneer and Albyn.
Going Forward
Going forward, the Group aims to develop the
non-refractory and refractory Reserve base at
and around its operational assets. This is
expected to be achieved through continuous
exploration, targeting both open pit and
underground reserves.
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. Gold production data
consists of gold recovered during the period
and is adjusted for the movement of gold
remaining 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 2017
The Group produced 439.6koz, towards
the upper end of the guided range and 10%
higher than during the same period in 2016
(400.2koz). Both of our flagship mines,
Pioneer and Albyn, outperformed the
previous year’s production.
It should be noted that from the beginning
of 2017, the Company moved to using gold
poured as the definition for production and
comparable 2016 gold production numbers
were adjusted accordingly.
Going Forward
Gold production for 2018 is forecast between
420 - 460koz. As part of the mining plan,
ore will be sourced from open pit operations,
with meaningful contribution from our
underground mines at Malomir and Pioneer.
Although the Board has taken a conservative
approach towards the production forecast for
2018, management is aiming to produce first
gold from the POX Hub in Q4 2018.
(1) Commencing 2017, the Company moved to using gold poured as the definition for production. The production data for
2017 and 2016 has been prepared to reflect this. However, it should be noted that the 2015 numbers have not been restated.
Petropavlovsk Annual Report 2017 33
Strategic reportFinancial statementsGovernance Operational Performance
Pioneer
Pioneer remains Petropavlovsk’s flagship asset with the most
significant exploration potential.
2017 gold production:
161.8koz –37% of total Group gold
production for the year.
Location
Operating Mine
Underground
Lime deposit
POX
Analytical Labs
Hydro Plant
Railway
Federal highway
Core assets
Blagoveschensk
Pokrovskiy POX Hub
Pioneer
Operating Mine
POX
Railway
Underground
Lime deposit
Hydro Plant
Core assets
Analytical Labs
Blagoveshchensk
Federal highway
Site plan
West Zheltunak
East Zheltunak
Katrin
c.20km
Vostochnaya
Andreevskaya
Perspektivnaya
Nikolaevskaya
NE Bakhmut 1,2&3
Otvalnaya
c.15km
Alexandra
Shirokaya
Brekchievaya
Bakhmut & Promezhutochnaya
Yuzhnaya
Zvezdochka
1,000m
Existing ore body
Current + future production pits
Depleted / nearly depleted pits; transition to underground
34 Petropavlovsk Annual Report 2017
Production as a % of total group
Key facts:
2001
Pioneer was acquired as a greenfield license
2.4Moz
Gold produced to date
6,783kt
Ore processed via RIP in 2017
752kt
Ore processed via HL in 2017
1,337km2
Total gold licence area
6.10Moz
Mineral Resources, including 2.94Moz
Ore Reserves
15 year
Mine life
Geology
Gold mineralisation at Pioneer was formed
near a contact between a granitoid massif
and Jurassic country rocks, as a result of
hydrothermal processes during the late
Mesozoic Period.
Pioneer includes five licences covering
multiple 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
generally 1 to 8 metres in thickness with a
strike length of up to 400m. The more
moderate grade halos are up to 200m thick
with a strike length of up to 2km. Many of the
high-grade pay shoots are open at depth,
providing potential for further increase in
resources. Exploration potential for the
discovery of significant open pit resources is
also acknowledged, particularly south and
south west from Pioneer.
Mining and Processing
Pioneer is a multiple open pit, bulk tonnage
mine. 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.
The Group is at an advanced stage of
developing a new processing plant - the POX
Hub, which will enable gold production from
refractory ore. The POX Hub is located at
Pokrovskiy, c.40km south of Pioneer, and is
expected to become operational by the end
of 2018. It will process refractory concentrates
initially produced at Malomir and later at
Pioneer after a flotation unit is added to the
Pioneer processing facility. The Group is
evaluating the potential to complete the
Pioneer flotation plant and enable refractory
production as soon as possible, in order to
increase production output in the mid-term.
Low-grade non-refractory ore (<0.5g/t) is
processed via a seasonal, heap leach
operation. Underground development
commenced at Pioneer’s North East
Bakhmut area in Q3 2016 using a reputable
Russian mining contractor.
Underground production at North East
Bakhmut commenced in H1 2017.
Underground production is planned to be
ramped up throughout 2018 to 0.2-0.3Mtpa.
Operations
In 2017, Pioneer produced 161.8koz, 37% of
total Group production, and a 21% increase
from 2016 (133.2Koz). The increase is mainly
Pioneer open pit and underground mining operations
Total material moved
Ore mined
Average grade
Gold content
Processing operations (Resin-in-pulp plant)
Total milled
Average grade
Gold content
Recovery
Gold recovered
Heap leach operations
Total stacked
Average grade
Gold content
Recovery
Gold recovered
Pioneer gold production – Doré
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2017
15,857
8,489
0.72
196.4
Year ended
31 December 2016
17,360
3,266
0.95
99.4
Units
t ’000
g/t
oz. ’000
%
oz. ’000
t ’000
g/t
oz. ’000
%
oz. ’000
oz. ’000
Year ended
31 December 2017
6,783
0.68
148.9
75.3%
112.1
Year ended
31 December 2016
6,700
0.75
159.8
85.5%
136.6
752
0.49
11.7
51.8%
6.1
161.8
701
0.53
12.0
44.1%
5.3
133.2
attributable to a significant reduction of
gold in circuit, which is gold remaining in
the processing circuit of the plant (primarily
in resin sorbent and cyanide solution, in the
form of electrolytic product). The release of
gold in circuit was primarily achieved through
the successful commissioning, in Q1 2017,
of a resin treatment facility that releases gold
‘trapped’ in used resin.
The main sources of ore at Pioneer
were pits of the Alexandra, Yuzhnaya,
Promezhutochnaya and Andreevskaya-West
zones. This ore was blended with lower grade
material from stockpiles. RIP processing
recoveries were lower than in 2016 due to
head grades being lower and the ore
processed being more refractory than in the
previous year. Heap leach operations
operated through the warmer season,
producing 6.1koz of gold.
During 2017, a total of 3,646m (50,268m3) of
underground development was completed.
The first underground ore was produced in
June. In total, 35.1kt of underground ore with
an average gold content of 2.78g/t was mined
in 2017. By the end of 2018, when
underground mining at Pioneer is ramped up
to full capacity, Pioneer is expected to
produce ore at an average of 4-5g/t.
Total Cash Costs◆ were US$791/oz, a
25% increase from 2016 (US$631/oz). All-in
Sustaining Costs◆ were US$1,164/oz, a 30%
increase from 2016. Both Total Cash Costs◆
and All-in Sustaining Costs◆ are affected by
Rouble appreciation against the US Dollar
and by Rouble inflation. Higher Total Cash
Costs◆ also reflect the impact of the lower
grades processed and lower metallurgical
recoveries. The increase in All-in Sustaining
Costs◆ is also attributable to the development
of the NE Bakhmut underground project and
tailings dam expansion.
Outlook
In 2018, Pioneer production is expected to be
at the same level as in 2017. Open pit mining
and production is expected to be in line with
2017, whilst we expect to see the NE Bakhmut
underground mine ramping up to its full
planned capacity by the end of the year.
Underground reserves at Pioneer are 263koz
at present, a c.100koz increase compared to
the last year, and there is significant potential
for these to increase in the course of further
exploration works planned for 2018. The
release of gold in circuit is no longer expected
to contribute materially, though gold output
will be maintained by increasing underground
production from 2017 levels.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 35
Strategic reportFinancial statementsGovernance Operational Performance continued
Albyn
Albyn is Petropavlovsk’s largest producing mine and has a
100% non-refractory Resource base.
2017 gold production:
181.6koz – 41% of total Group gold
production for the year.
Location
Operating Mine
Analytical Labs
Hydro Plant
Railway
Federal highway
Core assets
Blagoveschensk
Operating Mine
POX
Railway
Albyn
Production as a % of total group
Key facts:
2005
Albyn was acquired as a greenfield license
0.9Moz
Federal highway
Gold produced produced to date
Underground
Lime deposit
Hydro Plant
Core assets
Analytical Labs
Blagoveshchensk
Site plan
N
Albyn
Unglichikan
c.15km
1,000m
c.25km
Elginskoye
Existing ore body
Current + future production pits
Depleted / nearly depleted pits; transition to underground
36 Petropavlovsk Annual Report 2017
4,618kt
Ore processed via RIP in 2017
1,053.1km2
Total gold licence area
4.95Moz
Mineral Resources, including 2.31Moz
Ore Reserves
16 year
Mine life
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 three
licences covering multiple orebodies within
four key deposits: Albyn, Elginskoye,
Unglichikan and Afanasevskoye. All these
orebodies are open in a down dip direction.
Elginskoye, Unglichikan and Afanasevskoye
are also open along the strike.
The mineralisation at Albyn comprises a
series of sub parallel metasomatic zones,
gently dipping to the north, which appear to
be open in a down-dip direction. Elginskoye
mineralisation is also confined within gently
dipping metasomatic zones but dipping
south. Gold mineralisation has been
confirmed by drilling over a strike length in
excess of 5.7km, and remains open in all
directions. Unglichikan comprises a series of
sub-parallel, relatively narrow, steeply dipping
zones, which were proven over a strike length
in excess of 5.2km. It remains open in all
directions. Afanasevskoye represents a
relatively narrow, c.1.5km long single zone of
gold mineralisation with a steep dip, which is
open in down-dip and west strike directions.
In addition to these four proven deposits,
there are a number of known exploration
targets of which Ulgen, Yasnoye and
Leninskoye are the most significant.
Most of the licence area remains
underexplored and is highly prospective.
All known Mineral Resources and Reserves
are currently classified as non-refractory,
though refractory gold mineralisation is
known to exist at the Unglichikan and
Elginskoye deposits.
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
Gold recovered
Albyn gold production - Doré
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2017
28,557
5,263
1,16
196.5
Year ended
31 December 2016
31,763
4,970
1.25
199.5
Units
t ’000
g/t
oz. ’000
%
oz. ’000
oz. ’000
Year ended
31 December 2017
4.618
1.16
171.9
93.3%
160.3
181.6
Year ended
31 December 2016
4,675
1.28
192.5
93.5%
180.0
173.9
Mining and Processing
Albyn is a large (2.2km in length), open pit,
bulk tonnage operation. The Group operates
its own mining fleet at Albyn, which consists
of modern diesel and electrical excavators,
dump trucks, drill rigs, bulldozers and other
vehicles. Mining productivity and equipment
utilisation is optimised by operating two daily
shifts throughout the year.
Total Cash Costs◆ were US$541/oz,
a 7% decrease from 2016 (US$581/oz).
All-in Sustaining Costs◆ were US$718/oz
with no material change compared to 2016.
Total Cash Costs◆ and All-in Sustaining
Costs◆ are affected by Rouble appreciation
against the US Dollar, and by Rouble inflation.
Higher head grades mitigated the negative
effect of these factors.
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. The RIP plant
comprises of two identical grinding lines, each
with a 1.8Mtpa design capacity. Operational
optimisations and improvements completed
since the Albyn plant was commissioned in
2011 allowed a 30% increase over the original
design processing capacity.
Operations
In 2017, Albyn produced 181.6koz, 41% of
total Group production and a 4% increase
on 2016 (173.9koz). The main sources of ore
were the Central and Eastern zones of the
Albyn main pit, with a small amount of ore
supplied from stockpiles. The eastern zone
was completed during 2017. Throughout the
year, the processing plant had consistently
high recoveries of over 90%.
Outlook
In 2018, Albyn production is expected to be
marginally higher than in 2017, due to slightly
higher grades in both ore mined and
processed during the year. Production will
continue from open pit operations. Albyn’s
current open pit is now entering its final
stages and scheduled to be completed in
2019, when production from Elginskoye and
Unglichikan is expected to start. As the Albyn
orebody remains open at depth well below
the open pit, the Group is also exploring the
potential for underground mining there.
This may become an additional source of
production in the future, should planned
exploration confirm sufficient underground
Reserves.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 37
Strategic reportFinancial statementsGovernance Operational Performance continued
Malomir
Malomir is the Group’s largest asset by Reserves and
Resources and with c.90% refractory ore Reserves will
be the main source of concentrate for the future POX Hub.
2017 gold production:
65.6koz – 15% of total Group gold
production for the year.
Location
Operating Mine
Underground
Lime deposit
POX
Analytical Labs
Hydro Plant
Railway
Federal highway
Core assets
Blagoveschensk
Malomir
Pokrovskiy POX Hub
Operating Mine
POX
Railway
Underground
Lime deposit
Hydro Plant
Core assets
Analytical Labs
Blagoveshchensk
Federal highway
Site plan
N
1,000m
Quartzitovoye
Ozhidaemoye
Magnetitovoye
Malomir Central
Existing ore body
Current + future production pits
Depleted / nearly depleted pits; transition to underground
38 Petropavlovsk Annual Report 2017
Production as a % of total group
Key facts:
2003
Malomir was acquired as a greenfield license
0.6Moz
Gold produced to date
3,404kt
Ore processed via RIP in 2017
821.3km2
Total gold licence area
7.06Moz
Mineral Resources, including 2.70Moz
Ore Reserves
16 year
Mine life
Geology
Malomir 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. Malomir licences also cover a number
of exploration targets including Uspenskoye,
Razlomnoye, Tumannoye and Zapadnoye.
These targets remain prospective for the
discovery of both refractory and non-refractory
resources. Quartzitovoye is a high-grade zone
and remains open in down dip direction,
with potential to increase non-refractory
resources for potential underground mining.
Mining and Processing
Malomir is an open pit and underground
operation. Underground mining is performed
by a reputable Russian underground mining
contractor. The Group operates its own mining
fleet at Malomir for open pit mining and is
assisted by a local contractor. Mining productivity
and equipment utilisation is optimised by
operating two daily shifts throughout the year.
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, which is operational throughout the year.
The refractory ore from Ozhidaemoye does not
respond to standard RIP processing methods.
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 is being built in two stages.
As a result of the first stage of development
(capacity of 3.6Mtpa), the Group is expected
to start concentrate production in Q2 2018.
The second stage, to increase the capacity
of the Malomir flotation unit to 5.4Mtpa,
is currently expected to be completed and
commissioned in 2019. The flotation plant will
convert the refractory reserves into higher-
grade flotation concentrate, which will be sent
to the POX Hub for processing.
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
Gold recovered
Malomir gold production - Doré
operational by the end of 2018, processing
refractory concentrates initially produced at
Malomir and from 2023 at Pioneer.
Underground development commenced at
Malomir’s Quartzitovoye zone in January 2017.
Despite initial delays due to slow contractor
mobilisation, Quartzitovoye underground
production started in June 2017 and ramped
up to an annualised 0.25Mtpa of ore by the end
of the year. The grade of the ore mined in
December 2017 reached 9.16g/t, c.30% higher
than budgeted. Quartzitovoye is expected to
maintain this level of ore production through
2018, and the grade of underground ore mined
in 2018 is expected to be c.6g/t.
Operations
In 2017 Malomir produced 65.6koz, 15% of
total Group production and a 20% increase
from 2016 (54.9koz). The increase is mostly
attributable to the processing of high grade
underground ore and to an overall increase in
plant throughput.
The main sources of ore were pits of the
Quartzitovoye and Magnetitovoye zones,
blended with high grade ore mined from
underground and low grade ore from
stockpiles. The volumes of ore treated through
the plant increased by 13% compared to 2016,
which was in line with the mining plan.
The Quartzitovoye 2 pit was completed in H1,
though recovery rates from the pit were lower
than planned due to its ore being more
refractory than expected.
The POX Hub is located at Pokrovskiy,
c.670km (by motor road) from Malomir.
Construction of the POX Hub is at an
advanced stage and it is expected to become
The construction of an underground mine
at Quartzitovoye 1 began in January 2017,
and 3,084m (47,157m3) of underground
development was completed during the year.
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2017
9,380
2,770
0.97
86.1
Year ended
31 December 2016
8,115
1,535
1.11
54.9
Units
t ’000
g/t
oz. ’000
%
oz. ’000
oz. ’000
Year ended
31 December 2017
3,404
0.91
99.5
64.9%
64.6
65.6
Year ended
31 December 2016
3,000
0.86
82.5
68.9%
56.8
54.9
Delays experienced in Q1 2017 were largely
rectified by the end of Q3. Full scale stope
mining commenced in December, resulting
in strong production towards the year end.
During 2017, a total of 73.6kt of ore was mined
from underground, with an average gold
content of 8.03g/t. The Quartzitovoye
underground mine is expected to be in
full production throughout 2018.
Total Cash Costs◆ were US$929/oz, a 13%
increase from 2016 (US$824/oz). All-in
Sustaining Costs◆ were US$1,278/oz, a 27%
increase from 2016. Both Total Cash Costs◆
and All-in Sustaining Costs◆ are affected by
Rouble appreciation against the US Dollar,
and by Rouble inflation. Higher Total Cash
Costs◆ also reflect the impact of the higher
strip ratio and lower metallurgical recoveries.
The increase in All-in Sustaining Costs◆ is
also attributable to the development of the
Quartzitovoye underground project.
Outlook
Malomir production is expected to increase
in 2018. Non-refractory production will be
supported by the high-grade ore mined from
underground and non-refractory RIP plant
throughput is expected to be at the same
level as in 2017. The transition to flotation and
refractory processing planned for Q2 2018
will reduce the capacity of the RIP plant from
the present value of 3.0Mtpa to c.0.65Mtpa.
It is expected that flotation concentrate from
Malomir will be initially stockpiled to create a
reliable feed for autoclave treatment when
POX Hub operations at Pokrovskiy
commence in Q4 2018. The first production
from Malomir’s refractory reserves, expected
in Q4 2018, is set to contribute to the overall
production increase at Malomir.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 39
Strategic reportFinancial statementsGovernance Operational Performance continued
Pokrovskiy
The Group’s oldest mine, Pokrovskiy is at the end of its
operational life and is in the process of being converted
into a key POX Hub site.
2017 gold production:
30.6koz – 7% of total Group gold
production for the year.
Location
Operating Mine
Underground
Lime deposit
POX
Analytical Labs
Hydro Plant
Railway
Federal highway
Core assets
Blagoveschensk
Malomir
Pokrovskiy POX Hub
Pioneer
Operating Mine
POX
Railway
Underground
Lime deposit
Hydro Plant
Core assets
Analytical Labs
Blagoveshchensk
Federal highway
40 Petropavlovsk Annual Report 2017
Production as a % of total group
Key facts:
1994
Acquired in early stages of exploration by Pavel
Maslovskiy, co-founder and former CEO, before
the Group was created in 1994 to finance its
development.
2.0Moz
Gold produced to date
1,815kt
Ore processed via RIP in 2017
95.0km2
Total gold licence area
1.32Moz
Mineral Resources, including 0.005Moz
Ore Reserves
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
Gold recovered
Heap leach operations
Total stacked
Average grade
Gold content
Recovery
Gold recovered
Pokrovskiy gold production - Doré
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2017
3,745
1,468
0.51
24.1
Year ended
31 December 2016
4,709
1,027
0.79
26.0
Units
t ’000
g/t
oz. ’000
%
oz. ’000
t ’000
g/t
oz. ’000
oz. ’000
oz. ’000
Year ended
31 December 2017
1,815
0.47
27.4
82.9%
22.7
Year ended
31 December 2016
1,791
0.65
37.1
90.1%
33.5
498
0.39
6.3
45.4
2.9
30.6
440
0.45
6.3
64.8%
4.1
38.2
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 2017. Tokur has been fully impaired
(in 2015) and the Group intends to review its
development plans in the medium term.
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, set to be used as the
main source of limestone for future POX
Hub operations.
Mining and Processing
Pokrovskiy has functioned as a multiple open
pit operation since 2001 but the mining and
processing of Pokrovskiy ores came to an
end in Q1 2018.
Pokrovskiy is being converted into a key
POX hub site during 2018. The Pokrovskiy
site was chosen due to its strategic location,
infrastructure, processing facilities and
proximity to Pioneer’s limestone deposit,
limestone being a key ingredient for the
pressure oxidation process.
Operations
In 2017 Pokrovskiy produced 30.6koz, 7% of
total Group production, and a 20% decrease
from 2016 (38.2koz) due to the mine’s closure.
The Zeyskaya and Vodorazdelnaya zones
were the main sources of low-grade ore,
which was blended with ore from stockpiles.
This contributed to a year-on-year decrease
in H1 processing recovery at the plant.
Leading up to the transition of the RIP plant
into a key POX Hub component, both RIP
and heap leach plants operated as planned.
Heap leaching commenced in April and ended
with the arrival of cold weather in October.
Total Cash Costs◆ were US$1,236/oz,
a 41% increase on 2016 (US$878/oz). All-in
Sustaining Costs◆ were US$1,367/oz, a 38%
increase from 2016. Costs were high due to the
processing of remaining marginal Reserves.
The Pokrovskiy mine is now closed and in the
process of being converted into the POX Hub.
Outlook
In 2018, production from Pokrovskiy is
expected to be significantly below its 2017
levels as the mine is in the process of being
converted into a key POX Hub site. Integration
of the existing infrastructure and RIP plant
into the POX Hub commenced in Q1 2018.
The POX Hub is expected to start production
towards the end of 2018 producing c.30koz of
gold from Malomir concentrate by the end of
the year.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 41
Strategic reportFinancial statementsGovernance Capacity
No. of Autoclaves
Refractory Reserves
Refractory Resources
Mass pull
(Malomir concentrate)
Concentrate grade
(Malomir concentrate)
Sulphur content
(Malomir concentrate)
Total avg gold recovery
(Malomir concentrate)
Mass pull
(Pioneer concentrate)
Concentrate grade
(Pioneer concentrate)
Sulphur content
(Pioneer concentrate)
Total avg gold recovery
(Pioneer concentrate)
500ktpa
4
4.10Moz
9.63Moz
5.5% mass
24 g/t Au
24.9%
80%
2.9% mass
24 g/t Au
21.0%
80%
The POX Hub
Of Petropavlovsk’s 20.86Moz of Resources
and Reserves, 9.63Moz is classified as
refractory. Unlike non-refractory ore,
refractory ore cannot be processed via
regular processes; in order to unlock the
value embedded in these ounces,
alternative methods must be used. One of the
most efficient, reliable and environmentally
friendly methods is pressure oxidation (‘POX’),
which is considered an industry standard.
Petropavlovsk has decided to adopt this
method in order to monetise its own refractory
assets and, due to the abundance of refractory
gold reserves in the Russian Far East and the
lack of facilities to process them, potentially
process refractory ores or concentrates from
other sources.
Today, the Group is nearing completion of a
pressure oxidation facility (‘POX Hub’), which
is scheduled for commissioning in Q4 2018.
Petropavlovsk has been developing the POX
Hub’s main structures at Pokrovskiy, the site
of its first producing mine, which has now
reached the end of its operational life.
Non-refractory Resources (11.23Moz)
Refractory Resources (9.63Moz)
42 Petropavlovsk Annual Report 2017
Petropavlovsk Annual Report 2017 43
Strategic reportFinancial statementsGovernance The POX Hub continued
About Refractory Ore
Refractory gold ore is mineralised rock that is
resistant to recovery via standard cyanidation
and carbon/resin adsorption methods.
In refractory ore, gold is largely associated
with sulphide minerals, which encapsulate
gold particles. This makes it difficult for the
leach solution to reach and dissolve the gold.
Some refractory ores also contain organic
carbon which absorbs gold from the solution
before it is recovered, causing high
metallurgical losses. In addition, refractory
ores often contain arsenic, which needs to
be handled in a safe and environmentally
responsible way.
For effective gold recovery, sulphides in
the refractory ore need to be broken either
chemically (usually by oxidation) or
mechanically (by very fine grinding). If carbon
is present, special measures are required to
neutralise its effect and minimise gold losses.
As with non-refractory ‘free milling’ ore,
refractory processing starts with crushing and
grinding and ends with cyanide leaching and
gold recovery from the solution. Finally, the
gold is smelted into doré bars.
However, there are additional processing
stages required prior to cyanide leaching,
which breaks sulphides and releases the gold
encapsulated within them. In order to
maximize the efficiency of the leaching
process and to reduce costs, many refractory
gold producers use flotation, which produces
high grade concentrate. This concentrate can
then be sent for oxidation or ultra-fine
grinding, instead of raw ore. Flotation typically
means an 85-97% reduction in mass.
There are four practical methods for breaking
up refractory ore sulphides:
– Pressure oxidation (POX):
– Sulphides are oxidised in an autoclave
under high pressure and temperature
using pure oxygen.
– Roasting:
– Oxidation by high temperature roasting.
– Bio oxidation (BIOx):
– Sulphides are oxidised using bacteria
that ‘eat’ sulphides.
– Ultra Fine Grinding (UFG):
– Refractory ore or concentrate is grinded
to a very (ultra) fine state in attempt to
release gold encapsulated in the
sulphides or other minerals.
Group Refractory Processing Flowsheet
Flotation Plant
Malomir (From 2018)
Flotation Plant
Pioneer (From 2023)
Malomir concentrate
86% recovery
5.5% concentrate yield
24 g/t Au
Pioneer concentrate
82% recovery
2.9% concentrate yield
24 g/t Au
Concentrate
Re-grinding
90% -0.044mm
Autoclave Oxidation
4x 15mx4m autoclave
225ºC @ 35 bar
20-30 minutes
RIP Circuit
Purogold
Doré to Refinery
Recoveries
Malomir = 93%
Pioneer = 98%
Total recovery
=
c.80%
1
2
3
4
44 Petropavlovsk Annual Report 2017
with a volume of 66m3) with potential to
expand by adding 2 additional vessels.
Following the downward gold price trend
in 2013, the Company moved the POX Hub
development to care and maintenance while
exploring potential external funding
solutions, namely with the Company’s
lenders and possible joint venture partners.
Prior to this, significant design work, earth
works, civil works and construction had
been completed. From the beginning of
2017, full scale development works were
resumed with the aim to commission the
hub in Q4 2018.
Gold Processing Trends
Roasting
High Grade
Concentrate
POX
BIOX
As roasting generates toxic fumes, it is usually
considered to carry high environmental risks,
especially if arsenic is present in the feed.
The BIOx method can be an efficient
processing option, though it relies on
organisms that only live in certain conditions.
Consequently, BIOx is very sensitive to the
composition of the feed. In addition, the BIOX
waste discharge contains arsenic in a soluble
form, which creates both safety and
environmental risks. UFG can only be used if
the gold is encapsulated as fine inclusions in
sulphides and other minerals, and can be
liberated by a process of mechanical grinding.
For this reason, most refractory deposits are
not amenable to UFG.
In contrast to other refractory processing
options, POX can be applied efficiently to a wide
range of refractory feeds. If arsenic is present it is
discharged in the form of scorodite, which can
be safely stored in a tailings pond. Many gold
producers have adopted the technology
successfully, after it was developed in the 1950s
and first implemented for gold ores in 1985 by
Homestake Mining Company at its McLaughlin
project, USA.
In 2017, nine gold POX processing plants were
operational worldwide. Three were either in
advanced construction or development stages
and were expected to be commissioned
between 2018 and 2023; a further two were in
early development stages.
The POX Process
The POX process begins with the same
mining operations as a traditional RIP method
where firstly, ore is mined, crushed, and
ground. It then passes through one of the
flotation circuits, which are currently under
development at each site. The resultant high
grade concentrate, equating to between 2.9
and 5.5% mass of the original ore, is
transported to the POX Hub for further
processing and gold recovery.
The POX Hub is designed to operate at
pressure of 3,500kPa and at a temperature
of 225°C. This is higher than most other
operating POX plants, and enables refractory
feed with varying metallurgical properties to
be processed efficiently.
Having four separate autoclave vessels gives
our refractory processing operations a
significant degree of flexibility because
flotation concentrates from Malomir and
Pioneer (and potentially other sources) can be
processed optimally at the same time, without
compromising productivity or gold recovery.
POX at Petropavlovsk
In 2010, following the confirmation of
substantial refractory resources at the Pioneer
and Malomir projects, an extensive feasibility
study into refractory ore processing solutions
was carried out by PHM Engineering, a
Petropavlovsk subsidiary. This incorporated a
base engineering study prepared by Outotec,
a Finnish engineering firm, in cooperation with
the RDC Hydrometallurgy methodological
scientific centre, another Petropavlovsk
subsidiary. The results demonstrated that
POX was the most technically, economically
attractive processing solution, in addition to
being the most safe and environmentally
friendly method.
In 2011, the Company decided to proceed
with development of the POX project. The final
design required the construction of flotation
plants at Malomir (5.4Mtpa) and Pioneer
(6.0Mtpa), and a 500ktpa pressure oxidation
facility (POX Hub) at Pokrovskiy, utilising four
separate autoclave vessels (15m x 4m, each
Refractory Processing Options
Techniques employed
(prominent mining firms)
POX is the most
common
UFG, 3%
BIOX, 3%
Roast, 7%
POX, 18%
Con 11%
Refractory 31%
Cyanidation 45%
Heap Leach 13%
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 45
Strategic reportFinancial statementsGovernance The POX Hub continued
Project team
Aleksey Afanasiev
Head of the POX Hub
Professor Yakov Schneerson
Director of Gidrometallurgiya
R&D Centre
– Professional with over 10 years of
technology.
– Authoritative expert in autoclave
experience in the field.
– 8 years with the Company including
4.5 years as the Head of Albyn.
Viktor Fedorov
Head of Research and
Development
– 17 years of project management in
ferrous and non-ferrous sectors.
– Strong track record of managing and
delivering logistically and technologically
challenging and complex development
projects.
46 Petropavlovsk Annual Report 2017
– Over 50 years of experience.
– Extensive experience working on
POX projects including Nadezhdinskiy
(Norilsk Nickel).
– Credited with 65 inventions.
Interview with
Professor Yakov Schneerson
Professor Schneerson, when did you start
working on the POX Project?
In 2007, Petropavlovsk’s senior management
decided to establish a POX research and
development centre, in order to support its
strategic aim of developing refractory reserves
at Pioneer and Malomir into production.
There was no such laboratory in Russia at the
time. In 2008, RDC Hydrometallurgy was
created, and I was invited to join the research
and development team. The laboratory
equipment for our St Petersburg lab was
commissioned in January 2009, and we began
to perform tests for the future POX Hub;
in 2011, a pilot autoclave in Blagoveshchensk
was also commissioned, which allowed us to
carry out metallurgical tests continuously.
RDC Hydrometallurgy remains the only
specialised POX research and development
centre in Russia.
What kind of specialists work at the Research
centre, and what experience of POX
technology do they have?
Petropavlovsk invited top Russian experts in
the field, with both practical and academic
backgrounds, to join the team. The team has
experience of research and development,
as well as POX commissioning and
production, not only in the USSR and Russia
but also internationally. The team was
strengthened by the recruitment of talented
graduates from a younger generation. Many
have now defended their PhD thesis using
unique tests and research results completed
for the POX project, and are now highly
qualified specialists with unique POX research
and development experience. They continue
to work in the centre.
Could you describe the main advantages
of POX – which features make it suitable for
processing a wide range of refractory
materials?
For years, POX technology has proved to be
one of the most efficient and environmentally
friendly processing methods. In our work on
the Pokrovskiy POX hub, we decided to move
even further within the known technology and
to implement the most advanced
developments and findings in the processing
of refractory gold ore. Our POX Hub is
therefore a unique project, for which RDC
Hydrometallurgy has improved and adjusted
POX technology to the types of ores we are
planning to process. We have patented
several of our findings, which are being
implemented at Petropavlovsk for the first
time. Distinctive features of the POX plant
include its high temperature and pressure, its
robust design with flexible equipment and its
technological setup, which allows us to
process materials with different compositions
and metallurgical characteristics at the same
time. I am confident that together with other
unique features of the POX plant this will allow
us to process a wide range of refractory feeds
efficiently, including what is known as ‘double’
refractory ore, where gold is not only trapped
in sulphides but its recovery is affected by the
presence of carbon.
Having several independent processing lines
will allow for uninterrupted production even
when one of the lines is stopped for routine
maintenance.
Which works are being carried out now to
improve the efficiency of the POX plant?
Since inception, RDC Hydrometallurgy has
tested hundreds of metallurgical samples for
the POX plant, which has involved
approximately 1,000 individual autoclave
experiments. This includes continuous tests
on our unique pilot autoclave that closely
replicates the processing environment of the
full scale plant. This work has been
instrumental in defining the optimal design
and processing parameters for the POX plant,
and in derisking the project. For example,
our first tests of Malomir concentrate samples
demonstrated recovery rates of only 70%.
The results of further tests and research work
allowed us to establish processing
parameters and regimes under which we can
now recover between 92 and 94%. We are
currently working to improve this further to
97% by researching the possibility of
concentrate pre-treatment as an additional
stage ahead of POX. These findings will have
a crucial importance in decreasing the costs
of production from refractory ores.
Andrey Domanchuk
Deputy General Director, Capital
Construction Projects
– Over 20 years of work experience including
15 years managing capital intensive mining
and processing projects.
– Principal managing role in successful
completion of several processing plant
construction and expansion projects for
Russian Gold Majors, e.g. Verinskoye plant
construction and Olimpiadninskoye BIOX
plant expansion (Polyus Gold), Belaya Gora
(Highland Gold).
Interview with
Andrey Domanchuk
Being in charge of the Department of Capital
Construction Projects, could you explain how it
functions and the focus of its work at present?
The department was formed specifically for
the POX project. We are one of the driving
units within the POX development manager
structure, fully engaged in the project’s EPC
– engineering, procurement and construction.
Our main task is to get everything completed
and ready for autoclave leaching to begin in
2018, on time and within the planned budget.
You have managed projects for some of the
largest companies operating in Russia – Polyus
Gold, Highland Gold… When did you become
a member of the Petropavlovsk team?
I joined Petropavlovsk in December 2016,
when work to recommence the project
began. This is the largest and the most
exciting project I have ever worked on and
I am tremendously proud to be part of it.
Prior to joining Petropavlovsk, what knowledge
did you have of the Company’s POX project?
Our professional circle is very close and I have
been working in the industry for a long time,
so I had been following its development and
had a reasonable understanding of the project,
as you can imagine. When I was approached
to take part, I agreed immediately; it was an
easy decision, certainly this was of great
professional interest to me.
I was also looking forward to working
alongside the Group’s highly professional
and widely recognised team of scientists
and engineers.
Could you summarise the progress made
during 2017?
First of all, there was a lot of preparatory
work. We revised the budget, issued working
documents, initiated the main procurement
campaign and signed major contracts for the
supply of equipment, prioritizing items that
should be supplied in early 2018.
A large amount of construction and installation
work was carried out. The thickeners have
been fully completed, which required skilled
welding work. The tank equipment for the filter
building has been welded, and about 60% of
work on the Duplex and Super Duplex steel
pipelines has been completed. During the year,
we completed most concrete and metal
structure work; in the autoclave building alone,
about 580 tons of metal structures have been
welded. These numbers are staggering.
We also launched the electric substation
at Pokrovskiy, which supplies electricity to
the oxygen plant. Nearly all technological
platforms have been completed, and we are
now starting to refurbish and integrate the
RIP plant into the POX Hub. The RIP Plant
reconstruction is one of the biggest remaining
tasks for 2018.
What are your expectations for 2018?
Within the Russian gold mining sector,
Petropavlovsk will be the second firm to
successfully implement this technology;
we believe the Pokrovskiy POX Hub is far
more technologically advanced than the one
that already exists. Understandably, the team
is very excited for it to be launched! We made
considerable progress in the last 12 months
since the project was recommenced, which
required a great deal of hard work from the
team. As such, I feel totally focused on driving
progress towards the completion of the final
construction phase, and to having a strong
finish to 2018, with the Pokrovskiy POX Hub
operational and producing its first gold.
Dr Sergey Ryakhovskiy
Group Head of Metallurgy
– Professional with 30+ years of experience.
– Extensive experience in gold and uranium
hydrometallurgy in particular with RIP
process.
– Has been leading designs and oversaw
the commissioning of all Group processing
facilities.
Evgeniy Kudrin
Technical Director of POX Hub
– Over 20 years of experience working in
refractory ore processing.
– Formerly Deputy Director for Production
and Operations at Nadezhdinskiy POX
Plant (Norilsk Nickel).
Teemu Karjalainen
Outotec Project Manager
– 20 years’ experience in international sales
and projects.
– 10 years in Outotec’s Project Management
in the field of Hydrometallurgy and Minerals
Processing.
– Involved in Petropavlovsk’s POX HUB
project since 2011.
Petropavlovsk Annual Report 2017 47
Strategic reportFinancial statementsGovernance The POX Hub continued
Regional Licence Acquisition
Due to the absence of viable processing
options, refractory gold prospecting and
exploration have been - and still are, a low
priority for many Russian gold miners and
explorers. As such, many highly promising
refractory exploration and development
projects are available for licensing from the
Russian Government, and for low cost
acquisition from other gold explorers, who
lack access to suitable processing facilities.
Expansion
The Pokrovskiy POX Hub is the second of its
kind in Russia. When complete, it is expected
to be the largest with a capacity to process
c.500ktpa of concentrate, and to be the
most technologically advanced due to its
parameters, including high pressure and
temperature. In the autoclave building,
space has been reserved for two further
autoclave vessels in addition to the current
four, meaning expansion to a capacity of up
to 650ktpa is possible in the future. This is
expected to give Petropavlovsk a competitive
advantage in developing other Russian
refractory deposits.
Ability to Process Third Party Ore
Given the scale of the POX Hub and the
large amount of undeveloped refractory
gold mineralisation in the Russian Far East,
the POX Hub provides opportunities for the
future growth of the Group beyond its own
existing reserves and potential reserves by
processing third party ore or concentrate for
a fee or under a tolling arrangement.
Selling Concentrate
Market analysis is being carried out to explore
the possible economic benefit of selling
concentrate to generate a near term revenue
stream ahead of the POX Hub’s commissioning.
Further Optimisation
Research completed by RDC Hydrometallurgy
indicates that there is potential to increase
recovery from Malomir concentrate from
92% (as currently budgeted) to a maximum
of 97%, by employing concentrate thermal
pre-treatment ahead of POX. This is yet to be
incorporated in the POX design and yet to be
reflected in the Group’s production and
financial projections.
There is also the opportunity to further
optimise production within the Group’s own
assets and increase the grades of treated
concentrate, or do so in cooperation with
third parties using their high grade ores or
concentrates.
POX Research and Development
Expertise: RDC Hydrometallurgy
The Group’s expertise in pressure oxidation
is principally represented by RDC
Hydrometallurgy, a scientific research centre
based in St. Petersburg and a POX pilot plant
located in Blagoveshchensk. It is equipped
with state of art autoclave laboratory facilities
and is currently testing the most recent
developments in this field.
Its specialists include 9 PhD holders led by
Professor Yakov Shneerson, an internationally
recognised authority in the autoclave
processing field, and have substantial
experience in the research, development and
practical implementation of pressure oxidation
technology. RDC Hydrometallurgy’s principal
specialists have previously worked on the
development, and in some cases the
commissioning, of some of Russia and
Kazakhstan’s major pressure oxidation plants.
RDC Hydrometallurgy was established to
undertake work on extraction methods that
could increase processing efficiency at our
producing and prospective assets, with a
focus on gold recovery from refractory
reserves. The centre has particular expertise
in gold extraction from refractory sulphide
ores, where it is necessary to use pressure
oxidation technology.
Project Economics
Capital Costs
As at 31 December 2017, the total project
cash capital spent on the POX Hub was
approximately US$233.4 million. The total
outstanding estimated CAPEX◆ as at that date
was approximately US$62 million for the POX
Hub. The total outstanding estimated Capital
Expenditure◆ as at 31 December 2017 was
approximately US$24 million for Stages 1 and 2
of the Malomir flotation plant and approximately
US$5 million for tailings related to Malomir
flotation. The Capital Expenditure◆ associated
with the construction of the Pioneer flotation
facility is currently estimated at US$40mln.
Potential Upside
Exploration
The Group’s defined economic refractory
ounces of 4.10Moz refractory JORC Reserves
are located within the Malomir and Pioneer
projects, with licence areas of 820km2 and
1,337km2 respectively. Both projects sit along
or above the Mongolo-Okhotskiy mineralised
belt, which hosts a number of large deposits,
including Sukhoi Log and Teseevskoe to the
west of the Amur region. Malomir’s JORC Ore
Reserves are estimated to be 87% refractory.
It is the only large refractory deposit known
within the north east of the Amur region and
remains largely underexplored, offering
further refractory resource upside.
Malomir’s geology is favourable for the
formation of orogenic type gold deposits,
which makes it highly prospective for the
additional discovery of resources. This is
further confirmed by the large number of
known alluvial deposits in this area formed
as a result of hard rock gold mineralisation
eroding. In addition to its significant non
refractory reserves, further refractory
resource potential exists at Pioneer,
particularly along the contact between
granitoid and Jurassic host rocks, south and
south west of the Pioneer RIP plant. 56% of
Pioneer’s JORC Ore Reserves are refractory.
The Group continues to explore the potential
for further mine life extension and production
expansion. Exploration work has identified
several prospective satellite refractory targets
at Malomir and Pioneer for further work,
including Ozhidaemoye. There is also known
refractory mineralisation within the Albyn
licence holding.
48 Petropavlovsk Annual Report 2017
Location and Infrastructure
Amur region
Yakutia
Khabarovsk
Malomir
Albyn
Zabaykalsk
Pokrovskiy POX Hub
Pioneer
CHINA
Pilot POX Hub
Blagoveschchensk
Operating Mine
Underground
Lime deposit
POX
Analytical Labs
Hydro Plant
Located in the Amur region, the Pokrovskiy
mine is a mature mining operation that has
reached the end of its life after 19 years of
successful operations, and has been
identified as the optimal strategic location for
the POX Hub. Its extensive onsite facilities and
well developed infrastructure will be adopted
and integrated into the project, and includes a
2Mtpa RIP plant, accommodation, roads,
power lines, offices and laboratories.
Buildings and equipment with a gross book
value of approximately US$90 million are
being incorporated directly, which is expected
to have a beneficial impact on capital costs.
The Pokrovskiy site is 670km from Malomir
and 40km from Pioneer via all-weather
federal roads.
The Pokrovskiy site is located within close
proximity to lime deposits, which provide an
essential reagent used in POX processing.
The site benefits from access to low cost and
sustainable hydropower from four regional
hydroelectric stations, which have a
combined capacity of approximately 5GW.
The Trans-Siberian Railway - one of the main
regional railroads, is 10km from the
Pokrovskiy site, and the regional capital
Blagoveshchensk – an important Russia-
China trading hub, is 450km away via federal
motorway. The region also benefits from the
availability of highly skilled labour.
The Group also operates a unique POX pilot
plant that replicates an industrial POX
processing plant at a small scale. This facility
was instrumental in defining optimal
processing parameters and regimes,
developing the final processing design, and
derisking the Pokrovskiy POX development.
The pilot plant was also used to test the
suitability of vital parts of the high pressure
furniture and fittings, such as valves and pipes,
in order to select the most suitable products.
It is expected that the pilot plant will
continue to be used after the POX Hub is
commissioned, for the purpose of testing
samples to ensure processing parameters
and regimes are adjusted in a timely manner,
depending on the future feed. The plant also
carries out work for third parties.
During 2017 significant research and
metallurgical tests took place, alongside
ongoing support of the Pokrovskiy POX Hub
engineering, procurement and construction.
Test work and research included:
– further tests to reconfirm and refine
operational parameters;
– developing recommendations regarding the
continuous maintenance of the pilot plant,
including research on the durability of the
various high pressure valves used at the
test autoclave;
– research including metallurgical tests
to further improve and optimise the
processing of refractory concentrates of
different mineralogical compositions;
– developing recommendations regarding
optimal metallurgical testing for new
refractory deposits and orebodies; and
– successful conclusion of test work and
study, which focused on the thermal
pre-treatment of refractory concentrate
ahead of POX, indicates potential to
increase recovery from Malomir
concentrate from 92% (as budgeted)
to 97%.
RDC Hydrometallurgy also provides
metallurgical tests and consultancy services
to third parties. Its clients include Outotec,
Polyus Gold, Kazzink, Kazakhmys, Norilsk
Nikel and other CIS mining companies.
In total, the team has published 25 articles in
both Russian and international journals, and
patented 6 of its research findings.
Petropavlovsk Annual Report 2017 49
Strategic reportFinancial statementsGovernance The POX Hub continued
Construction Progress
Malomir Flotation Plant (Design
Capacity 5.4Mtpa)
The Malomir flotation plant is a staged build
with the following two stages:
Stage 1 capacity is 3.6Mtpa across two
parallel 1.8Mtpa lines. Construction of Stage 1
is complete with only some work outstanding,
primarily on the flotation tailings facility.
Flotation concentrate production is scheduled
for the second quarter of 2018.
Initially the concentrate will be stockpiled
before being transported to the POX Hub site
ahead of the staged autoclave commissioning,
which is expected to start in Q4 2018.
Stage 2 will expand the flotation plant to
5.4Mtpa by adding a third 1.8Mtpa line. This
will fully calibrate the combined flotation and
RIP plant capacity with the existing 6.0Mtpa
crushing and grinding capacity. Stage 2
expansion is currently expected to be
completed and commissioned in 2019.
During Stage 1, the spare crushing and
grinding capacity will be fully utilised for
non-refractory feeds from open pit and
underground into the RIP plant.
The completion of Stage 2 will leave
approximately 0.6Mtpa of milling capacity
to process the remaining non-refractory
underground and open pit reserves.
Pioneer Flotation Plant (design
capacity 6.0Mtpa)
Construction of the Pioneer flotation plant
is scheduled to start in 2021, ahead of
concentrate production from 2023. The Group
is evaluating the possibility of moving the
completion of Pioneer’s flotation plant forward
to the end of 2019. This would improve the
Group’s gold production profile and allow for
better utilisation of the POX Hub capacity.
During 2016, the Company renewed key
contracts with Outotec, which is responsible
for the design and development of the plant.
All assembling, installation and
commissioning works are being carried out
under Outotec installation and technical
supervision. As part of recommencing the
POX Hub development, Outotec and the
Company completed in-situ checks on all
major equipment and commenced work on
the automation and control systems.
In January 2017, a contract was awarded
to commence all the piping, welding and
assembly works, which continued throughout
the year.
Key Construction Milestones
As of the end of 2017, designs for all main
facilities are largely completed - the oxygen
plant, principal POX Hub infrastructure, high
pressure piping, welding and assembly
works. This leaves the following major
outstanding items to be completed during
2018 ahead of the scheduled POX plant
commissioning in Q4 2018:
Pokrovskiy RIP refurbishment and integration
into the POX hub:
– To be completed by the end of
September 2018.
– Low pressure POX facilities:
– To be completed by mid-November
2018.
– POX control and automation systems:
– To be completed by mid-September
2018.
– Other site infrastructure and auxiliary
facilities:
– To be completed by the end of July 2017.
– POX tailings facility:
– To be completed by the end of February
2019.
– There will be temporary tailings storage
available for the commissioning and early
ramp up stage.
In H2 2018, the POX Hub is scheduled to
commence a staged dry and wet
commissioning, one autoclave at a time.
The commissioning of the oxygen plant is
scheduled for Q2 2018 ahead of the autoclave
commissioning. The ramp up to commercial
production is due to occur throughout 2019.
50 Petropavlovsk Annual Report 2017
Key Construction Milestones
2018
Malomir Flotation Plant
Concentrate production
POX Hub Construction
Piping + welding complete
Autoclaves complete
Pokrovskiy RIP refurbishment + integration
POX Hub Commissioning
Oxygen plant complete
Plant infrastructure (incl. steam plant, electrical, automation)
Autoclaves: staged dry commissioning
Autoclaves: staged wet commissioning
First Production
Due date
Q2
Due date
Q2
Q3
Q3
Due date
Q2
Q2
Q3
Q4
Q4
Petropavlovsk Annual Report 2017 51
Strategic reportFinancial statementsGovernance Underground
In line with its strategy of organic growth,
in 2016 the Group commenced development
of its underground operations to access high
grade non-refractory ores, allowing for
improvements in and for the de-risking of
production output until refractory ore
processing is ramped up to full capacity.
In 2017 first production was achieved from the
first two underground operations at Pioneer
(NE Bakhmut) and at Malomir (Quartzitovoye).
Both underground sites are trackless with
decline access, and ore is mined using a
sublevel open stope method with primarily
unconsolidated rock back fill.
Successful exploration and the completion
of technical studies in 2017 has enabled the
preparation of mine designs and Ore Reserve
estimates for two further sites at Pioneer,
Andreevskaya and Nikolaevskaya.
Andreevskaya’s Reserves are located under
depleted pits at Andreevskaya West and
Andreevskaya East, where underground
access can be gained easily from the open
pit floor. The new Nikolaevskaya Reserves
are estimated within a high grade pay shoot
discovered in H2 2017, 120m below the
surface, beneath the refractory open pit
reserves.
Total Ore Reserves across Pioneer and
Malomir now amount to 0.43Moz of gold at
an average grade of 5.32g/t, a 16% increase
compared to last year. It is estimated that
these initial Reserves support a mine life of
at least 5 years for Quartzitovoye and NE
Bakhmut. The new Andreevskaya Reserves
are non-refractory and are expected to
contribute to Pioneer production from 2019;
at present Andreevskaya’s mine life is
estimated at approximately two years.
Preliminary metallurgical tests suggest
Nikolaevskaya’s underground Reserves are
suitable for either RIP or POX processing.
As POX is expected to result in better gold
recovery, this material is currently
conservatively classified as refractory, and
as such mining is not scheduled until 2024,
when refractory production at Pioneer is
expected to reach full capacity. Group
specialists continue metallurgical tests to
improve Nikolaevskaya’s RIP gold recovery.
Should this work be successful, production
from Nikolaevskaya may be brought forward.
It is expected that Nikolaevskaya’s current
Reserves should support at least four years
of production.
All ore bodies scheduled for underground
mining are open in a down dip direction.
Further exploration is expected to increase
Reserves and extend mine life.
The simultaneous development of both
NE Bakhmut and Quartzitovoye mines has
proved to be challenging, and the Group
faced some frustrating setbacks, particularly
at NE Bakhmut. However, due to a
conservative budgeting approach these
delays did not have a material impact on
the Group’s overall production results and
financial position.
Construction of the NE Bakhmut mine began
in Q3 2016 and continued throughout 2017.
The first development ore was produced in
June 2017, and underground mining is now
ramping up to full capacity.
Despite the delays, a total of 3,646m of
underground developments were completed
during 2017 at NE Bakhmut. A total of 35.1kt
of ore at a grade of 2.78g/t was produced
from NE Bakhmut in 2017. All necessary
ventilation, dewatering and mine services
are now in place and the construction of
Pioneer’s NE Bakhmut mine has been
completed.
Development of the Malomir underground
mine began in January 2017 with a delay
of approximately one month due to slow
contractor mobilisation. This delay was largely
rectified by the end of Q3 2017 and the first
development ore was produced in June from
a new, previously unknown pay shoot in Zone
49. In Q3 2017, underground development
reached Zone 55, the main high grade
production area at Quartzitovoye 1. By the
end of the year, a total of 73.6kt of ore with
an average grade of 8.03g/t was produced.
The grade mined was 17% higher than
estimated due to the unexpectedly high
grade of the stopes.
A total of 3,084m of underground
development was completed at
Quartzitovoye 1 during 2017. Ventilation
and pumping facilities were also completed
and Quartzitovoye is now a fully functioning,
modern underground mine, which is
expected to contribute a significant amount to
Malomir gold output during 2018, whilst we
transition to flotation and refractory
processing there.
52 Petropavlovsk Annual Report 2017
Reserves and Resources
In line with best industry practices,
Petropavlovsk reports its Mineral Resources
and Ore Reserves in accordance with the
JORC Code. These Group Mineral Resource
and Ore Reserve estimates are an update on
the estimates prepared in April 2017 by
Wardell Armstrong International (WAI), a UK
based independent technical consultancy
firm. The updated estimates incorporate all
material exploration completed during 2017
and take into account 2017 mining.
Total Mineral Resource ounces (including
Reserves) as of 31 December 2017 amounted
to 20.86Moz, compared to 20.16Moz in
2016, with a total Reserve of 8.15Moz
compared to 7.95Moz in the previous
year. The increase in Mineral Resources is
attributable to discoveries at Pioneer and
Albyn, including Resource expansions at
the NE Bakhmut 2 and Nikolaevskaya Zones
(Pioneer) and at Unglichikan (Albyn), and also
the discovery of the non-refractory satellite
deposit Katrin (Pioneer).
The increase in Ore Reserves is attributable
to open pit Reserve expansion at
Elginskoye and Unglichikan, to an increase
in underground Reserves at Pioneer, and to
new open pit Reserves discovered via
exploration at North East Bakhmut,
Katrin as well as at the Otvalnaya Zone.
Taking into account the 0.47Moz depletion
from mining operations during 2017, the
Group achieved a 1.17Moz gross increase
in Mineral Resources and a 0.67Moz gross
increase in Ore Reserves, compared to the
2017 WAI statement.
Total Reserves for underground mining
increased 16% from 0.37Moz to 0.43Moz,
whilst underlying Mineral Resources for
potential underground mining increased 26%
from 0.72Moz to 0.93Moz. This increase is
entirely at Pioneer, where new Mineral
Resources and Ore Reserves have been
estimated at the North East Bakhmut,
Andreevskaya and Nikolaevskaya Zones.
The tables below provide a summary and an asset-by-asset breakdown of Group Mineral Resources and Ore Reserves.
Total Ore Reserves for open pit and underground extraction (as at 31 December 2017)
(in accordance with JORC Code)
Total
Non-Refractory
Refractory
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Note: Figures may not add up due to rounding.
Total Ore Reserves for open pit extraction (as at 31 December 2017)
(in accordance with JORC Code)
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)
38,767
213,125
251,892
19,587
103,383
122,970
19,180
109,742
128,922
Tonnage (kt)
38,577
210,790
249,367
19,397
101,597
120,995
19,180
109,192
128,372
Grade (g/t Au)
0.87
1.03
1.01
0.69
1.09
1.02
1.06
0.98
0.99
Grade (g/t Au)
0.84
0.99
0.96
0.62
1.02
0.96
1.06
0.96
0.97
Gold (Moz Au)
1.09
7.06
8.15
0.43
3.62
4.05
0.65
3.45
4.10
Gold (Moz Au)
1.04
6.68
7.72
0.39
3.33
3.72
0.65
3.35
4.01
Petropavlovsk Annual Report 2017 53
Strategic reportFinancial statementsGovernance Reserves and Resources continued
Total Ore Reserves for underground extraction (as at 31 December 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)
190
2,335
2,525
190
1,785
1,975
–
550
550
Total Mineral Resource for potential open pit and underground extraction (as at 31 December 2017)
(in accordance with JORC Code)
Total
Non-Refractory
Refractory
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Note: Figures may not add up due to rounding.
Total Mineral Resource for potential open pit extraction (as at 31 December 2017)
(in accordance with JORC Code)
Total
Non-Refractory
Refractory
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding.
54 Petropavlovsk Annual Report 2017
Tonnage (kt)
55,522
426,170
481,693
256,913
33,430
218,702
252,133
105,818
22,092
207,468
229,560
151,095
Tonnage (kt)
55,380
422,904
478,283
254,733
33,287
216,179
249,467
104,337
22,092
206,724
228,816
150,396
Grade (g/t Au)
7.87
5.12
5.32
7.87
5.02
5.30
–
5.43
5.43
Grade (g/t Au)
0.96
0.90
0.91
0.82
0.96
0.96
0.96
1.00
0.95
0.84
0.85
0.69
Grade (g/t Au)
0.95
0.86
0.87
0.79
0.94
0.91
0.91
0.96
0.95
0.82
0.83
0.68
Gold (Moz Au)
0.05
0.38
0.43
0.05
0.29
0.34
–
0.10
0.10
Gold (Moz Au)
1.71
12.39
14.10
6.76
1.04
6.78
7.82
3.41
0.67
5.61
6.29
3.35
Gold (Moz Au)
1.68
11.74
13.43
6.50
1.01
6.30
7.31
3.21
0.67
5.44
6.11
3.29
Total Mineral Resource for potential underground extraction (as at 31 December 2017)
(in accordance with JORC Code 2012)
Total
Non-Refractory
Refractory
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
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 2017)
Pioneer
(in accordance with JORC Code 2012)
Total
Non-Refractory Open Pit
Non-Refractory Underground
Subtotal Non-Refractory (Open Pit and Underground)
Refractory Open Pit
Refractory Underground
Subtotal Refractory (Open Pit and Underground)
Subtotal Open Pit (Non-Refractory and Refractory)
Subtotal Underground (Non-Refractory and Refractory)
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
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Tonnage (kt)
143
3,267
3,409
2,181
143
2,523
2,666
1,481
–
743
743
699
Tonnage (kt)
19,962
88,472
108,434
10,479
40,441
50,920
74
876
950
10,553
41,318
51,870
9,409
46,605
56,014
–
550
550
9,409
47,154
56,564
19,888
87,046
106,934
74
1,426
1,500
Grade (g/t Au)
5.87
6.19
6.18
3.67
5.87
5.88
5.88
4.17
–
7.27
7.27
2.62
Grade (g/t Au)
0.68
0.88
0.84
0.52
0.73
0.69
4.03
5.60
5.48
0.54
0.83
0.77
0.85
0.87
0.86
–
5.43
5.43
0.85
0.92
0.91
0.67
0.80
0.78
4.03
5.53
5.46
Gold (Moz Au)
0.03
0.65
0.68
0.26
0.03
0.48
0.50
0.20
–
0.17
0.17
0.06
Gold (Moz Au)
0.44
2.50
2.94
0.17
0.95
1.12
0.01
0.16
0.17
0.18
1.11
1.29
0.26
1.30
1.55
–
0.10
0.10
0.26
1.39
1.65
0.43
2.25
2.68
0.01
0.25
0.26
Petropavlovsk Annual Report 2017 55
Strategic reportFinancial statementsGovernance Reserves and Resources continued
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)
6,624
57,310
63,933
6,624
57,310
63,933
–
–
–
Tonnage (kt)
9,910
65,148
75,058
23
1,651
1,674
116
909
1,025
139
2,560
2,699
9,771
62,588
72,358
9,794
64,239
74,033
Grade (g/t Au)
0.53
1.19
1.12
0.53
1.19
1.12
–
–
–
Grade (g/t Au)
1.37
1.08
1.12
0.83
1.54
1.53
10.32
4.46
5.13
8.75
2.58
2.90
1.26
1.02
1.05
1.26
1.03
1.06
Gold (Moz Au)
0.11
2.20
2.31
0.11
2.20
2.31
–
–
–
Gold (Moz Au)
0.44
2.27
2.70
0.001
0.08
0.08
0.04
0.13
0.17
0.04
0.21
0.25
0.40
2.05
2.45
0.40
2.14
2.53
Albyn
(in accordance with JORC Code 2012)
Total
Non-Refractory Open Pit
Refractory Open Pit
Note: Figures may not add up due to rounding.
Malomir
(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 Open Pit (Non-Refractory and Refractory)
56 Petropavlovsk Annual Report 2017
Pokrovskiy
(in accordance with JORC Code 2012)
Total
Non-Refractory Open Pit
Refractory Open Pit
Note: All Pokrovskiy Ore Reserve is for open pit extraction.
Tokur
(WAI, 2010, in accordance with JORC Code 2004)
Total
Non-Refractory Open Pit
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
Tonnage (kt)
244
–
244
244
–
244
–
–
–
Tonnage (kt)
2,028
2,195
4,223
2,028
2,195
4,223
–
–
–
Grade (g/t Au)
0.59
–
0.59
0.59
–
0.59
–
–
–
Grade (g/t Au)
1.47
1.44
1.45
1.47
1.44
1.45
–
–
–
Gold (Moz Au)
0.005
–
0.005
0.005
–
0.005
–
–
–
Gold (Moz Au)
0.10
0.10
0.20
0.10
0.10
0.20
–
–
–
Note: All Tokur Ore Reserve is for open pit extraction
Notes on Ore Reserve statement:
(1) Group Ore Reserves statements are prepared internally as an update of the April 2017 WAI estimate; Pioneer, Malomir and Albyn Reserves are prepared in February 2018 in accordance with JORC Code
2012; Tokur Reserves are prepared in 2010 in accordance with JORC Code 2004 and there have been no changes to the Tokur estimates since that date; All Pokrovskiy Ore Reserves are expected to be
depleted by the end of Q1 2018, Pokrovskiy Reserve figures in this statement are based on January 2018 actual production and the February-March 2018 Group internal production plan
(2) Pioneer, Malomir and Albyn 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 the
projected performance of these operating mines. Tokur Reserves have been based on a $1,000/oz gold price assumption, together with operating costs assumptions relevant at the time of the estimate
(3) The 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 a mine design with decline access, trackless mining equipment and a sublevel open stope mining method with or without back fill
(5) Reserve figures have been adjusted for anticipated dilution and mine recovery
(6) The Underground Reserve cut-off grade for reporting is 1.5g/t Au for Pioneer and 1.7g/t Au for Malomir
(7) In accordance with JORC Code, all open pit and underground designs has been based on Measured and Indicated Resources; in addition to the Proven and Probable Reserve quoted above the design
captures the following Inferred Resource:
– Pioneer: 5,009kt@0.68g/t (0.11Moz) of non-refractory and 4,417kt @ 0.68g/t (0.10Moz) of refractory
– Malomir: 484kt @ 2.59g/t of non-refractory and 2,013kt@0.86g/t (0.06Moz) of refractory
– Albyn 2,345@1.27g/t (0.1Moz) of non-refractory
(8) Figures may not add up due to rounding
Petropavlovsk Annual Report 2017 57
Strategic reportFinancial statementsGovernance
Reserves and Resources continued
Summary of Mineral Resources by asset (as at 31 December 2017)
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
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
24,621
165,820
190,441
66,396
10,923
73,636
84,559
22,188
105
1,389
1,494
584
11,028
75,026
86,053
22,773
13,593
90,051
103,644
42,925
–
743
743
699
24,516
163,687
188,204
65,113
105
2,133
2,238
1,283
Grade (g/t Au)
0.69
0.77
0.76
0.67
0.53
0.66
0.64
0.62
4.36
6.82
6.65
4.18
0.57
0.77
0.75
0.71
0.79
0.72
0.73
0.62
–
7.27
7.27
2.62
0.67
0.69
0.69
0.62
4.36
6.98
6.86
3.33
Gold (Moz Au)
0.55
4.12
4.66
1.44
0.20
1.56
1.75
0.44
0.01
0.30
0.32
0.08
0.20
1.87
2.07
0.52
0.34
2.07
2.42
0.85
–
0.17
0.17
0.06
0.53
3.64
4.17
1.30
0.01
0.48
0.49
0.14
Pioneer
(in accordance with JORC Code 2012)
Total
Non-Refractory Open Pit
Non-Refractory Underground
Subtotal Non-Refractory (Open Pit and Underground)
Refractory Open Pit
Refractory Underground
Subtotal Open Pit (Non-Refractory and Refractory)
Subtotal Underground (Non-Refractory and Refractory)
58 Petropavlovsk Annual Report 2017
Albyn
(in accordance with JORC Code 2012)
Total
Non-Refractory Open Pit
Refractory Open Pit
Note: All Albyn Mineral Resources is for open pit extraction
Malomir
(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 Open Pit (Non-Refractory and Refractory)
Note: Figures may not add up due to rounding.
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
6,785
79,944
86,728
48,732
6,785
79,944
86,728
48,732
–
–
–
–
Tonnage (kt)
8,567
135,297
143,864
120,667
30
17,490
17,520
12,299
38
1,134
1,172
897
68
18,624
18,692
13,196
8,499
116,673
125,172
107,471
8,529
134,163
142,692
119,770
Grade (g/t Au)
0.54
1.19
1.14
1.14
0.54
1.19
1.14
1.14
–
–
–
–
Grade (g/t Au)
1.25
0.90
0.92
0.73
1.12
0.64
0.65
0.67
10.04
4.72
4.89
4.16
6.08
0.89
0.91
0.91
1.21
0.90
0.92
0.70
1.21
0.86
0.88
0.70
Gold (Moz Au)
0.12
3.06
3.17
1.78
0.12
3.06
3.17
1.78
–
–
–
–
Gold (Moz Au)
0.34
3.90
4.24
2.82
0.001
0.36
0.36
0.27
0.01
0.17
0.18
0.12
0.01
0.53
0.55
0.39
0.33
3.36
3.73
2.43
0.33
3.73
4.06
2.70
Petropavlovsk Annual Report 2017 59
Strategic reportFinancial statementsGovernance Reserves and Resources continued
Pokrovka&Burinda
(in accordance with JORC Code 2012)
Total
Non-Refractory
Refractory
Note: All Albyn Mineral Resources is for open pit extraction
Tokur
(WAI, 2010, in accordance with JORC Code 2004)
Total
Non-Refractory
Refractory
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
3,598
29,013
32,611
10,412
3,598
29,013
32,611
10,412
–
–
–
–
Tonnage (kt)
11,952
16,096
28,048
10,706
11,952
16,096
28,048
10,706
–
–
–
–
Grade (g/t Au)
1.75
0.83
0.93
1.04
1.75
0.83
0.93
1.04
–
–
–
–
Grade (g/t Au)
1.30
1.06
1.16
1.09
1.30
1.06
1.16
1.09
–
–
–
–
Gold (Moz Au)
0.20
0.77
0.98
0.35
0.20
0.77
0.98
0.35
–
–
–
–
Gold (Moz Au)
0.50
0.55
1.05
0.38
0.50
0.55
1.05
0.38
–
–
–
–
Note: All Tokur Mineral Resources is for open pit extraction
Notes to Mineral Resource Statement:
(1) Mineral Resources include Ore Reserves.
(2) Mineral Resource estimates for Pokrovskiy, Pioneer, Malomir and Albyn were prepared internally by the Group in accordance with JORC Code 2012 as an update of the April 2017 statement audited by WAI;
Mineral Resources for Tokur were reviewed by WAI in 2010 in accordance with JORC Code 2004 and there have been no changes to the Tokur estimates since that date
(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) Cut-off grade is 1.5g/t is used to report Mineral Resource for potential underground mining.
(6) Mineral resources are not reserves until they have demonstrated economic viability based on a feasibility or pre-feasibility study.
(7) Grade represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery.
(8) Figures may not add up due to rounding
60 Petropavlovsk Annual Report 2017
Exploration Update
Pioneer
Pioneer is considered to be one of the
Group’s most prospective projects for future
resource and reserve discoveries. Pioneer
consists of the Pioneer ore body and the
Alexandra, Katrin and Zheltunak satellite ore
bodies. The Pioneer ore body comprises of
several zones, of which Andreevskaya and
North East Bakhmut are high grade and to
date have provided the majority of Pioneer
production. Pioneer and Alexandra have both
refractory and non-refractory resources and
reserves whilst Katrin and Zheltunak are
entirely non-refractory.
In addition to the known ore bodies and
zones, Pioneer’s 1,337km2 license area offers
a number of exploration opportunities for both
non-refractory and refractory resources,
including high grade exploration targets.
Pioneer’s 2017 exploration programme was
successful, leading to the expansion of
Pioneer’s Resources and Reserves, and to
the identification
of promising new exploration targets.
Significant 2017 results include:
– identification of further down dip extensions
of the high grade pay shoot at NE Bakhmut
No 2, which remains open at depth offering
further potential for underground resource
and reserve expansion;
– subsequent expansion of NE Bakhmut
JORC Reserves for underground mining;
– discovery of a high grade pay shoot at
Nikolaevskaya;
– first JORC Reserves for underground
mining at Andreevskaya and Nikolaevskaya;
– identification of JORC Resources and
Reserves at Katrin, a satellite deposit
discovered in 2016 south of Pioneer; and
– discovery of two new zones of non-
refractory mineralisation north of NE
Bakhmut No 2 that are suitable for open pit
mining, and subsequent JORC Reserve
estimates for them.
Drilling and trenching has also confirmed the
presence of large-scale refractory gold
mineralisation at the geochemical anomaly
south of Pioneer identified within the
Sosnovaya license.
Katrin
Katrin is a high grade, non-refractory satellite
deposit situated south of Pioneer. It is located
within the same geological setting as the
Zheltunak deposit, which has been mined
since 2011, producing 926kt of ore at an
average grade of 1.91g/t Au (57koz of
contained gold).
Katrin is confined within a silification zone
hosted by Cretaceous volcanites. To date,
mineralisation has been traced by exploration
drilling over a 1km strike length to a depth of
up to 200m from the surface. It remains open
in both strike directions as well as down dip,
offering the opportunity for further
discoveries. Exploration here continued in Q1
2018 and Group geologists expect a further
increase in Katrin’s Mineral Resources and
Reserves during 2018.
NE Bakhmut
In 2017, underground resource and reserve
exploration took place at NE Bakhmut,
consisting of surface and underground drilling
and underground development. The most
significant results were in the NE Bakhmut No
2 area. Two new zones of mineralisation
potentially suitable for open pit mining were
discovered north from the depleted pit at NE
Bakhmut No 2.
The first, Oblomochnaya, is a shallow,
sub-horizontal mineralised zone only 30-35m
below the surface. Geological interpretations
suggest that this zone was formed as a result
of NE Bakhmut’s hard rock ore body being
eroded and material being deposited, forming
a soft oxide mineralised seam which later was
buried under a layer of Neogenic sand
formation. Metallurgical tests have confirmed
that the material is suitable for RIP processing.
It is expected that both the overburden and
the ore will be amenable to free digging,
making it a low cost open pit mining target.
Whilst exploring Oblomochnaya, a second
new zone was identified directly below it. To
date, the new zone has been intersected by
three drill holes only, with the best
intersections including 5.3m at 1.64g/t and
5.2m at 7.56g/t. It remains open in a down dip
direction and in both strike directions.
Surface drilling proved a high-grade pay
shoot mined from the open pit at NE Bakhmut
No 2 to a depth of 140m below the pit floor.
The best deep intersection is
19.6m@10.90g/t. The pay shoot is 145m long
and remains open in a down dip direction.
There are several further high-grade
intersections including 1.1m@8.10g/t and
1.0m@19.30g/t, which belong to smaller
parallel zones and/or apophysis; these await
follow up exploration.
Alexandra Area
In 2017, drilling discovered additional
low-grade mineralisation at the Shirokaya
Zone and a c.500m long extension to the
Brekchievaya Zone. Subsequent
interpretations and resource modelling
completed in 2017 resulted in the conclusion
that the new mineralisation discovered at
Brekchievaya appears to be high grade,
though it is also narrow and discontinuous,
which makes it a low priority mining target.
New mineralisation identified at Shirokaya is
relatively low grade and predominantly
refractory. Nevertheless, 2017 Alexandra
exploration added c.79koz of refractory
Resources including c.27koz of refractory
Reserves to the Pioneer Project.
Nikolaevskaya
A new high-grade pay shoot was discovered
in Q3 2017 and explored during Q4 2017 at
the Nikolaevskaya Zone, below a previously
known resource for potential open pit mining.
The pay shoot is situated between 120 and
270m from surface and remains open at
depth. A Resource estimate completed on
the explored part of the Nikolaevskaya is
200koz at an average grade of 5.66g/t, of
which c.96koz has already been classified as
Reserves. Preliminary metallurgical test
results suggest that although this material is
amenable to RIP processing, it may be more
suitable for flotation and POX, as the latter is
expected to give a better gold recovery.
Group specialists continue metallurgical tests
with the aim of improving RIP recovery at
Nikolaevskaya, which would allow production
to be brought forward from this new pay
shoot. The current Resource and Reserve
statement classifies this material as refractory.
Group geologists believe Nikolaevskaya is
less eroded than the Andreevskya and NE
Bakhmut zones, which to date have been
prime sources of the c.2.4Moz gold produced
from Pioneer. As such, Nikolaevskaya is
thought to have significant potential for the
discovery of further high-grade mineralisation
at depth.
Sosnovaya
Trenching and drilling completed in late 2016
at a 9km long geochemical anomaly at
Sosnovaya confirmed the presence of
low-grade gold mineralisation with selected
intersections including:
– 14.2m@0.80g/t (drill hole C-182-4, interval
26.7 - 40.9m);
– 42.6m@0.31g/t (drill hole C-599-11, interval
36.4 - 79.0m); and
Petropavlovsk Annual Report 2017 61
Strategic reportFinancial statementsGovernance Exploration Update continued
– 1.3m@1.14g/t (trench K-622-3, interval
227.5 - 228.8m).
Mineralisation discovered so far is too low
grade to represent immediate economic
interest. However, since almost every drill
hole completed intersected low-grade
gold halos (0.1 – 0.3g/t), indicating extensive
hydrothermal processes, these results are still
considered encouraging. Group geologists
are analysing the results, updating their
exploration model and intend to continue
exploring this target in the future.
Albyn
The Albyn project consists of three licenses
with an aggregated area of 1,053.1km2.
This includes the main Albyn ore body,
a number of known satellite ore bodies,
namely Elginskoye, Unglichikan and
Afanasevskoye as well as exploration
targets, of which Ulgen, Leninskoye and
Yasnoye are the most significant.
2017 exploration gave the following significant
results:
– Extensions to the Unglichikan ore body
were identified and explored, contributing to
Resources and Reserves.
– Ulgen exploration identified a 3km long
zone of gold mineralisation, which could
potentially provide significant additions to
Albyn Resources.
– A new high grade zone of gold
mineralisation, Sukholozhskiy, proved close
to Albyn with underground as well as open
pit mining potential.
Unglichikan
In 2017, exploration at Unglichikan continued
with drilling at the south group of mineralised
zones over a strike length of 1,200m.
The 2017 drilling results confirmed known
mineralisation and extended it down dip
to a depth of 90 to 130m from the surface.
The last down dip intersections include 4.7m
at 5.34g/t, 14.7m at 2.97g/t, and 0.8m at
26.9g/t where both grade and thickness
appear to increase with depth, suggesting
there may also be potential for underground
mining at Unglichikan.
These 2017 drilling results have supported an
increase in JORC Resources at Unglichikan
from 0.84 to 1.07Moz.
62 Petropavlovsk Annual Report 2017
Ulgen
In 2017, exploration also continued at Ulgen,
located c.30km south west from the Albyn
plant in an area of extensive historical alluvial
gold production. The best new trench
intersections include 7.0m@5.11g/t,
5.0m@3.58g/t and 2.0m@2.84g/t.
Exploration completed to date, which
includes 80m to 350m spaced trenches and
six drill holes, proved gold mineralisation
extends along the strike for 3km. It remains
open in both strike directions as well as in a
down dip direction. Exploration results at
Ulgen are very encouraging as there are many
similarities with Elginskoye, where JORC
Resources currently stand at 2.8Moz. Despite
this no further exploration is planned at Ulgen
in 2018 as due to its remote location and lack
of local infrastructure it is unlikely to offer an
immediate production upside. Ulgen remains
a significant exploration target and work is
expected to resume in the future.
Albyn- Sukholozhskiy Zone
The Sukholozhskiy Zone is a zone of gold
mineralisation discovered approximately
600m west from the Albyn pit in early 2010.
Exploration completed in 2010 and 2011
could not identify an attractive mining target,
though further exploration drilling completed
later in 2016 and 2017 discovered a c.700m
long zone of mineralisation of complex
morphology, which remains open in a down
dip direction. This zone is expected to be
suitable for combined open pit and
underground mining although formal
resource and reserve estimates are yet to be
completed to confirm this. High-grade drill
intersections at the Sukholozhskiy Zone
include:
– 2.3m@6.87g/t
– 1.0m@9.40g/t
– 1.7m@5.60g/t
– 1.0m@6.30g/t
– 7.3m@4.37g/t
– 2.0m@37.1g/t
Sukholozhskiy offers opportunities for further
resource expansions for both open and
underground mining and additional
exploration drilling is warranted.
Malomir
Malomir is one of the Group’s principal projects
located in the north east of the Amur region.
With c.87% of its Resources and Reserves
classified as refractory, it set to become a
principal source of refractory concentrate for
the Pokrovskiy POX Hub. The Project has a
combined total license area of 821.3km2.
Licenses cover Malomir, Quartzitovoye,
Ozhidaemoye, Magnetitovoye and Berezovoye
ore bodies, as well as a number of exploration
targets. 2017 exploration at Malomir primarily
focused on the Quartzitovoye underground
mine and most of the work was located within
previously known mineralisation. It comprised
of grade control sampling and underground
stope definition drilling. As such, 2017 Malomir
exploration did not result in a material increase
in the Project’s Resources and Reserves.
Following successful exploration drilling at
Quartzitovoye in 2016, a maiden non-
refractory Reserve was defined in early 2017,
underpinning an initial six year production
plan for high grade underground mining.
This exploration drilling confirmed that
high-grade mineralisation remains open at
depth, with the deepest holes greater than
440m below the surface (245m below the
open pit floor), intersecting attractive grades
and thicknesses.
In May 2017, underground developments
at Quartzitovoye led to the discovery of a
previously unknown high-grade pay shoot
producing three intersections:
5.32m@69.9g/t, 1.8m@42.9 g/t and
1.01m@12.2 g/t. The pay shoot is steep
dipping, hosted within low-grade zone
No 49 which was mined from the open pit
approximately 90m above. It appears this
high-grade shoot is controlled by an
intersection between the structure of zone
No 49, striking north-south, and a steep
east-west contact between plagiogranites
and schists.
By the end of 2018 the pay shoot has been
explored by underground workings on 390m
and 375m levels. It now has a proven strike
length of c.55m, an average thickness of c.3m
with an average grade of c.14g/t and grades
of up to 458g/t in selected samples. It remains
open in both up and down directions. It is also
considered possible that other similar pay
shoots could be discovered within zone 49,
which has a total strike length of 280m.
With Malomir starting production from its
large refractory Reserves, there are no plans
to intensify exploration here in 2018 and work
will continue at the Quartzitovoye
underground mine.
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 part of Petropavlovsk’s Non
Precious Metals Division before it was listed on
the Hong Kong Stock Exchange in 2010 (stock
code 1029). Petropavlovsk is a shareholder of
IRC (31.1%) and is the guarantor of the US$340
million project finance facility to develop the K&S
mine (US$234 million principal outstanding, as at
31 December 2017). It should be noted that IRC
is an associate of Petropavlovsk and not a
subsidiary.
IRC assets
IRC’s key mining assets are K&S, Kuranakh
and Garinskoye.
– K&S: an asset producing premium 65% iron
ore concentrate with a 20 year mine life, located
in the Jewish Autonomous Region (EAO) of the
Russian Far East. The project is currently in
phase one of two phases and is expecting to
ramp up to full capacity of 3.2Mtpa in 2018.
– Kuranakh: an iron ore/ilmenite concentrate
mine located in the Amur region, Russian Far
East, which is currently in a state of care and
maintenance.
– Garinskoye: also located in the Amur region,
this project is at an advanced stage of
exploration with Probable Ore Reserves
as well as Indicated and Inferred Mineral
Resources.
IRC’s non-core mining assets are those that
are not expected to contribute substantially
to revenue in the short to medium term.
These projects 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.
In addition to these assets, IRC also operates:
– Giproruda: based in St Petersburg and 70%
owned by IRC, Giproruda is a technical mining
and research consultancy; and
– SRP: a steel slag reprocessing plant located in
Heilongjiang, North East China. It is a joint
venture between IRC, which owns 46%, and
one of its largest iron ore customers. However,
as Kuranakh has been moved to care and
maintenance, with no alternative feedstock for
the plant, SRP was also placed into care and
maintenance in 2017.
Operational performance in 2017
K&S
In 2017, K&S continued to make good progress
with the phase one ramp up, transitioning from a
development project into a cash generating
mine. Once completed and fully ramped up,
phase one is expected to result in the annual
production of 3.2 million tonnes of iron ore
concentrate with a 65% iron (Fe) content. As iron
ore prices continued their uptrend in 2017, the
benchmark 65% Fe Platts spot price index
averaged US$81 per tonne.
Annual production of iron ore concentrate
increased 339% to 1,563,066 tonnes, with the
plant operating at a steady state capacity of
approximately 70% and rising in March 2018.
A successful 24 hour loading test at 90%
capacity took place earlier in the year, without the
assistance of a drying unit, an essential part of the
K&S production line in extreme cold as it removes
excessive moisture from the iron ore concentrate
to prevent the product from freezing. However,
technical issues with the drying unit encountered
due to poor quality contractor work impacted on
output at K&S, hindering the plant’s ability to
operate at full load.
During the year, K&S also experienced
some delay in transporting products to
customers using the Trans-Siberian Railway.
Already burdened by high traffic volumes of
thermal coal shipments during the winter, further
congestion delays were caused by heavy
torrential rain. While the congestion issue was
gradually resolved by the Russian
railway authority, K&S successfully signed
a new offtake contract with a Russian customer.
Railway congestion impacted shipments
travelling eastwards to customers in China,
though did not affect shipments to the Russian
customer, based west of K&S.
With regards to the K&S project finance facility,
ICBC agreed to restructure the remaining
repayments of c.US$234m as part of a debt
service holiday. Accordingly, two repayment
instalments originally due in 2017 and amounting
to c. US$43 million shall now be repayable as
part of five subsequent 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
challenging operating environment and lower iron
prices. There were no sales of iron ore
concentrate or ilmenite from Kuranakh in 2017.
The care and maintenance programme involves
limited costs to keep the mine and plant available
for reopening in the future. Prior to being moved
to care and maintenance, Kuranakh produced
approximately 1.1 million tonnes of iron ore
concentrate and 0.2 million tonnes of ilmenite per
annum. The potential to restart the Kuranakh
mine may represent significant upside for IRC
shareholders.
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.
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 2017.
FY 2017 Financial Results
2017 has been a year of growth for IRC, with
reported iron ore concentrate sales of over
1.5 million tonnes, a sixfold increase compared to
2016 and at double the selling price of US$78 per
tonne (2016: US$39 per tonne). In addition, apart
from a significant EBITDA contribution from K&S,
IRC recorded an impairment loss reversal in 2017,
resulting in a positive turnaround of attributable
profit totalling US$113 million, compared to an
attributable loss of US$18 million in 2016.
Underlying losses for the year reduced by 10% to
US$16 million. Overall, the results demonstrate
the transformation of K&S from a developing
project to a cash generating mine.
Petropavlovsk Annual Report 2017 63
Strategic reportFinancial statementsGovernance Sustainability
64 Petropavlovsk Annual Report 2017
Key Performance Indicators
Our key performance indicators appear throughout this report and introduce the operational
and sustainability sections and the CFO statement respectively (pages 33, 65 and 81).
Lost Time Injury Frequency Rate
2017
2016
2015
3.11
2.64
2.63
Definition
The 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 ensure that the Group’s occupational
health and safety policies are implemented
effectively, the health and safety team
continues to enforce the use of personal
protective equipment, risk identification and
mitigation, and individual actions to improve
personal safety 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 a database of statistics, training
programmes and operating parameters used
for regular analysis and control. Use of this
KPI helps to ensure the Group’s compliance
with Russian legislation, and provides the
Group with a basis for continuous
improvement.
Performance in 2017
For the year ended 31 December 2017, Group
operations recorded a LTIFR of 3.11 accidents
per million man hours worked. It is with the
utmost regret that we report three fatalities in
2017. The first accident occurred at Pioneer in
January, when a bulldozer operator fell
through ice. The second incident occurred at
a Malomir construction site in July, when an
employee was hit by unsecured apparatus
and suffered a fall. The third, in December,
involved an employee at a truck repair facility,
who undertook work without realising the
vehicle’s transmission was still engaged.
In order to minimize the possibility of such
serious incidents reoccurring, and in pursuit
of a zero-injury target, actions were taken to
raise employee awareness of each incident
and lessons were learned in order to avoid
such accidents in future. This information was
communicated to all sites and subdivisions,
to reinforce health and safety principles in all
activities, and focus on mandatory job-
specific rules and regulations to protect
employees.
Additional initiatives to reinforce employee
responsibility for a safer workplace
(individually and collectively), included a
review and revision of job descriptions to
reflect lessons learnt from recent accidents.
Furthermore, to identify and address any
gaps in knowledge of safety procedures,
exams and training were conducted amongst
employees of relevant departments.
Going Forward
As a matter of priority, senior management
continue to encourage greater awareness of
health and safety matters amongst Group staff
on an ongoing basis. The Group continues to
improve the quality of the working environment
across all sites, and, where applicable,
introduce advanced collective and personal
protection systems. This is, in part, facilitated
by the internal corporate communications
team, which uses a range of materials,
including the Group corporate newspaper,
made available to all employees, to highlight
health and safety issues.
It is the Group’s intention to:
– Analyse and draw relevant lessons from
historical records
– Develop an action plan to improve safety
performance
– Implement plan and monitor performance
– Update the Group’s safety systems and
processes as appropriate, in line with overall
Group strategy
Petropavlovsk Annual Report 2017 65
Strategic reportFinancial statementsGovernance Key Performance Indicators continued
Total Headcount and Gender Split
2017
2016
2015
6,674 1,950 8,624
6,364 1,857 8,221
6,417 1,813 8,234
■ Male
■ Female
Definition
Total Headcount is the total number of full
time staff employed by the Group, while
Gender Split is the number of male and
female staff as a proportion of the overall
workforce. Both data points are reported as
at 31 December of each calendar year.
Relevance
This KPI helps management to keep track of
not only the size of the workforce over time but
also to ensure that there is a balanced split of
male and female employees throughout the
business. Management firmly believes that the
Group’s ongoing success depends in part on
its ability to hire, motivate, develop and retain
staff with the right skills and experience, to help
them master challenges and make the most of
opportunities. Although traditionally the mining
industry in Russia has been heavily male
dominated, the Group actively seeks to apply
meritocratic principles and provides equal
opportunities and pay for all employees,
regardless of gender. Female employees
occupy senior positions across the business
and include departmental heads, deputy
directors, chief accountants and managers of
laboratories. Petropavlovsk is also the first and
only mining company in Russia to provide the
opportunity for women to work as heavy
machine operators, driving 90-ton haul trucks.
Performance in 2017
Total headcount increased by 5% in 2017 to
8,624 employees across the Group.
Of this total, women made up 23% of the
workforce and men 77%. During 2017, the
number of female employees hired by the
Group increased by 93 (+5%) to 1,950, and
the proportion of female staff is higher in office
roles. The proportion of female staff with
higher education qualifications is 30% (534),
while among men this share is lower, at 14%
(851 people).
Going forward
Petropavlovsk conducts staff diversity
reviews on an ongoing basis. The Group is
committed to operating as a responsible
employer, promoting the fair treatment,
non-discrimination, and equal opportunity of
workers as required under both Russian and
UK law. As the business continues to grow,
evolve and develop, as part of the resourcing
and HR strategy, the Group will seek to
ensure that it continues to hire a diverse range
of well qualified personnel.
66 Petropavlovsk Annual Report 2017
Greenhouse Gas (‘GHG’) Emissions
2017
2016
2015
2017
2016
2015
2017
2016
2015
Combustion of fuel and
operation of facilities
(Tonnes of CO2e)
1.01
0.97
1.07
227,305
222,847
Electricity, heat, steam and
cooling purchased for own use
(Tonnes of CO2e)
218,502
182,408
276,144
260,195
Emissions reported above
normalised per oz. of gold
produced
(Tonnes of CO2e/oz)
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 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 2017, Petropavlovsk
produced 439.6koz 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 Rosprirodnadzor.
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.
Please note that there has been a transposition error above, affecting the headings of the first
and third graphs. In 2017, the figure for the combustion of fuel and operation of facilities was
218,502 tonnes of CO2e. Emissions reported above normalised per ounce of gold produced
were at 1.01 tonnes of CO2e/oz.
Petropavlovsk Annual Report 2017 67
Strategic reportFinancial statementsGovernance Interim CEO’s Statement
Since the foundation of Petropavlovsk in 1994,
sustainability has been at the core of its
business strategy and today, as a major
presence in the Amur region, the Company
remains committed to developing its approach.
Health and safety is surely one of the most
significant challenges facing the Group, and
across its operations Petropavlovsk maintains
a zero-injury target, which it is dedicated to
achieving. Tragically, despite these efforts,
there were 3 fatalities at Petropavlovsk in
2017. This is clearly unacceptable and the
Group is committed to ensuring that we
operate safely at all times. All accidents were
carefully analysed, lessons were learned and
necessary preventative measures have been
taken, as disclosed in the LTIFR section of this
annual report.
In 2018, Petropavlovsk will continue to develop
underground mining, flotation and autoclave
technologies, all of which are deemed to be
high risk. Health and safety remains our
foremost priority. The professionalism and
dedication of all employees involved, on whom
our health and safety depends, is clear to me
and gives me confidence that these tasks will
be successfully accomplished in a safe and
responsible manner.
Petropavlovsk has a strong team focused on
environmental management and has upheld
a strong track record of performance for
many years. Acting on its own initiative, the
Group previously gained an international
certification in this field, and in 2017
Petropavlovsk’s environmental management
system received an accreditation of
compliance. This applies to each mine and is
in accordance with the international standard
GOST R ISO 14001-2016 (ISO 14001:2015).
We at Petropavlovsk aim to foster an
environment that promotes motivation, loyalty
and professionalism amongst its employees.
The number of family members and long
service workers that we have retained
demonstrates that Petropavlovsk continues
to be an attractive place to work.
Sergey Ermolenko
Interim CEO
“ Petropavlovsk has a strong
team focused on environmental
management and has upheld
a strong track record of
performance for many years.”
68 Petropavlovsk Annual Report 2017
Approach to Sustainability
At Petropavlovsk, our objective is to act in
the interests of our stakeholders, including
shareholders, employees and the
communities in which we operate, by
ensuring all our activities are efficient,
responsible, transparent and sustainable.
We seek to provide a fair return to our
shareholders. We aim to ensure a safe
working environment and just remuneration
for our employees. We play an important role
in the regions where the Group operates and
seek to contribute to their economic and
social development. We give high priority to
our responsibilities to local communities and
enjoy their active support. We believe that
mining companies have a particular
responsibility to care for the environment and
to mitigate the impact of their operations.
Sustainable development has been a key
focus for the Group since its foundation.
In its management and operations,
Petropavlovsk is committed to:
– full compliance with the legislation of the
Russian Federation;
– a rigorous approach to health and safety,
underpinned by close scrutiny by the Board
and management. The Group’s objective is
to minimise the risk of accidents and of
occupational illnesses, and to aim for zero
fatalities. All accidents are recorded, and all
serious accidents are investigated;
– a rigorous approach to environmental
standards, implemented both through
internal compliance measures and through
external expert auditing and monitoring
– provision of good working facilities,
high-quality equipment, and suitable living
conditions at the Group’s mining
operations;
– provision of appropriate and high-quality
training for its employees and opportunities
for career development;
– investment in initiatives to support
education in the regions where the Group
operates;
– promotion of the social and economic
development of these regions both through
the widening scope of the Group’s
operations and with the assistance of the
Petropavlovsk Foundation for Social
Investment;
– an active dialogue with local communities
and local and regional authorities to
maintain a transparent, two-way flow
of information and to sustain long-term,
constructive relationships between the
Group and these communities;
– fair and supportive management, with
appropriate procedures developed for
handling disputes and grievances;
– zero tolerance of bribery and corruption
and strict compliance with the relevant
legislation of the Russian Federation and
the United Kingdom; and
– the ongoing development of mine closure
plans.
Petropavlovsk Annual Report 2017 69
Strategic reportFinancial statementsGovernance Sustainability Policy and Action Plan
Safety and Sustainability Policy
Petropavlovsk recognises that a successful
business is one that is sustainable and is
supported by the communities within which
it works. Our approach is to respect the
communities that host our operations and
to undertake our business in a socially and
environmentally responsible manner.
By creating a sustainable business,
we help to make a successful business.
Our Corporate Values
– We aim to operate such that we avoid
causing harm to employees, the
environment and local communities.
– Work-related incidents, illnesses and
injuries are preventable.
– Foreseeable hazards and environmental
impacts must be identified, the associated
risk assessed and, where reasonably
practical eliminated, or minimised.
– We respect the human rights of our
workers, suppliers and host communities.
– There is a safe and correct way of doing
every task, however urgent or important.
– All employees are responsible for their own
actions and the workplace health and safety
of their fellow workers.
– Health, safety and environmental
performance and community engagement
can be continually improved.
Our Guiding Principles
– We will implement and maintain ethical
business practices and sound systems of
corporate governance.
– We will integrate sustainable development
considerations within the corporate
decision-making process.
– We will uphold fundamental human rights
and respect cultures, customs and values
in dealings with employees and others who
are affected by our activities.
– We will implement risk management
strategies based on valid data and sound
science.
– We will seek continual improvement of the
Company’s health and safety performance.
– We will seek continual improvement of the
Company’s environmental performance.
– We will contribute to conservation of
biodiversity and integrated approaches
to land use planning.
70 Petropavlovsk Annual Report 2017
Case Study: Female Truck Drivers
Number of female CAT-777 drivers
Pokrovskiy +
Pioneer (12)
Albyn (24)
Malomir (3)
Petropavlovsk is the first and so far the only
company in Russia that has decided to
follow the success of Western countries and
provide opportunities for women to work as
drivers of 90-ton haul trucks. This
responsible and well-paid work gives
women in the Amur Region an opportunity
to realise their potential and benefit from
some of the highest salaries among
labourers in the mining industry.
The opportunity for women to learn how to
drive the heavy-duty trucks was met with
great interest among potential applicants,
and admission was highly competitive.
The first enrolment to the Pokrovskiy Mining
College was in 2010. After 6 months of
training, this first group of students (9
women) successfully passed their exams
and began working at Petropavlovsk. It was
considered a successful experiment.
Tuition fees and accommodation at the
college are both free. Each applicant must
hold a category B driver’s license and be
aged between 30 and 45. The training lasts
six months and includes three stages:
theory, training for driver category C, and
production practice at the Pokrovskiy mine
quarries.
Since 2010, the Pokrovskiy Mining College
has trained 53 female drivers of CAT-777;
today, 39 female drivers work at Group
enterprises.
“ I have been working at Petropavlovsk since
2011 and was amongst the first group of
female drivers to study at the Pokrovskiy
Mining College. My natural interest in
engineering and mechanics probably
helped me to complete the course
successfully. I feel confident in my abilities,
am comfortable working and feel I am
where I belong. What I like most is to delve
into the finer details of how the truck is
constructed. Although the driver does
not engage in repair, I am always keen
to understand what the cause of the
breakdown is and how to drive in order
that it doesn’t happen in the future.”
Olesya Ostrah,
CAT-777 driver, Pokrovskiy mine
– We will facilitate and encourage responsible
product design, use, re-use, recycling and
disposal of the Company’s products
– We will contribute to the social, economic
and institutional development of the
communities in which the Company
operates
– We will implement effective and transparent
engagement, communication and
independently verified reporting
arrangements with Group stakeholders.
Our Commitments
– We are committed to managing our
operations to ensure the health, safety and
security of employees, contractors and
local communities, and to limit any negative
impact on the surrounding environment.
In planning our approach to business,
we recognise that we have duties to
shareholders and responsibilities to a wider
group of stakeholders (those who can affect
or who are affected by our activities).
– We are committed to undertaking all our
operations in compliance with Russian
regulatory requirements and international
good practice.
– We are committed to going beyond legal
compliance where necessary to protect our
workers, the surrounding environment and
the communities within which we operate.
Action Plan
In order to implement our Safety &
Sustainability Policy, we have developed a
cross-business and inter-disciplinary Action
Plan focused on our priority areas of health
and safety, human rights and stakeholder
engagement and environmental management.
Our key priorities for 2018 are set out below:
– Health & Safety.
– An ongoing campaign to go beyond
compliance and develop a safety culture
within the Group based on behavioural-
based safety at Group operations.
– A campaign and ongoing process to
encourage safe practices related to
off-site driving on public roads.
– Human Rights & Stakeholder Engagement.
– A process to ensure compliance with the
UK Modern Slavery Act through
implementation of risk assessments
across the business to identify any
potential high-risk activities with regard
to modern slavery and develop plans to
manage any high-risk areas identified.
– Ongoing engagement with host
communities to build two-way dialogue
and ensure that stakeholder comments,
questions and concerns are addressed
in a timely manner.
– Environment.
– Ongoing implementation of the
International Cyanide Management
Code at production sites.
Social Responsibility
Petropavlovsk recognises the socio-
economic influence it has as a major
employer and taxpayer in the Amur Region,
where around two thirds of employees are
residents. Working with local contractors,
particularly on large-scale projects such as
the POX Hub development, further reinforces
the Company’s economic impact.
An additional 200 contractors were recruited
to work on the project during each month of
2017. Group employment figures in the last
two years have stayed consistently above
8,000 workers, excluding contractors.
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, both in
Russia and worldwide. 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.
Working at Petropavlovsk
Employment Split by Region
Average wages in 2017, $
Amur region
(6285)
Other Russian
region (2339)
Petropavlovsk is committed to operating as
a responsible employer, promoting the fair
treatment, non-discrimination, and equal
opportunity of workers as required under
both Russian and UK law. It is Petropavlovsk’s
duty as an 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.
Average wage in Russia
Average wage in Amur region
Average Petropavlovsk wage
Gold mining division
Blast hole drilling division
Exploration division
641.5
613.1
816.1
760.2
973.9
920.6
Construction division
744.4
Management
Educative division
Other service divisions and companies
696.3
679.7
1584.9
tournaments, which included employees,
contractors and interns; the younger
generation of the Ivanovo village also
took part.
weddings and anniversaries), holiday camps
for the children of employees, arranging
sporting events and festive celebrations at
the mines, and also to paying bonuses.
At the mines, shift patterns are arranged
to help employees to maintain their family
commitments whilst ensuring operations can
run throughout the year. These patterns are
usually either 14, 30 or 45 days with
subsequent leave of the same duration.
Whilst on duty, employees live in comfortable,
on-site, hotel style accommodation with
access to leisure facilities. Competitions are
held at each site and in 2017, more than 300
people took part in a variety of sports
In order to facilitate a permanent productive
dialogue between senior management and
employees, a trade union was established at
Pokrovskiy in 2003. Today, 1,629 employees
are members of the trade union, and in a
continuation of the Group’s historical record,
there were no strikes to report during 2017.
The trade union budget of RUB 29 million in
2017 was allocated to health treatments for
employees, financial assistance (for medical
treatment and operations, the birth of a child,
Petropavlovsk has developed a strong
internal communications team responsible
for the exchange of information between the
Company and its employees. For over 10
years, the team has provided timely updates
on corporate news and provided a
mechanism for questions and answers via
multiple channels, particularly through its
Pokrovka+ newspaper. This is delivered in
both digital and print formats to ensure
access by employees based on site with
Petropavlovsk Annual Report 2017 71
Strategic reportFinancial statementsGovernance Sustainability continued
limited computer access. Questions are often
answered by relevant specialists within the
newspaper itself, which is also circulated to
residents of local communities.
Petropavlovsk offers competitive salaries
which exceed regional and country averages.
The average wage of Petropavlovsk
employees in Russia is 133% higher than the
Amur region average, and 127% higher than
the Russian average. The Petropavlovsk
minimum wage is 225% higher than the
regional minimum wage. As a socially
responsible employer, alongside salaries
Petropavlovsk provides social benefits such
as pensions, maternity and paternity leave,
and employee assistance programmes. In
2017, 85 people took maternity (99%) and
paternity (1%) leave. Employee assistance
programmes are carried out by Petropavlovsk
companies as well as by the trade union.
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.
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.
Petropavlovsk understands that its
employees are key assets and invests in them
accordingly. Some of its initiatives, highlighted
below, have been especially successful:
Minimum salaries in 2017, $
Regional minimum
227.4
Petropavlovsk minimum
Gold mining division
Blast hole drilling division
Exploration division
Construction division
Management
445.7
405.9
485.0
511.0
466.4
Educative division
305.5
Other service divisions and companies
381.9
1002.6
Petropavlovsk minimum and average wages vs. regional minimum and average
Regional minimum wage
227.4
Average wage in Amur region
Average wage in Russia
613.1
641.5
Petropavlovsk minimum
445.7
Petropavlovsk average wage
816.1
Case Study: Extending the Service Life
of Off-Road Tyres Brings Substantial
Business Savings and Bonuses to
Prudent Drivers
The proper operation of machinery is of
paramount importance in the mining
industry. Since 2016, Petropavlovsk drivers
have had the opportunity to receive bonuses
for demonstrating high professionalism and
a careful attitude to equipment, by
prolonging the life of the off-the-road tyres
for the trucks they operate. This particular
machinery affects the delivery of ore
material, meaning delays can be costly, and
potential efficiencies are especially valuable.
Amur Machinery LLC, the official Caterpillar
dealer in the Amur region, works with
Petropavlovsk on this program.
observing the speed regime and monitoring
tyre pressure). To enable the driver to
understand that pressure has exceeded the
norm, trucks at Pioneer and Albyn were
equipped with pressure control systems,
which consist of a monitor installed in the
cabin, and sensors attached to the truck tyre
valves. The data for each car is recorded and
entered into a web application, created by
the IT department of MC Petropavlovsk. This
allows the pressure dynamics to be traced,
and alerts the driver of any unusual activity.
Igor Velikiy received a thank you letter and a
bonus for his cautious approach:
“I tried to drive carefully, avoiding poorer
quality sections of the road, and monitored
the sensors.”
The service life of the tyre depends on many
factors, including how the roads are
serviced, though also on the driver’s
approach (timely technical inspections,
Analysis has showed that in 2016, the
service life of off-the road tyres increased by
an average of 20% at Pioneer and Albyn
compared to 2015.
72 Petropavlovsk Annual Report 2017
Education
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 is Petropavlovsk’s main
educational asset and has been successfully
preparing qualified graduates for the Group for
nine years. Today, the college is a constantly
progressing, multi-level, innovative educational
institution that implements a wide range of
educational programs in-house.
The college is a private, non-profit,
professional educational institution that
implements educational programs in
accordance with the state license:
– Secondary education (training of mid-level
specialists, skilled workers and employees).
– Additional education (retraining for a new
activity, advanced training).
– Professional training (over 40 programs).
There are 18 teachers at the college.
Engineering and technical personnel from
Petropavlovsk and other companies are
involved in organising theoretical training and
practical experience at the mines, in
developing training documentation, and in the
final certification.
For the duration of study, tuition and
accommodation is free for students, and those
who demonstrate outstanding results may
receive a scholarship.
In 2017, 1,958 people were trained at the
Pokrovskiy Mining College. The main
contractor was the largest company,
Pokrovskiy.
Number of PGK graduates
In 2017, activity at the college focused on
professional training and additional education
programmes, in line with new technologies
and production improvements introduced.
For each course, the college developed an
individual syllabus based on recommendations
from the Ministry of Education, adapted to
Petropavlovsk operations; technical specialists
and engineers took part in this process.
One example is the professional development
course aimed at better preparing specialists for
their work by updating and refining their
knowledge of the latest Health and Safety
practices. During this short course,
11 employees from around the Company
studied theoretical and practical materials
prepared both by teachers from the college
and by representatives of state authorities.
All successfully completed their exams.
During their studies, students had the
opportunity to meet with colleagues and
discuss issues related to passing inspections,
which are regularly conducted by Government
authorities at Petropavlovsk operations.
Maria Silich, Deputy Chief Engineer and Head
of Health and Safety at Albyn:
“The Ministry of Labour and Social Affairs of
the Russian Federation recently adopted a
professional standard for Health and Safety
specialists. According to new requirements,
employees must either have a degree in this
specific area or must retrain accordingly.
2017
2016
2015
2014
408
2013
343
1958
1941
2107
As such, many of my colleagues and I had to
take part in an advanced training course.
Tatyana Bredikhina, Director of the Pokrovskiy
Mining College, responded to my request to
develop a program and organise training for
the ‘Safety in the Technosphere’ course.
We were free to communicate with
representatives of the supervisory bodies and
ask questions in between the main course and
lectures. It was also helpful to be able to
communicate with colleagues from other
companies without restriction; we could ask
each other questions, discuss complex topics
and share our experiences throughout.
In 2018, the Pokrovskiy Mining College will
become one of multiple sites used for POX
personnel training, for which it has been
developing programs during 2017. Based on
the results of its work in 2015, 2016 and 2017,
the college has been listed in the Unified
National Register of ‘Leading Educational
Institutions of the Russian Federation”.
Albyn
Malomir
19/225/2/27 273
4/68/4/196 272
Pokrovskiy + Pioneer
32/529/12/680 1,253
Others
14/59/18/69 160
Secondary education (non-university level)
Nonprofessional occupations (skilled workers)
Additional education (advanced training)
Additional education (professional training)
Petropavlovsk Annual Report 2017 73
Strategic reportFinancial statementsGovernance Sustainability continued
Human Rights
Uliana Levanova
Head of Welfare and
Community Liaison
“The Amur region is developing actively with
new projects in various industries, from a gas
processing plant to a space port! We are in
The Petropavlovsk Foundation
Petropavlovsk provides direct support to local
communities through the Petropavlovsk
Foundation. Established in 2010, the Foundation
invests in programs aimed to encourage
socio-economic development, improve quality
of life for local inhabitants, and maintain a positive
socio-cultural environment.
competition with some of the largest Russian
companies for qualified employees, and our
task is to ensure that they choose us. We
accomplish this by fulfilling our commitments,
by supporting personal development, and
most importantly, by demonstrating
appreciation of our employees and their
contributions.”
The Petropavlovsk Safety & Sustainability
Policy explicitly acknowledges that the
company respects the human rights of our
workers, suppliers and host communities. We
seek to align our activities with the UN Guiding
Principles on Business and Human Rights.
In practice, this is implemented via a number
of mechanisms, namely:
– modern slavery risk management within the
supply chain (to meet the requirements of
the Modern Slavery Act, 2015);
– engagement with host communities
(including the proposed community
grievance mechanism); and
– implementation of human resources
policies and procedures for workers in
accordance with the requirements of the
Russian Federation.
The Foundation’s social projects fall under 6 strategic areas:
– Education.
– Culture.
– Future Generations (Child Development).
– Quality of Life.
– Research and Development.
– Sport.
Engaging with Indigenous Groups
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 2017. The Group continues to monitor
circumstances in line with its commitment to
maintaining good relationships with local
communities and authorities.
There are 5 villages with predominantly Evenk
populations in the Amur region. The Albyn
mine is located approximately 20km from one
of these, the Ivanovskoye village in the northern
Seledmzhinsky district, with a population of
375 people. Petropavlovsk considers its
residents to be interested parties and pays
special attention to its interactions with them.
The village is located in a traditional gold mining
area, where alluvial gold has been mined since
the 19th century, and local gold mining
companies not part of the Group continue to
mine alluvial gold in the vicinity of the village.
Ivanovskoye by Ulgen and the neighbouring
Selitkan community. During its years of
operation in the Selemgjinsky district,
Petropavlovsk provided Ivanovskoye with
in-kind assistance and social support, mainly
through the Petropavlovsk Foundation.
There is a school and a kindergarten in the
village where the Evenk language is taught.
Residents enjoy spending leisure time at a local
stadium and at a community centre, which in
2010 began to be used by a newly created folk
dance group. Between 2010 and 2017,
Petropavlovsk took part in the rebuilding and
improvement of all social and educational
facilities. A traditional type of Evenk farming,
reindeer husbandry, is conducted in
The long-standing goal of the Ivanovo
community is the creation of an ethnocultural
centre that will unite and lead work on
preserving the Evenki language, traditional
crafts and folklore. In 2017, Regis - a Group
company, took part in exploration work to
research the territory on which the main
building is to be constructed.
74 Petropavlovsk Annual Report 2017
Government Relationship
In recent years, the Government of the Russian
Federation has been actively implementing a
policy of development in the Russian Far East.
A number of measures have been adopted to
support the construction and development of
modern production facilities in the region,
which will create jobs and increase income
from taxation.
In 2015, the Group received state support for
a project located in the Selemdzhinsky district,
in the remote north of the Amur Region.
The project, focused on the construction
and operation of gold mining and processing
plants, was among the six key investment
projects in the Russian Far East that received
such support.
Within the framework of the project, the
government invested in the creation of local
energy infrastructure, consisting of a new
220kV, 175km long transmission line
(February-Rudnaya) and a 220kV substation
in the village of Koboldo (Rudnaya).
The infrastructure will provide a reliable energy
supply to Petropavlovsk mines, and increase
possible connectivity for the opening of new
local production facilities and deposits.
RUB 5.49 billion of state support has been
pledged, the expected amount needed to
complete the project, of which RUB 4.9 billion
has been received (89%).
Russian contractors including local contractors
have worked on the project. The construction
of the high-voltage line and the substation
involved 196 people and 90 units of
equipment. Most of the work has been
completed at this stage, and the infrastructure
facilities are planned to be completed in 2018.
Grievance Mechanism
In line with good international industry
practice, a Grievance Procedure has been
developed to enable members of the public
and other stakeholders to raise complaints or
issues concerning Petropavlovsk activities
and to be assured that these complaints will
receive due consideration and a written
response. The Grievance Mechanism is
currently being discussed with the view to it
being implemented in 2018. Once in place,
individuals will be able to register complaints
online, by post, by phone or in person.
Information on the proposed community
grievance mechanism will be made available
to local residents and other stakeholders.
Key performance statistics on the use of
the Grievance Procedure, the nature of
issues raised, and the responsiveness
of Petropavlovsk in resolving issues in a
timely manner will be reported in future
Sustainability Reports.
Health and Safety
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.
Our Commitments
Occupational health and safety is the Group’s
key priority. The Group is committed to:
– providing a safe working environment for
all employees;
– ensuring full compliance with the legislation
of the Russian Federation;
– minimising the risk of accidents and
occupational illness; and
– providing high quality, task-specific training.
All employees are provided with task-specific
PPE and failure to wear or use the appropriate
PPE is a disciplinary offence.
H&S Management Systems
Health and safety management should
be at the core of every company and at
Petropavlovsk we continuously review our
approach in line with the latest regulations
and best practice. Drills are conducted twice
a month at all operations in accordance with
plans approved by the Chief Engineer of
the site.
Upon joining the Company, training is
provided to all employees, who later must
undergo refresher courses and take health
and safety exams. Employees receive
specially tailored training in the event of an
accident, incorporating the findings of the
respective investigation, as well as targeted
training if embarking on a specific
assignment.
Audits and Inspections
Various Government HSE auditors make
regular visits to the Group’s operations to
conduct rigorous safety inspections and
request compliance information, and their
findings are documented and submitted to the
HSE Committee. The Group conducts regular
internal health and safety inspections, too.
Information regarding any safety violations is
communicated to employees, line managers
and operational management, referencing the
danger posed and the relevant Russian
legislation, and/or the Group’s health and
safety policies. Where appropriate, follow up
meetings are conducted with management of
the individual entities inspected.
As a last resort, the Group has the authority
to fine or discipline individuals, including line
managers, for any safety breaches.
Compliance with Russian Health and
Safety Legislation
The Group is committed to full compliance
with Russian labour legislation, of which the
most significant is the Labour Code of the
Russian Federation and FZ-116 ‘On Industrial
Safety at Hazardous Production Facilities’.
Petropavlovsk Annual Report 2017 75
Strategic reportFinancial statementsGovernance Sustainability continued
In line with the Russian Labour Code, a review
of labour protection in the workplace is
conducted regularly. Other rules, standards
and regulations include:
– state labour safety system standards;
– state sanitary-epidemiological rules and
standards;
– integrated safety rules;
– rules of installation and safe operation; and
– labour protection regulations.
The Group aims to incorporate any additional
legislative developments into the Group’s
health and safety standards. It is the Group’s
obligation and duty to comply with health and
safety legislation and all relevant regulations in
the regions we operate in. Beyond that,
Petropavlovsk strives to pursue and introduce
industry best practice, both in Russia and
internationally.
Group Health and Safety policies were
updated in 2017 to improve and update
existing documentation in line with business
developments, particularly the
commissioning of the underground project. In
order to realise our strategy in a safe and
responsible manner, it was clear that a major
and enhanced focus on occupational health
and safety was required, and as such
appropriate actions were taken.
Petropavlovsk ensured to keep both our
employees and stakeholders constantly
informed throughout the campaign, seeking
feedback aimed at subsequent improvement.
In addition to its other initiatives,
Petropavlovsk carries out regular campaigns
to raise health and safety awareness, recently
focusing on road safety and also slips, trips
and falls. The road safety campaign promoted
the use of seat belts and maintaining speed
limits, whilst the latter campaign was
developed in line with widespread practices
to avoid injuries occurring as a result of
seemingly minor actions. Both campaigns
were successful and management was
reassured that it should maintain its
approach, which encompasses the
simultaneous use of educational activities
and outreach tools alongside the targeting
of individuals.
Health and Safety at the POX Hub
The POX Hub will be commissioned and will
operate in line with mining industry standards,
which outline specific requirements for the
safe operation and training of staff in
potentially hazardous production facilities.
The Department of Occupational Health and
Safety is currently developing technical
protocols relating to the safe installation
and operation of POX equipment. Prior to
commissioning, all equipment will be tested
to reconfirm it is safe to use. Equipment will
be certified by State authorities in order to
confirm its safety in line with Russian
standards and regulations. Employees
operating the POX Hub will be required
to undergo specific training on the safe
operation of all relevant equipment and will
be examined in-house. In addition, senior
technical staff will be State-certified.
At present, a specialised Health and Safety
department is being created and all regulatory
documents will be prepared for the launch of
the autoclave.
Zhanna Kirienko
Group Health and Safety
Coordinator
“The creation and maintenance of a safe
environment in which to operate remains the
cornerstone of Petropavlovsk’s ethos. People
are our first priority; their health, safety and
welfare are our constant concern, and we
work continually to improve working
conditions and minimize risks. We strive to
promote a health and safety culture amongst
employees that ensures they return safely to
their families after work. An injury-free record
is our ultimate goal.”
Vladimir Novikov
Health and Safety Specialist at
MC Petropavlovsk
(Blagoveshchensk)
“It is in everybody’s interest to abide by
rigorous health and safety rules and
regulations and encourage those around you
to follow. Across our operations, our health
and safety teams strive relentlessly to raise
employee awareness of the risks and hazards
that may be hidden in their daily routines.
We aim to achieve this by introducing new
methodologies, best practices and
campaigns, whilst always leading by example.
Continuous training aimed at reinforcing
knowledge as well as enhancing vital skills
is crucial.”
76 Petropavlovsk Annual Report 2017
Cyanide Management
As a gold producer, Petropavlovsk uses
cyanide for the extraction of gold from ore.
The Company has a rigorous approach to the
handling, management and monitoring of
cyanide due to its hazardous potential.
This involves identifying all associated
hazards and strictly controlling all cyanide
levels in our tailings, surface and ground
waters. All facilities are fully compliant with
Russian regulations and environmental
monitoring results are provided to the
authorities on a regular basis.
The comprehensive measures currently
employed by the Group to monitor and
manage cyanide are outlined in the
adjacent tables:
Tailings Management Facilities
All residue and waste from cyanide-based
processes is disposed of at fully approved
tailings management facilities, which are
located in controlled access areas outside
the city. The Group regularly conducts safety
assessments of tailings dams at all sites,
analysing their design, construction and
operation. We will endeavour to continue
this monitoring and control at our tailings
management facilities in line with best
practice, improving our methods where
applicable.
The Group recognises that if its tailings dams
were to fail, this could have a major impact on
the local environment. The risk of a tailings
dam failure is included in the Group’s HSE risk
management matrix. All the Group’s tailings
management facilities are insured, operated
and monitored in accordance with legislation
of the Russian Federation. Examinations and
monitoring are performed on a daily basis and
as a result, the risk is deemed to be low.
Implementation of the International
Cyanide Management Code
Petropavlovsk has systems in place already,
driven by Russian regulations. In addition and
as part of the original Sustainability Plan, an
independent audit by an accredited ICMC
auditor was undertaken in April 2009. A range
Environmental
Health & Safety
– Special sensors monitor the presence of
– Practice drills and training with the
cyanide compounds at the Group’s
processing plants. If high concentrations
are detected, supply and exhaust
ventilation is automatically turned on
presence of medical services are carried
out on a monthly basis; all employees
involved in cyanide handling are regularly
instructed and tested
– Electronic digital bird scaring systems
(Bird Gard Super Pro AMP) are installed
along the perimeter of heap leach
solution ponds, in order to repel
waterfowl from the surface where
cyanide concentration is over 50 mg/l
– The monitoring and protection of wildlife is
an obligatory part of the Operational
Environmental Control, carried out in
accordance with the approved
Environmental Monitoring Program.
Monitoring data is included in the yearly
report submitted to state bodies of all levels
– A detailed closure plan outlining
special measures to decommission
facilities is prepared three years before the
actual closure. The plan provides
a mechanism for ensuring the financing of
these works. This project is coordinated
with state bodies of the Regional and
Local government and in accordance with
the environmental requirements of the
Russian Federation, and also undergoes a
State Environmental review
– Tailings dams are designed to be water
tight and are monitored on a daily basis.
– Personal Protective Equipment and
workwear are available and must be
used at all times
– Most cyanide drums are recycled
– The implementation of a cyanide
destruction system is ongoing and has
been partially completed
– Cyanide signage around process plants
to identify pipes and tanks containing
cyanide solutions is being improved
– An updated detailed response plan is
available for each hazardous facility
– Cyanide and other dangerous
substances are stored securely.
Access is limited to fully-qualified
personnel and is closely monitored by
security staff; security procedures are
reviewed on a monthly basis
– The handling and transportation of
cyanide is carried out in line with strict
security requirements and only authorised
personnel are allowed to transport
cyanide. All transportation is logged.
of recommendations was identified to bring the
operating mines into compliance with ICMC
requirements. The key recommendations were
taken into consideration and the appropriate
measures have been implemented with clearly
assigned responsibilities.
In 2018, the HSE Committee plans to review
the Group’s approach to cyanide management
and decide if the company should undertake a
compliance audit against the requirements of
the ICMC, in order to develop an updated set
of actions for cyanide management and to
seek ICMC accreditation.
The HSE Audit conducted by WAI in 2011
concluded that cyanide is well managed
and that there was clear evidence that the
improvements are being implemented at
Pioneer and Pokrovskiy.
Petropavlovsk Annual Report 2017 77
Strategic reportFinancial statementsGovernance Sustainability continued
Environmental Management
Vera Usova
Head of the Environmental Safety
Department
“Environmental monitoring is an integral part
of our operations and our team of specialists
is truly committed to what we do. The team
covers all Petropavlovsk sites and monitors
all stages of construction, operation, and land
reclamation to ensure we protect the
environment that we operate in for the benefit
of our many stakeholders.”
Petropavlovsk is committed to effectively
managing environmental issues, upholding
the highest standards as required by Russian
Water used (total), m3
Water used for drinking and domestic purposes, m3
Raw water used (technical), m3
Recycled water, m3
Water discharged, m3
law, and operating in line with international
best practice.
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), which may detail
limits and conditions to help protect the
environment. It must also draw up
environmental impact assessments for
mining project permits to be considered,
in line with Russian legislation. Further, 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.
The environment is monitored throughout the
life of each mine to identify any impact Group
activities might have on the surrounding
ecosystem. The Group has developed an
appropriate environmental protection policy
to support this aim and informs all relevant
authorities and interested parties of its
production activity and associated
environmental data on a regular basis.
Data is collected according to state approved
schedules and samples analysed in state
accredited laboratories.
In 2017, there were no regulatory non-
compliance issues to report. In addition,
upon the expiry of the certificates under the
previous requirements of GOST R ISO
14001-2007 (ISO 14001:2004), new ones
were received for all four mines to comply with
GOST R ISO 14001-2016 (ISO 14001:2015).
Water Management
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.
2017
21,738,223
517,488
4,569,262
16,651,473
0
2016
32,212,228
594,419
4,465,662
27,152,148
0
2015
19,705,304
583,481
4,412,012
14,709,811
0
There is no water discharge as it is transferred to a third party organisation to be recycled/neutralised.
Recycled water
Energy
Energy consumption per 1t of ore, GJ
Energy consumption per 1t of ore, kWh
2017 (164)
2016 (236)
2015 (244)
2017 (33)
2016 (45)
2015 (40)
2017
76.6%
2016
84.3%
2015
74.6%
78 Petropavlovsk Annual Report 2017
Consumption of primary energy sources
Energy Consumption
Electricity
Diesel
Kerosene
Gasoline
Coal
GJ
000 kW/h
l
l
l
t
2017
3,122,507
598,816
71,958,915
130,605
582,409
17,153
2016
3,357,161
588,205
78,435,164
155,053
421,331
12,608
2015
3,810,484
607,047
90,959,194
235,851
471,870
13,185
Waste Management
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.
In 2017, 6965.9 tons of waste were generated, which is 380.3 tons more than in 2016. Growth in the volume of waste generated is caused by an
increase in annual gold production and the development of the POX Hub project.
Generated, t
Reused, t
Disposed
2017
6966
2981
1896
2016
6586
2727
1599
Air Quality
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.
There were no violations in 2017, the levels of
monitored indicators were comparable with
those of 2016 and there were no observed
changes in the chemical composition of air
in impact areas.
Rehabilitation
To date, the Group has not decommissioned
any mines. However, it is the Group’s intention
to ensure that after decommissioning, the
landscape will be restored as far as possible
to its original state. All operating mines are
subject to an ongoing rehabilitation
programme, which is compliant with
regulatory requirements. Closure plans are
prepared as a part of the initial permitting
process and these are updated as required.
In 2017, the reclamation was completed on
four Pioneer waste dumps within an area of
more than four hundred hectares.
First, a mechanical stage of reclamation took
place, during which heaps/piles were levelled
and pine seedlings were planted on 75
hectares. The pine tree was chosen due
to its local presence and high survival rate.
The advantage of planting seedlings on an
artificial surface such as a heap is that within
ten to fifteen years, the seedlings will be
guaranteed to be protected from wildfires.
After reclamation is completed, the land is
transferred to the Magdagachinsky Forestry,
which owns it.
Rehabilitation was also carried out at the
Malomir and Albyn mines. At these mines,
the project includes preparation of the site
for vegetation to grow naturally.
Land restoration, ha
Land restored in 2017, ha
2017
3004.0
Pokrovskiy
492
Pioneer
816
2016
973.0
Malomir
434
2015
1336.0
Albyn
1262
POX
Arsenic is a hazardous waste component
usually present in refractory ores and
concentrates in the form of arsenopyrite
(FeAsS) and requires special anti-
contamination measures to ensure safe
disposal. Disposal of arsenic waste products
is strictly regulated by both Russian and
international environmental legislation.
The POX process converts the majority of
arsenopyrite into scorodite (FeAsO4•2H2O),
which is insoluble in water, hence it is the
safest form of arsenic for disposal. In contrast,
the BIOX® process produces tailings with a
higher concentration of water-soluble mobile
arsenic, which is more hazardous even after
the additional treatment required before it can
be disposed of into a tailings dam.
Petropavlovsk Annual Report 2017 79
Strategic reportFinancial statementsGovernance 80 Petropavlovsk Annual Report 2017
Key Performance Indicators
Our key performance indicators appear throughout this report and introduce the operational
and sustainability sections and the CFO statement respectively (pages 33, 65 and 81).
Total Cash Costs◆ per Ounce of Gold for Hard Rock Mines (US$/oz)
All-in Sustaining Costs◆ (US$/oz)
2017
2016
2015
963
807
874
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.
Definition
All in sustaining cash costs (“AISC”) include
both operating and capital costs required to
sustain gold production on an ongoing basis,
over and above the direct mining and selling
costs shown by TCC◆. AISC◆ is calculated in
accordance with guidelines for reporting
AISC◆, as published by the World Gold
Council in 2013.
Performance in 2017
Total Cash Costs◆ for hard rock mines
increased from US$660/oz in 2016 to
US$741/oz in 2017. The increase reflects
primarily the effect of Rouble appreciation,
inflation of certain Rouble denominated costs,
lower recoveries at Pioneer, Pokrovskiy and
Malomir and lower grades at Pioneer,
Pokrovskiy and Albyn, which was partly
compensated by a mining tax relief applied
by the Group in 2017.
Going Forward
The Group expects TCC◆ for 2018 to be in
the range of c.US$700-750/oz, based on the
exchange rate of RUB58 : US$1.
For further information on TCC◆ please refer to the CFO
Statement on pages 84to 93 of this report.
Relevance
AISC◆ allows for a better understanding of
the true cost of producing gold once key
components such as central admin costs
and the cost of sustaining capital and
exploration expenditure are taken into
account. Management uses this measure to
monitor the performance of our assets and
their ability to generate positive cash flows.
Performance in 2017
AISC◆ increased from US$807/oz in 2016 to
US$963/oz in 2017. This reflects the increase
in TCC◆ as well as sustaining Capital
Expenditure◆, primarily in relation to Pioneer
and Malomir underground projects and the
expansion of tailing dams at Pioneer and
Albyn, ongoing exploration focused on near
mine resource expansion, prospective
stripping at Albyn and Malomir in advance
of mining in 2018 and the increase in central
administration expenses.
Going Forward
The Group expects AISC◆ for 2018 to be
in the range of c.US$800/oz - US$850/oz,
based on exchange rate of RUB 58 : US$1.
For further information on AISC◆ please refer to the CFO
Statement on pages 84 to 93 of this report.
2017
2016
2015
660
741
749
Definition
Total cash cost per ounce (“TCC”) is 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, producing 100% of the Group’s total
gold production.
TCC◆ are calculated by the Group as
operating cash costs less co-product
revenue. TCC◆ per oz are calculated as Total
Cash Costs◆ divided by the ounces of gold
sold and are presented on a segmental basis.
Operating cash costs are defined by the
Group as operating cash expenses plus
refinery and transportation costs, other taxes,
mining tax and the amortisation of deferred
stripping costs.
The key components of operating cash
expenses are wages, electricity, diesel,
chemical reagents and consumables.
The main 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 is also a
variable cost dependent on production
volume and the gold price realised.
The Russian statutory mining tax rate is 6%.
Under the Russian Federal Law 144-FZ
dated 23 May 2016 that introduced certain
amendments to the Russian Tax Code,
taxpayers who are participants to the
Regional Investment Projects (“RIP”) have
the right to apply the reduced mining tax
rate provided certain conditions are met.
The Group’s mining entities (JSC Pokrovskiy
Rudnik, LLC Malomirskiy Rudnik and LLC
Albynskiy Rudnik) met eligibility criteria and
applied 0% mining tax rate in 2017. The Group
also expects to apply 0% mining tax rate in
2018. Subsequently, the mining tax rate will
increase incrementally by 1.2% every two
years, reaching 6% in 2027.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 81
Strategic reportFinancial statementsGovernance Key Performance Indicators continued
Average Realised Gold Sales Price◆
(US$/oz)
Net Debt◆ (US$m)
Underlying EBITDA◆ (US$m)
2017
2016
2015
1,262
(585)
1,222
(599)
1,178
(610)
2017
2017
2016
2016
2015
2015
197
200
173
Definition
Net Debt◆ shows how indebted a company is
after total debt and any cash (or its equivalent)
are netted off against each other. Net Debt◆ is
calculated as the sum of current borrowings
and non-current borrowings less cash and
cash equivalents. Other companies may
calculate this measure differently.
Definition
EBITDA is a common measure used to
assess profitability without the impact of
different financing methods, tax, asset
depreciation and amortisation of intangibles
and items of an exceptional / non-recurring
nature, or those that could make comparison
of results from prior periods less meaningful.
Relevance
Management considers Net Debt◆ a key
measure of the Company’s leverage and its
ability to repay debt as well showing what
progress is being made in strengthening
the balance sheet.
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 2017
Net Debt◆ reduced to US$585 million as at
31 December 2017 from US$599 million as
at 31 December 2016.
Performance in 2017
In 2017, the Group generated Underlying
EBITDA◆ of US$196.8 million, compared with
US$200.1 million in 2016.
Going Forward
The Group’s Net Debt◆ is expected to be
in the range of c.US$560-585 million by the
end of 2018, assuming an average market
gold price of US$1,275/oz for the remainder
of 2018.
For further information on Net Debt◆ please refer to the CFO
Statement on pages 84 to 93 of this report.
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 Underlying EBITDA◆ levels.
For further information on Underlying EBITDA◆ please refer to
the CFO Statement on pages 84 to 95 of this report.
Definition
The Average Realised Gold Sales Price◆ is the
mean price at which the Group sold its gold
production throughout the reporting period,
including the realised effect of cash flow
hedge contracts. The Average Realised Gold
Sales Price◆ is calculated by dividing total
revenue received from gold sales (including
the realised effect of any hedging contracts)
by the total quantity of gold sold during
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 and profitability.
Performance in 2017
In 2017, the average realised gold price was
US$1,262/oz, a 3% increase from US$1,222/
oz in 2016 and above the average LBMA gold
price afternoon fixing of US$1,257/oz.
The average realised gold price for 2017
includes a US$2/oz effect from hedge
arrangements (2016: US$(21)/oz).
Going Forward
The Group generates most of its revenue
from the sale of gold. The Group’s policy is to
sell its products at the prevailing market price.
The Group constantly monitors the gold price
and hedges some portion of production as
considered necessary. Forward contracts
to sell an aggregate of 400koz of gold at
an average price of US$1,252/oz were
outstanding as at 31 December 2017.
Forward contracts to sell an aggregate
of 350koz of gold at an average price of
US$1,252/oz are outstanding as at
27 March 2018.
For further details on the components of Group revenue, cash
flow and hedge arrangements please refer to the CFO
Statement on pages 84 to 93 of this report
82 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Profit/(Loss) For The Period (US$m)
Basic Earnings/(Loss) Per Share (US$)
42
32
2017
2016
2015
(0.09)
0.01
0.01
2017
2016
2015
(298)
Definition
Profit / (loss) for the period is calculated
by deducting operating and net finance
expenses, taxation and any relevant share of
results of 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
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 2017 was 3,303,768,532
(31 December 2016: 3,303,768,532).
Performance in 2017
Basic profit per share for 2017 was US$0.01,
approximately as per 2016.
Going Forward
The Group aims to continue to sell gold at
competitive margins, which will, amongst other
factors, influence the Group’s future EPS.
For the calculation of basic EPS please refer to the note 11 of the
Consolidated Financial Statements on page 172 of this report.
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.
Performance in 2017
Profit for the period amounted to
US$41.5 million in 2017, compared to a profit
of US$31.7 million in 2016. While Underlying
EBITDA◆ remained at approximately the same
level as in 2016, the Group’s profit for the
period was positively affected by a
US$35.2 million share of profit in associates
that included partial reversal of previously
recognised impairment losses at K&S, as
recorded by the Group’s associate IRC (2016:
a loss of results of associates of
US$3.6 million). This was partially offset by
US$29.2m of deferred taxation (including a
foreign exchange effect on deferred tax due
to appreciation of the Rouble against the
US Dollar).
Going Forward
The Group aims to continue to produce and
sell gold at competitive margins, which will,
amongst other factors, influence the Group’s
future profit / (loss) for the period.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 83
Strategic reportFinancial statementsGovernance
Chief Financial Officer’s Statement
For the year ended 31 December 2017
Andrey Maruta
Note: Figures may not add up due to rounding
Financial Highlights
Gold produced
Gold sold
Group revenue
Average realised gold price◆
Average LBMA gold price afternoon fixing
Total cash costs◆ (a)
All-in Sustaining Costs◆ (b)
All-in costs◆ (b)
Underlying EBITDA◆
Operating profit
Profit before tax
Profit for the period
Profit for the period attributable to equity shareholders of Petropavlovsk PLC
Basic profit per share
Net cash from operating activities
’000oz
’000oz
US$ million
US$/oz
US$/oz
US$/oz
US$/oz
US$/oz
US$ million
US$ million
US$ million
US$ million
US$ million
US$
US$ million
(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.
Cash and cash equivalents
Loans (c)
Notes (d)
Convertible bonds (e)
Net Debt◆
(c) US$4 million principal under Sberbank facility at amortised cost.
(d) US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost.
(e) US$100 million convertible bonds due on 18 March 2020 at amortised cost.
Revenue
Revenue from hard rock mines
Revenue from other operations
2017
439.6
439.8
587.4
1,262
1,257
741
963
1,065
196.8
111.9
60.5
41.5
42.4
0.01
124.0
2016
400.2
399.9
540.7
1,222
1,250
660
807
838
200.1
77.0
27.0
31.7
33.7
0.01
37.0
31 December 2017
US$ million
31 December 2016
US$ million
11.4
(7.1)
(497.7)
(91.6)
(585.1)
12.6
(522.8)
–
(88.4)
(598.6)
2017
US$ million
556.2
31.2
587.4
2016
US$ million
490.0
50.7
540.7
84 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Group revenue during the period was
US$587.4 million, 9% higher than the
US$540.7 million achieved in 2016.
Revenue from hard rock mines was
US$556.2 million, 14% higher than the
US$490.0 million achieved in 2016. Gold
remains the key commodity produced and
sold by the Group, comprising 95% of total
revenue generated in 2017. The physical
volume of gold sold from hard rock mines
increased by 10% from 399,858oz in 2016 to
439,834oz in 2017. The average realised gold
price◆ increased by 3% from US$1,222/oz in
2016 to US$1,262/oz in 2017. The average
realised gold price◆ includes a US$2/oz effect
from hedge arrangements (2016: US$(21)/oz).
Hard rock mines sold 65,503oz of silver in
2017 at an average price of US$17/oz,
compared to 98,231oz in 2016 at an
average price of US$16/oz.
the Group has entered into a number of
gold forward contracts.
Revenue generated as a result of third-party
work by the Group’s in-house service
companies was US$31.2 million in 2017,
a US$19.5 million decrease compared to
US$50.7 million in 2016. This revenue is
substantially attributable to sales generated
by the 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$29.0
million in 2017 compared to US$44.8 million
in 2016.
Cash flow hedge arrangements
In order to increase certainty in respect of
a significant proportion of its cash flows,
Forward contracts to sell an aggregate of
212,501oz of gold matured during 2017 and
contributed US$0.8 million to cash revenue
(2016: US$(8.5) million net cash settlement
paid by the Group from forward contracts to
sell an aggregate of 134,545oz of gold).
The Group constantly monitors the gold price
and hedges some portion of production as
considered appropriate. Forward contracts
to sell an aggregate of 400koz of gold at an
average price of US$1,252/oz were outstanding
as at 31 December 2017. Forward contracts to
sell an aggregate of 350koz of gold at an
average price of US$1,252/oz are outstanding
as at 27 March 2018.
Underlying EBITDA◆ and analysis of operating costs
Profit for the period
Add/(less):
Investment income
Interest expense
Other finance gains
Other finance losses
Foreign exchange losses
Accrual for additional mining tax (a)
Taxation
Depreciation
Impairment of exploration and evaluation assets
(Reversal of impairment)/ impairment of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Share of results of associates (b)
Underlying EBITDA◆
2017
US$ million
41.5
2016
US$ million
31.7
(0.8)
25.9
(2.2)
28.5
0.7
19.9
19.1
93.2
–
(4.7)
3.9
0.6
(28.7)
196.8
(0.6)
61.0
(11.9)
1.5
5.2
–
(4.7)
105.3
9.2
1.2
–
–
2.4
200.1
(a) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.
(b) Group’s share of interest expense, investment income, other finance gains and losses, foreign exchange losses, taxation, depreciation and impairment/reversal of 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◆
2017
US$ million
75.5
0.8
22.1
130.7
229.1
(32.3)
196.8
2016
US$ million
79.2
13.2
22.0
110.4
224.7
(24.6)
200.1
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 85
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2017
Hard rock mines
During this period, hard rock mines generated
Underlying EBITDA◆ of US$229.1 million
compared to US$224.7 million Underlying
EBITDA◆ in 2016.
Total Cash Costs◆ for hard rock mines
increased from US$660/oz in 2016 to
US$741/oz in 2017. The increase in TCC◆
primarily reflects the effect of Rouble
appreciation, inflation of certain Rouble
denominated costs, lower recoveries at
Pioneer, Pokrovskiy and Malomir and lower
grades at Pioneer, Pokrovskiy and Albyn,
which was partly compensated by a mining
tax relief applied by the Group in 2017. The
increase in the average realised gold price◆
from US$1,222/oz in 2016 to US$1,262/oz in
2017 and the increase in physical ounces sold
had a US$40.3 million positive contribution to
Underlying EBITDA◆ in 2017. This effect was
offset by the increase in Total Cash Costs◆,
which had a US$35.9 million impact on the
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 strengthening of the Rouble against
the US Dollar.
Compared with 2016 there was ongoing
inflation of certain Rouble denominated costs,
in particular, electricity costs increased by up
to 14% in Rouble terms (increased by up to
31% in US Dollar terms) and the cost of diesel
increased by up to 11% in Rouble terms
(increased by up to 28% in US Dollar terms).
A 13% strengthening of the Rouble against
the US Dollar has occurred during 2017
compared to 2016, with the average
exchange rate for the period going from 67.18
Roubles per US Dollar in 2016 to 58.32
Roubles per US Dollar in 2017.
Refinery and transportation costs are variable
costs dependent on production volume.
Mining tax is also a variable cost dependent
on production volume and the gold price
realised. The Russian statutory mining tax
rate is 6%. Under the Russian Federal Law
144-FZ dated 23 May 2016 that introduced
certain amendments to the Russian Tax
Code, taxpayers who are participants to the
Regional Investment Projects (“RIP”) have the
right to apply the reduced mining tax rate
provided certain conditions are met.
The Group’s mining entities (JSC Pokrovskiy
Rudnik, LLC Malomirskiy Rudnik and LLC
Albynskiy Rudnik) met eligibility criteria and
applied 0% mining tax rate in 2017. The Group
also expects to apply 0% mining tax rate in
2018. Subsequently, the mining tax rate will
increase incrementally by 1.2% every two
years, reaching 6% in 2027.
The Group initially applied a reduced rate of
mining tax since 1 July 2016 in its capacity of
a participant to the RIP. The position of the
Russian tax authorities was that the effective
date for the aforementioned concession
should be 1 January 2017 and, accordingly,
the Group should be liable for the mining tax
of for the six month period to 31 December
2016. Following unfavourable court decisions,
the Group has settled an aggregate
equivalent of US$19.9 million of mining tax for
the six month period to 31 December 2016,
interest and penalties, which amounts were
recognized as an expense in 2017.
Staff cost
Materials
Fuel
Electricity
Other external services
Other operating expenses
Movement in ore stockpiles, gold in circuit and
bullion in process attributable to gold production (a)
Total operating cash expenses
(a) Excluding deferred stripping
2017
2016
US$ million
72.1
107.1
43.8
30.1
36.2
24.1
313.4
(19.2)
294.2
%
23
34
14
10
12
7
100
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
86 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Revenue
Gold
Silver
Expenses
Operating cash expenses
Refinery and transportation
Other taxes
Mining tax
Accrual of additional mining tax (a)
Deferred stripping costs
Depreciation
Impairment of exploration and evaluation assets
(Reversal of impairment)/Impairment
of ore stockpiles
Impairment of gold in circuit
Operating expenses
Result of precious metals operations
Add/(less):
Accrual of additional mining tax (a)
Depreciation
Impairment of exploration and evaluation assets
(Reversal of impairment)/Impairment
of ore stockpiles
Impairment of gold in circuit
Segment EBITDA◆
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◆
Hard rock mines
Pioneer
US$ million
Pokrovskiy
US$ million
Malomir
US$ million
Albyn
US$ million
2017
Total
US$ million
2016
Total
US$ million
202.4
0.7
203.1
125.5
0.3
1.9
–
6.5
–
28.9
–
(3.6)
2.6
162.1
41.0
6.5
28.9
–
(3.6)
2.6
75.5
40.7
0.1
40.8
39.6
0.1
0.4
–
2.3
–
7.1
–
0.2
0.7
50.3
(9.5)
2.3
7.1
–
0.2
0.7
0.8
83.1
0.0
83.1
55.7
0.1
1.7
–
2.8
3.6
12.6
–
0.3
0.6
77.3
5.8
2.8
12.6
–
0.3
0.6
22.1
228.9
0.2
229.1
73.4
0.3
2.0
–
8.3
22.6
44.3
–
(1.6)
–
149.4
79.7
8.3
44.3
–
(1.6)
–
130.7
555.1
1.1
556.2
294.2
0.8
5.9
–
19.9
26.2
93.0
–
(4.7)
3.9
439.1
117.1
19.9
93.0
–
(4.7)
3.9
229.1
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
160,421
32,250
65,678
181,485
439,834
399,858
125.5
0.3
1.9
–
–
127.7
(0.7)
126.9
39.6
0.1
0.4
–
–
40.0
(0.1)
39.9
55.7
0.1
1.7
–
3.6
61.1
(0.0)
61.0
929
73.4
0.3
2.0
–
22.6
98.4
(0.2)
98.2
541
294.2
0.8
5.9
–
26.2
327.1
(1.1)
326.0
225.6
0.7
6.3
14.7
18.0
265.3
(1.5)
263.7
741
660
TCC◆/oz, US$/oz
791
1,236
(a) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 87
Strategic reportFinancial statementsGovernance
Chief Financial Officer’s Statement continued
For the year ended 31 December 2017
All-in Sustaining Costs◆ and All-in Costs◆
AISC◆ increased from US$807/oz in 2016 to US$963/oz in 2017. The increase in AISC◆ reflects the sustaining Capital Expenditure◆, primarily
in relation to Pioneer and Malomir underground projects and expansion of tailing dams at Pioneer and Albyn, ongoing exploration focused
on near mine resource expansion, prospective stripping at Albyn and Malomir in advance of the mining in 2018 and the increase in central
administration expenses.
AIC◆ increased from US$838/oz in 2016 to US$1,065/oz in 2017, primarily reflecting the increase in AISC◆ explained above and Capital
Expenditure◆ in relation to the POX project.
Hard rock mines
Pioneer
US$ million
Pokrovskiy
US$ million
Malomir
US$ million
Albyn
US$ million
2017
Total
US$ million
2016
Total
US$ million
Physical volume of gold sold, oz
160,421
32,250
65,678
181,485
439,834
399,858
Total Cash Costs◆
TCC◆, US$/oz
126.9
39.9
791
1,236
(Reversal of impairment)/ Impairment
of ore stockpiles
Impairment of gold in circuit
Adjusted operating costs
Central administration expenses
Capitalised stripping at end of the period
Capitalised stripping at beginning of the period
Close down and site restoration
Sustaining exploration expenditures
Sustaining Capital Expenditure◆
All-in Sustaining Costs◆
(1.3)
2.6
128.2
14.6
0.9
–
0.1
6.0
15.4
165.1
0.2
0.7
40.8
2.9
–
–
0.2
0.0
0.2
44.1
61.0
929
0.3
0.6
61.9
6.0
10.6
(3.6)
0.3
3.8
4.9
83.9
98.2
326.0
263.7
541
741
660
(1.6)
–
96.6
16.5
28.2
(22.6)
0.9
6.3
4.5
130.4
(2.5)
3.9
327.4
39.9
39.8
(26.2)
1.5
16.1
24.9
423.5
7.2
–
270.9
32.6
26.2
(18.0)
0.2
–
10.9
322.8
All-in Sustaining Costs◆, US$/oz
1,029
1,367
1,278
718
963
807
Exploration expenditure◆
Capital Expenditure◆
Reversal of impairment of ore stockpiles (a)
All-in costs◆
5.6
18.2
(2.2)
186.7
–
–
–
44.1
0.0
23.0
–
107.0
0.1
–
–
130.5
5.8
41.2
(2.2)
468.3
16.6
1.9
(6.0)
335.3
All-in costs◆, US$/oz
1,164
1,367
1,628
719
1,065
838
(a) Refractory ore stockpiles to be processed at the POX Hub.
88 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Corporate and other
Corporate and other operations contributed US$(32.3) million to Underlying EBITDA◆ in 2017 compared to US$(24.6) million in 2016.
Corporate and other operations primarily include central administration function, result of in-house service companies and the Group’s
share of results of its associate IRC.
The Group has corporate offices in London, Moscow and Blagoveschensk, which together represent the central administration function.
Central administration expenses increased by US$7.3 million from US$32.6 million in 2016 to US$39.9 million in 2017. The increase in central
administration expenses is primarily attributed to a US$6.5 million increase in staff costs, mainly as a result of the payments and accruals key
management bonuses, an increase in Russian staff costs due to the appreciation of RUB against US Dollar and general increase in Russian
salaries to align with the market.
The Group’s share of profit generated by IRC is US$35.2 million (2016: US$(3.6) million share of losses generated by IRC), including
US$40.3 million effect from partial reversal of impairment at K&S mine. IRC contributed US$6.5 million to the Group’s Underlying EBITDA◆
in 2017.
Impairment review
The Group undertook an impairment review of the tangible assets attributable to its gold mining projects, exploration assets adjacent to
the existing mines and supporting in-house service companies and concluded no impairment was required as at 31 December 2017.
As at 31 December 2017, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines.
The forecast future cash flows are based on the Group’s current mining plan that assumes POX Hub completion in the year 2018.
The other key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:
Long term gold price
Discount rate (a)
RUB : US$ exchange rate
(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 11.6% (2016: 10.1%)
Interest income and expense
Investment income
The Group earned US$0.8 million interest income on its cash deposits with banks.
Interest expense
Interest capitalised
Other
2017
US$1,300/oz
8%
2016
US$1,200/oz
8%
RUB60 : US$1 RUB60 : US$1
2017
US$ million
0.8
2016
US$ million
0.6
2017
US$ million
60.2
(34.6)
0.3
25.9
2016
US$ million
60.8
0.2
61.0
Interest expense for the period was comprised of US$5.3 million effective interest on the Notes , US$12.2 million effective interest on the
Convertible Bonds and US$42.7 million interest on bank facilities (2016: US$11.9 million and US$48.9 million, respectively).
As the Group resumed active construction of the POX Hub and flotation at Malomir and proceeded with underground development at Pioneer
and Malomir, these projects met eligibility criteria for borrowing costs capitalization under IAS 23 “Borrowing Costs”. US$34.6 million of interest
expense was capitalised within property, plant and equipment in 2017, accordingly.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 89
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2017
Other finance gains and losses
Other finance gains for the period comprised US$2.2 million compared to US$11.9 million in 2016. Included in other finance gains is a financial
guarantee fee of US$2.2 million (2016: US$4.5 million) charged in connection with the ICBC facility.
Other finance losses for the period comprised US$28.5 million compared to US$1.5 million in 2016. Included in other finance losses are
US$6.9 million (2016: US$nil) fair value losses on the revaluation of the embedded option for the bondholders to convert into the equity of the
Company and a US$21.6 million (2016: US$1.5 million) loss on bank debt refinancing.
Taxation
Tax charge/(credit)
2017
US$ million
19.1
2016
US$ million
(4.7)
The Group is subject to corporation tax under the UK, Russia and Cyprus tax legislation. The statutory tax rate for 2017 was 19.25% in the UK and
20% in Russia. Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants to the Regional Investment Projects
(“RIP”) have the right to apply the reduced corporation tax rate if certain conditions are met. In 2017, LLC Albynskiy Rudnik has received tax relief
as a RIP participant and is entitled to the reduced statutory corporation tax rate of 17% for the period of 10 years, subject to eligibility criteria.
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$24.4 million (2016: US$29.8 million) and a deferred tax credit, which is a non-cash item, of US$5.3 million (2016: deferred tax credit of
US$34.5 million). Included in the deferred tax credit in 2017 is a US$7.5 million credit (2016: US$26.0 million credit) 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 Roubles, 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$31.1 million in Russia (2016: corporation tax payments in
aggregate of US$35.3 million in Russia).
Earnings per share
Profit for the period attributable to equity holders of Petropavlovsk PLC
Weighted average number of Ordinary Shares
Basic profit per ordinary share
2017
2016
US$42.4 million US$33.7 million
3,303,768,532 3,302,148,536
US$0.01
US$0.01
Basic profit per share for 2017 was US$0.01, which is approximately at the same level as in 2016. The total number of Ordinary Shares in issue as
at 31 December 2017 was 3,303,768,532 (31 December 2016: 3,303,768,532).
90 Petropavlovsk Annual Report 2017
Financial position and cash flows
Cash and cash equivalents
Bank loans (a)
Notes (b)
Convertible bonds (c)
Net Debt◆
(a) US$4 million principal under Sberbank facility at amortised cost.
(b) US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost.
(c) US$100 million convertible bonds due on 18 March 2020 at amortised cost.
Net cash from operating activities
Net cash used in investing activities
Net cash used in financing activities
(d) Including US$88.1 million cash CAPEX◆.
31 December 2017
US$ million
11.4
(7.1)
(497.7)
(91.6)
(585.1)
31 December 2016
US$ million
12.6
(522.8)
–
(88.4)
(598.6)
2017
US$ million
124.0
(87.0) (d)
(38.6)
2016
US$ million
37.0
(8.7)
(46.8)
Issue of US$500 million Notes
In November 2017, the Group issued US$500 million Guaranteed Notes due for repayment on 14 November 2022. The Notes were issued by the
Group’s wholly owned subsidiary Petropavlovsk 2016 Limited and are guaranteed by the Company and its subsidiaries JSC Pokrovskiy Rudnik,
LLC Albynskiy Rudnik and LLC Malomirskiy Rudnik. The Notes have been admitted to the official list of the Irish Stock Exchange and to trading on
the Global Exchange Market of the Irish Stock Exchange on 14 November 2017. The Notes carry a coupon of 8.125% payable semi-annually in
arrears. Net proceeds from the issue of the Notes were used to refinance substantially all of the loans provided pursuant to the banking facilities
by Sberbank and VTB Bank.
Key movements in cash and Net Debt◆
As at 1 January 2017
Net cash generated by operating activities before working capital changes
Decrease in working capital
Income tax paid
Capital Expenditure◆
Exploration expenditure
Issue of Notes, net of transaction cost
Amounts repaid under bank loans
Interest accrued
Interest paid
Transaction costs in connection with bank loans
Bank debt refinancing
Other
As at 31 December 2017
As at 31 December 2017, there were no undrawn facilities available to the Group.
Cash
US$ million
12.6
156.8
47.5
(31.1)
(66.2)
(21.9)
495.0
(525.8)
–
(49.2)
(9.0)
–
2.7
11.4
Debt
US$ million
(611.2)
–
–
–
–
–
(492.4)
525.8
(60.2)
49.2
13.9
(21.6)
–
(596.5)
Net Debt◆
US$ million
(598.6)
(585.1)
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 91
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2017
Capital Expenditure◆
The Group invested an aggregate of US$88.1 million in 2017 compared to US$29.4 million in 2016. The key areas of focus this year were on
the POX project, for which active development was recommenced ahead of scheduled commissioning in 2018, exploration and development
to support the underground mining at Pioneer and Malomir, 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.
Following the recommencement of active development of the POX project and the development of Pioneer and Malomir underground
mining operations, the Group capitalised US$34.6 million of interest expense incurred in relation to the Group’s debt into the cost of the
aforementioned assets.
POX (a)
Pokrovskiy and Pioneer (b)
Malomir (c),(d)
Albyn
Upgrade of in-house service companies
Exploration
expenditure
US$ million
-
11.6
3.8
6.4
-
21.9
Development
expenditure and
other CAPEX◆
US$ million
33.2
14.6
12.7
3.6
2.2
66.2
Total CAPEX◆
US$ million
33.2
26.2
16.5
10.1
2.2
88.1
(a) Including US$33.2 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$12.0 million of expenditure in relation to the underground mining project at Pioneer to be sustaining Capital Expenditure◆ for the purposes of calculating the All-in Sustaining Costs◆ and All-in Costs◆.
(c) Including US$3.5 million of expenditure in relation to the underground mining project at Malomir to be sustaining Capital Expenditure◆ for the purposes of calculating the All-in Sustaining Costs◆ and All-in
Costs◆.
(d) Including US$8.1 million of expenditure in relation to Malomir flotation (including tailing dams), which is considered to be non-sustaining Capital Expenditure◆ for the purposes of calculating All-in Sustaining
Costs◆ and All-in Costs◆.
Foreign currency exchange differences
The Group’s principal subsidiaries have a US Dollar functional currency. Foreign exchange differences arise on the translation of monetary assets
and liabilities denominated in foreign currencies, which for the principal subsidiaries of the Group are the Russian Rouble and GB Pounds Sterling.
The following exchange rates to the US Dollar have been applied to translate monetary assets and liabilities denominated in foreign currencies.
GB Pounds Sterling (GBP: US$)
Russian Rouble (RUB : US$)
31 December 2017
0.74
57.60
31 December 2016
0.81
60.66
The Rouble recovered by 5% against the US Dollar during 2017, from RUB60.66: US$1 as at 31 December 2016 to RUB57.60: US$1 as at 31
December 2017. The average year-on-year appreciation of the Rouble against the US Dollar was approximately 13%, with the average exchange
rate for 2017 being RUB58.32: US$1 compared to RUB67.18: US$1 for 2016. The Group recognised foreign exchange losses of US$0.7 million in
2017 (2016: US$5.2 million) arising primarily on Rouble denominated net monetary assets.
92 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
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
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 for the period of
12 months from the date of approval of the
2017 Annual Report and Accounts. As at
31 December 2017, the Group had sufficient
liquidity headroom. Following the successful
issue of the US$500 million Guaranteed
Notes (note 20), the Group is also satisfied
that it has sufficient headroom under a base
case scenario for the period to April 2019.
In the meantime, the Group’s projections
under a layered stressed case that is based
on the gold price, which is 10% lower than the
average of the market consensus forecasts,
indicate that unless mitigating actions can be
taken, there will be insufficient liquidity under
a layered stressed case for the relevant period
to April 2019. These mitigating actions include
items within the control of the management,
such as accessing deposits not currently in
the Group’s mining plan, cost cutting and
reduction of exploration expenditure.
The Group has guaranteed the outstanding
amounts IRC owes to ICBC. The outstanding
loan principal was US$234 million as at 31
December 2017. 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. In 2017, IRC has agreed
with ICBC to reschedule repayments under the
ICBC Facility Agreement and 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). The next repayment instalment
under the ICBC Facility Agreement is now due
on 20 June 2018 and semi-annually thereafter
until June 2022. IRC projections demonstrate
that although IRC expects to have sufficient
working capital liquidity over the next 12
months, these projections indicate that, unless
mitigating actions can be taken, there will be
insufficient liquidity to meet its debt repayment
schedule and non-compliance with certain
financial covenants for the relevant period to
April 2019. Management of Company and IRC
has approached ICBC to request an
amendment of the repayment schedule and
obtain waivers in respect of obligations to
comply with certain financial covenants.
Management is also in active discussions
regarding the full refinancing of the ICBC facility
with an alternative lender. However, if ICBC
refinancing is not completed, IRC’s financial
liquidity may be adversely impacted. IRC and/
or the Company would then need to carry out
contingency plans including entering into
negotiations with banks or other investors for
additional debt and/or equity financing.
If a missed repayment under debt or
guarantee obligations 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 risk that ICBC refinancing is not
completed or alternative contingency plans
are not realised represents a material
uncertainty which may cast significant doubt
upon the Group’s ability to continue to apply
the going concern basis of accounting.
Nevertheless, 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 2017 Annual
Report and Accounts. Accordingly, they
continue to adopt the going concern basis
of accounting in preparing consolidated
financial statements.
2018 Outlook
The Group is currently aiming to achieve
2018 production guidance in the range of
420 – 460 koz. The Group’s operating
cash expenses are substantially Rouble
denominated. The Group expects its TCC◆ in
2018 to be in the range of c.US$700-750/oz at
current exchange rates.
The Strategic Report was approved by the
Board on 27 March 2018 and signed on its
behalf by:
Ian Ashby
Independent Non-Executive Chairman
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 93
Strategic reportFinancial statementsGovernance
Board of Directors
Chairman
Executive Directors
Non-Executive
Directors
Mr Ian Ashby
Independent Non-Executive
Chairman
Mr Sergey Ermolenko
Interim Chief Executive
Officer
Mr Andrey Maruta
Chief Financial Officer
Mr Bruce M. Buck
Senior Independent Non-
Executive Director
Appointed on 22 June 2017
Appointed on 18 July 2017
Appointed on 2 January 2011
Appointed on 22 June 2017
Mr Maruta is a fellow member
of The Association of Chartered
Certified Accountants.
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.
External Appointments
None.
Committee membership
None.
Experience
Mr Buck has been practicing law
in Europe since 1983. His work
at the law firm of Skadden, Arps,
Slate, Meagher and Flom, where
he was a partner and latterly Of
Counsel retiring from this role in
July 2017, included a broad range
of mergers, acquisitions and
capital markets transactions,
including IPOs and high-yield
transactions. Mr Buck has been
involved in work in Central and
Eastern Europe, and particularly
in the Russian Federation,
since 1990.
External Appointments
Mr Buck is the Chairman and a
Director of Chelsea FC plc and
he also holds a Non-Executive
Director position on the Board
of AIM-listed Globalworth Real
Estate Investments Limited.
Committee membership
Chairman of the Remuneration
Committee and a member of the
Audit and HSE Committees.
Experience
Mr Ashby has 36 years of
international experience in the
minerals industry across a range
of commodities that include
copper, iron ore, coal, silver,
gold, lead and zinc. In his most
recent executive role between
2006 and 2012, Mr Ashby was
President of BHP Billiton’s Iron
Ore division, the largest and
most profitable business within
BHP Billiton, where he was
responsible for global strategy
development and execution,
opportunity identification,
project development and
operations. Post his executive
career, Mr Ashby has pursued
Non-Executive Director roles at
Genco Shipping and New World
Resources.
Mr Ashby holds a Bachelor of
Engineering in Mining from the
University of Melbourne.
External Appointments
Mr Ashby currently holds NED
positions on the boards of
Anglo-American PLC, Nevsun
Resources and Alderon Iron Ore
Corporation.
Committee membership
Chairman of the Nomination
Committee and a member of
the Audit and Remuneration
Committees.
94 Petropavlovsk Annual Report 2017
Mr Ermolenko, who is also the
General Director of Management
Company Petropavlovsk,
was CEO of Petropavlovsk PLC
from December 2011 to
November 2014.
Mr Ermolenko is one of the
original members of the Group’s
founding management team.
Experience
Mr Ermolenko has held top
managerial positions with the
Group since its inception in 1994
and he has been instrumental in
the expansion of the Group into a
multi-mine operation, overseeing
the commissioning of Pokrovskiy,
Pioneer, Malomir and Albyn.
He was appointed General
Director of Management
Company Petropavlovsk in
2004. In this capacity, he led
the expansion of the Group
into a multi mine operator.
Mr Ermolenko is Chairman of the
Executive Committee and the
Group’s Operations Committee.
External Appointments
None.
Committee membership
Member of the HSE Committee
From 16 April 2018
Mr Ermolenko will revert to his
former role as General Director of
MC Petropavlovsk following the
appointment of Mr Deniskin as
Chief Executive Officer.
Incoming Chief
Executive Officer
Mr Adrian Coates,
Independent Non-Executive
Director
Mr Bektas Mukazhanov
Non-Executive Director
Mr Garrett Soden
Independent Non-Executive
Director
Appointed on 16 February 2018
Appointed on 8 February 2018
Appointed on 22 June 2017
Mr Roman Deniskin
Appointment effective from
16 April 2018
Experience
Mr Mukazhanov brings a
wealth of knowledge from his
professional experience at a
senior level in the financial and
information technology industries.
Mr Mukazhanov holds degrees
in computer science and
information technology and
is a CFA charterholder.
External Appointments
Mr Mukazhanov is an
employee at Fincraft Holdings
Ltd, the major shareholder
of Petropavlovsk PLC.
Committee membership
None.
Experience
Mr Coates has many years’
experience in the investment
banking industry, having held
senior positions with HSBC Bank
plc and UBS Investment Bank
amongst others, latterly with a
specialisation in the natural
resources sector. Since then,
Mr Coates has held Non-
Executive positions at both Polyus
Gold International Limited,
Kazakhgold Group Limited and
Regal Petroleum plc. He has also
worked as a strategic consultant
to prominent clients in the metals
and mining industry
Mr Coates holds MA degrees
in Economics from Fitzwilliam
College of Cambridge University
and a MBA from London
Business School.
External Appointments
Mr Coates holds Non-Executive
positions at JKX Oil and Gas plc,
where he is Senior Independent
Director and Chairman of the
Audit Committee, and at Thor
Explorations Ltd, where he is
Non-Executive Director and
Chairman of the Audit
Committee.
Committee membership
None.
Experience
Mr Deniskin has extensive
experience at strategic and
senior operating levels within
mining and industrial companies.
Whilst his focus in mining was on
iron ore, coal and gold in Russia
and CIS, it also included
successful gold sector
expansion in Africa. During his
diverse career, Mr Deniskin spent
significant time working at global
management consulting firms
McKinsey & Company and
Boston Consulting Group,
focused primarily on metals and
mining. In his most recent role,
he served as Deputy Chairman
of Eurasian Resources Group,
a leading diversified mining and
smelting group based in
Kazakhstan. Prior to this,
Mr Deniskin held senior positions
at Rostec, MMK and Severstal
Resources.
Mr Deniskin holds degrees in
mechanics and economics.
From 16 April 2018
Mr Deniskin will be appointed
as Chief Executive Officer on
16 April 2018. He will have no
external appointments at the
date of his appointment.
Experience
Mr Soden has extensive
experience as a senior executive
and board member of various
public companies in the natural
resources sector. He has worked
with the Lundin Group for the last
decade. Previously, he was
Chairman and CEO of RusForest
AB, CFO of Etrion and PetroFalcon
Corporation and a Non-Executive
Director of PA Resources AB.
Prior to joining the Lundin Group,
Mr. Soden worked at Lehman
Brothers in equity research and at
Salomon Brothers in mergers and
acquisitions. He also previously
served as Senior Policy Advisor
to the U.S. Secretary of Energy.
Mr Soden holds a BSc honours
degree from the London School
of Economics and an MBA from
Columbia Business School.
External Appointments
Mr Soden is currently President
and CEO of Africa Energy Corp.,
a Canadian oil and gas
exploration company focused on
Africa. He is also a Non-Executive
Director of Etrion Corporation,
Gulf Keystone Petroleum Ltd.,
Panoro Energy ASA and Phoenix
Global Resources PLC.
Committee membership
Chairman of the Audit
Committee and a member of the
Remuneration and Nomination
Committees.
Petropavlovsk Annual Report 2017 95
GovernanceFinancial statementsStrategic report Governance Report
Chairman’s introduction
Dear Shareholder
The 2017 year to date has been a
considerable period of change for the
Petropavlovsk Board.
I and two of my fellow Directors, Bruce Buck
and Garrett Soden were proposed for
appointment, by certain shareholders,
as Independent Non-Executive Directors at the
Annual General Meeting held on 22 June 2017
(the ‘2017 AGM’), following which I was
appointed by the Board to act as its Chairman.
At the same meeting, Vladislav Egorov, who
resigned as a Director on 1 January 2018,
was proposed by the Company’s former
major shareholder, for appointment as a
Director. In addition, during 2018 I have
welcomed both Adrian Coates as an
Independent Non-Executive Director and
Bektas Mukazhanov as a Director to the
Board and announced the appointment of
Roman Deniskin as Chief Executive Officer
effective from 16 April 2018.
Adrian was appointed as an additional
Independent Non-Executive Director on
16 February 2018 to further strengthen the
Board, whilst Bektas was appointed as
Non-Independent Non-Executive Director
on 8 February 2018. Details of all Board
changes during 2017 and 2018 to-date are
provided in this report, including information
on those Directors who departed the Board
during the year. The Board’s composition is
fully compliant with the UK Corporate
Governance Code and has been throughout
2017 to date.
Since my appointment as Chairman I have
met with many shareholders, principally
during the 2017 interim results investor
roadshow and immediately prior to the launch
of the Group’s US$500m 8.125% Guaranteed
Notes due 2022 (the “Notes”) in November
2017. I, and the Board, welcome dialogue
with all of the Company’s shareholders and
we are mindful of our obligation to maintain
a dialogue with shareholders based on a
mutual understanding of objectives.
Whilst the appointment of myself, Bruce,
Garrett and Vladislav at the 2017 AGM
was proposed by shareholders having a
substantial interest in the Company’s issued
share capital, the Board recognises that not
all shareholders were supportive of our
appointment. I hope that their concerns
have been addressed by the aforementioned
meetings and by the actions taken by the
Board since the 2017 AGM. Following our
appointment the Board’s priorities have
been to:
(i) ensure that POX is delivered on time and
on budget;
(ii) refinance the Group’s bank debt to provide
medium term financial stability and
flexibility for the business. This has been
achieved through the successful issuance,
in November 2017, of the Notes;
(iii) ensure the successful ramping up of the
Group’s underground mining operations,
maximising operational efficiency and
cashflow potential, whilst ensuring the
safety of our employees and contractors;
and
(iv) seek new options to resolve the potential
liability of the Company’s guarantee to
ICBC in respect of IRC’s loan facility and
maximise the value of the Group’s equity
interest in IRC.
I and my fellow Directors remain committed
to this strategy. In addition the Board has
announced the appointment of an
experienced CEO who we expect to
modernise the Group’s practices and
procedures. Details of the progress made
in the implementation of our strategy and
proposed actions, together with the
management of associated risks, are
included in the Strategic Report.
This Governance Report demonstrates the
Board’s commitment to good standards of
governance and to improving its engagement
with all of the Company’s shareholders and
stakeholders, whilst delivering its strategy.
I hope that you will find it informative.
Ian Ashby
Chairman
27 March 2018
96 Petropavlovsk Annual Report 2017
In addition the following should be noted:
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% Convertible
Bonds due 2015 which completed in March
2015 and prior to his appointment as a
Director. The Board did not deem that this
constituted a material business relationship
with the Company. Accordingly, the Board
considered that Mr Jenkins was independent
at the date of his appointment and that he
continued to be an independent director of
the Company until his retirement from the
Board on 22 June 2017.
Provision B.6 of the Code requires the Board
to report on performance of the Board
evaluation. Following the change of the
Chairman and Non-Executive Directors on
22 June 2017 and the resignation of the Chief
Executive Officer on 17 July 2017 it was
considered appropriate to defer the annual
evaluation of the Board’s performance and
that of its Committees in 2017 until the latter
part of 2018. Details of this evaluation will be
included in the 2018 Annual Report.
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 Governance Report is arranged around
these main principles and together with the
Audit Committee Report (on pages 108 to
113, the Remuneration Committee Report
(on pages 115 to 132) and the Nomination
Committee Report (on pages 106 and 107)
sets out how the Company has applied the
main principles of the Code during 2017.
The Company has complied with the
requirements of the Code published in
April 2016 throughout the year ended
31 December 2017, with the exception
of the following:
Provision E.2.4 of the Code requires that the
Company should arrange for the Notice of
the AGM and related papers to be sent to
shareholders at least 20 working days before
the meeting. The Company did not meet
this deadline for the 2017 AGM due to the
time required to consider and include the
additional resolutions proposed by three of
its major shareholders as detailed on page
98. The Board considers that these were
exceptional circumstances and it does not
envisage that it will be non-compliant with this
Code provision in the future.
Petropavlovsk Annual Report 2017 97
GovernanceFinancial statementsStrategic report Governance Report continued
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; and
– 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.
Role of the board
Current Membership:
Mr Ian Ashby,
Non-Executive Chairman
Mr Bektas Mukazhanov,
Non-Independent Non-Executive Director
Mr Sergey Ermolenko,
Interim Chief Executive Officer
Mr Bruce M. Buck,
Senior Independent Director
Mr Adrian Coates,
Independent Non-Executive Director
Mr Andrey Maruta,
Chief Financial Officer
Mr Garrett Soden,
Independent Non-Executive Director
Further information:
– The Group’s strategy, set by the Board, is
fully described in the Strategic Report on
pages 14 and 15.
– Directors’ Biographies are on pages 94
to 95.
Code compliant:
The Board comprises a Non-Executive Chairman and three Independent Non-Executive Directors.
Board changes during the year
At the Annual General Meeting held on 22 June 2017, shareholders did not vote for the
re-election of the Executive Chairman Mr Peter Hambro or the Company’s three Independent
Non-Executive Directors, Messrs Alexander Green, Robert Jenkins and Andrew Vickerman.
Accordingly these individuals retired from the Board on 22 June 2017.
At the same meeting, shareholders approved the appointment of the following new Directors,
Messrs Ian Ashby, Bruce Buck, and Garrett Soden as Independent Non-Executive Directors
and Vladislav Egorov as a Non-Independent Non-Executive Director. These appointments
were proposed by certain shareholders having a substantial interest in the Company's issued
ordinary shares. At the time of his appointment and until the date of his resignation on
1 January 2018 Mr Egorov held the position of a Deputy M&A and Project Director at Renova
Group, formerly the Company’s major shareholder.
Dr Pavel Maslovskiy resigned as a Director of the Company and as Chief Executive Officer
on 17 July 2017. Mr Sergey Ermolenko was appointed as Interim Chief Executive Officer on
18 July 2017.
98 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Role of the board
Board changes announced during 2018
– Mr Egorov resigned from the Board on 1 January 2018 following the disposal by the
Renova Group of its entire shareholding in Petropavlovsk, as announced by the Company
on 27 December 2017.
– Mr Bektas Mukazhanov was appointed as a Non-Independent Non-Executive Director on
8 February 2018. At the time of his appointment Mr Mukazhanov was Investment Adviser
and a Director of Fincraft Holdings Ltd, the Company’s major shareholder. Mr Mukazhanov
resigned as a Director of Fincraft Holdings Ltd, on 8 February 2018, following his
appointment as a Director of the Company, but retains the position of an employee.
– Mr Adrian Coates was appointed as an Independent Non-Executive Director on
16 February 2018.
– The appointment of Mr Roman Deniskin as Chief Executive Officer of the Company
with effect from 16 April 2018 was announced on 8 February 2018.
– The resignation of Mr Andrey Maruta as Chief Financial Officer of the Company
effective from 31 March 2018 was announced on 16 February 2018.
Details of the process undertaken by the Company on the appointment of the above
Directors are provided in the Nomination Committee Report on pages 106 to 107.
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.
Board composition and roles
Non-Executive Chairman:
Mr Ian Ashby
Interim Chief Executive Officer:
Mr Sergey Ermolenko
Code Compliant:
The Non-Executive Chairman and Chief Executive Officer have clearly defined and separated responsibilities.
Chief Financial Officer:
Mr Andrey Maruta
Senior Non-Executive Director:
Mr Bruce M. Buck
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.
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 Directors or for
which such contact is inappropriate.
Independent Non-Executive Directors:
Mr Bruce M. Buck
Mr Garrett Soden
Mr Adrian Coates
The Independent 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. They challenge management,
helping develop the Group’s strategy, and monitor the performance of management.
Code compliant:
In accordance with the requirement of the Code in respect of smaller companies,
the Board was comprised of at least two independent directors at all times during 2017.
Code compliant:
Non-Executive Chairman
Senior Independent Non-Executive Director
Three Independent Non-Executive Directors (including SID)
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.
Petropavlovsk Annual Report 2017 99
GovernanceFinancial statementsStrategic report Governance Report continued
– Monitoring the progress of the
commissioning of IRC’s K&S Facility and
the financial position of IRC given the
Company’s guarantee in respect of IRC’s
ICBC facility.
– Reviewing and approving the Company’s
first ‘Modern Slavery and Human
Trafficking Statement’ which is available
on the Company’s website at
www.petropavlovsk.net.
– The appointment of a new Chief Executive
Officer to replace Dr Pavel Maslovskiy who
resigned as a Director and as Chief
Executive Officer on 17 July 207.
Committees of the Board in 2017
As explained on page 98, four new
Non-Executive Directors were appointed
to the Board on 22 June 2017, with three
Independent Non-Executive Directors and
the Executive Chairman departing the Board
on the same date.
The Board had four committees focusing
on specialist areas, which were ultimately
accountable to the Board. These comprised:
– The Audit Committee;
– The Nomination Committee;
– The Remuneration Committee; and
– The HSE Committee.
The Board committees met independently
and provided feedback to the Board through
their chairmen.
Effectiveness and Accountability
of the Board
The Directors Business Experience,
Independence and Country of
Permanent Residence
The graphs illustrate the collective business
experience of the Directors outside that
acquired at Petropavlovsk PLC 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
The Board believes that the Directors have
the necessary skills and level of experience
in order to effectively implement the Group’s
strategy.
Board activities during the year
In 2017, the Board met on six scheduled
occasions, with 13 additional meetings held
during the year, principally due to the issuance
of the Notes. Many of these additional
meetings were called at short notice and were
accommodated as conference calls.
Further Board meetings were held to deal with
matters of a routine or administrative nature.
In addition to the standard agenda items,
the Board considered the following matters
during the year:
– Consideration of the issuance of the Notes,
on 14 November 2017, to refinance the
Group’s loan facilities provided by Sberbank
and VTB Bank.
– Monitoring the progress of the construction
of the POX Hub and the underground mining
operations which are critical to the Group’s
future, including receiving presentations from
members of the Executive Committee on the
POX construction.
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
The Board believes that the Directors have the necessary skills and level of
experience in order to effectively implement the Group’s strategy.
Board balance of Directors
Non-Executive
Chairman (1)
Non-Independent
Non-Executive
Directors (1)
Independent Non-
Executive Directors (3)
Executive Directors (2)
Directors of other
quoted companies
Finance
Fund management/
banking
Legal
Natural resources
Business experience
within Russia
Independent (3)
Non-independent (3)
Chairman (1)
Russian
British
American
Australian
Kazakhstan
Business experience
Independence
Nationality
Language skills – Russian
Native/fluent
Basic or none
Language skills – English
Native
Fluent
None
100 Petropavlovsk Annual Report 2017
Committee membership from 22 June 2017
Ian Ashby
Bruce M. Buck
Vladislav Egorov
Garrett Soden
Pavel Maslovskiy1
Sergey Ermolenko
Audit Committee
Member
Member
Remuneration Committee
Member
Chairman
Nomination Committee
Chairman
Chairman
Member
Member
Member
Member
HSE Committee
Member
Chairman
Member
Member
1 Dr Maslovskiy resigned as a member of the HSE Committee and the Nomination Committee on 17 July 2017 upon his resignation as Chief Executive Officer and a Director of Petropavlovsk PLC.
Committee membership from 1 January to 22 June 2017
Audit Committee
Remuneration Committee
Peter Hambro2
Alexander Green2
Robert Jenkins
Pavel Maslovskiy
Andrew Vickerman2
Dmitry Chekashkin
Alya Samokhvalova3
Member
Chairman
Member
Member
Nomination Committee
Chairman
Member
Member
HSE Committee
Chairman
Chairman
Member/Chairman
Member
Member
Alternate to Pavel Maslovskiy
Member2
2. Mr Vickerman was appointed as Chairman of the Nomination Committee on 27 April 2017, succeeding Mr Hambro who retired as a member of the Committee and Committee chair on that date.
Mr Green was appointed as a member of the Nomination Committee on 27 April 2017.
3. Dr Samokhvalova continues to attend HSE Committee meetings at the request of the HSE Committee Chair.
A diagram including the principal role of each of these Board Committees is shown on page 104.
Board composition, independence and
commitment
From 1 January 2017 to the Annual General
Meeting held on 22 June 2017, the Board
comprised:
– an Executive Chairman;
– Chief Executive Officer;
– Chief Financial Officer; and
– three Independent Non-Executive
Directors.
Following the constitution of a new Board on
22 June 2017 and for the remainder of 2017,
the Board comprised:
– a Non-Executive Chairman;
– Chief Executive Officer;
– Chief Financial Officer;
– two Independent Non-Executive Directors;
and
– one Non-Independent Non-Executive
Director.
Changes to the Directors during 2017 and
up until the date of this Annual Report are
provided on page 132.
It is the Board’s view that the current
Non-Executive Directors have sufficient time
to fulfil their commitments to the Company.
No Executive Director holds a Non-Executive
Directorship in any company. The Board
together with the Nomination Committee
considers the appropriateness
of Board composition and further details
are provided in the Nomination Committee
Report on pages 106 and 107.
The Board provides sufficient resources to
its Committees to enable them to undertake
their duties.
Director’s induction and professional
development, information flow and
professional advice
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 Ashby, Chairman and Mr Egorov,
Non-Independent Non-Executive Director
visited the Group’s four principal mines and
the POX Hub construction in August 2017
shortly after their appointment as Directors.
They also visited the IRC K&S facility and met
with IRC’s Executive management team.
In addition they visited the Group’s offices
both in Blagoveshchensk, meeting with
members of the Group’s Operations
Committee and in Moscow where they had
meetings with members of key management.
In his capacity as HSE Committee chair,
Mr Egorov also visited the Group’s offices in
Moscow and Blagoveshchensk later in the
year together with Dr Alya Samokhvalova,
Deputy Chief Executive Strategic
Development, meeting with various
members of the Group’s H&S department
to fully understand how the Group manages
the health and safety of its employees.
It is proposed that other members of the Board
will visit the Group’s operations during 2018
and a Board meeting will be held in the Group’s
Moscow offices later this year, in order that the
Petropavlovsk Annual Report 2017 101
GovernanceFinancial statementsStrategic report Governance Report continued
Board can meet with more members of the
Petropavlovsk management team.
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
advisors and a programme of directors
training has been prepared for 2018 by the
Company Secretary at the request of the
Chairman.
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, the Chairman 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
2017 Annual General Meeting
The following table details the four resolutions proposed at the 2017 AGM which received significant votes against and a further two resolutions
which were withdrawn immediately prior to the meeting due to lack of shareholder support.
Resolutions:
Re-election of Mr Robert Jenkins
Re-election of Mr Alexander Green
Re-election of Mr Andrew Vickerman
Re-election of Mr Peter Hambro
Renewal of authority to allot shares for cash other than to existing shareholders (Resolutions 17 and 18)
‘Against’
‘For’
66.50%
33.50%
66.48%
33.52%
66.60%
33.40%
69.87%
30.13%
Withdrawn prior to meeting
The Board is mindful of its obligation to
maintain a dialogue with shareholders based
on a mutual understanding of objectives and
considers that certain of the votes ‘against’ the
above Directors were, to a certain extent, due
to an absence of mutual understanding.
Following the 2017 AGM, Mr Ashby, Chairman,
Mr Buck, Senior Independent Director and
Mr Soden, Independent Non-Executive
Director, who were proposed for appointment
by certain major shareholders of the Company,
have ensured together with Dr Alya
Samokhvalova, Deputy CEO Strategic
Development, that the Group’s investor
relations programme is appropriate and that
the Board updates the market on a regular
basis to provide consistency and transparency
regarding its strategy.
The Board met with Fincraft Holdings Ltd
(‘Fincraft’) in February 2018 following their
acquisition of 13.3% of the Company’s
issued ordinary shares in December 2017 to
listen to their views on the Company. On the
basis that Fincraft is the Company’s major
shareholder it was agreed that Mr Bektas
Mukazhanov, the Investment Advisor and
then-Director of Fincraft should join the
Board. These discussions culminated in his
appointment as a Director on 8 February 2018.
Mr Mukazhanov does not participate in any
discussions or decisions of Fincraft regarding
its investment in the Company.
The Board also appreciates that although
the Executive Chairman and the three
Independent Non-Executive Directors were
not re-elected at the 2017 AGM, a significant
number of shareholders were supportive of
their re-election. Since his appointment
Mr Ashby has participated in the investor
roadshow following the 2017 interim results
announcement and as part of the launch of
the Notes in order to meet with both existing
and potential shareholders, to explain the
strategy of the Board and address any
concerns they may have. Messrs Buck and
Soden were also available to discuss matters
of concern with shareholders in the months
following the 2017 AGM and have met with
major shareholders since that date.
102 Petropavlovsk Annual Report 2017
Following the 2017 AGM the Board spoke
with certain shareholders regarding their
intention to vote against the two special
resolutions to allot ordinary shares for cash
other than to existing shareholders to
understand and address their concerns.
All resolutions at the 2017 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 UK
Corporate Governance 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.
Investor engagement
The Board aims to maintain an open and
transparent dialogue with its shareholders and
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. Small retail
shareholders are important to the Company
and the investor relations team ensures that
copies of all investor presentations are made
available on the Company’s website at www.
petropavlovsk.net
Over 100 meetings were held by the
Company with a range of equity shareholders,
both existing and potential, and fixed income
investors following the 2017 interim results
announcement and as part of the launch of
the Notes issued in November 2017. The
Chairman participated in these meetings in
both London and the USA. During the year
executive management also attended
investor conferences in Europe, including
both London and Moscow.
The Executive Directors and Deputy CEO
Strategic Development ensure 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 2018 Annual General Meeting
Individual shareholders are important to the
Company 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.
The Audit and Remuneration Committee
Chairmen 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.
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 21 June 2018. The re-election of
each of the 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 appoint or re-elect all of
the eligible Directors of the Company and the
reasons for this recommendation will be set
out in the letter from the Chairman
accompanying 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 their re-election or 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 104.
Petropavlovsk Annual Report 2017 103
GovernanceFinancial statementsStrategic report Governance Report continued
Board structure – as at 31 December 2017
Board
– Responsible for the Group’s system of corporate governance
– Ultimately accountable for the Group’s activities, including strategy, risk management 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 internal and external
auditors.
– Overseas external audit
process.
– Reviews the financial risks.
– Reviews internal audit
plans.
Membership
Garrett Soden (Chair)
Ian Ashby
Bruce M. Buck
– 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.
Membership
– 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
made to the Board.
Membership
Ian Ashby (Chair)
Vladislav Egorov
Bruce M. Buck (Chair)
Garrett Soden
Ian Ashby
Garrett Soden
– Reviews the Group’s
health, safety,
environmental and
community relations
(“Sustainability”) strategy.
– Evaluates the effectiveness
of the Group’s policies and
systems for managing
Sustainability issues
and risks.
– Assesses the performance
of the Group with regard to
the impact of Sustainability
decisions and actions.
Membership
Vladislav Egorov (Chair)
Bruce M. Buck
Sergey Ermolenko
See pages 108 to 113
for more information
See pages 115 to 132
for more information
See pages 106 to 107
for more information
Please see Sustainability
on pages 64 to 79.
104 Petropavlovsk Annual Report 2017
Board membership as at
31 December 2017.
All Committees are authorised to obtain legal
or other professional advice as necessary and
to secure the attendance of external advisers
at their meeting.
The Company also operates an Executive
Committee comprising of the Executive
Directors and key executives within the
Company. The Executive Committee is:
– responsible for the day to day management
of the Company; and
– acting as a conduit between management
and the Board.
Members of the Executive Committee as at 31 December 2017 are:
Mr Sergey Ermolenko, Interim Chief Executive Officer
Mr Andrey Maruta, Chief Financial Officer
Mr Valery Alexseev, Group Head of Construction and Engineering
Mr Dmitry Chekashkin, Chief Operating Officer
Mr Alexey Maslvoskiy, 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
Mr Nikolai Vlasov, Group Chief Geologist
The Company Secretary acts as secretary to the Audit, Remuneration, Nomination and HSE Committees. The Deputy Company Secretary acts as
secretary to the Executive Committee.
Meetings of the Board, Board Committees and attendance to 22 June 2017
Peter Hambro²
Pavel Maslovskiy3
Alexander Green2,4
Robert Jenkins2,4
Andrey Maruta
Andrew Vickerman2,4
Board1
Audit
C
M
M
M
M
M
3/3
3/3
3/3
3/3
3/3
3/3
–
–
M
C
–
M
2
1
2/2
2/2
2
2/2
Remuneration
–
–
M
–
–
C
2/2
–
2/2
–
–
2/2
Meetings of the Board, Board Committees and attendance from 22 June 2017
Ian Ashby 4,5
Pavel Maslovskiy 3
Sergey Ermolenko6
Bruce M. Buck,4,5
Vladislav Egorov 5
Andrey Maruta
Garrett Soden 4,5
Key: C= Chairman, M=Member
Board1
Audit
C
M
M
M
M
M
M
4/4
1/1
2/2
4/4
4/4
4/4
4/4
M
–
–
M
–
–
C
2/2
–
–
2/2
–
2/2
2/2
Remuneration
M
–
–
C
–
–
M
2/2
–
–
2/2
–
–
2/2
Nomination9
HSE
C
–
M
M
–
M/C
C
M
–
–
M
–
M
1/1
–
–
1/1
–
1/1
–
M
C
–
–
M
Nomination
HSE
1/1
–
–
–
1/1
–
1/1
–
–
M
M
C
–
–
2
2/2
2/2
–
–
2/2
–
–
1/1
3/3
3/3
–
–
1 Scheduled Board meetings. Additional Board meetings were held during the year, principally relating to the issuance of the Notes and strategic matters.
2 Retired as a Director on 22 June 2017.
3 Resigned as a Director on 17 July 2017.
4 Director who the Board has determined to be independent.
5 Director appointed to the Board on 22 June 2017.
6 Appointed as a Director and as Interim Chief Executive Officer on 18 July 2017.
7 Directors who are not members of the Audit, Remuneration and HSE Committees may attend meetings at the invitation of the Chairman of that Committee.’
8 Dr Alya Samokhvalova was a member of the HSE Committee until 22 June 2017. Dr Samokhvalova continues to attend meetings of the HSE Committee at the request of the Committee Chairman.
9 Mr Vickerman was appointed as Chairman of the Nomination Committee on 27 April 2017, succeeding Mr Hambro who retired as a member of the Committee and Committee chair on that date.
Mr Green was appointed as a member of the Nomination Committee on 27 April 2017.
Petropavlovsk Annual Report 2017 105
GovernanceFinancial statementsStrategic report
Nomination Committee Report
Letter from the Nomination Committee Chairman
Dear Shareholder
I am pleased to present this, my first report as
Nomination Committee chair. My colleagues
on the Committee as at 31 December 2017
were Vladislav Egorov and Garrett Soden.
Following Vladislav’s resignation as a Director
on 1 January 2018, Bruce Buck was
appointed as a member of the Committee.
Details of Committee membership during
2017 are provided on page 101.
Board changes
As detailed in the Governance Report, 2017 to
date has been a period of significant change
in relation to the composition of the Board.
This report sets out the actions undertaken by
the Committee in respect of these changes.
Following the resignation of Dr Pavel
Maslovskiy as Chief Executive Officer on
17 July 2017, the Committee’s principal focus
was on the recruitment of an outstanding
candidate for the CEO position, with the
requisite skills and experience to work closely
with the Board and lead the executive
management team in achieving the
Company’s objectives. This comprehensive
search process was facilitated by a third party
external worldwide executive search firm,
specialising in chief executive and senior level
assignments. This process culminated in the
Committee’s recommendation to the Board
of the appointment of Mr Roman Deniskin
as Chief Executive Officer. Prior to his
appointment Roman was introduced to our
major shareholders: Fincraft Holdings Ltd,
Sothic Capital, the D.E. Shaw group and
M&G Investments, all of whom gave their
full support. Roman will be appointed as
Chief Executive Officer on 16 April 2018.
The Committee and the Board consider that
Roman will bring all the necessary experience
and leadership attributes required as the
Company enters a new phase in its history
with the completion of the POX Hub and the
start-up of the Group’s underground
mining operations.
In addition, the Committee considered the
appointment of Mr Bektas Mukazhanov as a
Non-Independent Non-Executive Director.
Mr Mukazhanov was proposed as a Director
by the Company’s major shareholder, Fincraft
Holdings Ltd. Prior to his appointment on
8 February 2018, Mr Mukazhanov met with
all members of the Committee, and his
appointment was then recommended to the
Board. The Committee also consulted with
certain of the Company’s major shareholders
prior to this appointment. Following his
appointment as a Director, Mr Mukazhanov
has resigned as a Director of Fincraft Holdings
Ltd and he has removed himself from any
decisions by Fincraft regarding their
investment in Petropavlovsk PLC.
Strengthening of the Board
There has been a high degree of Board activity
post the 22nd June 2017 Board restructure
which led to the appointment of myself as
Chairman and Bruce Buck and Garrett Soden
as Independent Non-Executive Directors.
In particular there has been the issuance of
the Notes and increased activity relating to our
interest in IRC. As a result, it was agreed in the
latter part of 2017 that the Board should be
further strengthened by the addition of two
Independent Non-Executive Directors.
A search firm was appointed by the
Committee to progress these appointments.
Mr Adrian Coates' details were submitted into
this process as a potential candidate, following
which he met with all members of the
Committee and the Chief Financial Officer.
In addition, his details were provided to certain
of the Company’s major shareholders and it
was thought that his many years’ of experience
in the investment banking industry with a
specialisation in the natural resources sector
together with his experience of Russian
companies would provide additional depth to
the Board. It has been proposed to IRC Ltd
that Mr Coates should join the IRC Board and
discussions in this respect are ongoing.
Mr Coates’ appointment as an Independent
Non-Executive Director of the Company was
announced on 16 February 2018.
The Committee is continuing its search for
an additional Independent Non-Executive
Director and a detailed candidate profile has
been agreed with the external consultants.
In addition we are now leading the process
on behalf of the Board and working together
with an independent third party executive
search firm to identify a successor to
Mr Andrey Maruta, Chief Financial Officer, who
will be leaving the Board on 31 March 2018.
The Committee will be working closely with
Mr Deniskin on this appointment.
Diversity statement
In assessing candidates for the position of
either an Independent Non-Executive Director
or an Executive Director the Committee will
consider the composition of the Board to
ensure diversity of gender, ethnicity, age and
education and professional backgrounds.
I am pleased to note the diversity of our Board
in many areas. Our Board comprises of
individuals of Russian, American, Australian,
British and Kazakhstan background and
nationality. Our ages range from 35 to 72
and we have a broad range of professional
expertise and experience including in mining,
finance and legal and in many geographical
regions. However, although the Company’s
Executive Committee comprises c.22% of
women, the Committee notes the lack of
gender balance on the Board. The Committee
hopes that this issue can be partially
addressed in the current search for
a new Independent Non-Executive Director.
Ultimately, the Board’s recruitment decisions,
at all levels, are driven by the need to ensure
the longer-term success of the Company,
by appointing the person that most closely
matches the requirements for the position,
regardless of their background or gender.
Details of the gender balance of our
employees is provided in the Sustainability
report on page 66 this also includes the
proportion of women appointed in office
roles and with higher education.
106 Petropavlovsk Annual Report 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 2016 Nomination
Committee Report.
Board composition
Following the proposed appointments
the Board will constitute a Non-Executive
Chairman, Chief Executive Officer,
Chief Financial Officer, four Independent
Non-Executive Directors and one
Non-Independent Non-Executive Director.
The Committee considers that given the
stage of the Company’s development,
including its transition to POX and the
focus on resolving the IRC guarantee this
composition is optimal.
Succession planning
Given the complete change in the
Committee’s membership in June 2017,
extensive Board changes during 2017 and
to date including changes to the Executive
Directors, the Committee has not considered
succession planning as a separate agenda
item. As at 1 April 2018 all Directors will have
served less than one year on the Board.
Succession planning for other senior
executives will be considered by the
Committee together with the new Chief
Executive Officer following his appointment.
Effectiveness of the Committee
The Committee has not reviewed its
effectiveness during 2017. Due to changes
in Committee membership as detailed in this
report this was not deemed to be appropriate.
However it is the intention that a review will be
carried out in the latter part of 2018.
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.
Ian Ashby
Chairman,
Nomination Committee
27 March 2018
Petropavlovsk Annual Report 2017 107
GovernanceFinancial statementsStrategic report Audit Committee Report
Letter from the Audit Committee Chairman
senior management the additional financial
controls and procedures that should be
implemented following his departure to
ensure that appropriate controls are in place
prior to the appointment of his successor.
In addition, the Committee has received
presentations from the Group Head of Internal
Audit and has reviewed and approved the
scope of internal audit for 2018 to ensure that
this function addresses relevant risks.
The Committee continues to oversee 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 Code.
A more detailed review of the Committee’s
work during the year, which I hope you will find
informative, is provided in this Report.
Garrett Soden
Audit Committee Chairman
27 March 2018
Dear Shareholder
I am pleased to introduce my first report
as Audit Committee Chair. I was appointed
as Chairman on 22 June 2017 immediately
following my appointment as an Independent
Non-Executive Director of the Company
at the 2017 Annual General Meeting.
My colleagues on the Committee are
Mr Ian Ashby, the Company’s Chairman,
and Mr Bruce Buck, Senior Independent
Director, who were also both appointed as
Non-Executive Directors of the Company
on 22 June 2017. Details of Committee
membership during the year are detailed
on page 101 of this Annual Report.
Following my appointment as Audit
Committee chair I had several meetings with
key members of the executive management
team and the Company’s internal and external
auditors in order to better understand the
matters that needed to be addressed by the
Committee and the challenges facing the
Group. I continue to meet regularly and
maintain an active dialogue with senior
management and our auditors in order to
keep the Committee well informed of matters
under its remit.
Significant judgements
The new members of the Committee met
formally for the first time in early September
2017, at which time the Committee
considered the 2017 interim results,
receiving reports from both our auditors and
management. Matters requiring significant
judgement of the Committee included the
assessment of the going concern
assumption, impairment of the Group’s
mining assets and the recoverability of
gold-in-circuit inventory. The Committee was
pleased to note that gold-in-circuit held on the
balance sheet had substantially reduced from
US$70.6m at 31 December 2016 to
US$40.7m at 30 June 2017 due to the
success of the acid wash commissioned in
H1 2017 that is used to treat Pioneer resin.
The amount of gold-in-circuit held on the
balance sheet as at 31 December 2017 has
reduced further to US$24.2m. Consequently,
this is no longer considered as a significant
matter for the Committee’s judgement.
The issuance, in November 2017, of
US$500m 8.125% Guaranteed Notes due
2022 (the ‘Notes’) has provided the Group
with medium term financial stability and
flexibility for the business. The subsequent
repayment of the Group’s loan facilities with
Sberbank and VTB, the removal of financial
covenants previously in these banking
108 Petropavlovsk Annual Report 2017
facilities and the bullet repayment schedule of
of the Notes has significantly de-risked the
Company, with its production and maturity
profiles now balanced. However, the
extraordinary guarantee given to ICBC in
respect of the project finance facility provided
to IRC for the construction of the K&S iron ore
facility still presents a significant risk to the
Group and this remains a key focus of the
Committee in its deliberation of the going
concern assumption and a key consideration
when advising the Board on the viability
statement. The Board continues to review
new options to resolve this potential liability.
Accordingly, the main focus of the Committee
in its review of the 2017 financial statements
remained the going concern assumption.
The other significant judgement for the
Committee’s consideration related to the
potential impairment of the Group’s mining
assets, including the POX Hub, which is due
to be commissioned in Q4 2018.
Under the 2016 UK Corporate Governance
Code (the ‘Code’), the audit committee
should have primary responsibility for
negotiating the fee and scope of the audit,
initiating a tender process, influencing the
appointment of an engagement partner and
making formal recommendations to the board
on the appointment, reappointment and
removal of the auditors. The Committee is
mindful that Deloitte LLP has been auditor to
the Company since 2009 and as such the
Committee gave serious consideration to a
tender of the audit during the year. However,
given that the Committee was only
constituted in its current form in June 2017
and that the Board was in the process of
recruiting a new Chief Executive Officer, it was
agreed that the timing of such a tender was
not optimal. The Committee intends to
consider this matter following the
appointment of the incoming Chief Executive
Officer and a new Chief Financial Officer,
and expects that the audit will be put to tender
later this year in order to appoint the audit firm
that will provide the highest quality, most
effective and efficient audit. Amongst other
matters, the tender is likely to consider the
quality and cultural fit of the lead partner and
key members of their team, approach to client
services and quality of the audit, technical
expertise and independence of the audit firm.
The Committee continues to assist the Board
in its review of the Group’s internal control
systems. Following Mr Maruta’s decision to
resign as Chief Financial Officer, effective from
31 March 2018, the Committee has
discussed with him and other members of
– 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;
– 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; and
– 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.
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; and
– 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 2016 Annual Report and
Accounts and the six months’ Half Year
report ended 30 June 2017 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 2016 Annual
Report and Accounts, taken as a whole,
was fair, balanced and understandable and
reported to the Board on its conclusion.
Governance
Mr Soden is considered by the Board as
having the requisite and relevant financial
experience due to his previous experience as
both a senior executive and Audit Committee
chair of listed natural resources companies.
Mr Soden also holds a BSc honours degree
from the London School of Economics and an
MBA from Columbia Business School.
Messrs Soden and Ashby have extensive
executive experience in the natural resources
and mining sectors respectively, whilst Mr
Buck, through his work at the law firm of
Skadden, Arps, Slate, Meagher and Flom,
has been involved in work in the Russian
Federation since 1990. The Board therefore
considers that the Committee as a whole has
competence relevant to the sector in which it
operates. The biographies of Messrs Soden,
Ashby and Buck are provided on pages 94
and 95.
The Chief Executive Officer, the Chief
Financial Officer, the Group Head of Internal
Audit and Group Head of Corporate
Reporting, other Directors and
representatives of the external auditors are
invited to attend all Committee meetings with
Deloitte LLP, the external auditor, attending all
Committee meetings in 2017. In addition, the
Committee Chairman meets on a regular
basis with 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 auditor,
including auditor independence, fees and
provision of non-audit services;
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 24 to 27 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.
– Received and considered reports detailing
litigation in which the Company and/or any
of its subsidiaries are involved.
Internal audit
– Evaluated the effectiveness and the scope
of work to be undertaken by Group Internal
Audit during 2017, 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.
– Audits undertaken during the year, amongst
others, were:
– procurement function,
– supply chain management,
– management reporting – budgeting and
forecasting, and
– operational audit of LLC BMRP.
– Reviewed and approved the 2018 audit
plan which will include an audit of the POX
Hub construction, underground operations
and continuation of the management
reporting audit.
– Reviewed management responses to audit
reports issued during the year.
– Approved the appointment of an additional
member of the internal audit function to
ensure that it has the necessary resources
to perform its mandate.
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 2017 financial statements.
Petropavlovsk Annual Report 2017 109
GovernanceFinancial statementsStrategic report Audit Committee Report continued
Committee action
Given the implications of the layered stressed
case and the importance of IRC’s financial
position due to the Company’s guarantee,
the Committee continually monitored these
matters and considered the appropriateness
of the going concern assumption by:
– discussing with the Executive Directors the
potential options that were available to the
Company to mitigate the risk of insufficient
liquidity or non-compliance with certain
covenants, including refinancing the existing
debt or raising additional equity and
assessing whether these proposed mitigating
actions were realistic. The issuance of the
Notes in November 2017 has addressed this
risk; and
– receiving regular updates from IRC’s
Executive Directors on the commissioning
of K&S and on their contingency plans.
Conclusion
When reviewing the half-yearly financial
statements for the six months’ ended 30 June
2017, the Committee considered the options
available to the Company and the progress of
IRC and noted that whilst there could be no
guarantee that either the Company or IRC
could undertake their proposed mitigating
actions if needed the Directors had a
reasonable expectation that they would be
able to do so and therefore the going concern
basis of accounting remained appropriate.
Significant issues considered by the
Committee in the context of the 2017
financial statements:
The Committee identified the issues below as
significant in the context of the 2017 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.
Governance
– Evaluated the independence and objectivity
of the external auditor
To date in 2018 the Committee has reviewed,
amongst others, the following matters in
relation to the 2017 financial statements.
– The going concern assumption.
– Impairment of mining assets.
The Committee has also advised the Board
on:
– whether the 2017 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
140; and
– the viability statement of the Company
required in accordance with provision C.2.2
of the Code. The viability statement is set
out on page 139.
Significant issues considered by the
Committee during 2017 – 2017 Interim
review
The going concern assumption
The key judgement for the Committee during
2017 related to the appropriateness of the
basis of accounting. During the year the
Group’s assessment was highly sensitive.
– The Group’s projections under a layered
stressed case that was based on a
US$1,125oz gold price, which at that time
was the bottom end of market consensus
forecast, indicated that unless mitigating
actions could be taken, there would be
insufficient liquidity and non-compliance
with certain covenants under a layered
stressed case for the period to
September 2018.
– In relation to IRC: If scheduled full
commercial production of the K&S project
is not achieved or the market conditions
turn out to be significantly less favourable
than predicted IRC’s financial liquidity may
be adversely impacted. IRC would then
need to carry out contingency plans
including entering into negotiations with
banks or other investors for additional debt
or equity financing.
110 Petropavlovsk Annual Report 2017
Issue
Committee action
Conclusion
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;
– with regards to IRC maintaining regular dialogue
with the IRC Board and its Executive Directors in
respect of:
– the status of its progress to refinance and/or
restructure its debt with ICBC and obtain new
equity investors;
– the ongoing active discussions by
management of the Company and IRC with
an alternative lender; and
– the K&S facility and when it expects to
achieve full production.
– reviewing options to resolve the IRC guarantee;
and
– progressing the appointment of a nominee Director
on the Board of IRC.
The risk that the ICBC
refinancing is not completed or
alternative contingency plans
are not realised represents a
material uncertainty which may
cast significant doubt upon the
Group's ability to continue to
apply the going concern basis
of accounting.
However, 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 2017
financial statements.
The Committee has advised
the Board accordingly.
The going concern assumption
The key judgement for the Committee for the 2017
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$234m as at 31 December 2017), 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 issuance of the Notes, the
Group is satisfied that it has sufficient headroom
under a base case scenario for the period to April
2019. However, the Group’s projections under a
layered stress case that is based on a gold price,
which is 10% lower than the mean of the market
consensus forecasts, indicate that unless mitigating
actions can be taken, there will be insufficient liquidity
under a layered stress case for the relevant period to
April 2019.
Further IRC's projections demonstrate that although
IRC expects to have sufficient working capital
liquidity over the next 12 months, unless mitigating
actions can be taken there will be insufficient liquidity
to meet the debt repayment schedule and non-
compliance with certain financial covenants for the
period to April 2019. In this respect management of
the Company and IRC has approached ICBC to
request an amendment of the repayment schedule
and obtain waivers in respect of obligations to
comply with certain financial covenants.
Management is also in active discussions regarding
the full refinancing of the ICBC facility with an
alternative lender.
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 five years as part of the overall
viability statement. The viability statement can be
found on page 139.
Petropavlovsk Annual Report 2017 111
GovernanceFinancial statementsStrategic report Audit Committee Report continued
Issue
Committee action
Conclusion
Carrying value of mining assets including POX
(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.
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 2017.
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 projects and the Russian Rouble US Dollar
exchange rate, and understanding and challenging
these assumptions;
– receiving regular updates on the construction of
the POX Hub;
– noting the Group’s Gold Ore Reserves and Mineral
Resources estimated as at 31 December 2017,
prepared by the Group’s Competent Person in
accordance with the JORC Code;
– 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;
and
– discussing with the external auditor their view on
the impairment testing procedure including the key
assumptions used by management.
Accounting for the investment in
Associate
In addition the Committee considered the
partial reversal of previously recognised
impairment losses by the Company's
associate, IRC Ltd at its K&S mine of
c.US$130m in its 2017 financial statements.
In accordance with the requirements of IAS28
'Investments in associates' and subsequently
testing for impairment the Company has
included c.US$40m in the Group's share of
the results of IRC.
External auditor
Deloitte was appointed as auditor to the
Company in 2009 following the Company’s
listing on the main market.
Whilst recognising that all members of the
Committee have only been members of the
Committee and Directors of the Company for
9 months, the Committee has evaluated the
effectiveness of the external auditor by taking
the following actions. In addition, the
Committee has met regularly with the external
auditor who also undertook the review of the
Company’s 2017 interim results. The
Committee considers that, on this basis,
Deloitte remains effective in their role as
external auditor.
– Deloitte’s proposed audit fee for the 2017
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 (see page below for
further discussion on this matter)
– Deloitte’s publication entitled ‘Briefing on
audit matters’ which explains the key
concepts behind the Deloitte Audit
methodology including audit objectives and
materiality
– Deloitte’s “2017 Audit Transparency Report’
in respect of the year ended 31 May 2017.
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.
The Committee has recommended to the
Board that Deloitte be appointed as external
auditor and a resolution will be proposed to
this effect at the 2018 Annual General
Meeting.
Although the Committee is recommending
Deloitte’s appointment as external auditor,
the Committee still intends to consider
tendering the 2018 audit. Under the provisions
on audit tendering, the Committee will be
required to tender the audit prior to 2019.
Non-audit services
The majority of non-audit fees paid to Deloitte
were in respect of:
– their engagement as reporting accountant on
the issuance of the Notes. The appointment
of Deloitte was approved by the Audit
Committee and an independent review
partner was involved. In addition
the fees were not considered as being
sufficiently high in the wider context of Deloitte
to impact their independence; and
– their appointment for the review of the
Company’s financial statement for the
six months’ ended 30 June 2017. This is
considered as standard practice for a listed
company. Approval was given by the
Audit Committee.
112 Petropavlovsk Annual Report 2017
– 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 members of the Executive
Committee of detailed management
accounts including variance analysis
against the approved annual budget,
a copy of which is provided to the Board
following this review;
– appropriate segregation of duties
throughout the Group, in particular
separating the purchasing and ordering
function from the processing and payments
function;
– a centrally directed treasury function which
manages the Company’s cash and debt on
a daily basis; and
– 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.
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, summaries the risk
management framework together with details
of the principal risks of the Group and is on
pages 18 to 31 of this Report.
Overview
As a result of the Committee’s work during the
year, the Committee has concluded that it has
acted in accordance with its terms of
reference.
Deloitte’s engagement on the above matters
was undertaken 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 work on the issue
of the Notes within the time available and for a
reasonable fee given their detailed knowledge
of the Group. This work is typically performed
by a company’s external auditor. 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 non-audit fees paid in 2017 is
set out in note 7 on page 169 of this Report.
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.
On behalf of the Board the Committee has
considered the effectiveness of the Group’s
system of internal control. Following this
review the Committee considers the internal
controls of the Group to have operated
effectively throughout 2017 and up to the
date of this report. 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, that reviews the results
of the Group’s operations.
– 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.
Some key features of the internal control
system, not detailed above, are:
Petropavlovsk Annual Report 2017 113
GovernanceFinancial statementsStrategic report 114 Petropavlovsk Annual Report 2017
Directors’ Remuneration Report
Annual statement from the Chairman
of the Remuneration Committee (the “Committee”)
Remuneration highlights:
– Non-Executive Directors’ fees unchanged
2017
– Inflationary salary increase of c.1.3%
awarded to the Chief Financial Officer for
the year commencing 1 January 2017 with
no salary increase for the Executive
Chairman or Chief Executive Officer.
– Non-Executive Directors’ fees unchanged
for 2017.
– Performance against targets for 2017,
relating to the satisfaction of strategic and
operational objectives, resulted in a bonus
payable of 25% of salary for both the Interim
Chief Executive Officer and the Chief
Financial Officer; for the Interim Chief
Executive Officer 50% of the bonus will be
awarded in the form of a Deferred Bonus
Award, and 50% will be paid in cash.
– An additional bonus of 25% of salary was
awarded to the Chief Financial Officer to
reflect his significant contribution to the
successful issuance, in November 2017, of
the Group’s US$500m 8.125% Guaranteed
Notes due 2022’ (the ‘Notes’).
– No performance share awards were
granted under the Long-Term Incentive Plan
(‘LTIP’) during 2017 due to the change in the
membership of the Committee and the
resignation of Dr Pavel Maslovskiy, Chief
Executive Officer on 17 July 2017.
– The Company’s Remuneration Policy
(the ‘Policy’) was amended for:
– the introduction of a two-year post-
vesting holding period for LTIP awards
from 2017 onwards;
– malus and clawback provisions were
strengthened; and
– bonus payable for achieving target was
reduced from 60% to 50% of maximum.
– The revised Policy received shareholder
support of more than 96% at the 2017
Annual General Meeting.
2018 to date and proposed
– No salary increase awarded to the Chief
Financial Officer for the year commencing
1 January 2018.
– Salary and terms and conditions of new
Chief Executive Officer approved by the
Committee. Shareholder approval to be
sought at the 2018 Annual General Meeting
for changes in the Policy to reflect the CEO
appointment. The Interim Chief Executive
Officer will revert to his former role as
General Director, MC Petropavlovsk.
for 2018.
Dear Shareholder
Introduction
On behalf of the Board I am pleased to
present the Directors’ Remuneration Report
for the year ended 31 December 2017.
I was appointed by the Board to act
as Senior Independent Director and
Committee Chair on 22 June 2017.
This followed the approval by shareholders
of my appointment as a Director on the same
date. Mr Ian Ashby, the Company’s Non-
Executive Chairman and Mr Garrett Soden,
Independent Non-Executive Director,
were also appointed as members of the
Committee on 22 June 2017 immediately
following their appointment as Directors of
the Company.
The Committee spent time during the latter
half of 2017 reviewing the Company’s
remuneration arrangements. I have met
separately with the Committee’s
remuneration advisors, who have supported
the Committee on a review of the current
remuneration structure. We have considered
best practice arrangements and engaged our
advisors to undertake a benchmarking
exercise of the remuneration paid to the
Chairman, the Executive Directors, members
of the Company’s Executive Committee and
the Company Secretary to ensure that these
are aligned with our peer group given our
Company size and the complexity of our
operations.
The Committee’s review of our remuneration
arrangements and our Remuneration Policy is
ongoing. The Committee will consult with the
Company’s shareholders in advance
of any significant changes to the Policy,
as appropriate.
2017 annual bonus
For 2017, the annual bonus performance
conditions were linked to the Group’s
operational performance and strategic
initiatives. 40% of the bonus was linked to the
achievement of strategic objectives including
in relation to the construction of the POX Hub
and the progress of the underground mining
project, the success of these projects being
critical to the future of the Group. 20% related
to each of production and a reduction in
average all-in-sustaining costs◆ per ounce,
with 10% related to the improvement of the
Group’s Net Debt◆ to EBITDA◆ ratio. Given
the inherent health and safety risks within our
business, 10% of the bonus was based on
a Lost-Time Injury Frequency rate target.
Based on the significant progress made on
the construction of the POX Hub, as detailed
in the Strategic Report, and production of
c.439,600oz of gold the Committee awarded
an annual bonus of 25% of salary to
Mr Sergey Ermolenko, the Interim Chief
Executive Officer, and Mr Andrey Maruta,
the Chief Financial Officer, for performance
against the bonus scorecard. For the Interim
Chief Executive Officer, 50% 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.
In the late summer and early autumn of 2017
Mr Maruta and the Board engaged in a series of
discussions over a number of weeks regarding
his prospects and future with the Company.
The Board indicated that, although they had
been acquainted with Mr Maruta only for several
months, they considered he was performing
strongly in his role and was providing excellent
support to the new Board members in fulfilling
their duties. At that time, the Board considered
that Mr Maruta was essential in leading the
refinancing of the Company’s bank debt and
Mr Maruta would be eligible for an additional
bonus of up to 25% of salary if he led the
Company’s team to a successful conclusion
of the refinancing in 2017.
The Committee has awarded Mr Maruta
a bonus of 50% of base salary, with the
additional 25% of base salary paid to reflect
his significant contribution to the successful
issuance of the Notes. The funds from the
issue of the Notes have been used to repay
loans provided pursuant to banking facilities
with Sberbank and VTB Bank. This has
provided medium term financial stability for
the Company and flexibility for the Group’s
operations. The Committee has considered
the payment of Mr Maruta’s bonus in light of
his decision to resign as Chief Financial
Officer on 31 March 2018. Taking into account
discussions between Mr Maruta and the
Board, as detailed above, and given that
Mr Maruta will continue in a consultancy
capacity for a period of 4 months and assist
the Company whilst it is in the process of
recruiting a new Chief Financial Officer and
during handover, the Committee agreed that
Mr Maruta shold be treated as a good leaver
for incentive purposes. For these reasons and
as permitted under the Policy, the Committee
has approved the payment of the bonus.
For the same reasons, the Committee agreed
that Mr Maruta's outstanding Deferred Bonus
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 115
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Award (relating to his 2016 bonus) should vest
to him on a time pro-rata basis as soon as
practicable after the cessation of his
employment.
Further details of the 2017 annual bonus
scheme and the performance against
objectives are provided on pages 126
and 127.
Amendments to the Remuneration Policy
The Company’s search for a new Chief Executive
Officer commenced formally in autumn 2017 with
the retention of a specialist executive search firm.
During the course of the process, as short-listed
candidates were identified and being
interviewed, a substantial block of the
Company’s shares was sold by one major
shareholder. On the advice of the specialist
search firm, which was based on discussions
with short-listed candidates, the Board agreed,
subject to approval of a revised Policy by our
shareholders, that some modest protection
should be provided to the incoming Chief
Executive Officer if a change of control of the
Company occurred in the reasonably near future.
As previously announced, Mr Roman Deniskin
will be joining the Board as Chief Executive
Officer in April 2018. His employment terms
are described on pages 121 and 129 and are
the same as detailed in the current Policy
except for the inclusion of a clause in his
contract which provides him with an
entitlement, in the event of a change of control
within the first 24 months of his employment,
to give notice within three months of the date
of change of control to terminate his
employment and receive, within one month,
a sum equal to six months’ basic salary.
No additional sum in lieu of notice would
be payable. Further, Mr Deniskin’s contract
provides for a shorter notice period of six
months’ from either the Company or Mr
Deniskin in the event of termination of his
employment, instead of the 12 months’ notice
period permitted under the existing Policy.
The Committee also proposes to amend the
Policy to include the flexibility to provide
similar protection in the event of a change of
control to an incoming Chief Financial Officer,
as appropriate.
The Committee has also taken the
opportunity to clarify the clawback provisions
in the Policy to reflect any restrictions by local
legislation on the application of clawback.
At the 2018 Annual General Meeting to be
held on 21 June 2018 (the ‘2018 AGM’), the
Board will be seeking shareholder approval
116 Petropavlovsk Annual Report 2017
for a revised Policy, with the only changes
being those stated above.
The Committee trusts that shareholders will
understand the reasons for the proposed
changes to the Policy. I and my colleagues
on the Committee are available to answer
any questions or address any concerns you may
have. If you wish discuss further this or any other
issue, please email the Company Secretary,
Amanda Whalley, at aw@petropavlovsk.net
and she will make the necessary arrangements.
Other decisions
The Committee negotiated the severance
arrangements for Mr Peter Hambro, the
Company’s former Executive Chairman, who
was not re-elected by shareholders at the
2017 AGM. Details of these arrangements,
which are in accordance with the Policy
approved by shareholders on 22 June 2017,
are provided on page 128.
Implementation of the Remuneration
Policy in 2018
The Committee recognises that no award has
been made under the Long-Term Incentive
Plan, with the exception of Deferred Bonus
Awards, since 2011. The current Committee,
which as stated above was newly formed in
June 2017, has already commenced a review
of the LTIP with a view to making awards
under the Plan following the appointment of
Roman Deniskin as Chief Executive Officer on
16 April 2018. The Committee will consult with
shareholders as appropriate with regards to
the performance conditions to be attached to
these awards.
I will be in attendance at the Company’s 2018
AGM and I will be pleased to discuss any
remuneration matters with you.
Bruce Buck
Remuneration Committee Chairman
27 March 2018
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 2017.
The report complies with the provisions of the
Companies Act 2006 and Schedule 8 of The
Large and Medium-sized Companies and
Groups (Accounts and Reports)
(Amendment) Regulations 2013. The report
has been prepared in line with the
recommendations of the UK Corporate
Governance Code and the requirements of
the UKLA Listing Rules.
The current Remuneration Policy (the ‘Policy’)
was approved at the 2017 AGM, receiving
more than 96% support from shareholders.
However as detailed in the letter from the
Committee Chairman, changes are being
proposed to this Policy. The revised Policy
will be put to shareholders for approval in a
binding vote at the 2018 AGM. If approved,
the revised Policy will take effect from the date
of the 2018 AGM. The Committee’s current
intention is that the revised Policy will operate
for the two year period to the AGM in 2020
unless the Committee recommends changes
as a result of its current review of the Policy.
The Statement from the Chairman of the
Remuneration Committee (set out on pages
115 and 116) and the Annual Report on
Remuneration (set out on pages 124 to 132)
will be subject to an advisory vote at the
2018 AGM.
Summary of Policy changes
The main changes to the Remuneration Policy,
from the Policy approved by Shareholders at
the 2017 AGM, are as described in the
Chairman’s letter and are as follows:
– Approach to recruitment and promotion:
The inclusion of an additional clause in the
service agreement of Mr Roman Deniskin
who will be appointed as Chief Executive
Officer on 16 April 2018 to provide for some
modest protection in the event of a change
of control within the first 24 months of his
appointment. The Policy is also amended
to include the flexibility to apply the same
clause for an incoming Chief Financial
Officer, as appropriate.
– Mr Deniskin’s service agreement provides
for a six month’ notice period from either the
Company or Mr Deniskin in the event of
termination of his employment instead of
the 12 month’ notice period permitted
under the existing Policy approved by
shareholders on 22 June 2017.
– Given the international nature of our
business, the Company’s ability to operate
and/or enforce certain provisions and
remuneration arrangements such as the
malus and clawback provisions may be
restricted by relevant local laws.
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. 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. significant 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.
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):
– 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.
Maximum opportunity
The cost of these benefits to the Company is dependent upon market rates and availability of the
respective benefits.
Performance metrics
Not applicable.
Remuneration element
Pension
Purpose and link to strategy
To provide market-competitive pension benefits in line with the wider workforce whilst ensuring
no undefined liability for the Company.
Operation
Executive Directors may receive contributions from the Company into a personal pension plan
or similar savings vehicle.
Petropavlovsk Annual Report 2017 117
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Maximum opportunity
Performance metrics
Remuneration element
Purpose and link to strategy
Operation
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. 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. Please also refer to Note 1 on page 119.
Maximum opportunity
Maximum bonus opportunity is 100% of salary.
Performance metrics
For target level performance, the bonus earned is 50% of maximum.
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; and
– 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.
118 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Remuneration element
Long term Incentive Plan (“LTIP”)
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
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. 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. Please also refer to Note 1 below.
Note 1: Given the international nature of the
Group’s business, the Company’s ability to
operate and/or enforce certain provisions and
remuneration arrangements such as the
malus and clawback provisions may be
restricted by relevant local laws.
The Committee reserves discretion to make
minor changes to this Policy, which do not
have a material advantage to Executive
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.
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 rewards delivery
against these.
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
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
Petropavlovsk Annual Report 2017 119
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Interim Chief Executive Officer (£)
Incoming Chief Executive Officer (£)
Chief Financial Officer (£)
2,100,000
1,500,000
1,260,000
1,254,867
900,000
500,000
700,000
774,867
454,867
Minimum
Target
Maximum
Minimum
Target
Maximum
Minimum
Target
Maximum
Salary
100%
Annual bonus 0%
LTIP
0%
55.6%
27.8%
16.7%
33.3%
33.3%
33.3%
Salary
100%
Annual bonus 0%
LTIP
0%
52.6%
31.6%
15.8%
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%
% of remuneration
Key
LTIP
Annual bonus
Salary
Assumptions:
Minimum = base salary, benefits and pension where applicable (i.e. fixed remuneration only). Base salary
only has been used for the Incoming Chief Executive Officer as the cost of providing benefits, including
healthcare and life assurance is not known. This will be obtained at market rates.
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 .
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.
Chief Financial Officer the introduction of
shareholding guidelines is not thought to
be appropriate at this time.
Shareholding guidelines
There is no formal requirement for Executive
Directors to own shares in the Company.
Shareholding guidelines had not previously
been considered as equitable given that there
have been no LTIP performance share awards
since 2011. In addition Mr Peter Hambro and
Dr Pavel Maslovskiy, the former Executive
Chairman and Chief Executive Officer who
departed the Board on 22 June 2017 and
17 July 2017 respectively, had significant
shareholdings in the Company given their
status as original founders of the Company.
The Committee has recently reviewed
this matter. However given that Mr Roman
Deniskin will be appointed as Chief Executive
Officer on 16 April 2018 and the Company is
currently progressing the recruitment of a new
The Committee will continue to monitor market
trends with respect to minimum shareholding
guidelines for the Executive Directors.
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 2018 (or on appointment, in the case
of the incoming Chief Executive Officer):
£700,000 for the incoming Chief Executive
Officer, £500,000 for the Interim Chief
120 Petropavlovsk Annual Report 2017
Executive Officer, and £400,000 for the Chief
Financial Officer. The graphs have been
prepared on the basis that LTIP Awards will be
granted during 2018. Note that the graph
excludes any future share price movements.
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.
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.
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.
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.
The service contract for the incoming Chief
Executive Officer, Mr Roman Deniskin
provides for a six-month notice period,
from both the Company and Mr Deniskin.
Mr Deniskin’s service contract also includes a
change of control provision. In the event that
there is a change of control within 24 months
of Mr Deniskin’s commencement date, he will
be entitled to give notice to terminate his
employment within 3 months of the date of
the change of control and receive within one
month, a sum equal to six months’ basic
salary. No additional sum in lieu of notice would
be payable. In this instance change of control
means the date on which (a) any person
obtains Control of the Company as a result of
making a general offer to acquire the whole of
the issued share capital of the Company
(which is made on the condition that the
person making such offer will acquire Control),
and for this purpose, a person shall be deemed
to have obtained Control if he and others acting
in concert with him have obtained Control; or
(b) the Court sanctions a compromise or
arrangement pursuant to section 899 of the
Companies Act which will result in a person
obtaining Control of the Company; or (c) the
date on which any person becomes entitled
to acquire shares of the Company pursuant
to sections 979 and 980 of the Companies
Act 2006. For these purposes Control shall
have the meaning given to it by section 995 of
the Income Tax Act 2007. The Remuneration
Committee also has the flexibility to include the
same change of control clause in the service
Petropavlovsk Annual Report 2017 121
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
contract for an incoming Chief Financial
Officer, as appropriate.
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
Sergey Ermolenko
Andrey Maruta
Position
Effective date of contract
Interim Chief Executive Officer
18 July 2017
Chief Financial Officer
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 Bonus 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.
122 Petropavlovsk Annual Report 2017
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 Chairman of 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 appointments are as follows:
Date of original appointment
Unexpired term as at
31 December 2017
Date of appointment/last
reappointment at AGM
Name
Ian Ashby
22 June 2017
Bruce M. Buck
22 June 2017
Garrett Soden
22 June 2017
Bektas Mukazhanov
8 February 2018
Adrian Coates
16 February 2018
30 months
30 months
30 months
N/A
N/A
2017
2017
2017
N/A
N/A
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 Sustainability report
on pages 71 and 72 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.
Notice period
3 months
3 months
3 months
3 months
3 months
Petropavlovsk Annual Report 2017 123
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Annual Report on Remuneration
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 2017, and how the proposed Policy will be implemented in 2018. Any information contained in this section of the report
that is subject to audit is highlighted.
The Remuneration Committee
Members
From
Bruce M. Buck (Chairman)
22 June 2017
Ian Ashby
Garrett Soden
Andrew Vickerman
– Chairman
– Member
Alexander Green
22 June 2017
22 June 2017
28 June 2016
22 October 2015
22 October 2015
To
Present
Present
Present
22 June 2017
22 June 2017
22 June 2017
Number of meetings in 2017
- Attendance/Eligibility
2/2
2/2
2/2
2/2
2/2
The Committee held four formal meetings during the year.
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 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.
Activities of the Committee during 2017
Key activities during the year included:
Decisions made prior to
22 June 2017:
Committee membership:
Mr Andrew Vickerman, Chairman,
Mr Alexander Green
– Review and approval of the 2016 annual
bonus outcome, including proposed award
of Deferred Bonus Awards.
– Review and approval of the 2017 annual
bonus performance measures and targets.
– Review and approval of the 2016 Directors’
Remuneration Report.
124 Petropavlovsk Annual Report 2017
– Review of Executive Directors’ and
Executive Committee members’ total
remuneration benchmarked against the
Company’s peer group, including the review
of Executive Directors’ salaries for 2018.
External advisors
In carrying out its responsibilities, the
Committee is independently advised by
external advisers.
Mercer 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. Mercer 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 2017, Mercer Kepler also provided
support in finalising the revised Remuneration
Policy which was approved by shareholders
on 22 June 2017.
Mercer Kepler is a signatory to the Code of
Conduct for Remuneration Consultants of
UK-listed companies (which can be found at
www.remunerationconsultantsgroup.com).
– Proposing changes to the Remuneration
Policy for approval by shareholders at the
2017 AGM, including:
– introduction of a two year post-vesting
holding period for future awards made
under the LTIP;
– strengthening of malus and clawback
provisions; and
– reduction of the bonus payable for
achieving target from 60% to 50%
of maximum.
Decisions made post 22 June
2017:
Committee membership:
Mr Bruce Buck, Chairman,
Mr Ian Ashby
Mr Garrett Soden
– Review and approval of the termination
arrangements for Mr Peter Hambro,
Executive Chairman who departed the
Company on 22 June 2017.
– Initial review of the Company’s long-term
incentive arrangements.
– Review of base salary for Mr Sergey
Ermolenko, following his appointment
as Interim Chief Executive Officer on
18 July 2017.
– Approval of Dr Pavel Maslovskiy’s
consultancy arrangements with the
Company for the period 1 August 2017 to
31 January 2018 following his resignation as
Chief Executive Officer on 17 July 2017.
Mercer Kepler reports directly to the
Committee Chairman and neither Mercer
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 and life assurance
scheme for the Company’s UK based
employees.
Mercer Kepler’s total fees for the provision of
remuneration services to the Committee in
2017 were £26,250 on the basis of time and
materials, excluding expenses and VAT.
Annual Report on Remuneration vote
In addition the Committee received external
legal advice from Norton Rose Fulbright LLP
including on amendments to the Rules of the
Company’s Long-Term Incentive Plan,
matters relating to the resignation of Dr Pavel
Maslovskiy as Chief Executive Officer and
termination arrangements for Mr Peter
Hambro who retired as Executive Chairman
on 22 June 2017. Fees in this respect totalled
£51,734 on the basis of time, excluding
expenses and VAT.
For
Against
Remuneration Policy vote
For
Against
Shareholder voting at the 2017 AGM
The table below sets out the results of the votes on the 2017 Annual Report on Remuneration
and the Directors’ Remuneration Policy at the 2017 Annual General Meeting.
Annual Report on Remuneration vote
Votes for
Votes against
Total votes cast
Votes withheld
Remuneration Policy vote
Votes for
Votes against
Total votes cast
Votes withheld
The above resolutions were passed on a poll.
Annual Report on Remuneration
Total number
of votes
2,466,777,101
13,682,206
2,480,459,307
2,842,823
% of votes cast
99.45%
0.55%
Annual Report on Remuneration
Total number
of votes
2,392,541,301
89,330,313
2,481,871,614
1,430,516
% of votes cast
96.40%
3.60%
As in previous years and as required by law, details of the voting on all resolutions at the 2018 Annual General Meeting will be announced via a
regulatory news service and posted on the Petropavlovsk website following the 2018 Annual General Meeting.
Petropavlovsk Annual Report 2017 125
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Executive Directors
The remuneration received by Executive Directors in respect of the financial years ended 31 December 2017 and
31 December 2016 is set out below.
Year
Salary & fees
Taxable Benefit(e)
Annual Bonus(b)
Pension
Other(d)
Executive Director
Peter Hambro(a)
Pavel Maslovskiy(c)
Sergey Ermolenko(d)
Andrey Maruta
Total
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
350,273(b)
655,000
357,433
655,000
227,151
N/A
400,000
395,000
1,334,857
1,705,000
–
–
–
–
N/A
4,867
12,958
4,867
12,958
–
131,000
–
131,000
56,788
N/A
200,000
79,000
256,788
341,000
–
–
–
–
N/A
50,000
49,375
50,000
49,375
630,000
–
–
–
–
N/A
–
–
630,000
–
Single Figure
Remuneration
Total £
Single Figure
Remuneration
Total US$(g)
980,273
786,000
357,433
786,000
283,939º
N/A
654,867
536,333
2,276,512
2,108,333
1,263,474
1,065,030
460,695
1,065,030
365,968
N/A
844,058
726,731
2,934,195
2,856,791
(a) Mr Peter Hambro was not re-elected as a Director by shareholders at the Company’s Annual General Meeting held on 22 June 2017 and consequently retired as a Director of the Company on that date. Pay in
lieu of notice, as detailed on page 128 included:
- A payment of £600,000 as compensation for failure by the Company to give notice of termination in accordance with Mr Hambro’s Service Agreement.
- A lump sum payment of £30,000 as compensation for loss of office and termination of employment.
(b) Salary includes a payment of £22,773 as payment in lieu of 9 days’ annual leave accrued but untaken as at Mr Hambro’s departure date of 22 June 2017.
(c) Dr Pavel Maslovskiy resigned as a Director and as Chief Executive Officer of the Company on 17 July 2017; the remuneration shown in the table relates to the period 1 January to 17 July 2017. Dr Maslovskiy
continued as an employee of the Company until 31 July 2017. Dr Maslovskiy acted as a consultant of the Company from 1 August 2017 to 31 January 2018, continuing to assist on the POX Hub project and
other operational matters, for which he received a fee of £54,583 per month. No further payments are due to Dr Maslovskiy.
(d) Mr Sergey Ermolenko was appointed as a Director and as Interim Chief Executive Officer of the Company on 18 July 2017; the remuneration in the table relates to the period 18 July to 31 December 2017.
(e) Benefits are in respect of private medical insurance for the Director, his spouse and any children under the age of 18.
(f) Value of annual bonus (including any Deferred Bonus Awards) awarded in respect of the corresponding performance year.
(g) Converted from GBP to US$ using the average exchange rate for the year. (2017: £0.776:US$1, 2016:£0.738:US$1).
Implementation of the Remuneration Policy in 2017
Executive Directors
Salary
Mr Andrey Maruta, Chief Financial Officer,
was awarded an inflationary salary increase
of c.1.3% effective from 1 January 2017.
No salary increases were awarded to Dr Pavel
Maslovskiy, Chief Executive Officer or
Mr Peter Hambro, Executive Chairman
during 2017.
Mr Sergey Ermolenko was appointed as
Interim Chief Executive Officer on 18 July 2017,
following the resignation of Dr Pavel Maslovskiy
on 17 July 2017. Mr Ermolenko was the
General Director of MC Petropavlovsk and a
member of the Executive Committee prior to
this appointment. Mr Ermolenko received a
pro-rated annual salary of £500,000 p.a. from
the date of his appointment on 18 July 2017 to
31 December 2017.
Pension
The Group made contributions into a personal
pension scheme on behalf of Mr Andrey
Maruta, Chief Financial Officer during 2017.
A rate of 12.5% of base salary (paid partly as a
pension contribution and partly as a taxable
cash supplement) was payable in return for a
minimum personal contribution of 3% on
pension payments. Any cash payment was
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 year ended 31 December
2017, the Group’s pension contribution for
Mr Maruta was £50,000. Mr Hambro,
Dr Maslovskiy and Mr Ermolenko received
no payment from the Company in respect
of pension entitlements.
Annual bonus
For 2017, the annual bonus was based 40%
on operational targets, 10% on financial
results, 50% on strategic targets, and 10%
on health and safety. The maximum bonus
opportunity was 100% of salary, and target
bonus was 50% of salary. The performance
targets and actual achievement during the
year, and the resulting bonus outcome,
are set out in the following table.
126 Petropavlovsk Annual Report 2017
Objective
Operational
Total Group production
Cash Costs – All-in-sustaining costs◆
Health & Safety - LTIFR
Financial
Leveraged debt EBITDA/Net Debt◆
Strategic
Construction of POX
Underground mining
Total
Weighting (% of max)
Target
Stretch target
Actual outturn
achieved
Bonus payable
(% of max)
Performance targets
420,000oz
US$945oz
2.25
460,000oz
=/2.5
90% of
budgeted ore
mined
110% of
budgeted ore
mined
See detail below
47%
20%
20%
10%
10%
20%
20%
100%
15%
0%
0%
0%
10%
0%
25%
Continuing construction of the POX Hub:
Following the year-end, the Committee
assessed the progress of the construction of
the POX Hub, both in terms of timing of the
project against schedule and Capital
Expenditure◆ against budget. As stated in the
Company’s full year update announcement
released on 30 January 2018, the
construction of the POX Hub progressed as
planned during 2017 and commissioning is
expected to commence in Q4 2018. After due
consideration the Committee decided to
award a 10% of salary (out of 20%) bonus
for this objective, being the pay-out for target
performance. Please see ‘The POX Hub’
report on pages 42 to 51 for further
information on this project.
Mr Sergey Ermolenko, Interim Chief Executive
Officer, was therefore awarded a total bonus
of 25% of his pro-rated base salary.
Mr Andrey Maruta, Chief Financial Officer,
was awarded a bonus of 50% of base salary,
with the additional 25% of base salary paid to
reflect his leadership of the project to
refinance the Company’s bank debt.
This culminated in the successful issuance
by the Group, in November 2017, of the Notes.
As detailed in the Chairman’s statement on
page 115, this bonus objective was agreed
with Mr Maruta in the late summer of 2017
and following the change of Directors at the
2017 Annual General Meeting. The funds from
the issue of the Notes have been used to
repay loans provided pursuant to banking
facilities with Sberbank and VTB Bank.
This has provided medium term financial
stability for the Company and flexibility for
the Group’s operations.
As detailed in the 2016 Directors’
Remuneration Report, 50% of the bonus
payable will be paid in cash with the remaining
50% payable in the form of a Deferred Bonus
Award. The Deferred Bonus Awards will be
granted following the publication of the 2017
Annual Report, and will vest after one year
subject to the continued employment of the
individual. The Committee has considered the
payment of Mr Maruta’s bonus in light of his
decision to resign as Chief Financial Officer
on 31 March 2018. However given the
discussions between Mr Maruta and the
Board, as detailed in the Chairman’s letter,
and as permitted under the Policy, the
Committee has approved the payment of the
50% bonus to Mr Maruta. Given the Rules of
the LTIP in relation to the Deferred Bonus
Award this bonus will be paid in cash.
LTIP
Due to the complete change in the
membership of the Remuneration Committee
on 22 June 2017 and the resignation of
Dr Pavel Maslovskiy as Chief Executive
Officer on 17 July 2017 it was agreed that no
grant should be made under the Long-Term
Incentive Plan during 2017. The Remuneration
Committee reviewed the Company’s
Long-Term Incentive arrangements in
July 2017.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 127
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Chairman and Non-Executive Director remuneration
The fees paid to the Non-Executive Chairman, Mr Ian Ashby, since his date of appointment on 22 June 2017, and to Non-Executive Directors in
respect of the financial years ended 31 December 2017 and 31 December 2016 are as follows:
Non-Executive Directors
Ian Ashby1
Bruce M. Buck2
Garrett Soden2
Vladislav Egorov
Former Non-Executive Directors
Alexander Green3
Robert Jenkins3
Andrew Vickerman3
Sir Roderic Lyne4
Total
Total fees
2017
£
2016
£
Total fees
2017
US$
2016
US$
79,038
47,423
44,788
0
37,500
46,250
41,250
–
296,250
–
–
–
–
75,000
87,500
75,000
37,500
275,000
101,873
61,124
57,728
0
48,334
59,612
53,167
–
381,837
–
–
–
–
101,625
118,562
101,625
50,813
372,625
1. Mr Ian Ashby was appointed as Non-Executive Chairman on 22 June 2017.
2. Messrs Bruce M. Buck and Garrett Soden were appointed as Non-Executive Directors on 22 June 2017.
3. Messrs Alexander Green, Robert Jenkins and Andrew Vickerman were not re-elected by shareholders at the AGM held on 22 June 2017 and retired as Directors on that date.
4. 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.
5. Mr Vladislav Egorov did not receive any fees from the Company in respect of his position as a Non-Executive Director.
During 2017, fees for the Non-Executive Directors remained unchanged. The base fee was £75,000. The Chairman of the Audit Committee and the
Senior Non-Executive Director were entitled to an additional payment of £10,000 and £7,500 per annum respectively, in respect of these additional
responsibilities. The Chairman of the Remuneration Committee was entitled to an additional fee of £7,500 per annum.
Payments for loss of office (audited)
The table below sets out the treatment in relation to Mr Peter Hambro, Executive Chairman, who was not re-elected as a Director at the
Annual General Meeting of the Company held on 22 June 2017 and therefore retired from the Board on that date (the ‘Termination Date’).
The remuneration arrangements in respect of Mr Hambro’s departure, set out below, were determined by the Company’s Remuneration
Committee, in line with the Company’s Remuneration Policy approved by shareholders on 22 June 2017.
Former Executive Director
Peter Hambro
Payment in lieu of
notice1
£600,000
Compensation
for loss of office2
£30,000
Total
£630,000
1. Under his service agreement with the Company, Mr Hambro was entitled to 12 months’ notice of termination and, as at the Termination Date, received an annual basic salary of £655,000. Mr Hambro received
a lump sum payment of £600,000 as compensation for failure by the Company to give notice of termination in accordance with the Service Agreement. This payment was discounted for early receipt.
2. Mr Hambro received a further lump sum payment of £30,000 as compensation for loss of office and termination of employment and (in particular for unfair dismissal).
The payments referred to in 1 and 2 are subject to clawback provisions in the event that Mr Hambro breaches obligations owed to the Company and its subsidiaries under the terms of his settlement
agreement with the Company.
In addition Mr Hambro received a payment in
lieu of 9 days’ annual leave accrued but untaken
as at the Termination Date of £22,673.
Mr Hambro received a contribution of £20,000
plus VAT in respect of his legal expenses
incurred in connection with his departure,
which was paid directly to Mr Hambro’s legal
advisers. Mr Hambro had no outstanding
awards under the Company’s Long Term
Incentive Plan at the Termination Date.
As announced by the Company on
16 February 2018, Mr Andrey Maruta will
resign as a Director on 31 March 2018.
For the reasons detailed in the Chairman's
letter, in line with the approved Remuneration
Policy and in accordance with the LTIP
Rules, the Committee has used its discretion
to allow the pro-rated vesting of the Deferred
Bonus Award granted to Mr Maruta on
1 August 2017. In this respect 358,032
Petropavlovsk PLC ordinary shares (with a
value of c.£25k as at 26 March 2018) will vest
and will be transferred to Mr Maruta as soon
as possible following the date of his
resignation. Income tax, and employee’s
National Insurance contributions will be
payable by Mr Maruta on the value of the
shares as at the date of vesting.
Dr Pavel Maslovskiy resigned as Chief Executive
Officer and as a Director on 17 July 2017.
Dr Maslovskiy acted as a consultant of the
Company during the period 1 August 2017 to
31 January 2018 assisting the Board whilst it
undertook a search for Dr Maslovskiy’s
successor. In particular Dr Maslovskiy
assisted with the project to construct the
POX Hub, which is critical to the future of the
Group. Dr Maslovskiy received a salary of
£24,650 during the period 18 July 2017 to
31 July 2017 and a fee of £272,917 for the
period 1 August 2017 to 31 December 2017.
External directorships
None of the Executive Directors earned
remuneration from external non-executive
appointments during the year.
128 Petropavlovsk Annual Report 2017
Implementation of Remuneration Policy in 2018
The section below sets out a summary
of how the proposed Remuneration Policy
will be implemented for the year ending
31 December 2018.
Executive Directors
Salary
The Remuneration Committee reviewed
the Executive Directors’ salaries for 2018 in
February 2018. It was agreed that no increases
should be awarded to either Mr Sergey
Ermolenko, Interim Chief Executive Officer or
to Mr Andrey Maruta, Chief Financial Officer.
As detailed in the Company’s announcement
on 8 February 2018, Mr Roman Deniskin will
be appointed as Chief Executive Officer with
effect from 16 April 2018. His remuneration
package on appointment has been
determined in line with the Remuneration
Policy, and is set out below:
– Salary: £700,000 p.a.
– Annual bonus: maximum opportunity of
100% of salary.
– LTIP: it is intended that an award of 100%
of salary will be granted.
Upon Mr Roman Deniskin’s appointment in
April 2018, Mr Sergey Ermolenko, Interim
Chief Executive Officer, will revert to his former
role as General Director of MC Petropavlovsk.
Mr Andrey Maruta, Chief Financial Officer,
will resign as a Director on 31 March 2018.
He will continue as a consultant to the
Company for a period of 4 months, whilst the
Company appoints a successor and to assist
in the handover to the new Chief Financial
Officer, during which he will receive a fee of
£25,000 per month.
Annual bonus
The maximum annual bonus opportunity for
2018 remains 100% of salary for Executive
Directors. The target bonus is 50% of salary;
bonuses will be payable on a straight-line
basis between target and stretch.
The 2018 annual bonus is based on such
measures as the construction of POX,
which continues to be critical to the Group,
improvement in costs, resolving the potential
liability of the Company’s guarantee to ICBC
in respect of IRC’s loan facility and maximising
the value of the Group’s equity interest in IRC
together with health and safety, the latter
being of paramount importance to the Board.
As was the case last year, details of the
specific targets have not been disclosed in
advance due to their commercial sensitivity.
Full retrospective disclosure of the specific
targets and performance against them will
be provided in the 2018 Annual Report on
Remuneration.
The annual bonus outcome will be
determined with reference to the achievement
of the performance conditions, subject to the
Committee’s broader assessment of overall
Company performance. The Committee has
the discretion to reduce bonus payments
based on its qualitative assessment of overall
HSE performance, taking into account the
occurrence of any material adverse HSE
event or an event which leads to significant
reputational damage for the Company.
For 2018, 50% of any bonus payable will be
paid in the form of a Deferred Bonus Award,
vesting after one year subject to continued
service. The remaining 50% will be payable
in cash, subject to the normal statutory
deductions.
Malus and clawback provisions may be
applied at the discretion of the Committee
in the event of material misconduct, material
misstatement of results, a calculation error
and/or poor information used when
calculating the reward outcome, for a period
of up to two years post-payment.
LTIP
The Committee intends to grant performance
share awards under the LTIP awards following
the appointment of Mr Deniskin as Chief
Executive Officer.
Chairman and Non-Executive Directors
The Non-Executive Chairman and Non-Executive Directors’ fees for 2018 will remain unchanged from 2017 levels. A summary of fees is
set out below:
Non-Executive Chairman fee
Non-Executive Director base fee
Additional Senior Independent Director fee
Additional Audit Committee Chairman fee
Additional Remuneration Committee fee
Fees 2018
£150,000
£75,000
£7,500
£10,000
£7,500
Fees 2017
N/A
£75,000
£7,500
£10,000
£7,500
Change
N/A
0%
0%
0%
0%
Petropavlovsk Annual Report 2017 129
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Percentage change in remuneration of the Chief Executive Officer
The table below shows the percentage change in Chief Executive Officer remuneration from the prior year compared to the average percentage
change in remuneration for Executive Committee members. Given that the Group operates in a number of diverse locations and its employees
cover a wide remit of roles, the majority of whom are operational employees based at the Group’s producing mines in the Far East Amur Region
of Russia and also include geologists, technicians at the Group’s laboratories and functional staff at the Group’s offices in Blagoveshchensk,
Moscow and London, the Committee believes that using the Executive Committee as a subset for the purposes of comparing Chief Executive
Officer pay against wider employee pay provides a more useful and meaningful comparison than using pay data for all employees. The majority
of the workforce in Russia received wage growth of 10% in 2017.
Item
Base salary
Taxable benefits
Annual bonus
Percentage change 2017 vs. 2016
Chief Executive
Officer1
Change
Executive
Committee
Change
(11)%
0%
5%
11%
0%
5%
1. For 2017, based on the sum of remuneration paid to Dr Pavel Maslovskiy from 1 January to 17 July and to Sergey Ermolenko from 18 July to 31 December. For 2016, based on Dr Pavel Maslovskiy.
Relative importance of the spend on pay
The table below shows the movement in spend on staff costs between the 2017 and 2016 financial years, compared to profit before tax
and dividends:
Staff costs
Average number of staff
Profit before tax
Dividends
2017
US$103.63m
8,519
US$60.5m
–
2016
US$80.09
8,064
US$27.0m
–
Change
29.4%
5.6%
124.1%
–
There were no dividends paid or declared during the years ended 31 December 2017 and 31 December 2016 and no share buy-backs
were undertaken.
130 Petropavlovsk Annual Report 2017
Total shareholder return
This graph shows the Company’s TSR performance relative to the FTSE350 Mining Index over a period of nine years to 31 December 2017. The Board
considers the FTSE350 Mining Index to be an appropriate index for comparison as the constituents represent the UK-listed mining sector.
£100 invested in Petropavlovsk and FTSE350 Mining Index on 31 December 2008
350
300
250
200
150
100
50
0
Petropavlovsk PLC
FTSE 350 Mining Index
31/12/08
31/12/09
31/12/10
31/12/11
31/12/12
31/12/13
31/12/14
31/12/15
31/12/16
31/12/17
Chief Executive Officer Remuneration
The table below shows the single figure of total remuneration for the Chief Executive Officer during each of the last nine financial years.
Year ended 31 December
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
Chief Executive Officer
during the year(a)
Total remuneration £
Annual bonus (%)
LTIP vesting (%)
1,138,339 (b)
70% (b)
0%
1,025,991
45%
0%
Dr Maslovskiy
1,569,190
94.4%
0%
661,000
45.5%
0%
Mr Ermolenko
400,000
0%
0%
Mr Ermolenko/
Dr Maslovskiy
977,605
100%
N/A
655,000
0% (c)
N/A
Dr Maslovskiy
786,000
20%
N/A
Dr Maslovskiy/
Mr Ermolenko
584,584
25%
N/A
a. Dr Pavel Maslovskiy resigned as Chief Executive Officer on 20 December 2011 and Mr Sergey Ermolenko was appointed as Chief Executive Officer on that date. Mr Ermolenko stepped down as Chief
Executive officer on 5 November 2014 and Dr Maslovskiy was appointed as Chief Executive Officer on that date. Dr Maslovskiy resigned as Chief Executive Officer on 17 July 2017 and Mr Ermolenko was
appointed as Interim Chief Executive Officer on 18 July 2017.
b. Dr Maslovskiy also received a special bonus payment of £225,000 during the year ended 31 December 2009 in recognition of the services provided in relation to the Company’s acquisition of Aricom plc and
to the admission of the Company’s shares to trading on the Main Market of the London Stock Exchange plc. The special bonus payment of £225,000 is included in the total remuneration for 2009 shown
above but is not included in the annual bonus percentage figure shown of 70%.
c. The formulaic outcome of the 2015 Annual Bonus Plan would have resulted in a bonus of 30% of basic salary. However, Dr Maslovskiy agreed that his bonus payment should be waived.
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 131
GovernanceFinancial statementsStrategic report
Directors’ Remuneration Report continued
Directors’ shares and share plan interests
Directors’ share interests
The interests of the Directors who held office during the period from 1 January 2017 to 31 December 2017 in the ordinary shares of the Company,
together with details of changes to shareholdings between 1 January 2018 and 27 March 2018, are as set out in the table below.
Director
Ian Ashby1
Bruce M. Buck2
Vladislav Egorov3
Sergey Ermolenko4
Alexander Green7
Peter Hambro5
Robert Jenkins7
Pavel Maslovskiy6
Andrey Maruta
Garrett Soden2
Andrew Vickerman7
1. Appointed Non-Executive Chairman on 22 June 2017.
2. Appointed as an Independent Non-Executive Director on 22 June 2017.
3. Appointed as a Non-Executive Director on 22 June 2017.
4. Appointed as Interim Chief Executive Officer on 18 July 2017.
5. Retired as Executive Chairman on 22 June 2017.
6. Resigned as a Director and as Chief Executive Officer on 17 July 2017.
7. Retired as an Independent Non-Executive Director on 22 June 2017.
Shares held
as at
1 January 2017 or
date of appointment if
Shares held
as at
31 December 2017 or
date of retirement if
later1
0
0
0
318,247
0
152,280,861
750,000
190,774,346
33,925
0
0
earlier2
0
0
0
318,247
0
152,280,861
750,000
58,943,880
33,925
0
0
Shares held
as at
27 March 2018
0
0
0
318,247
–
–
–
–
33,925
0
–
Outstanding share awards
With the exception of the Deferred Bonus Awards made to Messrs Ermolenko and Maruta in respect of 50% of their 2016 bonus, there were no
LTIP Awards outstanding as at 1 January 2017 and no LTIP Awards were made during the year.
Director
Sergey Ermolenko
Andrey Maruta
Date of award
1 August 2017
1 August 2017
At 1 January 2017
–
–
Granted during
the year
441,876
537,049
Face value at grant At 31 December 2017
441,876
537,049
£32,500
£39,500
Normal vesting date
1 August 2018
1 August 2018
Mr Ermolenko’s outstanding award which
related to 50% of the bonus awarded for
2016, will vest and the Ordinary Shares
subject to the awards will be transferred to
him on 1 August 2018, subject to his
continuous employment with the Company
until that date.
Mr Maruta will resign as Chief Financial Officer
and as a Director of the Company on
31 March 2018. In accordance with the rules
of the LTIP 358,032 shares which related to
50% of the bonus awarded for 2016 will vest
to Mr Maruta as soon as practicable after the
cessation of his employment.
Shares were awarded based on a share price
of 7.355 pence per share being the mid-
market closing share price of Petropavlovsk
PLC Ordinary Shares on 31 July 2017.
Approval
The Annual Remuneration Report has been
approved by the Board of Directors and
signed on its behalf by:
Bruce M. Buck
Chairman, Remuneration Committee
27 March 2018
132 Petropavlovsk Annual Report 2017
Directors’ Report
For the year ended 31 December 2017
This report
This report includes certain disclosures which
are required by law to be included in the
Directors’ Report.
In accordance with the Companies Act 2006,
the following items have been reported in
other sections of this Annual Report and are
included in this Directors’ Report by
reference:
– Directors’ interests in shares as at
31 December 2017 and any changes
thereafter can be found on page 132 of the
Directors’ Remuneration Report.
– The Strategic Report on pages 1 to 93 gives
a fair view of the business and an indication
of likely future developments and fulfils the
requirements set out in section 414C of the
Companies Act 2006.
– Details of the Group’s corporate
governance arrangements and its
compliance with the UK Corporate
Governance Code (the Code) can be found
on pages 96 to 105.
– Details of the Group’s approach to financial
risk management, its objectives and
policies and exposure to risk are described
in notes 18 and 27 to the financial
statements and in the Risks to Our
Performance section on pages 18 to 31.
– The Group’s disclosure of its greenhouse
gas emissions can be found on page 67.
Directors, Directors’ appointment,
conflicts of interest and Directors’
indemnity
Directors
The names and biographies of the Directors
who held office at the date of this Annual
Report are set out on pages 94 and 95.
Mr Andrey Maruta, Chief Financial Officer held
office throughout 2017 and up until the date of
this Report. Changes to the Directors during
2017 and up until the date of this Report are
detailed in the table below
Name
Mr Peter Hambro
Mr Alexander Green
Mr Robert Jenkins
Mr Andrew Vickerman
Mr Ian Ashby
Mr Bruce M. Buck
Mr Vladislav Egorov
Mr Garrett Soden
Dr Pavel Maslovskiy
Mr Sergey Ermolenko
Mr Bektas Mukazhanov
Mr Adrian Coates
Appointed
22 June 2017
22 June 2017
22 June 2017
22 June 2017
17 July 2017
8 February 2018
16 February 2018
Retired/Resigned
22 June 2017
22 June 2017
22 June 2017
22 June 2017
1 January 2018
18 July 2017
Position
Executive Chairman
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Non-Executive Chairman
Independent Non-Executive Director
Non-Executive Director
Independent Non-Executive Director
Chief Executive Officer
Interim Chief Executive Officer
Non-Executive Director
Non-Executive Director
Further details of these changes are provided on pages 98 and 99 of the Governance Report.
Directors’ appointment
With regard to the appointment and
replacement of Directors, the Company is
governed by its Articles of Association, the UK
Corporate Governance Code, the Companies
Act 2006, and related legislation. Directors may
be appointed by the Company by ordinary
resolution or by the Board, on recommendation
of the Nomination Committee. A Director
appointed by the Board holds office only until
the following annual general meeting and is
then eligible for election by shareholders.
The Company may, in accordance with and
subject to the provisions of the Companies Act
2006, by ordinary resolution of which special
notice has been given, remove any Director
before the expiration of his or her term of office.
In accordance with the requirements of the
UK Corporate Governance Code, all eligible
directors will stand for election at the
2018 AGM.
Conflicts of interest
Under the Companies Act 2006, Directors are
subject to a statutory duty to avoid a situation
where they have, or can have, a direct or
indirect interest that conflicts, or may possibly
conflict, with the interests of the Company.
The Companies Act 2006 allows directors of
public companies to authorise conflicts and
potential conflicts of interest of directors where
the articles of association contain a provision to
that effect. The Company’s Articles of
Association afford the Directors such
powers. In addition, the Directors will be able
to impose limits or conditions when giving any
authorisation, if they think this is appropriate.
Petropavlovsk Annual Report 2017 133
GovernanceFinancial statementsStrategic report Directors’ Report continued
For the year ended 31 December 2017
The Board has an established procedure for
the disclosure of interests and other related
matters. Each Director must promptly
disclose actual or potential conflicts and any
changes to the Board, which are noted at
each Board meeting. The Board considers
and authorises potential or actual conflicts as
appropriate. Directors with a conflict do not
participate in the discussion or vote on the
matter in question.
The Directors have reviewed the interests
declared by Directors, which could conflict
with those of the Company, and are satisfied
that the Board’s power to authorise potential
conflicts is operating effectively. Related party
transactions, which includes those in respect
of any Director, are disclosed in note 25 to the
financial statements on page 181.
Directors’ indemnities
A qualifying third-party indemnity provision as
defined in Section 234 of the Companies Act
2006 is in force for the benefit of the Directors
in respect of liabilities incurred as a result of
their office to the extent permitted by law.
In respect of those liabilities for which
Directors may not be indemnified, the
Company maintained a directors’ and
officers’ liability insurance policy throughout
the financial year.
Powers of Directors
Subject to the Company’s Articles of
Association, the prevailing legislation and
any directions given by special resolution,
the business and affairs of the Company
are managed by the Directors who may
exercise all such powers of the Company.
The powers of Directors are further
described in the Schedule of Matters
reserved for the Board, copies of which
are available on the Company’s website
at www.petropavlovsk.net.
Other statutory disclosures
Dividends
The Directors do not recommend a final
dividend in respect of the year ended
31 December 2017. Future decisions
regarding the dividend will be based on
a number of factors, including market
conditions, distributable reserves,
liquidity and operational performance.
In any event, the payment of dividends by
the Company is restricted by covenants in the
Petropavlovsk 2010 Limited 9% Guaranteed
Convertible Bonds due 2020 of which the
Company is the guarantor.
Employees
The Group maintains a policy of providing
employees with information about the
Company and regular meetings are held
between management and employees to
allow exchanges of information and ideas.
The Group is committed to providing equal
opportunity for individuals in all aspects
of employment. The Group gives every
consideration to applications for employment
by disabled persons where the requirements
of the job may be adequately filled by a
disabled person. Where existing employees
become disabled, it is the Group’s policy
wherever practicable to provide continuing
employment under similar terms and
conditions and to provide training,
career development and promotion
wherever appropriate.
Research and development
Companies within the Group carry out
exploration, development and analysis work
necessary to support their activities.
Further information is provided in the
Operational Performance, Exploration,
the POX Hub, the Underground and the
Reserves and Resources sections on pages
32 to 62 of the Strategic Report and are
incorporated into this Directors’ Report by
reference.
Donations
In line with the Group policy, no donations
were made for political purposes.
Details of the Group’s charitable activities are
set out in the Sustainability report on page 74.
Share capital and related matters
Share capital
The Company has 3,303,768,532 ordinary
shares of £0.01 each in issue as at
31 December 2017 (2016: 3,303,768,532).
Details of the Company’s issued share capital
are set out in note 23 on page 179.
Petropavlovsk’s Articles of Association
provide the authority for the Company to
purchase its own shares provided that it
complies with any applicable requirements
contained in the Companies Act 2006, the
CREST regulations and any other applicable
law. The Company did not seek authority from
shareholders to make purchases of its own
shares at the 2017 AGM and no such
authority will be sought in 2018.
Shareholders’ rights
The rights attaching to the Ordinary Shares
are governed by the Company’s Articles
of Association and prevailing legislation.
There are no specific restrictions on the
size of a holding.
Subject to applicable law and the Articles of
Association, holders of Ordinary Shares are
entitled to receive all shareholder documents,
including notice of any general meeting;
attend, speak and exercise voting rights
at general meetings, either in person or by
proxy; and participate in any distribution of
income or capital.
134 Petropavlovsk Annual Report 2017
Allotment of Ordinary Shares and
disapplication of pre-emption rights
The Company has authority to issue Ordinary
Shares under its Articles of Association.
Petropavlovsk’s shareholders passed the
following resolution relating to the allotment
of shares at the 2017 AGM.
– The Directors were granted authority to allot
new shares (or grant rights to subscribe for
or convert securities into shares) up to a
nominal value of £10,890,000, equivalent
to approximately 33% of the total issued
Ordinary Share capital of the Company,
exclusive of treasury shares, at the time of
passing the resolution. In addition to this,
the Directors were also granted authority to
allot additional new shares (or grant rights to
subscribe for or convert any security into
shares) up to a further nominal amount of
£10,890,000, but only in connection with a
rights issue.
This authority has not been exercised
during the reporting period and will expire
on the date of the forthcoming AGM.
– The Directors withdrew resolutions seeking
to dis-apply pre-emption rights prior to the
2017 AGM.
Resolutions for a renewal of the authority to
allot new shares together with authority to
dis-apply pre-emption rights over new shares
allotted for cash pursuant to the authority to
allot new shares may be sought at the 2018
AGM. If sought, the resolutions as regards
pre-emption rights disapplication will reflect
the requirements of the Pre-Emption Group’s
revised Statement of Principles
that provide for certain non-pre-emptive
allocations in the context of acquisitions
and specified capital investments.
Further details of the above proposals and
resolutions will be contained in the Notice of
Annual General Meeting.
Amendment of Articles of Association
The Company’s Articles of Association
may be amended by special resolution of
shareholders. A copy of the Company’s
Articles of Association adopted by
shareholders on 26 February 2015 are
available on the Company’s website.
Restrictions on voting
In general there are no specific restrictions
on a shareholder’s ability to exercise their
voting rights, save in situations where the
Company is legally entitled to impose such
restrictions (usually where amounts remain
unpaid on the shares after request, or the
shareholder is otherwise in default of an
obligation to the Company). Currently,
all issued Ordinary Shares are fully paid.
Deadlines for exercising voting rights
Votes are exercisable at a general meeting
of the Company in respect of which the
business being voted upon is being heard.
Votes may be exercised in person, by proxy,
or in relation to corporate members,
by corporate representatives. The Articles of
Association provide a deadline for submission
of proxy forms of not less than 48 hours
before the time appointed for the holding of
the meeting or adjourned meeting.
Transfer of Ordinary Shares
The transfer of Ordinary Shares is governed
by the general provisions of the Company’s
Articles of Association and prevailing
legislation. There are no restrictions on the
transfer of the Ordinary Shares other than
(i) as set out in the Articles of Association;
(ii) certain restrictions which may from time
to time be imposed by laws and regulations
(for example, insider trading laws); and
(iii) pursuant to the Listing Rules of the
Financial Conduct Authority and the Market
Abuse Regulation whereby certain Directors,
officers and employees of the Company
require approval to deal in the Ordinary
Shares in accordance with the Company’s
share dealing rules.
Petropavlovsk Annual Report 2017 135
GovernanceFinancial statementsStrategic report
Directors’ Report continued
For the year ended 31 December 2017
Significant shareholdings
Information provided to the Company pursuant to the Financial Conduct Authority’s Disclosure Guidance and Transparency Rules (DGTRs)
is published on a Regulatory Information Service and on the Company’s website.
As at 31 December 2017, the Company had received the following disclosures of major holdings of voting rights, pursuant to the requirements
of Rule 5 of the DGTR, from holders of notifiable interest in the Company’s voting rights.
No of Shares
% interest in
voting rights
ordinary shares
Qualifying
Financial
Instruments
% voting
Rights
Financial
instruments
with similar
economic effect
to Qualifying
Financial
Instruments % voting rights
6.83
% of voting
rights
(as at
31 December
2017)
Total number of
voting rights
– 225,674,382
(nominal) 669,239,867
20.17
Fincraft Holdings Ltd(a)
Sothic Capital European
Opportunities Master
Fund Limited (b)
Gertjan Koomen
Vailaski Holding Limited(c)
Public joint stock company
Asian-Pacific Bank(c)
VTB Bank (Deutschland) AG
D.E. Shaw & Co., L.P. and
D.E. Shaw & Co. (London),
LLPDBMMA015 is the full name
of the shareholder with respect
to the indirect interest over
256,609,333 Ordinary Shares
M&G/Prudential plc group of
companies(d)
440,565,485
13.34
347,534,872
316,200,954
(301,035,074
indirect)
301,035,074
300,000,000
10.51
9.57
(9.11
indirect)
9.11
9.08
256,609,333
7.77
–
–
–
–
–
–
–
14,837,653
–
–
–
–
0.45 (Delta) 362,372,525
316,200,954
(301,035,074
indirect)
–
– 301,035,074
– 300,000,000
10.96
9.57
(9.11
indirect)
9.11
9.08
– 256,609,333
– 225,155,859
7.77
6.82
–
–
–
–
–
224,905,854
6.82
250,005
0.00
(a) The interest in financial instruments with similar economic effect to qualifying financial instruments of Fincraft Holdings Ltd relates to the Group’s 9% Convertible Bonds due 2020.
(b) The interest in financial instruments with similar economic effect to qualifying financial instruments of Sothic Capital European Opportunities Master Fund Limited relate to Contract for Differences and Total
Rate Return Swap.
(c) Vailaski Holding Limited has entered into an option agreement with Asian-Pacific Bank in respect of a total of 301,035,074 shares.
(d) The interest in qualifying instruments of M&G/Prudential group of companies relate to a ‘Right of Recall.’
136 Petropavlovsk Annual Report 2017
As at 27 March 2018, the Company had received the following disclosures (which have not been subsequently changed) of major holdings of
voting rights, pursuant to the requirements of Rule 5 of the DGTR:
% interest in
voting rights
ordinary
shares
Qualifying
Financial
Instruments
% voting
Rights
No of Shares
Financial
instruments
with similar
economic effect
to Qualifying
Financial
Instruments % voting rights
6.83
Total number of
voting rights
% of voting
rights (as at
27 March
2018)
440,565,485
Fincraft Holdings Ltd(a)
Sothic Capital European Opportunities
Master Fund Limited (b) Gertjan Koomen 347,534,872
301,035,074
Slevin Ltd
VTB Bank (Deutschland) AG
300,000,000
D.E. Shaw & Co., L.P. and D.E. Shaw &
Co. (London), LLPDBMMA015 is the full
name of the shareholder with respect to
the indirect interest over 256,609,333
Ordinary Shares
M&G/Prudential plc group of
companies(d)
256,609,333
224,905,854
13.34
10.51
9.11
9.08
7.77
–
–
–
–
–
6.82
250,005
0.00
– 225,674,382
(nominal) 669,239,867
20.17
–
–
–
–
14,837,653
–
–
0.45 (Delta) 362,372,525
– 301,035,074
– 300,000,000
10.96
9.11
9.08
–
–
– 256,609,333
– 225,155,859
7.77
6.82
(a) The interest in financial instruments with similar economic effect to qualifying financial instruments of Fincraft Holdings Ltd relates to the Group’s 9% Convertible Bonds due 2020.
(b) The interest in financial instruments with similar economic effect to qualifying financial instruments of Sothic Capital European Opportunities Master Fund Limited relate to Contract
for Differences and Total Rate Return Swap..
(c) The interest in qualifying instruments of M&G/Prudential group of companies relate to a ‘Right of Recall.’
The information provided in the above
tables was correct at the date of notification.
It should be noted that these holdings may
have changed since the Company was
notified. However, notification of any change
is not required until the next notifiable
threshold is crossed.
Change of control (significant contracts)
and post-balance sheet events
A change of control of the Company following
a takeover may cause a number of agreements
to which the Company, or any of its
subsidiaries, is party, such as commercial
trading contracts, joint venture agreements
and banking arrangements, to take effect,
alter or terminate. In the context of the potential
impact on the Group, certain of these
arrangements are considered to be significant.
The following significant agreements contain
certain termination and other rights for the
counterparties of the Group companies upon
a change of control of the Company.
Pursuant to an up to US$340 million Credit
Facility dated 13 December 2010 (“ICBC
Loan”) between Industrial and Commercial
Bank of China Limited, ZAO Industrial and
Commercial Bank of China (Moscow) as the
lenders and LLC Kimkano-Sutarskiy Mining
and Benefication Plant as borrower and the
Company as guarantor, if any person or group
of persons acting in concert gains control of
the Company, the lenders may cancel the
total commitments under the ICBC Loan and
may accelerate all amounts outstanding
under the ICBC Loan so that they become
immediately due and payable.
Pursuant to the issue of US$100 million
9.00% guaranteed Convertible Bonds due
2020 (‘the Bonds’) issued by Petropavlovsk
2010 Limited (‘the Issuer’) on 18 March 2015
and guaranteed by the Company, upon a
change of control over the Company
constituting a Relevant Event (as defined in
the Terms and Conditions of the Bonds),
the exchange price of the shares shall be
adjusted in accordance with the formula
contained in the Terms and Conditions of the
Bonds and the Bondholders have the right to
require the redemption of the Bonds at their
principal amount plus accrued and unpaid
interest to the date of redemption.
Post-balance sheet events
There have been no material events from
31 December 2017 to the date of this Report.
2018 Annual General Meeting (AGM)
Notice of General Meeting
A separate document, the Notice of Annual
General Meeting 2018, convening the AGM
of the Company to be held on 21 June 2018,
will be sent or made available to all
shareholders and will contain an explanation
of the resolutions to be proposed to that
meeting. The Directors consider that each of
the Resolutions is in the best interests of the
Company and the shareholders as a whole
and recommend that shareholders vote in
favour of all of the Resolutions.
Electronic proxy voting
Registered shareholders have the opportunity
to submit their votes (or abstain) on all
Resolutions proposed at the AGM by means
of an electronic voting facility operated by the
Company’s registrar, Link Asset Services.
This facility can be accessed by visiting
www.signalshares.com. CREST members
may appoint a proxy or proxies by using the
CREST electronic appointment service.
Petropavlovsk Annual Report 2017 137
GovernanceFinancial statementsStrategic report Directors’ Report continued
Electronic copies of the annual report
and financial statements and other
publications
Copies of the 2017 annual report and financial
statements, the Notice of Annual General
Meeting, other corporate publications,
press releases and announcements are
available on the Group’s website at
www.petropavlovsk.net. Shareholders
are encouraged to take advantage of the
provisions allowing the Company to deliver
notices of meetings and associated
documentation electronically by email, or via
the Group’s investor relations webpages at
www.petropavlovsk.net/en/investors.
Disclosure required under the Listing
Rules
For the purpose of Listing Rule 9.8.4C,
the information required to be disclosed by
LR9.8.4R can be found in the Annual Report
in the following locations:
Listing Rule
9.8.4(1)
9.8.4(2)
9.8.4(4)
9.8.4(5)
9.8.5(6)
9.8.4(7)
9.8.4(8)
9.8.4(9)
9.8.4(10)
9.8.4(11)
9.8.4(12)
9.8.4(13)
9.8.4(14)
Information to be included
Interest capitalised
Publication of unaudited financial information
Long-term incentive scheme only involving a director (LR9.4.3)
Waiver of emoluments by a Director
Waiver of future emoluments by a Director
Non pre-emptive issues of equity for cash
Non pre-emptive allotments for cash (major subsidiaries)
Listed company is a subsidiary of another company
Contracts of significance involving a director
Contracts of significance involving a controlling shareholder
Waivers of dividends
Waivers of future dividends
Agreement with a controlling shareholder LR9.2.2AR(2)(a)
Disclosure
Chief Financial Officer's Statement on page 89
Not applicable
None
None
None
None
None
Not applicable
None
None
None
None
Not applicable
Accountability and audit
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 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 for the period of
12 months from the date of approval of the
2017 Annual Report and Accounts. As at
31 December 2017, the Group had sufficient
liquidity headroom. Following the successful
issue of the US$500 million Guaranteed
Notes (note 20), the Group is also satisfied
that it has sufficient headroom under a base
case scenario for the period to April 2019. In
the meantime, the Group’s projections under
a layered stressed case that is based on the
gold price, which is 10% lower than the
average of the market consensus forecasts,
indicate that unless mitigating actions can be
taken, there will be insufficient liquidity under
a layered stressed case for the relevant period
to April 2019. These mitigating actions include
items within the control of the management,
such as accessing deposits not currently in
the Group’s mining plan, cost cutting and
reduction of exploration expenditure.
The Group has guaranteed the outstanding
amounts IRC owes to ICBC. The outstanding
loan principal was US$234 million as at
31 December 2017. 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. In 2017,
IRC has agreed with ICBC to reschedule
repayments under the ICBC Facility
Agreement and 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). The next repayment instalment
under the ICBC Facility Agreement is now due
on 20 June 2018 and semi-annually thereafter
until June 2022. IRC projections demonstrate
that although IRC expects to have sufficient
working capital liquidity over the next
12 months, these projections indicate that,
unless mitigating actions can be taken, there
will be insufficient liquidity to meet its debt
repayment schedule and non-compliance
with certain financial covenants for the
relevant period to April 2019. Management of
Company and IRC has approached ICBC to
request an amendment of the repayment
schedule and obtain waivers in respect of
obligations to comply with certain financial
covenants. Management is also in active
discussions regarding the full refinancing of
the ICBC facility with an alternative lender.
However, if ICBC refinancing is not
completed, IRC’s financial liquidity may be
adversely impacted. IRC and/or the Company
would then need to carry out contingency
plans including entering into negotiations with
banks or other investors for additional debt
and/or equity financing.
If a missed repayment under debt or
guarantee obligations occurs or financial
covenant requirements are not met, this
138 Petropavlovsk Annual Report 2017
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 risk that ICBC refinancing is not
completed or alternative contingency
plans are not realised represents a material
uncertainty which may cast significant doubt
upon the Group's ability to continue to apply
the going concern basis of accounting.
Nevertheless, 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 2017 Annual
Report and Accounts. Accordingly, they
continue to adopt the going concern basis
of accounting in preparing these consolidated
financial statements.
Viability Statement
In accordance with provision C.2.2 of the UK
Corporate Governance Code, the Directors
have assessed the prospects of the Company
over a longer period than the 12 months
required for the “Going Concern” statement.
In preparing the assessment of viability the
Board has considered the principal risks
faced by the Group. These include those of
its associate, IRC, for which the Company is
a guarantor of the ICBC facility with K&S,
a subsidiary of IRC (the “ICBC Facility”),
relevant financial forecasts and sensitivities
and the availability of adequate funding.
Assessment period and review of forecasts
The Board reviews the Group’s forward plans
and projections at least annually and has
selected a period (“the assessment period”)
to 31 December 2022 as one appropriate for
the purposes of a longer term viability
assessment, compared with the three year
period selected in both 2015 and 2016.
This reflects, in particular, its consideration of
the following key matters relating to this
timeframe:
– During 2017, the Group repaid its facilities
with Sberbank and VTB Group from funds
raised from the Group’s issuance of
US$500m 8.125% Guaranteed Notes due
2022 (the ‘Notes’). The repayment of the
facilities with Sberbank and VTB and the
removal of the financial covenants
contained within these facilities has
provided the Company with medium term
financial stability, excluding any potential
liability arising from the Company’s
guarantee on the ICBC Facility as detailed
below. With the exception of the guarantee
provided to ICBC in respect of the ICBC
Facility (the ‘Guarantee’), the issuance of the
Notes has significantly de-risked the Group,
with its production and maturity profiles
now balanced.
– The Group’s ability to repay the Group’s
US$100m Convertible Bonds due March
2020 in full in the event that the Convertible
Bonds have not been converted into
Petropavlovsk equity.
– The Group’s ability to repay the Notes in
full in November 2022.
– The inherent significant uncertainties in
forecasting the gold price and Russian
Rouble to US Dollar exchange rate over a
longer term timeframe.
– The Group’s long-term mining plan (‘LTP’)
which covers a five year period.
Forecasts are prepared using forward
commodity prices and Russian/Rouble
US Dollar exchange rate assumptions. In
addition as detailed in the Strategic Report,
key elements of the forecasts include:
– Commence commissioning of the POX Hub
in Q4 2018, with first commercial
production scheduled in Q4 2018; and
– Continue ramping up of underground
production at both Pioneer and Malomir.
The Board has considered the Group’s
long-term mining plan (“LTP”) which covers a
five year period and has concluded that a five
year period is the most appropriate period for
assessing the Group’s prospects (the
“assessment period”).
The Group’s planning process is built on a
mine by mine basis, using a detailed technical
and financial model. The LTP makes certain
assumptions regarding the future gold price
environment and the Russian Rouble US
Dollar exchange rates. The LTP is stress
tested for market sensitivities as part of
ongoing reviews. The key components of the
LTP, associated risks and relevant scenario
testing to this planning process are
communicated to the Directors at least
annually as appropriate.
The Board considers that the LTP provides a
robust planning tool against which strategic
decisions can be made, however it is not
prepared with the same level of detail as the
annual budget and hence provides less
certainty of outcome.
Petropavlovsk Annual Report 2017 139
GovernanceFinancial statementsStrategic report Resolution to re-appoint independent
auditor
Deloitte LLP has expressed their willingness
to continue in office as auditor and a
resolution to re-appoint them will be
proposed at the forthcoming AGM.
Fair, balanced and understandable
The Directors consider that this Annual
Report, taken as a whole, is fair, balanced and
understandable and provides the information
necessary for shareholders to assess the
Company’s performance, business model
and strategy.
This report was approved by the Board of
Directors of Petropavlovsk PLC and signed
on its behalf by:
Amanda Whalley ACIS
Company Secretary
27 March 2018
The Company and IRC has entered into
discussions with ICBC to reschedule its
repayments and obtain waiver of financial
covenants. In addition IRC is in advanced
discussions with a leading Russian bank to
refinance the ICBC Facility. In preparing this
viability statement the Directors, have
carefully considered the analysis of IRC that
it will be successful in either rescheduling the
ICBC Facility or refinancing the ICBC Facility
with another lender and following this analysis
the viability statement is based on the
Directors’ assessment that this will be
achieved.
On this basis, the five year forecast
supporting the Group’s longer term viability
statement assumes that IRC will be able to
reschedule its debt with ICBC and receive
waivers of financial covenants or refinance its
debt with the Russian bank.
Conclusion
On the basis of the key assumptions
described above, the Directors confirm that
they have a reasonable expectation that the
Group will continue to operate and meet its
liabilities as they fall due, during the period to
31 December 2022. The Directors’
assessment has been made with reference to
the Group’s current position and prospects,
the Group’s strategy, the Board’s risk appetite
and how these are managed, as detailed in
the Strategic Report.
Information to the independent auditors
The Directors who held office at the date of this
Directors’ Report confirm that, so far as they
are each aware, there is no relevant audit
information of which the Company’s auditor is
unaware, and that each Director has taken all
steps that he ought to have taken as a Director
to make himself aware of any relevant audit
information and to establish that the
Company’s auditor is aware of that information.
Review of principal risks
During 2017, the Board carried out a robust
assessment of the principal risks facing the
Group, including those that would threaten
its business model, future performance,
solvency or liquidity, including the Guarantee.
IRC became an associate of the Group on 7
August 2015, however given the continuance
of the Guarantee the Board closely reviews
the operations of IRC and takes into account
IRC’s going concern analysis and financial
model. The Group’s principal risks are set out
in detail on pages 20 to 31.
The key assumptions that are included in the
five year forecast are that the Group will be
able to:
i) Complete the construction of the POX Hub
out of free cash flow for commissioning Q4
2018, with ramp up to full commercial
production throughout 2019;
ii) Achieve the Group’s production profile,
cash generation and adhere to the Capital
Expenditure◆ plans detailed in the LTP;
iii) Repay the US$100m Petropavlovsk 2010
Limited 9% Convertible Bonds due 2020
(the ‘2020 Bonds’) from cash generated
from the Group’s operation on the
assumption that they have not been
converted into equity; and
iv) Repay the US$500m 8.125% Guaranteed
Notes issued in November 2017, when they
become repayable in November 2022 from
cash generated from the Group’s
operations.
In addition, and as stated above, the Group
has guaranteed the amounts outstanding
under the ICBC Facility. As at 31 December
2017 the amount outstanding under this
facility was US$234m. The next repayment
instalment under the ICBC Facility Agreement
of US$29.75m is due on 20 June 2018 with
payments then due semi-annually until June
2022. IRC’s projections demonstrate that
although IRC expects to have sufficient
working capital liquidity over the next
12 months, unless mitigating actions can be
taken there will be insufficient liquidity to meet
its debt repayment schedule and for IRC and
Petropavlovsk PLC to comply with certain
financial covenants within the ICBC Facility
Agreement.
140 Petropavlovsk Annual Report 2017
Directors’ Responsibilities Statement
For the year ended 31 December 2017
The directors are responsible for preparing
the Annual Report and the financial
statements in accordance with applicable law
and regulations.
– prepare the financial statements on
the going concern basis unless it is
inappropriate to presume that the company
will continue in business.
– In preparing the group financial statements,
International Accounting Standard 1
requires that directors:
The directors are responsible for the
maintenance and integrity of the corporate
and financial information included on the
company’s website. Legislation in the United
Kingdom governing the preparation and
dissemination of financial statements may
differ from legislation in other jurisdictions.
Company law requires the directors to
prepare financial statements for each financial
year. Under that law the directors are required
to prepare the group financial statements in
accordance with International Financial
Reporting Standards (IFRSs) as adopted by
the European Union and Article 4 of the IAS
Regulation and have elected to prepare the
parent company financial statements in
accordance with United Kingdom Generally
Accepted Accounting Practice (United
Kingdom Accounting Standards and
applicable law), including FRS 101 “Reduced
Disclosure Framework”. Under company law
the directors must not approve the accounts
unless they are satisfied that they give a true
and fair view of the state of affairs of the
company and of the profit or loss of the
company for that period.
In preparing the parent company financial
statements, the directors are required to:
– select suitable accounting policies and then
apply them consistently;
– make judgments and accounting estimates
that are reasonable and prudent;
– state whether applicable UK Accounting
Standards have been followed, subject to
any material departures disclosed and
explained in the financial statements; and
– properly select and apply accounting
policies;
Directors’ responsibility statement
We confirm that to the best of our knowledge:
– present information, including accounting
– the financial statements, prepared in
accordance with the relevant financial
reporting framework, give a true and fair
view of the assets, liabilities, financial
position and profit or loss of the company
and the undertakings included in the
consolidation taken as a whole;
– the strategic report includes a fair review of
the development and performance of the
business and the position of the company
and the undertakings included in the
consolidation taken as a whole, together
with a description of the principal risks and
uncertainties that they face; and
– the annual report and financial statements,
taken as a whole, are fair, balanced and
understandable and provide the information
necessary for shareholders to assess the
company’s position and performance,
business model and strategy.
policies, in a manner that provides relevant,
reliable, comparable and understandable
information;
– provide additional disclosures when
compliance with the specific requirements
in IFRSs are insufficient to enable users to
understand the impact of particular
transactions, other events and conditions
on the entity’s financial position and
financial performance; and
– make an assessment of the company’s
ability to continue as a going concern.
The directors are responsible for keeping
adequate accounting records that are
sufficient to show and explain the company’s
transactions and disclose with reasonable
accuracy at any time the financial position of
the company and enable them to ensure that
the financial statements comply with the
Companies Act 2006. They are also
responsible for safeguarding the assets of
the company and hence for taking reasonable
steps for the prevention and detection of fraud
and other irregularities.
This responsibility statement was approved by the board of directors on 27 March 2018 and is signed on its behalf by:
Ian Ashby
Chairman
27 March 2018
Andrey Maruta
Chief Financial Officer
27 March 2018
Petropavlovsk Annual Report 2017 141
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC
For the year ended 31 December 2017
Report on the audit of the financial
statements
In our opinion:
– the financial statements give a true and fair
view of the state of the Group’s and of the
Company’s affairs as at 31 December 2017
and of the Group’s profit for the year then
ended;
– the Group financial statements have been
properly prepared in accordance with
International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
– the Company financial statements have
been properly prepared in accordance
with United Kingdom Generally Accepted
Accounting Practice including Financial
Reporting Standard 101 “Reduced
Disclosure Framework”; and
– the financial statements have been
prepared in accordance with the
requirements of the Companies Act 2006
and, as regards the group financial
statements, Article 4 of the IAS Regulation.
We have audited the financial statements of
Petropavlovsk PLC (the ‘Company’) and its
subsidiaries (the ‘Group’) which comprise:
– the Group Income Statement;
– the Group Statement of Comprehensive
Income;
– the Group and Company Balance Sheets;
– the Group and Company statements of
changes in equity;
– the Group Cash Flow Statement;
– the Group and Company Statements
of accounting policies;
– the related notes 1 to 32 to the Group
financial statements; and
– related notes 1 to 9 to the Company
financial statements.
The financial reporting framework that has
been applied in the preparation of the group
financial statements is applicable law and
IFRSs as adopted by the European Union.
The financial reporting framework that has
been applied in the preparation of the
Company financial statements is applicable
law and United Kingdom Accounting
Standards, including FRS 101 “Reduced
Disclosure Framework” (United Kingdom
Generally Accepted Accounting Practice).
142 Petropavlovsk Annual Report 2017
Basis for opinion
We conducted our audit in accordance with
International Standards on Auditing (UK) (ISAs
(UK)) and applicable law. Our responsibilities
under those standards are further described
in the auditor’s responsibilities for the audit of
the financial statements section of our report.
We are independent of the Group and the
Company in accordance with the ethical
requirements that are relevant to our audit of
the financial statements in the UK, including
the FRC’s Ethical Standard as applied to listed
public interest entities, and we have fulfilled
our other ethical responsibilities in
accordance with these requirements.
We confirm that the non-audit services
prohibited by the FRC’s Ethical Standard were
not provided to the Group or the Company.
We believe that the audit evidence we have
obtained is sufficient and appropriate to
provide a basis for our opinion.
Material uncertainty relating to going
concern
We draw attention to note 2.1 in the financial
statements, which indicates that certain events
or conditions have been identified during the
course of the audit that may cast significant
doubt on the Group’s ability to continue as a
going concern as explained below.
The Group guarantees US$234m of debt
owed by its associate, IRC Ltd, and is also
affected by the financial covenants
associated with the guarantee. Management
has concluded that IRC is unlikely to have
sufficient liquidity to make the principal
repayment due on 20 June 2018 and,
furthermore, that there is expected to be a
breach of the financial covenants by the
Group and IRC Ltd at the next covenant
measurement date of 30 June 2018. IRC has
initiated negotiations with its lender and an
alternative lender to refinance the debt and
extend its credit facilities, these discussions
are ongoing as at the date of approval of the
Group’s financial statements.
If the refinancing does not occur the
outstanding loan principal would become
due and the Group would become liable for
the guarantee. The Group’s cash flow
forecasts indicate that there will be insufficient
funds to pay the guarantee if it is called.
As such, the ability of the Group to continue
as a going concern is reliant on the successful
completion of the refinancing of IRC’s debt.
We understand that both IRC and
Petropavlovsk management are in discussion
with the lender and, concurrently, with an
alternative lender but that these negotiations
are not complete.
Given the importance of management’s
judgements in relation to this matter, and in
relation to the Group’s own liquidity forecasts,
we also considered there to be potential for
manipulation of the assumptions made by
management.
In response to this matter, we:
– assessed the impact of the Group’s
continuing guarantee of its associate IRC
Ltd’s debt with ICBC, through assessment
of the likelihood of the guarantee being
called during the going concern period;
– obtained and reviewed the cash flow
forecasts prepared by management of the
Group’s significant associate, IRC Ltd, and
assessed the reasonableness of the
underlying key assumptions, including
performing a sensitivity analysis;
– obtained and reviewed the Group
management’s paper on going concern
which was approved by the Board and
the Group’s cash flow and covenant
compliance forecasts for the period of
twelve months from the date of approval of
the Group’s financial statements; this paper
included stress tests for a range of
reasonably possible scenarios and also
identified a number of mitigating actions to
counter reasonable downside scenarios;
– with our mining specialists, VenmynDeloitte,
challenged the reasonableness of the
mitigating actions proposed by the Group’s
management, including a production profile
and recovery rates forecast in relation to the
Katrin deposit and assessed the extent to
which further oxide ore reserves can add
to production levels by interviewing the
Group’s chief geologist and reviewing
internally prepared production profiles
based on additional JORC reserves
approved in March 2018;
– compared the Group’s cash flow forecasts
which are prepared on a rolling basis with
the Board approved budget and obtained
explanations for any significant differences;
– assessed the historical accuracy of the
Group’s forecasting, with the assistance of
VenmynDeloitte;
– used our internal modelling specialists to
test clerical accuracy of the underlying
model used to prepare the forecasts;
– obtained and reviewed the minutes of
relevant Board meetings;
– assessed whether the disclosures relating
to going concern included in the financial
statements are balanced, proportionate
and clear; and
– considered evidence of management bias
in the assumptions selected and applied
professional scepticism to address the risk
of fraud.
Summary of our audit approach
As stated in note 2.1 to the financial
statements the need for IRC Ltd to refinance
indicates that a material uncertainty exists
that may cast significant doubt on the Group’s
and the Company’s ability to continue as a
going concern. Our opinion is not modified in
respect of this matter.
Key audit matters
The key audit matters that we identified in the current year were:
– going concern (see material uncertainty related to going concern section above);
Materiality
Scoping
– impairment of mining assets;
– accounting for the investment in associate.
We used a materiality of $8.7 million (2016: $10 million) for our audit of the Group financial
statements. This represents less than 2% of net assets.
Our Group audit included a full scope audit of all operating mines and service entities and
specific procedures in relation to certain exploration assets, cost of sales and inventory
balances. Our full scope and specific audit procedures covered 100% of the Group’s revenue
(2016: 99%) and 96% of the Group’s net assets (2016: 95%).
Significant changes in our approach
There have been no significant changes to our approach to the audit, aside from recoverability
of gold in circuit inventory not being a key audit matter for this year’s audit and the inclusion of
the accounting for the investment in associate as a new key audit matter.
Following a number of operational measures implemented by management the gold in circuit
balance decreased to $24 million at 31 December 2017 (2016: $71 million) and a write-down of
$3.9 million has been recognised by management in line with the requirements of IAS 2. On this
basis, we concluded that recoverability of gold in circuit inventory was not a key audit matter for
the year ended 31 December 2017.
Given the significance of the impact of IRC’s results on the Group’s financial statements and
the material uncertainty associated with IRC’s going concern status as noted above, we have
identified the Accounting for the Investment in Associate as a new key audit matter in the
current period.
Conclusions relating to principal risks
and viability statement
Based solely on reading the directors’
statements and considering whether they
were consistent with the knowledge we
obtained in the course of the audit, including
the knowledge obtained in the evaluation of
the directors’ assessment of the group’s and
the company’s ability to continue as a going
concern, we are required to state whether we
have anything material to add or draw
attention to in relation to:
– the disclosures on pages 18 to 31 that
describe the principal risks and explain how
they are being managed or mitigated;
– the directors' confirmation on page 140 that
they have carried out a robust assessment
of the principal risks facing the group,
including those that would threaten its
business model, future performance,
solvency or liquidity; or
– the directors’ explanation on page 139 as
to how they have assessed the prospects of
the group, over what period they have done
so and why they consider that period to be
appropriate, and their statement as to
whether they have a reasonable
expectation that the group will be able to
continue in operation and meet its liabilities
as they fall due over the period of their
assessment, including any related
disclosures drawing attention to any
necessary qualifications or assumptions.
We are also required to report whether the
directors’ statement relating to the prospects
of the group required by Listing Rule 9.8.6R(3)
is materially inconsistent with our knowledge
obtained in the audit.
Aside from the impact of the matters
disclosed in the material uncertainty
relating to going concern section,
we confirm that we have nothing
material to add or draw attention
to in respect of these requirements.
Petropavlovsk Annual Report 2017 143
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2017
Key audit matters
Key audit matters are those matters that,
in our professional judgement, were of most
significance in our audit of the financial
statements of the current period and include
the most significant assessed risks of material
misstatement (whether or not due to fraud)
that we identified. These matters included
those which had the greatest effect on:
the overall audit strategy, the allocation of
resources in the audit; and directing the
efforts of the engagement team.
These matters were addressed in the context
of our audit of the financial statements as a
whole, and in forming our opinion thereon,
and we do not provide a separate opinion
on these matters.
In addition to the matter described in the
material uncertainty relating to going concern
section, we have determined the matters
described below to be the key audit matters
to be communicated in our report.
Impairment of mining assets
Key audit matter description
The carrying amount of the Group’s mining assets at 31 December 2017 was $964 million
(2016: $934 million). In line with IAS 36 Impairment of Assets management assessed whether
any internal or external indicators of impairment exist in relation to these assets at
31 December 2017.
Following the identification of a number of impairment indicators a full impairment test has
been performed across all mining assets. No impairments were recognised as a result of this
assessment. Please refer to note 2.1 to the Group financial statements and the Audit
Committee report on page 108 for further details.
As described in note 3.2 to the financial statements the recoverable value of property, plant
and equipment is considered by management to be a critical accounting judgement and key
source of estimate uncertainty. The recoverable values are sensitive to changes in assumptions
made by management in the underlying calculations, in particular to movements in the gold
price and discount rates. Management has disclosed the impact of sensitivities of the discount
rate, foreign exchange rate and the long term gold price in note 6 to the Group financial
statements on page 168.
We have pinpointed the key audit matter in this area to the key judgements which are the
discount rate, future production estimates, the long term gold price and the exchange rate.
How the scope of our audit
responded to the key audit matter
We challenged management’s significant assumptions used in the impairment testing
for mining assets, by:
– benchmarking and analysing management’s assumed future gold prices and foreign
exchange rates with reference to third party data such as independent broker forecasts
and market consensus data where appropriate;
– engaging our mining consultants, VenmynDeloitte, to review the Group’s long-term mine
plan, including an assessment of the refractory ore production forecasts for reasonableness;
– engaging our internal valuations team to perform an independent WACC recalculation
to facilitate the benchmarking of management’s adopted discount rate;
– evaluating the sensitivity analysis performed by management relating to the
impairment review.
The assumptions made by management when determining the mining assets’ recoverable
amounts fall within a reasonable range, except for the foreign exchange rate which falls below
the consensus range in the long term. We note that sensitising this assumption would not lead
to additional impairments.
Overall, we are satisfied that the recoverability of the assets has been assessed in accordance
with the requirements of IAS 36 Impairment of Assets.
Key observations
144 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
Accounting for the Investment in Associate
Key audit matter description
On 20 March 2018, the Group’s associate, IRC Ltd, announced that in its 2017 financial
statements it plans to book a partial reversal of previously recognised impairment losses at the
K&S mine of c.$130m, of which c.$40m has been included in the Group’s share of the results of
the associate. The recognition of this reversal has resulted in an uplift in the valuation of the
investment in IRC to $71m at 31 December 2017 (2016: $36m).
Given the size of the reversal, the significance of the impact of IRC’s results on the Group’s
financial statements and the material uncertainty associated with IRC’s going concern status
as noted above, we have identified the Accounting for the Investment in Associate as a new key
audit matter in the current period.
Due to the liquidity issues experienced by IRC Ltd management identified this as an impairment
indicator in relation to the carrying value of the investment in associate at 31 December 2017.
An impairment test has been performed to determine whether the recoverable amount of the
investment was higher than its carrying value. Based on the assessment performed
management has concluded that no impairment would be required in the Group financial
statements in relation to this balance. Please refer to note 2.1 to the Group financial statements
and the Audit Committee report on page 108 for further details.
How the scope of our audit
responded to the key audit matter
We challenged management’s significant assumptions used in the impairment testing for
mining assets, by:
– obtaining and challenging management’s impairment assessment of the Group’s investment
in IRC Ltd;
– determine whether the accounting adopted in respect the investment in associate is in
compliance with the requirements of IAS 28;
– checking the mechanical accuracy of management’s calculations underpinning the
recognition of the Group’s share of IRC Ltd’s profit and the carrying amount of the investment
in associate at 31 December 2017;
– obtaining and challenging the key assumptions used in the impairment model prepared by
the Group’s associate’s management to determine the value in use of IRC Ltd’s mining asset
in respect of which the impairment reversal has been recognised; this included evaluating the
sensitivity analysis performed in relation to the key assumptions;
– comparing the carrying value of the investment in the Group’s financial statements at
31 December 2017 to the fair value of the investment in IRC determined with reference to
its share price and to the value in use of the underlying asset to assess it for impairment.
We are satisfied that management has accounted for the investment in associate in line with
the requirements of IAS 28 Investments in Associates and management’s assessment of the
Group’s investment in IRC for impairment has been performed in accordance with the
requirements of IAS 36 Impairment of Assets.
Key observations
Petropavlovsk Annual Report 2017 145
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2017
Our application of materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a
reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in
evaluating the results of our work.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Materiality
$8.7 million (2016: $10.0 million)
$8.3 million (2016: $9.9 million)
Group financial statements
Company financial statements
Basis for determining materiality
Less than 2 per cent of Group net assets,
consistent with the approach taken in 2016.
This reflects the value of the Group’s mining
assets and associated proven and probable
reserves. We determined that using a
balance sheet metric, rather than profit-
based metric, provides a more stable base
for materiality as it is not affected by income
statement volatility.
Group materiality
Net assets
Net assets $579m
Less than 2 per cent of the Company’s net
assets, consistent with the approach taken
in 2016.
We have determined materiality based on
the net asset position of the Company as its
principal activity is to hold investments in
subsidiaries and external debt.
Group materiality $8.7m
Component materiality
range $2.2m to $8.3m
Audit Committee
reporting threshold $0.44m
materiality of the Group’s business operations
at the selected locations.
These operating locations represent the
principal business units within the Group’s
reportable segments and account for 96%
(2016: 95%) of the Group’s net assets and
100% (2016: 99%) of the Group’s revenue.
They were also selected to provide an
appropriate basis for undertaking audit work
to address the significant risks of material
misstatement identified above.
Full scope audits and specified audit
procedures were performed by the
component team in Russia under the direct
supervision of the Group audit team and
executed at levels of materiality applicable to
each individual entity. The materiality applied
to components, ranged from $2.2 million to
$8.3 million (2016: $4.5 million to $9.9 million).
The Group team took direct responsibility for
the audit work in respect of the consolidation
process, the investment in associate as well
as the Group and Company financial
statements. The Group team planned,
oversaw and directed the work performed
by the component auditors. The procedures
performed included, but were not limited to,
site visits to Group’s operating locations,
regular communications with the component
auditors, a review of the reports provided on
the results of the work undertaken by the
component audit teams as well as a detailed
review of the underlying working papers and
challenging the procedures performed to
ensure compliance with the relevant
professional standards.
During the audit the Senior Statutory Auditor
and senior members of his Group audit team
visited Moscow to review the work performed
Rationale for the benchmark applied
We agreed with the Audit Committee that
we would report to the Committee all audit
differences in excess of $435 thousand
(2016: $500 thousand) for the Group and
$413 thousand (2016: $495 thousand) for the
Company, as well as differences below that
threshold that, in our view, warranted reporting
on qualitative grounds. We also report to the
Audit Committee on disclosure matters that
we identified when assessing the overall
presentation of the financial statements.
An overview of the scope of our audit
Our Group audit focused primarily on the
operating locations, being the four operating
mines (2016: four), twelve service entities
(2016: twelve), four exploration assets
(2016: six), twenty four finance and holding
companies (2016: twenty four) as well as on
a significant associate of the Group. All of the
operating mines were subject to a full scope
audit, whilst the exploration assets, finance
and holding companies and service entities
were subject to specified audit procedures,
including testing of the capitalised spend on
exploration activities, an impairment
assessment and substantive testing of
borrowings, material cost of sales and
inventory balances, or desktop reviews.
The Group’s associate was subject to specific
audit procedures. The extent of our audit
procedures was based on our assessment of
the risks of material misstatement and of the
146 Petropavlovsk Annual Report 2017
by the Russian component team and the Amur
region of Russia to view the Group’s assets
and hold meetings with senior operational
staff. In addition a senior member of the Group
audit team visited Hong Kong to review the
work performed by Deloitte Hong Kong on
IRC Ltd, an associate of the Group. This is in
recognition of the continued importance of IRC
Ltd to the audit as a result of Petropavlovsk’s
guarantee of IRC’s bank debt.
Other information
The directors are responsible for the other
information. The other information comprises
the information included in the annual report,
other than the financial statements and our
auditor’s report thereon.
Our opinion on the financial statements does
not cover the other information and, except to
the extent otherwise explicitly stated in our
report, we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial
statements, our responsibility is to read the
other information and, in doing so, consider
whether the other information is materially
inconsistent with the financial statements
or our knowledge obtained in the audit or
otherwise appears to be materially misstated.
If we identify such material inconsistencies or
apparent material misstatements, we are
required to determine whether there is a
material misstatement in the financial
statements or a material misstatement of the
other information. If, based on the work we
have performed, we conclude that there is a
material misstatement of this other information,
we are required to report that fact.
In this context, matters that we are specifically
required to report to you as uncorrected
material misstatements of the other
information include where we conclude that:
– Fair, balanced and understandable – the
statement given by the directors that they
consider the annual report and financial
statements taken as a whole is fair,
balanced and understandable and provides
the information necessary for shareholders
to assess the group’s position and
performance, business model and strategy,
is materially inconsistent with our
knowledge obtained in the audit; or
– Audit committee reporting – the section
describing the work of the audit committee
does not appropriately address matters
communicated by us to the audit
committee; or
– Directors’ statement of compliance with
the UK Corporate Governance Code – the
parts of the directors’ statement required
under the Listing Rules relating to the
company’s compliance with the UK
Corporate Governance Code containing
provisions specified for review by the
auditor in accordance with Listing Rule
9.8.10R(2) do not properly disclose a
departure from a relevant provision of
the UK Corporate Governance Code.
We have nothing to report in respect of
these matters.
Responsibilities of directors
As explained more fully in the directors’
responsibilities statement, the directors are
responsible for the preparation of the financial
statements and for being satisfied that they
give a true and fair view, and for such internal
control as the directors determine is
necessary to enable the preparation of
financial statements that are free from material
misstatement, whether due to fraud or error.
In preparing the financial statements,
the directors are responsible for assessing
the Group’s and the Company’s ability to
continue as a going concern, disclosing as
applicable, matters related to going concern
and using the going concern basis of
accounting unless the directors either intend
to liquidate the Group or the Company or to
cease operations, or have no realistic
alternative but to do so.
Auditor’s responsibilities for the audit of
the financial statements
Our objectives are to obtain reasonable
assurance about whether the financial
statements as a whole are free from material
misstatement, whether due to fraud or error,
and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that
an audit conducted in accordance with ISAs
(UK) will always detect a material misstatement
when it exists. Misstatements can arise from
fraud or error and are considered material if,
individually or in the aggregate, they could
reasonably be expected to influence the
economic decisions of users taken on the
basis of these financial statements.
A further description of our responsibilities for
the audit of the financial statements is located
on the Financial Reporting Council’s website
at: www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s
report.
Use of our report
This report is made solely to the company’s
members, as a body, in accordance with
Chapter 3 of Part 16 of the Companies Act
2006. Our audit work has been undertaken so
that we might state to the company’s members
those matters we are required to state to them
in an auditor’s report and for no other purpose.
To the fullest extent permitted by law, we do
not accept or assume responsibility to anyone
other than the company and the company’s
members as a body, for our audit work, for this
report, or for the opinions we have formed.
Net assets
Revenue
Full audit scope
(58%)
Specific audit
procedures
(38%)
Review at
group level
(4%)
Full audit scope
(100%)
Specific audit
procedures
(0%)
Group analytical
review
(0%)
Petropavlovsk Annual Report 2017 147
GovernanceFinancial statementsStrategic report For the year ended 31 December 2017
Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2017
Report on other legal and regulatory
requirements
Opinions on other matters prescribed by
the Companies Act 2006
In our opinion the part of the directors’
remuneration report to be audited has been
properly prepared in accordance with the
Companies Act 2006.
In our opinion, based on the work undertaken
in the course of the audit:
– the information given in the strategic report
and the directors’ report for the financial
year for which the financial statements are
prepared is consistent with the financial
statements; and
– the strategic report and the directors’ report
have been prepared in accordance with
applicable legal requirements.
In the light of the knowledge and
understanding of the group and the Company
and their environment obtained in the course of
the audit, we have not identified any material
misstatements in the strategic report or the
directors’ report.
Matters on which we are required to
report by exception
Adequacy of explanations received and
accounting records
Under the Companies Act 2006 we are
required to report to you if, in our opinion:
– we have not received all the information and
explanations we require for our audit; or
– adequate accounting records have not
been kept by the Company, or returns
adequate for our audit have not been
received from branches not visited by us; or
– the Company financial statements are not in
agreement with the accounting records and
returns.
We have nothing to report in respect of
these matters.
Directors’ remuneration
Under the Companies Act 2006 we are also
required to report if in our opinion certain
disclosures of directors’ remuneration have
not been made or the part of the directors’
remuneration report to be audited is not in
agreement with the accounting records
and returns.
We have nothing to report in respect of
these matters.
Other matters
Auditor tenure
Following the recommendation of the audit
committee, we were appointed by the Board
of Directors on 15 May 2009 to audit the
financial statements for the year ending
31 December 2009 and subsequent financial
periods. The period of total uninterrupted
engagement including previous renewals and
reappointments of the firm is 9 years covering
the years ending 31 December 2009 to
31 December 2017.
Consistency of the audit report with the
additional report to the audit committee
Our audit opinion is consistent with the
additional report to the audit committee we
are required to provide in accordance with
ISAs (UK).
Timothy Biggs, FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
27 March 2017
148 Petropavlovsk Annual Report 2017
Consolidated Income Statement
For the year ended 31 December 2017
Group revenue
Operating expenses
Share of results of associates
Operating profit
Investment income
Interest expense
Other finance gains
Other finance losses
Profit before taxation
Taxation
Profit for the period
Attributable to:
Equity shareholders of Petropavlovsk PLC
Non-controlling interests
Profit per share
Basic profit per share
Diluted profit per share
note
5
6
14
9
9
9
9
10
11
11
2017
US$’000
587,420
(510,683)
76,737
35,208
111,945
760
(25,905)
2,199
(28,470)
60,529
(19,063)
41,466
42,378
(912)
US$0.01
US$0.01
2016
US$’000
540,684
(460,103)
80,581
(3,581)
77,000
556
(60,976)
11,976
(1,548)
27,008
4,698
31,706
33,719
(2,013)
US$0.01
US$0.01
Petropavlovsk Annual Report 2017 149
Financial statementsStrategic reportGovernance Consolidated Statement of Comprehensive Income
For the year ended 31 December 2017
Profit for the period
Items that may be reclassified subsequently to profit or loss:
Revaluation of available-for-sale investments
Exchange differences:
Exchange differences on translating foreign operations
Share of other comprehensive (loss)/income of associate
Cash flow hedges:
Fair value losses
Tax thereon
Transfer to revenue
Tax thereon
Other comprehensive (loss)/profit for the period net of tax
Total comprehensive profit for the period
Attributable to:
Equity shareholders of Petropavlovsk PLC
Non-controlling interests
2017
US$’000
41,466
(758)
832
(458)
(39,148)
7,343
(808)
162
(32,835)
8,631
9,706
(1,075)
8,631
2016
US$’000
31,706
834
2,577
560
(4,940)
988
8,494
(1,699)
6,814
38,520
40,494
(1,974)
38,520
150 Petropavlovsk Annual Report 2017
Consolidated Balance Sheet
As at 31 December 2017
Assets
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Investments in associates
Available-for-sale investments
Inventories
Other non-current assets
Current assets
Inventories
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Trade and other payables
Current income tax payable
Borrowings
Provision for close down and restoration costs
Net current assets/(liabilities)
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Provision for close down and restoration costs
Financial liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium
Own shares
Hedging reserve
Share based payments reserve
Other reserves
Retained earnings/(losses)
Equity attributable to the shareholders of Petropavlovsk PLC
Non-controlling interests
Total equity
(a) See note 2 for details regarding the restatement.
31 December
2017
US$’000
note
31 December
2016
(restated) (a)
US$’000
1 January
2016
(restated) (a)
US$’000
12
13
14
15
15
16
18
17
19
20
22
20
18
21
22
25
23
53,518
984,114
70,890
347
72,720
8,931
1,190,520
172,652
75,830
–
11,415
259,897
1,450,417
(88,333)
(940)
(7,137)
(200)
(96,610)
163,287
(589,337)
(49,684)
(106,271)
(20,804)
(8,603)
(774,699)
(871,309)
579,108
48,920
518,142
–
(26,388)
144
(17,500)
47,457
570,775
8,333
579,108
49,270
953,794
36,140
1,105
51,686
11,383
1,103,378
183,266
90,430
7,478
12,642
293,816
1,397,194
(55,638)
(2,288)
(85,306)
–
(143,232)
150,584
(525,906)
(10,314)
(119,028)
(19,152)
(9,229)
(683,629)
(826,861)
570,333
48,920
518,142
–
5,900
–
(17,574)
(1,502)
553,886
16,447
570,333
68,993
1,038,343
39,394
271
51,434
12,543
1,210,978
175,222
49,937
3,925
28,239
257,323
1,468,301
(96,567)
(4,748)
(260,248)
–
(361,563)
(104,240)
(378,030)
(14,684)
(152,799)
(17,184)
(12,368)
(575,065)
(936,628)
531,673
48,874
518,142
(8,933)
3,096
280
(20,985)
(27,222)
513,252
18,421
531,673
These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 27 March 2018
and signed on their behalf by
Ian Ashby
Director
Andrey Maruta
Director
Petropavlovsk Annual Report 2017 151
Financial statementsStrategic reportGovernance Consolidated Statement of Changes in Equity
For the year ended 31 December 2017
Total attributable to equity holders of Petropavlovsk PLC
Share
Share capital
premium
US$’000
US$’000
48,874 518,142
Own
shares (a)
US$’000
(8,933)
Share
based
payments
reserve
US$’000
280
Hedging
reserve
US$’000
3,096
Other
reserves (b)
US$’000
(20,985)
Retained
earnings/
(losses)
US$’000
Total
US$’000
(47,922) 492,552
Non-
controlling
interests
Total equity
US$’000
US$’000
18,421 510,973
–
–
–
–
–
–
20,700
20,700
–
20,700
48,874 518,142
(8,933)
–
–
–
46
–
–
–
–
48,920 518,142
–
–
–
–
–
48,920 518,142
–
–
–
–
–
–
–
–
8,933
–
–
–
–
–
–
–
280
–
–
–
(280)
–
–
–
–
144
–
144
3,096
2,804
–
2,804
–
5,900
(32,288)
–
(32,288)
–
–
(26,388)
(20,985)
3,411
–
3,411
–
(17,574)
74
–
74
–
–
(17,500)
(27,222) 513,252
40,494
34,279
33,719
33,719
6,775
560
(8,559)
140
(1,502) 553,886
9,706
41,920
42,378
42,378
(32,672)
(458)
144
–
7,039
7,039
47,457 570,775
18,421 531,673
38,520
(1,974)
31,706
(2,013)
6,814
39
140
–
16,447 570,333
8,631
(1,075)
41,466
(912)
(32,835)
(163)
144
–
(7,039)
–
8,333 579,108
Balance at 1 January 2016
Correction of error in accounting
for deferred tax liabilities (c)
Balance at 1 January 2016 (restated)
Total comprehensive income/(loss)
Profit/(loss) for the period
Other comprehensive income
Deferred share awards
Balance at 31 December 2016
Total comprehensive (loss)/income
Profit/(loss) for the period
Other comprehensive (loss)/income
Deferred share awards
Issue of shares by subsidiary
Balance at 31 December 2017
(a) Own shares represented 1,441,406 Ordinary Shares held by the Company’s EBT until they were transferred upon vesting of the Deferred Share Award on 1 May 2016.
(b) Including translation reserve of US$(14.8) million, 31 December 2016: US$(15.6) million.
(c) See note 2 for details regarding the restatement.
152 Petropavlovsk Annual Report 2017
Consolidated Cash Flow Statement
For the year ended 31 December 2017
Cash flows from operating activities
Cash generated from operations
Interest paid
Income tax paid
Net cash from operating activities
Cash flows from investing activities
Proceeds from disposal of subsidiaries, net of cash disposed and liabilities settled
Proceeds from disposal of the Group’s interests in associates
Purchase of property, plant and equipment
Expenditure on exploration and evaluation assets
Proceeds from disposal of property, plant and equipment
Repayment of amounts loaned to other parties
Interest received
Net cash used in investing activities
Cash flows from financing activities
Issue of Notes, net of transaction cost
Proceeds from borrowings
Repayments of borrowings
Debt transaction costs paid in connection with bank loans
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
Guarantee fee in connection with ICBC facility
Net cash used in financing activities
Net decrease in cash and cash equivalents in the period
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
note
24
24
12
29
29
17
17
2017
US$’000
2016
US$’000
204,306
(49,205)
(31,098)
124,003
–
–
(82,295)
(5,763)
334
–
752
(86,972)
495,035
–
(525,789)
(9,040)
31,225
(31,225)
1,158
(38,636)
(1,605)
378
12,642
11,415
126,013
(53,708)
(35,305)
37,000
19,188
231
(22,004) (a)
(7,356) (a)
742
1
540
(8,658)
–
295,250 (b)
(322,221) (b)
(4,031)
30,771
(47,665)
1,126
(46,770)
(18,428)
2,831
28,239
12,642
(a) An amount of US$9.2 million has been re-presented between movements in purchase of property, plant and equipment and expenditure on exploration and evaluation assets. This increased the cash outflow
for the purchase of property, plant and equipment from US$12.8 million to US$22.0 million with a corresponding adjustment to expenditure on exploration and evaluation assets which reduced from US$16.6
million to US$7.4 million.
(b) Including US$295.25 million in connection with bank debt refinancing.
Petropavlovsk Annual Report 2017 153
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements
For the year ended 31 December 2017
1. General information
Petropavlovsk PLC (the ‘Company’) is a
company incorporated and registered in
England and Wales. The address of the
registered office is 11 Grosvenor Place,
London SW1X 7HH.
2. Significant accounting policies
2.1. Basis of preparation and
presentation
The consolidated financial statements of
Petropavlovsk PLC and its subsidiaries
(the ‘Group’) have been prepared in
accordance with International Financial
Reporting Standards (‘IFRS’) as adopted by
the European Union, IFRIC Interpretations and
the Companies Act 2006. The consolidated
financial statements have been prepared
under the historical cost convention, as
modified by the revaluation of available-for-sale
financial investments, financial assets and
financial liabilities (including derivative
instruments) at fair value through profit or loss.
The principal accounting policies applied in the
preparation of these consolidated financial
statements are set out below. These policies
have been consistently applied to all years
presented, unless otherwise stated.
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 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 for the period of
12 months from the date of approval of the
2017 Annual Report and Accounts. As at
31 December 2017, the Group had sufficient
liquidity headroom. Following the successful
issue of the US$500 million Guaranteed
Notes (note 20), the Group is also satisfied
that it has sufficient headroom under a base
case scenario for the period to April 2019. In
the meantime, the Group’s projections under
a layered stressed case that is based on the
gold price, which is 10% lower than the
average of the market consensus forecasts,
indicate that unless mitigating actions can be
taken, there will be insufficient liquidity under
a layered stressed case for the relevant period
to April 2019. These mitigating actions include
items within the control of the management,
such as accessing deposits not currently in
the Group’s mining plan, cost cutting and
reduction of exploration expenditure.
The Group has guaranteed the outstanding
amounts IRC owes to ICBC. The outstanding
loan principal was US$234 million as at
31 December 2017. 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. In 2017,
IRC has agreed with ICBC to reschedule
repayments under the ICBC Facility
Agreement and 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). The next repayment instalment
under the ICBC Facility Agreement is now due
on 20 June 2018 and semi-annually thereafter
until June 2022. IRC projections demonstrate
that although IRC expects to have sufficient
working capital liquidity over the next 12
months, these projections indicate that,
unless mitigating actions can be taken, there
will be insufficient liquidity to meet its debt
repayment schedule and non-compliance
with certain financial covenants for the
relevant period to April 2019. Management of
Company and IRC has approached ICBC to
request an amendment of the repayment
schedule and obtain waivers in respect of
obligations to comply with certain financial
covenants. Management is also in active
discussions regarding the full refinancing of
the ICBC facility with an alternative lender.
However, if ICBC refinancing is not
completed, IRC’s financial liquidity may be
adversely impacted. IRC and/or the Company
would then need to carry out contingency
plans including entering into negotiations with
banks or other investors for additional debt
and/or equity financing.
If a missed repayment under debt or
guarantee obligations 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 risk that ICBC refinancing is not
completed or alternative contingency plans
are not realised represents a material
uncertainty which may cast significant doubt
upon the Group’s ability to continue to apply
the going concern basis of accounting.
Nevertheless, 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 2017 Annual
Report and Accounts. Accordingly, they
continue to adopt the going concern basis of
accounting in preparing these consolidated
financial statements.
Correction of error in accounting
for deferred tax liabilities
In 2017, the Group undertook a detailed
review of the implications of impairment
provision recognised in relation to property,
plant and equipment in prior periods on
deferred taxation and concluded that
deferred tax liability has been overstated.
The error has been corrected by restating
each of the affected financial statement line
items for the prior periods as follows:
31 December 2016
US$’000
139,728
549,633
22,202
549,633
(Decrease)/
increase
US$’000
(20,700)
20,700
(20,700)
20,700
31 December 2016
Restated
US$’000
119,028
570,333
1,502
570,333
1 January 2016
US$’000
173,499
510,973
47,922
510,973
(Decrease)/
increase
US$’000
(20,700)
20,700
(20,700)
20,700
1 January 2016
Restated
US$’000
152,799
531,673
27,222
531,673
Deferred tax liabilities
Net assets
Retained losses
Total equity
154 Petropavlovsk Annual Report 2017
Presentation of the ICBC
guarantee arrangements
As at 30 June 2017, the Group reviewed
arrangements under the ICBC guarantee
(note 20) and concluded it would be more
appropriate to disclose the associated
receivable from IRC and financial liability
under the ICBC guarantee contract on a
gross basis. The affected financial statement
line items for the prior periods have been
re-presented accordingly as set out below.
This re-presentation did not have any impact
on net assets, retained losses or total equity.
Other non-current assets
Financial liabilities
31 December 2016
US$’000
2,154
–
Increase
US$’000
9,229
9,229
31 December 2016
Restated
US$’000
11,383
9,229
1 January 2016
US$’000
175
-
Increase
US$’000
12,368
12,368
1 January 2016
Restated
US$’000
12,543
12,368
2.2. Adoption of new and revised
standards and interpretations
New and revised standards and
interpretations adopted for the
current reporting period.
The following new and revised Standards and
Interpretations that were effective for annual
periods beginning on or after 1 January 2017
and applicable to the Group have been
adopted:
– Amendments to IAS 7 ‘Statement of cash
flows”: Disclosure Initiative.
– Amendments to IAS 12 “Income taxes”:
Recognition of Deferred Tax Assets for
Unrealised Losses.
– Annual Improvements to IFRS Standards
2014–2016 Cycle – Amendments to IFRS
12 12 “Disclosure of interests in other
entities”.
These standards, amendments, and
interpretations have not had a significant
impact on amounts reported, presentation
or disclosure in these consolidated financial
statements.
New standards, amendments and
interpretations that are applicable
to the Group, issued but not yet
effective for the reporting period
beginning 1 January 2017 and not
early adopted.
At the date of approval of these financial
statements, the following Standards and
Interpretations which have not been applied in
these consolidated financial statements were
in issue but not yet effective (and in some
cases had not yet been adopted by the EU):
– IFRS 9 ‘Financial instruments’:
The standard addresses the classification,
measurement and recognition of financial
assets and financial liabilities, introduces
new rules for hedge accounting and a new
impairment model for financial assets.
The standard is effective for annual periods
beginning in or after 1 January 2018.
Classification and measurement: IFRS 9
establishes a principles-based approach to
determining whether a financial asset should
be measured at amortised cost or fair value,
based on the cash flow characteristics of the
asset and the business model in which the
asset is held. The Group anticipates that the
classification and measurement basis for its
financial assets will be largely unchanged
under this model.
Impairment: The new impairment model
requires the recognition of impairment
provision based on expected credit losses
rather than only incurred credit losses as is
the case under IAS 39. This may result in an
earlier recognition of credit losses. Based
on the assessments undertaken to date,
the Group expects an approximately
US$0.5 million increase in the loss
allowance for the receivable recognised in
relation to the ICBC guarantee
arrangements (note 25).
Hedge accounting: The adoption of the new
standard would not materially change the
amounts recognised in relation to existing
hedging arrangements but could provide
scope to apply hedge accounting to a
broader range of transactions in the future.
The Group intends to continue to apply hedge
accounting requirements under IAS 39.
– IFRS 15 ‘Revenue from contracts with
customers’.
The standard replaces IAS 18 ‘Revenue’
and IAS 11 ‘Construction Contracts’ and
related interpretations and is effective for
annual periods beginning in or after
1 January 2018.
The new standard is based on the principal
that revenue is recognised when control of
a good or service is transferred to a
customer.
The Group’s revenue is predominantly
derived from gold sales, where the point
of recognition is dependent on the contract
sales terms. As the transfer of risks and
rewards generally coincides with the
transfer of control at a point in time, the
timing and amount of revenue recognised
for the sale of gold is unlikely to be
materially affected.
– IFRS 16 ‘Leases’.
The standard replaces IAS 17 ‘Accounting
for Leases’ and related interpretations and
is effective for annual periods beginning in
or after 1 January 2019.
The standard will affect primarily the change
the accounting treatment by lessees of
leases currently classified as operating
leases. Lease agreements will give rise to
the recognition by the lessee of an asset,
representing the right to use the leased
item, and a related liability for future lease
payments. Lease costs will be recognised
in the income statement in the form of
depreciation of the right-of-use asset over
the lease term, and finance charges
representing the unwind of the discount on
the lease liability. The only exceptions are
short-term and low-value leases.
The accounting for lessors will not
significantly change.
The Group’s operating lease arrangements
are set out in note 28. The Group has
performed the review to what extent these
commitments will result in the recognition of
an asset and a liability for future payments
and how this will affect the Group’s profit and
classification of cash flows. The Group
estimates that, except for the lease of office
premises, the majority of lease arrangements
will be covered by the exception for
short-term and low-value leases which will
be recognised on a straight-line basis as an
expense in profit or loss. With regards to the
lease of office premises, the Group has not
yet assessed what other adjustments, if any,
are necessary because the different
treatment of extension and termination
options. It is therefore not yet possible to
estimate the amount of right-of-use assets
and lease liabilities that will have to be
Petropavlovsk Annual Report 2017 155
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
2.5. Investments in associates
An associate is an entity over which the Group
is in a position to exercise significant influence
and that is neither a subsidiary nor an interest
in a joint venture. Significant influence is the
power to participate in the financial and
operating policy decisions of the investee but is
not control or joint control over those policies.
Investments in associates are accounted
for using the equity method of accounting.
Investments in associates are carried in
the balance sheet at cost as adjusted by
post-acquisition changes in the Group’s share
of the net assets of the associate, less any
impairment in the value of individual
investments. Losses of an associate in
excess of the Group’s interest in that
associate (which includes any long-term
interests that, in substance, form part of the
Group’s net investment in the associate) are
recognised only to the extent that the Group
has incurred legal or constructive obligations
or made payments on behalf of the associate.
The carrying amount of equity-accounted
investments is tested for impairment whenever
events or changes in circumstances indicate
that the carrying amount may not be
recoverable in accordance with the policy
described in note 2.9.
When a Group entity transacts with an
associate of the Group, profits and losses are
eliminated to the extent of the Group’s interest
in the relevant associate.
2.6. Foreign currency translation
Items included in the financial statements of
each of the Group’s entities are measured
using the currency of the primary economic
environment in which the entity operates
(the functional currency). For the purpose
of the consolidated financial statements,
the results and financial position of each
Group company are expressed in US Dollars,
which is the Group’s presentation currency.
The functional currency of the Company
is the US Dollar.
recognised, if any, on adoption of the new
standard and how this may affect the group’s
profit or loss and classification of cash flows
going forward.
There are no other standards and
amendments that are not yet effective and
would be expected to have a significant
impact on the Group’s financial statements.
The Group intends to apply the simplified
transition approach and will not restate
comparative amounts for the year prior to
first adoption.
2.3. Basis of consolidation
These consolidated financial statements
consist of the financial statements of the
Company and its subsidiaries as at the
balance sheet date. Subsidiaries are all
entities over which the Group has control.
Control is achieved when the Group is
exposed, or has rights, to variable returns
from its involvement with the subsidiary and
has the ability to affect those returns through
its power over the subsidiary. Specifically, the
Group controls a subsidiary if, and only if, it
has all of the following:
– Power over the subsidiary (i.e. existing rights
that give it the current ability to direct the
relevant activities of the subsidiary).
– Exposure, or rights, to variable returns
from its involvement with the subsidiary.
– The ability to use its power over the
subsidiary to affect its returns.
When the Group has less than a majority
of the voting rights of a subsidiary or similar
rights of a subsidiary, it considers all relevant
facts and circumstances in assessing
whether it has power over the subsidiary
including:
– the size of the Group’s holding of voting
rights relative to the size and dispersion
of holdings of the other vote holders;
– potential voting rights held by the Group,
other vote holders or other parties;
– rights arising from other contractual
arrangements; and
– any additional facts and circumstances
that indicate that the Group has, or does not
have, the current ability to direct the relevant
activities at the time that decisions need to
be made, including voting patterns at
previous shareholders’ meetings.
The Company reassesses whether or
not it controls a subsidiary if facts and
circumstances indicate that there are
changes to one or more of the three elements
of control listed above.
Consolidation of a subsidiary begins when the
Group obtains control over the subsidiary and
ceases when the Group loses control of the
subsidiary. Specifically, income and expenses
of a subsidiary acquired or disposed of during
the year are included in the consolidated
statement of income and other
comprehensive income from the date the
Group gains control until the date when the
Group ceases to control the subsidiary.
Inter-company transactions, balances and
unrealised gains on transactions between
Group companies are eliminated on
consolidation. Unrealised losses are also
eliminated unless the transaction provides
evidence of an impairment of the asset
transferred. Where necessary, adjustments
are made to the financial statements of
subsidiaries to ensure consistency of
accounting policies with the policies adopted
by the Group.
Non-controlling interests in the net assets
of consolidated subsidiaries are identified
separately from the Group’s equity therein.
The interests of non-controlling shareholders
may be initially measured at fair value or at
the non-controlling interests’ proportionate
share of the fair value of the acquiree’s
identifiable net assets. The choice of
measurement is made on an acquisition-by-
acquisition basis. Subsequent to acquisition,
the carrying amount of non-controlling
interests is the amount of those interests at
initial recognition plus the non-controlling
interests’ share of subsequent changes in
equity. The recognised income and expense
are attributed to non-controlling interests
even if this results in the non-controlling
interests having a deficit balance.
2.4. Non-controlling interests
The Group treats transactions with non-
controlling interests as transactions with
equity owners. For purchases from non-
controlling interests, the difference between
any consideration paid and the relevant share
acquired of the carrying value of net assets of
the subsidiary is recorded in equity. Gains or
losses on disposals to non-controlling
interests are also recorded in equity.
156 Petropavlovsk Annual Report 2017
The rates of exchange used to translate balances from other currencies into US Dollars were as follows (currency per US Dollar):
GB Pounds Sterling (GBP : US$)
Russian Rouble (RUB : US$)
In preparing the financial statements of the
individual companies, transactions in
currencies other than the entity’s functional
currency (foreign currencies) are translated
into the functional currency using the
exchange rates prevailing at the dates of the
transactions or valuation where items are
remeasured. Foreign exchange gains and
losses resulting from the settlement of such
transactions and from the translation at the
year-end exchange rates of monetary assets
and liabilities denominated in foreign
currencies are recognised in the income
statement. Non-monetary items carried at
fair value that are denominated in foreign
currencies are translated at the rates
prevailing at the date when the fair value was
determined. Non-monetary items that are
measured in terms of historical cost in a
foreign currency are not retranslated.
For the purpose of presenting consolidated
financial statements, the assets and liabilities
of the Group’s foreign operations which have
a functional currency other than US Dollars
are translated at exchange rates prevailing on
the balance sheet date. Income and expense
items are translated at the average exchange
rates for the year, unless exchange rates
fluctuate significantly during that year, in
which case the exchange rates at the date of
transactions are used. Exchange differences
arising, if any, are recognised in other
comprehensive income and expenses and
accumulated in equity, with share attributed
to non-controlling interests as appropriate.
On the disposal of a foreign operation, all of
the accumulated exchange differences in
respect of that operation attributable to the
shareholders of the Company are reclassified
to profit or loss.
Goodwill and fair value adjustments arising
on the acquisition of a foreign operation
are treated as assets and liabilities of the
foreign operation.
As at 31 December
2017
0.74
57.60
Average year ended
31 December 2017
0.78
58.32
As at 31 December
2016
0.81
60.66
Average year ended 31
December 2016
0.74
67.18
2.8. Property, plant and equipment
Mine development costs
Development expenditure incurred by or on
behalf of the Group is accumulated separately
for each area of interest in which economically
recoverable resources have been identified.
Such expenditure includes costs directly
attributable to the construction of a mine and
the related infrastructure. Once a development
decision has been taken, the carrying amount
of the exploration and evaluation expenditure in
respect of the area of interest is aggregated
with the development expenditure and
classified under non-current assets as ‘mine
development costs’. Mine development costs
are reclassified as ‘mining assets’ at the end of
the commissioning phase, when the mine is
capable of operating in the manner intended
by management.
Mine development costs are not depreciated,
except for property plant and equipment used
in the development of a mine. Such property,
plant and equipment are depreciated on a
straight-line basis based on estimated useful
lives and depreciation is capitalised as part of
mine development costs.
Mining assets
Mining assets are stated at cost less
accumulated depreciation. Mining assets
include the cost of acquiring and developing
mining assets and mineral rights, buildings,
vehicles, plant and machinery and other
equipment located on mine sites and used in
the mining operations.
2.7. Exploration and evaluation assets
Exploration and evaluation expenditure
incurred in relation to those projects where
such expenditure is considered likely to be
recoverable through future extraction activity
or sale, or where the exploration activities
have not reached a stage which permits a
reasonable assessment of the existence of
reserves, are capitalised and recorded on
the balance sheet within exploration and
evaluation assets for mining projects at the
exploration stage.
Exploration and evaluation expenditure
comprise costs directly attributable to:
– researching and analysing existing
exploration data;
– conducting geological studies, exploratory
drilling and sampling;
– examining and testing extraction and
treatment methods;
– compiling pre-feasibility and feasibility
studies; and
– costs incurred in acquiring mineral rights,
the entry premiums paid to gain access to
areas of interest and amounts payable to
third parties to acquire interests in existing
projects.
Exploration and evaluation assets are
subsequently valued at cost less impairment.
In circumstances where a project is
abandoned, the cumulative capitalised costs
related to the project are written off in the
period when such decision is made.
Exploration and evaluation assets are not
depreciated. These assets are transferred to
mine development costs within property, plant
and equipment when a decision is taken to
proceed with the development of the project.
Petropavlovsk Annual Report 2017 157
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
If the carrying amount of the asset exceeds its
recoverable amount, the asset is impaired and
an impairment loss is charged to the income
statement so as to reduce the carrying
amount in the balance sheet to its recoverable
amount. A previously recognised impairment
loss is reversed if the recoverable amount
increases as a result of a reversal of the
conditions that originally resulted in the
impairment. This reversal is recognised in the
income statement and is limited to the carrying
amount that would have been determined,
net of depreciation, had no impairment loss
been recognised in prior years.
2.10. Deferred stripping costs
In open pit mining operations, removal of
overburden and other waste materials,
referred to as stripping, is required to obtain
access to the ore body.
Stripping costs incurred during the
development of the mine are capitalised
as part of mine development costs and are
subsequently depreciated over the life of a
mine on a units of production basis.
Stripping costs incurred during the
production phase of a mine are deferred as
part of cost of inventory and are written off to
the income statement in the period over
which economic benefits related to the
stripping activity are realised where this is the
most appropriate basis for matching the costs
against the related economic benefits.
Where, during the production phase, further
development of the mine requires a phase of
unusually high overburden removal activity
that is similar in nature to pre-production
mine development, such stripping costs
are considered in a manner consistent
with stripping costs incurred during
the development of the mine before the
commercial production commences.
In gold alluvial operations, stripping activity is
sometimes undertaken in preparation for the
next season. Stripping costs are then
deferred as part of cost of inventory and are
written off to the income statement in the
following year to match related production.
Mining assets, where economic benefits from
the asset are consumed in a pattern which is
linked to the production level, are depreciated
using a units of production method based on
the volume of ore reserves. This results in a
depreciation charge proportional to the
depletion of reserves. The basis for
determining ore reserve estimates is set out
in note 3.2. Where the mining plan anticipates
future capital expenditure to support the
mining activity over the life of the mine, the
depreciable amount is adjusted for such
estimated future expenditure.
Certain property, plant and equipment within
mining assets are depreciated based on
estimated useful lives, if shorter than the
remaining life of the mine or if such property,
plant and equipment can be moved to
another site subsequent to the mine closure.
Mining assets related to alluvial gold
operations are depreciated on a straight-line
basis based on estimated useful lives.
Non-mining assets
Non-mining assets are stated at cost less
accumulated depreciation. Non-mining
assets are depreciated on a straight-line basis
based on estimated useful lives.
Capital construction in progress
Capital construction in progress is stated at
cost. On completion, the cost of construction
is transferred to the appropriate category of
property, plant and equipment. Capital
construction in progress is not depreciated.
Depreciation
Property, plant and equipment are depreciated
using a units of production method as set out
above or on a straight-line basis based on
estimated useful lives. Estimated useful lives
normally vary as set out below.
Average life
Number of years
2.9. Impairment of non-financial assets
Property, plant and equipment, exploration
and evaluation assets and other non-financial
assets are tested for impairment whenever
events or changes in circumstances indicate
that the carrying amount may not be
recoverable. This applies to the assets held by
the Group itself as well as the Group’s share
of the assets held by the associates.
When a review for impairment is conducted,
the recoverable amount is assessed by
reference to the higher of ‘value in use’ (being
the net present value of expected future cash
flows of the relevant cash generating unit) or
‘fair value less costs to sell’. Where there is no
binding sale agreement or active market, fair
value less costs to sell is based on the best
information available to reflect the amount the
Group could receive for the cash generating
unit in an arm’s length transaction. Future
cash flows are based on:
– estimates of the quantities of the reserves
and mineral resources for which there is a
high degree of confidence of economic
extraction;
– future production levels;
– future commodity prices (assuming the
current market prices will revert to the
Group’s assessment of the long-term
average price, generally over a period of
up to five years); and
– future cash costs of production, capital
expenditure, environment protection,
rehabilitation and closure.
IAS 36 ‘Impairment of assets’ includes a
number of restrictions on the future cash
flows that can be recognised in respect of
future restructurings and improvement related
capital expenditure. When calculating ‘value
in use’, it also requires that calculations should
be based on exchange rates current at the
time of the assessment.
Buildings
Plant and machinery
Vehicles
Office equipment
Computer equipment
15-50
3-20
5-7
5-10
3-5
For operations with a functional currency
other than the US Dollar, the impairment
review is undertaken in the relevant functional
currency. These estimates are based on
detailed mine plans and operating budgets,
modified as appropriate to meet the
requirements of IAS 36 ‘Impairment of assets’.
Residual values and useful lives are reviewed
and adjusted if appropriate, at each balance
sheet date. Changes to the estimated residual
values or useful lives are accounted for
prospectively.
The discount rate applied is based upon a
post-tax discount rate that reflects current
market assessments of the time value of money
and the risks associated with the relevant cash
flows, to the extent that such risks are not
reflected in the forecast cash flows.
158 Petropavlovsk Annual Report 2017
2.11. Provisions for close down and
restoration costs
Close down and restoration costs include the
dismantling and demolition of infrastructure
and the removal of residual materials and
remediation of disturbed areas. Close down
and restoration costs are provided for in the
accounting period when the legal or
constructive obligation arising from the
related disturbance occurs, whether this
occurs during the mine development or
during the production phase, based on the
net present value of estimated future costs.
Provisions for close down and restoration
costs do not include any additional
obligations which are expected to arise from
future disturbance. The costs are estimated
on the basis of a closure plan. The cost
estimates are calculated annually during
the life of the operation to reflect known
developments and are subject to formal
review at regular intervals.
The amortisation or unwinding of the discount
applied in establishing the net present value of
provisions is charged to the income statement
in each accounting period. The amortisation
of the discount is shown as a financing cost,
rather than as an operating cost. Other
movements in the provisions for close down
and restoration costs, including those
resulting from new disturbance, updated cost
estimates, changes to the lives of operations
and revisions to discount rates are capitalised
within property, plant and equipment. These
costs are then depreciated over the lives of
the assets to which they relate.
Where rehabilitation is conducted
systematically over the life of the operation,
rather than at the time of closure, provision
is made for the outstanding continuous
rehabilitation work at each balance sheet
date. All other costs of continuous
rehabilitation are charged to the income
statement as incurred.
Changes in the measurement of a liability
relating to the decommissioning of plant or
other site preparation work (that result from
changes in the estimated timing or amount of
the cash flow or a change in the discount
rate), are added to or deducted from the cost
of the related asset in the current period. If a
decrease in the liability exceeds the carrying
amount of the asset, the excess is recognised
immediately in the income statement. If the
asset value is increased and there is an
indication that the revised carrying value is not
recoverable, an impairment test is performed
in accordance with the accounting policy set
out above.
2.12. Financial instruments
Financial instruments recognised in the
balance sheet include cash and cash
equivalents, other investments, trade and
other receivables, borrowings, derivatives,
and trade and other payables.
accumulated under the heading of other
reserve in equity. When the investment is
disposed of or is determined to be impaired,
the cumulative gain or loss previously
accumulated in equity is reclassified to
the income statement.
Financial instruments are initially measured at
fair value when the Group becomes a party to
their contractual arrangements. Transaction
costs are included in the initial measurement
of financial instruments, except financial
instruments classified as at fair value through
profit or loss. The subsequent measurement
of financial instruments is dealt with below.
Financial assets
Financial assets are classified into the
following specified categories: ‘financial
assets at fair value through profit or loss’,
‘held-to-maturity investments’, ‘available-for-
sale financial assets’ and ‘loans and
receivables’. The classification depends on
the nature and purpose of the financial assets
and is determined at the time of initial
recognition. Financial assets are recognised
at trade-date, the date on which the Group
commits to purchase the asset. The Group
does not hold any financial assets which
meet the definition of ‘held-to-maturity
investments’.
Financial assets at fair value
through profit or loss
This category has two sub-categories:
financial assets held for trading, and those
designated at fair value through profit or loss
at inception. A financial asset is classified in
this category if acquired principally for the
purpose of selling in the short term or if so
designated by management. Derivatives are
also categorised as held for trading unless
they are designated as hedges. Assets in this
category are classified as current if they are
either held for trading or are expected to be
realised within 12 months of the balance
sheet date.
Available-for-sale financial assets
Available-for-sale financial assets are
non-derivative financial assets that are either
designated in this category or not classified in
any of the other categories. They are included
within non-current assets unless the
investment matures or management intends
to dispose of them within 12 months of the
balance sheet date. Available-for-sale
financial assets are initially measured at cost
and subsequently carried at fair value.
Changes in the carrying amount of available-
for-sale financial assets are recognised in
other comprehensive income and
Loans and receivables
Loans and receivables are non-derivative
financial assets fixed or determinable
payments that are not quoted on an
active market. Loans and receivables
are recognised initially at fair value and
subsequently measured at amortised cost
using the effective interest method, less any
impairment. Interest income is recognised by
applying the effective interest rate, except for
short-term receivables when the recognition
of interest would be immaterial.
Effective interest method
The effective interest rate method is a method
of calculating the amortised cost of a financial
asset and of allocating interest income over
the relevant period. The effective interest rate
is the rate that exactly discounts estimated
future cash receipts through the expected life
of the financial asset, or where appropriate,
a shorter period, to the net carrying amount
on initial recognition.
Cash and cash equivalents
Cash and cash equivalents are defined
as cash on hand, demand deposits and
short-term, highly liquid investments readily
convertible to known amounts of cash and
subject to insignificant risk of changes in value
and are measured at cost which is deemed to
be fair value as they have a short-term maturity.
Trade receivables
Trade receivables are measured on initial
recognition at fair value and are subsequently
measured at amortised cost using the
effective interest rate method. Impairment of
trade receivables is established when there is
objective evidence as a result of a loss event
that the Group will not be able to collect all
amounts due according to the original terms
of the receivables. The amount of the
impairment is the difference between the
asset’s carrying amount and the present
value of estimated future cash flows,
discounted at the original effective interest
rate. The impairment is recognised in the
income statement.
Petropavlovsk Annual Report 2017 159
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
Other investments
Listed investments and unlisted equity
investments, other than investments in
subsidiaries, joint ventures and associates,
are classified as available-for-sale financial
assets and subsequently measured at fair
value. Fair values for unlisted equity
investments are estimated using methods
reflecting the economic circumstances of the
investee. Equity investments for which fair
value cannot be measured reliably are
recognised at cost less impairment. Changes
in the carrying amount of available-for-sale
financial assets are recognised in other
comprehensive income and accumulated
under within Other reserves in equity. When
the investment is disposed of or is determined
to be impaired, the cumulative gain or loss
previously accumulated in the investments
revaluation reserve is reclassified to the
income statement as ‘gains and losses
from investment securities’.
Financial liabilities
Financial liabilities, other than derivatives,
are measured on initial recognition at fair value
and are subsequently measured at amortised
cost, using the effective interest rate method.
Borrowings
Borrowings are recognised initially at fair
value, net of transaction costs incurred.
Borrowings are subsequently stated at
amortised cost; any difference between the
proceeds (net of transaction costs) and the
redemption value is recognised in the income
statement over the period of the borrowings
using the effective interest method.
Borrowings are classified as current liabilities
unless the Group has an unconditional right
to defer settlement of the liability for at least
12 months after the balance sheet date.
Derivative financial instruments
In accordance with IAS 39 the fair value of
all derivatives is separately recorded on the
balance sheet. Derivatives are initially
recognised at fair value at the date the
derivative contracts are entered into and are
subsequently remeasured to their fair value at
the balance sheet date. The resulting gain or
loss is recognised in the income statement
immediately unless the derivative is
designated and effective as a hedging
instrument, in which event the timing of the
recognition in the income statement depends
on the nature of the hedge relationship.
Derivatives embedded in other financial
instruments or non-financial host contracts
are treated as separate derivatives when their
risks and characteristics are not closely
related to their host-contract and the host
contract is not carried at fair value. Embedded
derivatives are recognised at fair value at
inception. Any change to the fair value of the
embedded derivatives is recognised in other
finance gains or losses within the income
statement. Embedded derivatives which are
settled net are disclosed in line with the
maturity of their host contracts.
The fair value of embedded derivatives is
determined by using market prices where
available. In other cases, fair value will be
calculated using quotations from independent
financial institutions, or by using appropriate
valuation techniques.
Hedge accounting
The Group designates certain derivative
financial instruments as hedging
relationships. For the purposes of hedge
accounting, hedging relationships may be
of three types:
– fair value hedges are hedges of particular
risks that may change the fair value of a
recognised asset or liability;
– cash flow hedges are hedges of particular
risks that may change the amount or timing
of future cash flows; and
– hedges of net investment in a foreign entity
are hedges of particular risks that may
change the carrying value of the net assets
of a foreign entity.
Currently the Group only has cash flow hedge
relationships.
To qualify for hedge accounting the hedging
relationship must meet several strict
conditions on documentation, probability
of occurrence, hedge effectiveness and
reliability of measurement. If these conditions
are not met, then the relationship does not
qualify for hedge accounting. In this case the
hedging instrument and the hedged item are
reported independently as if there were no
hedging relationship.
The effective portion of changes in fair value
of derivatives that are designated and qualify
as cash flow hedges is recognised in other
comprehensive income. The fair value gain
or loss relating to the ineffective portion is
recognised immediately in profit or loss.
Amounts previously recognised in other
comprehensive income and accumulated in
hedging reserve in equity are reclassified to
profit or loss in the periods when the hedged
item is recognised in profit or loss, in the same
line of the income statement as the
recognised hedged item.
Hedge accounting is discontinued when
the Group revokes the hedging relationship,
the hedging instrument expires or is sold,
terminated or exercised, or no longer qualifies
for hedge accounting. Any gain or loss
recognised in other comprehensive income
at that time is accumulated in equity and is
reclassified to profit or loss when the forecast
transaction is ultimately recognised in profit or
loss. When a forecast transaction is no longer
expected to occur, the gain or loss
accumulated in equity is recognised
immediately in profit or loss.
Trade payables
Trade payables are recognised initially at fair
value and subsequently measured at
amortised cost using the effective interest
method.
Equity instruments
An equity instrument is any contract that
evidences a residual interest in the assets of
the Group after deducting all of its liabilities.
Equity instruments issued are recorded at the
proceeds received, net of direct issue cost.
Impairment of financial assets
The Group assesses at each balance sheet
date whether there is objective evidence that
a financial asset or a group of financial assets
is impaired. In the case of equity securities
classified as available-for-sale, a significant
or prolonged decline in the fair value of the
security below its cost is considered in
determining whether the securities are
impaired. If any such evidence exists for
available-for-sale financial assets, the
cumulative loss – measured as the difference
between the acquisition cost and the current
fair value, less any impairment loss on that
financial asset previously recognised in profit
or loss – is removed from equity and
recognised in the income statement.
Impairment losses recognised in the income
statement on equity instruments are not
reversed.
160 Petropavlovsk Annual Report 2017
2.13. Provisions
Provisions are recognised when the Group
has a present obligation, whether legal or
constructive, as a result of a past event for
which it is probable that an outflow of
resources embodying economic benefits
will be required to settle the obligation and a
reliable estimate can be made of the amount
of the obligation.
Provisions are measured at the present value
of management’s best estimate of the
expenditure required to settle the obligation
at the balance sheet date. The discount rate
used to determine the present value reflects
current market assessments of the time value
of money and the risks specific to the liability.
2.14. Inventories
Inventories include the following major
categories:
– Stores and spares represent raw materials
consumed in the production process as
well as spare parts and other maintenance
supplies.
– Construction materials represent materials
for use in capital construction and mine
development.
– Ore in stockpiles represent material that,
at the time of extraction, is expected to be
processed into a saleable form and sold at
a profit. Ore in stockpiles is valued at the
average cost per tonne of mining and
stockpiling the ore. Quantities of ore in
stockpiles ore are assessed through
surveys and assays. Ore in stockpiles is
classified between current and non-current
inventory based on the expected
processing schedule in accordance with
the Group’s mining plan.
– Work in progress inventory primarily
represents gold in processing circuit that
has not completed the production process.
Work in progress inventory is valued at the
average production costs.
Provisions are recorded to reduce ore in
stockpiles, work in process and finished goods
inventory to net realisable value where the net
realisable value is lower than relevant inventory
cost at the balance sheet date. Net realisable
value is determined with reference to relevant
market prices less estimated costs to
complete production and bring the inventory
into its saleable form. Provisions are also
recorded to reduce mine operating supplies
to net realisable value, which is generally
determined with reference to salvage or scrap
value, when it is determined that the supplies
are obsolete. Provisions are reversed to reflect
subsequent recoveries in net realisable value
where the inventory is still on hand at the
balance sheet date.
2.15. Leases
Leases where the lessor retains substantially
all the risks and rewards of ownership are
classified as operating leases. Payments
made under operating leases (net of any
incentives received from the lessor) are
charged to the income statement on a
straight-line basis over the period of the lease.
2.16. Revenue recognition
Revenue is measured at the fair value of the
consideration received or receivable, stated
at the invoiced value net of discounts and
value added tax.
Sales of gold and silver
The majority of the Group’s revenue is derived
from the sale of refined gold and silver, the
latter being a by-product of gold production.
Revenue from the sale of gold and silver is
recognised when:
– the risks and rewards of ownership as
specified in individual contracts are
transferred to the buyer;
– the Group retains neither a continuing
involvement nor control over the goods
sold;
– the amount of revenue can be measured
– Deferred stripping costs are included in
reliably; and
inventories where appropriate, as set out in
note 2.10.
Inventories are valued at the lower of cost
and net realisable value, with cost being
determined primarily on a weighted average
cost basis.
– it is probable that the economic benefits
associated with the transaction will flow
to the Group.
Other revenue
Other revenue is recognised as follows:
– engineering and construction contracts:
When the outcome of a construction
contract can be estimated reliably, revenue
and costs are recognised by reference to
the stage of completion of the contract
activity at the balance sheet date. When the
outcome of a construction contract cannot
be estimated reliably, contract revenue is
recognised to the extent of contract costs
incurred where it is probable they will be
recoverable. When it is probable that
contract costs will exceed total contract
revenue, the expected loss is recognised
as an expense immediately;
– revenue from sales of goods is recognised
when the goods are delivered to the buyer
and the risks and benefits associated with
ownership are transferred to the buyer; and
– rental income from operating leases is
recognised on a straight line basis over
the term of the relevant lease.
2.17. Borrowing costs
Borrowing costs are generally expensed
as incurred except where they relate to the
financing of acquisition, construction or
development of qualifying assets, which
are mining projects under development that
necessarily take a substantial period of time
to get prepared for their intended use.
Such borrowing costs are capitalised and
added to mine development costs of the
mining project when the decision is made to
proceed with the development of the project
and until such time when the project is
substantially ready for its intended use
(which is when commercial production is
ready to commence) or if active development
is suspended or ceases.
To the extent that funds are borrowed to
finance a specific mining project, borrowing
costs capitalised represent the actual
borrowing costs incurred. To the extent that
funds are borrowed for the general purpose,
borrowing costs capitalised are determined
by applying the interest rate applicable to
appropriate borrowings outstanding during
the period to the average amount of capital
expenditure incurred to develop the relevant
mining project during the period.
Petropavlovsk Annual Report 2017 161
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
2.18. Taxation
Tax expense for the period comprises current
and deferred tax. Tax is recognised in the
income statement, except to the extent that it
relates to items recognised in the statement of
comprehensive income or directly in equity.
In this case, the tax is also recognised in the
statement of comprehensive income or
directly in equity, respectively.
Deferred tax is calculated at the tax rates that
are expected to apply in the period when the
liability is settled or the asset is realised using
tax rates that have been enacted, or
substantively enacted. Deferred tax is
charged or credited in the income statement,
except when it relates to items charged or
credited directly to equity, in which case the
deferred tax is also dealt within equity.
Current tax is the tax expected to be payable
on the taxable income for the year calculated
using rates that have been enacted or
substantively enacted by the balance sheet
date. It includes adjustments for tax expected
to be payable or recoverable in respect of
previous periods.
Deferred tax assets and liabilities are offset
when there is a legally enforceable right to
set-off current tax assets against current tax
liabilities, when they relate to income taxes
levied by the same taxation authority and the
Group intends to settle its current tax assets
and liabilities on a net basis.
Full provision is made for deferred taxation
on all temporary differences existing at the
balance sheet date with certain limited
exceptions. Temporary differences are the
difference between the carrying value of an
asset or liability and its tax base. The main
exceptions to this principle are as follows:
– Tax payable on the future remittance of the
past earnings of subsidiaries, associates
and jointly controlled entities is provided
for except where the Company is able to
control the remittance of profits and it is
probable that there will be no remittance
in the foreseeable future.
– Deferred tax is not provided on the initial
recognition of goodwill or from the initial
recognition of an asset or liability in a
transaction that does not affect accounting
profit or taxable profit and is not a business
combination, such as on the recognition of
a provision for close down and restoration
costs and the related asset or on the
inception of finance lease.
– Deferred tax assets are recognised only to
the extent that it is more likely than not that
they will be recovered.
Deferred tax is provided in respect of
fair value adjustments on acquisitions.
These adjustments may relate to assets
such as mining rights that, in general, are not
eligible for income tax allowances. In such
cases, the provision for deferred tax is based
on the difference between the carrying value
of the asset and its nil income tax base.
3. Areas of judgement in applying
accounting policies and key sources of
estimation uncertainty
When preparing the consolidated financial
statements in accordance with the
accounting policies as set out in note 2,
management necessarily makes judgements
and estimates that can have a significant
impact on the financial statements. These
judgements and estimates are based on
management’s best knowledge of the
relevant facts and circumstances and
previous experience. Actual results may differ
from these estimates under different
assumptions and conditions.
3.1. Critical accounting judgements
Taxation
The Group is subject to income tax in the UK,
Russian Federation and Cyprus. Assessing
the outcome of uncertain tax positions
requires judgements to be made. The Group
recognises liabilities for anticipated tax issues
based on estimates of whether additional
taxes will be due, such estimates are based
on the status of ongoing discussions with the
relevant tax authorities and advice from
independent tax advisers. Details of tax
charge for the year are set out in note 10.
Deferred tax assets, including those arising
from tax losses carried forward for the future
tax periods, capital losses and temporary
differences, are recognised only where it is
considered more likely than not that they will
be recovered. The likelihood of such
recoverability is dependent on the generation
of sufficient future taxable profits which a
relevant deferred tax asset can be utilised to
offset.
Assumptions about the generation of future
taxable profits depend on management’s
estimates of future cash flows. Judgements
are also required about the application of
income tax legislation. These judgements and
assumptions are subject to risk and
uncertainty and there is a possibility that
changes in circumstances will alter
expectations, which may impact the amount
of deferred tax assets recognised on the
balance sheet and the amount of other tax
losses and temporary differences not yet
recognised. In such circumstances, the
carrying amount of recognised deferred tax
assets may require adjustment, resulting in a
corresponding charge or credit to the income
statement.
Details of deferred tax disclosures out in
note 21.
3.2. Key sources of estimation
uncertainty
Ore reserve estimates
The Group estimates its ore reserves and
mineral resources based on the Australasian
Code for Reporting of Exploration Results,
Mineral Resources and Ore Reserves (the
JORC Code) and the internally used Russian
Classification System, adjusted to conform
with the mining activity to be undertaken
under the Group mining plan. Both the JORC
Code and the Russian Classification System
require the use of reasonable investment
assumptions when reporting reserves,
including future production estimates,
expected future commodity prices and
production cash costs.
Ore reserve estimates are used in the
calculation of depreciation of mining assets
using a units of production method (note 13),
impairment charges (note 6) and for
forecasting the timing of the payment of close
down and restoration costs (note 22). Also, for
the purposes of impairment reviews and the
assessment of life of mine for forecasting the
timing of the payment of close down and
restoration costs, the Group may take into
account mineral resources in addition to ore
reserves where there is a high degree of
confidence that such resources will be
extracted.
162 Petropavlovsk Annual Report 2017
Ore reserve estimates may change from
period to period as additional geological
data becomes available during the course of
operations or economic assumptions used to
estimate reserves change. Such changes in
estimated reserves may affect the Group’s
financial results and financial position in a
number of ways, including the following:
– Asset carrying values due to changes in
estimated future cash flows (note 6).
– Depreciation charged in the income
statement where such charges are
determined by using a units of production
method or where the useful economic lives
of assets are determined with reference to
the life of the mine.
– Provisions for close down and restoration
costs where changes in estimated reserves
affect expectations about the timing of the
payment of such costs (note 22).
– Carrying value of deferred tax assets and
liabilities (note 21) where changes in
estimated reserves affect the carrying
value of the relevant assets and liabilities.
Exploration and evaluation costs
The Group’s accounting policy for exploration
and evaluation expenditure results in
exploration and evaluation expenditure being
capitalised for those projects where such
expenditure is considered likely to be
recoverable through future extraction activity
or sale or where the exploration activities have
not reached a stage which permits a
reasonable assessment of the existence of
reserves. This policy requires management to
make certain estimates and assumptions as
to future events and circumstances, in
particular whether the Group will proceed
with development based on existence of
reserves or whether an economically viable
extraction operation can be established.
Such estimates and assumptions may
change from period to period as new
information becomes available. If, subsequent
to the exploration and evaluation expenditure
being capitalised, a judgement is made that
recovery of the expenditure is unlikely or the
project is to be abandoned, the relevant
capitalised amount will be written off to the
income statement. Details of exploration and
evaluation assets are set out in note 12.
Deferred stripping costs
The calculation of deferred stripping costs
requires the use of estimates to assess the
improved access to the ore to be mined in
future periods. Changes to the Group’s
mining plan and pit design may result in
changes to the timing of realisation of the
stripping activity. As a result, there could be
significant adjustments to the amounts of
deferred stripping costs capitalised and their
classification between current and non-
current assets. Details of deferred stripping
costs capitalised are set out in note 15.
Impairment and impairment
reversals
The Group reviews the carrying values of its
tangible and exploration and evaluation
assets to determine whether there is any
indication that those assets are impaired.
The recoverable amount of an asset, or
cash-generating unit (‘CGU’), is measured as
the higher of fair value less costs to sell and
value in use.
Management necessarily apply their
judgement in allocating assets to CGUs as
well as in making assumptions to be applied
within the value in use calculation. The key
assumptions which formed the basis of
forecasting future cash flows and the value in
use calculation are set out in note 6.
Subsequent changes to CGU allocation or
estimates and assumptions in the value in use
calculation could impact the carrying value of
the respective assets. The impairment
assessments are sensitive to changes in
commodity prices, foreign exchange rates and
discount rates. Changes to these assumptions
would result in changes to conclusions in
relation to impairment, which could have a
significant effect on the consolidated financial
statements. Details of impairment and/or
impairment reversals are set out in note 6.
Close down and restoration costs
Costs associated with restoration and
rehabilitation of mining sites are typical for
extractive industries and are normally incurred
at the end of the life of the mine. Provision is
recognised for each mining site for such costs
discounted to their net present value, as soon
as the obligation to incur such costs arises.
The costs are estimated on the basis of the
scope of site restoration and rehabilitation
activity in accordance with the mine closure
plan and represent management’s best
estimate of the expenditure that will be
incurred. Estimates are reviewed annually
as new information becomes available.
The initial provision for close down and
restoration costs together with other
movements in the provision, including those
resulting from updated cost estimates,
changes to the estimated lives of the mines,
and revisions to discount rates are capitalised
within ‘mine development costs’ or ‘mining
assets’ of property, plant and equipment.
Capitalised costs are depreciated over the life
of the mine they relate to and the provision is
increased each period via unwinding the
discount on the provision. Changes to the
estimated future costs are recognised in the
balance sheet by adjusting both the asset and
the provision.
The actual costs may be different from those
estimated due to changes in relevant laws
and regulations, changes in prices as well as
changes to the restoration techniques. The
actual timing of cash outflows may be also
different from those estimated due to
changes in the life of the mine as a result of
changes in ore reserves or processing levels.
As a result, there could be significant
adjustments to the provision for close down
and restoration costs established which
would affect future financial results.
Details of provision for close down and
restoration costs are set out in note 22.
Going Concern
Details about the Group’s ability to continue
as a going concern are set out in note 2.1.
4. Segment information
The Group’s reportable segments under IFRS
8, which are aligned with its operating
locations, were determined to be Pokrovskiy,
Pioneer, Malomir and Albyn hard rock gold
mines which are engaged in gold and silver
production as well as field exploration and
mine development.
Corporate and Other segment amalgamates
corporate administration, in-house geological
exploration and construction and engineering
expertise, engineering and scientific
operations and other supporting in-house
functions as well as various gold projects and
other activities that do not meet the reportable
segment criteria.
Reportable operating segments are based on
the internal reports provided to the Chief
Operating Decision Maker (‘CODM’) to
evaluate segment performance, decide how to
allocate resources and make other operating
decisions and reflect the way the Group’s
businesses are managed and reported.
Petropavlovsk Annual Report 2017 163
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
The financial performance of the segments is principally evaluated with reference to operating profit less foreign exchange impacts.
4. Segment information continued
2017
Revenue
Gold (a)
Silver
Other external revenue
Inter segment revenue
Intra group eliminations
Total Group revenue from external customers
Operating expenses and income
Operating cash costs
Accrual for additional mining tax (b)
Depreciation
Central administration expenses
Reversal of impairment/ (impairment) of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Total operating expenses (c)
Share of results of associates
Segment result
Foreign exchange losses
Operating profit
Investment income
Interest expense
Other finance gains
Other finance losses
Taxation
Profit for the period
Segment assets
Segment liabilities
Deferred tax – net
Unallocated cash
Loans given
Borrowings
Net assets
Other segment information
Additions to non-current assets:
Exploration and evaluation expenditure
capitalised within intangible assets
Capital Expenditure◆
Other items capitalised (d)
Average number of employees
(a) Including US$0.8 million contribution from the cash flow hedge.
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
Consolidated
US$’000
202,392
743
–
815
(815)
203,135
(127,657)
(6,511)
(28,936)
–
3,589
(2,594)
–
(162,109)
–
41,026
40,687
121
–
–
–
40,808
(39,988)
(2,255)
(7,112)
–
(175)
(733)
–
(50,263)
–
(9,455)
83,098
42
–
1,001
(1,001)
83,140
(61,079)
(2,780)
(12,607)
–
(304)
(563)
–
(77,333)
–
5,807
228,915
185
–
327
(327)
229,100
(98,354)
(8,306)
(44,346)
–
1,592
–
–
(149,414)
–
79,686
–
–
31,237
154,325
(154,325)
31,237
(30,030)
–
(215)
(39,944)
–
–
(629)
(70,818)
35,208
(4,373)
413,757
(35,777)
11,117
(7,583)
489,986
(14,474)
379,040
(35,949)
154,281
(74,781)
555,092
1,091
31,237
156,468
(156,468)
587,420
(357,108)
(19,852)
(93,216)
(39,944)
4,702
(3,890)
(629)
(509,937)
35,208
112,691
(746)
111,945
760
(25,905)
2,199
(28,470)
(19,063)
41,466
1,448,181
(168,564)
(106,271)
2,236
–
(596,474)
579,108
5,592
44,349
26,438
1,670
–
37
355
990
44
29,700
8,540
1,021
127
10,000
1,052
1,535
–
2,070
–
3,303
5,763
86,156
36,385
8,519
(b) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.
(c) Operating expenses less foreign exchange losses (note 6).
(d) Interest capitalised and close down and restoration costs (note 13).
164 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
4. Segment information continued
2016
Revenue
Gold (e)
Silver
Other external revenue
Inter segment revenue
Intra group eliminations
Total Group revenue from external customers
Operating expenses and income
Operating cash costs
Depreciation
Central administration expenses
Impairment of exploration and evaluation assets
(Impairment)/reversal of impairment of ore stockpiles
Gain on disposal of non-trading loans
Gain on disposal of subsidiaries
Total operating expenses (f)
Share of results of associates
Segment result
Foreign exchange losses
Operating profit
Investment income
Interest expense
Other finance gains
Other finance losses
Taxation
Profit for the period
Segment assets
Segment liabilities
Deferred tax – net
Unallocated cash
Loans given
Borrowings
Net assets
Other segment information
Additions to non-current assets:
Exploration and evaluation expenditure
capitalised within intangible assets
Other additions to intangible assets
Capital Expenditure◆
Other items capitalised (g)
Average number of employees
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
Consolidated
(restated)
US$’000
163,514
958
–
–
–
164,472
(85,273)
(38,776)
–
–
(6,110)
–
–
(130,159)
–
34,313
46,692
275
–
–
–
46,967
(33,777)
(6,586)
–
–
(1,002)
–
–
(41,365)
–
5,602
67,107
101
–
1,233
(1,233)
67,208
(45,243)
(13,632)
–
–
5,826
–
–
(53,049)
–
14,159
211,155
207
–
390
(390)
211,362
(100,979)
(45,729)
–
(9,155)
123
–
–
(155,740)
–
55,622
–
–
50,675
101,032
(101,032)
50,675
(48,995)
(529)
(32,623)
–
–
6,724
791
(74,632)
(3,581)
(27,538)
444,611
(13,387)
19,724
(4,034)
402,878
(8,963)
390,646
(15,975)
133,894
(54,262)
488,468
1,541
50,675
102,655
(102,655)
540,684
(314,267)
(105,252)
(32,623)
(9,155)
(1,163)
6,724
791
(454,945)
(3,581)
82,158
(5,158)
77,000
556
(60,976)
11,976
(1,548)
4,698
31,706
1,391,753
(96,621)
(119,028)
4,843
598
(611,212)
570,333
2,219
–
14,052
349
1,658
–
–
96
177
964
838
–
2,765
389
926
4,082
–
7,488
1,262
1,450
217
–
1,380
–
3,066
7,356
–
25,781
2,177
8,064
(e) Including US$(8.5) million net cash settlement paid by the Group under the cash flow hedge.
(f) Operating expenses less foreign exchange losses (note 6).
(g) Close down and restoration costs (note 13).
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 165
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
4. Segment information continued
Entity wide disclosures
Revenue by geographical location (a)
Russia and CIS
Other
(a) Based on the location to which the product is shipped or in which the services are provided.
Non-current assets by location of asset (b)
Russia
Other
(b) Excluding financial instruments and deferred tax assets.
2017
US$’000
587,361
59
587,420
2016
US$’000
540,606
78
540,684
2017
US$’000
1,181,197
45
1,181,242
2016
US$’000
1,090,847
43
1,090,890
Information about major customers
During the years ended 31 December 2017 and 2016, the Group generated revenues from the sales of gold to Russian banks for Russian
domestic sales of gold. Included in gold sales revenue for the year ended 31 December 2017 are revenues of US$555 million which arose from
sales of gold to two banks that individually accounted for more than 10% of the Group’s revenue, namely US$414 million to Sberbank of Russia
and US$142 million to VTB (2016: US$488 million which arose from sales of gold to two banks that individually accounted for more than 10% of the
Group’s revenue, namely US$292 million to Sberbank of Russia and US$197 million to VTB). The proportion of Group revenue of each bank may
vary from year to year depending on commercial terms agreed with each bank. Management considers there is no major customer concentration
risk due to high liquidity inherent to gold as a commodity.
2017
US$’000
571,666
15,045
709
587,420
760
588,180
2016
US$’000
522,491
17,531
662
540,684
556
541,240
5. Revenue
Sales of goods
Engineering and construction contracts
Rental income
Investment income
166 Petropavlovsk Annual Report 2017
6. Operating expenses and income
Net operating expenses (a)
Accrual for additional mining tax (b)
Impairment of exploration and evaluation assets
(Reversal of impairment)/ impairment of ore stockpiles (a)
Impairment of gold in circuit
Central administration expenses (a)
Foreign exchange losses
Impairment of non-trading loans
Gain on disposal of non-trading loans
Gain on disposal of subsidiaries
(a) As set out below.
(b) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.
Net operating expenses
Depreciation
Staff costs
Materials
Fuel
External services
Mining tax
Electricity
Smelting and transportation costs
Movement in ore stockpiles, deferred stripping, work in progress and bullion in process attributable to gold production
Taxes other than income
Insurance
Professional fees
Office costs
Operating lease rentals
Business travel expenses
Provision for impairment of trade and other receivables
Bank charges
Goods for resale
Other operating expenses
2017
US$’000
450,324
19,852
–
(4,702)
3,890
39,944
746
629
–
–
510,683
2017
US$’000
93,216
80,071
108,201
43,793
38,719
–
30,074
794
7,456
5,886
8,214
297
307
3,352
1,274
364
258
11,802
16,246
450,324
2016
US$’000
419,519
–
9,155
1,163
–
32,623
5,158
–
(6,724)
(791)
460,103
2016
US$’000
105,252
63,022
100,638
40,621
25,619
14,713
23,305
699
(22,475)
6,352
6,409
877
324
3,173
1,434
282
205
24,186
24,883
419,519
Petropavlovsk Annual Report 2017 167
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
6. Operating expenses and income continued
Central administration expenses
Staff costs
Professional fees
Insurance
Operating lease rentals
Business travel expenses
Office costs
Other
2017
US$’000
23,556
6,854
928
1,920
1,142
533
5,011
39,944
2016
US$’000
17,067
8,214
789
1,893
881
489
3,290
32,623
Impairment charges
Impairment of mining assets and exploration and evaluation assets
The Group undertook an impairment review of the tangible assets attributable to its gold mining projects, exploration assets adjacent to the
existing mines and supporting in-house service companies and concluded no impairment was required as at 31 December 2017. As at
31 December 2017, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines (note 12).
The forecast future cash flows are based on the Group’s mining plan that assumes POX Hub completion in the year 2018. The other key
assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:
Long term gold price
Discount rate (a)
RUB : US$ exchange rate
(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 11.6% (2016: 10.1%).
Year ended
31 December 2017
US$1,300/oz
8%
Year ended
31 December 2016
US$1,200/oz
8%
RUB60.0 : US$1 RUB60.0 : US$1
With all other assumptions being constant, changes to the aforementioned key assumptions could potentially result in impairment of certain mining
assets as set out below.
10% decrease in long-term gold price
10% increase in discount rate
10% strengthening of RUB/US$ exchange rate
Potential impairment
US$29 million
Recoverable amount exceeds carrying amount
Recoverable amount exceeds carrying amount
Impairment of ore stockpiles
The Group assessed the recoverability of the carrying value of ore stockpiles and recorded impairment charges/reversals of impairment
as set out below:
Year ended 31 December 2017
Year ended 31 December 2016
Pre-tax
impairment
charge/
(reversal of
impairment)
US$’000
175
(3,589)
304
(1,592)
(4,702)
Post-tax
impairment
charge/
(reversal of
impairment)
US$’000
140
(2,872)
243
(1,321)
(3,810)
Pre-tax
impairment
charge/
(reversal of
impairment)
US$’000
1,002
6,110
(5,826)
(123)
1,163
Taxation
US$’000
(35)
717
(61)
271
892
Post-tax
impairment
charge/
(reversal of
impairment)
US$’000
802
4,887
(4,661)
(98)
930
Taxation
US$’000
(200)
(1,223)
1,165
25
(233)
Pokrovskiy
Pioneer
Malomir
Albyn
168 Petropavlovsk Annual Report 2017
7. Auditor’s remuneration
The Group, including its overseas subsidiaries, obtained the following services from the Company’s auditor and their associates:
2017
US$’000
2016
US$’000
Audit fees and related fees
Fees payable to the Company’s auditor for the annual audit of the parent company and
consolidated financial statements
Fees payable to the Company’s auditor and their associates for other services to the Group:
For the audit of the Company’s subsidiaries as part of the audit of the consolidated financial statements
For the audit of subsidiary statutory accounts pursuant to legislation (a)
Non-audit fees
Other services pursuant to legislation – interim review
Fees for reporting accountants services (b)
Tax services
(a) Including the statutory audit of subsidiaries in the UK and Cyprus.
568
296
57
921
231
202
12
445
(b) Fees payable in relation to the issuance of the US$500 million 8.125 per cent Guaranteed Notes (note 20) (2016: Fees payable in relation the Proposed Acquisition announced on 28 April 2016).
8. Staff costs
Wages and salaries
Social security costs
Pension costs
Share-based compensation
2017
US$’000
81,619
21,696
168
144
103,627
577
285
55
917
185
1,153
–
1,338
2016
US$’000
61,996
17,732
221
140
80,089
Average number of employees
8,519
8,064
Petropavlovsk Annual Report 2017 169
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
9. Financial income and expenses
Investment income
Interest income
Interest expense
Interest on bank loans
Interest on notes
Interest on convertible bonds
Interest capitalised
Unwinding of discount on environmental obligation
Other finance gains
Fair value gain on derivative financial instruments (a)
Financial guarantee fee (b)
Other finance losses
Loss on bank debt refinancing (c)
Fair value loss on derivative financial instruments (a)
2017
US$’000
2016
US$’000
760
760
(42,701)
(5,308)
(12,221)
(60,230)
34,592
(267)
(25,905)
-
2,199
2,199
(21,577)
(6,893)
(28,470)
556
556
(48,934)
–
(11,867)
(60,801)
–
(175)
(60,976)
7,434
4,542
11,976
(1,548)
–
(1,548)
(a) Result from re-measurement of the conversion option of the Convertible Bonds to fair value (note 20) and the Call Option over the Company’s shares to fair value (note 18).
(b) Note 25.
(c) Note 20.
170 Petropavlovsk Annual Report 2017
10. Taxation
Current tax
Russian current tax
Deferred tax
Reversal of timing differences (a)
Total tax charge/(credit)
2017
US$’000
2016
US$’000
24,357
24,357
(5,294)
19,063
29,788
29,788
(34,486)
(4,698)
(a) Including effect of foreign exchange movements in respect of deductible temporary differences of US$(7.5) million (year ended 31 December 2016: US$(26.0) million) which primarily arises as the tax base for a
significant portion of the future taxable deductions in relation to the Group’s property, plant and equipment are denominated in Russian Rouble whilst the future depreciation charges associated with these
assets will be based on their US Dollar carrying value and reflects the movements in the Russian Rouble to the US Dollar exchange rate.
The charge for the year can be reconciled to the loss before tax per the income statement as follows:
Profit before tax
Less: share of results of associates
Profit before tax (excluding associates)
Tax on profit (excluding associates) at the Russian corporation tax rate of 20% (2016: 20%)
Effect of the reduced corporation tax rate (b)
Effect of different tax rates of subsidiaries operating in other jurisdictions
Tax effect of expenses that are not deductible for tax purposes (c)
Tax effect of tax losses for which no deferred income tax asset was recognised (d)
Utilisation of previously unrecognised tax losses
Foreign exchange movements in respect of deductible temporary differences (e)
Effect of the reduced corporation tax rate on previously recognised deferred tax (b)
Other adjustments
Tax charge/(credit) for the period
2017
US$’000
60,529
(35,208)
25,321
5,064
(2,034)
912
3,043
25,237
(288)
(7,512)
(4,283)
(1,076)
19,063
2016
US$’000
27,008
3,581
30,589
6,118
–
36
1,765
14,778
(2,574)
(26,025)
–
1,204
(4,698)
(b) Under the Russian Federal Law 144-FZ dated 23 May 2016 taxpayers who are participants to the Regional Investment Projects (“RIP”) have the right to apply the reduced corporation tax rate if certain
conditions are met. In 2017, LLC Albynskiy Rudnik has received tax relief as a RIP participant and is entitled to the reduced statutory corporation tax rate of 17% for the period of 10 years, subject to eligibility
criteria. Relevant deferred tax balances were recalculated by applying the reduced tax rate accordingly.
(c) Primarily relate to the result of re-measurement of the conversion option of the Convertible Bonds to fair value (note 9) and certain professional fees incurred in relation to corporate projects.
(d) Primarily relate to central administration expenses and interest expense incurred in the UK.
(e) Foreign exchange movements arise as 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 and reflects the movements in the Russian Rouble to the US Dollar exchange rate.
Tax laws, regulations and court practice applicable to the Group are complex and subject to frequent change, varying interpretations and
inconsistent and selective enforcement. There are a number of practical uncertainties associated with the application of relevant tax legislation and
there is a risk of tax authorities making arbitrary judgements of business activities. If a particular treatment, based on management’s judgement of
the Group’s business activities, was to be challenged by the tax authorities, the Group may be subject to tax claims and exposures. The Directors
do not anticipate that these exposures will have a material adverse effect upon the Group’s financial position.
Petropavlovsk Annual Report 2017 171
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
11. Earnings per share
Profit for the period attributable to equity holders of Petropavlovsk PLC
Interest expense on convertible bonds (a)
Profit used to determine diluted earnings per share
Weighted average number of Ordinary Shares
Adjustments for dilutive potential Ordinary Shares (a)
Weighted average number of Ordinary Shares for diluted earnings per share
Basic profit per share
Diluted profit per share
2017
US$’000
2016
US$’000
42,378
–
42,378
No of shares
3,303,768,532
–
3,303,768,532
US$
0.01
0.01
33,719
–
33,719
No of shares
3,302,148,536
–
3,302,148,536
US$
0.01
0.01
(a) Convertible bonds which could potentially dilute basic profit/(loss) per ordinary share in the future are not included in the calculation of diluted profit/(loss) per share because they were anti-dilutive for the year
ended 31 December 2017 and 2016.
12. Exploration and evaluation assets
At 1 January 2017
Additions
Transfer to mining assets
At 31 December 2017
Flanks of
Pioneer
US$’000
1,750
5,592
(1,515)
5,827
Flanks of
Albyn
US$’000
33,949
127
–
34,076
Flanks of
Malomir
US$’000
12,148
44
–
12,192
Other (a)
US$’000
1,423
–
–
1,423
(a) Amounts capitalised in respect of limestone, an essential reagent the pressure oxidation process, and underground water deposits to be used for the POX Hub operations.
At 1 January 2016
Additions
Impairment (c)
Reallocation and other transfers
Disposal of subsidiary
Disposal
At 31 December 2016
Visokoye
US$’000
16,251
213
–
–
(16,464)
–
–
Flanks of
Pioneer
US$’000
–
1,750
–
–
–
–
1,750
Flanks of
Albyn
US$’000
39,080
4,082
(9,155)
(58)
–
–
33,949
Flanks of
Malomir
US$’000
11,375
776
–
(3)
–
–
12,148
Other (b)
US$’000
2,287
535
–
(269)
–
(1,130)
1,423
Total
US$’000
49,270
5,763
(1,515)
53,518
Total
US$’000
68,993
7,356
(9,155)
(330)
(16,464)
(1,130)
49,270
(b) Amounts capitalised in respect of limestone, an essential reagent the pressure oxidation process, and underground water deposits to be used for the POX Hub operations.
(c) Impairment charges recorded against associated exploration and evaluation costs following the decision to suspend exploration on the Kharginskoye ore field, an immediate extension of the Albyn deposit.
172 Petropavlovsk Annual Report 2017
13. Property, plant and equipment
Cost
At 1 January 2016
Additions
Close down and restoration cost capitalised (note 22)
Transfers from capital construction in progress
Disposals
Disposal of subsidiaries
Reallocation and other transfers
Foreign exchange differences
At 31 December 2016 (d)
Additions
Interest capitalised (a)
Close down and restoration cost capitalised (note 22)
Transfer from exploration and evaluation assets (note 12)
Transfers from capital construction in progress (b)
Disposals
Reallocation and other transfers
Foreign exchange differences
At 31 December 2017 (d)
Accumulated depreciation and impairment
At 1 January 2016
Charge for the year
Disposals
Disposal of subsidiaries
Reallocation and other transfers
Foreign exchange differences
At 31 December 2016
Charge for the year
Disposals
Reallocation and other transfers
Foreign exchange differences
At 31 December 2017
Net book value
At 31 December 2016 (e)
At 31 December 2017 (e)
Mining assets
US$’000
Non-mining
assets
US$’000
Capital
construction in
progress (c)
(US$’000
Total
US$’000
1,861,891
19,470
2,177
2,523
(19,645)
(919)
9,844
–
1,875,341
34,725
–
1,793
1,515
22,397
(8,856)
1,727
–
1,928,642
1,182,974
100,934
(16,748)
–
662
–
1,267,822
90,862
(8,062)
192
–
1,350,814
607,519
577,828
197,698
885
–
159
(6,235)
(2,052)
(808)
3,907
193,554
2,048
–
–
–
4,042
(4,731)
(1,897)
1,245
194,261
173,375
5,034
(6,036)
(1,127)
(662)
3,173
173,757
2,708
(5,196)
2,213
1,014
174,496
19,797
19,765
341,587
5,426
–
(2,682)
(77)
(2,436)
(8,856)
–
332,962
49,383
34,592
–
–
(26,439)
(72)
170
4
390,600
6,484
–
–
–
–
–
6,484
–
–
(2,405)
–
4,079
2,401,176
25,781
2,177
–
(25,957)
(5,407)
180
3,907
2,401,857
86,156
34,592
1,793
1,515
–
(13,659)
–
1,249
2,513,503
1,362,833
105,968
(22,784)
(1,127)
–
3,173
1,448,063
93,570
(13,258)
–
1,014
1,529,389
326,478
386,521
953,794
984,114
(a) Borrowing costs were capitalised at the weighted average rate of the Group’s relevant borrowings being 10% (2016: nil).
(b) Being costs primarily associated with continuous development of Malomir and Pioneer projects.
(c) Including US$277.6 million costs associated with the POX Hub project (31 December 2016: US$200.3 million).
(d) Including US$215.6 million of fully depreciated property, plant and equipment (31 December 2016: US$137.4 million).
(e) Property, plant and equipment with a net book value of US$nil million (31 December 2016: US$110.0 million) have been pledged to secure borrowings of the Group.
Petropavlovsk Annual Report 2017 173
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
14. Investments in associates
IRC Limited (‘IRC’)
Summarised financial information for those associates that are material to the Group is set out below.
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Prepayments for property, plant and equipment
Other non-current assets
Current assets
Cash and cash equivalents
Other current assets
Current liabilities
Borrowings (a)
Other current liabilities
Non-current liabilities
Borrowings (a)
Other non-current liabilities
Net assets
2017
US$’000
70,890
70,890
2016
US$’000
36,140
36,140
IRC
Year ended
31 December
2017
US$’000
IRC
Year ended
31 December
2016
US$’000
7,259
458,624
494
4,992
471,369
8,997
54,026
63,023
61,309
37,729
99,038
162,078
33,722
195,800
239,554
6,966
246,191
87,499
4,773
345,429
31,342
44,184
75,526
66,147
21,414
87,561
177,239
34,431
211,670
121,724
(a) On 13 December 2010, K&S entered into a project finance facility agreement with the Industrial and Commercial Bank of China Limited (‘ICBC’) (the ‘ICBC Facility Agreement’) pursuant to which ICBC would
lend US$340 million to K&S to be used to fund the construction of the IRC’s mining operations at K&S. The facility is guaranteed by the Company (note 25) and originally was repayable semi-annually in 16
instalments US$21.25 million each, starting from December 2014 and is fully repayable by June 2022. On 27 February 2017, ICBC agreed to restructure two repayment instalments originally due for payment
on 20 June 2017 and 20 December 2017 in an aggregate amount of US$42.5 million evenly into five subsequent semi-annual repayment instalments. As a result, each of the repayment instalments due on 20
June 2018, 20 December 2018, 20 June 2019, 20 December 2019 and 20 June 2020 increased by US$8.5 million to an amount equal to US$29.75 million. The outstanding loan principal was US$233.75
million as at 31 December 2017 and 2016. As at 31 December 2017 and 2016, there was no undrawn finance facility available under the ICBC Facility Agreement. The loan is carried at amortised cost with
effective interest rate 6.41% per annum (2016: 6.13%). ICBC Facility Agreement contains certain financial covenants to which ICBC has agreed to grant a waiver until 31 December 2017, inclusive. As at 31
December 2017 and 31 December 2016, The Group’s entire 31.1% ownership in the issued capital of IRC was pledged to ICBC as security for the obligations of the Company as guarantor and in
consideration for the waiver of financial covenants under the ICBC facility.
174 Petropavlovsk Annual Report 2017
14. Investments in associates continued
Revenue
Net operating income/(expenses)
Including
Depreciation
Reversal of impairment of mining assets
Impairment of ore stockpiles
Impairment of investments in joint ventures
Foreign exchange losses
Investment income
Interest expense
Taxation
Profit/(loss) for the period
Other comprehensive (loss)/profit
Total comprehensive profit/(loss)
15. Inventories
Current
Construction materials
Stores and spares
Ore in stockpiles (a), (c)
Gold in circuit
Deferred stripping costs
Bullion in process
Other
Non-current
Ore in stockpiles (a), (b), (c)
(a) Note 6.
(b) Ore in stockpiles that is not planned to be processed within twelve months after the reporting period.
(c) As at 31 December 2017, ore in stockpiles include balances in the aggregate of US$31.1 million carried at net realisable value (2015: US$45.5 million).
IRC
Year ended
31 December
2017
US$’000
109,265
25,657
IRC
Year ended
31 December
2016
US$’000
16,467
(34,503)
(14,618)
129,614
–
–
(859)
114
(22,410)
590
113,216
(1,470)
111,746
(1,155)
–
(841)
(47)
(3,440)
413
(1,189)
(315)
(19,127)
1,555
(17,572)
2017
US$’000
2016
US$’000
6,792
57,226
37,496
24,088
39,767
391
6,892
172,652
72,720
72,720
5,072
57,699
17,104
70,996
26,187
1,189
5,019
183,266
51,686
51,686
Petropavlovsk Annual Report 2017 175
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
16. Trade and other receivables
Current
VAT recoverable
Advances to suppliers
Prepayments for property, plant and equipment
Trade receivables (a)
Other debtors (b)
2017
US$’000
2016
US$’000
20,438
11,343
5,809
9,297
28,943
75,830
30,265
11,394
694
6,160
41,917
90,430
(a) Net of provision for impairment of US$0.2 million (2016: US$0.2 million). Trade receivables are generally due for settlement between three and twelve months.
(b) Net of provision for impairment of US$1.3 million (2016: US$1.3 million).
There is no significant concentration of credit risk with respect to trade and other receivables. The Group has implemented policies that require
appropriate credit checks on potential customers before granting credit. The Group has adopted a policy of only dealing with creditworthy
counterparties. The Group’s exposure and credit ratings of its counterparties are monitored by the Board of Directors. The maximum credit risk of
such financial assets is represented by the carrying value of the asset.
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
17. Cash and cash equivalents
Cash at bank and in hand
Short term bank deposits
18. Derivative financial instruments
Forward gold contracts – cash flow hedge (a), (b), (c)
Call Option over the Company’s shares (d)
Conversion option (e), (f)
2017
US$’000
8,109
3,306
11,415
2016
US$’000
10,284
2,358
12,642
31 December 2017
31 December 2016
Assets
US$’000
–
–
–
–
Liabilities
US$’000
(32,477)
(3,097)
(14,110)
(49,684)
Assets
US$’000
7,478
–
–
7,478
Liabilities
US$’000
–
(3,064)
(7,250)
(10,314)
(a) Forward contracts to sell an aggregate of 400,000 ounces of gold at an average price of US$1,252 per ounce are outstanding as at 31 December 2017 (31 December 2016: 50,006 ounces of gold at an
average price of US$1,303 per ounce).
(b) Measured at fair value and considered as Level 2 of the fair value hierarchy which valuation incorporates the following inputs:
– gold forward curves observable at quoted intervals; and
– observable credit spreads.
(c) The hedged forecast transactions are expected to occur at various dates during the period to December 2019.
Gain and losses recognised in the hedging reserve in equity as at the reporting date will be recognised in the income statement in the periods during which the hedged gold sale transactions affect the income
statement.
There was no ineffectiveness to be recorded from the cash flow hedge during the years ended 31 December 2017 and 2016.
(d) Cash settled call option issued in relation to 3.6 per cent. of the outstanding aggregate ordinary share capital in the Company exercisable between December 2018 and June 2019 at strike price of £0.068.
(e) Note 20.
(f) Measured at fair value and considered as Level 2 of the fair value hierarchy which valuation incorporates the following inputs:
–
the Group’s credit risk;
– historic share price volatility;
–
–
–
the conversion price;
time to maturity; and
risk free rate.
176 Petropavlovsk Annual Report 2017
19. Trade and other payables
Trade payables
Payables for property, plant and equipment
Advances from customers
Advances received on resale and commission contracts (a)
Accruals and other payables
2017
US$’000
39,902
10,389
826
1,029
36,187
88,333
2016
US$’000
24,110
958
2,148
1,847
26,575
55,638
(a) Amounts included in advances received on resale and commission contracts at 31 December 2017 and 31 December 2016 relate to services performed by the Group’s subsidiary, Irgiredmet, in its activity to
procure materials such as reagents, consumables and equipment for third parties.
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
20. Borrowings
Borrowings at amortised cost
Notes (a)
Convertible bonds (b)
Bank loans (c)
Amount due for settlement within 12 months
Amount due for settlement after 12 months
2017
US$’000
2016
US$’000
497,747
91,590
7,137
596,474
7,137
589,337
596,474
–
88,369
522,843
611,212
85,306
525,906
611,212
(a) US$500 million Guaranteed Notes due for repayment on 14 November 2022 (the “Notes”), measured at amortised cost. The Notes were issued by the Group’s wholly owned
subsidiary Petropavlovsk 2016 Limited and are guaranteed by the Company and its subsidiaries JSC Pokrovskiy Rudnik, LLC Albynskiy Rudnik and LLC Malomirskiy Rudnik. The Notes
have been admitted to the official list of the Irish Stock Exchange and to trading on the Global Exchange Market of the Irish Stock Exchange on 14 November 2017. The Notes carry a
coupon of 8.125% payable semi-annually in arrears. The interest charged was calculated by applying an effective interest rate of 8.35%
(b) Debt component of the US$100 million Convertible Bonds due on 18 March 2020, measured at amortised cost. The interest charged was calculated by applying an effective interest
rate of 13.89% to the liability component.
The conversion option of the US$100 million Convertible Bonds represents the fair value of the embedded option for the bondholders to convert into the equity of the Company (the
“Conversion Right”). As the Company can elect to pay the cash value in lieu of delivering the Ordinary Shares following the exercise of the Conversion Right, the conversion option is a
derivative liability. Accordingly, the conversion option is measured at fair value and is presented separately within derivative financial liabilities.
As at 31 December 2017, the fair value of debt component of the convertible bonds, considered as Level 2 of the fair value hierarchy, amounted to US$102.1 million (31 December
2016: US$97.3 million). Valuation incorporates the following inputs: the Group’s credit risk, time to maturity and risk free rate.
As at 31 December 2017, the fair value of the convertible bonds, considered as Level 1 of the fair value hierarchy and calculated by applying the market traded price to the convertible
bonds outstanding, amounted to US$116.3 million (31 December 2016: US$103.9 million).
(c) The weighted average interest rate during the year ended 31 December 2017 was 9.3% (2016: 9.0%).
The carrying value of the bank loans approximated their fair value at each period end.
As at 31 December 2017, there was no security and financial covenants attached to the bank loans (31 December 2016: Bank loans with an aggregate carrying value of US$233.1
million were secured against certain items of property, plant and equipment of the Group (note 13) and shares in subsidiaries held by Petropavlovsk PLC: 100% of LLC Albynskiy
Rudnik; 89.73% of LLC Malomirskiy Rudnik; 100% of LLC Temi. Bank loans with an aggregate carrying value of $522.8 million contained certain financial covenants).
Petropavlovsk Annual Report 2017 177
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
21. Deferred taxation
At 1 January
Deferred tax credited to income statement (a)
Deferred tax (credited)/charged to equity
Exchange differences
At 31 December
Deferred tax liabilities
Net deferred tax liability
(a) Note 10.
Property, plant and equipment
Inventory
Exploration and evaluation assets
Fair value adjustments
Other temporary differences
Property, plant and equipment
Inventory
Exploration and evaluation assets
Fair value adjustments
Other temporary differences
2017
US$’000
119,028
(5,294)
(7,505)
42
106,271
(106,271)
(106,271)
2016
US$’000
152,799
(34,486)
711
4
119,028
(119,028)
(119,028)
Exchange
differences
US$’000
59
–
–
–
(17)
42
Exchange
differences
US$’000
45
–
–
–
(41)
4
At 31 December
2017
US$’000
88,978
10,711
8,070
6
(1,494)
106,271
At 31 December
2016
(restated)
US$’000
96,024
10,056
5,008
129
7,811
119,028
At 1 January
2017
US$’000
96,024
10,056
5,008
129
7,811
119,028
At 1 January
2016
(restated)
US$’000
119,234
16,172
7,255
246
9,892
152,799
Charged/
(credited) to the
income
statement
US$’000
(7,105)
655
3,062
(123)
(1,783)
(5,294)
Charged/
(credited) to the
income
statement
US$’000
(23,255)
(6,116)
(2,247)
(117)
(2,751)
(34,486)
Credited
directly
to equity
US$’000
–
–
–
–
(7,505)
(7,505)
Credited
directly
to equity
US$’000
–
–
–
–
711
711
As at 31 December 2017, the Group did not recognise deferred tax assets in respect of the accumulated tax losses comprising US$698.7 million
that can be carried forward against future taxable income (2016: US$620.2 million). Tax losses of US$531.0 million arise primarily in the UK and
can be carried forward indefinitely, tax losses of US$167.6 million arise in Russia and can be carried forward indefinitely.
As at 31 December 2017, the Group did not recognise deferred tax assets of US$2.7 million (2016: US$2.6 million) in respect of temporary
differences arising on property, plant and equipment.
The Group has not recorded a deferred tax liability in respect of withholding tax and other taxes that would be payable on the unremitted
earnings associated with investments in its subsidiaries and associates as the Group is able to control the timing of the reversal of those
temporary differences and does not intend to reverse them in the foreseeable future. As at 31 December 2017, statutory unremitted earnings
comprised in aggregate US$943.8 million (2016: US$839.4 million).
178 Petropavlovsk Annual Report 2017
22. Provision for close down and restoration costs
At 1 January
Unwinding of discount
Change in estimates (a)
Disposal of subsidiary
Amounts charged against provision
At 31 December
2017
US$’000
19,152
267
1,793
–
(208)
21,004
2016
US$’000
17,184
175
2,177
(384)
–
19,152
(a) Primarily reflects the effect of change in the forecast the Russian Rouble to the US Dollar exchange rate following continued appreciation of the Russian Rouble during the year ended 31 December 2017
and 2016.
The Group recognised provisions in relation to close down and restoration costs for the following mining operations:
Pokrovskiy (a)
Pioneer
Malomir
Albyn
2017
US$’000
3,195
2,876
6,679
8,254
21,004
2016
US$’000
2,842
3,155
6,049
7,106
19,152
(a) With the expected closure of Pokrovskiy mine in 2018, as the site is being transformed into a key component of the POX Hub, the associated amounts of close down and restoration costs will be
attributed to the POX project accordingly.
The provision recognised represents the present value of the estimated expenditure that will be incurred, which has been arrived at using the
long-term risk-free pre-tax cost of borrowing. The expenditure arises at different times over the life of mine. The expected timing of significant
cash outflows is between years 2019 and 2033, varying from mine site to mine site.
23. Share capital
Allotted, called up and fully paid
At 1 January
Issued during the period
At 31 December
2017
2016
No of shares
US$’000
No of shares
US$’000
3,303,768,532
–
3,303,768,532
48,920
–
48,920
3,300,561,697
3,206,835
3,303,768,532
48,874
46
48,920
The Company has one class of ordinary shares which carry no right to fixed income.
Petropavlovsk Annual Report 2017 179
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
24. Notes to the cash flow statement
Reconciliation of profit before tax to operating cash flow
Profit before tax
Adjustments for:
Share of results of associate
Investment income
Interest expense
Other finance gains
Other finance losses
Share based payments
Depreciation
Impairment of exploration and evaluation assets
(Reversal of impairment)/ impairment of ore stockpiles
Effect of processing previously impaired stockpiles
Provision for impairment of trade and other receivables
Impairment of gold in circuit
Effect of processing previously impaired gold in circuit
Loss on disposals of property, plant and equipment
Gain on disposal of subsidiaries
Foreign exchange losses
Impairment of non-trading loans
Gain on disposal of non-trading loans
Other non-cash items
Changes in working capital:
Decrease/(increase) in trade and other receivables
Decrease in inventories
Increase/(decrease) in trade and other payables
Net cash generated from operations
Reconciliation of cash flows used to purchase property, plant and equipment
Additions to property, plant and equipment
Non-cash additions to property, plant and equipment:
Transfer from materials
Capitalised depreciation
Finance lease additions
Associated cash flows:
Purchase of property, plant and equipment
(Increase)/decrease in prepayments for property, plant and equipment
Increase in payables for property, plant and equipment
Cash movements presented in other cash flow lines:
Changes in working capital
2017
US$’000
60,529
(35,208)
(760)
25,905
(2,199)
28,470
144
93,216
–
(4,702)
(12,948)
364
3,890
(1,315)
67
–
746
629
–
(75)
26,515
4,323
16,715
204,306
2017
US$’000
86,156
(600)
(207)
–
85,349
82,295
(5,115)
9,431
(1,262)
85,349
2016
US$’000
27,008
3,581
(556)
60,976
(11,976)
1,548
140
105,252
9,155
1,163
(7,536)
282
–
–
2,431
(791)
5,158
–
(6,724)
177
(25,828)
298
(37,745)
126,013
2016
US$’000
25,781
–
(155)
(919)
24,707
22,004
1,147
954
602
24,707
Non-cash transactions
An equivalent of US$14.5 million of VAT recoverable was offset against additional mining tax (note 6). There were no other significant non-cash
transactions during the years ended 31 December 2017 and 2016.
180 Petropavlovsk Annual Report 2017
25. Related parties
Related parties the Group entered into transactions with during the reporting period
PJSC Asian-Pacific Bank (‘Asian-Pacific Bank’), LLC Insurance Company Helios Reserve (‘Helios’) and Peter Hambro Limited are considered
to be related parties as members of key management had an interest in and collectively exercise significant influence over these entities until
22 June 2017 when the Group lost significant influence over these companies.
The Petropavlovsk Foundation for Social Investment (the ‘Petropavlovsk Foundation’) is considered to be a related party due to the participation
of the key management of the Group in the governing board of the Petropavlovsk Foundation and their presence in its board of guardians.
IRC Limited and its subsidiaries (Note 31) are associates to the Group and hence are related parties since 7 August 2015.
Transactions with related parties which the Group entered into during the years ended 31 December 2017and 2016 are set out below.
Trading Transactions
Related party transactions the Group entered into that relate to the day-to-day operation of the business are set out below.
Asian-Pacific Bank
Other
Trading transactions with other related parties
Insurance arrangements with Helios, rent and other transactions with other entities in
which key management have interest and exercises a significant influence or control
Associates
IRC Limited and its subsidiaries
Sales to related parties
Purchases from related parties
2017
US$’000
2016
US$’000
2017
US$’000
2016
US$’000
3
3
–
85
85
22
22
66
69
135
35
35
1,301
2,062
3,363
102
102
3,514
1,996
5,510
During the year ended 31 December 2017, the Group made US$0.2 million charitable donations to the Petropavlovsk Foundation
(2016: US$0.2 million).
The outstanding balances with related parties at 31 December 2017 and 2016 are set out below.
Helios and other entities in which key management have interest and exercises a
significant influence or control (b)
Asian-Pacific Bank (b)
IRC Limited and its subsidiaries
Amounts owed by related parties
Amounts owed to related parties
2017
US$’000
2016
US$’000
2017
US$’000
2016
US$’000
236
–
2,099
2,335
1,383
1
14,502 (a)
15,886
–
–
527
527
1
–
1,704
1,705
(a) Including US$12.5 million advanced to IRC in December 2016. This balance was fully repaid in January 2017.
(b) PJSC Asian-Pacific Bank (“Asian-Pacific Bank”), LLC Insurance Company Helios Reserve (“Helios”) and Peter Hambro Limited ceased being related parties to the Group from 22 June 2017.
Banking arrangements
The Group has current and deposit bank accounts with Asian-Pacific Bank.
The bank balances at 31 December 2017 and 2016 are set out below.
Asian-Pacific Bank
(c) PJSC Asian-Pacific Bank (“Asian-Pacific Bank”) ceased being related party to the Group from 22 June 2017.
2017
US$’000
– (c)
2016
US$’000
629
Petropavlovsk Annual Report 2017 181
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
Financing transactions
The Group has charged a fee for the provision of the guarantee to IRC (note 14), equal to 1.75% on the outstanding loan amount under the
ICBC Facility Agreement and which amounted to US$4.1 million during the year ended 31 December 2017 (31 December 2016: US$4.5 million).
The Guarantee fee principal outstanding amounted to an equivalent of US$6.4 million (31 December 2016:US$3.4 million).
Key management compensation
Key management personnel, comprising a group of 13 (2016: 15) individuals, including Executive and Non-Executive Directors of the Company
and members of senior management, are those having authority and responsibility for planning, directing and controlling the activities of the Group.
Wages and salaries
Pension costs
Share based compensation
26. Analysis of Net Debt◆
Cash and cash equivalents
Borrowings
Net Debt◆
At 1 January
2017
US$’000
12,642
(611,212)
(598,570)
(a) Being amortisation of borrowings and the effect of the bank debt refinancing (note 20).
Cash and cash equivalents
Borrowings
Net Debt◆
At 1 January
2016
US$’000
28,239 (b)
(638,278)
(610,039)
Disposal of
subsidiaries
US$’000
–
–
–
Disposal of
subsidiaries
US$’000
(99)
–
(99)
Net cash
movement
US$’000
(1,605)
87,191
85,586
Net cash
movement
US$’000
(18,329)
84,710
66,381
Exchange
movement
US$’000
378
–
378
Exchange
movement
US$’000
2,831
173
3,004
(b) Including US$15.1 million received under investment agreement with the Russian Ministry of Far East Development (note 29).
(c) Being amortisation of borrowings and the effect of the Refinancing.
2017
US$’000
6,285
176
136
6,597
2016
US$’000
6,103
182
610
6,895
Non-cash
changes
US$’000
–
(72,453)
(72,453) (a)
At 31 December
2017
US$’000
11,415
(596,474)
(585,059)
Non-cash
changes
US$’000
–
(57,817)
(57,817) (c)
At 31 December
2016
US$’000
12,642
(611,212)
(598,570)
182 Petropavlovsk Annual Report 2017
◆ Go to pages 197 to 203 for more information on our APMs.
27. Financial instruments and financial
risk management
Capital risk management
The Group’s objectives when managing capital
are to safeguard the Group’s ability to continue
as a going concern in order to provide returns
for shareholders and benefits for other
stakeholders and to optimise the weighted
average cost of capital and tax efficiency
subject to maintaining sufficient financial
flexibility to undertake its investment plans.
The capital structure of the Group consists of
Net Debt◆ (as detailed in note 26) and equity
(comprising issued capital, reserves and
retained earnings). As at 31 December 2017,
the capital comprised US$1.2 billion (2016:
US$1.2 billion).
In order to maintain or adjust the capital
structure, the Group may adjust the amount
of dividends paid to shareholders, return
capital to shareholders, issue new shares
or sell assets to reduce debt. The Group
adopts a modular approach in developing
its projects in order to minimise upfront
capital expenditure and related funding
requirements. The Group manages in detail
its funding requirements on a 12 month rolling
basis and maintains a five year forecast in
order to identify medium-term funding needs.
The Group is not subject to any externally
imposed capital requirements.
Significant accounting policies
Details of significant accounting policies and
methods adopted, including the criteria for
recognition, the basis of measurement and
the basis on which income and expenses are
recognised, in respect of each class of
financial asset, financial liability and equity
instrument are disclosed in note 2 to the
consolidated financial statements.
Categories of financial instruments
Financial assets
Cash and cash equivalents
Derivative financial instruments
Loans and receivables
Available-for-sale investments
Financial liabilities
Trade and other payables – at amortised cost
Borrowings – at amortised cost
Derivative financial instruments
Financial liabilities
2017
US$’000
11,415
–
37,615
347
71,653
596,474
49,684
8,603
2016
(restated)
US$’000
12,642
7,478
50,331
1,105
43,688
611,212
10,314
9,229
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 183
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
27. Financial instruments and financial
risk management continued
Financial risk management
The Group’s activities expose it to interest rate
risk, foreign currency risk, risk of change in
the commodity prices, credit risk and liquidity
risk. The Group’s overall risk management
programme focuses on the unpredictability
of financial markets and seeks to minimise
potential adverse effects on the Group’s
financial performance.
Risk management is carried out by a
central finance department and all key risk
management decisions are approved by the
Board of Directors. The Group identifies and
evaluates financial risks in close cooperation
with the Group’s operating units. The Board
provides written principles for overall risk
management, as well as guidance covering
specific areas, such as foreign exchange risk,
interest rate risk, gold price risk, credit risk
and investment of excess liquidity.
Interest rate risk
The Group’s fixed rate borrowings and are
carried at amortised cost. They are therefore
not subject to interest rate risk as defined in
IFRS 7, since neither the carrying amount nor
the future cash flows will fluctuate because of
a change in market interest rates. The Group
does not have borrowings with variable
interest rates.
Foreign exchange risk
The Group operates internationally and is
exposed to foreign exchange risk arising from
fluctuations in currencies the Group
transacts, primarily US Dollars, GB Pounds
Sterling and Russian Roubles.
Exchange rate risks are mitigated to the
extent considered necessary by the Board
of Directors, through holding the relevant
currencies. At present, the Group does
not undertake any foreign currency
transaction hedging.
The carrying amounts of the Group’s foreign
currency denominated monetary assets and
monetary liabilities at period end are set
out below.
Russian Roubles
US Dollars (a)
GB Pounds Sterling
EUR
Other currencies
Assets
Liabilities
2017
US$’000
40,101
3,101
2,560
–
–
2016
US$’000
39,404
5,355
2,444
54
49
2017
US$’000
55,740
3,768
3,173
763
313
2016
US$’000
35,675
4,700
813
18
288
(a) US Dollar denominated monetary assets and liabilities in Group companies with Rouble functional currency.
The table set out below illustrates the Group’s profit sensitivity to changes in exchange rates by 25% (2016: 25%), representing management’s
assessment of a reasonably possible change in foreign exchange currency rates. The analysis was applied to monetary assets and liabilities at the
reporting dates denominated in respective currencies.
2017
US$’000
3,910
167
153
191
78
2016
US$’000
932
164
408
9
60
financial statements and the outstanding
principal and interest under the ICBC facility
(note 14).
The major financial assets at the balance
sheet date are cash and cash equivalents
held with the counterparties as set out below.
Russian Rouble currency impact
US Dollar currency impact
GB Pounds Sterling currency impact
EUR currency impact
Other currencies
Credit risk
The Group’s principal financial assets are
cash and cash equivalents, comprising
current accounts, amounts held on deposit
with financial institutions and investments in
money market and liquidity funds. In the case
of deposits and investments in money market
and liquidity funds, the Group is exposed to a
credit risk, which results from the non-
performance of contractual agreements on
the part of the contract party. The Group is
also exposed to a credit risk in relation to the
amounts guaranteed under the ICBC facility
(note 14).
184 Petropavlovsk Annual Report 2017
The credit risk on liquid funds held in current
accounts and available on demand is limited
because the main counterparties are banks
with high credit-ratings assigned by
international credit-rating agencies. Having
performed a high level due diligence,
management does not consider the credit
risk associated with Asian-Pacific Bank and
other banks without international credit rating
to be high. Asian-Pacific Bank has a wide
network of branches in the Amur region and,
therefore, is extensively used by the entities of
the precious metals segment (note 25).
The Group’s maximum exposure to credit
risk is limited to the carrying amounts of the
financial assets recorded in the consolidated
Counterparty
VTB
UBS
AVANGARD
Sberbank
Barclays
Asian-Pacific Bank
Bank of Cyprus
Alfa-Bank
Commodity price risk
The Group generates most of its revenue
from the sale of gold and iron ore concentrate.
The Group’s policy is to sell its products at the
prevailing market price. In 2017 and 2016,
the Group has entered into gold forward
contracts to protect cash flows from the
volatility in the gold price (note 18).
Liquidity risk
Liquidity risk is the risk that suitable sources
of funding for the Group’s business activities
may not be available. The Group constantly
monitors the level of funding required to meet
its short, medium and long term obligations.
The Group also monitors compliance with
restrictive covenants set out in various loan
agreements (note 20) to ensure there is no
breach of covenants resulting in associated
loans become payable immediately.
Effective management of liquidity risk has
the objective of ensuring the availability of
adequate funding to meet short-term
requirements and due obligations as well as
the objective of ensuring a sufficient level of
flexibility in order to fund the development
plans of the Group’s businesses.
Carrying
amount at
31 December 2017
US$’000
6,559
1,493
1,436
914
660
78
11
7
Carrying
amount at
31 December 2016
US$’000
1,067
212
794
3,936
4,056
629
365
846
Credit rating
BB+
A+
–
BBB-
A
CCC
B-
BB+
The table below details the Group’s remaining
contractual maturity for its non-derivative
financial liabilities with agreed repayment
periods. The amounts disclosed are the
contractual undiscounted cash flows and so
these balances will not necessarily agree with
the amounts disclosed in the balance sheet.
The contractual maturity is based on the
earliest date on which the Group may be
required to pay.
Petropavlovsk Annual Report 2017 185
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
2017
Borrowings
– Convertible bonds
– Notes
– Loans
Future interest payments (a)
Trade and other payables
2016
Borrowings
– Convertible bonds
– Loans
Future interest payments (a)
Trade and other payables
0 - 3 months
US$’000
3 months -
1 year
US$’000
1 - 2 years
US$’000
2 - 3 years
US$’000
3 - 6 years
US$’000
–
–
–
2,395
48,396
50,791
–
1,524
13,257
34,658
49,439
–
–
4,006
51,229
23,257
78,492
–
83,782
38,670
9,030
131,482
–
–
–
49,625
–
49,625
–
46,255
44,589
–
90,844
100,000
–
–
42,875
–
142,875
–
86,475
40,322
–
126,797
–
500,000
–
81,250
–
581,250
100,000
311,759
74,730
–
486,489
(a) Future interest payments have been estimated using interest rates applicable at 31 December. There are no borrowings that are subject to variable interest rates and, therefore, subject to change in line with
the market rates.
28. Operating lease arrangements
The Group as a Lessee
The Group incurred rental expense, primarily associated with rent of office premises and rent of mining fleet, as set out below.
Minimum lease payments under operating leases recognised as an expense in the year
2017
US$’000
5,256
2016
US$’000
5,057
At the balance sheet date, the Group had outstanding commitments for future minimum lease payments under a non-cancellable operating lease
for office premises, which fall due as follows:
Expiring:
Within one year
In two to five years
2017
US$’000
2016
US$’000
369
123
492
319
531
850
The Group as a Lessor
The Group earned property rental income during the year of US$0.7 million (2016: US$0.7million) on buildings owned by its subsidiary Irgiredmet.
186 Petropavlovsk Annual Report 2017
29. Capital commitments
At 31 December 2017, the Group had entered
into contractual commitments in relation to
the acquisition of property, plant and
equipment and mine development costs
amounting to US$19.1 million (31 December
2016: US$3.8 million) including US$17.6
million in relation to POX Hub project (31
December 2016: US$3.8 million).
Investment agreement with the Russian
Ministry of Far East Development
On 14 December 2015, the Group entered
into an investment agreement with the
Russian Ministry of Far East Development
(the ‘Investment Agreement’). The Investment
Agreement involves provision of RUB5.5billion
(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 from 2015 to 2019.
The funds are passed through the Group
to the joint-stock company Far East Grid
Distribution Company (‘DRSK’), which is
required 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 is taking
ultimate responsibility for the construction of
the power line. Upon completion, the Group
will get access to the enhanced capacity of
the power supply infrastructure in the region.
Under the terms of the Investment
Agreement, the Group has certain capital
commitments, including further development
of Albyn and Malomir mines.
During 2017, the Group received an aggregate
RUB1.8 billion (an equivalent to US$31.2 million)
in funding under the Investment Agreement and
transferred these funds to DRSK (2016: the
Group received an aggregate RUB2.0 billion
(an equivalent to US$30.8 million) in funding
and transferred an aggregate RUB3.1 billion
(an equivalent to US$47.7 million) to DRSK).
30. Reconciliation of non-GAAP measures (unaudited)
Profit for the period
Add/(less):
Investment income
Interest expense
Other finance gains
Other finance losses
Foreign exchange losses
Accrual for additional mining tax (a)
Taxation
Depreciation
Impairment of exploration and evaluation assets
(Reversal of impairment)/ impairment of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Share of results of associates (b)
Underlying EBITDA◆
2017
US$’000
41,466
(760)
25,905
(2,199)
28,470
746
19,852
19,063
93,216
–
(4,702)
3,890
629
(28,744)
196,832
2016
US$’000
31,706
(556)
60,976
(11,976)
1,548
5,158
–
(4,698)
105,252
9,155
1,163
–
–
2,356
200,084
(a) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties settled by the Group in 2017 following unfavourable court decisions.
(b) Group’s share of interest expense, investment income, other finance gains and losses, foreign exchange losses, taxation, depreciation and impairment/reversal of impairment recognised by an associate (note 14).
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 187
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
31. Principal subsidiaries and other significant investments
The Group has the following principal subsidiaries and other significant investments, which were consolidated in this financial information.
Principal subsidiary, joint venture and
associate undertakings
Subsidiary
JSC Management Company
Petropavlovsk
Petropavlovsk 2010 Limited
Petropavlovsk 2016 Limited
JSC Pokrovskiy Rudnik
LLC Malomirskiy Rudnik
LLC Albynskiy Rudnik
LLC Osipkan
LLC Tokurskiy Rudnik
LLC Rudoperspektiva
LLC Temi
LLC AGPK
LLC PPOP
Universal Mining Inc.
LLC Kapstroi
LLC NPGF Regis
CJSC ZRK Dalgeologiya
JSC PHM Engineering
JSC Irgiredmet
LLC NIC Gydrometallurgia
LLC BMRP
LLC AVT-Amur
LLC Transit
Pokrovskiy Mining College
Associate
IRC Limited (b)
Country of
incorporation
Principal activity
Proportion of shares held
by Petropavlovsk PLC(a)
Proportion of shares held
by the Group(a)
31 December
2017
31 December
2016
31 December
2017
31 December
2016
Russia
Jersey
Jersey
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Guyana
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Management company
Finance company
Finance company
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Gold exploration and production
Construction services
Exploration services
Exploration services
Project and engineering services
Research services
Research services
Repair and maintenance
Production of explosive materials
Transportation services
Educational institute
100%
100%
100%
19.37%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
–
43.5%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
100%
99.38%
99.94%
100%
100%
100%
100%
75%
99.38%
–
100%
100%
100%
99.38%
94%
99.69%
100%
100%
49%
100%
99.38%
100%
100%
–
98.61%
99.86%
100%
100%
100%
100%
75%
98.61%
98.61%
100%
100%
100%
98.61%
94%
99.69%
100%
100%
49%
100%
98.61%
HK
Management and holding company
–
–
31.10%
31.10%
(a) In the ordinary class of shares.
(b) IRC Limited and its principal subsidiary and joint venture undertakings.
188 Petropavlovsk Annual Report 2017
Principal subsidiary, joint venture and
associate undertakings
Country of
incorporation
Principal activity
Proportion of shares held
by Petropavlovsk PLC (a)
Proportion of shares held
by the Group (a)
31 December
2017
31 December
2016
31 December
2017
31 December
2016
HK
Management and holding company
Russia
Russia
Russia
Management company
Iron ore exploration and production
Iron ore exploration and production
IRC and its principal subsidiary and joint venture undertakings (‘IRC’)
IRC Limited
Principal subsidiaries of IRC
LLC Petropavlovsk-Iron Ore
LLC Olekminsky Rudnik
LLC KS GOK
LLC Garinsky Mining & Metallurgical
Complex
Russia
Russia
LLC Kostenginskiy GOK
Russia
LLC Orlovo-Sokhatinsky Rudnik
Russia
JSC Giproruda
Russia
LLC SHMTP
Russia
LLC Amursnab
Heilongjiang Jiatal Titanium Co., Limited China
Russia
LLC Uralmining
LLC Gorniy Park
Russia
Joint ventures of IRC
Heilongjiang Jianlong Vanadium
Industries Co., Limited
Iron ore exploration and production
Iron ore exploration and production
Iron ore exploration and production
Engineering services
Infrastructure project
Procurement services
Titanium sponge project
Iron ore exploration and production
Molybdenym project
Vanadium project
China
(a) In the ordinary class of shares.
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
31.10%
31.10%
31.10%
31.10%
31.10%
30.97%
31.10%
31.10%
21.85%
31.10%
31.07%
31.10%
31.10%
18.75%
31.10%
31.10%
31.10%
30.97%
31.10%
31.10%
21.86%
31.10%
31.07%
31.10%
31.10%
18.75%
14.31%
14.31%
Petropavlovsk Annual Report 2017 189
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2017
32. Related undertakings of the Group
The Group consists of the parent company, Petropavlovsk PLC, incorporated in the United Kingdom and its subsidiaries, associates and joint
ventures. In accordance with Section 409 of the Companies Act 2006 a full list of related undertakings, the country of incorporation and the
effective percentage of equity owned as at 31 December 2017 is disclosed below. The Group’s principal subsidiaries and other significant
investments are set out in note 31.
Country of
incorporation
Proportion of
shares held by
the Group(a)
Registered address
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
UK
Jersey
Jersey
Jersey
Guernsey
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Guyana
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
100%
100%
100%
100%
100%
100%
100%
99.38%
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.38%
99.94%
100%
100%
100%
100%
75%
99.38%
100%
100%
99.38%
94%
99.69%
100%
100%
49%
100%
99.38%
100%
100%
100%
100%
100%
100%
100%
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
13-14 Esplanade, St. Helier, JE1 1EE
13-14 Esplanade, St. Helier, JE1 1EE
13-14 Esplanade, St. Helier, JE1 1EE
PO Box 409, Elizabeth House, Ruette Braye, St. Peter Port, GY1 3WA
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
676150, Amur Region, Magdagachinskiy District, Tygda Village,
Sovetskaya Street, 17
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
676581, Amur Region, Selemdzhinskiy District, Tokur Village,
Vorozhejkina Street, 16
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
675002, Amur Region, Blagoveshchensk, Amurskaya Street, 17
675027, Amur Region, Blagoveshchensk, Western Industrial Hub
680041, Khabarovskiy Region, Khabarovsk, Balashovskaya Street, 15
105082, Moscow, Rubtsov Pereulok, 13
664025, Irkutsk, Gagarina Boulevard, 38
196247, St. Petersburg, Leninskiy Prospekt, 151
675016, Amur Region, Blagoveshchensk, Kalinina Street, 137
675000, Amur Region, Blagoveshchensk, Lenina Street, 140/1
676572, Amur Region, Selemdzhinskiy District, Fevralsk Urban Village,
Vysotskogo Street, 1
676244, Amur Region, Zeya, Zolotogorskoe Shosse, 6
Lot 8 Pere Street, Kitty, Georgetown
14 Souliou Street, Aglantzia, Nicosia, 2102
14 Souliou Street, Aglantzia, Nicosia, 2102
14 Souliou Street, Aglantzia, Nicosia, 2102
14 Souliou Street, Aglantzia, Nicosia, 2102
14 Souliou Street, Aglantzia, Nicosia, 2102
14 Souliou Street, Aglantzia, Nicosia, 2102
Name of undertaking
Subsidiaries
Aricom B Finance Plc
Aricom Finance UK Limited
Aricom Treasury UK Limited
Aricom Services Limited
Aricom Roubles Treasury UK Limited
Aricom B Limited
Aricom B Roubles Treasury Limited
Petropavlovsk Rouble UK Limited
Eponymousco Limited
Victoria Resources Limited
Petropavlovsk Mining Treasury UK Limited
Petropavlovsk Rouble Treasury Limited
Petropavlovsk 2010 Limited
Petropavlovsk 2016 Limited
Petropavlovsk (Jersey) Limited
Petropavlovsk Group Finance Limited
JSC Management Company Petropavlovsk
JSC Pokrovskiy Rudnik
LLC Malomirskiy Rudnik
LLC Albynskiy Rudnik
LLC Osipkan
LLC Tokurskiy Rudnik
LLC Rudoperspektiva
LLC Temi
LLC AGPK
LLC Kapstroi
LLC NPGF Regis
CJSC ZRK Dalgeologiya
JSC PHM Engineering
JSC Irgiredmet
LLC NIC Gydrometallurgia
LLC BMRP
LLC AVT-Amur
LLC Transit
Pokrovskiy Mining College
Universal Mining Inc.
Petropavlovsk (Cyprus) Limited
Malomyrskiy Rudnik (Cyprus) Ltd
Voltimand Limited
Horatio Limited
Sicinius Limited
Syncrom High Corporation Ltd
190 Petropavlovsk Annual Report 2017
Name of undertaking
Cayiron Limited
Associates
IRC Limited (b)
Subsidiaries of IRC
LLC Petropavlovsk- Iron Ore
LLC Olekminsky Rudnik
HK
Russia
Russia
LLC KS GOK
LLC Garinsky Mining & Metallurgical Complex
Russia
Russia
LLC Kostenginskiy GOK
LLC Orlovo-Sokhatinsky Rudnik
JSC Giproruda
LLC SHMTP
LLC Amursnab
LLC Uralmining
LLC Gorniy Park
LLC Garinskaya Infrastructure
LLC TOK
Lucilius Investments Limited
Kapucius Services Limited
Lapwing Limited
Russian Titan Company Limited
Brasenose Services Limited
Tenaviva Limited
Esimanor Limited
Metellus Limited
Dardanius Limited
Rumier Holdings Limited
Guiner Enterprises Limited
Expokom Limited
Arfin Limited
Caedmon Limited
Thorholdco (Cyprus) Limited
Heilongjiang Jiatal Titanium Co., Limited
Ariti HK Limited
Ariva HK Limited
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Russia
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
Cyprus
China
Hong Kong
Hong Kong
Country of
incorporation
Proportion of
shares held by
the Group(a)
Registered address
Cayman Islands
100%
Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108
31.10%
6H, 9 Queen’s Road Central, Central, Hong Kong
31.10%
31.10%
31.10%
30.97%
31.10%
31.10%
21.85%
31.10%
31.07%
31.10%
18.75%
31.10%
31.10%
31.10%
31.10%
30.97%
31.10%
31.10%
31.10%
31.10%
31.10%
31.09%
31.10%
31.10%
31.10%
31.10%
18.75%
31.10%
31.10%
31.10%
31.10%
127055, Moscow, Lesnaya Street, 43, Office 313
676253, Amur Region, Tyndinskiy District, Village Olekma
679000, The Jewish Autonomous Region, Birobidzhan, 60-Letiya
SSSR Street, Building 22B
675027, Amur Region, Blagoveshchensk, Ignatievskaya Road, 19
679000, The Jewish Autonomous Region, Birobidzhan, 60-Letiya
SSSR Street, Building 22B.
675027, Amur Region, Blagoveshchensk, Ignatievskaya Road, 19
St. Petersburg, Leninskiy Avenue,151
682818, RF, Khabarovsk Territory, Town Sovetskaya Gavan,
Pervomayskaya Street, 48A
127055, Moscow, Lesnaya Street, 43, Office 313
105082, Moscow, Spartakovskaya Square, 14, Building 1
101000, Moscow, Pokrovka Street,1/13/6 Building 2, Office 35
675027, Amur Region, Blagoveshchensk, Ignatievskaya Road, 19
676282, Amur Region, Tynda, Sovetskaya Street,1A
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Themistokli Dervi 12, Palais D’ Ivoire, 2nd Floor, 1066 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
Souliou 14, Aglantzia, 2102 Nicosia
668, Songxing Street, Jiamusi, Heilongjiang Province
6H, 9 Queen’s Road Central, Central, Hong Kong
6H, 9 Queen’s Road Central, Central, Hong Kong
P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road,
Grand Cayman, KY1-1205
P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road,
Grand Cayman, KY1-1205
P.O. Box 31119 Grand Pavilion, Hibiscus Way, 802 West Bay Road,
Grand Cayman, KY1-1205
11 Grosvenor Place, London, SW1X 7HH
11 Grosvenor Place, London, SW1X 7HH
ThorRouble Limited
Cayman Islands
31.10%
Thordollar Limited
Cayman Islands
31.10%
Cayman Islands
UK
UK
31.10%
31.10%
31.10%
Thorholdco Limited
Aricom UK Limited
Aricom Limited
Joint ventures of IRC
Heilongjiang Jianlong Vanadium
Industries Co., Limited
(a) In the ordinary class of shares.
China
14.31%
Building 50, Block12, Advanced Business Park, No. 188.West Road,
South Ring 4, Fengtai District, Bejing
(b) IRC Limited and its principal subsidiary and joint venture undertakings.
Petropavlovsk Annual Report 2017 191
Financial statementsStrategic reportGovernance
Company Balance Sheet
At 31 December 2017
Fixed assets
Tangible assets
Investments
Current assets
Debtors: due within one year
Debtors: due after one year
Cash at bank and in hand
Creditors: amounts falling due within one year
Net current assets
Total assets less current liabilities
Derivative financial liability
Creditors: amounts falling due after more than one year
Net assets
Capital and reserves
Share capital
Share premium
Own shares
Other reserves
Profit and loss account
Shareholders’ funds
(a) See note 2 for details regarding the restatement.
31 December
2017
note
US$’000
3
4
4
5
5
33
775,657
775,690
1,123,900
8,396
2,200
1,134,496
(803,142)
331,354
1,107,044
(17,207)
(567,484)
522,353
48,920
518,142
–
(2,560)
(42,149)
522,353
31 December
2016
(restated)(a)
US$’000
59
739,921
739,980
761,366
309,229
4,259
1,074,854
(704,768)
370,086
1,110,066
(10,314)
(541,178)
558,574
48,920
518,142
–
(1,946)
(6,542)
558,574
1 January
2016
(restated)(a)
US$’000
87
776,214
776,301
305,346
610,757
4,966
921,069
(493,562)
427,507
1,203,808
(14,684)
(578,999)
610,125
48,874
518,142
(12,685)
(2,500)
58,294
610,125
The loss after tax for the year of the Company was US$35.6 million (2016: loss after tax of US$52.5 million).
The accompanying notes are an integral part of this balance sheet.
These financial statements for Petropavlovsk PLC, registered number 4343841, on pages 192 to 196 were approved by the Directors on
27 March 2018 and signed on their behalf by
Ian Ashby
Director
Andrey Maruta
Director
192 Petropavlovsk Annual Report 2017
Company Statement of Changes in Equity
For the year ended 31 December 2017
Balance at 1 January 2016
Loss for the year
Deferred share awards
Revaluation of available for sale investments
Balance at 1 January 2017
Loss for the year
Deferred share awards
Revaluation of available-for-sale investments
Balance at 31 December 2017
(a) Please see note 23 to the consolidated financial statements.
Share capital (a)
US$’000
48,874
–
46
–
48,920
–
–
–
48,920
Share premium (a)
US$’000
518,142
–
–
–
518,142
–
–
–
518,142
Own shares
US$’000
(12,685)
–
12,685
–
–
–
–
–
–
Other reserves
US$’000
(2,500)
–
(280)
834
(1,946)
–
144
(758)
(2,560)
Retained earnings
US$’000
58,294
(52,525)
(12,311)
–
(6,542)
(35,607)
–
–
(42,149)
Total
US$’000
610,125
(52,525)
140
834
558,574
(35,607)
144
(758)
522,353
Petropavlovsk Annual Report 2017 193
Financial statementsStrategic reportGovernance Notes to the Company Financial Statements
For the year ended 31 December 2017
2.5 Financial assets and liabilities
Financial assets and liabilities are measured
on initial recognition at fair value, and are
subsequently measured at amortised cost
using the effective interest rate method.
Appropriate allowances for estimated
irrecoverable amounts are recognised in the
profit and loss when there is objective
evidence that the financial asset is impaired.
The allowance recognised is measured as the
difference between the asset’s carrying
amount and the present value of estimated
future cash flows discounted at the effective
interest rate computed at initial recognition.
2.6 Derivative financial instruments
Derivative financial instruments are initially
accounted for and measured at fair value on
the date a derivative contract is entered into
and subsequently measured at fair value.
The gain or loss on re-measurement is taken
to the income statement except where the
derivative is a designated cash flow hedging
instrument.
Derivative financial instruments embedded in
other financial instruments or other host
contracts are treated as separate derivatives
when their risks and characteristics are not
closely related to those of host contracts and
the host contracts are not carried at fair value,
with gains or losses reported in the income
statement.
2.7 Dividends
Dividends payable are recognised when they
have been approved and, therefore, meet the
criteria for a present obligation.
2.8 Operating leases
Rentals paid under operating leases are
charged to the profit and loss account as
incurred.
1 Basis of preparation
Petropavlovsk PLC (the ‘Company’) is a
company incorporated and registered in
England and Wales. The address of the
registered office is 11 Grosvenor Place,
London SW1X 7HH.
These financial statements were prepared in
accordance with FRS 101 (Financial
Reporting Standard 101) ‘Reduced
Disclosure Framework’ as issued by the
Financial Reporting Council.
As permitted by FRS 101, the Company has
taken advantage of the disclosure exemptions
available under that standard in relation to
share-based payments, financial instruments,
presentation of comparative information in
respect of certain assets, presentation of a
cash-flow statement, standards not yet
effective, impairment of assets and related
party transactions.
Where required, equivalent disclosures are
given in the consolidated financial statements.
The financial statements have been prepared
on the historical cost basis except for the
re-measurement of certain financial
instruments to fair value.
As permitted by section 408 of the
Companies Act 2006, the profit and loss
account of the parent company is not
presented as part of these financial
statements.
2 Significant accounting policies
2.1 Foreign currencies
The functional and presentation currency of
the Company is the US Dollar. Transactions
denominated in other currencies, including
the issue of shares, are translated at the rate
of exchange ruling on the date of the
transaction. Monetary assets and liabilities
that are denominated in other currencies are
retranslated at the rates prevailing on the
balance sheet date. Exchange rates used are
consistent with the rates used by the Group
as disclosed in note 2.6 to the consolidated
financial statements. Exchange differences
are charged or credited to the profit and loss
account in the year in which they arise.
2.2 Tangible fixed assets and
depreciation
Tangible fixed assets are stated at cost, net of
accumulated depreciation. Depreciation is
provided on all tangible fixed assets at rates
calculated to write off the cost or valuation of
each asset on a straight-line basis over its
expected useful life as follows:
Office equipment
Computer equipment
Average life
Number of years
4-7
3
Useful lives and residual values are reviewed
at the end of every reporting period.
2.3 Investments
Investments in subsidiary undertakings and
joint ventures are initially measured at cost
and subsequently carried at cost less
provisions for impairment. Investments are
reviewed for impairment when events or
changes in circumstances indicate that the
carrying amount of the investment may not
be recoverable. An impairment loss is
recognised if the carrying amount of the
investment exceeds the higher of net
realisable value and the discounted future
earnings from the investment.
Other investments are those classified as
available-for-sale. Available-for-sale
investments are initially measured at cost and
subsequently carried at fair value. Changes to
the fair value of available-for-sale investments
are recognised in equity.
2.4 Taxation including deferred taxation
Full provision is made for deferred taxation on
taxable temporary differences that have arisen
but not reversed at the balance sheet date,
except that deferred tax assets are only
recognised to the extent that it is more likely than
not that they will be recovered. Deferred tax is
measured on a non-discounted basis at the tax
rates that are expected to apply in the periods in
which timing differences reverse, based on tax
rates and laws enacted or substantially enacted
at the balance sheet date.
194 Petropavlovsk Annual Report 2017
2.9 Presentation of the ICBC guarantee arrangements
As at 30 June 2017, the Group reviewed arrangements under the ICBC guarantee (note 20 to the consolidated financial statements) and concluded
it would be more appropriate to disclose the associated receivable from IRC and financial liability under the ICBC guarantee contract on a gross
basis. The affected financial statement line items for the prior periods have been re-presented accordingly as set out below. This re-presentation
did not have any impact on net assets, profit and loss account or shareholders’ funds.
Debtors: due after one year
Creditors: amounts falling due after more than
one year
31 December
2016
US$’000
300,000
Increase
US$’000
9,229
31 December
2016
Restated
US$’000
309,229
1 January 2016
US$’000
598,389
Increase
US$’000
12,368
1 January 2016
Restated
US$’000
610,757
531,949
9,229
541,178
566,631
12,368
578,999
2.10 Areas of judgement in applying accounting policies and key sources of estimation uncertainty
When preparing these financial statements in accordance with the accounting policies as set out in note 2, management necessarily makes
judgements and estimates that can have a significant impact on the financial statements. These judgements and estimates are based on
management’s best knowledge of the relevant facts and circumstances and previous experience. Actual results may differ from these estimates
under different assumptions and conditions (note 3 to the consolidated financial statements).
3. Investments
Cost
At 1 January 2017
Additions
Fair value change
At 31 December 2017
Provision for impairment
At 1 January 2017
Charge for the year
At 31 December 2017
Net book value
At 1 January 2017
At 31 December 2017
Investments in
Group
companies
US$’000
Other
investments
other than loans
US$’000
2,133,224
1,744
–
2,134,968
(1,394,404)
34,750 (a)
(1,359,654)
1,101
–
(758)
343
–
–
–
Total
US$’000
2,134,325
1,744
(758)
2,135,311
(1,394,404)
34,750
(1,359,654)
738,820
775,314
1,101
343
739,921
775,657
(a) Reversal of impairment to reflect changes in the value of the underlying investment in IRC Limited (note 14 to the consolidated financial statements).
Details of the Company’s subsidiary undertakings at 31 December 2017 are provided in note 32 to the consolidated financial statements.
4. Debtors
Owed by Group companies
VAT recoverable
Other debtors
Due within one year
Due after more than one year
2017
US$’000
1,116,939
2,053
13,304
1,132,296
1,123,900
8,396
1,132,296
2016
(restated)
US$’000
1,048,124
2,046
20,425
1,070,595
761,366
309,229
1,070,595
Petropavlovsk Annual Report 2017 195
Financial statementsStrategic reportGovernance Notes to the Company Financial Statements continued
For the year ended 31 December 2017
5. Creditors
Due to Group companies
Bank loans (a)
Trade creditors
Accruals and other creditors
Due within one year
Due after more than one year
(a) Please see note 20 to the consolidated financial statements.
6. Taxation
2017
US$’000
1,342,638
7,137
1,362
19,489
1,370,626
803,142
567,484
1,370,626
2016
(restated)
US$’000
706,751
525,132
975
13,088
1,245,946
704,768
541,178
1,245,946
As at 31 December 2017, the Company has tax losses available to carry forward in the amount of US$274.4 million (2016: US$198.0 million).
7. Parent company guarantees
The Company provided a number of corporate guarantees on behalf of certain Group undertakings. Please also see note 14 to the consolidated
financial statements.
8. Operating lease arrangements
At the balance sheet date, the Company had outstanding commitments for future minimum lease payments under a non-cancellable operating
lease for office premises, which fall due as follows:
Expiring:
Within one year
Within two to five years
9. Directors’ remuneration
2017
US$’000
2016
US$’000
369
123
492
319
531
850
There were two Executive Directors who held office at the end of the year (2016: three Executive Directors who held office at the end of the year).
Details of Directors’ remuneration are provided in the Directors’ Remuneration Report on pages 115 to 132 of this Annual Report.
196 Petropavlovsk Annual Report 2017
The Use and Application of Alternative
Performance Measures (APMs)
Throughout this Annual Report, when
discussing the Group’s financial performance,
reference is made to APMs.
Each of the APMs is defined and calculated
by the Group and as such they are non-IFRS
measures because they may include or
exclude certain items that an IFRS measure
ordinarily would or would not take into
account. APMs should not be regarded as
an alternative or substitute for the equivalent
measures calculated and presented in
accordance with IFRS but instead should be
seen as additional information provided to
investors to enable the comparison of
information between different reporting
periods of the Group.
Although the APMs used by the Group may
be calculated in a different manner and
defined differently by other peers in the
precious metals mining sector (despite being
similar in title), they are nonetheless relevant
and commonly used measures for the
industry in which Petropavlovsk operates.
These and similar measures are used widely
by certain investors, analysts and other
interested parties as supplemental measures
of financial performance.
Some of the APMs form part of the Group’s
Key Performance Indicators (KPIs), which are
used to monitor progress and performance
against strategic objectives and to
benchmark the performance of the business
each year.
A discussion of the relevance of each APM
as well as a description of how they are
calculated is set out below, with reconciliation
to IFRS equivalents from the consolidated
IFRS financial statements (Consolidated
Income Statement (IS), Consolidated Balance
Sheet (BS), Consolidated Cash Flows
Statement (CF) and the notes to the
consolidated IFRS financial statements).
Total Cash Costs (TCC)
Definition
The total cash cost per ounce is the cost of
producing and selling an ounce of gold from
the Group’s four hard rock operations.
Calculation
TCC are calculated by the Group as operating
cash costs less co-product revenue. TCC per
oz are calculated as Total Cash Costs divided
by the ounces of gold sold. TCC per oz are
presented on a segment basis.
Operating cash costs are defined by the
Group as operating cash expenses plus
refinery and transportation costs, other taxes,
mining tax and the amortisation of deferred
stripping costs. This also equates to the
Group’s segment result as reported under
IFRS plus each segment’s share of results
of associates, loss/gain on disposal of
subsidiaries, impairment of ore stockpiles and
gold in circuit, impairment of exploration and
evaluation assets, impairment of mining
assets, impairment of non-trading loans,
central administration expenses, depreciation
and accrual for additional mining tax minus
each segment’s revenue from external
customers. Operating cash costs are
presented on a segment basis.
Operating cash expenses are defined by the
Group as the total of staff costs, materials,
fuel, electricity, other external services, other
operating expenses, and the movement in
ore stockpiles, work in progress and bullion
in process attributable to gold production
(excluding deferred stripping costs). The main
cost drivers affecting operating cash expenses
are stripping ratios, production volumes of ore
mined / processed, recovery rates, cost
inflation and fluctuations in the Rouble to
US Dollar exchange rate.
Other companies may calculate this measure
differently.
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 operating cash costs and cost per tonne
mined and processed to identify where and
how efficiencies may be made.
Reconciliation
The tables below provide a reconciliation
between operating expenses and Total Cash
Costs to calculate the cash cost per ounce
sold for relevant periods.
Petropavlovsk Annual Report 2017 197
Financial statementsStrategic reportGovernance The Use and Application of Alternative
Performance Measures (APMs) continued
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
127,657
39,988
61,079
98,354
30,030
(743)
126,914
160,421
791
(121)
39,867
32,250
1,236
(42)
61,037
65,678
929
(185)
98,169
181,485
541
(30,030)
–
–
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
85,273
33,777
45,243
100,979
48,995
(958)
84,315
133,605
631
(275)
33,502
38,151
878
(101)
45,142
(207)
100,772
54,760
824
173,342
581
(48,995)
–
–
Total
US$’000
510,683
(746)
(19,852)
(93,216)
4,702
(3,890)
(629)
(39,944)
357,108
(30,030)
(1,091)
325,987
439,834
741
Total
US$’000
460,103
(5,158)
(105,252)
(1,163)
(9,155)
6,724
791
(32,623)
314,267
(48,995)
(1,541)
263,731
399,858
660
2017
Operating expenses
Deduct:
Foreign exchange losses
Accrual for additional mining tax
Depreciation
Reversal of impairment of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Central administration expenses
Operating cash costs
Deduct:
Corporate and other segment
Deduct: silver revenue
Total Cash Costs
Total ounces sold
TCC/oz sold
Ref
IS
note 6
note 6
note 6
note 6
note 6
note 6
note 6
note 4
note 4
note 4
oz
US$/oz
Ref
IS
2016
Operating expenses
Deduct:
note 6
Foreign exchange losses
note 6
Depreciation
Impairment of ore stockpiles
note 6
Impairment of exploration and evaluation assetsnote 6
note 6
Gain on disposal of non–trading loans
note 6
Gain on disposal of subsidiaries
note 6
Central administration expenses
Operating cash costs
note 4
Deduct:
Corporate and other segment
Deduct: silver revenue
Total Cash Costs
note 4
note 4
Total ounces sold
TCC/oz sold
oz
US$/oz
198 Petropavlovsk Annual Report 2017
All-in Sustaining Costs (AISC)
Definition
AISC includes both operating and capital
costs required to sustain gold production on
an ongoing basis, over and above the direct
mining and selling costs shown by TCC.
Calculation
AISC are calculated by the Group as TCC
plus/(minus) impairment/(reversal of
impairment) of ore stockpiles and gold in
circuit, central administration expenses, plus
capitalised stripping at the end of the period,
minus capitalised stripping at beginning of the
period, plus close-down and site restoration
and sustaining capital and exploration
expenditure. This is then divided by the
ounces of gold sold. AISC are presented
on a segment basis.
AISC are calculated in accordance with
guidelines for reporting AISC as published
by the World Gold Council in June 2013.
Other companies may calculate this
measure differently.
Relevance
AISC allows for a better understanding of
the true cost of producing gold once key
components such as central admin costs
and the cost of sustaining capital and
exploration expenditure are taken into
account. Management uses this measure to
monitor the performance of our assets and
their ability to generate positive cash flows.
Reconciliation
The tables below provide a reconciliation
between Total Cash Costs and All-in
Sustaining Costs to calculate all-in sustaining
cost per ounce sold for relevant periods.
2017
Total Cash Costs
Add:
(Reversal of impairment)/
impairment of ore stockpiles
Impairment of gold in circuit
Central administration expenses
Net capitalised stripping
Site restoration costs
Sustaining exploration expenditures
Sustaining Capital Expenditures
All-in Sustaining Costs
Ref
note 6
note 6
note 6
note 15
Total ounces sold
All-in Sustaining Costs per ounce sold
oz
US$/oz
2016
Total Cash Costs
Add:
Impairment/ (reversal of impairment) of ore
stockpiles
Central administration expenses
Net capitalised stripping
Site restoration costs
Sustaining Capital Expenditures
All-in Sustaining Costs
Ref
note 6
note 6
note 15
Total ounces sold
All-in Sustaining Costs per ounce sold
oz
US$/oz
Pioneer
US$’000
126,914
Pokrovskiy
US$’000
39,867
Malomir
US$’000
61,037
Albyn
US$’000
98,169
Corporate
and other
US$’000
–
Total
US$’000
325,987
(1,347)
2,594
14,569
917
101
5,993
15,351
165,092
160,421
1,029
175
733
2,929
–
201
37
159
44,101
32,250
1,367
304
563
5,965
7,024
327
3,789
4,929
83,938
65,678
1,278
(1,592)
–
16,481
5,639
868
6,318
4,510
130,393
181,485
718
–
–
–
–
–
–
–
–
(2,460)
3,890
39,944
13,580
1,497
16,137
24,949
423,524
439,834
963
Pioneer
US$’000
84,315
Pokrovskiy
US$’000
33,502
Malomir
US$’000
45,142
Albyn
US$’000
100,772
Corporate
and other
US$’000
–
Total
US$’000
263,731
6,301
10,900
–
54
3,902
105,472
133,605
789
1,002
3,113
–
19
61
37,697
38,151
988
(30)
4,468
3,610
48
1,724
54,962
54,760
1,004
(123)
14,142
4,596
54
5,209
124,650
173,342
719
–
–
–
–
–
–
7,150
32,623
8,206
175
10,896
322,781
399,858
807
Petropavlovsk Annual Report 2017 199
Financial statementsStrategic reportGovernance
The Use and Application of Alternative
Performance Measures (APMs) continued
All in Costs (AIC)
Definition
AIC comprises of AISC as well as Capital
Expenditures for major growth projects
or enhancement capital for significant
improvements at existing operations.
Calculation
AIC are calculated by the Group as AISC
plus non-sustaining exploration and Capital
Expenditure and (reversal of impairment)/
impairment of refractory ore stockpiles.
This is then divided by the ounces of gold
sold. AIC are presented on a segment basis.
Relevance
AIC reflect the costs of producing gold
over the life-cycle of a mine.
AIC is calculated in accordance with
guidelines for reporting AIC as published
by the World Gold Council in June 2013.
Other companies may calculate this
measure differently.
Reconciliation
The tables below provide a reconciliation
between All-in Sustaining Costs and All-in
Costs to calculate all-in cost per ounce sold
for relevant periods.
2017
All-in Sustaining Costs
Add:
Reversal of impairment of ore stockpiles
Exploration expenditure
Capital Expenditure
All-in costs
Total ounces sold
All-in costs per ounce sold
2016
All-in Sustaining Costs
Add:
Reversal of impairment of ore stockpiles
Exploration expenditure
Capital Expenditure
All-in costs
Total ounces sold
All-in costs per ounce sold
Ref
note 6
oz
US$/oz
Ref
note 6
oz
US$/oz
Pioneer
US$’000
165,092
Pokrovskiy
US$’000
44,101
Malomir
US$’000
83,938
Albyn
US$’000
130,393
(2,242)
5,592
18,237
186,679
160,421
1,164
–
–
–
44,101
32,250
1,367
–
44
22,972
106,954
65,678
1,628
–
127
–
130,520
181,485
719
Pioneer
US$’000
105,472
Pokrovskiy
US$’000
37,697
Malomir
US$’000
54,962
Albyn
US$’000
124,650
(191)
8,455
1,037
114,773
133,605
859
–
76
–
37,773
38,151
990
(5,796)
1,887
836
51,889
54,760
948
–
6,172
1
130,823
173,342
755
Corporate
and other
US$’000
–
–
–
–
–
Corporate
and other
US$’000
–
–
–
–
–
Total
US$’000
423,524
(2,242)
5,763
41,209
468,254
439,834
1,065
Total
US$’000
322,781
(5,987)
16,590
1,874
335,258
399,858
838
200 Petropavlovsk Annual Report 2017
Average Realised Gold Sales Price
Definition
The Average Realised Gold Sales Price is the
mean price at which the Group sold its gold
production output throughout the reporting
period, including the realised effect of cash
flow hedge contracts during the period.
Calculation
The Average Realised Gold Sales Price is
calculated by dividing total revenue received
from gold sales (including the realised effect of
any hedging contracts) by the total quantity of
gold sold during the period. Other companies
may calculate this measure differently.
Gold revenue
Gold sold
Average realised gold price
Ref
note 4
Relevance
As gold is the key commodity produced and
sold by the Group, the Average Realised Gold
Sales Price is a key driver behind the Group’s
revenues and profitability.
Reconciliation
The average realised gold price has been
calculated as set out in the table below.
US$’000
ounces
US$/oz
2017
555,092
439,834
1,262
2016
488,468
399,858
1,222
Capital Expenditure (CAPEX)
Definition
CAPEX is the investment required by the
Group to explore and develop its gold assets
and keep current plants and other equipment
at its gold mines in good working order.
Calculation
CAPEX represents cash flows used in investing
activities, namely Purchases of property, plant
and equipment and Expenditure on exploration
and evaluation assets.
Relevance
Capital Expenditure is necessary in order not
only to maintain but also to develop and grow
the business. CAPEX requirements need to
be balanced in line with the Group’s strategy
and provide an optimal allocation of the
Group’s funds.
Reconciliation
The table below provides a reconciliation
between Capital Expenditure and cash flows
used in investing activities.
Ref
Purchase of property, plant and equipment
CF
Expenditure on exploration and evaluation assets CF
Total Capital Expenditure
31 December 2017
US$’000
82,295
5,763
88,058
31 December 2016
US$’000
22,004
7,356
29,360
Net Debt
Definition
Net Debt shows how indebted a company is
after total debt and any cash (or its equivalent)
are netted off against each other.
Calculation
Net Debt is calculated as the sum of current
borrowings and non-current borrowings less
cash and cash equivalents. Other companies
may calculate this measure differently.
Relevance
Management considers Net Debt a key
measure of the Company’s leverage and its
ability to repay debt as well showing what
progress is being made in strengthening the
balance sheet. The measure is also widely
used by various stakeholders.
Reconciliation
The table below provides calculation of Net
Debt at relevant reporting dates.
Cash and cash equivalents
Borrowings
Net Debt
Ref
BS
BS
31 December 2017
US$’000
11,415
(596,474)
(585,059)
31 December 2016
US$’000
12,642
(611,212)
(598,570)
Petropavlovsk Annual Report 2017 201
Financial statementsStrategic reportGovernance The Use and Application of Alternative
Performance Measures (APMs) continued
Underlying EBITDA
Definition
EBITDA is a common measure used to
assess profitability without the impact of
different financing methods, tax, asset
depreciation and amortisation of intangibles
and items of an exceptional / non-recurring
nature, or those that could make comparison
of results from prior periods less meaningful.
Calculation
Underlying EBITDA is calculated as profit/(loss)
for the period before financial income, financial
expenses, foreign exchange gains and losses,
fair value changes, taxation, depreciation,
impairment charges and accrual for additional
mining tax. Other companies may calculate
this measure differently.
Relevance
Underlying EBITDA is an indicator of the
Group’s ability to generate operating cash
flows, which are the source of funding for
the Group’s working capital requirements,
Capital Expenditure and debt service
obligations. The measure is also widely
used by various stakeholders.
Reconciliation
The tables below provide reconciliations
between net profit and Underlying EBITDA as
well as reconciliation between operating profit
and Underlying EBITDA for relevant periods.
Ref
IS
Profit for the period
Add/(less):
IS
Investment income
IS
Interest expense
IS
Other finance gains
IS
Other finance losses
note 6
Foreign exchange losses
note 6
Accrual for additional mining tax
IS
Taxation
note 6
Depreciation
Impairment of exploration and evaluation assets
note 6
(Reversal of impairment)/ impairment of ore stockpiles note 6
note 6
Impairment of gold in circuit
note 6
Impairment of non-trading loans
Share of results of associates (a)
note 14
Underlying EBITDA
2017
US$’000
41,466
(760)
25,905
(2,199)
28,470
746
19,852
19,063
93,216
–
(4,702)
3,890
629
(28,744)
196,832
2016
US$’000
31,706
(556)
60,976
(11,976)
1,548
5,158
-
(4,698)
105,252
9,155
1,163
–
–
2,356
200,084
202 Petropavlovsk Annual Report 2017
2017
Operating profit
Foreign exchange losses
Segment result
Add/ (less):
Accrual for additional mining tax
Depreciation
(Reversal of impairment) /
impairment of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Share of results of associates (a)
Underlying EBITDA
2016
Operating profit
Foreign exchange losses
Segment result
Add/ (less):
Depreciation
Impairment of exploration and evaluation assets
Impairment/ (reversal of impairment) of ore
stockpiles
Share of results of associates (a)
Underlying EBITDA
Ref
IS
note 6
note 4
notes 4,6
notes 4,6
notes 4,6
notes 4,6
notes 4,6
note 14
Ref
IS
note 6
note 4
notes 4,6
notes 4,6
notes 4,6
note 14
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
41,026
(9,455)
5,807
79,686
(4,373)
Consolidated
US$’000
111,945
746
112,691
6,511
28,936
(3,589)
2,594
–
2,255
7,112
175
733
–
2,780
12,607
304
563
–
8,306
44,346
(1,592)
–
–
75,478
820
22,061
130,746
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
–
215
19,852
93,216
–
–
629
(28,744)
(32,273)
Corporate
and other
US$’000
(4,702)
3,890
629
(28,744)
196,832
Consolidated
US$’000
77,000
5,158
82,158
34,313
5,602
14,159
55,622
(27,538)
38,776
–
6,586
–
13,632
–
45,729
9,155
529
–
105,252
9,155
6,110
1,002
(5,826)
(123)
79,199
13,190
21,965
110,383
–
2,356
(24,653)
1,163
2,356
200,084
(a) Group’s share of interest expense, investment income, other finance gains and losses, foreign exchange losses, taxation, depreciation and impairment/reversal of impairment recognised by an associate.
Petropavlovsk Annual Report 2017 203
Financial statementsStrategic reportGovernance
Appendix, Glossary and Definitions
For the year ended 31 December 2017
Important information
Past performance of Petropavlovsk PLC or
any other company referred to in this
document cannot be relied on as a guide to
its future performance. Some figures may be
rounded. The content of websites referred to
in this document does not form
part of this document.
Forward looking statements
This document may include statements that
are, or may be deemed to be, forward looking
statements. Generally, these forward looking
statements can be identified by the use of
forward looking terminology, including the
terms ‘believes’, ‘estimates’, ‘plans’, ’targets’,
‘seeks’, ‘projects’, ‘anticipates’, ‘expects’,
‘intends’, ‘forecast’, ‘may’, ‘will’ ‘would’ or
‘should’ or, in each case, their negative or
other variations or comparable terminology,
or by discussions of strategy, plans,
objectives, goals, targets, future events or
intentions. These forward looking statements
include all matters that are not historical facts
and speak only as at the date of this
document. They appear in a number of
places throughout this document and
include, but are not limited to, statements
regarding the Group’s intentions, beliefs or
current expectations concerning, among
other things, the Group’s results of
operations, financial position, liquidity,
prospects, growth, strategies and
expectations of the industry.
By their nature, forward looking statements
involve risk and uncertainty because they
relate to future events and circumstances.
Forward looking statements are not
guarantees of future performance and the
development of the markets and the industry
in which the Group operates may differ
materially from those described in, or
suggested by, any forward looking
statements contained in this document.
In addition, even if the development of the
markets and the industry in which the Group
operates are consistent with the forward
looking statements contained in this
document, those developments may not be
indicative of developments in subsequent
periods. A number of factors could cause
developments to differ materially from those
expressed or implied by the forward looking
statements including, without limitation,
general economic and business conditions,
industry trends, competition, commodity
prices, changes in law or regulation, currency
fluctuations (including the US Dollar and
Russian Rouble), the Group’s ability to recover
its reserves or develop new reserves,
changes in its business strategy, political and
economic uncertainty. Save as required by
the Listing and Disclosure and Transparency
Rules, the Company is under no obligation to
update the information contained in this
document.
Nothing in this publication should be
considered to be a profit forecast and no
statement in this document should be
interpreted to mean that earnings per share
for the current or future financial years would
necessarily match or exceed the historical
published earnings per share. This document
does not constitute or form part of an
invitation to sell or issue, or any solicitation of
any offer or invitation to purchase or subscribe
for, any securities.
Ore Reserve and Mineral Resource
reporting – basis of preparation
In line with the approach adopted in previous
years, the Group has reported its hard rock
Mineral Resources and Ore Reserves in
accordance with JORC Code. The assets
are subdivided into ‘core’ and ‘non-core’
projects. Core projects are classified as the
Group’s four operational mines, namely:
Pokrovskiy, Pioneer, Malomir, Albyn and
all their satellites scheduled for production
through the mines’ existing processing
facilities. Mineral Resource and Ore Reserve
estimates for these assets were audited by
WAI in accordance with JORC Code (2012) in
April 2017. The ore reserve estimate uses a
long term gold price assumption of US$1,200/
oz with other modifying factors derived from
the actual 2016 operational performance.
Mineral resources are estimated using a
US$1,500/oz long term gold price
assumption. The Group considers its
‘non-core’ projects to be those assets which
have good prospects, but are not located
near current processing facilities. Following
the disposal of the Visokoye and Yamal assets
completed in 2016, the “non-core” projects
include Tokur and Burinda. Tokur Mineral
Resource and Ore Reserve estimates were
reviewed in accordance with JORC Code
(2004) and signed off by WAI in March 2011.
The estimate uses a US$1,000/oz gold price
assumption together with other modifying
factors relevant on the date of the estimate.
Tokur Mineral Resources and Ore Reserves
have not changed since. The Burinda
resource estimate was reviewed and signed
off by WAI in accordance with JORC Code
(2012) in April 2016. The estimate has not
changed since that date.
204 Petropavlovsk Annual Report 2017
For the year ended 31 December 2017
alluvial
Au
autoclave
cut off grade
Board
Bondholder
Directors
EPS
feasibility study
flotation
the Foundation or
the Petropavlovsk Foundation
geochemical prospecting
material that is transported by a river and deposited at points along the flood plain and river bed. The material may
contain economical placer deposits of gold and other valuable minerals
chemical symbol for the element gold
equipment used in the pressure oxidation process to enable gold extraction from refractory ores
the lowest grade of mineralised material considered economic, used in the reporting of Ore Reserves
and Mineral Resources
the Board of Directors of the Company
holders of the Group’s new US$100 million 9% convertible bonds due 2020
the Directors of the Company
Earnings (Loss) Per Share
an extensive technical and financial study to assess the commercial viability of a project
mineral processing technique used to separate mineral particles in a slurry, by causing them to selectively adhere
to a froth and float to the surface
the Petropavlovsk Foundation for Social Investment
techniques which measure the content of specified metals in soils and rocks; sampling defines anomalies for
further testing
geophysical prospecting
techniques that measure the physical properties (magnetism, conductivity, density, etc.) of rocks and define
anomalies
g/t
grade
Group
heap leach
gram per metric tonne
relative quantity or percentage of ore mineral or metal content in an ore body
the Company and its subsidiaries
process used for the recovery of metal ore from typically weathered low grade ore. Crushed material is laid on a
slightly sloping, impervious pad and uniformly leached by the percolation of the leach liquor trickling through the
beds by gravity to ponds. The metals are recovered via conventional methods from the solution
HSE Committee
Health, Safety and Environmental Committee
ICBC
Indicated Resource
Inferred Resource
IRC
JORC
Industrial and Commercial Bank of China
as defined in the JORC Code, the part of a mineral resource that has been sampled by drill holes, underground
openings or other sampling procedures at locations that are too widely spaced to ensure continuity, but close
enough to give a reasonable indication of continuity and where geoscientific data is known with a reasonable
degree of reliability. An Indicated Mineral Resource will be based on more data and therefore will be more reliable
than an Inferred Resource estimate
as defined in the JORC Code, the part of a mineral resource for which the tonnage and grade
and mineral content can be estimated with a low level of confidence. It is inferred from the geological evidence and
has assumed but not verified geological and/or grade continuity. It is based on information gathered through the
appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes, which may be
limited or of uncertain quality and reliability
IRC Limited, the Hong Kong listed former subsidiary, now associate, of the Group. Petropavlovsk remains a major
shareholder
Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute
of Geoscientists and the Minerals Council of Australia
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 205
Financial statementsStrategic reportGovernance Appendix, Glossary and Definitions continued
For the year ended 31 December 2017
K&S
Kapstroi
KPI
ktpa
LTIFR
mill
mineralisation
Mineral Resource
Mtpa
OHS/OH&S
open pit
ore
ore body
Ore Reserve
the Kimkan and Sutara deposits, which are being developed as one project by IRC
OOO Kapstroi, an indirect subsidiary of the Company. Specialising in mine construction, Kapstroi has
so far carried out the majority of the construction work for the Group
Key Performance Indicator, used to monitor progress and performance against strategic objectives
and to benchmark the Group’s performance
thousand tonnes per annum
Lost Time Injury Frequency Rate: the time lost as a result of an accident or fatality, measured as the
number of accidents per million man hours worked
equipment used to grind crushed rocks to the desired size for mineral extraction
process of formation and concentration of elements and their chemical compounds within a mass or
body of rock
concentration or occurrence of material of intrinsic economic interest in or on the Earth’s crust in such a form
that there are reasonable prospects for eventual economic extraction. The location, quantity, grade geological
characteristics and continuity of a mineral resource are known, estimated or interpreted from specific geological
evidence and knowledge. Mineral Resources are subdivided into Inferred, Indicated and Measured categories
million tonnes per annum
occupational health and safety
large excavation developed to extract a mineral deposit located near the surface
mineral deposit that can be extracted and marketed profitably
mining term to define a solid mass of mineralised rock that can be mined profitably under current or immediately
foreseeable economic conditions
the economically mineable part of a Measured or Indicated Mineral Resource. It includes diluting materials and
allowances for losses that 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 Probable and Proven
ounce or oz
overburden
placer deposit
troy ounce (= 31.1035 grams)
material that lies above the ore deposit
see entry for ‘alluvial’
pressure oxidation (POX)
a high temperature and pressure process in which refractory ores (gold bearing sulphides) are oxidised to render
gold amenable to cyanide leaching
Probable Reserve
Proven Reserve
refractory ore
R&D
RIP
Measured and/or Indicated Mineral Resources which are not yet proven, but where technical
economic studies show that extraction is justifiable at the time of the determination and under specific economic
conditions
Measured Mineral Resources, where technical economic studies show that extraction is justifiable at the time of
the determination and under specific economic conditions recovery of the proportion of valuable material obtained
in the processing of an ore, stated as a percentage of the material recovered compared with the total material
processed
ore material that is difficult to treat for recovery of the valuable element. Refractory gold ore requires additional
treatment such as pressure oxidation (POX), roasting or bio oxidation for efficient processing and gold recovery
research and development
resin-in-pulp; a processing technique by which a resin medium is used to absorb the desired element
out of solution or pulp
206 Petropavlovsk Annual Report 2017
Russian GKZ Standard
Classification System
the means by which Russian reserves are assigned to classes based on the degree of reliability of data
and indicates their comparative importance for the national economy
stockpile
strike
strike length
strip ratio
tailings
trench sampling
an accumulation of ore or mineral formed to create a reserve for loading, for when demand slackens or for
when the process plant is unequal to handling mine output
direction in which a horizontal line can be drawn on a plane, which determines the direction in which
to measure the true dip of an ore body
longest horizontal dimension of an ore body or zone of mineralisation
In mining, stripping ratio or strip ratio refers to the ratio of the volume of overburden (or waste material) required to
be handled in order to extract some volume of ore. For example, a 3:1 stripping ratio means that mining one cubic
metre of ore will require mining three cubic metres of waste rock
material that remains after all metals/minerals considered economic have been removed from the ore
sampling of a trench cut through the rock, generally in the form of a series of continuous channels
(channel samples)
tpm
tonnes per month
unit cost of mining
unit costs are the costs incurred by the Group to mine one m3 of rock and process one tonne of ore
◆ Go to pages 197 to 203 for more information on our APMs.
Petropavlovsk Annual Report 2017 207
Financial statementsStrategic reportGovernance Shareholder Information
For the year ended 31 December 2017
Shareholder queries
The Company’s share register is maintained
by the Company’s Registrar, Link Asset
Services. Shareholders with queries relating
to their shareholding should contact Link
Asset Services directly using one of the
methods listed below.
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
Telephone Helpline: 0871 664 0300
If shareholders have any questions please call
Link Asset Services on 0871 664 0300. Calls
cost 12p per minute plus your 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 Link helpline is open
between 09.00am to 5.30pm, Monday to
Friday excluding public holidays in England
and Wales.
Online: enquiries@linkgroup.co.uk
(from here you will be able to email
Link Asset Services with your enquiry).
For more general queries, shareholders
should consult the ‘Investors’ section of the
Company’s corporate website at www.
petropavlovsk.net.
Managing your shares online
Shareholders can manage their holdings
online by registering with Link Asset Services
share portal service. This is an online service
provided by Capita which enables you to view
and manage all aspects of your shareholding
security. The service is free and available 24
hours a day at your convenience.
Shareholders, whose shares are registered in
their own name, can:
– view holdings plus indicate price and
valuation
– view movements on their shareholdings
– view dividend payment history
– change their address
– register or change their email address
Useful contacts
Registered office:
Petropavlovsk PLC
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
Investor Relations Contact:
Dr Alya Samokhvalova
Deputy CEO Strategic Development
– sign up to receive communications by email
instead of post
Company Secretary:
Amanda Whalley ACIS
– access the online voting service.
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 the Company’s website.
This information has been prepared under the
relevant accounting standards and legislation.
Annual General Meeting 2018
This year’s Annual General Meeting (AGM)
will be held at 3 More London Riverside,
London SE1 2AQ. The meeting will be held
on 21 June 2018. Shareholders who wish to
attend the AGM are kindly 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.
208 Petropavlovsk Annual Report 2017
Designed and produced by Thoburns,
www.thoburns.com (United Kingdom).
Printed by Pureprint.
The paper used in this Report is a 100%
recycled paper which is FSC approved.
Petropavlovsk PLC
11 Grosvenor Place
London
SW1X 7HH
T +44 (0)20 7201 8900
E contact@petropavlovsk.net
www.petropavlovsk.net