Annual
Report
2018
Strategic Report
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 a respected
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 we 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 2018
Petropavlovsk is one of Russia’s major
gold mining companies, both in terms of
production and the size of its resource.
With a strong track record of mine
development, expansion and asset
optimisation, the Company has entered a
new era of growth following the successful
commissioning and start-up of the Pokrovskiy
POX Hub. As an established vertically
integrated gold producer in the Far East
of Russia, Petropavlovsk is positioned to
increase shareholder value by supplementing
traditional non-refractory production with
the processing of high-grade refractory
concentrate, while at the same time focusing
on costs and strengthening profitability.
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2018
At a Glance
Petropavlovsk Annual Report 2018
1
Strategic reportFinancial statementsGovernance Highlights
In December 2018,
Petropavlovsk poured the first
gold recovered from processing
concentrate through the
autoclaves at the newly
commissioned POX Hub.
It heralds a new era of
innovation and expansion
for the Group. This state-of-the-
art facility unlocks the value
embedded within c.5.3Moz of
refractory reserves discovered
by the Company and expands
business opportunities into the
field of third party concentrate
processing. It also gives
Petropavlovsk a significant
competitive advantage in
developing new gold exploration
terrains in the region.
POX Hub
R&D centre
Open pit mine
Offices
Underground mine
Analytical lab
City
IRC Limited Operations
Key 2018 Financial Figures
Revenue
(2017: US$587.4m)
Total Cash Costs
US$
499.8m
786/oz
US$
All-in Sustaining Costs 1,117/oz
US$
143.0m
25.9m
US$
US$
Underlying EBITDA
Net Profit
(2017: US$196.8m)
(2017: US$963/oz)
(2017: US$741/oz)
(2017:US$37.1m)
Kuranakh
Malomir
(670km from Pokrovskiy)
St Petersburg
Blagoveshchensk
Pioneer
(40km from Pokrovskiy)
Albyn
(835km from Pokrovskiy)
Blagoveshchensk
K&S
Pokrovskiy POX Hub
Moscow
Irkutsk
2
Petropavlovsk Annual Report 2018
At a Glance
Three mining centres with open pits and additional
underground operations at Pioneer and Malomir.
The Group has produced c.7.1Moz of gold to
31 December 2018
Long life JORC Resources base of c.20.5Moz,
including Reserves of c.8.2Moz
Newly commissioned state-of-the-art POX Hub at
the former site of the Pokrovskiy mine
Malomir flotation plant completed, production
commenced with concentrate grade more than
50% higher than originally planned
FY2018 gold production
of c.422koz (with sales
of c.370koz)
Prospective refractory
exploration targets
Significant potential for
third party processing
Skilled workforce
Petropavlovsk Annual Report 2018
3
Strategic reportFinancial statementsGovernance 4
Petropavlovsk Annual Report 2018
Contents
Inside this report
Strategic Report
Our Values
Annual Report 2018
Highlights
At a Glance
Contents
Chairman’s Statement
CEO’s Statement
Our Business Model
Governance
Introduction from the Chairman
Board of Directors
Executive Committee
Governance Report
Financial Statements
IFC
Our Strategy
1
2
3
5
6
8
10
97
98
Market Overview
Principal Risks and Mitigation
Operational Performance:
Key Performance Indicators
Operational Performance
The POX Hub
Underground
Reserves and Resources
Nominations Committee Report
Audit Committee Report
100
Directors’ Remuneration Report
102
Directors’ Report
Consolidated Statement of Profit or Loss
158
Notes to the Consolidated Financial
Statements
Consolidated Statement of Comprehensive
Income
Consolidated Statement of Financial
Position
Consolidated Statement of Changes in
Equity
Consolidated Statement of Cash Flows
159
Company Balance Sheet
Company Statement of Changes in Equity
160
161
162
Notes to the Company Financial
Statements
The Use and Application of Alternative
Performance Measures (APMs)
Exploration Update
IRC
Sustainability:
Key Performance Indicators
Introduction to Safety, Sustainability &
Workforce Committee Report
Our Approach to Sustainable Development
Financial Performance:
Key Performance Indicators
Chief Financial Officer’s Statement
Directors’ Responsibilities Statement
Independent Auditor’s Report
to the Members of Petropavlovsk PLC
Appendix, Glossary and Definitions
Shareholder Information
12
14
16
34
36
46
53
54
110
112
121
139
163
205
206
207
210
Non-Financial Information Statement
We aim to comply with the Non-Financial Reporting requirements contained in sections 414CA and 414CB of the Companies Act 2006.
The table below is intended to guide stakeholders to where the relevant non-financial information is included within our Strategic Report.
Reporting requirement
Policies and Standards
Outcomes and Additional Information
Environmental matters
Safety, Health and Environment
Managing environmental impact
GHG Emissions
ISO 14001-2016
Water Management
Waste Management Programme
Cyanide Management
Rehabilitation Programme
Education and Training
Climate change
Permitting
Water
Waste
The Pokrovskiy Mining College
Health & Safety Management Systems
Safety
Human Rights Policy
Grievance Mechanism
Human rights
Enable members of the public and other stakeholders to raise complaints
The Petropavlovsk Foundation
Code of Condut and Business Ethics
Building a purpose-led culture/corruption controls
Business model
Managing risk
Key performance indicators
Employees
Human rights
Social matters
Anti-corruption and
anti-bribery
Principal risks and impact
of business activity
Non-financial KPIs
65
67
68
72
73
84
87
145
146
217
221
Page
81-83
71
81
82
83
83
83
76
79-80
77
77
77
76
10-11
16-33
69-71
Petropavlovsk Annual Report 2018
5
Strategic reportFinancial statementsGovernance
Chairman’s Statement
Sir Roderic Lyne
This has been a good year for Petropavlovsk,
and I believe that the coming years will be
even better.
At the time of writing, I have recently returned
from a visit with all members of the Board to
the Group’s operations in the Far East of
Russia and to the Kimkan and Sutara (K&S)
mine of our associated company, IRC.
This was very encouraging. At Pokrovskiy
we saw the Pressure Oxidation (POX) plant
producing gold through autoclaves from
refractory concentrate mined and processed
at Malomir. This is one of only two such plants
processing gold in Russia and results from
the investment of over US$400 million since
Pavel Maslovskiy and his team initiated the
project in 2011. As around half of the Group’s
reserves and resources are in refractory ore
(as are a large proportion of Russia’s gold
resources), our ability to process this ore
through pressure oxidation will sustain our
future in the region for many years to come.
The successful commissioning since last
autumn of the huge and sophisticated
POX Hub is a major achievement.
From Pokrovskiy, after overflying the nearby
Pioneer mine, the Board moved on to Malomir
where a new flotation plant has been built to
feed concentrate to the POX Hub. Malomir is
another impressive and well-run operation,
mining ore from a network of open pits as
well as underground (as does Pioneer).
In Blagoveshchensk, as at the mines, we
were able to have extensive conversations with
those responsible for exploration, laboratory
analysis and testing, safety, sustainability,
training, and community relations.
No visitor can fail to be struck by the challenges
successfully overcome to create large-scale
enterprises in such remote and climatically
harsh locations; but most impressive of all
are the quality, technical expertise and
commitment of the staff at all levels. They are
rightly proud of what they have achieved and
determined to build on this. Backtracking in
time to the Company’s last Annual General
Meeting on 29 June 2018, when shareholders
elected Dr Pavel Maslovskiy, Mr Robert
Jenkins and myself to constitute the new
Board we set out to restore much-needed
stability and momentum to the Group.
We defined three immediate objectives;
the commissioning of the POX Hub, the
optimisation of the Company’s capital
structure including its relationship with
IRC, and the rebuilding of the Board and
Management team.
6
Petropavlovsk Annual Report 2018
I am pleased to report that all three of these
objectives have been achieved. The POX Hub
is now in operation. The IRC loan has been
refinanced and its guarantee restructured
on more favourable terms, as approved by
shareholders at the Company’s General
Meeting on 12 March 2019. The Board has
been reconstituted and strengthened by
the appointment of three new Independent
Directors. I shall take each of these points
in turn.
First, the commissioning of the POX Hub,
as I have said above, is the result of almost
a decade of work and is a step vital to the
Company’s future as it will enable us to
unlock the value embedded in c.5.3Moz of
the Company’s refractory reserves. POX has
created several options for the Company’s
growth, including both the processing of
third-party concentrate and known refractory
gold deposits in the Amur region which are
available from the Russian Government.
These licences are highly prospective, yet
until recently have not been of interest due
to the absence of viable processing options.
Further refinements of the technology have
the potential to increase recovery from the
concentrate, thereby raising profitability.
Secondly, an important task facing the newly
constituted Board was the de-risking of the
Company’s finances. Petropavlovsk holds a
31.1% equity stake in IRC, an iron ore miner
listed on the Hong Kong stock exchange
which produces 65% concentrate from its
K&S iron ore mine. The Group acts as
guarantor for the project finance facility in
relation to K&S and, as part of its ongoing
balance sheet optimisation, the Group also
continues to assess options to realise the
value of its current interest in IRC. As the
Board saw during their visit to the K&S mine,
the facility at K&S has been commissioned
(after a significant delay due principally to
under-performance by the main construction
contractor) and production of iron ore product
is being ramped up with IRC announcing that
in March 2019 it achieved a monthly record of
c.210,000 tonnes of 65% concentrate sold to
its customers. Construction of a new railway
bridge connecting Russia and China across
the Amur River near Birobidzhan is
approaching completion. The railway
crossing is expected to become operational
later in 2019 and will reduce the time and cost
of moving IRC’s iron ore concentrate to
customers in China.
The new US$240 million facility for IRC with
Gazprombank is on more favourable terms
than the previous ICBC facility and provides
IRC with an extended period to repay its debt
finance through to 2026. This new facility
de-risks the Company’s liability due to the
longer maturity of the facility, alongside a
more relaxed amortisation schedule that
aligns more closely with the ramp-up of
production at the K&S mine. As part of the
new facility, the guarantee mechanism is
implemented through a series of five
guarantees that fluctuate in value through the
eight-year life of the loan, with the possibility
of Petropavlovsk’s initial US$160 million
liability reducing to US$40 million within two
to three years, subject to certain conditions
being met. In these circumstances and for
the final two years of the new facility, the
guarantee liability will increase to a maximum
US$120 million to cover the final principal
and interest repayments. The facility has been
drawn down and has been used to repay the
outstanding ICBC facility of US$169 million;
two bridge loans advanced by the Company
to IRC, amounting to c.US$57 million; and
will enable IRC to to fully pay the guarantee
fee of c.US$6 million owing to Petropavlovsk
in relation to the guarantee provided for the
ICBC facility with a further US$5 million
payable no later than 31 March 2020.
Thirdly, we have restored strong leadership
to the Group. I was keen to ensure that
Petropavlovsk had a highly qualified and
independent Board, fully meeting UK
corporate governance standards. To support
the three Directors elected at the last AGM and
Mr Bektas Mukazhanov, who returned
to the Board on 27 July 2018 as the nominee of
our major shareholder, Fincraft Holdings
Limited, three additional Independent Directors
were appointed in the latter part of 2018. Mr
James W Cameron Jr, Mr Damien Hackett and
Mr Harry Kenyon-Slaney have brought a
wealth of knowledge and experience to the
Board, including (in the case of the last two
named) experience
of senior positions in management and
investment in the mining industry.
The reconstituted Board now has an
independent non-executive Chairman and four
independent non-executive Directors, one
Executive Director and one nominee Director.
I am also pleased to announce the
appointment of Mr Harry Kenyon-Slaney as
the Senior Independent Director effective from
23 April 2019. We have diversity of skills,
experience and nationality and are actively
seeking diversity of gender. I would like to
pay tribute to my Board colleagues for their
exceptional commitment to the Group.
Like all gold-mining companies,
Petropavlovsk is subject to both the technical
challenges of exploration, extraction and
processing, and to fluctuations in the gold
price and exchange rates in a volatile global
economy. We have navigated these
challenges successfully and without
complacency over the past year, helped
by the support of shareholders and the
commitment of the Group’s employees.
There will be further challenges in the years
ahead. With your continuing support and, for
the reasons given in this report, I am confident
that we can continue to handle the tasks
before us and help Petropavlovsk flourish.
Sir Roderic Lyne
Non-Executive Chairman
24 April 2019
During the ten months from 29 June 2018, the
Board has held no fewer than 8 scheduled
and 13 additional meetings, in addition to the
week-long site visit.
I cannot overstate the importance of Dr Pavel
Maslovskiy’s return as CEO after a year in
which, under the previous Board, the Group
was largely without a permanent Chief
Executive. As a co-founder of the company
and a respected authority with deep technical
understanding, Pavel Maslovskiy is uniquely
placed to drive the business forward. He has
reinvigorated the senior executive team,
whose confidence he enjoys. His return led
to a marked improvement in operational
performance in the second half of 2018,
during which both the Malomir flotation
plant and the POX Hub were commissioned
successfully. His personal commitment to
the Group’s success sets an example to all.
As a major employer and taxpayer in the Amur
region, Petropavlovsk’s success is linked to its
commitment to the local communities in which
it operates. We seek to act in the interests of all
our stakeholders by ensuring our activities are
safe, transparent and sustainable and by
creating equal opportunities for all employees.
Integral to this opportunity to progress up
the ranks is the education of graduates at the
Group’s Pokrovskiy Mining College. In 2018
we celebrated the tenth anniversary of this
institution from which over 10,500 people have
graduated. Study, tuition and accommodation
are free for students for the duration of training,
and those who demonstrate outstanding
results receive a stipend. The latest batch of
graduates received specialised training on a
unique simulator for their roles on the new
POX Hub.
In 2018 the Amur region celebrated the
160th anniversary of its foundation and the
Petropavlovsk Foundation produced a
documentary about its history which was
distributed to all the schools in the region for
use as a teaching aid. The Company also
supports an annual festival of theatre and
cinema as well as the development of
children’s sports activities.
A new Safety, Sustainability and Workforce
Committee (SSW Committee) was formed
in November 2018. The SSW Committee
will meet regularly and is chaired by Harry
Kenyon-Slaney who introduces the
Sustainability Report on page 72. The safety
of our employees and the people in our local
communities is at the head of our priorities.
Over the past year there has been a good
safety record in our mining operations, but we
constantly seek improvements. 2018 has been
another strong year for environmental
management with zero reported licence
violations. There were no serious or moderate
incidents of air pollution, contamination of the
soil or ground water during the year.
The Company implements several initiatives
aimed at reducing its footprint or improving the
environment, including a zero-discharge and
a recycled water supply systems which are in
place within all Group companies. This has
allowed us to significantly reduce the
consumption of clean natural resources
and minimise the discharge of waste water.
Initiatives undertaken by the Group on
environmental protection included the release
of eighty thousand carp hatchlings into the
waters of the Zeya River.
Petropavlovsk stands on a much
stronger foundation than it did a year ago.
Its stabilisation and improved performance
have been reflected in the share price.
The Board now wishes to look ahead to
the strategic development and growth of
the Group and to the delivery of value to our
shareholders. The pressure oxidation process
will allow us to unlock value from our existing
asset base. We shall wish to explore the
possibility of building a flotation plant at
Pioneer and of expanding the flotation
facilities at Malomir. We shall also review
new ore bodies in the region and the
options for treating third party concentrates.
By exploiting these opportunities, we intend
to strengthen cash flows and further de-risk
the Group’s balance sheet.
Petropavlovsk Annual Report 2018
7
Strategic reportFinancial statementsGovernance CEO’s Statement
Pavel Maslovskiy
In July 2018, after an absence of nearly
12 months, I returned as CEO of a Company
that I co-founded with my business partner
nearly 25 years ago. The situation which
presented itself on my return was one of
declining morale under previous leadership
and worsening operational performance
which required immediate action; not to
mention the critical work that was required
to deliver a project of the scale and complexity
of the POX Hub.
The successful commissioning of the POX
Hub in the second half of 2018 is a landmark
achievement under any circumstance and
represents the fruition of nearly a decade of
work by our world-class experts and
consultants. The commissioning of this
state-of-the art project creates significant
optionality with respect to the ores that can be
treated and growth potential which will help to
secure our long-term future in the region.
Notwithstanding the challenges experienced
in the first half of the year, from an operational
point of view, our principal objectives for 2018
were largely met and included:
– The completion and commissioning of
the first two lines of the flotation plant at
Malomir;
– The completion and commissioning of the
POX Hub at Pokrovskiy with initial gold doré
production;
– The further development of underground
mining at Pioneer and Malomir; and
– The exploration and development of further
ore resources for both conventional and
POX processing.
The turnaround of our business is a testament
to the ongoing support, dedication and hard
work of all Petropavlovsk’s employees and
I take this opportunity to express my gratitude
as well as to thank our newly constituted
Board for their guidance during this
challenging period.
8
Petropavlovsk Annual Report 2018
The Commissioning of the POX Hub
It gives me great pleasure to report on the
first phase of the Company’s flagship project,
the POX Hub, which was successfully
commissioned ahead of schedule with the
first two autoclave lines reaching design
capacity in record time, validating the plant
design work of the project’s scientific and
engineering teams. The first gold doré was
poured on 21 December 2018, ahead of
schedule, with a total of 0.6koz produced
by the end of 2018. The Group is on track
to commission the next two processing lines
of the POX project in H2 2019. In its present
configuration, with two fully working
autoclaves, the POX Hub will have an annual
capacity of up to c.250ktpa of concentrate
(depending on the properties of the
concentrate to be processed). Importantly,
the design of the hub containing separate
autoclaves enhances the operating flexibility
of the Hub which means that we can
process different types of concentrate at
the same time. In addition, initial refinements
of the technology by our in-house experts
have demonstrated the potential to
increase recovery from the double-refractory
concentrate, something which will contribute
positively to the bottom line.
The immediate impact of the POX Hub is to
unlock the value embedded within c.5.3Moz
of the Group’s refractory gold reserves, thus
doubling the material available for immediate
processing. The first two lines of the
associated flotation plant at our Malomir
mine were successfully commissioned and
ramped-up by Q3 and are now supplying the
POX Hub with high grade refractory ore
concentrate. Our specialists managed to
significantly improve the original parameters
of the flotation plant thus improving the
profitability of the project. The key attribute
of POX Hub is the competitive advantage
and optionality that this technology affords
the Company. The Board is now reviewing
the possibility of bringing forward an
expansion of the flotation plant at Malomir
and the construction of a new flotation plant
at the Pioneer mine to increase the supply of
our own refractory ore concentrates to the
POX Hub.
With the additional two autoclaves operating
at full capacity, the POX Hub will be able to
treat up to 500ktpa of concentrates. Ahead
of growth in the supply of our own refractory
concentrates, there is expected to be
potential spare capacity of up to c.250ktpa
in the POX Hub which can be used to treat
concentrate from other mines in the region,
providing the Company with a potentially
low-risk and high-return income stream.
We are already in active discussions with
several refractory gold concentrate suppliers
and pleasingly have already secured two
batches of high-grade concentrate.
Enhancing capacity utilisation by expanding
and optimising concentrate throughput from
the Group’s refractory reserves as well as
from third party sourced concentrate may
result in a meaningful contribution to
overall 2019 production. In addition, the
commissioning of the POX Hub has opened
the possibility of acquiring refractory gold
deposits in the Amur and neighbouring
regions. These licences are highly prospective
and have the potential to further improve the
Company’s outlook.
Operations
During the year, the Company continued to
progress with its development plans whilst
achieving good operational results and
maintaining financial discipline. At Albyn,
one of our flagship mines, slightly lower
grades impacted production, leading to an
uptick in unit costs, while at Pioneer more
challenging geotechnical and hydrogeological
conditions than expected were encountered
but resolved. However, this meant that
access to high-grade stopes at Pioneer’s
underground operations were delayed,
impacting on production and costs.
We continued to ramp up underground
operations at both Pioneer and Malomir
during 2018. These simultaneous
developments proved to be challenging
and led to some delays to the original
commissioning timetable. By year end,
Malomir was producing at full design
capacity. Issues at Pioneer were due to
unexpected ingress of underground water;
however, I am pleased to report that due to
the proactive approach of the in-house
engineering team, these problems are now
fully resolved and Pioneer is expected to ramp
up to full capacity during 2019.
In the medium term, significant prospectivity
exists at Albyn, Malomir and Pioneer for the
discovery of additional non-refractory and
refractory gold, which would add to our
existing 20Moz of resources. The exploration
programme 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 with 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 2019 and we will
provide regular updates to the market as
the drilling programme progresses.
Exploration
Production from the Group’s refractory
reserves will enable the Company to process
higher grade ores which have been previously
proven untreatable at the Resin-in-Pulp (RIP)
facilities. This gives us confidence in our ability
to generate positive cash flows from our
c.5.3Moz refractory reserves base.
To replenish the resource and reserve base,
the Company has carried out aggressive
brownfield exploration.
At the beginning of October 2018, the
Company received a permit from the
Russian authorities to develop and mine
the Elginskoye deposit which is considered a
strategic deposit due to the size of its mineral
resources base (JORC Resources of 2.8Moz
at 1.1g/t). Elginskoye forms part of the Albyn
cluster of assets with ore expected to be
extracted from 2020. The reserves as
currently defined are only for a proportion
of the overall deposit. The remainder of the
zone continues to be explored for additional
mineral resources.
Additional high-grade refractory
mineralisation for potential open pit
extraction has been discovered at the
down-dip extension at Promezhutochnaya
(Pioneer). Early stage exploration at Katrin
(Pioneer) has identified a prospective gold
deposit in the east. Further down dip
extensions for potential underground mining
were also identified at Albyn and a new zone
of gold mineralisation was discovered near
Kazimirovskaya (Albyn). We are hugely
encouraged by the prospectivity of our
existing exploration projects which together
have the potential to supply the POX Hub
for a significant period into the future.
Production and Costs
For 2018 Group production amounted
to 422.3koz, including gold in concentrate,
a modest decrease on the previous year
(439.6koz) which was in line with the plans
given the switch to increased mining of
refractory ores at Malomir ahead of
commissioning the POX Hub and the decline
from Pokrovskiy which has come to the end
of its economic life after producing c.2Moz of
gold for the Group.
This result is in-line with the Company’s
revised guidance for the year of 420 – 450koz
including concentrates. Of the three mining
centres, Albyn produced 36% of total gold
production for the year, while Pioneer
contributed 32%. Malomir gold doré
production amounted to 18% of the total,
with an additional 12% in the form of gold
in concentrate.
Total cash costs, one of our Alternative
Performance Measures, increased a modest
6% due to the effects of Rouble denominated
inflation and suboptimal mining performance
in the first half of the year. These increases
were partially offset by higher grades and
recoveries at Pioneer and Malomir as well
as Rouble depreciation over the course of
the year.
Health and Safety
We are sad to report that there was one
fatality in 2018. An employee travelling from
the accommodation blocks to the plant at
Albyn died in an accident. The safety of our
employees remains our number one priority.
With the commissioning of the POX Hub and
the increased activity at our underground
mines, the need for stringent safety standards
has become ever more important. Technical
inspection of the pressure vessels in the POX
Hub has been conducted and an industrial
safety review was carried out.
The Group has put employees through
extensive training to minimise the probability
of any accidents following the inauguration
of the POX Hub. This took place at the
Pokrovskiy Mining college and included
both theoretical courses and training on
a POX simulator.
All employees are trained in safety when
they join the Company and must undergo
additional refresher courses and pass health
and safety exams. Our staff receive tailored
training in the event of an accident which
incorporates the findings of investigations
into specific assignments outside their
daily routine.
Outlook
Although 2018 has been a year of
notable success, there is never a time for
complacency and the focus going forward
remains on delivering increased cash flow
and the deleveraging of the Group’s balance
sheet. This requires that we focus harder
than ever on our operations and to optimise
capacity utilisation at the POX Hub through
the supply of concentrate from our own
refractory reserve base as well as from
third parties.
In 2019 we are targeting 450,000 – 500,000oz
of gold production and believe the final
number may be improved upon through
additional gold produced from third party
concentrates. As mentioned, costs are a key
focus for the Company and, while recognising
the challenge of one-off costs associated with
the ramp-up of the POX Hub, we are seeking
to contain costs within a US$850-950/oz
range for the year.
With respect to the POX Hub, our focus for
2019 will be on reaching full design capacity
with stable operations and reliable sources
of concentrate so that this asset will be
achieving its targeted operating costs.
In parallel, our geological team will be
carrying out further work to discover new
orebodies as well as building upon the
earlier delineation of high-grade refractory
orebodies. Our objective is to constantly
improve upon the quality and quantity of
the Company’s refractory reserves and
resources.
From 2020 onwards, we believe these
measures will ensure the Company regains
its status as one of the leading gold producers
in Russia, with a strengthened balance sheet,
attractive cashflows and enhanced returns
to our shareholders.
Dr Pavel Maslovskiy
Chief Executive Officer
24 April 2019
Petropavlovsk Annual Report 2018
9
Strategic reportFinancial statementsGovernance Our Business Model
1.
Exploration
and Evaluation
2.
Mining and
Development
3.
Processing
We have a strong track record of
identifying, exploring and appraising
deposits with commercially viable
concentrations of gold in both
brownfield and greenfield sites.
These deposits replenish and
increase our resource base.
Our operating experience allows
us to achieve optimal ore extraction
from our open pit and underground
assets. This, along with the scale
of our asset base, enables us to
increase processing capacity and
operating profits.
We have harnessed industry leading
expertise in processing technologies
to develop and construct a Pressure
Oxidation Circuit at Pokrovskiy
(the POX Hub). Our research centre,
RDC Hydrometallurgy, defined optimal
processing parameters for the plant
and continues to refine processing
technology for all the Company’s ore
processing installations.
10 Petropavlovsk Annual Report 2018
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, sustainability
and financial sections
respectively (pages 35,
69 and 84).
Petropavlovsk Annual Report 2018
11
4.
Production
5.
Mine Closure and
Rehabilitation
We produce gold doré bars which
are sent to refineries for smelting
into bullion. Currently, all of the doré
produced at Petropavlovsk is sold
to banks in Russia.
Mine closure planning is integrated
into the asset life cycle. This ensures
responsible environmental compliance
and the sustainable development of
mines in the project areas.
Strategic reportFinancial statementsGovernance Our Strategy
The Group’s current
strategy is focused on
the following aspects
12 Petropavlovsk Annual Report 2018
Maintain and
expand Reserves
and Resources
Unlock the value
creation potential
of the POX Hub
The POX Hub has opened up a whole swathe
of new opportunities for the Group to exploit
both in the short and long term.
In the short term, the commissioning of
the POX Hub and associated flotation
infrastructure at Malomir have unlocked the
refractory ore which forms 60% of the Group’s
current resource base. The optimisation of the
Malomir flotation plant has increased the grade
and decreased the bulk of the concentrate for
the POX Hub, reducing transportation and
processing costs.
In the longer term, the ability to process
refractory ore has opened up the prospect
of acquiring further exploration ground in
the underexploited Mongolo-Okhotskiy
mineralised belt which hosts a number of
large gold deposits, including Sukhoi Log
and Taseevskoye. Once the POX Hub is
expanded to four autoclaves, it will have
a total processing capacity of up to
c.500ktpa which leaves open the possibility
of processing third party ore. This can
potentially be further expanded to 650ktpa.
The POX pilot plant and research facilities
are used to provide metallurgical tests and
consultancy services to third parties including
Outotec, Polyus Gold, Kazzink, Kazakhmys
and Norilsk Nickel.
The commissioning and ramp-up of the
POX Hub has reinforced the added value of
refractory ore exploration at Petropavlovsk.
Mining costs are potentially reduced as a
result of lower stripping ratios associated with
refractory ores. Furthermore, the availability
of known refractory deposits in the Amur
region results in lower discovery costs
which also increases the possibilities for
resource expansion.
The Group aims to identify and develop
new resources and reserves through its
exploration programme in order to offset
depletion and expand the total resource
to support long term growth. Exploration
potential exists for the discovery of further
significant open pit resources, particularly south
and south west of Pioneer. There are also a
number of potential exploration targets at Albyn,
of which Ulgen, Yasnoye and Leninskoye are the
most significant. There is also exploration
potential on down dip extensions of main Albyn
ore body. Most of the licence area remains
underexplored and is highly prospective.
The Group’s short-term reserves and
resources strategy focuses on:
– Maintaining reserves of non-refractory
and refractory ore through exploration at
or adjacent to the Group’s current mining
operations to continue efficient utilisation
of current RIP processing capacity; and
– Further exploration to expand the reserves
and resources at the existing underground
operations at Pioneer and Malomir.
The Group’s longer-term reserves and
resources strategy focuses on:
– Further exploration of the identified
refractory targets at Pioneer and Malomir;
– Further exploration 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 additional Capital
Expenditure◆.
Cost optimisation
and operational
efficiency
Strengthen the
balance sheet and
liquidity position
The Group’s strategic plan for the identification
and implementation of operational efficiencies
and cost optimisations focuses on new
projects and continued operations.
Two flotation lines have successfully been
put into production at Malomir producing a
concentrate at c.36-40g/t which is a significant
improvement on the original design. This will
engender cash flow improvement due to
reduced processing and transportation costs
(more gold, less material to process).
Other project cost initiatives include:
– Developing full-scale high-grade
underground operations at Malomir and
Pioneer;
– Creation of extra capacity at the POX Hub
for potential processing of material from
third party suppliers; and
– Optimization of waste stripping when
mining refractory ore bodies.
The Group is also committed to continuous
operational improvements, aimed in part at
increasing throughput and recovery rates and
comprehensive cost control.
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.
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 finance its planned Capital
Expenditure◆ programme of approximately
US$45 to US$55 million in 2019.
The Company has US$100 million
convertible bonds due on 18 March 2020
which it considers can be repaid directly out
of net cash flow from operating activities.
Along with its advisors, Management are
exploring options with respect to the bond
repayment in order to optimise its cash
position while taking into account the
Company’s various strategic growth and
development objectives and opportunities.
The refinancing of the IRC debt, completed
in March 2019, was a major milestone in
de-risking the Group’s finances. Successful
negotiation of a new US$240 million facility
with Gazprombank yielded more favourable
terms than its previous ICBC facility and
provides IRC with an extended period to
repay this through to 2026. The new facility
de-risks the Group’s liability due to longer
maturity and a more relaxed amortisation
schedule. The Gazprombank facility has
enabled a US$63 million aggregate cash
inflow for Petropavlovsk as repayment by IRC
of approximately US$57 million of two bridge
loans provided by Petropavlovsk in 2018 and
US$6 million in guarantee fees. A further
US$5 million in guarantee fees is payable
no later than 31 March 2020.
Continuous
improvement of
environmental health
and safety standards
The health and safety of its workforce is a
top priority for the Board and management
of Petropavlovsk. The Group is focused on
the continual improvement of health and
safety performance to ensure a safe working
environment for them. Risk management
strategies are being implemented based on
valid data and sound science to reduce the
number of The Lost-Time Injury Frequency
Rates (LTIFRs) and accidents.
An ongoing campaign is in progress to
go beyond compliance with the regulatory
framework and to develop a safety culture
within the Group based on behavioural-
based safety at the Group operations.
Petropavlovsk’s objective is to minimise
the risk of accidents and occupational
illnesses, and to aim for zero fatalities.
In 2018, employees were trained at the
Pokrovskiy Mining College in the operation
of the POX Hub. The course completed was
‘Autoclave Oxidative Leaching of Gold-
bearing Sulphide Flotation Concentrates’.
Work has begun on the organisation of the
Emergency Rescue Team, with certification of
rescuers and protocols planned for Q2 2019.
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 new Safety,
Sustainability & Workforce Committee (SS&W
Committee) was constituted on 12 November
2018 and will meet regularly. 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.
Petropavlovsk Annual Report 2018
13
Strategic reportFinancial statementsGovernance Market Overview
How did the gold price perform in 2018?
The Gold PM Fix price declined by 3% in
2018, commencing the year at US$1,312/oz
and closing at US$1,279/oz. The precious
metal traded within a range of US$1,178/oz
– US$1,355/oz, averaging US$1,268/oz for
year, a 1% increase on 2017. On a relative
basis, while gold comfortably outperformed
silver (-12%), platinum (-16%) and the
Bloomberg Commodity Index (-8%), it could
not quite match the returns generated by
palladium (+17%).
What factors may have influenced the
gold price during the year?
2018 was an eventful year in terms of ongoing
political and macroeconomic newsflow.
The US pulled out of the Iran nuclear accord,
and the trade war between the US and China
escalated. A poorly communicated
December rate hike by the US Federal
Reserve, was followed by the longest US
government shutdown in history. In Europe,
the Italian elections resulted in a backlash
against the establishment and a hung
parliament, and the ECB announced the end
of quantitative easing. Ongoing, tortuous
Brexit negotiations have rattled European
markets. There was also an increase in
tension between Turkey and Russia over
Syria. Finally, global stocks suffered their
worst losses since the 2008 financial crisis
prompting observations that the long bull
market rally may be coming to an end.
What were the notable demand trends
during 2018?
Broadly speaking global gold demand
increased by 4% in 2018, to c.140Moz (2017:
c.134Moz), primarily influenced by central
bank purchases but also by an uptick in bar
and coin demand.
Overall, the jewellery sector showed no
material change from 2017 (c.71Moz),
accounting for around half of total gold
demand at 71Moz. On a combined basis,
the biggest gold jewellery consumers are
China (c.22Moz) and India (c.19Moz), together
accounting for 57% of global demand.
Although annual Chinese jewellery demand
increased by 3%, Q4 2018 was impacted by
consumer sentiment over economic growth,
the ongoing trade war with the US and poor
stock market performance - the Shanghai
Composite Index closed down 25% in 2018.
Indian demand was broadly stable, but high
gold prices in local currency terms affected
consumer sentiment. Meanwhile,
notwithstanding economic and stock market
concerns, US jewellery demand rose to
4.1Moz, up 4% on 2017 levels (c.4.0Moz).
14 Petropavlovsk Annual Report 2018
Appetite for gold jewellery in Turkey, Iran and
the UAE was impacted by sanctions (Iran),
inflation and employment concerns (Turkey)
and the introduction of VAT (UAE).
Investment demand is the second largest
market and includes bars, coins and exchange
traded funds (ETFs). While physical bar demand
remained broadly flat in 2018 at c.25Moz, gold
coin demand rose by more than a quarter to
7.6Moz (2017: 6.0Moz). On a combined basis,
China (9.8Moz) and India (c.5.2Moz) accounted
for 43% of 2018 bar and coin demand. India
saw its bar and coin demand decline 4% to
5.2Moz, in part due to a weaker Rupee and a
strong local stock market (2017: 5.4Moz), while
demand in China was roughly flat at 10Moz.
However, Iran saw an increase in demand of
more than 200% to 2.0Moz (2017: 0.6Moz), on
the back of currency weakness, inflation and
political instability. UK demand came in at
c.0.4Moz, and while not a substantial number in
itself, this was some 12% higher than in 2017
(c.0.3Moz). The weaker pound alongside
ongoing Brexit related issues may have
encouraged investors to buy bars and coins. In
contrast, US demand declined 20% to
c.0.9Moz (2017: 1.1Moz) due to a buoyant equity
market during the first three quarters of 2018,
alongside the expectation of further Federal
Reserve rate increases going forward.
An additional sub-category of investor demand
is Exchange Traded Funds (ETFs). According
to data compiled by UBS, global ETFs added
2.3Moz to their holdings (+3%), commencing
the year at 74.0Moz and finishing 2018 at
76.3Moz, equivalent to c.US$98 billion in value
as at 31 December 2018. With c.25Moz of gold
held, the SPDR Gold Shares is the largest gold
ETF in the world.
In terms of official sector demand, central
bank purchases totalled c.21Moz in 2018, up
more than 70% on 2017 (12Moz). The quantity
acquired is significant in that it is the highest
level of central bank demand for almost half
a century. With gold viewed as a safe haven
asset class which can be used effectively to
help diversify reserves, Russia, Kazakhstan,
Turkey and India all added to their existing
holdings. Russia was a significant buyer,
acquiring c.8.8Moz (total official reported
holdings: c.68Moz). This is of particular
interest as the Central Bank of Russia views
gold as a key asset in the face of political and
economic uncertainty and its gold reserves
have increased for 13 consecutive years,
growing to 19% of total reserves. Turkey
purchased c.1.7Moz (total official reported
holdings: c.8.2Moz) re-entering the market
after a 25-year absence, Kazakhstan added
c.1.6Moz (total official reported holdings:
c.11Moz), while India added c.1.3Moz (total
official reported holdings: c.19Moz).
What were the key takeaways in terms of
gold supply?
In its tenth year of annual growth, total gold
supply increased by 1% in 2018 to 144Moz
(2017: 143Moz), on the back of record mine
production. Gold output in Russia (the world’s
third biggest producer by volume) saw a rise
in output of 10% year on year, in part due to
government support by way of tax incentives,
loans at attractive rates and a waiver on
royalty payments. This was in contrast to
Chinese gold production (China is the world’s
largest gold producer), which fell by 9%
compared to 2017, due to stricter
environmental regulations being enforced,
resulting in the scaling down and closure of
some smaller operations. It is also worth
mentioning South Africa, where production
declined by 18%, impacted heavily by a
number of factors, including industrial action.
Recycling ticked up too by just over 1% to
37.7Moz (2017: 37.2Moz).
How did the RUB perform against the
USD?
While Petropavlovsk’s gold sales are
denominated in US dollars (US$),
approximately 85% of the Group’s costs are
Rouble (RUB) based. A weaker RUB is
beneficial for the business because operating
costs are lower when translated into our
reporting currency.
From 10th January 2018 to 30th December
2018, the RUB depreciated by c.22%, trading
within a range of 55.7RUB to 70.0RUB per
US$, commencing the year at 57.0RUB and
closing at 69.5RUB. The strength of the
Rouble has often been correlated to the
movement of oil prices, and, as such, lower oil
prices in Q4 2018 may be one of the factors
behind the currency’s performance.
How did the oil price fare in 2018?
Oil prices increased steadily during the first
three quarters of 2018. This trend began to
reverse after Brent crude hit a 2018 high of c.
US$86 in the first week of October finishing the
year down 20% overall. Several factors were
responsible for the Q4 price decline.
Uncertainty over trade policy became a drag
on economic activity and in October the
International Monetary Fund (IMF) cut its
forecast for average oil prices on the back of
lower global growth in 2018/19 of 3.7% (down
from an earlier forecast of 3.9%). Also, the US
moved to impose sanctions on Iran’s oil in
November, but stopped short of market
expectations on an outright export ban by
granting temporary waivers which allowed
Iran to trade oil with eight specified countries.
The price of oil fell in response to this news
when traders realised the sanctions were
not as harsh as expected. During 2018, fuel
costs accounted for approximately 15% of
Petropavlovsk’s total operating cash expenses.
How has gold performed in 2019?
Rising a modest 0.7% during the first three
months of 2019, gold prices have proven
remarkably resilient to the emergence of a
dialogue between the US and China over
tariffs, strong stock market performance and
a slightly stronger USD. For the remainder of
2019, gold prices will be influenced by a range
of factors, including inflation data, interest
rates (the US Federal Reserve is expected to
hike During the first two months of 2019, gold
rates further in 2019), USD strength, stock
market performance / volatility, consumer
confidence and geopolitical risk.
The average annual gold price increased by 1% in 2018 to US$1,268/oz (in US$/oz)
1,268
1,257
1,248
1,265
1,160
1,224
973
1,410
1,668
1,570
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
Source: The London Gold Market Fixing Limited. Data provided for information purposes only
Gold depreciated by 3% in 2018 (in US$/oz)
2,000
1,600
1,200
800
400
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: The London Gold Market Fixing Limited. Data provided for information purposes only
Gold ETF’s finished 2018 with combined holdings of approximately 76Moz, up 3% on the year (in Moz)
100
80
60
40
20
0
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: UBS
Petropavlovsk Annual Report 2018
15
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation
Responsibility for each risk category is
delegated to a member of the Executive
Committee (a ‘Risk Owner’). Each Risk Owner
is responsible for:
Changes from risks identified in the 2017
Annual report
During 2018 the most critical risks to the
Group related to:
– Identifying risks in their risk area;
(i) Commissioning of the POX Hub; and
– Assessing the likelihood of occurrence and
potential impact on the Group of each risk;
and
– The implementation of mitigating controls
and action plans which seek to remove or
minimise the likelihood and impact of the
risks before they occur.
Each Risk Owner reports their findings to the
Executive Committee.
The Board recognises that some risks by their
nature cannot be mitigated by the Company.
A diagram detailing the Group’s Risk
Management Framework is provided below.
Principal risks relating to the Group
A table summarising Principal Risks is
provided below, followed on pages 20 to 33
by further information on the potential impact
of each specific risk and mitigating measures
in place.
The risks set out below should not be
regarded as a complete or comprehensive
list of all potential risks and uncertainties
facing the Group which could have an
adverse impact on its performance.
Additional risks which are currently believed
to be immaterial could turn out to be material
and significantly affect the Group’s business
and financial results.
Details of the Group’s internal control systems
which support this risk management system
are outlined on page 120.
(ii) 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 (the ‘ICBC
Facility’).
At the date of this report the Board is pleased
to note:
(i) The successful commissioning of the POX
Hub, within the revised timeframe and
within budget; and
(ii) The approval of the Company’s
shareholders, on 12 March 2019, to
the Board’s recommended proposal
to guarantee the obligations of K&S
under two facility agreements with
Gazprombank JSC. The new
Gazprombank facility which has
refinanced the ICBC Facility, is on more
favourable terms to the Company, IRC and
K&S because it extends the maturity of the
debt obligations, therefore reducing the
schedule repayment amounts for K&S
and allowing the repayment of those
obligations to be made over an extended
period of time. The Gazprombank facility
enables IRC to repay the Company
c.US$57m as full repayment of two bridge
loans extended to IRC by Petropavlovsk
during 2018 together with the payment by
IRC to Petropavlovsk of the outstanding
c.US$6 million guarantee fee, significantly
improving the Company’s cash position.
As at the date of this report the guarantees
provided by the Company to
Gazprombank total US$160m, compared
with US$234m under the ICBC Facility
guarantee as at 31 December 2017.
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.
Following the constitution of the new Board on
29 June 2018, the Board considered the Group’s
risks and its mechanisms and processes for
handling these risks. The Board discussed the
principal risks for the Group, differentiating those
where action can be taken to mitigate and control
such risk from those outside of the Company’s
control, where risk can be monitored but not
controlled. Whilst considering risks, the Board
takes into account its responsibility to all of its
stakeholders, including shareholders and
bondholders, the workforce, the local
communities in which the Group operates,
and local and federal government.
Monitoring of risks
The new Board has designed a Group risk
management system whereby the Group
risks are 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 Safety,
Sustainability & Workforce Committee
(‘SS&W’ Committee). The Audit and SS&W
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 attention is focused on those risks
with the highest potential impact.
In addition, the newly constituted Executive
Committee, details of which are provided
on pages 100 and 101, is a key component
of the Group’s risk management system.
The Executive Committee has responsibility
for evaluating risks in terms of potential impact
and financial cost, with reference to the
Group’s strategy and the operating
environment. The Executive Committee also
focusses on any new and emerging risks and
presents its findings to the Board, Audit
Committee and SS&W Committee as
appropriate.
16 Petropavlovsk Annual Report 2018
New risks
The Board considers, and is conscious
of, new risks. Whilst the successful
commissioning of the POX Hub is a
considerable achievement, the Board is
mindful that this new and complex
metallurgical facility brings added challenges
particularly in the area of process safety.
Accordingly, this is reviewed as a new specific
Health & Safety Risk and will be a focus of the
Safety, Sustainability & Workforce Committee
during 2019. Further details are provided in
the Sustainability Report contained within this
Annual Report.
In addition, the Board has considered the
potential impact on the Company of an IT
breakdown or cyber-attack and the likelihood
of such a risk occurring. The most significant
risk from this perspective relates to the
operation of the POX Hub. The Board has
obtained confirmation from the Head of the
Group’s IT Department of the actions that
have been undertaken to mitigate this risk and
the Board is content that this is adequate and
appropriate. The Board will continue to
monitor this risk.
Given the current focus on Brexit and the
guidance provided by the Financial Reporting
Council, the Board has considered the
potential risk of Brexit on the Company and
has concluded that there are no obvious,
company-specific risks to Petropavlovsk’s
operations or financial results arising directly
from the Brexit process.
The Board has also included ‘Loss of
Personnel’ as a Principal Risk in the table
opposite. The resignation of Dr Maslovskiy in
July 2017, following the Board changes in
June 2017, had a detrimental impact on the
Group’s operations, resulting in a
disappointing operational performance in
H1 2018, low workforce morale and, critically,
to a potential delay in the commissioning of
the POX Hub. Dr Maslovskiy’s return as CEO
restored authoritative leadership throughout
the Group and reinvigorated the senior
executive team, leading to improved H2
2018 operational performance and the
commissioning of the POX Hub on time
and within the revised timeframe.
Given Dr Maslovskiy’s importance to the
Group, the Board and the Nominations
Committee consider this to be a principal
risk and that mitigating actions including
appropriate remuneration and well
considered succession planning are
essential. The Board also recognises the
potential risk from the loss of other long-
serving members of the Executive Committee
and the senior management team.
Finally given the commissioning of the
POX Hub and the progress at the Group’s
underground mining operations, risks relating
to these matters have been moved from
‘Project Related Risks’ to ‘Operational’,
‘Processing’ and ‘Safety & Environmental’
as appropriate.
Petropavlovsk Annual Report 2018
17
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Increased risk
No change
Decreased risk
Table Summarising Principal Risks
Risks
Operational
a) Production
– Weather
– Delivery of equipment
– Stripping ratios
b) Exploration
Processing
– Mechanical failure of POX Hub
– Failure to reach expected recovery
– High levels of preg-robbing
Financial
– Lack of funding and liquidity
– Gold price
– Exchange rate
– Guarantee of IRC’s debt
Health, Safety & Environmental
– POX
– Underground mining
– Contamination
Significant factors 2018 and 2019
Overall change from prior year
The successful commissioning of POX in Q4 2018 has unlocked
access to c.12.3Moz of refractory gold resources in highly
prospective, easily accessible, low stripping deposits.
POX is a new and complex metallurgical facility which brings
added challenges.
– IRC’s increased financial stability following its Gazprombank
refinancing and the recent increase in the iron ore price, along
with new guarantee arrangements reducing the Company’s
risk exposure to IRC;
– The new forward gold sales contract with Gazprombank
has provided additional liquidity to the Company; and
– Options are being considered for bringing forward the
construction of the Pioneer flotation plant.
The Company has constituted a new Safety, Sustainability &
Workforce Committee, which amongst other matters will focus
on the new safety challenges arising from the Group’s POX Hub
and underground mining operations.
Loss of Key Personnel
Re-appointment of Dr Maslovskiy as CEO on 29 June 2018.
– The Company is dependent on
Dr Maslovskiy and other long-
serving members of the senior
executive team
Succession Planning on the Agenda of the Nominations Committee
and the Board
Appropriate remuneration considered and determined by the
Remuneration Committee.
Country/Compliance
The Board will continue to monitor these issues.
– The Group requires various licences
and permits in order to operate
– Risks associated with operating in
Russia
18 Petropavlovsk Annual Report 2018
Risk management framework
Petropavlovsk PLC Board
Audit Committee
Safety, Sustainability and
Workforce 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 lack of
funding and
liquidity, inability
to raise finance,
gold price risk,
exchange rate
exposure and risks
related to the new
Gazprombank
guarantees
Health, Safety
and Environmental
(‘HSE’)
County/
Compliance
Risks
Workplace hazards
that could result in
liability for the Group
or have an adverse
impact on output
Risks that create
potential for loss
arising from
uncertainty due
to legal actions or
uncertainty in the
application of laws
or regulations
Human
Resources
Risks associated
with the recruitment
and ongoing
management
of people
Investor Relations
and External
Communications
Includes risks
such as poor
management
of market
expectations and
poorly informed
investor perception
Chief Executive
Officer
Chief Financial
Officer
Chief Executive
Officer
Senior Legal
Advisor
Chief Executive
Officer
Deputy CEO
Petropavlovsk Annual Report 2018
19
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Table of principal risks
Operational risks
PRODUCTION RELATED RISK – Failure to achieve the Group’s production plan
Risk
Description and potential impact
Risk to production from:
i) Weather
ii) Delivery of equipment
iii) Stripping ratios
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
(both open pits and underground) and from POX in order to
generate revenue and cash flow.
Potential impact/
Change since 2017
High
Mitigation/comments/ 2018 Progress
Additional
information
Preventative maintenance procedures are undertaken on a regular and periodic basis to ensure that machines will
Operational
function properly in extreme cold weather conditions; heating plants at operational bases are regularly maintained
and operational equipment is fitted with cold weather protection to assist in ensuring that equipment does not fail
Performance on
pages 34 to 43
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 times in order to ensure timely delivery of equipment.
The Group has a number of contingency plans in place to address any disruption to services
In October 2018, mining in the first underground stopes of the main high-grade orebody at -5m MSL level caused
unusually high water inflow into the +55m MSL sublevel and all work in the North East Bakhmut 3 area at Pioneer’s
underground mining operations had to be stopped until the flooding was under control. Ore mining at North East
Bakhmut resumed in January 2019.
The successful commissioning of the POX Hub commenced in November 2018. POX is a proven technology
facilitating large scale, long life projects and with a reasonable cost profile.
During 2018 the Group delivered production in line with its revised guidance.
20 Petropavlovsk Annual Report 2018
The symbols indicate how the Company
considers that these risks have changed
since 2017.
Increased risk
No change
Decreased risk
New risk
Operational risks
PRODUCTION RELATED RISK – Failure to achieve the Group’s production plan
Risk to production from:
The Group’s assets are located in the Russian Far East, a
High
i) Weather
ii) Delivery of equipment
iii) Stripping ratios
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
(both open pits and underground) and from POX in order to
generate revenue and cash flow.
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
Preventative maintenance procedures are undertaken on a regular and periodic basis to ensure that machines will
function properly in extreme cold weather conditions; heating plants at operational bases are regularly maintained
and operational equipment is fitted with cold weather protection to 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 times in order to ensure timely delivery of equipment.
The Group has a number of contingency plans in place to address any disruption to services
In October 2018, mining in the first underground stopes of the main high-grade orebody at -5m MSL level caused
unusually high water inflow into the +55m MSL sublevel and all work in the North East Bakhmut 3 area at Pioneer’s
underground mining operations had to be stopped until the flooding was under control. Ore mining at North East
Bakhmut resumed in January 2019.
The successful commissioning of the POX Hub commenced in November 2018. POX is a proven technology
facilitating large scale, long life projects and with a reasonable cost profile.
During 2018 the Group delivered production in line with its revised guidance.
Additional
information
Operational
Performance on
pages 34 to 43
Petropavlovsk Annual Report 2018
21
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Operational risks continued
EXPLORATION RELATED RISK
Risk
Description and potential impact
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
may not result in their replacement or expansion with new
Reserves after their depletion from current production.
22 Petropavlovsk Annual Report 2018
Potential impact/
Change since 2017
High
Mitigation/comments/ 2018 Progress
The Group uses modern geophysical and geochemical exploration and surveying techniques. The Group employs
Exploration Update
a highly qualified team of geologists with considerable regional expertise and experience. They are supported by a
on pages 65 to 66
network of fully accredited laboratories experienced in performing a range of assay work to high standards.
Additional
information
The POX Hub on
pages 46 to 52
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 legislation, 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 assurance about the Company’s Reserve estimates.
The Group employs a team of qualified mining engineers to undertake mine planning, complete open pit and
underground mine design and production scheduling.
The success of the POX Hub has unlocked the Group’s access to the 12.33Moz refractory Resources which support
the Group’s long-term growth objectives in doubling the average life of mine and sustaining its production profile.
The Group continues to explore the potential for further mine life extension and production expansion. Exploration
work has identified several prospective satellite refractory targets for further work at Malomir and Pioneer. A successful
exploration campaign in 2018 yielded a 2% increase (before depletion and disposals) in JORC Mineral Resources
across the Group’s assets. This maintained the total Mineral Resource at 20.52Moz despite depletion of 0.49Moz
due to mining and the disposal or surrender of several licences containing 0.3Moz JORC resources during the year.
The increase is mainly attributable to additions at open pit and underground targets at Pioneer, Malomir and Albyn,
including a 26% increase in resources potentially suitable for underground mining, from c.0.94Moz to c.1.19Moz.
Potential resources for underground mining have been identified at Pokrovskiy and Albyn.
Successful near mine exploration identified a number of promising targets that warrant further exploration, which may
result in an increase in Mineral Resources and possibly new Ore Reserves.
Operational risks continued
EXPLORATION RELATED RISK
The Group’s activities are reliant
on the quantity and quality of the
Exploration activities are speculative, time-consuming and
High
can be unproductive. In addition, these activities often require
Mineral Resources and Ore Reserves
substantial expenditure to establish Reserves through drilling
available to it.
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
may not result in their replacement or expansion with new
Reserves after their depletion from current production.
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
The Group uses modern geophysical and geochemical exploration and surveying techniques. The Group employs
a highly qualified team of geologists with considerable regional expertise and experience. They are supported by a
network of fully accredited laboratories experienced in 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 legislation, 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 assurance about the Company’s Reserve estimates.
The Group employs a team of qualified mining engineers to undertake mine planning, complete open pit and
underground mine design and production scheduling.
The success of the POX Hub has unlocked the Group’s access to the 12.33Moz refractory Resources which support
the Group’s long-term growth objectives in doubling the average life of mine and sustaining its production profile.
The Group continues to explore the potential for further mine life extension and production expansion. Exploration
work has identified several prospective satellite refractory targets for further work at Malomir and Pioneer. A successful
exploration campaign in 2018 yielded a 2% increase (before depletion and disposals) in JORC Mineral Resources
across the Group’s assets. This maintained the total Mineral Resource at 20.52Moz despite depletion of 0.49Moz
due to mining and the disposal or surrender of several licences containing 0.3Moz JORC resources during the year.
The increase is mainly attributable to additions at open pit and underground targets at Pioneer, Malomir and Albyn,
including a 26% increase in resources potentially suitable for underground mining, from c.0.94Moz to c.1.19Moz.
Potential resources for underground mining have been identified at Pokrovskiy and Albyn.
Successful near mine exploration identified a number of promising targets that warrant further exploration, which may
result in an increase in Mineral Resources and possibly new Ore Reserves.
Additional
information
Exploration Update
on pages 65 to 66
The POX Hub on
pages 46 to 52
Petropavlovsk Annual Report 2018
23
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Processing
Risk
Description and potential impact
Potential impact/
Change since 2017
Mitigation/comments/ 2018 Progress
Additional
information
A mechanical or metallurgical failure
of the POX Hub, including failure to
reach expected recovery rates or high
levels of preg-robbing could result in
lower production and/or higher costs.
POX is a new and complex metallurgical facility which brings
added challenges.
New risk
The first two autoclaves which are the principal components of the POX Hub were successfully commissioned
in December 2018, within the revised timeframe and have now been operational at design processing and
The POX Hub on
pages 46 to 52
If there is a failure in the POX process this could lead to lower
production and/or higher costs which may have a detrimental
impact on the Group’s operating performance and financial
condition.
The monitoring equipment used at the POX plant uses
radioactive isotopes to monitor the processing. A failure to
use the equipment correctly could result in contamination.
gold recovery.
The Group’s expertise in pressure oxidation is represented by RDC Hydrometallurgy, a scientific research centre
based in St Petersburg with a POX pilot plant located in Blagoveshchensk.
In early 2018, a decision was made for RDC Hydrometallurgy to develop an advanced engineering course ‘Autoclave
Oxidative Leaching of Gold-bearing Sulphide Flotation Concentrates’ for the Group’s engineering and technical
personnel and to install the only pilot autoclave installation in Russia. This simulation of the operator’s workplace
allowed trainees to learn to monitor and regulate all POX parameters.
For six months, the engineers and technicians from Pokrovskiy, studied the theoretical section of the course at the
training centre of Pokrovskiy Mining College. They then practised on the simulator to be fully prepared for the real-life
commissioning.
Safety requirements for the use of nuclear isotopes are exceeded only by the space industry. Therefore, for successful
commissioning, it was necessary to fulfil a number of stringent requirements and conditions. The Group had to obtain
a license to operate radiation sources in the POX Hub and appropriate training was organised for employees
24 Petropavlovsk Annual Report 2018
Processing
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
A mechanical or metallurgical failure
POX is a new and complex metallurgical facility which brings
New risk
of the POX Hub, including failure to
added challenges.
reach expected recovery rates or high
levels of preg-robbing could result in
lower production and/or higher costs.
If there is a failure in the POX process this could lead to lower
production and/or higher costs which may have a detrimental
impact on the Group’s operating performance and financial
condition.
The monitoring equipment used at the POX plant uses
radioactive isotopes to monitor the processing. A failure to
use the equipment correctly could result in contamination.
The first two autoclaves which are the principal components of the POX Hub were successfully commissioned
in December 2018, within the revised timeframe and have now been operational at design processing and
gold recovery.
The Group’s expertise in pressure oxidation is represented by RDC Hydrometallurgy, a scientific research centre
based in St Petersburg with a POX pilot plant located in Blagoveshchensk.
In early 2018, a decision was made for RDC Hydrometallurgy to develop an advanced engineering course ‘Autoclave
Oxidative Leaching of Gold-bearing Sulphide Flotation Concentrates’ for the Group’s engineering and technical
personnel and to install the only pilot autoclave installation in Russia. This simulation of the operator’s workplace
allowed trainees to learn to monitor and regulate all POX parameters.
For six months, the engineers and technicians from Pokrovskiy, studied the theoretical section of the course at the
training centre of Pokrovskiy Mining College. They then practised on the simulator to be fully prepared for the real-life
commissioning.
Safety requirements for the use of nuclear isotopes are exceeded only by the space industry. Therefore, for successful
commissioning, it was necessary to fulfil a number of stringent requirements and conditions. The Group had to obtain
a license to operate radiation sources in the POX Hub and appropriate training was organised for employees
Additional
information
The POX Hub on
pages 46 to 52
Petropavlovsk Annual Report 2018
25
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Financial risks
Risk
Liquidity Risk
The Group’s result of operations
may be affected by changes in
the gold price
Exchange rate fluctuations
26 Petropavlovsk Annual Report 2018
In the event that the Group requires additional finance for shorter term liquidity purposes, including for capital
Chief Financial
expenditure purposes, the Group may have access to forward gold sales funding. This may be advantageous,
Officer’s Statement on
depending upon the Group’s access otherwise to debt or equity finance and the terms on which these may
pages 87 to 95
be available.
In December 2018, Petropavlovsk’s liquidity position was significantly strengthened after entering into a number
of gold sales contracts with Gazprombank, for sales of c.175Koz in 2019-2020. These arrangements allow the
Company to receive advance payments for 70% of gold with shipment to Gazprombank over a period commencing
six months following receipt of an advance by the Company and ending no later than December 2020. Theses sale
contracts have provided the Group with flexibility during the POX plant ramp up period.
Description and potential impact
Potential impact/
Change since 2017
Mitigation/comments/ 2018 Progress
Additional
information
The Group may need ongoing access to liquidity and funding
in order to:
High
(i) Refinance or repay its existing debt as required;
(ii) Support its existing operations and extend their life and
capacity; and
(iii) Invest to develop its refractory ore concentrate production
and underground mining projects and exploration.
There is a risk that the Group may be unable to obtain
necessary funding when required or that such funding
will only be available on unfavourable terms.
The Group may therefore be unable to meet its business
development objectives or financial commitments
The Group’s financial performance is highly dependent on the
price of gold. A sustained downward movement in the market
price for gold would negatively affect the Group’s profitability
and cash flow and consequently its ability to develop its
business. The market price of gold is volatile and is affected
by numerous factors which are beyond the Group’s control.
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 revenues are generated.
Significant costs are incurred in and/or influenced by the local
currencies in which the Group operates, principally Russian
Roubles. An 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 exchange rate movements may
materially affect the Group’s financial condition and results of
operations.
– 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.
High
The Chief Financial Officer constantly monitors the gold price and influencing factors on a daily basis and consults
with the Board as appropriate.
deem necessary.
The Group has a hedging policy and hedges a portion of production as the Chief Financial Officer and Board
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 2018.
Forward contracts to sell an aggregate of 200,000oz of gold at an average price of US$1,252oz were outstanding
as at 31 December 2018.
A higher gold price environment may allow the Group to consider other hedging arrangement options in 2019.
Market Overview
on pages 14 to 15
Chief Financial
Officer’s Statement
on pages 87 to 95
High
The average year-on-year depreciation of the Russian Rouble against the US Dollar was approximately 7%, with the
Chief Financial
average exchange rate for 2018 being RUB62.68 : US$1 compared to RUB58.32 : US$1 for 2017.
Officer’s Statement
on page 95
The Group’s policy is to keep under review possible options for exchange rate hedging, although it currently has
not entered into any such transactions.
Liquidity Risk
The Group may need ongoing access to liquidity and funding
High
in order to:
(i) Refinance or repay its existing debt as required;
(ii) Support its existing operations and extend their life and
capacity; and
(iii) Invest to develop its refractory ore concentrate production
and underground mining projects and exploration.
There is a risk that the Group may be unable to obtain
necessary funding when required or that such funding
will only be available on unfavourable terms.
The Group may therefore be unable to meet its business
development objectives or financial commitments
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
High
price of gold. A sustained downward movement in the market
price for gold would negatively affect the Group’s profitability
and cash flow and consequently its ability to develop its
business. The market price of gold is volatile and is affected
by numerous factors which are beyond the Group’s control.
Exchange rate fluctuations
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 revenues are generated.
Significant costs are incurred in and/or influenced by the local
currencies in which the Group operates, principally Russian
Roubles. An 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
High
relative to its revenues.
In addition:
– A portion of the Group corporate overhead is denominated in
Sterling. Therefore, adverse exchange rate movements may
materially affect the Group’s financial condition and results of
operations.
– 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.
Financial risks
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
In the event that the Group requires additional finance for shorter term liquidity purposes, including for capital
expenditure purposes, the Group may have access to forward gold sales funding. This may be advantageous,
depending upon the Group’s access otherwise to debt or equity finance and the terms on which these may
be available.
In December 2018, Petropavlovsk’s liquidity position was significantly strengthened after entering into a number
of gold sales contracts with Gazprombank, for sales of c.175Koz in 2019-2020. These arrangements allow the
Company to receive advance payments for 70% of gold with shipment to Gazprombank over a period commencing
six months following receipt of an advance by the Company and ending no later than December 2020. Theses sale
contracts have provided the Group with flexibility during the POX plant ramp up period.
Additional
information
Chief Financial
Officer’s Statement on
pages 87 to 95
The Chief Financial Officer constantly monitors the gold price and influencing factors on a daily basis and consults
with the Board as appropriate.
Market Overview
on pages 14 to 15
The Group has a hedging policy and hedges a portion of production as the Chief Financial Officer and Board
deem necessary.
Chief Financial
Officer’s Statement
on pages 87 to 95
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 2018.
Forward contracts to sell an aggregate of 200,000oz of gold at an average price of US$1,252oz were outstanding
as at 31 December 2018.
A higher gold price environment may allow the Group to consider other hedging arrangement options in 2019.
The average year-on-year depreciation of the Russian Rouble against the US Dollar was approximately 7%, with the
average exchange rate for 2018 being RUB62.68 : US$1 compared to RUB58.32 : US$1 for 2017.
Chief Financial
Officer’s Statement
on page 95
The Group’s policy is to keep under review possible options for exchange rate hedging, although it currently has
not entered into any such transactions.
Petropavlovsk Annual Report 2018
27
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Potential impact/
Change since 2017
High
Financial risks continued
Risk
Risk that:
– Funding may be demanded from
Petropavlovsk under a guarantee
provided in relation to a project
finance facility provided to K&S a
wholly owned subsidiary of IRC.
– K&S will not be able to service the
interest and meet the repayments
due on its loan due to insufficient
funds arising from a decrease in the
iron ore price or operational issues
at the K&S site
Description and potential impact
As at 31 December 2018, Petropavlovsk had 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$169m was outstanding as at
31 December 2018 (2017: cUS$234m).
In the event that K&S defaulted on its loan, Petropavlovsk may
have been liable to repayment of the outstanding loan under the
terms of the guarantee and other Group indebtedness may
have become repayable under cross-default provisions.
Due to actions taken by IRC and the Company during 2018
(see Mitigation/Comments) this risk has substantially reduced.
– Risk that further issues delaying the
ramping up of the K&S facility and/or a
decrease in the iron price could result
in a decrease in the value of the Group’s
shareholding in IRC.
However due to the guarantees provided by the Company
to Gazprombank, the Group’s going concern status remains
sensitive to IRC’s ability to comply with covenants within the
new facilities and generate sufficient cash flows from its
K&S mine.
28 Petropavlovsk Annual Report 2018
Mitigation/comments/ 2018 Progress
– In June and December 2018, the Group provided IRC with bridge loans totalling c.US$57m. These funds were
IRC on page 67
used by IRC to pay two schedule payments to ICBC.
– On 19 December 2018, K&S signed two new broadly identical facility agreements with Gazprombank (the ‘Facility
Agreements’) whereby Gazprombank would provide K&S with a US$240m facility for the purposes of repaying
in full the outstanding project finance facility K&S had with ICBC and repaying the two bridge loans provided by
Petropavlovsk to IRC (the ‘Gazprombank Facility’).
– Pursuant to the Facility Agreements, Petropavlovsk was to guarantee the obligations of K&S up to an initial amount
Shareholders dated
of US$160m through a series of five guarantees over the life of the Gazprombank Facility. These guarantees were
15 February 2019,
entered into by the Company and Gazprombank on 15 February 2019, with the effectiveness of each of the
is available at
guarantees being conditional upon shareholder approval being obtained at a General Meeting. Such Shareholder
www.petropavlovsk.net
Additional
information
Audit Committee
Report on page 116
The Company’s
Circular to
approval was obtained on 12 March 2019.
– The Gazprombank Facility has been drawn down and has enabled IRC to:
– Repay in full the sum of approximately US$169m outstanding under the ICBC Facility; and
– Repay Petropavlovsk the Russian Rouble equivalent of approximately c.US$57m, in addition to any accrued
interest and fees, as full repayment of the two bridge loans.
– The Gazprombank Facility will also enable IRC to fully pay guarantee fees of c.US$6 million, owing to Petropavlovsk
in relation to the guarantee provided for the ICBC facility (c.US$4.5 million of which has been paid to date).
– The risk of K&S defaulting on its loan, and hence the risk that Petropavlovsk may be liable to repay the outstanding
loan, has been reduced by K&S entering into the Gazprombank Facility and repaying the ICBC Facility because:
– The Gazprombank Facility provides for a significantly more relaxed amortisation schedule compared to that under
the ICBC Facility; and
– Better aligns with the proposed ramp up of K&S and the revenues that are anticipated to be generated by it.
– The guarantee provided by the Company has decreased to US$160m as at the date of this Annual Report.
However in certain circumstances the Company could have a maximum liability of US$240m under the guarantees.
Full details of the guarantees and the associated risks are contained in the Company’s Circular to Shareholders dated
15 February 2018, a copy of which can be found on the Company’s website at http://www.petropavlovsk.net/
wp-content/uploads/2019/02/c114994CCL-pfp.pdf
Financial risks continued
Risk
Risk that:
– Funding may be demanded from
Petropavlovsk under a guarantee
provided in relation to a project
finance facility provided to K&S a
wholly owned subsidiary of IRC.
As at 31 December 2018, Petropavlovsk had provided a
High
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$169m was outstanding as at
31 December 2018 (2017: cUS$234m).
– K&S will not be able to service the
have been liable to repayment of the outstanding loan under the
In the event that K&S defaulted on its loan, Petropavlovsk may
interest and meet the repayments
due on its loan due to insufficient
funds arising from a decrease in the
iron ore price or operational issues
at the K&S site
– Risk that further issues delaying the
ramping up of the K&S facility and/or a
decrease in the iron price could result
in a decrease in the value of the Group’s
shareholding in IRC.
terms of the guarantee and other Group indebtedness may
have become repayable under cross-default provisions.
Due to actions taken by IRC and the Company during 2018
(see Mitigation/Comments) this risk has substantially reduced.
However due to the guarantees provided by the Company
to Gazprombank, the Group’s going concern status remains
sensitive to IRC’s ability to comply with covenants within the
new facilities and generate sufficient cash flows from its
K&S mine.
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
Additional
information
– In June and December 2018, the Group provided IRC with bridge loans totalling c.US$57m. These funds were
IRC on page 67
used by IRC to pay two schedule payments to ICBC.
– On 19 December 2018, K&S signed two new broadly identical facility agreements with Gazprombank (the ‘Facility
Agreements’) whereby Gazprombank would provide K&S with a US$240m facility for the purposes of repaying
in full the outstanding project finance facility K&S had with ICBC and repaying the two bridge loans provided by
Petropavlovsk to IRC (the ‘Gazprombank Facility’).
– Pursuant to the Facility Agreements, Petropavlovsk was to guarantee the obligations of K&S up to an initial amount
of US$160m through a series of five guarantees over the life of the Gazprombank Facility. These guarantees were
entered into by the Company and Gazprombank on 15 February 2019, with the effectiveness of each of the
guarantees being conditional upon shareholder approval being obtained at a General Meeting. Such Shareholder
approval was obtained on 12 March 2019.
Audit Committee
Report on page 116
The Company’s
Circular to
Shareholders dated
15 February 2019,
is available at
www.petropavlovsk.net
– The Gazprombank Facility has been drawn down and has enabled IRC to:
– Repay in full the sum of approximately US$169m outstanding under the ICBC Facility; and
– Repay Petropavlovsk the Russian Rouble equivalent of approximately c.US$57m, in addition to any accrued
interest and fees, as full repayment of the two bridge loans.
– The Gazprombank Facility will also enable IRC to fully pay guarantee fees of c.US$6 million, owing to Petropavlovsk
in relation to the guarantee provided for the ICBC facility (c.US$4.5 million of which has been paid to date).
– The risk of K&S defaulting on its loan, and hence the risk that Petropavlovsk may be liable to repay the outstanding
loan, has been reduced by K&S entering into the Gazprombank Facility and repaying the ICBC Facility because:
– The Gazprombank Facility provides for a significantly more relaxed amortisation schedule compared to that under
the ICBC Facility; and
– Better aligns with the proposed ramp up of K&S and the revenues that are anticipated to be generated by it.
– The guarantee provided by the Company has decreased to US$160m as at the date of this Annual Report.
However in certain circumstances the Company could have a maximum liability of US$240m under the guarantees.
Full details of the guarantees and the associated risks are contained in the Company’s Circular to Shareholders dated
15 February 2018, a copy of which can be found on the Company’s website at http://www.petropavlovsk.net/
wp-content/uploads/2019/02/c114994CCL-pfp.pdf
Petropavlovsk Annual Report 2018
29
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Health, Safety & Environmental Risks
Risk
Description and potential impact
The Group operates potentially hazardous
sites such as open-pits, underground
mines, the POX Hub plant, exploration
sites processing facilities and explosive
storage facilities. The operation of these
sites exposes its personnel to a variety of
health and safety risks.
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.
Potential impact/
Change since 2017
Medium/high
Major pollution arising from operations
include: air and water pollution, land
contamination and deforestation.
If the Group was involved in a major environmental event,
potential impacts could include fines and penalties, statutory
liability for environmental remediation and other financial
consequences that might be significant.
Accidental spillages of cyanide and other chemicals may result
in damage to the environment, personnel and individuals within
the local community.
Medium/high
The Company operates a certified environmental management system at all of its sites which meet international
Sustainability Report
on pages 81 to 83
Loss of Personnel
Risk
Description and potential impact
The Company is dependent on
Dr Pavel Maslovskiy, CEO and
other long-serving members of
the senior executive team
The loss of key personnel to the Company may impact the
morale of senior management and the workforce, the result
of the Group’s operations and a delay in the delivery of projects
Potential impact/
Change since 2017
Medium/high
Mitigation/comments/ 2018 Progress
Succession Planning is on the Agenda of the Nominations Committee and the Board.
The Remuneration Committee will ensure appropriate remuneration.
Additional
information
Nominations
Committee Report
on page 110
Directors’
Remuneration
Report on pages
121 to 138
30 Petropavlovsk Annual Report 2018
Mitigation/comments/ 2018 Progress
Additional
information
Board level oversight of health and safety issues occurs through the work of the Safety, Sustainability and Workforce
Committee (SS&W Committee) which was constituted on 12 November 2018. The Committee is chaired by Mr Harry
Sustainability Report
on pages 68 to 83
Kenyon-Slaney, Independent Non-Executive Director, who is assisted by his colleagues on the Committee namely, Dr Pavel
Maslovskiy, Chief Executive Officer, Mr Damien Hackett, Independent Non-Executive Director, Mr Bektas Mukazhanov,
Non-Executive Director and Dr Alya Samokhvalova, Deputy CEO. Mr Kenyon-Slaney’s introduction to the Sustainability
Report is provided on page 72 of this Annual Report. Members of the SS&W Committee visited the Group’s operating mines
in April 2019 during which they met with members of the workforce.
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 and where possible with international
best practice. 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.
The SS&W Committee has sought assurance from management that appropriate health and safety procedures have been
enacted throughout the Group’s POX Hub, not only to comply with Russian health and safety legislation but to adhere to
international best practice, in recognition of the inherent risks within this new technology. The Group has provided extensive
safety training to its employees on the operation of the POX process and in relation to its underground mining operations.
The Lost-Time Injury Frequency Rate (LTIFR) for 2018 of 2.52 accidents per 1 million man-hours worked compared
with a LTIFR of 3.11 in 2017. Regrettably this included one fatality, a road traffic accident involving an employee
at Albyn who was being transported to his place of work from his accommodation at the time of the incident.
Health & Safety targets are included in the annual bonus scheme for Executive Directors and the Executive
Committee. The Remuneration Committee may also consider the Group’s health and safety performance during
the year when considering bonus plan payments.
standards.
environment.
The Company has implemented a number of initiatives to monitor and limit the impact of its operations on the
Cyanide and other dangerous substances are kept in secure storages with access limited only to qualified personnel,
with access closely monitored by security staff.
Health, Safety & Environmental Risks
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
The Group operates potentially hazardous
The Group’s employees are one of its most valuable assets.
Medium/high
sites such as open-pits, underground
mines, the POX Hub plant, exploration
sites processing facilities and explosive
storage facilities. The operation of these
sites exposes its personnel to a variety of
health and safety risks.
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.
Board level oversight of health and safety issues occurs through the work of the Safety, Sustainability and Workforce
Committee (SS&W Committee) which was constituted on 12 November 2018. The Committee is chaired by Mr Harry
Kenyon-Slaney, Independent Non-Executive Director, who is assisted by his colleagues on the Committee namely, Dr Pavel
Maslovskiy, Chief Executive Officer, Mr Damien Hackett, Independent Non-Executive Director, Mr Bektas Mukazhanov,
Non-Executive Director and Dr Alya Samokhvalova, Deputy CEO. Mr Kenyon-Slaney’s introduction to the Sustainability
Report is provided on page 72 of this Annual Report. Members of the SS&W Committee visited the Group’s operating mines
in April 2019 during which they met with members of the workforce.
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 and where possible with international
best practice. 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.
The SS&W Committee has sought assurance from management that appropriate health and safety procedures have been
enacted throughout the Group’s POX Hub, not only to comply with Russian health and safety legislation but to adhere to
international best practice, in recognition of the inherent risks within this new technology. The Group has provided extensive
safety training to its employees on the operation of the POX process and in relation to its underground mining operations.
The Lost-Time Injury Frequency Rate (LTIFR) for 2018 of 2.52 accidents per 1 million man-hours worked compared
with a LTIFR of 3.11 in 2017. Regrettably this included one fatality, a road traffic accident involving an employee
at Albyn who was being transported to his place of work from his accommodation at the time of the incident.
Health & Safety targets are included in the annual bonus scheme for Executive Directors and the Executive
Committee. The Remuneration Committee may also consider the Group’s health and safety performance during
the year when considering bonus plan payments.
Additional
information
Sustainability Report
on pages 68 to 83
Major pollution arising from operations
If the Group was involved in a major environmental event,
Medium/high
include: air and water pollution, land
potential impacts could include fines and penalties, statutory
contamination and deforestation.
liability for environmental remediation and other financial
The Company operates a certified environmental management system at all of its sites which meet international
standards.
Sustainability Report
on pages 81 to 83
consequences that might be significant.
Accidental spillages of cyanide and other chemicals may result
in damage to the environment, personnel and individuals within
the local community.
The Company has implemented a number of initiatives to monitor and limit the impact of its operations on the
environment.
Cyanide and other dangerous substances are kept in secure storages with access limited only to qualified personnel,
with access closely monitored by security staff.
Loss of Personnel
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
The Company is dependent on
Dr Pavel Maslovskiy, CEO and
other long-serving members of
the senior executive team
The loss of key personnel to the Company may impact the
morale of senior management and the workforce, the result
of the Group’s operations and a delay in the delivery of projects
Succession Planning is on the Agenda of the Nominations Committee and the Board.
The Remuneration Committee will ensure appropriate remuneration.
Potential impact/
Change since 2017
Medium/high
Additional
information
Nominations
Committee Report
on page 110
Directors’
Remuneration
Report on pages
121 to 138
Petropavlovsk Annual Report 2018
31
Strategic reportFinancial statementsGovernance Principal Risks and Mitigation continued
Country and Compliance Risks
Risk
Description and potential impact
The Group requires various licences and
permits in order to operate.
The Group is subject to risks associated
with operating in Russia.
The Group’s principal activity is gold mining 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.
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.
32 Petropavlovsk Annual Report 2018
Potential impact/
Change since 2017
Medium/high
Mitigation/comments/ 2018 Progress
Additional
information
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
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.
The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted
legislation and 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.
by the Russian Government.
The Group closely monitors its assets and the probability of their inclusion into the Strategic Assets lists published
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 Law.
This risk cannot be influenced by the management of the Company. However, the Group continues to monitor
changes in the political environment including the impact of any potential sanctions, and reviews changes to the
relevant legislation, policies and practices.
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.
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.
Country and Compliance Risks
Risk
Description and potential impact
Mitigation/comments/ 2018 Progress
Potential impact/
Change since 2017
Additional
information
The Group requires various licences and
The Group’s principal activity is gold mining which require it to
Medium/high
permits in order to operate.
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.
The Group is subject to risks associated
Actions by governments or changes in economic, political,
Medium/high
with operating in Russia.
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.
The Group seeks to mitigate the political and legal risk by constant monitoring of the proposed and newly adopted
legislation and 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 Law.
This risk cannot be influenced by the management of the Company. However, the Group continues to monitor
changes in the political environment including the impact of any potential sanctions, and reviews changes to the
relevant legislation, policies and practices.
Petropavlovsk Annual Report 2018
33
Strategic reportFinancial statementsGovernance Operational Performance
34 Petropavlovsk Annual Report 2018
Key Performance Indicators
Our key performance indicators appear throughout this report and introduce the operational
and sustainability sections and the CFO statement respectively (pages 35, 69 and 84).
Mineral Resources (Moz)
Ore Reserves (Moz)
Total Attributable Gold Production
(koz)
2018
2017
2016
20.52
2018
20.86
2017
20.16
2016
8.21
2018
8.15
2017
7.95
2016
422
440
400
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, and quantity that there are reasonable
prospects for eventual economic extraction.
The location, quantity, grade, 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.
Progress In 2018
The successful exploration campaign in
2018 maintained the total Mineral Resource
at 20.52Moz despite a depletion of 0.79Moz
by mining and disposals. Additions to the
resource base at both open pit and
underground targets at Pioneer, Malomir and
Albyn, included a 26% increase in resources
potentially suitable for underground mining.
Total refractory resources increased by
c.28%, predominantly via the re-classification
of transitional material which was potentially
amenable for RIP but is now deemed more
suitable for the refractory processing route.
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 2019,
Group geologists will look to delineate further
mineral resources at Albyn and Pioneer sites.
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 standard
mining, metallurgical, economic, marketing,
legal, environmental, social and governmental
factors. These assessments demonstrate
that, at the time of reporting, 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 its Ore Reserves
depleted from its operations.
Progress In 2018
Work completed in 2018 increased total
Group reserves by c.7% or c.0.6Moz (before
depletion) to 8.21Moz. New open pit
Reserves were established at Pioneer,
Malomir and Albyn. Following commissioning
of the Pokrovskiy POX Hub, refractory
reserves increased by 1.21Moz (from 4.10 to
5.31Moz), predominantly via re-classification
of transitional reserves which are amenable
for either RIP and Flotation/POX and now
are deemed more suitable for the refractory
processing route. There was a corresponding
decrease in the non-refractory ore resources.
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 higher grade 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 2018
The Group produced 422.3koz, including
52.1koz of gold contained in high grade
refractory concentrate. This result is in line
with the Company’s guidance for the year of
420 – 450koz. As the Group’s flagship mine,
Albyn produced 36% of total gold production
for the year, while Pioneer contributed 32%.
Malomir gold doré production amounted 18%
of the total, with an additional 12% in the form
of gold in concentrate. Output from
Pokrovskiy was largely immaterial (2%)
because the asset’s mining operations were
wound down and the existing processing
plant and related infrastructure were
converted into the POX Hub during the period.
Going Forward
Gold production for 2019 is forecast between
450 – 500koz. Enhancing capacity utilisation
at the recently commissioned POX Hub facility,
by expanding and optimising concentrate
throughput from the Company’s refractory
reserves as well as from third party sourced
concentrate, will result in a meaningful
contribution to total 2019 production.
Petropavlovsk Annual Report 2018
35
Strategic reportFinancial statementsGovernance Operational Performance
Pioneer
Pioneer remains one of Petropavlovsk’s flagship assets
with significant exploration potential.
2018 gold production:
135.1koz – 32% of total Group gold
production for the year.
Location
Pokrovskiy POX Hub
Pioneer
Open pit mine
Underground mine
Lime deposit
Analytical lab
POX Hub
Hydro plant
Core assets
Blagoveshchensk
Railway
Federal highway
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 contains 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
low-grade halos 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 exists for the
discovery of further significant open pit
resources particularly south and south
west from Pioneer.
Mining and Processing
Pioneer is a bulk tonnage mine with
multiple open pits and an underground
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 new POX Hub has enabled gold
production from the refractory ore.
The POX Hub is located at Pokrovskiy,
c.40km south of Pioneer, and was
commissioned at 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.
36 Petropavlovsk Annual Report 2018
Production as a % of total group
Key facts:
2001
Pioneer was acquired as a greenfield licence
2.6Moz
Gold produced to date
6,395kt
Ore processed via RIP in 2018
701kt
Ore processed via HL in 2018
1,337km2
Total gold licence area
5.94Moz
Mineral Resources, including 2.84Moz
Ore Reserves
19 years
Mine life
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.
A second underground mine at Andreevskaya
Zone is expected to be built during 2019.
Operations
In 2018, Pioneer produced 135.1koz, c.32%
of total Group production, and a c.16.5%
decrease from 2017 (161.8koz). The decrease
reflects an ending to exceptional gold
recovered at the resin treatment facility which
was constructed in 2017 to recover gold that
had built up in the processing circuit.
The main sources of ore at Pioneer were
stockpiles accumulated during 2017 and pits
of the Alexandra, North-East Bakhmut, Katrin,
Yuzhnaya and Promezhutochnaya. RIP
processing recoveries were higher than in
2017 due to head grades being higher and the
ore processed being less refractory than in
the previous year. Heap leach operations
operated through the warmer season,
producing 5.6koz of gold.
During 2018, a total of 4,397m (57,763m3) of
underground development was completed.
In total, 115kt of underground ore with an
average gold content of 2.82g/t was mined
in 2018. More challenging than expected
geotechnical and hydrogeological conditions
hampered 2018 underground production.
As the result, access to the high-grade stopes
was not available and majority of ore came
from lower grade ore bodies and sublevel
development. Problems faced in 2018 have
now been resolved and by the end of 2019,
when underground mining at Pioneer is
ramped up to full capacity, Pioneer is
expected to produce ore at an average
of 4-5g/t.
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
Figures may not add up due to rounding
Total Cash Costs◆ were US$799/oz, a
1% increase from 2017 (US$791/oz). All-in
Sustaining Costs◆ were US$1,294/oz a 26%
increase compared to 2017. Total Cash Costs◆
stayed virtually the same as last year despite a
decrease in gold ounces produced, thanks to
increase in the head grade and RIP recovery.
All-in Sustaining Costs◆ were affected by
higher volumes of deferred stripping and
increase in both sustaining capital and
sustaining exploration expenditures.
Sustaining capital expenditures primarily
relate to expansion of the RIP tailings dam
and development to support the
underground mining.
Outlook
Production at Pioneer is expected to be
marginally lower than 2018 at 129koz down
from 135koz. This is due to a scheduled
decline in processing grades during the
final stage of non-refractory processing.
Production is expected to come from
Alexandra and Katrin open pits, from
operating North-East Bakhmut and
proposed Andreevskaya underground
mines as well as from existing stockpiles.
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2018
18,612
3,173
1.07
108.9
Year ended
31 December 2017
15,857
8,489
0.72
196.4
Units
t ’000
g/t
oz. ’000
%
oz. ’000
t ’000
g/t
oz. ’000
%
oz. ’000
oz. ’000
Year ended
31 December 2018
6,395
0.73
150.0
80.4
120.6
Year ended
31 December 2017
6,783
0.68
148.9
75.3
112.1
701
0.50
11.3
50.1
5.6
135.1
752
0.49
11.7
51.8
6.1
161.8
Petropavlovsk Annual Report 2018
37
Strategic reportFinancial statementsGovernance Operational Performance continued
Albyn
The Albyn project consists of three adjoining licences covering
multiple orebodies within four key deposits: Albyn, Elginskoye,
Unglichikan and Afanasevskoye. All these orebodies are open
down-dip. Elginskoye, Unglichikan and Afanasevskoye are also
open along the strike.
Location
2018 gold production:
151koz – 36% of total Group gold
production for the year.
Albyn
Production as a % of total group
Key facts:
2005
Albyn was acquired as a greenfield licence
1.1Moz
Gold produced to date
4,602kt
Ore processed via RIP in 2018
1,053km2
Total gold licence area
5.35Moz
Mineral Resources, including 2.32Moz
Ore Reserves
18 years
Mine life
Open pit mine
Underground mine
Lime deposit
Analytical lab
POX Hub
Hydro plant
Core assets
Blagoveshchensk
Railway
Federal highway
Geology
The project 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 down dip. They show
variable thickness and grade, extending
for c.4.5km in strike length.
The mineralisation at Elginskoye is
confined within gently dipping
metasomatic zones which dip to the
south. Gold mineralisation has been
confirmed from drilling and extends
over a strike length in excess of 5.7km.
It remains open in all directions.
Unglichikan comprises a series of
sub-parallel, relatively narrow, steeply
dipping zones, which are proven over
a strike length in excess of 5.2km.
It remains open in all directions. There is
a relatively narrow, c.1.5km long single
zone of gold mineralisation with a steep
dip at Afanasevskoye, which is open in
down-dip and west strike directions.
There are a number of potential
exploration targets in addition to these
four known deposits, 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 at Albyn deposit are currently
classified as non-refractory. Elginskoye
has both non-refractory and refractory
Mineral Resource and Ore Reserves.
Refractory gold mineralisation is also
known to exist at the Unglichikan
deposit.
38 Petropavlovsk Annual Report 2018
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2018
18,155
3,904
1.1
137.8
Year ended
31 December 2017
28,557
5,263
1.16
196.5
Units
t ’000
g/t
oz. ’000
%
oz. ’000
oz. ’000
Year ended
31 December 2018
4,602
1.09
161.7
94.0
152.1
151.0
Year ended
31 December 2017
4,618
1.16
171.9
93.3
160.3
181.6
Mining and Processing
Albyn is a large (2.2km long), open pit, bulk
tonnage operation. The Group operates its
own mining fleet at Albyn, consisting of
modern diesel and electrical excavators,
dump trucks, drill rigs, bulldozers and other
vehicles. Mining productivity and equipment
utilisation is optimised by operating two shifts
daily throughout the year.
The Albyn licence includes multiple defined
orebodies. All are non-refractory and can be
treated at the 4.7Mtpa RIP plant, which
operates throughout the year. 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 have allowed for a 30% increase over the
original design processing capacity.
Operations
In 2018, Albyn produced 151.0koz, 36% of
total Group production and a c.17% decrease
on 2017 (181.6koz) largely as a result of
continued floodwater issues at the mine.
The main sources of ore were the Central
zone of the Albyn main pit, with some
amount of ore supplied from stockpiles.
Throughout the year, the processing plant
had consistently high recoveries of over 90%.
Total Cash Costs◆ were US$747/oz, a 38%
increase from 2017 (US$541/oz).
All-in Sustaining Costs◆ were US$974/oz,
a 36% increase from 2017 (US$718/oz).
Total Cash Costs◆ and All-in Sustaining
Costs◆ were affected by higher volumes of
stripping, suboptimal organisation of mining
works in the first half of 2018 and decrease
in average grades processed. Rouble
depreciation against the US Dollar partially
mitigated the negative effect of these factors.
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
Figures may not add up due to rounding
Outlook
In 2019, Albyn production is expected to
be marginally higher than in 2018, due to
slight increase in the plant throughput.
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. Ore will be extracted at
Elginskoye from 2020 and at Unglichikan
open pit from 2022. 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.
Petropavlovsk Annual Report 2018
39
Strategic reportFinancial statementsGovernance Operational Performance continued
Malomir
The Malomir project includes multiple identified orebodies of
which Malomir, Quartzitovoye, Ozhidaemoye and
Magnetitovoye are the most significant.
2018 gold production:
77.6koz – 18% 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
Open pit mine
Underground mine
Lime deposit
Analytical lab
POX Hub
Hydro plant
Core assets
Blagoveshchensk
Railway
Federal highway
Geology
Malomir is situated along and above a
major thrust zone within the Mongolo-
Okhotskiy mineralised belt. Ore body
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.
Malomir is the most significant known
orebody within the Malomir licence.
The principal zone of mineralization is of
a tabular morphology with strike length
of 4.2km and down dip extension of up
to 1.5km. The typical thickness of this
zone within pit design is 20 to 30m and
up to 100m in some places. It is found
above shallow dipping thrust zone
dipping in northern direction at 15-20°.
In addition to this principal zone, there
are a large number of smaller steep
dipping zones situated above the main
zone. The Malomir orebody is refractory,
suitable for the flotation and POX
processing route.
Quartzitovoye is the other significant
orebody within the project. It comprises
of high-grade steep dipping zones 55
and 49 as well as low grade stockwork
style mineralisation. The high-grade
zones are non-refractory and they
remain open in down dip direction,
with potential to increase non-refractory
resources for potential underground
mining.
Ozhidaemoye is an eastern extension
of Malomir with a similar tabular
morphology and shallow dip towards
north. Ozhidaemoye is refractory and
expected to provide ore for flotation
and POX.
40 Petropavlovsk Annual Report 2018
Production as a % of total group
Key facts:
2003
Malomir was acquired as a greenfield licence
0.7Moz
Gold produced to date
2,375kt
Ore processed via RIP in 2018
74.5km2
Total gold licence area
6.92Moz
Mineral Resources, including 2.86Moz
Ore Reserves
18 years
Mine life
Magnetitovoye is a small narrow steep
dipping non -refractory satellite orebody
situated c.4.5km east from Malomir open pit.
Mining and Processing
Mining operations at Malomir are carried out
both in open pit and underground. The Group
operates its own mining fleet at Malomir for
exploiting the open pit and is assisted by a local
contractor. Underground mining is performed
by a reputable Russian underground mining
contractor. Mining productivity and equipment
utilisation is optimised by operating two shifts
daily throughout the year.
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
Malomir and Ozhidaemoye does not respond
to standard RIP processing methods but can
now be processed in the Group’s recently
commissioned POX plant at Pokrovskiy
c.670km (by motor road) from Malomir.
The first stage construction of the Malomir
flotation plant is now complete. The initial
flotation line at Malomir was successfully
commissioned in July 2018. The second was
commissioned at the beginning of October
and is now fully operational. A total of 46kt of
concentrate containing c.52.1koz of gold has
been produced by year end.
The second stage of construction designed
to increase the capacity of the Malomir
flotation unit to 5.4Mtpa, is currently
scheduled to begin construction in 2020.
Management is considering to fast-track
its development to maximize utilisation of
capacity at the POX Hub. The flotation plant
is converting the refractory reserves into
higher- grade flotation concentrate, which
is now being sent to the POX Hub for
processing.
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 250ktpa of
ore by the end of 2017. Quartzitovoye
maintained and exceeded this level of ore
production through 2018. A total of 291kt of
ore at an average grade 4.52g/t containing
42.3koz of gold was produced from Malomir
underground operations.
Malomir mining operations
Total material moved
Non-refractory Ore
Average grade
Gold Content
Refractory Ore
Average grade
Gold content
Processing operations (Resin-in-pulp plant)
Total milled
Average grade
Gold content
Recovery
Gold recovered
Flotation Plant
Ore
Average grade
Gold content
Recovery
Yield
Concentrate produced
Grade
Gold content
Malomir gold production – Doré
Figures may not add up due to rounding
from 2017 (65.6koz) including gold in
concentrate. The increase is mostly
attributable to the processing of refractory
reserves and high-grade underground ore.
The refractory ore was sourced from the
Malomir Centralniy pit; Quartzitovoye and
Magnetitovoye zones together with
underground mine and low-grade stockpiles
provided non-refractory for the RIP plant.
The volumes of ore treated through the plant
increased by 7% compared to 2017, which
was in line with the mining plan.
The construction of an underground mine
at Quartzitovoye 1 began in January 2017,
and 3,084m (47,157m3) of underground
development was completed during 2017.
During 2018, a total of 291.0kt of ore was
mined from underground, with an average
gold content of 4.52g/t.
Operations
In 2018, Malomir produced 77.6koz, 18% of
total Group production and an 18% increase
Total Cash Costs◆ were US$791oz, a 15%
decrease compared to 2017 (US$929/oz).
All-in Sustaining Costs◆ were US$1,058/oz,
Units
m3 ‘000
t ‘000
g/t
oz. ‘000
t ‘000
g/t
oz. ‘000
Units
t ’000
g/t
oz. ’000
%
oz. ’000
t ‘000
g/t
oz. ‘000
%
oz. ‘000
t’000
g/t
oz. ‘000
oz. ‘000
Year ended
31 December 2017
9,380
2,770
0.97
86.1
–
Year ended
31 December 2018
7,464
2,264
1.39
101.3
837
1.55
41.8
Year ended
31 December 2018
2,375
1.33
101.7
73.6
74.8
Year ended
31 December 2017
3,404
0.91
99.5
64.9
64.6
1,266
1.48
60.2
86.6
3.6
46
35.2
52.1
77.6
–
–
–
–
–
–
–
–
65.6
a 17% improvement from 2017 (US$1,278/oz).
Decrease in the Total Cash Costs◆ per ounce
is associated with improvement in the RIP
head grades and recovery, physical volumes
of the both total rock moved and ore
processed through RIP plant decreased
helping to save on operating cost. All-in
Sustaining Costs◆ decrease is primarily
related to the decrease in the underlying Total
Cash Costs◆.
Outlook
Production from Malomir is expected to
increase to 190koz in 2019. Of this amount,
c.36koz represents gold to be extracted from
refractory gold concentrate stockpiles which
were mined and processed in the Malomir
flotation plant in 2018. Production will
increase as the contribution from refractory
processing has its full effect. Non-refractory
production is expected to decrease to
0.4Mtpa when the grinding capacity is
dedicated to the flotation circuit.
Non-refractory production will be supported
by the ore mined from Quartzitovoye
underground and open pit mines.
Petropavlovsk Annual Report 2018
41
Strategic reportFinancial statementsGovernance Operational Performance continued
Pokrovskiy
The Group’s oldest mining asset, Pokrovskiy has ended
its operational life and now has been converted into a key
POX Hub site.
2018 gold production:
6.5koz – 2% of total Group gold
production for the year.
Location
Malomir
Pokrovskiy POX Hub
Pioneer
Open pit mine
Underground mine
Lime deposit
Analytical lab
POX Hub
Hydro plant
Core assets
Blagoveshchensk
Railway
Federal highway
42 Petropavlovsk Annual Report 2018
Production as a % of total group
Key facts:
1994
Acquired in early stages of exploration by Pavel
Maslovskiy, co-founder and CEO, before
the Group was created in 1994 to finance its
development.
2.0Moz
Gold produced to date
223kt
Ore processed via RIP in 2018
95km2
Total gold licence area
0.88Moz
Mineral Resources
Pokrovskiy ceased mining and ore
processing operations in Q1 2018, after
nineteen years of successful operations.
Economic and technical studies identified
the site as the optimal strategic location for
the planned POX Hub. Its extensive onsite
facilities and well-developed infrastructure
have been adopted and integrated into
the project, which includes a RIP plant,
accommodation, roads, power lines, offices
and laboratories.
Buildings and equipment with a gross book
value of approximately US$90 million have
been directly incorporated into the project,
which has had 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 limestone 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.
Final Processing
Mining at Zeyskoye and Vodorazdelnoye ore
bodies accessed in 2017 stopped in Q1 2018.
All ore extracted was processed at the RIP
plant in Q1 2018, together with ore from
stockpiles. Pokrovskiy RIP plant was stopped
in Q1 2018 for refurbishment and integration
into POX Hub. A further small amount of gold
was recovered from plant circuit in the
remaining months during plant reconstruction.
Heap leach was on conservation and did not
operate during 2018.
The project is closed and transformed into the
key component of the POX Hub. The physical
volumes in 2018 were insignificant (6koz of
gold sold).
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
Figures may not add up due to rounding
Other Projects
Units
m3 ’000
t ’000
g/t
oz. ’000
Year ended
31 December 2018
152
116
0.59
2.2
Year ended
31 December 2017
3,745
1,468
0.51
24.1
Units
t ’000
g/t
oz. ’000
%
oz. ’000
t ’000
g/t
oz. ’000
%
oz. ’000
oz. ’000
Year ended
31 December 2018
223
0.55
4.0
94.2
3.7
Year ended
31 December 2017
1,815
0.47
27.4
82.9
22.7
–
–
–
–
–
6.5
498
0.39
6.3
45.4
2.9
30.6
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
assay 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 2018. Tokur has been fully impaired
(in 2015) and the Group intends to review its
development plans in the medium term.
Petropavlovsk Annual Report 2018
43
Strategic reportFinancial statementsGovernance 44 Petropavlovsk Annual Report 2018
The inside view of the POX Hub
Petropavlovsk Annual Report 2018
45
Strategic reportFinancial statementsGovernance Capacity
No. of Autoclaves
Refractory Reserves
Refractory Resources
Concentrate yield
(Malomir concentrate)
Concentrate grade
Sulphur content
(Malomir concentrate)
Total avg gold recovery
(Malomir concentrate)
Concentrate yield
(Pioneer concentrate)
Concentrate grade
(Pioneer concentrate)
Sulphur content
(Pioneer concentrate)
Total avg gold recovery (ore to doré)
(Pioneer concentrate)
up to 500ktpa
Depending on properties of the concentrate
4
5.31Moz
12.33Moz
2.8-4.2%
20-40 g/t Au
20-40%
80%
2.9%
20-30 g/t Au
21.0%
80%
The POX Hub
The Pressure Oxidation facility (‘POX Hub’) is a
cornerstone of Petropavlovsk’s strategy and
the principal driver of future value for the
Company. The POX Hub will be used to
process the Company’s 12.33Moz of
refractory gold resources and 5.31Moz of
refractory gold reserves which are found in
easily accessible deposits with low strip rates.
These deposits are highly prospective for
further exploration and discovery.
Having worked on this project for almost
a decade, the POX team successfully
commissioned the facility in December 2018,
within the revised timeframe. Design capacity
was achieved and Autoclave 1 commenced
processing the refractory ore concentrate
from Malomir in the first week of December.
Gold recovery of c.93-94% was achieved in
line with expectations for the double
refractory ore.
Following the successful commissioning of
Autoclave 1, Autoclave 2 was commissioned
on 27th of December 2018. It has also
reached design capacity ahead of schedule.
46 Petropavlovsk Annual Report 2018
High Grade
Concentrate
Roasting
BIOX
UFG
POX
About Refractory Ore
Refractory ore is rock mineralised with gold
that is resistant to recovery via standard
cyanidation and carbon/resin absorption
methods. The gold in refractory ore is
associated with sulphide minerals, which
encapsulate the gold particles, making 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 can be recovered,
causing high metallurgical losses. In addition
to this, 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 break down the sulphides and release
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. 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 ground 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 (operational
from July 2018)
Flotation Plant
Pioneer (expecting to
become operational
from 2023)
Malomir concentrate
86% recovery
2.8%-4.2% yield concentrate
grade of 20-40g/t Au
sulphur content 20-40%
Pioneer concentrate
82% recovery
2.9% yield concentrate
grade of 20-30g/t Au
sulphur content of 21%
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
(ore to doré) = c.80%
1
2
3
4
Petropavlovsk Annual Report 2018
47
Strategic reportFinancial statementsGovernance The POX Hub continued
The results demonstrated that POX was the
most attractive processing solution in both
technical and economic terms, in addition to
being the safest and most environmentally
friendly method.
In 2011, the Company sanctioned the
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
with a volume of 66m3) with potential to
expand by adding 2 additional vessels.
Following the reduction in the price of gold in
2013, the Company moved the POX Hub
development to care and maintenance while
exploring potential external funding solutions
with the Company’s lenders, and other Joint
Venture partners. Prior to this, significant
design work, earth works, civil works and
construction had been completed.
Starting in 2017, full scale development works
were resumed which led to the successful
commissioning of the hub in Q4 2018 on time
and on-budget.
Roasting generates toxic fumes, especially
if arsenic is present in the feed, and it is
considered to generate high environmental risk.
The BIOx method can be an efficient
processing option, but 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.
The POX Process
The POX method begins with the same
processes as a traditional RIP method
where firstly, ore is mined, crushed, and
ground. It then passes through a flotation
circuit. The Group expects to produce
high-grade concentrate equating
to between 2.8% and 4.2% mass of
the original ore (‘concentrate yield’).
This concentrate will be transported to
the POX Hub for further processing and
gold recovery.
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. Most refractory deposits are not
amenable to UFG.
In contrast to these 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 Hub at Pokrovskiy 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.
Refractory Processing Options
Con 11%
Refractory 31%
Cyanidation 45%
Heap Leach 13%
Source – GMR, Company Reports
48 Petropavlovsk Annual Report 2018
Techniques employed
(prominent mining firms)
POX is the most
common
UFG, 3%
BIOX, 3%
Roast, 7%
POX, 18%
POX Rational
The Pros and Cons of Pressure Oxidation
Pressure oxidation was originally developed
for processing base metal concentrate but
over the last twenty years it has been used to
liberate gold trapped in sulphide molecules.
Today POX is responsible for more than 10%
of gold production, about 4Mozpa
The key advantages of POX include:
– High gold recoveries (10% higher than roasting)
due to the complete breakdown of sulphide
minerals allowing the gold to be fully liberated;
– Arsenic is stabilised as scorodite rather than
reporting to the gas phase like it does in roasting;
and
– Sulphuric acid is produced in solution.
Gold, sulphur and carbonate levels in
refractory deposits show a wide variation.
A higher gold to sulphur ratio in the ore
generates more downstream processing
options. POX is flexible to a degree but a
consistent feed, in terms of sulphur content
and its ratio to carbonates, is required for the
plant to function correctly. This necessitates a
sophisticated stockpiling and blending
strategy across a number of grades of
material with variable sulphur content.
POX is a successful technology that
generates access to large scale, long life
projects with reasonable cost profiles.
Despite this global uptake of this ground-
breaking technology has been slow. The high
capital costs and complex technology are
major barriers to the construction of POX
facilities. Many companies with refractory ore
have opted to sell concentrate or pay for
tolling with the ensuing reduction in income
compensated for by the reduction in capital
costs up front.
Refractory Gold Deposits
As with most commodities, the more
accessible and easily processed gold
deposits are now mostly worked out.
Added to this, the political risks which are
part and parcel of the jurisdictions where
these deposits are situated make exploitation
almost impossible. However, refractory
gold deposits are still relatively common
and available for licensing in lower risk
jurisdictions.
Processing Options
Each deposit is different and all processing
options have their own idiosyncrasies. In the
past, roasting has been the most commonly
employed method of processing refractory
ore, but POX is now the default choice for new
refractory projects and now accounts for
~18% of gold production as opposed to ~7%
for roasting.
POX Projects
There are 11 POX operations for gold extraction currently running with Lihir operating the largest POX plant.
Operation
Pueblo Viejo
Goldstrike
Lihir
Twin Creeks
Kittila
Amursk
Porgera
Macraes
Córrego do Sítio
Pokrovskiy
Çöpler
Start
2012
1990
1997
1997
2008
2012
1990
1999
2011
2018
2018
POX Feed
Whole Ore
Whole Ore
Whole Ore & Con
Whole Ore & Con
Concentrate
Concentrate
Concentrate
Concentrate
Concentrate
Concentrate
Whole Ore
Flowsheet
POX, CIL
POX, TCM-RIL
Float, POX, CIL
POX, CIL
Float, POX, CIL
Float, POX, CIL
Float, POX, CIL
Float, POX, CIL
Float, POX, CIL
Float, POX, RIP
POX, CIL
Capacity 000 tpd
24.0
16.0
25.0
10.4
0.87
0.616
16.4
0.650
0.240
1.370
6.0
Autoclaves
4
6
4
2
1
1
4
1
1
4
2
Grade g/t
2.8
3.9
2.3
1.8
4.7
5.2
4.8
1.1
4.1
1.0
2.8
2018 was a successful year for the implementation of POX technology with two new projects, Pokrovskiy and Çöpler becoming operational.
The Pokrovskiy POX was commissioned in November 2018 and two of four autoclaves have reached their designed capacity and gold recovery.
Two other autoclaves will be commissioned once sufficient supplies of 3rd party concentrates have been secured. Çöpler sulphide POX plant was
also commissioned in Q4 2018.
Petropavlovsk Annual Report 2018
49
Strategic reportFinancial statementsGovernance The POX Hub continued
Unlocking POX potential
Project team
Aleksey Afanasiev
Head of the POX Hub
– Professional with over 10 years of
experience in the field.
– 9 years with the Company including
4.5 years as the Head of Albyn.
Viktor Fedorov
Head of Research and
Development
Exploration upside
The Group’s JORC-defined refractory reserves of 5.31Moz are located within the Malomir,
Pioneer and Albyn projects, with licence areas of 74.5, 1,337 and 1,053km2 respectively.
All three 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 area remains largely underexplored but is highly prospective for the discovery
of additional resources, offering further refractory resource upside.
Further refractory resource potential exists at Pioneer in addition to its significant non-refractory
reserves, particularly along the contact between granitoid and Jurassic host rocks, south and
south west of the Pioneer RIP plant. 76% 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
as well as non-refractory exploration potential within the Albyn licence holding.
Mayskoye
Regional licence acquisition
Kyuchus
The absence of viable processing options, due to the high barriers to entry, has meant that
prospecting and exploration of refractory gold deposits has been neglected despite the
existence of highly promising projects available for licensing from the Russian Government.
These deposits are also available for low cost acquisition from other gold explorers.
– 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.
Olimpiada
Bogolubovskoye
Location and infrastructure
Nezhdaninsko
Kluchevskoye
Malomir
(670km from Pokrovskiy)
Veduga
Professor Yakov Schneerson
Director of Gidrometallurgiya
R&D Centre
Sukhoi Log
Itakinskoye
Albazino
Albyn
(835km from Pokrovskiy)
Pioneer
(40km from Pokrovskiy)
Nasedkino
Taseevskoye
Pokrovskiy POX Hub
Petropavlovsk POX Hub
Petropavlovsk mines
Other refractory deposits
– Authoritative expert in autoclave
technology.
– Over 50 years of experience.
– Extensive experience working on
POX projects including Nadezhdinskiy
(Norilsk Nickel).
– Credited with 65 inventions.
50 Petropavlovsk Annual Report 2018
Expansion
The Pokrovskiy POX Hub is the second of its kind in Russia. When it is complete, it will have up
to nominal capacity of c.500ktpa of concentrate. It is also the most technologically advanced
due to the unusually high temperatures and pressures being employed. Space has been
reserved for two further autoclave vessels in addition to the current total of four. This would
create a total capacity of up to 650ktpa.
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 resources and potential resources by processing
third party ore or concentrate for a fee or under a tolling arrangement.
Further optimisation
Research completed by RDC Hydrometallurgy indicates that there is potential to increase
recovery from Malomir concentrate from 93% (as currently expected) 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
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 equipment, 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 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.
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 32 articles in both Russian and
international journals, and patented 6 of its research findings.
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 2018
51
Strategic reportFinancial statementsGovernance The POX Hub continued
Construction of Malomir Flotation Plant
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. The first flotation line at Malomir
was commissioned in July 2018. The second
flotation line at Malomir was commissioned in
October of 2018. By the year end both lines
reached their full capacity and produced
concentrate with an average grade of c.35g/t.
This is a significant improvement on its original
c.24g/t design assumption and leads to a
c.40% decrease in concentrate bulk that needs
to be transported and treated through the
autoclaves. In its medium-term production
projection, the Group adopted a conservative
approach budgeting an average grade of
concentrate 25g/t. This therefore represents a
significant upside in terms of the economics of
the Malomir project and its profitability.
Stage 2 will expand the flotation plant to
5.4Mtpa by adding a third 1.8Mtpa line.
Stage 2 expansion is currently scheduled
to begin construction in 2020, although
Management is considering to fast-track
its development to maximise utilisation of
capacity at the POX Hub.
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
The Pioneer flotation plant, comprising of two
1.8Mtpa lines, is scheduled to start production
in 2023. The Group Board of Directors is
currently discussing possibilities to start
construction by the end of 2019 to allow
concentrate production from the end of 2020.
Current strategy postulates a third similar line
at some point in future. This third line will bring
Pioneer flotation plant capacity to 5.4Mtpa.
Key Construction Milestones
Completed as of the end of 2018,
Malomir flotation plant commissioned and start production
Pokrovskiy RIP refurbishment and integration into the POX Hub
POX Hub dry commissioning
Malomir flotation plant expanded
POX Hot Commissioning: Autoclave No 1
POX Hot Commissioning: Autoclave No 2
First refractory gold poured
Autoclaves No 1 and 2 reached design capacity and recovery
July 2018
October 2018
October 2018
October 2018
November 2018
December 2018
December 2018
December 2018
Anticipated Milestones for 2019:
Steady POX processing state at 11t/hour per autoclave and steady gold production
POX tailings facility
Commissioning of autoclaves No 3 and 4
Completed in January 2019 ahead of plan
Completed in February 2019
Once sufficient supplies of 3rd party
concentrate can be secured
Case Study
POX Hub Training
In October 2018, wet commissioning
works began at the POX Hub. The POX
Hub was designed by Outotec, in a unique
collaboration with PHM Engineering,
the Group’s in-house design institute.
The Group completed a comprehensive
training programme in 2018 to prepare
our personnel to operate the unique and
innovative POX facility. In early 2018 RDC
Hydrometallurgy (St. Petersburg) was
commissioned to develop an advanced
engineering course ‘Autoclave Oxidative
Leaching of Gold-bearing Sulphide Flotation
Concentrates’ for our engineering and
technical personnel. The only pilot autoclave
installation in Russia that Group founded in
2011 has been used to train POX operational
personnel. This simulator of the operator’s
workplace allowed trainees to learn how to
monitor and control all POX parameters and
operate full scale POX safely and efficiently.
For six months, the engineers and technicians
from Pokrovskiy, studied the theoretical
section of the course at the training centre
of Pokrovskiy Mining College. They then
practiced on the simulator to be fully prepared
for the real-life commissioning. Following
52 Petropavlovsk Annual Report 2018
completion of the theoretical course, the
participants were trained to deal with the
commissioning and real live operation of the
full-scale POX plant using the pilot autoclave
with its POX control simulator.
Underground
Malomir
Quartzitovoye underground mine at Malomir
continued to exploit the high-grade ore body
No55 and its smaller satellites. Ore body
No55 has a strike length of 300m and an
explored vertical extend of 215m (the
remaining part below open pit). It has a
north-south strike direction and sub-vertical
dip. The ore body is open down dip.
As at 31 December 2018 Quartzitovoye had
170koz of JORC Resources including 102koz
of Proven and Probable Ore Reserves for
underground mining.
Mining at Quartzitovoye started in 2017 and
production was fully ramped up to 250ktpa of
ore by the end of 2017. In 2018 production
came from ore body No55 and a smaller ore
body No49. In H1 2018, ore stoping took
place at the central section of ore body No55
at sublevels 360-390m and at sublevel 245m
in the south section. Later work moved to
sublevel 285 in the northern section. As of
year-end, central and northern sections were
mined out above 285m. Ore body No49 was
exploited between sublevels 330-350m.
The access and haulage decline advanced
from 285m to 240m elevation providing a solid
foundation for 2019 production. In 2018, a
total of 6,910m of underground development
was completed; 291kt of ore with an average
grade 4.52g/t was mined. This included 165kt
of development ore at an average grade
3.4g/t and 126kt of stoping ore
grading 5.97g/t.
In 2019 development will advance from
elevation of 240m to 150m, stope mining will
take place between sublevels 300 and 390m
and later between 150 and 225m. A total of
3,530m of underground workings will be
completed; 224kt of ore grading 7.3g/t is
expected to be mined at Quartzitovoye
in 2019.
In 2018, the Group continued the
development of its underground mines
at the Pioneer and Malomir sites.
At Pioneer, underground mining continued
at North East Bakhmut zone (North East
Bakhmut). Two further underground
mines are planned at Andreevskaya and
Nikolaevskaya. Andreevskaya mine should
produce its first ore by the end of 2019 and
commence full scale production in 2020.
Construction of the Nikolaevskaya mine is
currently envisaged after 2030, once the
open pit mining there is completed.
At Malomir, the Group operates an
underground mine at Quartzitovoye .
Both of the Group’s operating mines are
trackless; developed and mined by reputable
mining contractors. Ore is mined using
sublevel open stoping with unconsolidated
waste back fill, or without backfill where
ground conditions permit.
Pioneer
The Group’s North-East Bakhmut
underground mine exploits the high-grade
pay shoots remaining below the completed
open pit. Pay shoots No2 and No3 are
sufficiently explored to support JORC Mineral
Resource and Ore Reserve estimates.
These two are included in the current mine
plan. They both strike towards the north east
dipping between 55 and 70 degrees towards
the north west. Pay shoot No 3 is 165m in
strike length. The explored vertical extent of
the orebody remaining below the open pit is
280m. The Pay shoot is up to 15m wide.
It narrows with depth but appears to be open
down dip.
The North East Bakhmut No 2 pay shoot is
located c.550m southwest from No 3. It has a
similar strike extension and thickness up to
25m and is also open down dip. There are
further three pay shoots known at North East
Bakhmut whose underground reserves are
yet to be established: Nos 1, 4 and 5. Pay
shoots Nos 1, 2 and 3 are non-refractory and
can be processed through the existing RIP
plant; Nos 4 and 5 are refractory and require
flotation and POX.
As at 31 December 2018 Pioneer had 590koz
of JORC Resources including 340koz of
Proven and Probable Ore Reserves for
underground mining.
Production at North East Bakhmut started in
2017 at a lower grade but easily accessible
“bridge zone” between North East Bakhmut
pay shoot No 2 and No 3. During 2018 at
North East Bakhmut, the access decline
advanced from level +40 to – 50m allowing
the first stopes to be mined from the high
grade 1-7 orebody at North East Bakhmut 3.
Work in 2018 was concentrated on the
development of the main haulage decline and
sublevels. The majority of 2018 production
came from development ore.
Mining and mine development work at North
East Bakhmut was hampered by challenging
hydrogeological and geotechnical conditions.
The main access and haulage decline hit
exceptionally poor ground in Q1 2018; the
position of the decline had to be changed
away from the problematic area as the result
and mine re-designed causing an initial delay.
In October 2018, mining in the first stopes
of the main high-grade orebody at -5m level
caused higher than expected water inflow
into the +55 m sublevel and all work in the
North East Bakhmut 3 area had to be
stopped until the inflow was under control.
While the mining team dealt with water at
North East Bakhmut, efforts were re-
orientated on developing access and
ventilation declines on North East Bakhmut
No 2 pay shoot. Ore mining at North East
Bakhmut only resumed in January 2019.
A total of 4,397m of underground
development was completed during 2018.
A total of 115kt of ore grading 2.82g/t was
mined from North East Bakhmut
underground workings including 76kt@ 1.95
g/t of development ore and 39kt@ 4.55g/t of
stope ore.
Production in 2019 is expected to come from
North East Bakhmut No3 and No 2. Pay
shoot No 3 expected to produce 130kt of ore
grading 6.7g/t whilst North East Bakhmut
No2 is expected to contribute 13kt of
development ore with an average grade of
c.6g/t.
In addition, mine development is scheduled to
start at Andreevskaya Zone on its eastern pay
shoot. In 2019 Andreevskaya underground
mine is expected to produce c20kt of ore with
an average grade of 14.4g/t.
Petropavlovsk Annual Report 2018
53
Strategic reportFinancial statementsGovernance Reserves and Resources
At Albyn, an increase in Mineral Resources
is associated with discoveries at the western
extensions of the Albyn ore body. The ore body
has been extended in a down dip direction,
allowing initial Resource estimation for potential
underground mining at Albyn. During 2018 the
results of exploration completed in H2 2017
at the south group of mineralised zones at
Unglichikanskoye were interpreted and
included in Mineral Resource and Ore Reserve
estimates. This led to a 101koz increase in
Mineral Resources and a 42koz increase in
Ore Reserves for the project.
At Malomir, an increase in both Mineral
Resources and Ore Reserves relates to the
successful exploration of low-grade stock
work mineralisation discovered at
Quartzitovoye. The mineralisation was
discovered west of the main Quartzitovoe pit,
an area currently sterilised by the underground
operations. It can be mined via open pit after
2023 once the mining at the Quartzitovoye
underground mine is completed and the mine
is decommissioned. In addition, metallurgical
tests confirmed that existing RIP tailings
contained c.0.17Moz of gold at 0.5g/t average
grade and this material can be re-processed
via flotation and POX. Consequently, these
additions have now been included into Mineral
Resource and Ore Reserve statements.
All these additions are refractory.
Taking into account the 0.49Moz Mineral
Resource and Ore Reserve depletion from
mining operations and 0.30Moz of Mineral
Resource disposals during 2018, the Group
achieved a 0.45Moz gross increase in Mineral
Resources compared to the 31/12/2017
statement. Ore Reserves increased by
0.56Moz and to a total of 8.21Moz.
Total Reserves for underground mining
marginally increased from 0.43Moz to
0.44Moz, whilst underlying Mineral
Resources for potential underground mining
increased by 26% from 0.94Moz to 1.19Moz.
This increase is largely attributable to new
Mineral Resources estimated at Pioneer’s
Nikolaevskaya Zone and below the Albyn
main pit. Because the existing open pit at
Pokrovka 1 has now been decommissioned
and used as POX tailings storage further open
pit mining in this area is no longer feasible.
A higher grade part of Mineral Resources
remaining below this open pit was re-
classified and reported as a Resource for
potential underground mining. This change
contributed to the overall increase in
underground Mineral Resources.
Following successful commissioning of the
Pokrovskiy POX Hub, some of the transitional
Mineral Resources and Ore Reserves suitable
for either RIP or refractory processing, were
reclassified from non-refractory to refractory.
As a result of this change, and due to the
success of the 2018 exploration campaign,
total refractory Resources increased by
2.69Moz (from 9.64Moz) to 12.33Moz.
There was a corresponding decrease in
the non-refractory Mineral Resources which
went down from 11.23Moz to 8.19Moz.
This change also reflects mine depletion and
disposals. All the ounces disposed of were
non-refractory. As the result of this re-
classification, first refractory Reserves and
Resources were classified at Elginskoye
within the Albyn project.
The tables opposite provide a summary
and an asset-by-asset breakdown of Group
Mineral Resources and Ore Reserves.
Review of Ore Reserves and Mineral
Resources
In line with best industry practice,
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 2018, as well as reflecting mining
depletion in 2017 and 2018.
As at 31 December 2018, total Group Mineral
Resources (including Reserves) amounted to
20.52Moz, compared to 20.86Moz in 2017,
with total Reserves of 8.21Moz compared to
8.15Moz in the previous year.
The marginal decrease in total Mineral
Resources is due to a combined effect of
mine depletion, disposals and sterilisation
of a part of the Pokrovskiy open pit resource
by the development of a POX tailings facility.
An estimated 0.49Moz of gold has been
depleted and sent to processing during 2018.
Non-core, non-producing satellite assets
containing an aggregate 0.30Moz of Mineral
Resources were disposed of during 2018.
In addition, 0.12Moz of open pit Mineral
Resources were sterilised by a POX tailings
facility and removed from the resource
statement. This decrease has been largely
compensated by discoveries at Pioneer,
Albyn and Malomir.
At Pioneer new Mineral Resources and
Ore Reserves were discovered at Katrin,
Nikolaevskaya and Ulunginskaya zones.
Katrin and Ulunginskaya are both open pits,
whilst the new Resources and Reserves at
Nikolaevskaya are suitable for underground
mining. The Katrin deposit is of a non-
refractory nature while Ulunginskaya and
Nikolaevskaya are both refractory assets.
54 Petropavlovsk Annual Report 2018
Group Total Ore Reserves as at 31/12/2018
(in accordance with the JORC Code 2012 (1))
Total Open Pit and Underground Ore Reserve
Total
Non-Refractory
Refractory
Note: Figures may not add up due to rounding.
Open Pit Ore Reserve
Total
Non-Refractory
Refractory
Note: Figures may not add up due to rounding.
Underground Reserve
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
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)
49,360
210,999
260,359
17,943
64,572
82,516
31,417
146,426
177,843
Tonnage (kt)
49,033
208,967
258,000
17,616
63,193
80,809
31,417
145,774
177,191
Tonnage (kt)
327
2,031
2,359
327
1,379
1,707
–
652
652
Grade (g/t Au)
0.77
1.03
0.98
0.69
1.21
1.09
0.82
0.95
0.93
Grade (g/t Au)
0.73
0.98
0.94
0.57
1.13
1.01
0.82
0.92
0.90
Grade (g/t Au)
7.21
5.62
5.84
7.21
4.68
5.16
–
7.60
7.60
Metal (Moz Au)
1.23
6.98
8.21
0.40
2.50
2.90
0.83
4.48
5.31
Metal (Moz Au)
1.15
6.61
7.76
0.32
2.29
2.61
0.83
4.32
5.15
Metal (Moz Au)
0.08
0.37
0.44
0.08
0.21
0.28
–
0.16
0.16
Petropavlovsk Annual Report 2018
55
Strategic reportFinancial statementsGovernance Reserves and Resources continued
Group Mineral Resources as at 31/12/2018
(in accordance with the JORC Code 2012 (1))
Total Open Pit and Underground Mineral Resource
Total
Non-Refractory
Refractory
Note: Figures may not add up due to rounding.
Open Pit Mineral Resource
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
Note: Mineral Resources are reported inclusive of Ore Reserves. Figures may not add up due to rounding.
Underground Mineral Resource
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.
56 Petropavlovsk Annual Report 2018
Tonnage (kt)
69,778
417,735
487,513
236,188
33,735
144,365
178,099
58,154
36,043
273,370
309,414
178,034
Tonnage (kt)
68,525
413,124
481,649
232,070
32,481
141,080
173,561
54,822
36,043
272,044
308,088
177,248
Tonnage (kt)
1,253
4,611
5,864
4,118
1,253
3,285
4,538
3,332
–
1,326
1,326
786
Grade (g/t Au)
0.89
0.90
0.90
0.85
0.96
1.03
1.02
1.25
0.82
0.83
0.82
0.72
Grade (g/t Au)
0.81
0.86
0.85
0.82
0.81
0.97
0.94
1.15
0.82
0.80
0.81
0.71
Grade (g/t Au)
4.93
4.13
4.30
2.85
4.93
3.70
4.04
2.89
–
5.21
5.21
2.68
Metal (Moz Au)
1.99
12.06
14.05
6.47
1.04
4.80
5.84
2.34
0.95
7.25
8.20
4.13
Metal (Moz Au)
1.79
11.44
13.24
6.09
0.84
4.41
5.25
2.04
0.95
7.03
7.98
4.06
Metal (Moz Au)
0.20
0.61
0.81
0.38
0.20
0.39
0.59
0.31
–
0.22
0.22
0.07
Summary of Ore Reserves by Asset as at 31/12/2018
(in accordance with the JORC Code 2012 (1))
Pioneer Open Pit
Total
Non-Refractory
Refractory
Pioneer Underground
Total
Non-Refractory
Refractory
Pioneer Total
Total
Non-Refractory
Refractory
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Tonnage (kt)
21,154
80,301
101,454
8,946
13,654
22,600
12,208
66,647
78,854
Tonnage (kt)
152
1,679
1,831
152
1,027
1,179
–
652
652
Tonnage (kt)
21,305
81,980
103,285
9,098
14,681
23,779
12,208
67,299
79,506
Grade (g/t Au)
0.64
0.80
0.77
0.44
0.84
0.68
0.79
0.79
0.79
Grade (g/t Au)
5.03
5.86
5.79
5.03
4.75
4.78
–
7.60
7.60
Grade (g/t Au)
0.67
0.90
0.85
0.51
1.11
0.88
0.79
0.86
0.85
Gold (Moz Au)
0.44
2.06
2.50
0.13
0.37
0.49
0.31
1.69
2.00
Gold (Moz Au)
0.02
0.32
0.34
0.02
0.16
0.18
–
0.16
0.16
Gold (Moz Au)
0.46
2.37
2.84
0.15
0.52
0.67
0.31
1.85
2.16
Petropavlovsk Annual Report 2018
57
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
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Tonnage (kt)
19,335
69,051
88,386
126
618
743
19,210
68,434
87,643
Tonnage (kt)
176
352
528
176
352
528
–
–
–
Tonnage (kt)
19,511
69,403
88,914
301
970
1,271
19,210
68,434
87,643
Grade (g/t Au)
0.84
1.00
0.97
1.00
1.37
1.31
0.84
1.00
0.97
Grade (g/t Au)
9.09
4.48
6.01
9.09
4.48
6.01
–
–
–
Grade (g/t Au)
0.92
1.02
1.00
5.72
2.50
3.26
0.84
1.00
0.97
Gold (Moz Au)
0.52
2.23
2.75
0.004
0.03
0.03
0.52
2.20
2.72
Gold (Moz Au)
0.05
0.05
0.10
0.05
0.05
0.10
–
–
–
Gold (Moz Au)
0.58
2.28
2.86
0.05
0.08
0.13
0.52
2.20
2.72
Malomir Open Pit
Total
Non-Refractory
Refractory
Malomir Underground
Total
Non-Refractory
Refractory
Malomir Total
Total
Non-Refractory
Refractory
58 Petropavlovsk Annual Report 2018
Albyn
Total
Non-Refractory
Refractory
Tokur
Total
Non-Refractory
Refractory
Notes:
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Category
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Proven
Probable
Proven+Probable
Tonnage (kt)
6,516
57,420
63,936
6,516
46,726
53,243
–
10,694
10,694
Tonnage (kt)
2,028
2,195
4,223
2,028
2,195
4,223
–
–
–
Grade (g/t Au)
0.45
1.20
1.13
0.45
1.20
1.11
–
1.23
1.23
Grade (g/t Au)
1.47
1.44
1.45
1.47
1.44
1.45
–
–
–
Gold (Moz Au)
0.09
2.22
2.32
0.09
1.80
1.89
–
0.42
0.42
Gold (Moz Au)
0.10
0.10
0.20
0.10
0.10
0.20
–
–
–
(1) Group Ore Reserves statements are prepared internally as an update of the April 2017 WAI estimate; Pioneer, Malomir and Albyn Reserves were prepared in February 2019 in accordance with JORC Code
2012; Tokur Reserves were prepared in 2010 in accordance with JORC Code 2004 and there have been no changes to the Tokur estimates since that date.
(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: 1,281kt@1.04g/t (0.04Moz) of non-refractory and 8,600kt @ 0.61g/t (0.17Moz) of refractory;
– Malomir: 277kt @ 3.00g/t (0.03Moz) of non-refractory and 2,644kt@0.96g/t (0.08Moz) of refractory
– Albyn 1,921@1.38g/t (0.09Moz) of non-refractory and 348kt@ 1.08g/t (0.01Moz) of refractory
(8) Figures may not add up due to rounding
Petropavlovsk Annual Report 2018
59
Strategic reportFinancial statementsGovernance Reserves and Resources continued
Summary of Mineral Resources by Asset as at 31/12/2018
(in accordance with JORC Code 2012 (1))
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
4,182
19,954
24,136
5,872
4,182
19,954
24,136
5,872
–
–
–
–
Tonnage (kt)
827
1,196
2,023
506
827
1,196
2,023
506
–
–
–
–
Tonnage (kt)
5,009
21,150
26,159
6,378
5,009
21,150
26,159
6,378
–
–
–
–
Grade (g/t Au)
0.70
0.62
0.63
0.88
0.70
0.62
0.63
0.88
–
–
–
–
Grade (g/t Au)
3.20
2.45
2.76
2.96
3.20
2.45
2.76
2.96
–
–
–
–
Grade (g/t Au)
1.11
0.72
0.79
1.04
1.11
0.72
0.79
1.04
–
–
–
–
Metal (Moz Au)
0.09
0.40
0.49
0.17
0.09
0.40
0.49
0.17
–
–
–
–
Metal (Moz Au)
0.09
0.09
0.18
0.05
0.09
0.09
0.18
0.05
–
–
–
–
Metal (Moz Au)
0.18
0.49
0.67
0.21
0.18
0.49
0.67
0.21
–
–
–
–
Pokrovskiy Open Pit
Total
Non-Refractory
Refractory
Pokrovskiy Underground
Total
Non-Refractory
Refractory
Pokrovskiy Total
Total
Non-Refractory
Refractory
60 Petropavlovsk Annual Report 2018
Pioneer Open Pit
Total
Non-Refractory
Refractory
Pioneer Underground
Total
Non-Refractory
Refractory
Pioneer Total
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
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
25,107
162,330
187,437
62,629
9,190
37,752
46,941
6,827
15,918
124,578
140,496
55,803
Tonnage (kt)
183
2,637
2,820
1,297
183
1,311
1,495
511
–
1,326
1,326
786
Tonnage (kt)
25,291
164,968
190,258
63,927
9,373
39,064
48,437
7,338
15,918
125,904
141,822
56,589
Grade (g/t Au)
0.67
0.69
0.69
0.60
0.45
0.69
0.65
0.74
0.79
0.69
0.70
0.58
Grade (g/t Au)
6.38
5.08
5.16
3.04
6.38
4.95
5.12
3.59
–
5.21
5.21
2.68
Grade (g/t Au)
0.71
0.76
0.75
0.65
0.57
0.84
0.78
0.94
0.79
0.74
0.74
0.61
Metal (Moz Au)
0.54
3.60
4.14
1.21
0.13
0.84
0.98
0.16
0.40
2.76
3.16
1.04
Metal (Moz Au)
0.04
0.43
0.47
0.13
0.04
0.21
0.25
0.06
–
0.22
0.22
0.07
Metal (Moz Au)
0.58
4.03
4.61
1.33
0.17
1.05
1.22
0.22
0.40
2.98
3.39
1.11
Petropavlovsk Annual Report 2018
61
Strategic reportFinancial statementsGovernance Reserves and Resources continued
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
20,248
133,488
153,736
107,375
135
802
936
513
20,113
132,686
152,800
106,862
Tonnage (kt)
243
403
646
354
243
403
646
354
–
–
–
–
Tonnage (kt)
20,492
133,891
154,382
107,728
378
1,204
1,582
867
20,113
132,686
152,800
106,862
Grade (g/t Au)
0.84
0.87
0.87
0.71
0.99
1.19
1.16
0.82
0.84
0.87
0.87
0.71
Grade (g/t Au)
9.71
4.37
6.38
3.45
9.71
4.37
6.38
3.45
–
–
–
–
Grade (g/t Au)
0.95
0.88
0.89
0.72
6.60
2.25
3.29
1.89
0.84
0.87
0.87
0.71
Metal (Moz Au)
0.55
3.74
4.29
2.47
0.004
0.03
0.03
0.01
0.54
3.71
4.25
2.45
Metal (Moz Au)
0.08
0.06
0.13
0.04
0.08
0.06
0.13
0.04
–
–
–
–
Metal (Moz Au)
0.62
3.79
4.42
2.51
0.08
0.09
0.17
0.05
0.54
3.71
4.25
2.45
Malomir Open Pit
Total
Non-Refractory
Refractory
Malomir Underground
Total
Non-Refractory
Refractory
Malomir Total
Total
Non-Refractory
Refractory
62 Petropavlovsk Annual Report 2018
Albyn Open Pit
Total
Non-Refractory
Refractory
Albyn Underground
Total
Non-Refractory
Refractory
Albyn Total
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
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
7,023
81,256
88,291
45,488
7,023
66,477
73,499
30,904
–
14,792
14,792
14,584
Tonnage (kt)
–
375
375
1,961
–
375
375
1,961
–
–
–
–
Tonnage (kt)
7,023
81,644
88,666
47,449
7,023
66,852
73,874
32,866
–
14,792
14,792
14,584
Grade (g/t Au)
0.50
1.21
1.15
1.29
0.50
1.21
1.15
1.33
–
1.19
1.19
1.20
Grade (g/t Au)
–
2.61
2.61
2.58
–
2.61
2.61
2.58
–
–
–
–
Grade (g/t Au)
0.50
1.22
1.16
1.34
0.50
1.22
1.15
1.40
–
1.19
1.19
1.20
Metal (Moz Au)
0.11
3.16
3.27
1.88
0.11
2.59
2.71
1.32
–
0.57
0.57
0.56
Metal (Moz Au)
–
0.03
0.03
0.16
–
0.03
0.03
0.16
–
–
–
–
Metal (Moz Au)
0.11
3.19
3.31
2.04
0.11
2.63
2.74
1.48
–
0.57
0.57
0.56
Petropavlovsk Annual Report 2018
63
Strategic reportFinancial statementsGovernance Reserves and Resources continued
Tokur
Total
Non-Refractory
Refractory
Category
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Measured
Indicated
Measured+Indicated
Inferred
Tonnage (kt)
11,952
16,096
28,048
10,706
11,952
16,096
28,048
10,706
–
–
–
–
Grade (g/t Au)
1.30
1.06
1.16
1.09
1.30
1.06
1.16
1.09
–
–
–
–
Metal (Moz Au)
0.50
0.55
1.05
0.38
0.5
0.55
1.05
0.38
–
–
–
–
Notes:
(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 Mineral Resources for open pit mining varies from 0.30 to 0.35g/t depending on the type of mineralisation and proposed processing method
(5) A cut-off grade of1.5g/t is used to report Mineral Resources 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
64 Petropavlovsk Annual Report 2018
Exploration Update
Pioneer
The most significant 2018 exploration results
were achieved at Katrin, Nikolaevskaya and
Ulunginskaya zones. Some early stage
exploration also took place at Aprelskiy
and Ulagach.
The 2018 drilling campaign at Katrin was
predominantly to in-fill the existing drill grid
with only a few holes targeting ore body
extensions. The most significant 2018 Katrin
intersections include:
Exploration at the Shirokaya zone (an area
part of Alexandra, north of Pioneer) involved
mostly in-fill drilling to improve confidence in
the resource estimate. The results are in-line
with the existing resource model and expect
to convert some of the Inferred Resources
into the Indicated category, which should
allow increase in Shirokaya Ore Reserve.
Most of the Shirokaya mineralisation is
refractory and relatively low grade; as such,
this area is not a high priority for further
2019 exploration.
– 16.8m @ 1.75g/t (C-516-25, interval
167.6m-184.4m);
– 18.0m @ 1.41g/t (C-516-23, interval
146.0m-164.0m);
– 11.0m @ 1.90g/t (C-515-23, interval
117.4m-128.4m);
– 4.3m @ 1.21g/t (C-507-38, interval
62.5m-66.8m); and
A new 270m zone of refractory zone of
mineralisation named Ulunginskaya,
located south-east of the Pioneer plant, was
delineated during 2018. The zone has a north
to south strike with a steep dip. It was proven
by drilling on 40m to 80m spaced drill profiles
to a depth of 100 to 120m from the surface,
and remains open at depth. Significant
intersections include:
The gold grades at Aprelskiy are associated
with quartz veins and veinlets containing
arsenopyrite-pyrite sulphide mineralisation.
Although the mineralisation discovered so
far is unlikely to represent an immediate
development interest due to its narrow
thickness and relatively low grade, the
presence of significant alluvial gold deposits
historically known at Aprelskiy suggest further
exploration may identify a more attractive
mining target.
Early stage exploration continued at
Ulagach, an exploration target c.20km east
of Pokrovskiy and 10km south of Katrin.
Trenches completed over the gold and
gold-arsenic geochemical anomalies
identified after evaluation of 2017 field work
results discovered three intersections:
– 7.2m @ 1.74g/t;
– 1.5m @ 0.74 g/t; and
– 13.4m @ 1.01g/t (C-507-44, interval
– 45.5m @ 1.69g/t (C-2452, interval
– 2.0m @ 0.79g/t.
132.6m-146.0m).
93.3m-138.8m);
Gold mineralisation discovered at Ulagach
associated with disseminated sulphides
hosted within Jurassic sandstone close
to a contact with Cretaceous granitoids.
As Ulagach geology has certain similarities
with the geology of Pioneer and Pokrovskiy,
Group specialists believe it offers potential
for discovery of a gold mineralisation of a
significant scale.
Exploration completed at the North East
Bakhmut underground mine during H1 2018
was production-related and as such did not
result in any significant resource expansion.
These intersections have been included in
the Katrin resource estimate, resulting in an
increase in both Mineral Resources and Ore
Reserves. Katrin Ore Reserves increased by
c.30koz (before depletion).
A total of 34 drill holes were completed at
Nikolaevskaya during 2018, principally targeting
open pit resources with particular emphasis on
in-filling the existing drill grid and increasing
confidence in the resource estimate.
Of the five drill holes drilled 150 to 200m north
of Nikolaevskaya, outside known mineralisation,
one particular drill hole (no C-2297) intersected
with a high-grade interval (23.2m @ 3.33g/t,
including 6.3m @ 8.54g/t) at a depth of c.75m
from surface. This new and previously unknown
zone of mineralisation may become an attractive
open pit and/or underground mining target
and as such warrants further exploration.
Exploration at Nikolaevskaya in 2018 resulted
in 57koz and 63koz increase in Mineral
Resources and Ore Reserves respectively.
Average grades of Nikolaevskaya underground
Reserves increased by 40% from 5.43g/t
to 7.60g/t.
– 20.7m @ 1.38g/t (C-2481, interval
100.5m-121.2m);
– 15.1m @ 0.62g/t (C-2486A, interval
92.1m-107.2m); and
– 27.0m @ 0.86g/t (C-2499, interval
97.6m-124.6m).
Formal Ulunginskaya resource estimates
have now been completed, adding 74koz and
21koz of gold to the Mineral Resource and
Ore Reserve statement respectively. As the
mineralisation has been proven to be
refractory, Ulunginskaya is not a high priority
for further exploration.
Early stage exploration was carried out at
the Aprelskiy exploration target, an area of
extensive historical alluvial production located
c.15km west of the Pioneer processing plant.
Thirteen drill holes were completed there in
H1 2018. The best intersections include
– 0.8m @ 2.69g/t (86-32);
– 2.2m @ 1.89g/t (C-88-6);
– 1.6m @ 1.38g/t (C-90-4);
– 4.6m @ 0.85g/t (C-94-6); and
– 2.2m @ 1.21g/t (C-98-30).
Petropavlovsk Annual Report 2018
65
Strategic reportFinancial statementsGovernance Exploration Update continued
A small amount of exploration, including
trenches, has been completed at Yasnoye
and some other smaller exploration targets
near Albyn. This work identified new gold
mineralisation which warrants further work,
but this remains a low priority compared to
Elginskoye, Unglichikanskoye and Albyn.
Malomir
All material exploration completed at
Malomir relates to underground mining at
Quartzitovoye and predominantly involved
reserve definition drilling and sampling.
Ten drill holes completed at zone 49 proved
50m strike and 100m down dip extensions of
high-grade mineralisation which is yet to be
incorporated into the Mineral Resource and
Ore Reserve estimate. New significant zone
49 intersections include:
– 1.6m @ 17.75g/t (C-608P-2, interval
62.4-64.0m);
– 2.0m @ 10.5g/t (C-613P-21, interval
35.0-37.0m);
– 1.0m @ 19.7g/t (C-613P-21, interval
96.5-97.5m);
Khabarovsk Exploration Assets
In H2 2018 Group acquired two early stage
exploration assets in Khabarovsk region:
– Verkhne Udskaya; and
– Chogarskaya.
Both properties are in proximity to known
alluvial gold deposits and have geology
deemed to be favourable for hosting orogenic
type hard rock gold deposits. Both areas were
subject to a systematic hard rock early stage
exploration/prospecting in the 1960’s when the
Government funded 1:200 000 scale mapping
and prospecting program was completed.
Later in 2005-2006 smaller scale prospecting
focusing on exploration targets identified by
1960’s work was also undertaken. Historical
trenching and geological traverses identified
grades up to 68g/t in selected samples.
Significant Verkhne Udskaya historical trench
intersections include:
– 8.0m@ 2.5g/t;
– 7.0m @ 3.93g/t;
– 3.0m @ 3.2g/t; and
– 13.0m @ 25.17g/t (C-612P-20, interval
– 2.0m @ 2.2g/t.
90.5-103.5m); and
– 2.9m @ 5.67g/t (C-612P-21, interval
70.1-73.0m).
Zone 49 remains open downdip and offers
further exploration potential to increase
resources and reserves for underground
mining.
In addition, underground workings intersected
low grade stockwork between Quartzitovoye
areas 1 and 2, which is suitable for open pit
mining once the Quartzitovoye underground
mine is completed; 112koz of Ore Reserves
were added in this area in 2018.
Historical work only involved trenching
and geological traverses. No drilling was
completed at these properties to date
therefore Verkhne Udskaya and Chogarskaya
are considered underexplored offering
potential for significant discoveries.
Verkhne Udskaya and Chogarskaya are
located 120km and 160km north-north
west and north from Malomir respectively.
These licences are one of the priority
exploration areas for 2019.
Albyn
In 2018, exploration at Albyn targeted deeper
extensions of both the Sukholozhskiy Zone
and the main ore body at Albyn. A total of 52
drill holes were drilled, including 49 resource
definition holes on a nominal 40m by 40m drill
grid at Sukholozhskiy, and 3 prospecting holes
to prove deeper extensions of the main Albyn
ore body. The results received to date are very
encouraging – the prospecting hole completed
at Albyn (C-225-28-313), intersected two
intervals of gold mineralisation potentially
suitable for underground mining: 417.7m -
427.7m (10.0m @ 4.41g/t) and 439.6m-443.6m
(4.0m @ 3.76g/t). These intersections are
situated 150m and 180m below the final Albyn
pit respectively and mineralisation still remains
open in a down-dip direction.
Resource definition and resource expansion
drilling at Sukholozhskiy intersected further
down-dip with the best intersections
including:
– 1.7m @ 12.1g/t (C-139-5, interval 156.5-
158.2m);
– 2.5m @ 7.84g/t (C-139-5A, interval
185.3m-187.8m);
– 1.4m @ 55.51g/t (C-143-4, interval
214.6m-216.0m);
– 1.9m @ 7.86g/t (C-133-4, interval
193.0m-194.9m);
– 1.0m @ 18.1g/t (C-129-3, interval
184.2m-184.9m); and
– 0.8m @ 13.8g/t (C-191-031, interval
80.2m-81.0m).
As Sukholozhskiy was an attractive mining
target, this area was mined during 2018.
Petropavlovsk specialists believe an
exploration target for potential underground
mining at Albyn ought to be at least equivalent
in size to total Albyn production to date
(c.1Moz). All metallurgical tests completed
to date suggest deeper extensions of Albyn
are non-refractory and readily suitable for
processing through the existing Albyn
processing plant.
66 Petropavlovsk Annual Report 2018
IRC
IRC produces and develops industrial
commodities. Based in the Russian Far East,
it benefits from low production costs and
proximity to China, the world’s largest consumer
of IRC’s main product, iron ore. IRC was part of
Petropavlovsk’s Non-Precious Metal Division
before it was listed on The Stock Exchange of
Hong Kong in 2010 (ticker: 1029.HK) as a
separate entity. With a holding of 31.1%,
Petropavlovsk is the largest IRC shareholder,
although it should be noted that IRC is an
associate of the Company and not a subsidiary.
As from 15 February 2019, Petropavlovsk acts
as a guarantor in relation to a new US$240
million Gazprombank Facility - please refer to
the Refinancing of the ICBC Project Finance
Facility section below for further details.
IRC assets
IRC’s key mining assets are K&S and Kuranakh.
– K&S: a mine producing 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
once ramped up, is expected to have a full
annual capacity of 3.2 million tonnes; and
– Kuranakh: a mine producing iron ore /
ilmenite concentrate located in the Amur
region, Russian Far East, currently in care
and maintenance. IRC are conducting a
strategic review to consider restarting
Kuranakh, following stabilisation of bulk
commodity prices.
IRC’s non-core mining assets are those that
are not expected to contribute substantially
to revenue in the short to medium term.
They include:
– Bolshoi Seym: an ilmenite deposit with
Indicated and Inferred Mineral Resources,
located north of Kuranakh;
– The Garinskoye flanks: the area surrounding
Garinskoye which is at an early stage of
exploration; and
– Kostenginskoye: an area 18km south of K&S
which is at an early stage of exploration.
The Garinskoye Flanks and Kostenginskoye
do not yet have JORC compliant Mineral
Resources and Ore Reserves.
Operational Performance in 2018
K&S
In 2018, K&S continued to make good
progress with the ramp up of phase one,
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 3.2million
tonnes of iron ore concentrate with a 65% iron
(Fe) content. As iron ore prices continued their
uptrend in 2018, the benchmark 65% Fe Platts
spot price index averaged US$90 per tonne.
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.
Annual production of iron ore concentrate
increased 43% to 2,234,517 tonnes, with
the plant operating at a steady state capacity
of approximately 70% and rising to an average
capacity of c.86% in the second half of
February 2019. The plant successfully
operated at 105% of its design capacity
during a 24-hour production run earlier this
year, and an additional continuous 72-hour
run at more than 90% of design capacity.
The successful tests demonstrated the
capability of the plant to run at design
capacity for a prolonged period. Despite,
technical issues with the Drying Unit at the
beginning of 2018 which affected production,
improved weather conditions reduced the
need for the Drying Unit which simplified the
production process alongside with
commissioning programme.
During the year, the Russian Railway Authority
resolved the congestion issue at the
Trans-Siberian Railway, which had been
affecting shipment of products to customers.
At the end of March 2019, the Amur River
Bridge was connected which, once it
becomes operational later in 2019, will further
reduce congestion and shorten shipment
times to IRC’s Chinese customers.
Kuranakh
Kuranakh was moved to care and
maintenance at 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 2018.
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 represents significant upside
potential for IRC shareholders. During 2018,
IRC conducted a strategic review to consider
restarting Kuranakh on the basis that the iron
ore market upside prevails.
Refinancing of the ICBC Project
Finance Facility
In December 2018, IRC announced the
agreement of a US$240 million facility
with Gazprombank to repay in full K&S’s
outstanding debt with ICBC of US$169 million,
borrowed under K&S’s project finance facility.
The New Facility will mature in 2026, consisting
of two tranches. The principal under the first
tranche amounts to US$160 million with
interest charged at 5.7% above LIBOR per
annum which is repayable in equal quarterly
payments during the facility term. The principal
under the second tranche amounts to US$80
million with interest charged at 7.7% above
LIBOR per annum and is repayable at the end
of the facility term.
On 19 March 2019, the refinancing of the
ICBC loan has been successfully completed
and the facility has been drawn down and
used to repay the outstanding ICBC facility
of US$169 million; two bridge loans advanced
by the Company to IRC, amounting to
c.US$57 million; and will enable full payment of
fees of c.US$6 million owing to Petropavlovsk
in relation to the guarantee provided for the
ICBC facility with a further US$5 million
payable no later than 31 March 2020.
For further details, please refer to IRC’s
announcements dated 28 November 2018,
19 December 2018, 15 February 2019 and 20
March 2019 at www.ircgroup.com.hk
FY 2018 Financial Results
2018 has been a year of growth for IRC, with
reported iron ore concentrate sales of over
2.2 million tonnes, a c.44% increase
compared to 2017, at a selling price of US$68
per tonne (2017: US$70 per tonne). Due to
increased sales, IRC reported a 39% increase
in revenue totalling US$152 million (2017:
US$109 million). While the 2018 headline profit
was affected by a non-cash adjustment
(impairment loss reversal of US$91 million),
the underlying performance of the business
improved significantly, resulting in a 42%
increase in adjusted EBITDA to US$29 million
(2017: US$20 million).
Petropavlovsk Annual Report 2018
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Strategic reportFinancial statementsGovernance Sustainability
68 Petropavlovsk Annual Report 2018
Key Performance Indicators
Our key performance indicators appear throughout this report and introduce the operational
and sustainability sections and the CFO statement respectively (pages 35, 69 and 84).
Lost Time Injury Frequency Rate
2018
2017
2016
2.52
2.64
3.11
Definition
Lost Time Injury Frequency Rate (LTIFR) is
a measure of the rate of recorded accidents,
including fatalities, which occur on Group
premises within the reporting period, per
million manhours worked. LTIFR for the
Group excludes IRC, which has separate
HSE management systems.
Relevance
The health and safety team strive to maintain
a safe environment at the Group’s operations
which includes implementing safety
protocols, providing protective equipment
and mitigating risks. The LTIFR is one of the
key indicators that the Group relies upon to
measure the effectiveness of the occupational
health and safety policies, and to identify
trends and areas of focus. It is an integral part
of a complex system covering the database of
statistics, training programmes and operating
parameters used for regular analysis and
control. The measure ensures the Group’s
compliance with Russian legislation and
provides the Group with a basis for
continuous improvement.
Performance in 2018
For the year ended 31 December 2018,
Group operations recorded an LTIFR of 2.52
accidents per million-man hours worked.
It is with the utmost regret that we report one
fatality in November 2018. The
aforementioned incident happened at Albyn
site in a very unfortunate road accident.
The mandatory Company practices were
implemented following the fatality with all sites
and divisions receiving a note on the accident
to familiarize the employees with the incident
and prevent occurrence of such accidents at
other sites.
Orders were issued to:
– Carry out extraordinary health and safety
briefings and instructions;
– Conduct extraordinary health and safety
exam for the drivers (where relevant);
– Reinforce preparatory safety measures
going into the cold weather, with winter
being notorious both for vehicles and
pedestrians;
– Inspect the internal site roads and improve
the conditions where necessary; and
– Extra training has been given to relevant
employees to reinforce safe working
practices.
In addition to this, gap analysis on road
safety was performed in order to rectify the
drawbacks and improve where prompted
by the necessity. Any recommendations
that arise from the report will immediately
be implemented on site.
Our employees are the key priority for the
Group and, therefore, the management is
always focused on creating a safer workplace
in the Company via promoting the health and
safety culture to ensure them returning safely
back home from work.
Going Forward
Petropavlovsk is continuously analysing its
health and safety performance, learning
lessons and improving its work in the field.
The Group uses all available tools to the
maximum – inclusive of health and safety
campaigns to unite all the divisions, applying
the inter-corporate communication at all levels
– the Company is there to prove itself a worthy
employer in the industry, while being one of
the reputable major players in the Amur region
and in Russia overall.
Our most significant goal is to keep the level
of health and safety awareness to its utmost
by constantly drawing attention to the health
and safety matters through the reinforcement
of the safety procedures, addressing
management and employees at all levels
and making sure everyone is involved.
Petropavlovsk Annual Report 2018
69
Strategic reportFinancial statementsGovernance Key Performance Indicators continued
Total Headcount and Gender Split
2018
2017
2016
6,713 2,187 8,900
6,674 1,950 8,624
6,364 1,857 8,221
■ Male
■ Female
Performance in 2018
Total headcount increased by 3% in 2018
to 8,900 employees across the Group.
As at 31 December 2018, 2187 employees
were female, representing almost a quarter
of the Group’s total workforce. The ratio of
female employees increased by 2% when
compared to the previous year’s ratio.
Going forward
Staff diversity reviews at Petropavlovsk are
conducted 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.
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. As of 2010 Petropavlovsk also
provides the opportunity for women to work
as heavy machine operators.
70 Petropavlovsk Annual Report 2018
Greenhouse Gas Emission (GGE)
2018
2017
2016
2018
2017
2016
2018
2017
2016
1.01
1.01
0.97
218,854
227,305
222,847
Emissions reported
above normalised per oz.
of gold produced
(Tonnes of CO2e/oz)
Electricity, heat,
steam and cooling
purchased for own use
(Tonnes of CO2e)
209,043
218,502
Combustion of fuel and
operation of facilities
(Tonnes of CO2e)
182,408
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 Greenhouse Gas
Emission (GGE) 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.
Relevance
Monitoring GGE Emissions enables the
Group to look for opportunities to minimize its
carbon footprint. Reducing emissions may
also help decrease operating expenditure.
Verification / Assurance
Quarterly reports of emissions against an
approved plan are sent to the Russian
Environmental Agency Rosprirodnadzor.
Performance in 2018
As a gold producer, the Group’s prime metric
is the amount of gold produced per calendar
year, measured in troy ounces. In 2018,
Petropavlovsk produced 422.3koz and this
figure has been used to calculate our
intensity metric.
Under Russian legislation, the GGE associated
with grid electricity are reported by the
generator. However, for transparency
purposes, the GGE associated with our
consumption of electricity has been reported.
This is measured in tonnes of carbon dioxide
and calculated using the 2016 IEA electricity
conversion factor for the Russian Federation
of 0.37959 kilograms of CO2 equivalent per
kilowatt hour. All emissions quoted above
are Gross as no deductions, for export of
renewable energy or purchase of certified
emission reduction, are applicable.
2018 GGE originated from the following
sources:
– Diesel: used in our fixed equipment
including crushers, screens and pumps,
and mobile equipment including
excavators, trucks, bulldozers and cars;
– Kerosene: used in our helicopters;
– Benzene: used in our cars; and
– Coal: used in our heating plants. All heat
produced is used for The Group’s own
consumption
Going Forward
The Group continues to monitor GGE and
reviews all relevant data on a regular to
analyse where improvements can be made.
Petropavlovsk Annual Report 2018
71
Strategic reportFinancial statementsGovernance Introduction to Safety, Sustainability & Workforce
Committee Report
Dear Shareholder
I am pleased to be writing to you in my capacity
as Chairman of the newly constituted Safety,
Sustainability & Workforce Committee (the
“SS&W Committee’) and to introduce this,
the 2018 Sustainability Report.
The SS&W Committee was formed in
November 2018. The remit of this Committee is
to review and monitor the Group’s safety, health,
environment and sustainability processes and
procedures. In addition, an important
responsibility of the Committee, will be to
monitor and assist with community relations
and workforce engagement and alignment
on behalf of the Board.
Regrettably, shortly after the formation of the
Committee, we were advised of the sad death
of Mr Pichinin an employee at our Albyn mine.
Mr Pichinin tragically died in a road accident
whilst travelling from his accommodation facility
to the process plant where he worked.
On behalf of the Committee, and indeed the
Board, I extend our sincere condolences to
Mr Pichinin’s family, friends and work colleagues.
Our priority, is to assist management in
achieving an improved health and safety
environment, recognising the basic
fundamental right of each of our employees to
go home to their families and friends unharmed
after each shift rotation. We will strive to achieve
best industry practice, with the aim of
eliminating fatalities and serious accidents,
and achieving continuous improvement in the
reduction of our Lost-Time Injury Frequency
Rate (LTIFR).
I am pleased to report a c.19% decrease in the
Group’s LTIFR for 2018 compared with 2017.
The Committee’s aim is to reduce this further
in 2019 and during the years beyond. Further
details of management’s plans to build upon
these results and improve our health and safety
record further in 2019, reducing the LTIFR at
each mine is provided on pages 79 to 80.
With regards to the impact of our operations on
the environment and community, management
continues to look for opportunities to minimise
the Group’s carbon footprint and its impact on
the environment. The biodiversity case study
included on page 83 of this Report further
demonstrates our commitment to protecting
the environment in which we operate.
The Committee has noted with sadness the
recent widely reporting tailings dam failures in
Brazil which resulted in the tragic loss of life and
destruction to local communities and the
72 Petropavlovsk Annual Report 2018
environment. We have considered our tailings
storage facilities in the light of these events.
We recognise that if our tailings dams were
to fail it could have a major impact on the local
environment. However, there are no villages
or people living in the path in the highly unlikely
event of any failures of our facilities. In addition
we use a different (downstream) method of
construction than used in Brazil. All of the
Group’s tailing management facilities are
insured, operated and monitored in accordance
with the legislation of the Russian Federation.
Examinations and monitoring are performed
on a daily basis and, as a result, the risk is
considered low.
In fulfilling our remit, we will work together
with the Executive team and members of
management. In addition, the Committee will
engage with the Group’s workforce in order to
understand their views and any concerns they
might have, communicating these to the Board
such that they can be taken into account in the
Board’s discussions and decision making.
As an initial step, I and my colleagues on the
Committee travelled to the Group’s operations
in early April 2019. We met with both workforce
and trade union representatives, including the
Chairman of the independent trade-union
organization of Pokrovskiy mine, discussing
a wide scope of matters including safety,
sustainability and the culture of the Company,
including the programmes in place to ensure
the wellbeing of our employees. The
Committee also met with the Head of Health
& Safety at Malomir and also with the Head
of our Environmental Department, Ms Vera
Usova who presented to the Committee on
the Group’s approach to its environmental
management.
I was impressed by the quality of the employees
that we met, their passion and commitment to
the success of the Group and their contribution
to the continued improvement in our health,
safety and environmental processes, which
is of benefit to all of our stakeholders.
The Group prides itself on the diversity of its
workforce. Despite the fact that the mining
sector is, and has historically been, male
dominated, almost a quarter of our workforce is
female, with a 2% increase during 2018, and real
opportunities for personal growth for women
within Petropavlovsk. In this report we include
the case study of Ms Olga Anokhina, head of
the Pokrovskiy factory analytical laboratory
provided on page 75.
community challenges that we face. This has
provided me with a better understanding of
how the Company tries to engage with local
communities, how it contributes to local
activities and culture and the importance
that is attributed to good communication
and problem solving.
The recent commissioning of POX, which is
critical to the future success of the Group,
was a significant milestone for the Company.
The Committee recognises that the construction
of a new and complex metallurgical facility brings
added challenges particularly in the area of
process safety. Our senior management has
devoted considerable time, assisted by the
relevant authorities as appropriate, to develop
and implement extensive training for those
employees who will be operating and working
at the POX Hub. An overview of the actions taken
by the Group in this respect is detailed on pages
79 to 80. The Committee will continue to focus
on this matter during 2019.
We recognise that some additional risks are also
inherent in our underground mining operations
when compared with open pit mining.
Accordingly, we will also pay particular attention
to the health and safety procedures at these
operations where extensive training has been
provided for the workforce.
As a newly formed Committee, our programme
for 2019, will include a review of the Group’s
health, safety and environmental policies and
procedures, and where appropriate we will
make recommendations to bring such policies
in line with best industry standard. Health and
safety is a matter not only for the Board and the
SS&W Committee but for all of our workforce
and our employees are actively encouraged to
provide ideas regarding improvements to our
operations, including those relating to health
and safety. We aim to cultivate an environment
where health and safety is the priority and where
each and every one of us is vigilant in looking out
for each other.
I hope that you will find this Sustainability Report
informative.
I look forward to reporting on the progress
made by the SS&W Committee next year.
I met in Blagoveshchensk with Uliana
Levanova, Head of Welfare and Community
Liaison discussing the sustainability and
Harry Kenyon-Slaney
Chairman, Safety, Sustainability & Workforce
Committee
Our Approach to Sustainable Development
Petropavlovsk recognises the use of
appropriate procedures developed for
handling disputes and grievances with zero
tolerance of bribery and corruption and strict
compliance with the relevant legislation of the
Russian Federation and the United Kingdom.
In summary, 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.
At Petropavlovsk, we recognise the socio-
economic influence we have as a major
employer and taxpayer in the Amur region.
Nearly two thirds of our employees are local
and we work with local contractors,
particularly on large-scale projects such
as the POX Hub development. This further
reinforces the Company’s economic impact
in the region. Our objective is to act in the
interests of all of our stakeholders by ensuring
our activities are efficient, responsible,
transparent and sustainable.
In planning our approach to business,
we recognise that we have duties to our
shareholders and responsibilities to a wider
group of stakeholders (those who can affect
or who are affected by our activities).
We believe that with the right approach,
health, safety environmental performance
and community engagement can be
continually improved.
We are committed to undertaking all our
operations in compliance with Russian
regulatory requirements and international
good practice, but we will go beyond legal
compliance where necessary to protect our
workers, the surrounding environment and
the communities within which we operate.
We achieve this by effective implementation
and transparent engagement, communication
and independently verified reporting
arrangements with Group stakeholders.
We provide a fair return to our shareholders
by striving for continuous improvement to
our technical processes in exploration and
production. We facilitate and encourage
responsible product design, use, re-use,
recycling and disposal of the Company’s
products. The implementation and
maintenance of ethical business practices
and sound systems of corporate governance
is key to our sustainable business practices.
Action plan for 2019:
We aim to ensure a safe working environment
with continual improvement of the Company’s
health and safety performance. Risk
management strategies are implemented
based on valid data and sound science.
We respect the human rights of our workers,
suppliers and host communities by upholding
fundamental human rights and respecting
cultures, customs and values in dealings with
employees and others who are affected by
our activities. High priority is given to
contributions to the social, economic and
institutional development of the communities
in which the Company operates.
We believe that mining companies have
a particular responsibility to care for the
environment and to mitigate the impact
of their operations. We strive for continual
improvement of the Company’s
environmental performance. We also
contribute to conservation of biodiversity
and integrated approaches to land use
planning and the ongoing development
of mine closure plans.
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. We provide appropriate
and high-quality training for employees
and opportunities for career development.
We support investment in initiatives to
support education in the regions where the
Group operates both through the widening
scope of the Group’s operations and with the
assistance of the Petropavlovsk Foundation
for Social Investment.
Health and Safety:
Stakeholder Engagement:
Environment:
– Reduce LTIFR rate at each mine
– Improve stakeholder relationships by
– Review and update H&S Policies to ensure
safe working at POX Hub and underground
increasing bilateral communications with
the workforce and the community
– Align the Grievance procedure with
international industry standards
– Harness innovation to further improve the
Company’s environmental performance
Petropavlovsk Annual Report 2018
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Strategic reportFinancial statementsGovernance Sustainability continued
Stakeholder Engagement
The Group is committed to establishing and maintaining constructive relationships with all stakeholders to foster sustainable, positive
and transparent interaction, and to ensure benefits for everyone from the Group’s activities for the term of the operations and beyond.
All persons or groups that are directly or indirectly involved in the operations of the Group are considered to be our stakeholders.
New stakeholders are regularly identified and included in the consultation process.
Stakeholder groups
Engagement mechanisms
Who is responsible within the Company
Shareholders,
lenders, bondholders
– AGM
– Annual Report
– Board
– CEO
– Investor conferences, conference calls, one-to-one
– IR department
Employees
Supplies and
contractors
Local communities,
potentially or directly
affected by Group
operations, including
Indigenous
communities.
Government and
Industry authorities
meetings
– Site visits
– Website
– Welfare and Community Liaison team
– Corporate newspaper Pokrovka Plus
– Trade union
– Public relations team
– HR Departments
– Meetings and face-to-face communication with
– H&S Departments
management
– Direct correspondence
– Meetings
– Contractual relationships
– Production departments
– Procurement departments
– Operations directors and Chief engineers
– Public hearings
– Welfare and Community Liaison team
– Corporate newspaper Pokrovka Plus
– Public relations team
– Social and charity activities
– Company website
– Direct correspondence
– Site visits
– Grievance mechanisms
– Petropavlovsk Foundation team
– Meetings, round-table conferences
– Group CEO
– Industry conferences
– Direct correspondence
– Company website
– Managing directors at operations
– Welfare and Community Liaison team
– Legal team
– Circulation of information (brochures, factsheets,
– GR team
leaflets etc).
Media
– Company website
– Welfare and Community Liaison team
– Press releases, conference calls
– Public relations team
– Site visits
– Interviews with top managers and representatives of
the Company, press visits to its enterprises
– Correspondence (letters and emails)
74 Petropavlovsk Annual Report 2018
Our Workforce
Petropavlovsk is committed to operating as
a responsible employer both by promoting
the fair treatment of its workforce through
equal opportunity, and by the absence of
discrimination required under both Russian
and UK law. All employees are issued with
contracts detailing their working hours, paid
annual leave and other guarantees, in line
with Russian or UK legislation (as applicable).
In Russia, the Group operates in accordance
with the Constitution of the Russian
Federation, which details the rights and
freedoms of citizens.
Shift patterns are organized in such a way as
to promote uninterrupted operations, but also
to allow employees to perform their duties
whilst providing for family commitments.
These patterns are usually either 14, 30 or 45
days at the mine with subsequent leave of the
same duration. Whilst on duty, employees live
on site in comfortable, hotel-style
accommodation with access to leisure
facilities. In 2018, more than 250 people,
including employees, contractors and interns,
took part in a variety of sports tournaments.
Trade Union
The Trade Union was formed in order to
represent and protect social and labour rights
and the professional interests of employees
and to help enhance the quality of life of Trade
Union members and their families. Today,
1,616 employees are members of the trade
union, and in a continuation of the Group’s
historical record, there were no strikes to
report during 2018.
The trade union budget of RUB 19.7 million
in 2018 was allocated to health treatments
for employees and financial assistance
for workers (for the purposes of medical
treatment and operations, the birth of a
child, weddings and anniversaries).
Competitive Remuneration
The Group pays its workforce competitive
salaries which exceed regional and country
averages. The average wage paid to a
Petropavlovsk employee working in Russia
is 56.40% higher than the Russian national
average. The minimum wage paid by the
Group is 12.48% higher than the regional
minimum wage. Exchange rate dynamics
in 2018 increased wages in Roubles but
decreased them in Dollars when compared
to 2017.
Case Study
Personal Growth Opportunities
for Women
At Petropavlovsk, career and development
opportunities of employees are created
regardless of gender. Many employees have
experienced considerable success here
having begun work in an entry level position,
and through acquiring experience and
education, have been promoted to
management.
Olga Anokhina is just one example. She is
now the head of the Pokrovskiy factory
analytical laboratory. In 2018 she was
awarded by the Ministry of Natural Resources
of the Amur region a diploma for many years
of hard work and high professionalism.
“ I am a Pokrovskiy Mining College graduate.
I started working in the Company as a 3rd
category lab technician and was able to
become the head of the Pokrovskiy
laboratory. And even though we employ
more than 130 people, it’s not hard to
manage a large team. If the task is set
correctly, then the team understands what
to do. The award I received this year is not
only a sign of recognition of my
professional qualities, it is a wonderful
recognition of the work of our entire
laboratory. I really value our team and try to
create an inclusive atmosphere to retain
them all in the Company.”
Minimum Salaries in 2018 $
Regional minimum
272.3
Petropavlovsk minimum
425.9
Gold Mining department
383.1
Blast Hole Drilling department
Exploration department
Construction department
470.7
499.0
452.2
Management
971.2
Education department
405.9
Other services departments and companies
364.7
Petropavlovsk minimum and average wages vs. regional minimum and average
Regional minimum wage
272.3
Average wage in Amur region
Average wage in Russia
641.2
691.9
Petropavlovsk minimum
425.9
Petropavlovsk average wage
778.3
Petropavlovsk Annual Report 2018
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Strategic reportFinancial statementsGovernance Sustainability continued
Social support
Social benefits, such as pensions, maternity/
paternity leave, and employee assistance
programs are all provided by Petropavlovsk.
The Group also pays for the employee
assistance programmes which fund one-off
payments in the case of childbirth, marriage,
medical treatment, funeral costs for close
family, financial difficulties and natural
disasters. In 2018, maternity leave was
taken by one hundred and eighty female
employees, and three male employees used
their paternity leave.
Employee communications
The exchange of information between the
Company and its employees is managed by
the internal communications team. For more
than 10 years, they have distributed company
news updates through multiple channels,
mainly the PokrovkaPlus newspaper and
provided a channel for discussion.
The newspaper is delivered in both digital
and print formats to ensure the involvement
of employees on site with limited computer
access. Professionals with specialist
knowledge of the subject give answers to
questions received from the communities.
These are published within the newspaper
itself, which is also circulated to local residents.
Corruption Controls
The Group has adopted a Code of Conduct
and Business Ethics (the ‘Code’) to reinforce
its zero-tolerance approach to bribery and
corruption. The policies and procedures in the
Code prevent, combat and reduce bribery
and corruption. The Code has been
distributed to all employees both in the UK
and in Russia.
Both bribery and corruption can have a
corrosive effect on Company reputation and
must be closely monitored by the Executive
Committee. These matters are discussed in
regular meetings and the responsibility for
ensuring enforcement of any decisions is
taken by the Chairman, who makes formal
reports on this to the Board.
Education
The employees are the key asset of the Group
which prioritizes investment to support them
and leverage their expertise. It provides them
with continuous development and training.
Pokrovskiy Mining College is Petropavlovsk’s
main centre of education. In 2018 it
celebrated its tenth anniversary of
successfully preparing qualified graduates to
the Group. More than 10,500 people
graduated the college during this period.
76 Petropavlovsk Annual Report 2018
This private, non-profit, innovative educational
institution offers a wide range of in-house
training courses:
– Secondary education (training of mid-level
specialists, skilled workers and employees);
– Additional education (retraining for a new
activity, advanced training); and
– Professional training (over 40 programs).
There are eighteen teachers at the college.
Theoretical training and practical experience at
the mines are given by engineering and
technical personnel from the Group. The
teachers actualize training documentation, and
take part in the final certification of graduates.
Study, tuition and accommodation is free for
students for the duration of training, and those
who demonstrate outstanding results receive
a stipend.
In 2018, the Pokrovskiy Mining College had
two thousand, seven hundred and eighteen
graduates. The main contractor was the
largest company of the Group, Pokrovskiy.
Number of PGK graduates
2018
2017
2016
2,718
1.958
1,941
The basis of the course for new POX
employees was prepared by specialists from
the Research and Development Center
Hydrometallurgy.
After completing a theoretical course at the
Pokrovskiy Mining College, students
underwent an internship at the experimental-
industrial plant in Blagoveshchensk. There
they trained using unique technical
equipment: a pilot autoclave unit and an
operator’s workplace simulator.
As a result, all staff had been fully trained by
the time of the POX launch and this made a
serious contribution to the successful
commissioning of the cornerstone project.
Case Study
WorldSkillsRussia Workers
Championship
In October 2018, students of the Pokrovskiy
Mining College took the 1st and 2nd places
in the regional stage of the WorldSkillsRussia
Workers ’Championship in Laboratory
Chemical Analysis.
Egor Eryomchenko, a first-year student,
became the winner of the competition
and will represent the Amur region at
the All-Russian stage of the WorldSkills
championship: “To tell you the truth I was
really nervous at first as it was my first
experience of participating in championships
of this level. But I managed to complete all
assignments successfully. When it was
announced that I had won the first prize,
I was overwhelmed with delight and pride
for the work done. My success is due to my
college teachers”
Worldskills is an international non-profit
movement that contributes to the prestige of
the working professions and raises
standards of professional training in 78
countries of the world.
Tatiana Bredikhina, Director of the
Pokrovskiy Mining College
“ The main success story in the work of the
Pokrovskiy mining college is its graduates,
who leave with both solid knowledge and
work experience. They understand their
professional tasks and they are motivated
to succeed in the job of their choice and to
keep on studying. When I get positive
feedback from Petropavlovsk operations
about our graduates, I realize that the
college has truly achieved the goal set by
the Petropavlovsk management team 10
years ago. It has been busy and fruitful ten
years for us., and we are eager to keep on
sharing our knowledge with new students.”
Our Stakeholders
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.
The Foundation’s social projects fall under 6
strategic areas:
– Education;
– Future Generations (Child Development);
– Research and Development;
– Culture;
– Quality of Life; and
– Sport.
Key projects in 2018
In 2018 the Amur region celebrated the 160th
anniversary of its foundation. To commemorate
this date and to educate people living in the
region and beyond about its history, The
Petropavlovsk Foundation produced a
historical documentary called “Albazinskie
skaski”. It is dedicated to the heroic past of the
Russian Far East. The premiere of the film took
place in September 2018. Copies of the film
were handed to all schools of the Amur region,
and now they are used as teaching aids. The
movie is posted on YouTube. By the end of
2018, it had been watched by more than 2,000
people. The project was co-financed by the
Russian Presidential Grants Fund.
Petropavlovsk also supported the Amur
Autumn annual festival of theatre and cinema.
Various festivals with the participation of
famous Russian actors took place in the
towns and villages where Petropavlovsk
employees live. They were bright and
memorable events for the people living in
these remote areas.
The foundation supported the development
of children’s football in the Amur region in
order to create conditions for local children to
succeed in this sport.
Gleb Kuznetsov, Director of Petropavlovsk
Foundation and Member of the Public
Chamber of the Russian Federation:
Petropavlovsk operates in a large region
where small settlements are located at a
significant distance from each other.
People who live there have truly deep and
interesting family history. But our common
weak spot in Russia is that many of us have
little knowledge of our history, of family history,
or the history of the region. This knowledge
is very important as it gives us roots and
allows us to improve our social well-being.
Therefore, in the Foundation, along with the
traditional charitable activities, we decided to
organize a project dedicated to discovering
the history of the Amur region. In 2018 we
shot a historical documentary. It is now used
in history lessons in all Amur schools. And
during a few months, more than 2 thousand
people watched it. You can do it as well any
time you like as we posted it on the YouTube
for everyone to watch.
Engaging with Indigenous Groups
There are five 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 374 people. Petropavlovsk
considers its residents to be stakeholders 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.
There is a school and a nursery in the
village where the Evenk language is taught.
Residents enjoy spending leisure time at a
local stadium and at a community centre,
which a new local folk dance group have
used since 2010. Between 2010 and 2017,
Petropavlovsk took part in the rebuilding and
improvement of all social and educational
facilities in the village. A traditional type of
Evenk farming, reindeer husbandry, is
conducted in Ivanovskoye by Ulgen and the
neighbouring Selitkan community. During its
years of operation in the Selemgjinsky district,
Petropavlovsk has provided Ivanovskoye with
in-kind assistance and social support, mainly
through the Petropavlovsk foundation.
Human Rights
At Petropavlovsk we respect the human rights
of our workers, suppliers and our host
communities. Our aim is to implement best
practices and to apply the UN Guiding
Principles on Business and Human Rights to
our activities. The main policies and
procedures we have in place in order to
address human rights are:
– The Code of Conduct and Business Ethics;
– Review and publication of a revised Modern
Slavery Statement annually;
– A Grievance mechanism for our employees
and third parties which has been
implemented in line with the UN Guiding
Principles on Business and Human Rights;
– Continuous engagement with our all our
stakeholders; and
– Human resources policies in compliance
with the requirements of the Russian
Federation.
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 introduction of the procedure was
approved by the Board of Directors. It will be
implemented throughout 2019.
Complaints can be registered online. High
Internet connectivity even in the most remote
areas of Amur region make it a convenient
way of communication. Information on the
Grievance Procedure is made available to
local residents and other stakeholders in the
Sustainability section Petropavlovsk website.
We are aiming to spread this information on
news boards in the villages and via local
newspapers as well. Different ways of
sending complaints will be tested and
considered in 2019 to perfect the procedure.
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.
Petropavlovsk Annual Report 2018
77
Strategic reportFinancial statementsGovernance Sustainability continued
Case Study
Governor’s visit to the POX Hub
The Amur region is the second region in
Russia to contain and operating POX Plant.
The POX Hub that has been commissioned
at Pokrovskiy is considered to be an
important investment project by the regional
officials and is supported by them within
Russian legal framework. The government of
the Amur region have grasped the social and
economic impact of the project, which will
allow jobs to be saved and new ones to be
created, establishing a taxable base for years
ahead. The governor of the region visited
POX main production facilities throughout
2018 and publicly announced the strategic
importance of the POX Hub for the gold-
mining industry of the Amur region.
“ I’m incredibly impressed!” admitted the
governor of the Amur region Vasily Orlov,
who visited the POX plant in 2018. “The
autoclave is of strategic importance for the
gold industry in the Amur region. It creates
a foundation for decades to come in terms
of working with refractory ores. Thanks to
this facility the gold mining industry will
deliver first class economic results. After
the launch of the Pokrovskiy autoclave, the
regional budget will receive up to 600
million roubles in taxes annually.”
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. The measures may be implemented at
both the regional and federal government levels.
The Amur region is the second in Russia
where a POX plant has been constructed.
The POX Hub is considered as an important
investment project by regional officials and is
supported by them within the Russian legal
framework. The government of the Amur
region understands the social and economic
impact of the project, which will enable it to
save jobs and to create new ones, to create a
taxable base for years ahead. The governor of
the region visited the POX main production
facilities throughout 2018 and publicly
acknowledged the strategic importance of
the POX Hub for the gold-mining industry of
the Amur region.
In 2015, the Group received state support for
a project located in the remote northern part
of the Amur region, the Selemdzhinsky
district. The project, which 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
220 kV, 175km long transmission line
(February-Rudnaya) and a 220 kV 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.
Most of the work has been completed at this
stage, with the infrastructure facilities planned
to be completed in 2019.
78 Petropavlovsk Annual Report 2018
Our Health & Safety
The health and safety of its workforce is a top
priority for Petropavlovsk. The Group is focused
on the continual improvement of the Company’s
health and safety performance to ensure a safe
working environment for them. Risk
management strategies are being implemented
based on valid data and sound science to
reduce the number of LTIFRs and accidents.
An ongoing campaign is in progress to go
beyond compliance with the regulatory
framework and to develop a safety culture
within the Group based on behavioural-based
safety at Group operations. The Group’s
objective is to minimise the risk of accidents
and of occupational illnesses, and to aim for
zero fatalities.
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. Any serious accidents
are investigated. Until November 2018, when
the Safety, Sustainability & Workforce
Committee was constituted health and safety
matters were considered and reviewed by the
Board, at scheduled meetings. Petropavlovsk
also conducts regular on-site inspections to
ensure all operations comply with 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.
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.
Group Health and Safety policies were
updated in 2018 to improve and update
existing documentation in line with business
developments, particularly the
commissioning of the underground project
and the POX Hub. We kept 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 has
adopted this approach, which encompasses
the simultaneous use of educational activities
and outreach tools alongside the targeting of
individuals.
All employees are provided with task-specific
PPE and failure to wear or use the appropriate
PPE is a disciplinary offence.
Audits and Inspections
A number of government bodies responsible
for ensuring compliance with HSE legislation
made several visits and conducted audits at
the Company’s sites throughout 2018.
All facets of the operations are scrutinised,
from the dormitories to the
Case Study
POX Hub Safety
The commissioning and further operations
at the POX Hub would not be possible
without the monitoring equipment –
radioisotope level gauges – sources of
ionizing radiation installed on autoclaves and
self-evaporators.
Before POX, there was no source of radiation
used within Petropavlovsk Group. Safety
requirements for the use of nuclear isotopes
are inferior only to the space industry.
Therefore, for successful commissioning, it
was necessary to fulfil a number of stringent
requirements and conditions. The Group had
to obtain a license to operate radiation
sources in the POX Hub. Training was
organised for employees at the Novosibirsk
Institute for Advanced Studies in various
programs including:
final production area of the process plants.
Health and safety documentation is analysed
and employees are interviewed.
The Group need to carry out regular internal
audits in the pursue of constant improvement
and cultural growth in order to pass these
inspections. The appliance of the relevant
risk assessment is one of our most valuable
managerial tools in this respect.
The results of all such activities are submitted
to the Chief Engineer of the Management
Company and the most important
observations are then presented to the
SSW Committee of the Board.
Whenever any safety violation is identified,
it is investigated and communicated to the
relevant managerial level, either the line
manager or operational management. They
assess the actual and potential hazards and
risks that have occurred, whether in the
breach of internal rules and policies or
legislative regulation. This enables them to
form a final decision on the route forward for
both the persons involved and Group strategy
overall. 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
– To monitor the suitability and placement of
radioisotope devices, according to safety
requirements;
– To develop radiation and individual
dosimetry monitoring programs;
– To organize the physical protection of
sources; and
– To install and calibrate the equipment at
the sites.
Some of new processes at the POX Hub
require special protective clothing to be
worn. For example, the staff at the POX
Oxygen Station, have wear summer and
winter suits with an antistatic thread, which
does not allow static electricity to form
during wearing. This is due to the safety
requirements during the operation of the
oxygen station.
Petropavlovsk Annual Report 2018
79
Strategic reportFinancial statementsGovernance Sustainability continued
During 2018 the following activities were
conducted in the field of occupational safety,
industrial and fire safety, as well as healthcare
on POX plant facilities.
– Standards for issuing special clothes and
footwear;
– Standards for issuing washing and
neutralizing agents for POX plant
employees have been developed and
approved;
– Annual x-ray examination was organized on
the territory of POX plant facilities for
employees; and
– Medical examination of employees has
been organized.
Safety instructions for blue-collar employees
and job descriptions for those responsible for
vessels working under pressure and lifting
equipment have been developed. Employees
were trained at Pokrovskiy Mining College
under the program “Autoclave oxidative
leaching processes and apparatuses for
gold-bearing sulphide flotation concentrates”.
Employees in the professions Slinger, Cradle
Worker, Floor Crane Operator, etc. are to be
trained quarterly.
A License to operate radiation sources has
been obtained. Personnel underwent training
on radiation safety. Individual radiation
monitoring has been organized and
necessary programs and plans approved by
regulatory agencies. The Annual report on
radiation safety has been turned in.
Work has begun on the organization of the
Emergency Rescue Team. Certification of
rescuers and formations is planned for Q2
2019. Plans for measures for the localization
and control of accidents at hazardous
production facilities of Pokrovskiy have been
developed and approved. The automatic fire
extinguishing system at the Oxygen Station
was commissioned.
Russian Federation and FZ-116 ‘On Industrial
Safety at Hazardous Production Facilities’.
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 standards for safety systems at work;
– State rules for sanitary-epidemiological
standards;
– Integrated safety rules;
– Rules for installation and safe operation of
machinery; and
– Regulations for protection at work.
H&S Management Systems
At Petropavlovsk, we continuously review our
approach in line with the latest regulations
and best practice in H&S. 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.
Health and Safety at the POX Hub
The POX Hub has been commissioned
and is operating 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 has
developed technical protocols relating to
the safe installation and operation of POX
equipment.
Prior to commissioning, technical inspection
of pressure vessels, which are registered at
Rostekhnadzor (Federal Environmental,
Industrial and Nuclear Supervision Service
of Russia), was conducted. Employees
operating the POX Hub underwent specific
training on the safe operation of all relevant
equipment and were examined in-house.
In addition, managers and key specialists
of the POX plant were certified in the Far
Eastern Department of Rostekhnadzor for
Industrial Safety.
80 Petropavlovsk Annual Report 2018
Our Environmental Management
Petropavlovsk recognise that activities
undertaken during the life cycle of our mines
will impact on the environment, so we
prioritise measures to mitigate and reduce
this impact. The Company has developed the
Environmental Management system which is
in full compliance with GOST R ISO 14001-
2016 (the Russian legislation equivalent to ISO
14001:2015). Data relating to the state of the
environment at industrial sites is regularly
disclosed to the environmental authorities
and local people and the system was certified
for use in 2018.
One of the main ways that the Company has
reduced its impact on the environment is by
introducing advanced technology,
equipment, and materials, and increasing the
automation of process control. This controls
emissions of harmful substances into the
biosphere by stabilising and reducing the
volume and toxicity of emissions and the
discharge of pollutants and waste while
increasing production volumes. Information
technology and technical diagnostics are
used to maximise the positive effects of this
modern equipment.
The main objectives of the Group’s
Environmental Policies are to control
operations in accordance with the
requirements of this legislation and to raise
the level of awareness of all personnel
regarding the environmental aspects of the
main and auxiliary processes of gold mining.
The entire workforce is encouraged to
participate in industrial and environmental
safety, and resource-saving activities and
appropriate incentive measures are
implemented to reward compliance.
As well as elaborating an annual plan of
measures for environmental protection of
its own operations, the company require
contractors to apply the same standards
and norms in the field of industrial and
environmental safety, and occupational
health and safety adopted by Petropavlovsk.
The Group continues to implement strict
control and a gradual reduction in the use
and formation of hazardous chemicals in
basic and auxiliary processes and to find
ways to reduce the generation of waste.
Permitting
In 2018 the Group’s EHS compliance with
the requirements of GOST R ISO 14001-2016
(ISO 14001:2015) was certified following a
scheduled inspection. The Company’s
licences on handling hazardous waste were
re-issued. Also, as the technological process
at Pokrovskiy was changed due to the POX
Hub operations, new maximum permittable
emissions standards were drafted and
received the appropriate permits from the
authorities.
Environmental data from 2018
The state’s supervisory bodies found no
violations of the Environmental Law in 2018.
The results of environmental monitoring and
industrial control showed that there was no
soil contamination, air pollution, surface or
ground waters contamination.
The group has adopted a grading system for
environmental incidents, based on their real
potential impact. Category 1 incidents are
classified as temporary lapses in normal
environmental procedures, which once
identified, may be remedied with no
detrimental impact on the environment.
Environmental incidents
Category 1 - Minor
Category 2 - Moderate
Category 3 - Serious
Licence violations
Environmental fines, RUB
2018
53
0
0
0
0
2017
41
0
0
0
0
2016
102
0
0
0
0
Air Quality
Air quality at each mine is monitored for the maximum permissible levels of pollutant emissions which are agreed with federal authorities
(Rosprirodnadzor of Amur region).
The maximum permissible concentrations for all standardized components were not exceeded in 2018. The level of the monitored indicators is
comparable with the results of 2017 and vary in minimum values. Changes in the chemical composition of atmospheric air in impact areas were
not observed.
In 2018 in order to comply with the requirements of environmental legislation, due to changes in the technological process Pokrovskiy, the
documentation for maximum permissible air emissions was drafted and the permits were issued by the Environmental authorities of the
Amur region.
Petropavlovsk Annual Report 2018
81
Strategic reportFinancial statementsGovernance Sustainability continued
Water Management
Water consumption at the Group’s operations is carried out in strict accordance with the usage quotas detailed in the licence terms. The Group utilises
water from underground sources and surface water bodies for the purposes of domestic, drinking and industrial water supply. A zero-discharge and
a recycled water supply systems are in place within all Group companies which has led to a significant reduction in the consumption of clean natural
resources. The quality of surface and ground waters is monitored and the analysis of water samples is recorded in the state register. At the end of each
year, a report is prepared and submitted to all of the relevant state bodies.
Water used (total), m3
Water used for drinking and domestic purposes, m3
Raw water used (technical), m3
Recycled water, m3
Water discharged, m3
Recycled water
Recycled water
2018
21,217,595
661,000
4,551,241
16,008,24
0
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
2018
75.4%
2017
76.6%
2016
84.3%
Energy consumption
Petropavlovsk manages the use of energy at its facilities by using modern mining equipment including CAT 330C electric mining excavators.
Optimal control schemes enable rock mass management to prevent multiple movements of the same material. Blasting and crushing is monitored
to obtain optimum coarseness for the material sent to the processing plants. The use of grinding technologies and mills with a light rubber lining
also contribute to energy saving.
Consumption of primary energy sources
Energy Consumption
Electricity
Diesel
Kerosene
Gasoline
Coal
GJ
000 kW/h
l
l
l
t
2018
3,002,111
576,554
71,724,401
123,841
702,140
12,708
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
Energy consumption per 1t of ore, GJ*
Energy consumption per 1 t of ore, kWh
2018 (0.12)
2017 (0.18)
2016 (0.26)
2018 (24)
2017 (34)
2016 (45)
* Energy consumption for 2016 and 2017 doesn’t correspond with the last year report as in 2017 the figures reported were per 1000 t of ore.
82 Petropavlovsk Annual Report 2018
Waste Management
A Waste management programme is agreed with regulatory authorities before being implemented at all Group operations. The data on waste
forms part of the overall monitoring information which is supplied to local authorities annually for their review. All of the Group’s companies have the
license to handle hazardous wastes, draft standards for waste generation and put limits on their disposal. The Group has its own solid waste
landfills in place. All employees engaged in hazardous waste handling activities have completed special training and received state Certificates that
allow them to implement this type of activity.
In 2018, 7428.4 tons of waste was generated, which is 462.5 tons more than in 2017. Growth in the volume of waste generation is caused by the
launch of POX Hub.
Generated, t
Reused, t
Disposed
2018
7,428
2,279
4,907
2017
6,966
2,981
1,896
2016
6,586
2,727
1,599
Cyanide management
Petropavlovsk has a stringent approach to the
handling, managing and monitoring of
cyanide due to its hazardous potential.
All associated risks are identified: cyanide
levels in our tailings, air, soil, surface and
ground waters are monitored and strictly
controlled. All facilities where cyanide is used
in the process are in full compliance with
Russian legislations, and environmental
monitoring results are provided to the
authorities regularly. The Company
continuously reviews its approach to cyanide
management and implements the highest
safety levels at all its facilities.
Rehabilitation
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.
Case Study
Compensation measures to protect
biodiversity: Release of 80,000
hatchling into the Zeya River
The enterprises of the Group released more
than 80 thousand hatchlings into the waters
of the Zeya River. It is a compensation for
possible biological damage from the
Pokrovskiy and Albynskiy mines operations.
New river dwellers were brought from the Amur
fish farm in the Khabarovsk Region. They made
their long way in special containers that, during
transportation, enriched water with oxygen.
– Our enterprises strictly comply with the
requirements of environmental legislation.
This year the sum of expenses reached
three million rubles. Carp is considered the
species, ideal for filling ichthyofauna of
local water bodies. Fish feeds mainly on
bottom vegetation, and the autumn period
for the release of fry is considered the most
favourable, - says Deputy General Director
of Petropavlovsk Management Company
Jury Petrovich Marchenko.
The fish will take two-three years to grow,
and its weight will be on average 3-4
kilograms.
Petropavlovsk Annual Report 2018
83
Strategic reportFinancial statementsGovernance
Key Performance Indicators
Total Cash Costs◆ per Ounce of Gold for Hard Rock Mines
(US$/oz)
Relevance
The Group closely monitors its current and
projected costs to track and benchmark the
ongoing efficiency and effectiveness of its
operations. This monitoring includes
analysing fluctuations in the components
that constitute cash costs and cost per tonne
mined and processed to identify whether and
where efficiencies may be made.
Performance in 2018
Total Cash Costs◆ for hard rock mines
increased from US$741/oz in 2017 to
US$786/oz in 2018. The increase in TCC◆
primarily reflects the effect of inflation of
certain Rouble denominated costs,
higher volumes of stripping and suboptimal
organisation of mining works in the first
half of 2018. This effect was partially
mitigated by higher grades of ore processed
at Pioneer and Malomir and higher recoveries
achieved at Pioneer, Albyn and Malomir as
well as by the effect of Rouble depreciation.
Going Forward
The Group expects TCC◆ for 2019 to be in
the range of c.US$850-950/oz, based on the
exchange rate of RUB66 : US$1.
For further information on TCC◆ please refer
to the CFO Statement on pages 87 to 95 of
this report.
2018
2017
2016
786
741
660
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 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, introducing certain
amendments to the Russian Tax Code,
taxpayers who are participants in the
Regional Investment Projects (“RIP”) have
the right to apply a 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 the eligibility criteria
and continued applying 0% mining tax rate
in 2018.
Our key performance indicators
appear throughout this report
and introduce the operational
and sustainability sections and
the CFO statement respectively
(pages 35, 69 and 84).
84 Petropavlovsk Annual Report 2018
All-in Sustaining Costs◆
(US$/oz)
Average Realised Gold Sales Price◆
(US$/oz)
Net Debt◆
(US$m)
2018
2017
2016
1,117
2018
963
807
2017
2016
1,263
(568)
1,262
(585)
1,222
(599)
2018
2017
2016
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.
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.
Performance in 2018
Net Debt◆ reduced to US$568 million as at
31 December 2018 from US$585 million as
at 31 December 2017.
Going Forward
The Group’s Net Debt◆ is expected to reduce
with the ramp up of production and increase
in free cash flow.
For further information on Net Debt◆ please
refer to the CFO Statement on pages 87 to 95
of this report.
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.
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 2018
AISC◆ increased from US$963/oz in 2017
to US$1,117/oz in 2018. The increase in AISC◆
reflects the growth in TCC as well as higher
sustaining capital expenditures related to the
existing mining operations and impairment of
non-refractory ore stockpile at Albyn due to
suboptimal organization of mining works in
the first half of 2018.
Going Forward
The Group expects AISC◆ for 2019 to be in
line with changes in TCC.
For further information on AISC◆ please refer
to the CFO Statement on pages 87 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 2018
In 2018, the average realised gold price was
US$1,263/oz, in line with the 2017 figure of
US$1,262/oz and below the average LBMA
gold price afternoon fixing of US$1,269/oz.
The average realised gold price for 2018
includes a US$(9)/oz effect from hedge
arrangements (2017: US$2/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 200koz of gold at an
average price of US$1,252/oz were outstanding
as at 31 December 2018. Forward contracts
to sell an aggregate of 133koz of gold at an
average price of US$1,252/oz are outstanding
as at 24 April 2019.
For further details on the components
of Group revenue, cash flow and hedge
arrangements please refer to the CFO
Statement on pages 87 to 95 of this report
Petropavlovsk Annual Report 2018
85
Strategic reportFinancial statementsGovernance Key Performance Indicators continued
Underlying EBITDA◆
(US$m)
Profit For The Period
(US$m)
Basic Earnings Per Share
(US$)
2018
2017
2016
143
2018
26
2018
197
2017
200
2016
37
2017
32
2016
0.01
0.01
0.01
Definition
Profit / (loss) for the period is calculated
by deducting operating and net finance
expenses, taxation and any relevant share
of results of associates 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 2018 was 3,307,151,712
(31 December 2017: 3,303,768,532).
Performance in 2018
Basic profit per share for 2018 was US$0.01
(2017: basic profit per share was US$0.01).
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 185 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 2018
Profit for the period amounted to
US$25.9 million in 2018, compared to a profit
of US$37.1 million in 2017. While the
Underlying EBITDA decreased by
US$53.8 million and the Group recognised
US$12.2 million impairment of exploration
and evaluation assets and US$18.0 million
impairment of ore stockpiles, the Group’s
profit for the period was positively affected by
a US$81.6 million post-tax impairment
reversals.
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.
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
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 2018
In 2018, the Group generated Underlying
EBITDA◆ of US$143.0 million, compared
with US$196.8 million in 2017. The decrease
in physical ounces sold from c.439.8koz in
2017 to c.369.6koz in 2018 resulted in
US$36.6 million decrease in the Underlying
EBITDA◆. The increase in TCC◆ contributed to
a further US$16.4 million decrease in the
Underlying EBITDA◆. This effect was partially
mitigated by the increase in the average
realised gold price◆ from US$1,262/oz in 2017
to US$1,263/oz in 2018 and US$0.6 million
profits from the sale of gold concentrate in
2018.
Going Forward
The Group aims to continue to produce and
sell gold at competitive margins, which will,
amongst other factors, influence the Group’s
future Underlying EBITDA◆ levels.
For further information on Underlying
EBITDA◆ please refer to the CFO Statement
on pages 87 to 95 of this report.
86 Petropavlovsk Annual Report 2018
Chief Financial Officer’s Statement
For the year ended 31 December 2018
Note: Figures may not add up due to rounding
Financial Highlights
Gold produced
Gold sold
Group revenue
Average realised gold price◆
Average LBMA gold price afternoon fixing
Total Cash Costs◆ (a)
All-in Sustaining Costs◆ (b)
All-in Costs◆ (b)
Underlying EBITDA◆
Operating profit
Profit before tax
Profit for the period
Profit for the period attributable to equity shareholders of Petropavlovsk PLC
Basic profit per share
Net cash from operating activities
(a) Calculation of Total Cash Costs◆ (“TCC”) is set out in the section Hard rock mines below.
’000oz
’000oz
US$ million
US$/oz
US$/oz
US$/oz
US$/oz
US$/oz
US$ million
US$ million
US$ million
US$ million
US$ million
US$
US$ million
2018
422.3
369.6
499.8
1,263
1,269
786
1,117
1,332
143.0
126.6
82.4
25.9
24.5
0.01
217.2
2017
(restated) (c)
439.6
439.8
587.4
1,262
1,257
741
963
1,065
196.8
100.4
48.9
37.1
37.0
0.01
124.0
(b) All-in Sustaining Costs◆ (“AISC”) and All-in Costs◆ (“AIC”) are calculated in accordance with guidelines for reporting All-in Sustaining Costs◆ and All-in Costs◆ published by the World Gold Council.
Calculation is set out in the section All-in Sustaining Costs◆ and All-in Costs◆ below.
(c) See note 2 of the Consolidated Financial Statements for details regarding the restatement which resulted in the 2017 deferred tax expense decrease by US$7.3 million and the depreciation
expense increase by US$11.6 million.
Cash and cash equivalents
Notes (d)
Convertible bonds (e)
Loans (f)
Net Debt◆
(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.
(f) US$4 million principal under Sberbank facility at amortised cost.
Revenue
Revenue from hard rock mines
Revenue from other operations
31 December 2018
US$ million
26.2
(499.0)
(95.2)
–
(568.0)
31 December 2017
US$ million
11.4
(497.7)
(91.6)
(7.1)
(585.1)
2018
US$ million
470.7
29.1
499.8
2017
US$ million
556.2
31.2
587.4
◆ Go to “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
Petropavlovsk Annual Report 2018
87
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2018
Group revenue during the period was
US$499.8 million, 15% lower than the
US$587.4 million achieved in 2017.
Revenue from hard rock mines during the
period was US$470.7 million, 15% lower than
the US$556.2 million achieved in 2017. Gold
remains the key commodity produced and
sold by the Group, comprising 93% of total
revenue generated in 2018. The physical
volume of gold sold from hard rock mines
decreased by 16% from 439,834oz in
2017 to 369,611oz in 2018. The average
realised gold price◆ slightly increased from
US$1,262/oz in 2017 to US$1,263/oz in 2018.
The average realised gold price◆ includes a
US$(9)/oz effect from hedge arrangements
(2017: US$2/oz).
The Group recognised a further
US$3.2 million revenue from sales of
refractory ore concentrate produced at the
Malomir flotation plant (2017: nil).
Hard rock mines sold 54,746oz of silver in
2018 at an average price of US$15/oz,
compared to 65,503oz in 2017 at an average
price of US$17/oz.
Revenue generated as a result of third-party
work by the Group’s in-house service
companies was US$29.1 million in 2018,
a US$2.1 million decrease compared to
US$31.2 million in 2017. 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$25.1 million in 2018 compared
to US$29.0 million in 2017.
Cash flow hedge arrangements
In order to increase certainty in respect of a
significant proportion of its cash flows, the
Underlying EBITDA◆ and analysis of operating costs
Group has entered into a number of gold
forward contracts.
Forward contracts to sell an aggregate of
200,000oz of gold matured during 2018
and resulted in a US$(3.4) million net cash
settlement by the Group (2017: US$0.8 million
cash contribution to revenue from forward
contracts to sell an aggregate of 212,501oz
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 200Koz of gold at an
average price of US$1,252/oz were
outstanding as at 31 December 2018. Forward
contracts to sell an aggregate of 133Koz of
gold at an average price of US$1,252/oz are
outstanding as at 24 April 2019.
Profit for the period
Add/(less):
Investment income
Interest expense
Other finance gains
Other finance losses
Foreign exchange (gains)/losses
Accrual for additional mining tax (a)
Taxation
Depreciation
Impairment of exploration and evaluation assets
Impairment/(reversal of impairment) of ore stockpiles
Impairment of gold in circuit
Impairment of non–trading loans
Reversal of impairment of mining assets
Share of results of associates (c)
Underlying EBITDA◆
2018
US$ million
25.9
2017
(restated) (b)
US$ million
37.1
(3.8)
29.5
(13.9)
32.4
(8.5)
–
56.5
102.2
12.2
18.0
2.1
–
(101.7)
(8.1)
143.0
(0.8)
25.9
(2.2)
28.5
0.7
19.9
11.8
104.8
–
(4.7)
3.9
0.6
–
(28.7)
196.8
(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) See note 2 of the Consolidated Financial Statements for details regarding the restatement.
(c) Group’s share of interest expense, investment income, other finance gains and losses, foreign exchange gains/losses, taxation, depreciation and impairment/reversal of impairment recognised by an
associate (IRC).
◆ Go to “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
88 Petropavlovsk Annual Report 2018
Underlying EBITDA◆ as contributed by business segments is set out below.
Pioneer
Pokrovskiy
Malomir
Albyn
Total Hard rock mines
Corporate and other
Underlying EBITDA◆
2018
US$ million
63.1
(0.5)
37.7
76.6
177.0
(34.0)
143.0
2017
US$ million
75.5
0.8
22.1
130.7
229.1
(32.3)
196.8
Hard rock mines
During this period, the hard rock mines
generated Underlying EBITDA◆ of
US$177.0 million compared to
US$229.1 million Underlying EBITDA◆ in 2017.
Total Cash Costs◆ for hard rock mines
increased from US$741/oz in 2017 to
US$786/oz in 2018. The increase in TCC◆
primarily reflects the effect of inflation of certain
Rouble denominated costs, higher volumes of
stripping and suboptimal organisation of
mining works in the first half of 2018. This effect
was partially mitigated by higher grades of ore
processed at Pioneer and Malomir and higher
recoveries achieved at Pioneer, Albyn and
Malomir as well as by the effect of Rouble
depreciation. The decrease in physical ounces
sold from c.439,834oz in 2017 to c.369,611oz
in 2018 resulted in US$36.6 million decrease in
the Underlying EBITDA◆. The increase in TCC◆
contributed to a further US$16.4 million
decrease in the Underlying EBITDA◆.
This effect was partially mitigated by the
increase in the average realised gold price◆
from US$1,262/oz in 2017 to US$1,263/oz in
2018 and US$0.6 million profits from the sale
of gold concentrate in 2018.
The key components of the operating cash
expenses are wages, electricity, diesel,
chemical reagents and consumables, as set out
in the table below. The key cost drivers affecting
the operating cash expenses are stripping
ratios, production volumes of ore mined and
processed, grades of ore processed, recovery
rates, cost inflation and fluctuations in the
Rouble to US Dollar exchange rate.
Compared with 2017 there was ongoing
inflation of certain Rouble denominated costs,
in particular, electricity costs increased by 3%
in Rouble terms (decreased by 4% in US Dollar
terms) and the cost of diesel increased by 26%
in Rouble terms (increased by 17% in US Dollar
terms). The Rouble depreciated against the US
Dollar by 7% in 2018 compared to 2017, with
the average exchange rate for the period of
62.68 Roubles per US Dollar in 2018
compared to 58.32 Roubles per US Dollar in
2017, somewhat mitigating the effect of Rouble
denominated costs inflation.
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 in 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 continued applying
0% mining tax rate in 2018.
The Group initially applied a reduced rate of
mining tax from 1 July 2016 in its capacity of
a RIP participant. 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$19.9 million of mining tax for the six month
period to 31 December 2016, interest and
penalties, which amounts were recognised
as an expense in 2017.
Staff cost
Materials
Fuel
Electricity
Other external services
Other operating expenses
Movement in ore stockpiles, gold in circuit, bullion in process,
limestone and flotation concentrate attributable to gold production (a)
Total operating cash expenses
(a) Excluding deferred stripping
2018
2017
US$ million
67.3
93.2
45.5
26.5
46.8
23.4
302.7
(55.6)
247.1
%
22
31
15
9
15
8
100
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
◆ Go to “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
Petropavlovsk Annual Report 2018
89
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2018
Hard rock mines
Pioneer
US$ million
Pokrovskiy
US$ million
Malomir
US$ million
Albyn
US$ million
2018
Total
US$ million
2017
Total
US$ million
Revenue
Gold
Silver
Flotation concentrate
Expenses
Operating cash expenses
Refinery and transportation
Other taxes
Accrual of additional mining tax (a)
Deferred stripping costs
Depreciation
Reversal of impairment of mining assets
Impairment of exploration and evaluation assets
Impairment/(reversal of 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
Reversal of impairment of mining assets
Impairment of exploration and evaluation assets
Impairment/(reversal of impairment)/ of ore stockpiles
Impairment of gold in circuit
Segment EBITDA◆
171.0
0.6
–
171.6
105.3
0.2
2.0
–
0.9
37.0
–
–
–
1.4
146.9
24.8
–
37.0
–
–
–
1.4
63.1
8.2
0.0
–
8.2
8.6
0.0
0.1
–
–
0.7
–
–
–
–
9.4
(1.2)
–
0.7
–
–
–
–
(0.5)
98.3
0.1
3.2
101.6
51.2
0.1
2.0
–
10.6
22.7
(83.0)
12.2
0.3
0.5
16.7
84.9
–
22.7
(83.0)
12.2
0.3
0.5
37.7
189.1
0.2
–
189.3
82.1
0.2
2.1
–
28.2
41.4
–
–
17.7
0.2
172.0
17.3
–
41.4
–
–
17.7
0.2
76.6
466.7
0.8
3.2
470.7
247.1
0.6
6.2
–
39.8
101.8
(83.0)
12.2
18.0
2.1
344.9
125.8
–
101.8
(83.0)
12.2
18.0
2.1
177.0
555.1
1.1
–
556.2
294.2
0.8
5.9
19.9
26.2
104.6
–
–
(4.7)
3.9
450.7
105.5
19.9
104.6
–
–
(4.7)
3.9
229.1
Physical volume of gold sold, oz
Cash costs
Operating cash expenses
Refinery and transportation
Other taxes
Deferred stripping costs
Operating cash costs
Deduct: co-product revenue
Deduct: cost of flotation concentrate
Total Cash Costs◆
135,001
6,442
77,448
150,720
369,611
439,834
105.3
0.2
2.0
0.9
108.5
(0.6)
–
107.9
8.6
0.0
0.1
–
8.7
(0.0)
–
8.6
51.2
0.1
2.0
10.6
63.9
(0.1)
(2.6)
61.3
791
82.1
0.2
2.1
28.2
112.7
(0.2)
–
112.5
247.1
0.6
6.2
39.8
293.7
(0.8)
(2.6)
290.3
294.2
0.8
5.9
26.2
327.1
(1.1)
–
326.0
747
786
741
TCC◆, US$/oz
799
1,341
(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 “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
90 Petropavlovsk Annual Report 2018
All-in Sustaining Costs◆ and All-in Costs◆
AISC◆ increased from US$963/oz in 2017 to US$1,117/oz in 2018. The increase in AISC◆ reflects the growth in TCC as well as higher sustaining
capital expenditures related to the existing mining operations and impairment of non-refractory ore stockpile at Albyn due to suboptimal
organization of mining works in the first half of 2018.
AIC◆ increased from US$1,065/oz in 2017 to US$1,332/oz in 2018, primarily reflecting the increase in AISC◆ explained above and Capital
Expenditure◆ in relation to the POX and Malomir flotation plant projects.
Physical volume of gold sold, oz
Total Cash Costs◆
TCC◆, US$/oz
Impairment/(reversal of 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◆
All-in Sustaining Costs◆, US$/oz
Exploration expenditure◆
Capital Expenditure◆
Reversal of impairment of ore stockpiles (a)
All-in Costs◆
All-in Costs◆, US$/oz
(a) Refractory ore stockpiles to be processed at the POX Hub.
Corporate and other
Corporate and other operations contributed
US$(34.0) million to Underlying EBITDA◆ in
2018 compared to US$(32.3) million in 2017.
Corporate and other operations primarily
include central administration function, the
results of in-house service companies and
related charges, and the Group’s share of
results of its associate IRC.
The Group has corporate offices in London,
Moscow and Blagoveshchensk, which
together represent the central administration
function. Central administration expenses
decreased by US$0.7 million from
US$39.9 million in 2017 to US$39.2 million
in 2018.
The Group recognised US$15.5 million
profit in relation to its associate IRC, including
US$28.1 million effect from partial reversal of
Pioneer
US$ million
135,001
107.9
799
–
Hard rock mines
Pokrovskiy
US$ million
6,442
8.6
1,341
–
Malomir
US$ million
77,448
61.3
791
0.3
Albyn
US$ million
150,720
112.5
747
17.7
2018
Total
US$ million
369,611
290.3
786
18.0
2017
Total
US$ million
439,834
326.0
741
(2.5)
1.4
109.3
14.3
22.9
(0.9)
0.2
8.9
20.0
174.7
1,294
1.1
22.7
–
198.5
1,470
–
8.7
0.7
–
–
–
–
–
9.3
1,449
–
–
–
9.3
1,449
0.5
62.1
8.2
11.5
(10.6)
0.6
5.5
4.6
81.9
1,058
1.1
53.9
–
136.9
1,768
0.2
130.4
16.0
12.6
(28.2)
0.5
4.1
11.5
146.8
974
1.0
–
–
147.8
980
2.1
310.5
39.2
47.0
(39.8)
1.2
18.5
36.1
412.7
1,117
3.1
76.7
–
492.5
1,332
3.9
327.4
39.9
39.8
(26.2)
1.5
16.1
24.9
423.5
963
5.8
41.2
(2.2)
468.3
1,065
impairment at K&S mine and US$(5.7) million
impairment of investment in IRC (2017:
US$35.2 million share of profit generated
by IRC, including US$40.3 million effect from
partial reversal of impairment at K&S mine).
IRC contributed US$7.4 million to the
Group’s Underlying EBITDA◆ in 2018.
Impairment review
The Group undertook a review of impairment
indicators and impairment reversal indicators
of the tangible assets attributable to its gold
mining projects and supporting in-house
service companies. Detailed calculations of
recoverable amounts, which are value-in-use
calculations based on discounted cash flows,
were prepared which concluded no
impairment was required as at 31 December
2018 and 2017.
Having considered the excess of estimated
recoverable amounts over the carrying values
of the associated assets on the balance sheet
as at 31 December 2018 and taking into
consideration removed uncertainty connected
with the timing of the final construction and
performance of the POX Hub, the Directors
concluded on the following:
– A reversal of impairment previously
recorded against the carrying value of the
assets that are part of the Malomir CGU
would be appropriate. Accordingly, a
post-tax impairment reversal of
US$66.4 million (being US$83.0 million
gross impairment reversal net of associated
deferred tax liabilities) has been recorded
against the associated assets within
property, plant and equipment.
The aforementioned impairment reversal
takes into consideration the effect of
◆ Go to “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
Petropavlovsk Annual Report 2018
91
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2018
depreciation attributable to relevant mining
assets and intra-group transfers of
previously impaired assets to Malomir.
– A further reversal of impairment previously
recorded against the carrying value of the
assets of the supporting in-house service
companies would be appropriate to the
extent of the headroom available at
Malomir and Albyn CGUs and relevant
carrying values allocated to these CGUs.
Accordingly, a post-tax impairment reversal
of US$15.2 million (being US$18.7 million
gross impairment reversal net of associated
deferred tax liabilities) has been recorded
against the associated assets within property,
plant and equipment. The aforementioned
impairment reversal takes into consideration
the effect of depreciation attributable to
relevant assets and intra-group transfers of
previously impaired assets.
The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:
Long-term real gold price
Discount rate (a)
RUB : US$ exchange rate
(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 12.5% (2017: 11.6%)
2018
US$1,300/oz
8.5%
RUB67 : US$1
2017
US$1,300/oz
8.0%
RUB60 : US$1
Impairment of exploration and evaluation assets
The Group performed a review of its exploration and evaluation assets and concluded to suspend exploration at the Flanks of Malomir and
surrender relevant licenses. An aggregate impairment charge of US$12.2 million was recorded against associated exploration and
evaluation assets.
As at 31 December 2018, all exploration and evaluation assets on the balance sheet related to the areas adjacent to the existing mines with
ongoing drilling and technical studies being performed.
Interest income and expense
Investment income
2018
US$ million
3.8
2017
US$ million
0.8
The Group recognised US$2.7 million interest income on loans granted to IRC and US$1.1 million interest income on cash deposits with banks.
Interest expense
Interest capitalised
Other
2018
US$ million
62.8
(33.7)
0.4
29.5
2017
US$ million
60.2
(34.6)
0.3
25.9
Interest expense for the period comprised
US$41.9 million of effective interest on the
Notes, US$12.6 million of effective interest on
the Convertible Bonds, US$1.1 million of
effective interest on bank facilities and US$7.2
million of interest on prepayments on gold
sale agreements (2017: US$5.3 million of
effective interest on the Notes, US$12.2
million of effective interest on the Convertible
Bonds and US$42.7 million of effective
interest on bank facilities).
As the Group continued with active
construction of the POX Hub and flotation at
Malomir, these projects met eligibility criteria
for borrowing costs capitalisation under IAS
23 “Borrowing Costs”. US$33.7 million of
interest expense was capitalised within
property, plant and equipment (2017:
US$34.6 million interest capitalised in
relation to the POX Hub, Malomir flotation
and underground projects at Pioneer and
Malomir). With the POX Hub having now
achieved commercial production, interest
captialisation will cease, resulting in an
increased interest expense from
2019 onwards.
Other finance gains and losses
Net other finance losses for the period totalled
US$(18.4) million compared to US$(26.3)
million of net other finance losses in 2017.
Key elements of other finance losses this
period include:
– US$(25.5) million losses recognised in
relation to the ICBC guarantee contract
to reflect the expected credit losses
associated with the ICBC guarantee
arrangement;
– US$(3.7) million result of re-measurement of
receivable from IRC under ICBC guarantee
arrangements to fair value (net of US$4.0
million contractual guarantee fee charges);
– US$(2.4) million lifetime expected credit
losses recognised on origination of loans
granted to IRC and US$(0.8) million further
impairment charges in relation to those
loans;
– US$11.7 million gain from re-measurement
of the conversion option of the Convertible
Bonds to fair value and US$1.9 million gain
from re-measurement of the issued the
Call Option over the Company’s shares
to fair value.
92 Petropavlovsk Annual Report 2018
Taxation
Tax charge
2018
US$ million
56.5
2017
(restated)
US$ million
11.8
The Group is subject to corporation tax under
the UK, Russia and Cyprus tax legislation.
The statutory tax rate for 2018 was 19.0% in
the UK and 20% in Russia. Under the Russian
Federal Law 144-FZ dated 23 May 2016
taxpayers who are participants in Regional
Investment Projects (“RIP”) have the right to
apply the reduced corporation tax rate over
the period until 2027, subject to eligibility
criteria. In 2018 and 2017, LLC Albynskiy
Rudnik has received tax relief as a RIP
participant and was entitled to the reduced
statutory corporation tax rate of 17%.
The tax charge for the period arises primarily
related to the Group’s gold mining operations
and is represented by a current tax charge of
US$19.9 million (2017: US$24.4 million) and a
deferred tax charge, which is a non-cash item,
of US$36.6 million (2017: deferred tax credit of
US$12.6 million). Included in the deferred tax
charge in 2018 is a US$30.6 million charge
(2017: US$8.6 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 which were
partially offset by refunds of excessive
advance payments made in prior periods and
giving a net of US$5.0 million in Russia (2017:
corporation tax payments in aggregate of
US$31.1 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
2018
2017
(restated)
US$24.5 million US$37.0 million
3,303,768,532
3,305,069,755
US$0.01
US$0.01
Basic profit per share for 2018 was US$0.01 (2017: basic profit per share was US$0.01). The total number of Ordinary Shares in issue as at
31 December 2018 was 3,307,151,712 (31 December 2017: 3,303,768,532).
Financial position and cash flows
Cash and cash equivalents
Notes (a)
Convertible bonds (b)
Bank loans (c)
Net Debt◆
(a) US$500 million Guaranteed Notes due on 14 November 2022 at amortised cost.
(b) US$100 million convertible bonds due on 18 March 2020 at amortised cost.
(c) US$4 million principal under Sberbank facility at amortised cost.
Net cash from operating activities
Net cash used in investing activities (d)
Net cash used in financing activities
(d) Including US$134.4 million Capital Expenditure◆ (2017: US$88.1 million) and US$56.75 million loans advanced to IRC (2017: US$nil).
◆ Go to “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
31 December 2018
US$ million
26.2
(499.0)
(95.2)
–
(568.0)
31 December 2017
US$ million
11.4
(497.7)
(91.6)
(7.1)
(585.1)
2018
US$ million
217.2
(186.5)
(13.0)
2017
US$ million
124.0
(87.0)
(38.6)
Petropavlovsk Annual Report 2018
93
Strategic reportFinancial statementsGovernance Chief Financial Officer’s Statement continued
For the year ended 31 December 2018
Key movements in cash and Net Debt◆
As at 1 January 2018
Net cash generated by operating activities before working capital changes
Increase in working capital (e)
Income tax paid
Capital Expenditure◆
Amounts repaid under bank loans
Interest accrued
Interest paid
Transaction costs in connection with bank loans
Transaction costs in connection with notes
Loans granted (g)
Interest received
Other
As at 31 December 2018
Cash
US$ million
11.4
122.6
160.3
(5.0)
(134.4)
(4.0)
–
(60.6) (f)
(6.4)
(2.6)
(57.0)
3.7
(1.8)
26.2
Debt
US$ million
(596.5)
–
–
–
–
4.0
(55.5)
53.8
–
–
–
–
–
(594.2)
Net Debt◆
US$ million
(585.1)
(568.0)
(e) Including an aggregate of US$163.8 million advance payments received from Gazprombank and Sberbank outstanding as at 31 December 2018. Advance payments are to be settled against physical
delivery of gold produced by the Group in regular intervals over the period of up to twenty-four months from the reporting date based on the sales price prevailing at delivery that is determined with reference
to LBMA fixing.
(f) Including US$6.7 million interest paid in relation to advance payments from Gazprombank and Sberbank.
(g) Including loans to IRC in the equivalent of US$56.75 million.
Capital Expenditure◆
The Group invested an aggregate of
US$134.4 million in 2018 compared to
US$88.1 million in 2017. The key areas of
focus in 2018 were on the POX Hub project,
for which active development continued
ahead of scheduled commissioning in the
end of 2018, exploration and development to
support the underground mining at Pioneer
and Malomir, expansion of tailings dams at
Pioneer and Albyn and ongoing exploration
related to the areas adjacent to the ore bodies
of the Group’s main mining operations.
The Group capitalised US$33.7 million of
interest expense incurred in relation to the
Group’s debt into the cost of the POX Hub
and Malomir flotation (2017: US$34.6 million
into the cost of the POX Hub, Malomir flotation
and underground development at Pioneer
and Malomir).
POX (a)
Pokrovskiy and Pioneer (b)
Malomir (c), (d)
Albyn
Other
Upgrade of in-house service companies
Exploration
expenditure
US$ million
–
10.0
5.5
5.0
1.1
–
21.6
Development
expenditure and
other CAPEX◆
US$ million
61.5
19.1
19.3
10.5
–
2.4
112.8
Total CAPEX◆
US$ million
61.5
29.1
24.8
15.5
1.1
2.4
134.4
(a) Including US$61.5 million of development expenditure in relation to the POX Hub which is considered to be non-sustaining Capital Expenditure◆ for the purposes of calculating AISC◆ and AIC◆.
(b) Including US$8.1 million of expenditure in relation to the underground mining project at Pioneer to be sustaining Capital Expenditure◆ for the purposes of calculating AISC◆ and AIC◆.
(c) Including US$6.1 million of expenditure in relation to the underground mining project at Malomir to be sustaining Capital Expenditure◆ for the purposes of calculating AISC◆ and AIC◆.
(d) Including US$15.2 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 AISC◆ and AIC◆.
◆ Go to “The Use and Application of Alternative Performance Measures (APMs)” section for further information on our APMs.
94 Petropavlovsk Annual Report 2018
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.
31 December 2018
0.78
69.47
31 December 2017
0.74
57.60
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 2018 Annual Report and Accounts.
Accordingly, they continue to adopt the going
concern basis of accounting in preparing
consolidated financial statements.
2019 Outlook
The Group is currently aiming to achieve 2018
production guidance in the range of 450
– 500 koz. The Group’s operating cash
expenses are substantially Rouble
denominated. The Group expects its TCC◆ in
2019 to be in the range of c.US$850-950/oz
at current exchange rates.
Alexey Dubynin
Chief Financial Officer
24 April 2019
The Strategic Report was approved by the
Board on 24 April 2019 and signed on its
behalf by:
Sir Roderic Lyne
Non-Executive Chairman
projected, and Russian Rouble : US Dollar
exchange rate that is approximately 8-9%
stronger than the average of the market
consensus forecasts. This layered stressed
case indicates that mitigating actions will be
required to be taken in order to ensure
sufficient liquidity for the relevant period to
May 2020. This includes sufficient liquidity for
the repayment, if necessary, of the Company’s
US$100 million 9% Convertible Bonds, due in
March 2020. The mitigating actions include
items within the control of the management,
such as cost cutting, reduction of capital
and operating expenditure, the deferral of
prepayment settlements as well as working
capital management.
As at 31 December 2018, the Group has
guaranteed the outstanding amounts IRC
owed to ICBC. The outstanding loan principal
was US$169 million as at 31 December 2018.
On 19 March 2019, the ICBC Facility was fully
refinanced by the loans from Gazprombank.
The Group has provided a guarantee in
respect of IRC’s new $240 million facility, of
which approximately $233 million has been
drawn down to date. The Gazprombank
Facility is subject to an initial $160 million
guaranteed by the Group. The assessment
of whether there is any material uncertainty
that IRC will be able to repay this facility as it
falls due is another key element of the Group’s
overall going concern assessment.
IRC projections demonstrate that IRC expects
to have sufficient working capital liquidity over
the next 12 months and expects to meet its
obligations under the Gazprombank Facility.
If a missed repayment under debt or guarantee
obligations occurs, this would result in events
of default which, through cross-defaults and
cross-accelerations, could cause all other
Group’s debt arrangements to become
repayable on demand.
GB Pounds Sterling (GBP : US$)
Russian Rouble (RUB : US$)
The Rouble depreciated by 21% against the US
Dollar during 2018, from RUB57.60 : US$1 as at
31 December 2017 to RUB69.47 : US$1 as at
31 December 2018. The average year-on-year
depreciation of the Rouble against the US Dollar
was approximately 7%, with the average
exchange rate for 2018 being RUB62.68 : US$1
compared to RUB58.32 : US$1 for 2017.
The Group recognised foreign exchange gains
of US$8.5 million in 2018 (2017: losses of
US$0.7 million) arising primarily on Rouble
denominated net monetary assets.
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 the 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,
advances received from customers under
prepayment arrangements 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 2018 Annual
Report and Accounts. As at 31 December
2018, the Group had sufficient liquidity
headroom. The Group is also satisfied that it
has sufficient headroom under a base case
scenario for the period to May 2020.
The Group has also performed projections
under a layered stressed case that is based
on a gold price, which is approximately 10%
to 14% lower than the average of the market
consensus forecasts, non-refractory gold
production approximately 5% lower than
Petropavlovsk Annual Report 2018
95
Strategic reportFinancial statementsGovernance
Governance
Governance
96 Petropavlovsk Annual Report 2018
Introduction from the Chairman
Building on a firm foundation
Dear Shareholder
On behalf of the Board I am introducing
Petropavlovsk PLC’s annual Corporate
Governance Report for the financial year
ended 31 December 2018.
Board changes and our commitment
to our shareholders
At the Company’s last Annual General
Meeting on 29 June 2018 shareholders voted
to change the composition of the Board of
Directors. As a result, I became Chairman;
Dr Pavel Maslovskiy returned as a Director
and Chief Executive Officer; and Mr Robert
Jenkins returned as an Independent
Non-Executive Director and became
Chairman of the Audit Committee. I had
previously served on the Board up to 2016;
Dr Maslovskiy and Mr Jenkins up to 2017.
Upon our election, the three Directors
committed ourselves to restore stability
and momentum to Petropavlovsk. We told
shareholders that our immediate focus would
be on three critical tasks:
(i) Taking the Pressure Oxidation (“POX”)
project towards commissioning and
production;
(ii) Working towards a resolution of the IRC
loan guarantee; and
(iii) Rebuilding the Board and the senior
management team.
We have achieved all three of these
objectives. The Pressure Oxidation process
produced its first doré bar in December and
two autoclaves have been commissioned.
An agreement to restructure the IRC loan
guarantee was approved by shareholders
in March 2019. Further details on POX and
IRC are contained in the Strategic Report.
The Board has been reconstituted.
As Chairman, I have sought to rebuild and
strengthen the Board; to ensure that it is
fully compliant through the appointment
of additional independent non-executive
Directors; and to commit Petropavlovsk to the
highest standards of corporate governance.
I am pleased to report that, following an
extensive search, we have appointed three
additional Independent Directors whose
varied experience and diverse skills are
making a vital contribution to our work.
Messrs James W Cameron Jr and Damien
Hackett were appointed as Independent
Non-Executive Directors of the Company on
15 October 2018. Mr Harry Kenyon-Slaney
was subsequently appointed as an
independent Non-Executive Director of the
Company on 7 November 2018. More detail
on the appointment process, led by the
Nominations Committee with the assistance
of an experienced external search firm, can
be found on page 110.
In addition to the Independent Directors,
Mr Bektas Mukazhanov returned to the Board
on 27 July 2018 as the nominee of our major
shareholder, Fincraft Holdings Ltd (“Fincraft”).
The Company has entered into a Relationship
Agreement with Fincraft and Mr Kenges
Rakishev, the beneficial owner of Fincraft.
Although this is not a mandatory requirement
the Board considered that it was appropriate
to have a formal agreement in place which
governs the rights of Fincraft and Mr Rakishev
in respect of the Company whilst ensuring the
Board’s independence.
Following the above appointments, the
reconstituted Board has an Independent
Non-Executive Chairman, four Independent
Non-Executive Directors, one Executive
Director and one nominee Director. I am
also pleased to announce the appointment
of Mr Harry Kenyon-Slaney as the Senior
Independent Director with effect from
23 April 2019.
Dr Pavel Maslovskiy’s return as CEO has
reinvigorated the senior executive team and
restored authoritative leadership throughout
the Group. It has led to a significant
improvement in operational performance
during the second half of 2018 and to the
successful commissioning of POX.
Membership of the Executive Committee
which manages the Group on a day-to-day
basis, chaired by Dr Maslovskiy, is detailed
pages 100 to 101.
Workforce Engagement
A new Safety, Sustainability and Workforce
Committee (SS&W Committee) was formed in
November 2018, chaired by Harry Kenyon-
Slaney, who in this capacity introduces the
Sustainability Report on page 72. This new
Committee reflects the Board’s commitment
to ensuring the health and safety of our
employees, sustainability of the environment
and engagement with our workforce and
local community. The Board visited the
Group’s operations in early April 2019 during
which Harry and his colleagues on the
Committee engaged with members of our
workforce to understand their views. It is the
intention that Harry and/or other members
of the SS&W Committee will meet with
representatives of our employees, at least
annually. Further details of the Board’s
engagement with its workforce will be
included in next year’s Annual Report.
This complies with the requirement on
workforce engagement detailed in the UK
Corporate Governance Code published in
July 2018, which the Board fully endorses.
Annual General Meeting
I would like to encourage shareholders to
attend our 2019 Annual General Meeting,
details of which are set out in the separate
Notice of AGM sent out with this Annual
Report. This is an opportunity, for our small
shareholders in particular, to meet our
Directors and we welcome their attendance.
The year ahead
The period since the last AGM has been one
of intensive and encouraging activity for the
Board and the Company. It now stands on a
much firmer foundation, and the long-awaited
implementation of the Pressure Oxidation
process has opened new horizons for
Petropavlovsk. In the years ahead, we shall
seek further to develop the Group and to build
on recent success for the benefit of all of our
shareholders.
Sir Roderic Lyne
Non-Executive Chairman
24 April 2019
Petropavlovsk Annual Report 2018
97
GovernanceFinancial statementsStrategic report
Board of Directors
Chairman
CEO
Independent Non-Executive Directors
The Rt. Hon. Sir Roderic Lyne
Non-Executive
Chairman (N*)
Dr Pavel Maslovskiy
Chief Executive
Officer (N) (S) (E*)
Mr James W Cameron Jr
Independent Non-Executive
Director (A) (R)
Mr Damien Hackett
Independent Non-Executive
Director (N) (A) (R) (S)
Mr James Cameron Jr. was
appointed as an Independent
Non-Executive Director of
Petropavlovsk PLC on
15 October 2018.
Experience
Mr Cameron, a US qualified lawyer,
has extensive international
experience, providing expertise
and consulting services for
companies particularly in the
natural resources sector within
Russia and the former Soviet
Union, since 1988. He was
formerly Founder, CEO and
Chairman of Occupational Urgent
Care Systems Inc., a company
traded on the NASDAQ National
Market System until it was sold
in 1992.
External Appointments
CEO and Chairman,
Cameron & Associates
Dr Pavel Maslovskiy cofounded the
Company in 1994 together with
former Chairman Peter Hambro.
He held directorships within the
Group – including the position of
Chief Executive Officer, from the
Group’s inception in 1994 until
December 2011, when he
relinquished all remunerated
positions following his appointment
as a Senator-Member of the
Federation Council (Upper House
of the Russian Parliament)
Dr Maslovskiy retired as a
Senator-Member in October 2014
and was re-appointed as Chief
Executive Officer in November
2014, having acted as Honorary
President from December 2011.
He resigned from the Board and
from the position of CEO in July
2017, and was reappointed
following the Company’s AGM on
29 June 2018.
Experience
Prior to embarking on his business
career, Dr Maslovskiy was an
Associate Professor of Metallurgy
at the Moscow Aircraft Technology
Institute.
External Appointments
None.
Mr Damien Hackett was appointed
as an Independent Non-Executive
Director of Petropavlovsk PLC on
15 October 2018.
Experience
Mr Hackett has 26 years critical
investment research experience
covering globally diverse mining
companies, initially as Global Head
of Mining Research with Credit
Suisse – First Boston in Australia,
following which he held similar
roles with Credit Suisse and
Canaccord Genuity in London.
Latterly he was Vice Chairman
Mining Advisory at Canaccord
Genuity responsible for developing
investment themes in metals and
mining across North America,
Europe, Russia and Australia.
Mr Hackett’s early career in
resources was grounded in 4 years
of exploration, resource
development and mining in
Western Australia followed by 7
years in mineral exploration and
economic assessment in Saudi
Arabia. Mr Hackett holds a
Bachelor of Science from the
Australian National University in
Canberra.
External Appointments
Mr Hackett is Chairman of
UrAmerica Ltd, a private uranium
exploration company in Argentina.
Sir Roderic Lyne was appointed as
Non-Executive Chairman on 29
June 2018.
Experience
Sir Roderic Lyne was first
appointed to the Board in April
2009 upon the Company’s merger
with Aricom PLC, and was
appointed as the Senior
Independent Director in November
2015. He was also Chairman of the
Company’s Remuneration and
HSE Committees. Sir Roderic
continued to act in such a capacity
until June 2016, when he retired as
a Director. He was subsequently
appointed as Chairman of
Petropavlovsk following the
Company’s AGM on 29 June 2018.
Sir Roderic was previously a
Non-Executive Director of Aricom
PLC, a position he held from
October 2006 until April 2009, and
a Director of the Russo-British
Chamber of Commerce from April
2006 to July 2009. He served as
British Ambassador to Russia from
January 2000 until August 2004,
and speaks Russian.
He is a former Non-Executive
Director of Accor, Senior Adviser
successively to HSBC, BP and JP
Morgan, Deputy Chairman of the
Council of the Royal Institute of
International Affairs (Chatham
House), and Chairman of the
Governors of Kingston University.
He was a member of the
Committee of the Iraq Inquiry and
was appointed to the Privy Council
in 2009.
External Appointments
Sir Roderic is a Non-Executive
Director of JP Morgan Bank
International.
98 Petropavlovsk Annual Report 2018
Non-Executive
Director
Mr Robert Jenkins
Independent Non-Executive
Director (A*) (R*) (N)
Mr Harry Kenyon-Slaney
Senior Independent
Director (S*) (A) (N)
Mr Bektas Mukazhanov
Non-Executive
Director (S)
Mr Bektas Mukazhanov was first
appointed to the Board of
Petropavlovsk PLC, as a Non-
Executive Director, in February 2018
and served until June 2018, before
being reappointed by the current
Board in July 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 Investment
Advisor at Fincraft Holdings Ltd,
the largest shareholder of
Petropavlovsk.
Mr Robert Jenkins was originally
appointed as an Independent
Non-Executive Director in April 2015
and as a Senior Non-Executive
Director in June 2016, a position he
held until June 2017. Mr Jenkins was
Chairman of the Audit Committee
and was a member of the
Nominations Committee. He was
reappointed to the Board as an
Independent Non-Executive Director
following the Company’s AGM on
29 June 2018.
Experience
Mr Jenkins is a Chartered
Accountant, has an MA in Modern
History and Modern Languages
from Oxford University, and is a
fluent Russian speaker. He has 25
years of Russia-related investment
and natural resources experience.
Mr Jenkins was formerly Finance
Director of AIM listed Eurasia
Mining PLC, a Russia-focused
mining exploration company, and
Chief Financial Officer of Urals
Energy, a Russia-based oil
exploration and production
company. He was formerly Senior
Independent Director and Audit
Committee Chairman of Ruspetro
Plc, a Russia-focused independent
oil and gas production company,
and Audit Committee Chairman of
Toledo Mining Corporation PLC,
which is engaged in nickel ore
production in the Philippines.
External Appointments
Mr Jenkins is also currently a
Non-Executive Director of Brazilian
Nickel PLC and of Oppenheimer
Resources, a Luxembourg-
registered investment vehicle
engaged in financing oil and gas
producers in the US.
Mr Harry Kenyon-Slaney was
appointed as an Independent
Non-Executive Director of
Petropavlovsk PLC on 7 November
2018 and as Senior Independent
Director on 23 April 2019.
Experience
Mr Kenyon-Slaney has over 33
years of experience in the mining
industry, principally with Rio Tinto.
He is a geologist by training and his
experience spans operations,
marketing, projects, finance and
business development. Until 2015,
Mr Kenyon-Slaney was a member
of the Group Executive committee
of Rio Tinto where he held the roles
of CEO of Energy, and before that
CEO of Diamonds and Minerals.
Prior to this he led Rio Tinto’s global
titanium dioxide business, was
CEO of Rio Tinto’s listed subsidiary,
Energy Resources of Australia Ltd,
was GM Operations at Palabora
Mining Company in South Africa
and held senior marketing roles in
copper, uranium and industrial
minerals.
He began his career as an
underground geologist with Anglo
American on the gold mines in
South Africa. Mr Kenyon-Slaney
has a BSc Geology from
Southampton University.
External Appointments
Mr Kenyon-Slaney, is currently
Non-Executive Chairman of Gem
Diamonds Limited, Non-Executive
Director of Sibanye Gold Limited
(trading as Sibanye-Stillwater) and
a senior advisor to McKinsey & Co.
Mr Kenyon-Slaney is a member of
the advisory board of directors of
Schenck Process AG.
N = Member of the Nominations Committee
A = Member of the Audit Committee
R = Member of the Remuneration Committee
S = Member of the Safety, Sustainability and
Workforce Committee
E = Executive Committee
*= Chairman of the Committee
Petropavlovsk Annual Report 2018
99
GovernanceFinancial statementsStrategic report Executive Committee
The Company’s Executive Committee was
reconstituted on 1 January 2019, and comprises
a focussed and experienced senior executive team
who manage the Group on a day-to-day basis.
Terms of Reference of the Executive Committee
are available on the Company’s website at
www.petropavlovsk.net.
Dr Pavel Maslovskiy, Chief Executive Officer,
whose biographical details are provided on
page 98 is Chairman of the Executive Committee.
Biographical details of the other members of the
Executive Committee are as follows:
100 Petropavlovsk Annual Report 2018
Dr Alya Samokhvalova
Deputy CEO
Mr Alexey Dubynin
Chief Financial Officer
Mr Alexey Dubynin was
appointed as Chief Financial
Officer in July 2018.
Mr Dubynin has been employed
with the Company since 2012,
initially as Group Head of Internal
Audit, being appointed as Group
Financial Controller in April 2013
prior to his promotion as Chief
Financial Officer.
Prior to his employment with
Petropavlovsk, Mr Dubynin was
employed by a number of large
Russian companies within the
mining and metallurgical sectors,
in senior financial, audit and
risk roles.
Mr Dubynin is a fellow member
of the Association of Chartered
Certified Accountants.
Dr Alfiya (Alya) Samokhvalova is
Deputy Chief Executive Officer
and a Member of the Safety,
Sustainability and Workforce
Committee of the Board of
Directors. In addition,
Dr Samokhvalova is Head of the
Company’s Corporate Office.
Dr Samokhvalova joined the
Company in 2002.
Dr Samokhvalova is also a
Non-Executive Director of the
Russo-British Chamber of
Commerce and a member
of the Global Advisory Board
of Cass Business School.
Dr Samokhvalova holds a
Masters in Investment
Management from Cass
Business School, London,
and a PhD in Economics from
the Moscow International High
Business School, a BSc in
Accounting and Audit (All Russia
Distant Economic and Finance
Institute, Moscow) and a BSc
in Pharmacy (Alma-Ata State
Medical University). She also
holds a Professional Accountant
Certificate from the Institute
of Professional Accountants
of Russia.
Mr Sergey Ermolenko
General Director MC
Petropavlovsk
Mr Sergey Ermolenko is the
General Director of Management
Company Petropavlovsk. Mr
Ermolenko served as a Director
and as Interim Chief Executive
Officer of Petropavlovsk PLC
from 18 July 2017 until 16 April
2018. He previously served in
this role from December 2011 to
November 2014 when Dr Pavel
Maslovskiy was serving as a
Russian senator.
Mr Ermolenko is one of the
original members of the Group’s
founding management team. He
has held top managerial
positions with the Group since its
inception in 1994 and has been
instrumental in the expansion of
the Group into a multimine
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 Nikolai Vlasov
Group Chief Geologist
Mr Mikhail Safray
Senior Legal Adviser
Mr Nikolai Vlasov has many years
of experience in gold exploration
and mining within the Amur region.
Mr Vlasov was one of the original
members of the Company’s
founding management. Prior to
this he was the chief geologist
of the only comprehensive
geological exploration expedition
in the Amur Region. Mr Vlasov
also headed the government
department for the evaluation
of gold resources in the Russian
Far East.
In his role of Group Chief
Geologist, Mr Vlasov leads the
Group’s exploration work.
Mr Vlasov has received various
state awards including for
excellence in exploration of
mineral resources, Honored
Prospector of mineral resources
and Honored Geologist of the
Russian Federation.
Mr Mikhail Safray joined the
Petropavlovsk Group in August
2018 and was appointed as
Senior Legal Adviser in
November 2018.
Prior to joining the Company,
Mr Safray held a number of
senior legal positions with large
Russian and international
companies, including his tenure
at Alfa Group, Immofinanz AG
and Interros. He also acted as
legal counsel for the European
Bank for Reconstruction and
Development in London where
he was responsible for
investments in industrial
companies in the CIS countries
and the Balkans.
Mr Safray graduated from the
National Research University
Higher School of Economics,
summa cum laude, and received
a PhD degree from the Kutafin
Moscow State Law University
and LL.M from the Boston
University.
Petropavlovsk Annual Report 2018 101
GovernanceFinancial statementsStrategic report
Governance 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.
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 112 to
120), the Directors’ Remuneration Report
(on pages 121 to 138) and the Nominations
Committee Report (on pages 110 to 111) sets
out how the Company has applied the main
principles of the Code during 2018.
Statement of Code Compliance
The Company has complied with the
requirements of the Code published in April
2016 (the ‘2016 Code’) throughout the year
ended 31 December 2018, with the following
exceptions.
102 Petropavlovsk Annual Report 2018
Board composition, Code Provision B.1.2
At the Annual General Meeting of the
Company held on 29 June 2018 (the ‘2018
AGM’), shareholders:
– Approved the appointment of Sir Roderic
Lyne, Dr Pavel Maslovskiy and Mr Robert
Jenkins as Directors. Their appointment
was proposed by two of the Company’s
major shareholders, together representing
9.1% of the Company’s voting rights; and
– Voted not to reappoint any of the then
incumbent Directors (Mr Ian Ashby,
Chairman, Messrs Bruce Buck, Adrian
Coates and Garrett Soden, Independent
Non-Executive Directors and Mr Roman
Deniskin, Chief Executive Officer).
Following the 2018 AGM, the Board
appointed Sir Roderic Lyne as Chairman
and Dr Pavel Maslovskiy as Chief Executive
Officer. The Board also initiated immediate
action to appoint additional Independent
Non-Executive Directors. Mr Bektas
Mukazhanov, who had ceased to be a
Director of the Company on 8 June 2018,
was re-appointed as a Non-Independent
Non-Executive Director of the Company on
27 July 2018. Mr Mukazhanov was proposed
as a Director by Fincraft Holdings Ltd, the
Company’s largest shareholder.
Due to these exceptional circumstances,
from 29 June 2018 until 15 October 2018,
when Messrs James W Cameron Jr and
Damien Hackett were appointed as
Independent Non-Executive Directors,
the composition of the Board did not comply
with the 2016 Code in respect of the number
of Independent Non-Executive Directors
required for a smaller listed company.
Following the appointment of Mr Harry
Kenyon-Slaney as an additional Independent
Non-Executive Director on 7 November 2018
the Board comprises:
– The Non-Executive Chairman;
– The Chief Executive;
Current status: The composition of the Board,
with a majority of Independent Non-Executive
Directors, complies with the 2016 Code and
the UK Corporate Governance Code
published in July 2018 (the ‘2018 Code’).
Details of:
– The process undertaken by the Company
for the appointments of Messrs Cameron,
Hackett, Kenyon-Slaney and Mukazhanov
are provided in the Nominations Committee
Report on page 110; and
– All changes to the Board during 2018 and
up until the date of this Report are detailed
in the Directors’ Report on page 139 of this
Annual Report.
Committee compliance, Code
Provisions B.2.1, C.3.1 and D.2.1:
During the period from 29 June 2018 to
12 November 2018:
– The Audit and Remuneration Committees
comprised Mr Robert Jenkins, Independent
Non-Executive Director as Chairman and
Sir Roderic Lyne; and
– The Nominations Committee was chaired
by Sir Roderic Lyne assisted by Mr Robert
Jenkins and Dr Pavel Maslovskiy, Chief
Executive Officer as members of the
Committee.
During this period none of the Audit,
Remuneration or Nominations Committees
complied with the requirements of the Code
relating to membership. This was again due to
the need to process the recruitment of new
Independent Non-Executive Directors, as
only three Directors had been appointed at
the AGM.
On 12 November 2018, following the
appointment of three new Independent
Non-Executive Directors (as detailed above),
the Board approved a new Committee
membership (detailed in Table C on
page 106).
– Four Independent Non-Executive Directors;
and
– One Non-Executive Director.
Current status: The composition of the Audit,
Remuneration and Nominations Committees
is now fully compliant with the 2016 and 2018
Codes.
In addition, the Board has established a
Safety, Sustainability and Workforce
Committee, details of which are provided on
page 97 of this Annual Report.
Independence of Directors Provision
B.1.1
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.
Sir Roderic Lyne and Mr Robert Jenkins were
proposed as Directors of the Company by
CABS Platform Limited (‘CABS’) and Slevin
Limited (‘Slevin’), major shareholders of the
Company together having an interest in 9.1%
of the Company’s voting rights over its
ordinary shares. Upon his appointment Sir
Roderic Lyne was elected by the Board as
Chairman of the Company.
Neither Sir Roderic Lyne nor Mr Jenkins have
any relationship with CABS, Slevin or any
other major shareholder of the Company
except in their capacity as a Director of the
Company. When informed of the proposal by
CABS and Slevin that they should be
appointed as Directors, they made clear that
they would not be nominees of any group of
shareholders and would accept appointment
only as Independent Directors, responsible
to, and acting in the interests of all
shareholders equally.
Sir Roderic Lyne previously served as a
Director of Aricom Limited, from 2 October
2006 until 22 April 2009 and as a Director of
Petropavlovsk PLC from 22 April 2009 until
he retired from the Board on 28 June 2016.
The Board considers that, given Sir Roderic
has no connection with any major shareholder,
and that he had retired as a Director two years
prior to his appointment as Chairman, having
had no involvement with the Company or its
operations during this time, (except in his
capacity as a small shareholder up to
mid-2017), he was independent upon
his appointment as Chairman.
Mr Robert Jenkins was previously a Director of
the Company for the period from 30 April 2015
to 22 June 2017. Given that Mr Jenkins has no
connection with any major shareholder and
that he was previously a Director of the
Company for a period of only just over 2 years,
he is considered by the Company, and by the
terms of the Code, as being an Independent
Director.
Senior Independent Director,
Code Provision A.4.1
Following the 2018 AGM the Directors agreed
that until the Board was fully constituted it
was not appropriate to appoint a Senior
Independent Director (‘SID’). The Board is
now fully compliant with the Code in terms
of membership, with four Independent
Non-Executive Directors. Following review
and recommendation of the Nominations
Committee, the Board has approved the
appointment of Mr Harry Kenyon-Slaney as
Senior Independent Director with effect from
23 April 2019.
Board evaluation, Code Provision B.6
The fully constituted new Board met for the
first time on 4 December 2018. The first annual
evaluation of the Board’s performance and of
its Committees will therefore be undertaken in
the autumn of 2019. Accordingly, the Company
did not comply with Provision B.6 of the Code
which requires that a board undertakes an
annual evaluation of its performance and of its
Committees on an annual basis. No evaluation
was undertaken by the previous Board in the
year to 29 June 2018.
Code Provisions A.4.2 and B.6.3
In addition, and for the reasons provided
above, the Company did not comply with
Code Provisions A.4.2 and B.6.3 which
require that, led by the SID,:
– The NEDs should meet at least annually to
appraise the performance of the Chairman;
and
– The NEDs should be responsible for the
performance evaluation of the Chairman,
taking into account the views of the
Executive Directors.
The Board expects to comply with the relevant
provisions of the 2018 Code during 2019 in this
respect.
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 its strategy and that a financial and operational structure
is in place to enable the Group to meet its goals.
Some decisions are sufficiently material that they can only be made by the Board as a whole.
The schedule of ‘Matters Reserved for the Petropavlovsk PLC Board’, and the Committees’
terms of reference, explain which matters are delegated and which are retained for the Board’s
approval. These documents are available on the Company’s website.
Role of the Board
Current Membership:
Sir Roderic Lyne
Non-Executive Chairman
Dr Pavel Maslovskiy
Chief Executive Officer
Mr James W Cameron Jr
Independent Non-Executive Director
Mr Damien Hackett
Independent Non-Executive Director
Mr Robert Jenkins
Independent Non-Executive Director
Mr Harry Kenyon-Slaney
Senior Independent Director
Mr Bektas Mukazhanov
Non-Executive Director
Further information:
– The Group’s near-term, medium-term and
long-term strategy, set by the Board, is fully
described in the Strategic Report on page 12
and 13; and
– Directors’ Biographies are on pages 98 to 99.
Petropavlovsk Annual Report 2018 103
GovernanceFinancial statementsStrategic report Governance Report continued
Role of the Board
Code compliant:
The Board comprises seven Directors including a Non-Executive Chairman and four Independent Non-Executive Directors.
Board composition and roles
Non-Executive Chairman:
Sir Roderic Lyne
Chief Executive Officer:
Dr Pavel Maslovskiy
Senior Non-Executive Director
Mr Harry Kenyon-Slaney
The Chairman provides the leadership to and direction of the Board. His objective is to
promote the strategic 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.
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.
Code Compliant:
The Non-Executive Chairman and Chief Executive Officer have clearly defined and separated responsibilities.
Independent Non-Executive Directors:
Mr James W Cameron Jr
Mr Damien Hackett
Mr Robert Jenkins
Mr Harry Kenyon-Slaney
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 Chief Executive Officer
and the Chief Financial Officer. They both challenge management, helping develop the
Group’s strategy, and monitor the performance of management.
It is the Board’s view that the current Non-Executive Directors have sufficient time to fulfil their commitments to the Company and the Chief
Executive Officer does not hold a Non-Executive Directorship in any company. The Board together with the Nominations Committee considers
the appropriateness of Board composition and further details are provided in the Nominations Committee Report on page 110.
Code compliant:
The Board comprises of four Independent Non-Executive Directors
Code compliant:
Non-Executive Chairman
Senior Independent Director
Four Independent Non-Executive Directors , including the Senior Independent Director
The Non-Executive Directors meet periodically with the Chairman without the Executives being present
The Non-Executive Directors hold meetings without the Chairman or Executive Directors being present
Corporate governance reforms
The 2018 Code was published in July 2018.
The 2018 Code:
– Introduces new requirements around
employee consultation, pay practices,
board culture, composition and diversity;
and
– Encourages companies to report on how
the 2018 Code’s principles have been
applied each year.
The Board has reviewed its existing practices
to identify where they are in line with the 2018
Code and to consider revisions to these
where required.
In response to the requirement for the
Board to engage with its workforce, the
Board has constituted the Safety,
Sustainability & Workforce Committee
(the SS&W Committee), chaired by
Mr Harry Kenyon-Slaney, Independent
Non-Executive Director. Mr Kenyon-Slaney
and his fellow members of the Committee
met with representatives of the Company’s
workforce and the trade unions during the
Board’s recent visit to the Group’s operations
in Russia. Further meetings will be held at
least annually. In addition it is intended that
members of the SS&W will meet with
representatives of the local community
and other stakeholders in the future.
The Board will report against the 2018 Code
in the 2019 Annual Report.
Effectiveness and Accountability of
the Board
The Directors Business Experience,
Independence and Country of
Permanent Residence
The graphs opposite illustrate the collective
business experience of the Directors outside
that acquired at Petropavlovsk as at the date
of this report, Director Independence as
determined by the Board, nationality and
language skills.
104 Petropavlovsk Annual Report 2018
– Reviewing Group policies and procedures
and approving amended Terms of
Reference for the Board Committees, as
well as Terms of Reference of the Executive
Committee; and
– Reviewing the revised UK Corporate
Governance Code, published in July 2018, and
establishing a new Safety, Sustainability and
Workforce Committee (the SS&W Committee).
The SS&W Committee will engage with the
Group’s workforce in order to understand their
views and any concerns they might have,
communicating these to the Board such that
they can be taken into account in the Board’s
discussions and decision making.
Committees of the Board in 2018
As explained on page 102, Messrs Ian Ashby,
Bruce M. Buck, Adrian Coates, Garrett Soden
and Roman Deniskin were not reappointed as
Directors at the AGM held on 29 June 2018.
During the period between 29 June 2018 and
12 November 2018 the Company was not
able to form the various Committees (Audit,
Remuneration and Nominations) in a form
which was compliant with the Code.
During 2018 the Board had three Committees
focusing on specialist areas, which were
ultimately accountable to the Board. These
comprised:
– The Audit Committee;
– The Nominations Committee; and
– The Remuneration Committee.
The Board constituted a new Safety,
Sustainability & Workforce Committee on 12
November 2018, which is chaired by Mr Harry
Kenyon-Slaney.
The Board committees met independently
and provided feedback to the Board through
their chairmen.
Board balance of Directors
Non-Executive
Chairman (1)
Non-Executive
Directors (1)
Independent Non-
Executive Directors (4)
Executive Directors (1)
Directors of other
quoted companies
Finance
Investment/banking/
research/broking
Legal
Natural resources
Diplomatic/Political
Business experience
within Russia
Independent (4)
Non-independent (2)
Chairman (1)
Russian (1)
British (3)
American (1)
Australian (1)
Kazakhstan (1)
Business experience
Independence
Nationality
Language skills – Russian
Native/fluent (4)
Basic or none (3)
Language skills – English
Native (5)
Fluent (2)
Understanding of the gold mining industry,
Russia and knowledge of the Group’s
operations are essential to the Board’s ability
to lead the Company.
Petropavlovsk has a strong, highly qualified
and independent Board to lead the Group into
the next phase of its development.
Board activities during the year
Three scheduled Board meetings were held
by the Board which was in office until 29 June
2018, with a number of additional meetings
being held, principally in relation to the bridge
loan provided to IRC in June 2018 and the
2018 AGM.
The Board elected on 29 June held
13 meetings up to 31 December 2018.
Five meetings followed the set schedule
and, eight additional meetings were
convened to deal with ongoing business,
including the refinancing of IRC’s project
finance facility with ICBC for which the
Company was the guarantor. Several of
these additional meetings were called at
short notice and were accommodated partly
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:
– The reconstitution of the Board, the
stabilisation of the Company and definition
of its key objectives, and the revival of its
leadership following the election of a new
Board and CEO;
– Monitoring the progress of the construction
of the POX Hub, with the first two
autoclaves commissioned prior to end-
December 2018, and the mining operations;
– Monitoring the progress of the ramping
up of IRC’s K&S Facility and the financial
position of IRC given the Company’s 31.1%
stake in IRC and guarantee in respect of
IRC’s ICBC facility;
– Consideration and approval of two bridge
loans provided to IRC in June 2018 and
December 2018, in order that IRC could
repay the scheduled payments due under
the ICBC facility;
– Consideration and recommendation to
shareholders of the proposed new
guarantees in respect of the new facilities
for IRC with Gazprombank, to refinance the
ICBC facility;
Petropavlovsk Annual Report 2018 105
GovernanceFinancial statementsStrategic report Governance Report continued
Committee membership from 1 January to 29 June 2018 – Table A
Ian Ashby
Bruce M Buck
Garrett Soden
Audit Committee
Member
Member
Chairman
Remuneration Committee
Member
Chairman
Member
Nominations Committee
Chairman
Member
Member
Committee membership from 29 June 2018 to 12 November 2018 – Table B
Roderic Lyne
Robert Jenkins
Pavel Maslovskiy
Audit Committee
Member
Chairman
Remuneration Committee
Member
Chairman
Nominations Committee
Chairman
Member
Member
Committee membership from 12 November 2018 to 31 December 2018 – Table C
Roderic Lyne
Robert Jenkins
Pavel Maslovskiy
James W Cameron Jr
Damien Hackett
Harry Kenyon-Slaney
Bektas Mukazhanov
Alya Samokhvalova
Audit Committee
Remuneration Committee
Chairman
Chairman
Member
Member
Member
Member
Member
Nominations Committee
Chairman
Member
Member
Member
Safety, Sustainability
& Workforce Committee
Member
Member
Chairman
Member
Member
The roles and activities of each of these
Committees are detailed on page 108.
The Board provides sufficient resources to
its Committees to enable them to undertake
their duties.
The Company also operates an Executive
Committee which is responsible for the
day-to-day management of the Company and
provides a conduit between management and
the Board. Members of the Committee and their
biographies are provided on pages 100 to 101.
Directors’ induction and professional
development, information flow and
professional advice
Induction and Professional Development
An induction programme is discussed with
each new Director upon appointment.
Directors 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.
Visits to the Group’s gold mining operations
are an important part of a Director’s induction.
The full Board visited the Group’s gold
mining operations in early April 2019.
The Directors visited the Group’s offices in
Blagoveshchensk, the Malomir mine and the
POX Hub at Pokrovskiy. A visit to IRC’s K&S
facility was also arranged. During the visit
the Chairman of the Safety, Sustainability
& Workforce Committee, and members of
this Committee, met with representatives
of the workforce. Management presentations
were arranged for the Board including from
Mr Nikolai Vlasov, Group Chief Geologist.
As detailed in the Audit Committee Report
on page 112, Mr Jenkins, Audit Committee
Chair, visited the Group’s mining operations
in November 2018, together with the
Company’s external auditor, Deloitte LLP,
including the Albyn, Malomir and Pioneer
mines and the POX Hub facility. Mr Jenkins
has also attended the Group’s offices in
Moscow for meetings with the
Chief Financial Officer, members of the
Group’s financial reporting team and Group
Head of Internal Audit.
As part of their induction, Messrs Cameron,
Hackett and Kenyon-Slaney, new members
of the Audit Committee, had an in-depth
briefing session with management on financial
control and reporting matters, to ensure that
they understood all relevant matters to enable
them to participate fully in Committee
meetings. New members of the Remuneration
Committee met with Mercer Kepler, adviser
to the Committee as part of their induction.
Meetings are also arranged for new Directors
with members of the Senior Executive,
including with Dr Alya Samokhvalova, Deputy
Chief Executive Officer and Mr Alexey Dubynin,
Chief Financial Officer.
As part of the issuance of the Class 1 Circular
in relation to the proposal to guarantee IRC’s
obligations under its new facilities with
Gazprombank, the Board had a detailed
presentation from the Company’s brokers
advising them of their responsibilities as
Directors of a listed company.
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
106 Petropavlovsk Annual Report 2018
and corporate governance issues from the
Company Secretary and the Company’s
advisers.
Information Flow
Prior to each Board meeting the Directors
receive detailed information on operational and
financial performance, activities of the Board
Committees, investor relations and projects
that are being progressed by the Executive
team. The Board receives presentations and
verbal updates from the Chief Executive
Officer, Chief Financial Officer and other
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 Chief Executive Officer or
members of the Senior Executive. 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.
Senior Adviser and President
As announced with the Company’s 2018
half-year results, Mr Peter Hambro, who
co-founded the Company with Dr Maslovskiy,
was appointed to the non-Board position of
President of the Company and as Senior
Adviser to the Board. Mr Hambro is not a
member of the Company’s management or
executive and has no authority therefore to
bind the Company or take executive
decisions.
During the period 26 July 2018 to 19
December 2018 Mr Hambro acted as a
nominee of JSC “Pokrovskiy mine” on the
board of IRC Ltd in accordance with the terms
of the bridging loan agreement between IRC
Ltd and JSC “Pokrovskiy mine”, a principal
subsidiary of Petropavlovsk PLC. Mr Hambro
resigned as a nominee Director when he was
appointed as Chairman of IRC Ltd.
Investor engagement
2018 Annual General Meeting
The following table details the resolutions proposed at the 2018 AGM by the Company which received significant votes against:
Resolutions:
Re-election of Mr Ian Ashby
Re-election of Mr Adrian Coates
Re-election of Mr Roman Deniskin
Re-election of Mr Bruce M. Buck
Re-election of Mr Garrett Soden
Given the events of the last two years, with
two changes of Board, the Board is very
mindful of its obligation to maintain a dialogue
with all shareholders based on the mutual
understanding of objectives. In this respect
the Chairman and Independent Non-
Executive Directors are available to meet with
Shareholders at their request and welcome
such dialogue.
As detailed in the Directors’ Remuneration
Report on page 130, the Directors’
Remuneration Report for the year ended
31 December 2017 was not approved by
shareholders, receiving 71.54% of votes cast
‘against’ the resolution. Membership of this
Committee changed on 29 June 2018
following the 2018 AGM. Action taken by
the ‘new’ Committee to address the concerns
raised by those shareholders who voted
against the 2017 Directors’ Remuneration
Report is detailed in the Directors’
Remuneration Report on page 121.
‘For’
47.76%
42.70%
42.60%
41.72%
47.57%
‘Against’
52.24%
57.30%
57.40%
58.28%
52.43%
All resolutions at the 2018 AGM were voted
by way of a poll. This follows best practice and
allows the Company to count all votes rather
than just those of shareholders attending the
meeting. As recommended by the Code,
all resolutions were voted separately and the
final voting results, which included all votes
cast for, against and those withheld, together
with all proxies lodged prior to the meeting,
were released to the London Stock Exchange
as soon as practicable after the meeting.
All resolutions will be voted by way of a poll
at the 2019 AGM.
Investor engagement during the year
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 45 meetings were held by the Company
with a range of equity shareholders, both
existing and potential, and fixed income
investors during the second half of the year.
During the year executive management also
attended investor conferences in Europe,
including both London and Moscow.
The Chief Executive Officer, Chief Financial
Officer and Deputy Chief Executive Officer
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 2019 Annual General Meeting
Individual shareholders are important to the
Company and the Board encourages as
many shareholders as possible to attend the
Petropavlovsk Annual Report 2018 107
GovernanceFinancial statementsStrategic report Governance Report continued
Company’s Annual General Meeting during
which shareholders are given the opportunity
to discuss matters with the Board.
The Audit, Remuneration and Safety,
Sustainability and Workforce 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 Nominations Committee.
Annual re-election of Directors
In accordance with the UK Corporate
Governance Code published July 2018
all Directors will be offering themselves for
re-election or appointment at the AGM on
13 June 2019. The re-election of each of
the Directors has been reviewed by the
Nominations Committee and the Board
who are satisfied that each of the Directors
continues to be effective and demonstrates
commitment to the role and that their election
or re-appointment is in the Company’s best
interest. The Board recommends that
shareholders vote in favour of the resolutions
to appoint or re-elect all of the eligible
Directors of the Company and the reasons
for this recommendation will be set out in
the Appendix to the Notice of the Annual
General Meeting.
Board Committees
A diagram detailing the corporate governance
framework established by the Board including
the principal role of each Board Committee is
shown below.
The Company Secretary acts as secretary
to the Audit, Remuneration, Nominations and
Safety, Sustainability and Workforce
Committees.
Board structure – as at 31 December 2018
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
Nominations 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;
and
– Reviews internal audit
plans.
Membership
– 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; and
– Ensures that the Company
maintains contact with
Shareholders regarding the
Company’s remuneration
policy.
– Reviews structure, size and
composition of the Board
and its Committees and
makes recommendations
to the Board as
appropriate;
– Considers succession
planning issues for
Directors and senior
executives; and
– Evaluates the skills and
experience of the Board
before any appointment is
made to the Board.
Membership
Sir Roderic Lyne (Chair)
Robert Jenkins (Chair)
Membership
Robert Jenkins
James W Cameron Jr
Robert Jenkins (Chair)
Harry Kenyon-Slaney
Damien Hackett
James W Cameron Jr
Dr Pavel Maslovskiy
Harry Kenyon-Slaney
Damien Hackett
See pages 112 to 120 for
more information
See pages 121 to 138 for
more information
See pages 110 and 111 for more
information
Safety, Sustainability &
Workforce Committee
– 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; and
– Seeks active engagement
with the Group’s workforce
on behalf of the Board.
Membership
Harry Kenyon-Slaney (Chair)
Damien Hackett
Dr Pavel Maslovskiy
Bektas Mukazhanov
Dr Alya Samokhvalova
Please see pages 72 and 97.
108 Petropavlovsk Annual Report 2018
Remuneration
Nominations
–
–
M
M
C
–
–
–
–
1/1
1/1
1/1
–
–
1/1
–
1/1
–
C
M
–
–
M
M
–
Nominations
C
M
M
–
Meetings of the Board, Board Committees and attendance of members from:
Table D:
12 November 2018 to 31 December 2018
Sir Roderic Lyne 2
Pavel Maslovskiy
James W Cameron 4,6
Damien Hackett 4,6
Robert Jenkins 6
Harry Kenyon–Slaney 5,6
Bektas Mukazhanov 3
Board1
C
M
M
M
M
M
M
1/1
1/1
1/1
1/1
1/1
1/1
1/1
Audit
–
–
M
M
C
M
–
–
–
1/1
1/1
1/1
1/1
–
29 June 2018 to 12 November 2018 (date of constitution of new Board Committees)
Sir Roderic Lyne 2
Pavel Maslovskiy
Robert Jenkins 6
Bektas Mukazhanov 3
Key: C = Chairman, M = Member
Board1
C
M
M
M
4/4
4/4
4/4
3/3
Audit
M
–
C
–
1/1
1/1
–
Remuneration
M
–
C
–
1 Scheduled Board meetings. Additional Board meetings were held throughout this period, principally relating to strategic matters, including the refinancing of IRC’s
project finance facility with ICBC and general administrative matters.
2 Sir Roderic Lyne was deemed to be independent by the Board on his appointment as Non-Executive Chairman.
3 Mr Mukazhanov was re-appointed as a Non-Executive Director of the Company on 27 July 2018.
4 Messrs James W Cameron Jr and Damien Hackett were appointed as Independent Non-Executive Directors of the Company on 15 October 2018.
5 Mr Harry Kenyon-Slaney was appointed as an Independent Non-Executive Director of the Company on 7 November 2018.
6 The Board has determined that Messrs James W Cameron Jr, Damien Hackett, Robert Jenkins and Harry Kenyon-Slaney are independent.
Table E:
1 January 2018 to 29 June 2018
Ian Ashby 6
Sergey Ermolenko 2
Bruce M Buck 6
Adrian Coates 3,6
Roman Deniskin 2
Andrey Maruta 4
Bektas Mukazhanov 5
Garrett Soden 6
Key: C = Chairman, M = Member
Board1
C
M
M
M
M
M
M
M
3/3
2/2
3/3
3/3
1/1
2/2
3/3
3/3
Audit
M
–
M
–
–
–
–
C
1/1
–
1/1
–
–
–
–
1/1
Remuneration
Nominations
M
–
C
–
–
–
–
M
3/3
–
3/3
–
–
–
–
3/3
C
–
M
–
–
–
–
M
1 Scheduled Board meetings. Additional Board meetings were held throughout this period, principally relating to strategic matters, including the refinancing of IRC’s
project finance facility with ICBC, approval of the June 2018 Bridge Loan provided to IRC, the 2018 Annual General Meeting and administrative matters.
2 Mr Ermolenko resigned as a Director and as Interim Chief Executive Officer on 16 April 2018 upon the appointment of Mr Roman Deniskin to this position. Mr Ermolenko
reverted to his previous position of General Director of MC Petropavlovsk.
3 Mr Coates was appointed as an Independent Non-Executive Director of the Company on 16 February 2018.
4 Mr Maruta resigned as a Director and as Chief Financial Officer on 31 March 2018.
5 Mr Mukazhanov was appointed as a Non-Executive Director of the Company on 8 February 2018, and was removed from this position on 8 June 2018.
6 Mr Ashby was deemed to be independent by the Board on his appointment as Non-Executive Chairman. Messrs Buck, Coates and Soden were considered
by the Board to be independent.
0
–
–
–
0
0
–
2/2
2/2
2/2
–
1/1
–
1/1
–
–
–
–
1/1
Petropavlovsk Annual Report 2018 109
GovernanceFinancial statementsStrategic report Nominations Committee Report
Letter from the Nominations Committee Chairman
Dear Shareholder
Introduction
In addition to the Chairmanship of the Board,
I act as Chair of the Nominations Committee,
the other members of which are Robert
Jenkins and Harry Kenyon-Slaney,
Independent Non-Executive Directors, and
Pavel Maslovskiy, Chief Executive Officer. I am
also pleased to confirm the appointment of
Damien Hackett, Independent Non-Executive
Director, with effect from today’s date. Details
of Committee membership during 2018 are
provided on page 106.
Board changes
As detailed in the Governance Statement,
following my appointment to the Board at the
Company’s Annual General Meeting (the
‘AGM’) on 29 June 2018, one of my first
priorities was to rebuild the Board and the
senior management team. Following the
AGM, the Board immediately initiated action
to recruit additional Non-Executive Directors
and to appoint a Chief Financial Officer.
As members of the Committee, Robert
Jenkins and I led the process, on behalf of
the Board, to appoint the new Independent
Non-Executive Directors. We defined criteria
for the roles we wished to fill (including
experience in mining and natural resources,
in capital markets, in Russia, and in Board-
level positions) and engaged Savannah
Group, an experienced global search firm,
to assist us. The Savannah Group has no
other connection to the Company or any
individual Director.
Through this process and after interviewing
a strong range of candidates, we were able
to announce the appointment of Messrs.
James W Cameron Jr and Damien Hackett as
Independent Non-Executive Directors of the
Company on 15 October 2018 and of
Mr Harry Kenyon-Slaney as an Independent
Non-Executive Director of the Company on
7 November 2018. We were delighted to
recruit such highly qualified Directors to
strengthen the Board, and they have brought
a wealth of expertise and experience to our
work, greatly to the Company’s benefit.
Details of their biographies are provided
on pages 98 to 99.
Mr Bektas Mukazhanov (who had served
briefly on the Board from 8 February 2018 to 8
June 2018) was proposed for reappointment
as a Director, by Fincraft Holdings Ltd, the
Company’s major shareholder. The
Nominations Committee welcomed this
proposal, noting both Mr Mukazhanov’s
personal qualities and the accepted practice
for a major shareholder to have a nominee
Director on the Board. The Committee
considered that Mr Mukazhanov had the
relevant experience and skills to make a
valuable contribution to the Board and
decided to reappoint him as a Non-Executive
Director from 27 July 2018. The Company has
entered into a formal Relationship Agreement
with Fincraft Holdings Ltd and Mr Kenges
Rakishev, the beneficial shareholder of
Fincraft which governs the rights of Fincraft,
Mr Rakishev and the Company and manages
any potential conflict situations.
The Committee was also pleased to approve
the appointment of Mr Alexey Dubynin, as
Chief Financial Officer. This is an executive
appointment outside the Board, but Mr
Dubynin attends all Board meetings by
invitation and works closely with the Directors.
Alexey has been employed by the Company
since 2012, initially as Group Head of Internal
Audit and as Group Financial Controller from
April 2013.
Diversity statement
One of the stated objectives of the
Nominations Committee, both during the
above appointment process and in the future,
is to enhance the diversity of the Board. The
seven-member Board now comprises
nationals of five different countries (the UK,
Russia, Kazakhstan, the USA and Australia)
with a wide range of appropriate backgrounds
and experience. All of the current Directors
are male. It is the Board’s aim to identify and
recruit both female and younger Directors
with relevant qualifications. We sought to
achieve this during the recent recruitment and
interviewed candidates of both genders and
different ages, but for differing reasons were
not able to meet that specific objective at this
stage. We are actively seeking to improve the
gender and age balance on the Board, while
ensuring selection is on the basis of merit
against objective criteria.
The Committee was pleased to approve the
appointment of Dr Alya Samokhvalova as
Deputy Chief Executive Officer in July 2018,
reporting directly to Dr Pavel Maslovskiy and
attending Board and Committee meetings by
invitation. Alya has been employed by the
Company since 2002. Her knowledge,
professionalism and experience are a great
asset to the Company.
Female employees comprise c.25% of the
Group’s workforce, a c.2% increase on 2017.
The Company is committed to operating as a
responsible employer, promoting the fair
treatment, non-discrimination and equal
opportunity of workers.
Board composition and appointment
of Senior Independent Director
As a result of the appointments made since
June 2018, Petropavlovsk now has a strong
and independent Board to lead the Group
into the next phase of its development.
As Non-Executive Chairman (with a decade’s
experience as an Independent Director in the
Group) I am supported by four Independent
Non-Executive Directors, one Nominee
Non-Executive Director and one Executive
Director, the Chief Executive Officer.
Following stabilisation of the new Board,
the Nominations Committee considered the
appointment of a Senior Independent Director
and was pleased to recommend the
appointment of Mr Harry Kenyon-Slaney.
Mr Kenyon-Slaney’s appointment as Senior
Independent Director was approved on
23 April 2019. The Group is fully compliant
with the UK Corporate Governance Code
published in July 2018 in this respect.
Diversity
Male
Board
100%
Executive Committee
80%
Direct Reports to Executive Committee
58%
All Employees
75%
Female
20%
42%
25%
110 Petropavlovsk Annual Report 2018
Additional activities prior to June 2018:
– Evaluation of each of the eligible Directors in
respect of their re-election at the 2018 AGM
and subsequent recommendation to the
Board;
– Consideration of the appointment of
Mr Bektas Mukazhanov as a Non-Executive
Director and recommendation to the Board;
– Approval of the 2017 Nominations
Committee Report;
– Consideration of potential candidates to be
appointed as an additional Independent
Non-Executive Director, following which the
Committee recommended the appointment
of Mr Adrian Coates to the Board; and
– Recommendation to the Board of the
appointment of Mr Roman Deniskin as
CEO, following a selection process.
Succession planning
Our critical task since June 2018 has been
to stabilise and strengthen the Group’s
leadership after a period of turbulence.
This we have achieved. Effective succession
planning will also be vital for the future
development of Petropavlovsk. As all of the
Non-Executive Directors are serving their first
year in their current capacities, succession
planning for the Board is a task for the future
rather than the current year, but underlies
our intention over time to address Board
succession planning requirements.
At the executive level, we have recognised
the importance of developing or recruiting
younger executives with the capability to
take on the most senior roles. This has been
underlined by the Board and will be the
subject of further discussion within the
Committee over the coming year.
Effectiveness of the Committee
The Committee has not reviewed its
effectiveness during 2018 as its members
have yet to serve a full year. A review will be
carried out in the latter part of 2019.
Re-election of Directors
The Committee has considered the
performance of each of the Directors, taking
into account the balance of skills, knowledge,
independence and experience of each
Director, and has recommended to the Board
that all Directors should seek re-election at
the Company’s forthcoming AGM.
In accordance with the new version of the
UK Corporate Governance Code published
in July 2018 the specific reasons why the
contribution of each Director is, and continues
to be, important to the Company’s long-term
sustainable success will be set out in the 2019
Notice of Annual General Meeting and
accompanying papers. I will be available
at the AGM to answer any questions that
Shareholders may wish to ask on the work
of the Committee.
Sir Roderic Lyne
Chairman
Nominations Committee
24 April 2019
Petropavlovsk Annual Report 2018 111
GovernanceFinancial statementsStrategic report
Audit Committee Report
Letter from the Audit Committee Chairman
Dear Shareholder
I was appointed as Committee Chair on 29
June 2018 following my appointment as an
Independent Non-Executive Director of the
Company at the 2018 AGM. I had previously
acted as Audit Chair from May 2015 until June
2017. Consequently, I had extensive
knowledge of the Group, and already
understood the role and challenges of its
Audit Committee.
To ensure that I was fully informed on matters
that had occurred since my departure in June
2017, I visited the Group’s offices in Moscow
in early July, meeting with Alexey Dubynin,
then Group Financial Controller, prior to his
appointment as CFO on 27 July 2018 and with
other key staff responsible for financial control
and reporting related matters as well as with
Andrey Sotnikov, Group Head of Internal Audit
who reports to the Committee in this role. I also
undertook a visit to our mining operations in
November 2018, visiting our Albyn, Malomir
and Pioneer mines as well as the POX Hub at
Pokrovskiy. During this visit I met with
members of the Group’s senior management
teams at its mining operations and new POX
Hub facility as well as with its Chief Geologist.
I was accompanied by members of the Deloitte
audit team together with their geologist and
metallurgist specialists assisting them on
technical matters.
I have also had several meetings with members
of our London Corporate team including our
Deputy CEO, Alya Samokhvalova and our
Group Head of Corporate Reporting, Natalia
Buynova. The site visit, meetings with senior
management and separate discussions with
our external audit partner have provided good
assurance about the controls and
management of the Group’s business
operations.
Since 12 November 2018, my new colleagues
on the Committee have been James
Cameron, Damien Hackett and Harry
Kenyon-Slaney, all of whom are Independent
Non-Executive Directors. An in-depth briefing
session was arranged upon their
appointment to ensure that my colleagues
had a proper understanding of relevant
matters to enable them to participate fully in
their first Committee meeting.
Prior to their appointment, Sir Roderic Lyne
was my fellow Committee member. Sir Roderic
resigned as a member upon their appointment,
ensuring that the constitution of the Committee
complies with the UK Corporate Governance
Code (the ‘Code’). Details of Committee
112 Petropavlovsk Annual Report 2018
membership during the year are detailed on
page 106 of this Annual Report.
As Independent Non-Executive Directors,
my colleagues and I are of an independent
mindset and, accordingly, we have no
hesitation in seeking clarification and a full
explanation from management or the external
auditor on any matter we feel necessary.
Significant judgements
I chaired my first Committee meeting in
September 2018, where we considered the
2018 interim results and received reports from
management and the external auditor. At that
time the going concern assumption was the
principal matter requiring significant
judgement of the Committee.
As at the date of the approval of the
Company’s 2018 interim results, IRC’s facility
with ICBC had not been refinanced although
discussions with a leading Russian bank were
ongoing. Given that the Group had
guaranteed IRC’s outstanding loan owing to
ICBC and that certain financial covenants
were due to be tested on the next testing date
of 30 June 2019, the ‘going concern’
statement contained reference to a material
uncertainty in this respect.
We are very pleased that, with management’s
efforts, IRC’s bank debt with ICBC has now
been refinanced through a new facility with
Gazprombank. In general, the new
Gazprombank facility is on more favourable
de-risking terms to the Company and IRC. It
provides a more relaxed amortisation
schedule and over an extended period, to
2026, for IRC to repay its debt, substantially
improving the financial stability of both
companies. It reduces the Company’s
guarantee, on the basis as approved by its
Shareholders on 12 March 2019.
Significant judgements for the Committee’s
consideration at the year-end related to:
– The going concern assumption;
– The carrying value of mining assets
including the POX Hub;
– Valuation of the Company’s investment in IRC;
– Accounting for Petropavlovsk’s guarantee
over IRC’s debt; and
– Accuracy and completeness of deferred tax.
These matters are discussed later in this
report.
Audit retendering
Deloitte LLP has been the external auditor of
the Company since 2009 when Deloitte won
a competitive tender. The year ended
31 December 2018 was therefore the tenth
consecutive audit for Deloitte, as the current
incumbent auditor. As stated in the 2017 Annual
Report, and in accordance with current
legislation, the Company was required to tender
the audit for the year ended 31 December 2019.
However, given the Board changes at the
2018 AGM, the appointment of a new Chief
Financial Officer in July 2018 and three new
members to the Committee in November
2018, we have sought permission to defer this
tender until later in 2019, with effect for the
financial year ending 31 December 2020.
This will enable the Committee to undertake a
proper audit tender process as outlined in the
Financial Reporting Council’s (‘FRC’) Notes
on Best Practice for Retendering.
The FRC has approved the Company’s
application for an extension to cover the
financial period ending 31 December 2019.
The Committee will tender the audit following
the approval of the 2019 interim results. This
will allow a detailed process and a smooth
transition should a new auditor be appointed.
Amongst other matters the tender will
consider the quality and cultural fit of the lead
partner and key members of their team, the
approach to client services and quality of the
audit, technical expertise and independence
of the audit firm.
Other matters
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 position and
performance, business model and strategy.
In addition, the Committee has advised the
Board on the viability statement required
under the Code.
In the following report the Committee has
sought to provide shareholders with an
understanding of the work that we have done
to provide assurance on the integrity of the
2018 Annual Report and financial statements.
I hope that you will find this informative.
Robert Jenkins
Audit Committee Chairman
24 April 2019
Governance
The Audit Committee is chaired by Mr Jenkins
and its other members are Messrs Cameron,
Hackett and Kenyon-Slaney, all Independent
Non-Executive Directors.
Mr Jenkins is considered by the Board as
having the requisite and relevant financial
experience due to his profession as a
Chartered Accountant and his previous roles
as Finance Director and Chief Financial
Officer of two Russia focussed natural
resource companies, including a UK AIM
listed mining exploration company. Mr
Jenkins was also the Senior Independent
Director and Audit Committee Chairman of
Ruspetro plc, an independent oil and gas
production company, until its delisting from
the London Stock Exchange in June 2016. He
was also previously Audit Committee
Chairman of UK AIM listed Philippines nickel
ore producer Toledo Mining Corporation PLC.
Messrs Hackett and Kenyon-Slaney also
have relevant experience within the mining
sector. Mr Hackett has 26 years’ investment
analyst research experience covering globally
diverse mining companies, initially as Global
Head of Mining Research with Credit Suisse
– First Boston in Australia, following which he
held similar roles with Credit Suisse and
Canaccord Genuity in London. Latterly he
was Vice Chairman Mining Advisory at
Canaccord Genuity responsible for
developing investment themes in metals and
mining across North America, Europe, Russia
and Australia. Mr Kenyon-Slaney is a
geologist by professional qualification and his
experience spans operations, marketing,
projects, finance and business development.
He has over 33 years’ experience in the
mining industry, principally with Rio Tinto and
is currently Non-Executive Chairman of Gem
Diamonds Limited and a Non-Executive
Director of Sibanye Gold Limited, a
Johannesburg listed gold precious metal
mining group trading as Sibanye-Stillwater.
Mr Cameron, a US qualified lawyer, has
extensive international experience, providing
expertise and consulting services for
companies particularly within Russia. The
Board therefore considers that the
Committee as a whole has competence
relevant to its responsibilities in the context of
the sector in which it operates. The
biographies of Messrs Jenkins, Cameron,
Hackett and Kenyon-Slaney are provided on
pages 98 and 99.
The Chief Executive Officer, the Chief
Financial Officer, the Group Head of Internal
Audit and Group Head of Corporate
Reporting and other Directors are invited to
attend Committee meetings with
representatives of Deloitte LLP, the external
auditor, attending all Committee meetings in
2018. 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. He also has regular meetings with
the Head of Internal Audit who reports to the
Committee.
Having been lead audit partner since 2014
and leader of Deloitte’s UK metals and mining
audit group, Mr Timothy Biggs, resigned in
December 2018, following a change in his
role at Deloitte. Under independence
requirements, he would have been required
to rotate as lead audit partner following the
audit for the year ending 31 December 2018.
In his place, Mr Chris Thomas was appointed
as lead audit partner in December 2018.
Mr Thomas is a Deloitte audit partner based
in London who has specialised in the metals
and mining sector for almost all of his 21 years
at Deloitte. He has been a Partner for eight
years and leads the Deloitte UK Metals and
Mining audit group.
Summary of the Committee’s role and
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;
– Where requested by the Board, reviewing
the content of the annual report and
accounts and advising the Board on
whether, taken as a whole, it is fair,
balanced and understandable and provides
the information necessary for shareholders
to assess the Company’s position and
performance, business model and strategy;
– Where requested by the Board, providing
advice on how, taking into account the
Company’s position and principal risks, the
Company’s prospects have been
assessed, over what period and why the
period is regarded as appropriate;
– Advising the Board on whether there is a
reasonable expectation that the Company
will be able to continue in operation and
meet its liabilities as they fall due over the
said period, drawing attention to any
qualifications or assumptions as necessary;
– The appropriateness of the Company’s
relationship with the external auditor,
including auditor independence, fees and
provision of non-audit services;
– The effectiveness of the external audit
process, making recommendations to the
Board on the appointment of the external
auditor;
– The effectiveness of the Group’s internal
control and financial and tax risk
management systems;
– Monitoring and reviewing the effectiveness
of the Group Internal function in the context
of the Company’s overall risk management
system; and
– Leading the external audit tender process.
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.
The Committee’s focus during 2018
The Committee met on three occasions
during the financial year. During the year,
amongst other matters, the Committee:
Financial statements and reports
– Reviewed the 2017 Annual Report and
Accounts and the six months’ Half Year
report ended 30 June 2018 before
recommending their adoption by the Board.
As part of these reviews the Committee
received reports from management and 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; and
– Considered whether the 2017 Annual
Report and Accounts, taken as a whole
were fair, balanced and understandable
and reported to the Board on its conclusion.
Petropavlovsk Annual Report 2018 113
GovernanceFinancial statementsStrategic report Audit Committee Report continued
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. See pages 26 to 29 of the Principal
Risks and Mitigation section which
describes the Group’s principal financial
risks during the year and actions taken to
mitigate them; and
– Received and considered reports detailing
litigation in which the Company and/or any
of its subsidiaries are involved.
Internal audit
– Evaluated the effectiveness of the internal
audit function, by reviewing the reports,
conclusions and recommendations of the
Group Internal Auditor, and discussing these
with the Chief Executive Officer and
members of the senior executive team.
Approving the scope of work to be
undertaken by Group Internal Audit during
2018. These included audits to be performed
at the Group’s mining operations. During the
year the Group Head of Internal Audit
presented his findings to the Committee
from various assignments which 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
unexpected ground water at Pioneer,
both Malomir and Pioneer reached full
capacity during 2018;
– Audit of the Group’s management
reporting, specifically relating to
budgeting. Internal audit identified
potential scope to enhance the Group’s
budgeting systems. The Committee will
evaluate these further with management
during 2019;
– Reviewed and approved the 2019 audit
plan which covers all of the Group’s mines
and its offices in both Moscow and
Blagoveshchensk. This will include an
audit of working capital management, the
Group’s procurement and supply process
together with follow-up audits; and
– Reviewed management responses to
internal audit reports issued during the year.
External auditor and non-audit work
– Reviewed, considered and agreed the
scope and methodology of the audit work
to be undertaken by the external auditor;
and
– Agreed the terms of engagement for the
audit of the 2018 financial statements.
The Committee has also advised the
Board on:
– Whether the 2018 Annual Report and
Accounts (the ‘2018 Report’) taken as a
whole is fair, balanced and understandable
and the Directors’ statement in this respect
is set out on page 144. The Committee and
the Board are satisfied that the 2018 Report
meets this requirement, as appropriate
weight has been given to both positive and
negative developments in the year.
In justifying this statement, the Committee
has considered the robust process which
operated in creating the 2018 Report,
including:
– A thorough process of review, evaluation
and verification of the inputs from the
Group’s operations is undertaken to
ensure accuracy and consistency;
– The Committee considered the
conclusions of the external auditor over
the key audit risks that contributed to their
audit report, specifically going concern,
impairment of mining assets, the valuation
of the Company’s investment in IRC
accounting for the guarantee of IRC’s
debt and the accuracy and completeness
of deferred tax; and
To date in 2019, the Committee has reviewed,
in particular, the following matters in relation to
the 2018 financial statements:
– The long-term viability statement of the
Company required in accordance with
provision C.2.2 of the 2016 Code.
others, comprised:
– The going concern assumption;
– Audit of the POX project – given the critical
– Impairment of mining assets;
– Valuation of the Company’s investment
in IRC:
– Accounting for the guarantee of IRC’s debt;
and
– Accuracy and completeness of deferred
taxation.
Evaluation of Committee’s performance
The Committee is required to undertake an
annual evaluation of its own performance.
Given that three of the four members of
the Committee were not appointed until
12 November 2018, no such evaluation was
undertaken during 2018. An evaluation will
be conducted following the publication of
the 2018 Annual Report, details of which
will be disclosed in the Company’s 2019
Annual Report.
importance of the POX project to the
Group, and as part of the Company’s risk
mitigation procedures, the Committee
requested a review of this project to ensure
that it was being completed within the
agreed budget and timeframe and that
any issues could be highlighted to the
Committee in a timely manner. The audit
concluded that the POX project was well
managed within the agreed budget and
timeframe, with all key project risks being
addressed by management. This has
been substantiated by the success of
the POX commissioning;
– Audit of underground mining
operations – an audit was initiated by
the Committee given the importance of
these operations in enabling the Group
to improve its short and mid-term cash
flow and facilitate long-term sustainability.
The audit concluded that management
had successfully dealt with the start-up
execution risks of underground mining.
Despite some delays at the start of
underground mining including
114 Petropavlovsk Annual Report 2018
Significant issues considered by the
Audit Committee in relation to the
Group’s 2018 interim financial
statements
The key judgement for the Committee during
2018 related to the appropriateness of the
use of ‘going concern’ as 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 at the date of
approval of the Company’s 2018 interim
financial statements, the Group’s
assessment was highly sensitive to the
following matters.
– The Group’s projections under a layered
stressed case that was based on a gold
price, 10% to 15% lower than the average
of the market consensus forecasts,
production forecasts that were
approximately 8% lower than budgeted,
and a Russian Rouble to US Dollar
exchange rate that was approximately 7%
stronger than the average of the market
consensus forecasts, indicated that unless
mitigating actions could be taken, there
would be insufficient liquidity for the
relevant period to October 2019.
– In relation to IRC: if full refinancing of the
ICBC facility was not completed prior to 20
December 2018, the next scheduled
repayment instalment date, IRC’s financial
liquidity would be adversely impacted. IRC
and/or the Group would then need to
implement contingency plans, including
potentially entering into negotiations with
banks or other investors for additional debt
and/or equity financing.
Audit Committee action
Conclusion
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 management the potential
options that were available to the Company
to mitigate the risk of insufficient liquidity;
and
– Receiving regular updates from the CEO,
CFO and Deputy CEO on the status of the
bank negotiations for the refinancing of the
ICBC facility.
In reviewing the half-yearly financial
statements for the six months ended 30 June
2018, the Committee considered the
mitigating options available to the Company
and the progress of the IRC refinancing
negotiations. The Committee noted that the
risk that the ICBC refinancing was not
completed or alternative contingency plans
were not realised represented 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 all factors into
account the Directors agreed that they had a
reasonable expectation that the Group would
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 half year report for
the period ended 30 June 2018 and therefore
the going concern basis of accounting
remained appropriate.
Post-interim event
On 18 December 2018, IRC’s subsidiary
Kimkano-Sutarsky Mining and Beneficiation
Plant LLC entered into two new facility
agreements with Gazprombank (Joint-Stock
Company). Following Petropavlovsk
shareholder approval, on 12 March 2019,
of the guarantees to be provided by the
Company to Gazprombank, the ICBC facility
has been fully repaid. In addition, the
Gazprombank facility has enabled IRC to
repay c.US$57m to the Company in respect
of the two bridge loans it has provided to
IRC and c.US$6m in respect of fees owing
to the Company for its guarantee of the ICBC
loan facility.
Petropavlovsk Annual Report 2018 115
GovernanceFinancial statementsStrategic report Audit Committee Report continued
The Committee identified the issues below as significant in the context of the 2018 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.
Issue
Committee action
Conclusion
Following careful review of all factors and
after making enquiries and considering the
uncertainties aforementioned and as detailed
in the going concern statement on page 143,
the Committee has 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
2018 Annual Report and Accounts and
accordingly, the going concern basis is the
appropriate basis for the preparation for the
2018 financial statements. The Committee
advised the Board accordingly.
The going concern assumption
(see note 2.1 to the financial statements)
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 gold production from the POX Hub, the
future gold price, the Russian Rouble US
Dollar exchange rate assumptions, the
timing of planned capital expenditure on
development projects; and
– Considering the mitigating actions
proposed by management in the event of
a reasonable downside scenario during
the going concern period, including the
purchase and processing of third-party
gold concentrate, deferral of capital
expenditure. (The analysis prepared by
management having indicated that there
would likely be a requirement for mitigating
action due to insufficient liquidity in a
reasonable worst case scenario, including
so as to be able to repay, if necessary, the
Group’s US$100 million 9% Convertible
Bonds maturing on 18 March 2020.)
A key judgement for the Committee relating
to the 2018 financial statements concerned
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.
In December 2018 IRC agreed to a
refinancing of the ICBC debt of its subsidiary
(K&S) with Gazprombank. Following
Petropavlovsk shareholder approval on
12 March 2019, the Company entered into
new guarantees with Gazprombank in
respect of this debt. The risk of K&S
defaulting on its loan, and hence the risk that
Petropavlovsk may be liable to repay the
outstanding loan, has been reduced by K&S
entering into the Gazprombank Facility and
repaying the ICBC Facility because the
Gazprombank Facility provides for a
significantly more relaxed amortisation
schedule compared to that under the ICBC
Facility; and better aligns with the proposed
ramp up of K&S and the revenues that are
anticipated to be generated by it.
However, the Group’s US$100 million 9%
Convertible Bonds mature on 18 March 2020
and the Group’s forecast liquidity is
dependent on meeting operational targets,
including the successful ramp-up of the POX
Hub, and also on utilising forward gold sale
facilities that are already available to it.
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 in their long-term viability
statement. The viability statement can be
found on page 143.
116 Petropavlovsk Annual Report 2018
Issue
Committee action
Conclusion
Taking the above into account the Committee
is satisfied with the thoroughness of the
approach and judgements taken.
The Committee has considered all relevant
facts and circumstances and recommended
to the Board:
– A reversal of the impairment taken at
31 December 2013 against the carrying
value of the assets relating to Malomir; and
– A further reversal of impairment previously
recorded against the carrying value of the
assets of the supporting in-house service
companies to the extent of the headroom
available at Malomir and Albyn and relevant
carrying values allocated to these.
Details of the impairment reversals totalling
c.US$102 million are set out in note 6 to the
financial statements on page 180 and on
pages 91 and 92 of the Chief Financial
Officer’s Report.
After consideration of management’s
analysis, the Committee agreed with the
conclusion that Petropavlovsk does not
have de facto control over IRC and that the
accounting treatment of IRC as an associate
is appropriate.
The Committee has also agreed with
management’s assessment that the
Company’s investment in IRC should be
impaired by US$5.7 million to US$85.1 million
as at 31 December 2018.
Carrying value of mining assets
including POX
(see note 6 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.
Where management identified an indicator of
impairment or impairment reversals, an
impairment test should be performed. The
Group’s calculation of a value in use for its
mining assets 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, particularly given the recent
successful commissioning of the POX Hub.
Consequently, the comparison of the
carrying value of the Group’s mining assets
with their net present value and whether an
impairment or reversal of impairment is
necessary requires significant judgement.
Valuation of the Company’s investment
in IRC
(see note 14 to the financial statements)
Petropavlovsk holds a 31.1% interest in IRC and
accounts for this investment as an associate
using the equity method. IAS 28 Investments
in Associates and Joint Ventures states that
impairment indicators should be considered
with reference to IFRS 9 Financial Instruments
and that, if indicators are identified, the potential
impairment should be determined with
reference to IAS 36 Impairment of Assets.
The key judgements for the Committee
related to the assumptions made by IRC
management in its valuation of the property,
plant and equipment and, in addition, the
completeness and accuracy of the
adjustments recognised by the Group.
A critical accounting judgement related to
whether the Company has significant
influence or control over IRC and
consequently whether the accounting
treatment to be applied for IRC as an
associate is appropriate.
The Committee has addressed this through:
– Receiving reports from management
outlining the basis for the assumptions used,
including assumptions on the gold price, the
discount rate used for the projects, the
Russian Rouble US Dollar exchange rate,
production in accordance with the Group’s
long-term mining plan and processing of third
party concentrate to utilise the available
capacity of the POX Hub and capital
expenditure in accordance with the Group’s
long-term plan. Management’s analysis
included the key risks from future cashflows
at both Pioneer and Malomir which include
those from the POX Hub, taking into account
the recent commissioning of the POX Hub
and hence its limited performance record.
The Committee considered this issue at
some length with management and
challenged their assumptions;
– Receiving regular updates on the
commissioning of the POX Hub.
All members of the Committee visited the
POX Hub and the Malomir flotation plant
in early April 2019 and reviewed these
operations with key members of senior
operational management; and
– Discussing with the external auditor their
view on the impairment testing procedure
including the key assumptions used by
management.
The Committee has addressed this matter
through:
– Receiving a paper from management on
IRC control considerations in order to
assess whether the investment in IRC
should be accounted for as an associate
using the equity method. This contained
a range of evidence including relative
shareholdings composition, the Group’s
representation level on the IRC Board and
the independence of IRC in determining its
recent refinancing arrangements; and
– Considering management’s conclusion
that there is objective evidence of an
impairment of the Company’s investment
in IRC, notwithstanding that IRC has
recognised a reversal of previous
impairment losses at the K&S mine of
US$90.5 million as at 31 December 2018
and challenging management’s
assessment. In making their assessment
management took into consideration the
depressed share price of IRC.
Petropavlovsk Annual Report 2018 117
GovernanceFinancial statementsStrategic report Audit Committee Report continued
Issue
Committee action
Conclusion
The Committee considers that the financial
liability recognised in respect of the
guarantee, and financial asset in respect of
the guarantee fee income have been valued
in accordance with IFRS 9 on transition at
1 January 2018 and as at 31 December
2018. In addition the Committee considers
that the values for the bridging loans is
consistent with the requirements of IFRS 9.
The Committee has addressed this matter
through:
– Engaging an external third party valuation
expert;
– The Audit Committee Chair and other
members of the Committee participating
in a number of joint meetings with the
Company’s expert, management and the
external auditor and their technical
accounting experts, challenging the
methodologies used and the assumptions
applied; and
– Discussing with management and with the
external auditor the findings of the valuation
expert.
Accounting for Petropavlovsk
guarantee over IRC’s debt
The Company previously provided a
guarantee over IRC’s debt with ICBC
(the ‘ICBC Facility’) with a fee receivable
equal to 1.75% of the guaranteed amount.
The amount outstanding under the
ICBC facility as at 31 December 2018
was US$169 million, representing the full
amount of IRC’s debt outstanding with ICBC.
The Company is required to value its liability
for the provision of the guarantee, as well as
the associated income stream of guarantee
fee payments from IRC, in accordance with
IFRS 9 Financial Instruments. Furthermore,
during 2018 Petropavlovsk provided two
bridging loans, for a total amount of
c.US$57 million to IRC in order to enable
it to make scheduled repayments to ICBC,
and avoid a potential default. These must
also be valued in accordance with IFRS 9
(which was adopted from 1 January 2018).
On 12 March 2019 Petropavlovsk’s
shareholders approved the provision of new
guarantees for IRC’s new US$240 million
loan facility with Gazprombank which has
replaced the ICBC Facility. As the
Gazprombank guarantees were not
approved before the balance sheet date, it
will not be accounted for in the Company’s
2018 financial statements.
The application of the new accounting
standard valuations of these financial
instruments is complex in respect of the
applicable methodologies and the
determination of the asset and liability values.
These take into account a number of factors,
including the assessed probability of IRC’s
future default.
118 Petropavlovsk Annual Report 2018
Issue
Committee action
Conclusion
Accuracy and completeness of deferred
tax
The Group’s deferred tax calculations reflect
the additional complexity of the key operating
entities having a US Dollar functional
currency for determining the accounting
base for its mining assets, but which have a
Russian Rouble tax base. In addition the
Group has historical losses for which the
recognition of deferred tax assets will often
require a judgement of the forecast
profitability of the Group.
Management and the external auditor have
identified prior year errors in relation to the
calculation and recognition of deferred tax
assets and deferred tax liabilities which is
described in note 21 to the financial
statements. Given these errors, the
complexity of the calculations and the
material size of the deferred tax liability
balances recognised, the accuracy and
completeness of deferred tax has been
identified as a matter requiring significant
judgement of the Committee.
External auditor
Deloitte was appointed as auditor to the
Company in 2009 following the Company’s
listing on the main market.
Whilst recognising that three members of the
Committee have only been members of the
Committee and Directors of the Company
for less than 6 months, the Committee has
evaluated the effectiveness of the external auditor
by taking the following actions.
– Reviewing Deloitte’s proposed audit fee
for the 2018 interim and year-end audits and
after consideration recommending these to
the Board for approval;
– Reviewing the non-audit fees payable to
Deloitte, having regard to the policy on the
provision of non-audit services (see note 7
for further discussion on this matter);
– Deloitte’s “2018 Audit Transparency Report’
in respect of the year ended 31 May 2018.
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; and
Following careful review the Committee is
satisfied with the proposed restatement of
the 2018 consolidated financial statements
and recommended them to the Board for
approval.
The Committee has addressed this matter
through:
– Receiving a paper from management
explaining the background, facts and
circumstances of this matter;
– Discussing this matter with the external
auditor;
– Noting and approving the recommendation
from management, supported by the
external auditor, that material errors
identified should be corrected in the 2018
consolidated financial statements by
restating the comparative amounts and the
opening balances of assets, liabilities and
equity; and
– Considering and approving the proposed
changes to the Group’s control processes
and procedures to ensure that a similar
error does not occur in the future.
– The deep knowledge of the Company
which enhances Deloitte’s effectiveness
as external auditor.
Non-audit services
The majority of non-audit fees paid to Deloitte
were in respect of:
In addition, the Committee has met regularly
with the external auditor who also undertook
the review of the Company’s 2018 interim
results. The Committee considers that, on this
basis, Deloitte remains effective in their role as
external auditor.
It is planned that members of the Committee
will meet to discuss Deloitte’s performance
and effectiveness during the 2018 year-end
audit following the approval of the 2018
financial statements. This will also include
discussions with the Chief Executive Officer
and relevant members of the Company’s
senior management team.
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 2019 Annual General
Meeting. However, as stated in the
Committee Chair’s introductory letter, the
Committee will tender the audit following the
approval of the 2019 interim results with
appointment of the successful firm for the
year ended 31 December 2020.
– Their engagement which was limited to that
of reporting accountant on the provision of
the new guarantees to be provided by the
Company to Gazprombank in relation to the
new finance facility provided to IRC. In
accordance with the UK Listing Authority
Listing Rules the provision of the guarantees
constituted a Class 1 transaction, requiring
shareholder approval. The appointment of
Deloitte was approved by the Audit
Committee and an independent review
partner was involved; and
– Their appointment for the review of the
Company’s financial statement for the
six months ended 30 June 2018. This is
considered as standard practice for a listed
company. Approval was given by the Audit
Committee.
Deloitte’s engagement on the above matters
was undertaken in accordance with the
Company’s policy on the provision of
non-audit services, a copy of which can
be located on the Company’s website or
obtained from the Company Secretary.
This policy follows the recommendations
of the Financial Reporting Council on the
provision of non-audit services contained
Petropavlovsk Annual Report 2018 119
GovernanceFinancial statementsStrategic report 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 Principal
Risks and Mitigation section, which has been
reviewed by the Audit Committee, summaries
the risk management framework together
with details of the principal risks of the Group
and is on pages 16 to 33 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.
Audit Committee Report continued
of failure to achieve the Group’s objectives.
Oversight is provided by the Executive
Committee, that reviews the results of the
Group’s operations; and
– 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:
– A defined management structure with clear
accountabilities. There is a clearly defined
delegation of authorities, which covers all
expenditure;
– Board approval of a Group annual budget,
and updated subsequently as appropriate;
– 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. A schedule of all related party
transactions is presented to the Board for
formal approval.
within the Guidance on Audit Committees
published in April 2016. 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 Class 1
Circular within the time available 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 2018 is
set out in note 7 on page 182 of this Report.
Internal Audit
The internal audit function supports the Audit
Committee. It also aims to raise levels of
understanding and awareness of risk and
control throughout the Group.
The Group Head of Internal Audit reports
to the Committee Chairman and to the
Group CFO.
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 Safety, Sustainability and Workforce
Committee and Executive Committee in
addition to the Audit Committee, details of
which are as follows.
– The Board (which receives advice from the
Audit, Safety, Sustainability and Workforce
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. The Committee
has given due consideration to the identified
tax errors related to prior year. This matter
is detailed on page 119. The Committee has
also considered other control issues as
part of its review of the 2018 financial
statements. The Committee will consider
these matters together with management
to ensure that formalised documentation of
processes and controls are in place and to
ensure a robust control environment.
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
120 Petropavlovsk Annual Report 2018
Directors’ Remuneration Report
Annual statement from the Chairman of the
Remuneration Committee (the “Committee”)
Dear Shareholder
Introduction
On behalf of the Board I am pleased to
present the Directors’ Remuneration Report
for the year ended 31 December 2018. I was
appointed by the Board to act as Committee
Chair on 29 June 2018. Sir Roderic Lyne who
was also appointed as a member of the
Committee on 29 June, stepped down from
this position on 12 November 2018 following
the appointment of Messrs James W.
Cameron and Damien Hackett as members
of the Committee. The Committee comprises
solely of Independent Non-Executive
Directors.
The newly formed Committee has been very
mindful of the concerns expressed by c71.5%
of those shareholders who voted against the
2017 Directors’ Remuneration Report and
since the formation of the new Committee, it
has considered its decisions carefully and in
accordance with the Company’s
Remuneration Policy (the ‘Policy’), consulting
with its advisers when required. Given that the
current Policy was approved by shareholders
at the 2018 Annual General Meeting (“AGM”),
the Company is not required to propose a
new Policy for approval at the 2019 AGM.
CEO Remuneration and 2018 Annual
Bonus
The first duty of the Committee, following
the 2018 AGM, was to give consideration
to the remuneration arrangements for
Dr Maslovskiy, following his re-appointment
to the position of Chief Executive Officer.
In doing so the Committee took into account
Dr Maslovskiy’s experience and wealth of
knowledge, particularly with regard to the
construction and operation of the Pressure
Oxidation (“POX”) Hub, a project that he
had led prior to his resignation in July 2017,
and the key management role he has played
previously in leading the development of
the Group. The Committee also took into
consideration concerns raised by some
shareholders relating to the remuneration
arrangements for the former CEO, Mr Roman
Deniskin who had been appointed to this
position on 16 April 2018. After careful
consideration of these matters, the
Committee agreed that Dr Maslovskiy should
receive the same remuneration as he had
received when he departed the Company
in July 2017. The Committee has
subsequently agreed that no salary increase
should be awarded to Dr Maslovskiy for the
year commencing 1 January 2019.
Immediately following its appointment, the
new Board committed to delivering on the
following objectives:
– First, the construction and commissioning
of the POX Hub; and
– Secondly, the refinancing of IRC’s existing
ICBC loan facility and restructuring of the
Group’s associated guarantee, so as to
reduce the related risk exposures.
The Board also noted the unsatisfactory
operational performance of the Group during
H1 2018, resulting from the lack of leadership,
and the related issues that needed to be
addressed.
Consequently, the annual bonus performance
conditions for 2018, which were determined
following Dr Maslovskiy’s appointment, in line
with the Remuneration Policy, were linked to
these matters - covering both strategic
initiatives and operational performance.
The bonus for Dr Maslovskiy was heavily
weighted towards the successful
commissioning of the POX Hub (80%), given
its strategic importance to the future of the
Group. Other performance measures related
to the refinancing of IRC’s existing ICBC loan
facility and restructuring of the Group’s
associated guarantee and the delivery of
positive H2 2018 operational performance
– both in terms of higher production and lower
Total Cash Costs. Given the inherent health
and safety risks within our business and our
commitment to ensuring the safety of our
employees, a portion of the bonus was also
based on improvement in the Lost-Time Injury
Frequency Rate.
The Board recognises that the achievement
of these objectives, was substantially due
to the return of Dr Pavel Maslovskiy as
Chief Executive Officer on 29 June 2018.
With the restoration of authoritative leadership
and a resulting energised and motivated
management team, the Company has
delivered the successful commissioning of
the POX Project, with the first gold produced
in 2018. The new guarantee arrangements
with Gazprombank, approved by
shareholders on 12 March 2019, in relation
to the refinancing of IRC’s debt obligations,
are a significant step forward in the Board’s
strategy of reducing the Group’s associated
risk exposure and to create shareholder
value. In addition, the Company has delivered
on its production target and reduced costs.
Due to the achievement of these performance
targets, as detailed in the Strategic Report,
the Committee has awarded a bonus of
c.49% of salary to Dr Maslovskiy. This reflects
a full bonus entitlement pro-rated to c.49% to
reflect the period of his employment as Chief
Executive Officer during 2018.
Other decisions
The Committee recognises the importance
of aligning the Executive’s interests with those
of our shareholders and consequently the
Committee intends to make a Performance
Share Award under the Company’s Long-
Term Incentive Plan to Dr Maslovskiy and
other members of the senior executive
management team following the
announcement of the Company’s 2018
results. Details of the proposed Award and
the performance measures are detailed on
page 136.
Executive Directors Shareholding
Guidelines
The new Committee noted the absence
of a shareholding guidelines policy for
the Company’s Executive Directors.
After consideration the Committee has
approved a shareholding requirement of its
Executive Directors with an equivalent value
of 150% of base salary. Executive Directors
will be required to build up this shareholding
within a period of 5 years. This policy currently
applies to Dr Maslovskiy. Further details are
provided on page 126.
Termination arrangements
The Committee also considered the
employment termination arrangements for
Mr Roman Deniskin who was not re-elected
by shareholders at the 2018 AGM, having
been appointed as Chief Executive Officer by
the former Board in April 2018. Details of
these arrangements, which are in accordance
with the Policy, are provided on page 133.
Robert Jenkins
Remuneration Committee Chairman
24 April 2019
Petropavlovsk Annual Report 2018 121
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
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 2018.
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 2018 AGM, receiving
c.85% support from our shareholders.
The Statement from the Chairman of the
Remuneration Committee (set out on page
121) and the Annual Report on Remuneration
(set out on pages 129 to 138) will be subject to
an advisory vote at the 2019 AGM.
Remuneration Policy report
The Group’s Remuneration Policy is designed
to provide remuneration packages to motivate
and retain high-calibre executives and to
attract new talent as required. The Committee
takes into account the principles of sound risk
management when setting pay and takes
action to ensure that the remuneration
structure at Petropavlovsk does not
encourage undue risk. The Policy is
unaudited.
The table below summarises the main
elements of the remuneration packages
for Executive Directors.
Information on how the Company intends
to implement the Policy for the current
financial year is set out in the Statement
of Implementation of Policy in 2019 on
pages 134 and 135.
Remuneration element
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Base salary
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.
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.
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.
Not applicable, although the individual’s contribution and overall performance is one of the
considerations in determining the level of any salary increase.
122 Petropavlovsk Annual Report 2018
Remuneration element
Purpose and link to strategy
Operation
Benefits
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.
Benefits may include (but are not limited to):
Maximum opportunity
Performance metrics
Remuneration element
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
– Private medical insurance for the individual and family;
– Life assurance up to 4x salary, subject to underwriting;
– Ill-health income protection; and
– Travel insurance whilst on Company business.
The cost of these benefits to the Company is dependent upon market rates and availability of the
respective benefits.
Not applicable.
Pension
To provide market-competitive pension benefits in line with the wider workforce whilst ensuring
no undefined liability for the Company.
Executive Directors may receive contributions from the Company into a personal pension plan
or similar savings vehicle.
A Company contribution of up to12.5% 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.
Petropavlovsk Annual Report 2018 123
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Remuneration element
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
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 125.
Maximum bonus opportunity is 100% of salary.
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.
124 Petropavlovsk Annual Report 2018
Remuneration element
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Long-Term Incentive Plan (‘LTIP’)
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-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 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.
Explanation of performance
metrics chosen
Performance targets are set to be stretching
and achievable, taking into account the
Group’s strategic priorities and the
environment within which the Group
operates. In setting these performance
targets the Committee will take into account
a number of different reference points, which
may include the Group’s long-term mining
plan, budgets and operational plans.
In respect of the annual bonus, strategic
objectives are selected to ensure the delivery
of the Company’s immediate policy objectives
within the wider context of the Group’s
long-term strategy and corporate
responsibilities. Other supporting annual
objectives are selected to reflect key financial
objectives of the Company, exploration
success, delivery of specific investment
projects and health and safety objectives, and
rewards delivery against these.
The Committee retains the discretion to
adjust the performance targets and measures
where it considers it appropriate to do so (for
example, to reflect changes in the structure of
the business and to assess performance on a
fair and consistent basis from year to year).
Remuneration Policy for
other employees
A large percentage of the Group’s employees
are based at the Group’s mines in the Amur
Region in the Far East of Russia, whilst
corporate, administrative and support staff
are based at the Group’s offices in
Blagoveshchensk, Moscow and London. The
Board aims to ensure that employees are paid
competitively within the region. Employees
based at the Group’s mines receive base
salary, shift and production related bonuses
where applicable to their role, together with
certain benefits.
Executive Committee members and
selected employees in London, Moscow
and Blagoveshchensk also participate in the
Company’s annual bonus scheme. Executive
Committee members and a number of senior
employees, principally based within Russia,
participated in the last LTIP cycle and received
awards in 2011. It is the intention that any
future LTIP awards will be granted to senior
employees in order that they have the
opportunity to share in the Group’s success,
aligning their interest with those of the
Executive Directors and shareholders.
LTIP performance conditions are the same
for all participants, while award sizes vary
accordingly to level of seniority.
Petropavlovsk Annual Report 2018 125
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Pay scenario charts
The charts below provide an estimate of the
potential future reward opportunities for the
CEO, and the potential split between the
different elements of remuneration under
three different performance scenarios:
‘minimum’, ‘on-target’ and ‘maximum’.
Potential reward opportunities are based on
the Remuneration Policy, applied to the CEO’s
base salary as at 1 January 2019 of £655,000.
Performance scenario (£’000)
1,965
The ‘minimum’ scenario shows base salary,
that is, fixed remuneration. The CEO does not
receive any benefits. This is the only element
of the CEO’s remuneration package which is
not at risk.
For 2019 the ‘on-target’ scenario reflects fixed
remuneration as above, plus a target payout
of 37.5% of the annual bonus and threshold
vesting of 30% of the maximum award under
the LTIP. The ‘on-target’ bonus payout of
37.5% for 2019 reflects the fact that the
financial performance target is binary.
The ‘maximum’ scenario reflects fixed
remuneration, plus full payout of the annual
bonus and LTIP award.
1,097
655
Maximum
On-target
Minimum
Salary
33.3%
Annual bonus 33.3%
LTIP
33.3%
59.7%
22.4%
17.9%
100%
0.0%
0.0%
% of remuneration
Key
Multi-year Variable
Single-year Variable
Fixed pay
The charts above exclude the effect of any
Company share price appreciation.
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 is 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.
Shareholding guidelines
The Committee has recently reviewed the
Company’s shareholding requirements for the
Executive Directors, noting that there was no
requirement for the Executive Directors to
own any shares in the Company.
The Committee recognised that this was not
in accordance with good corporate
governance practice. After consideration the
Committee has approved a shareholding
requirement for its Executive Directors which
will require them to build up a shareholding
equivalent to 150% of their base salary during
a period of 5 years.
This currently applies to Dr Pavel Maslovskiy,
Chief Executive Officer, who is the sole
Executive Director of the Company. In
accordance with the policy Dr Maslovskiy will
be required to build up a shareholding with a
value of £982,500 during the period ended 31
December 2023. In determining this time
period the Committee has taken into account
the fact that Dr Maslovskiy’s, having been
re-appointed as Chief Executive Officer on 29
June 2018, has no outstanding share awards.
126 Petropavlovsk Annual Report 2018
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
Base salary
Benefits
Pension
Annual bonus
Long-term incentives
Policy
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.
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.
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. Dr
Pavel Maslovskiy, Chief Executive Officer is
currently the only Executive Director of the
Company.
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.
Petropavlovsk Annual Report 2018 127
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Dates of Executive Director service contracts are as follows:
Executive Director
Pavel Maslovskiy
Position
Chief Executive Officer
Effective date of contract
29 June 2018
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.
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
Purpose and link to strategy
Operation
Maximum opportunity
Performance metrics
Fees
To attract and retain high performing independent Non-Executive Directors by ensuring that
fees are competitive and fair.
Paid monthly in arrears and reviewed annually by the Board, after recommendation from the
Chairman. Fee increases, if applicable are normally effective from 1 January.
There is no prescribed maximum annual increase although fees are determined by reference to
time commitment and relevant benchmark market data. The Chairman of the Audit Committee,
the Remuneration Committee and the Senior Independent Director may also receive an
additional fee in recognition of the greater time commitment.
The aggregate annual fees are limited to £1.0 million under the Company’s Articles of
Association.
Not applicable
In recruiting a new Non-Executive Director, the Board will use the Policy as set out in the table above.
128 Petropavlovsk Annual Report 2018
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:
Name
Roderic Lyne
James Cameron Jr.
Damien Hackett
Robert Jenkins
Harry Kenyon-Slaney
Bektas Mukazhanov
Date of original
appointment
29 June 2018
15 October 2018
15 October 2018
29 June 2018
7 November 2018
27 July 2018
Unexpired term as at
31 December 2018
30 months
33 months
33 months
30 months
34 months
31 months
Date of appointment/last
reappointment at AGM
2018
N/A
N/A
2018
N/A
N/A
Notice period
3 months
3 months
3 months
3 Months
3 Months
3 Months1
Mr Mukazhanov’s appointment may also be terminated in accordance with the terms of the Relationship Agreement between Fincraft Holdings
Ltd., Mr Kenges Rakishev (the sole beneficial owner of Fincraft) and the Company.
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 75 and 76
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.
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
2018, and how the proposed Policy will be implemented in 2019. Any information contained in this section of the report that is subject to audit is
highlighted.
The Remuneration Committee
Membership and process
Members
Robert Jenkins (Chairman)
Damien Hackett
James W Cameron
Sir Roderic Lyne
Bruce M. Buck (Chairman)
Ian Ashby
Garrett Soden
From
29 June 2018
12 November 2018
12 November 2018
29 June 2018
22 June 2017
22 June 2017
22 June 2017
The Committee held five formal meetings during the year.
To
Present
Present
Present
12 November 2018
29 June 2018
29 June 2018
29 June 2018
Number of meetings in 2018 –
Attendance/Eligibility
2/2
1/1
1/1
1/1
3/3
3/3
3/3
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 Group’s Executive Committee members. The Committee’s terms
of reference are available on the Company’s website at www.petropavlovsk.net.
Petropavlovsk Annual Report 2018 129
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Activities of the Committee during 2018
Key activities during the year included:
appointment as Chief Executive Officer
on 29 June 2018;
Decisions made prior to
29 June 2018:
Committee membership:
Mr Bruce M. Buck, Chairman,
Mr Ian Ashby,
Mr Garrett Soden.
– Determination of remuneration for
Mr Roman Deniskin in respect of his
appointment as Chief Executive Officer
on 16 April 2018.
Decisions made from 29 June
2018 to 31 December 2018:
Committee membership:
Mr Robert Jenkins, Chairman,
Sir Roderic Lyne, stepped-down from the
Committee on 12 November 2018,
Mr James W Cameron Jr, appointed on
12 November 2018,
Mr Damien Hackett, appointed on
12 November 2018.
– Determining the remuneration package
for Dr Pavel Maslovskiy, following his
– Determination of performance measures
for the 2018 annual bonus for Dr Maslovskiy
following his appointment as Chief
Executive Officer;
– Approval of the termination arrangements
for Mr Roman Deniskin, Chief Executive
Officer who left the Company on
29 June 2018; and
– Initial review of the Company’s long-term
incentive arrangements.
External advisors
In carrying out its responsibilities, the
Committee is independently advised by
external advisors.
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 2018, Mercer Kepler also
provided support in advising on the revised
Remuneration Policy which was approved
by shareholders on 29 June 2018.
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).
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
2018 were £16,425 on the basis of time and
materials, excluding expenses and VAT.
Shareholder voting at the Annual General Meeting
At the Annual General meeting held on 29 June 2018, the resolution on the Directors’ Remuneration Policy, which came into effect on that date,
received the following votes from shareholders:
For
Against
Total votes cast (for and against, excluding withheld votes)
(71.46% of issued share capital)
Votes withheld1
1. A vote withheld is not a vote in law and is not counted in the calculation of votes cast ‘for’ and ‘against’ a resolution.
Total number of votes
1,996,614,738
364,296,668
2,360,911,406
193,523,679
% of votes cast
84.57%
15.43%
100.00%
At the Annual General meeting held on 29 June 2018, the Directors’ Remuneration Report received the following votes from shareholders:
For
Against
Total votes cast (for and against, excluding withheld votes)
(63.7% of issued share capital)
Votes withheld1
1. A vote withheld is not a vote in law and is not counted in the calculation of votes cast ‘for’ and ‘against’ a resolution.
The above resolutions were voted on a poll.
Total number of votes
599,100,824
1,505,765,831
2,104,866,655
449,568,431
% of votes cast
28.46%
71.54%
100.00%
130 Petropavlovsk Annual Report 2018
Shareholders voted against the Directors’
Remuneration Report for a number of
reasons, including the level of bonus payment
made to Mr Andrey Maruta, Chief Financial
Officer, the remuneration in lieu of notice
payment made to the Company’s former
Executive Chairman, Mr Peter Hambro
and the level of remuneration agreed for
Mr Roman Deniskin, former Chief Executive
Officer upon his appointment in April 2018
The current members of the Remuneration
Committee, none of whom were members of
the Committee at the date of the 2018 AGM,
have noted the concern of shareholders in
respect of these issues. Given that
membership of the Committee changed
on 29 June 2018, the Committee decided
not to specifically address the concerns of
shareholders in a separate statement
following the AGM as Committee members
had not been party to these decisions.
However, the Committee welcomes dialogue
with the Company’s shareholders and takes
into account views of its shareholders and the
guidance published by the various proxy
advisory bodies in relation to remuneration
matters when making decisions.
As in previous years and as required by law,
details of the voting on all resolutions at the
2019 Annual General Meeting will be
announced via a regulatory news service and
posted on the Petropavlovsk website
following the 2019 Annual General Meeting.
Executive Directors’ remuneration as a single figure (audited information)
The remuneration received by Executive Directors in respect of the financial years ended 31 December 2018 and 31 December 2017 is set out below.
Executive Director
Pavel Maslovskiy (a)
Former Executive Director
Roman Deniskin (b)
Sergey Ermolenko (c)
Andrey Maruta (d)
Total
Total
Year
2018
2017
2018
2017
2018
2017
2018
2017
2018
2017
Salary
& fees
Taxable
Benefit(e)
Annual
Bonus(f)
Single Figure
Remuneration Total
£
Single Figure
Remuneration
US$(g)
Pension
330,017
357,433
146,282
–
145,833
227,151
100,000
400,000
722,132
984,584
0
–
0
–
0
0
1,509
4,867
1,509
4,867
324,654
–
0
–
–
56,788
0
200,000
324,654
256,788
0
–
654,671
357,433
903,446
460,695
0
–
0
0
12,500
50,000
12,500
50,000
146,282
–
145,833
283,939
114,009
654,867
1,060,795
1,296,239
201,869
–
201,250
365,968
157,332
844,058
1,463,897
1,670,721
(a) Dr Pavel Maslovskiy resigned as a Director and as Chief Executive Officer of the Company on 17 July 2017 and was re-appointed as a Director and Chief Executive Officer on 29 June 2018; the remuneration
shown in the table relates to his appointment during the periods 1 January to 17 July 2017 and 29 June 2018 to 31 December 2018.
(b) Mr Roman Deniskin who was appointed as a Director and Chief Executive Officer of the Company on 16 April 2018 departed the Company on 29 June 2018.
(c) Mr Sergey Ermolenko was appointed as a Director and as Interim Chief Executive Officer of the Company on 18 July 2017 and resigned from this position on 16 April 2018.
(d) Mr Andrey Maruta resigned as a Director and as Chief Financial Officer on 31 March 2018.
(e) Benefits are in respect of private medical insurance for the Director, their spouse and any children under the age of 18.
(f) Value of annual bonus (including Deferred Bonus Awards) awarded in respect of the corresponding performance year.
(g) Converted from GBP to USD using the average exchange rate for the year (2018: £0.7246:US$1, 2017: £0.776:US$1).
Petropavlovsk Annual Report 2018 131
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Implementation of the Remuneration Policy in 2018
Executive Directors
Salary
No salary increases were awarded to
Mr Andrey Maruta, Chief Financial Officer or
Mr Sergey Ermolenko, Interim Chief Executive
Officer. Mr Maruta left the Company on 31
March 2018. Mr Ermolenko resigned as
Interim Chief Executive Officer on 16 April
2018 upon the appointment of Mr Deniskin as
Chief Executive Officer. Mr Ermolenko
continued in his role as General Director MC
Petropavlovsk.
Mr Deniskin was appointed as Chief
Executive Officer on 16 April 2018 on a salary
of £700,000. Mr Deniskin was not re-elected
by shareholders at the 2018 AGM held on
29 June 2018 and left the Company on that
date.
Dr Pavel Maslovskiy was appointed as Chief
Executive Officer on 29 June 2018, following
his appointment as a Director which was
approved by shareholders at the 2018 AGM.
The Committee approved an annual base
salary of £655,000, being the salary that
Dr Maslovskiy earned prior to his resignation
as Chief Executive Officer on 17 July 2017.
2018 to the date of his resignation on
31 March 2018.
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% of
salary on pension payments. Cash payments
to Mr Maruta were made net of an amount
equivalent to the amount of employer’s
national insurance contributions payable
on the cash payment such that the Company
is not disadvantaged by making the payment
in cash rather than as a pension payment
which is not subject to employer’s national
insurance. For the period from 1 January
2018 to 31 March 2018, the date of Mr
Maruta’s resignation, the Company’s pension
contribution for Mr Maruta was £12,500.
Dr Maslovskiy, Mr Ermolenko and Mr Deniskin
received no payment from the Company in
respect of pension entitlements.
Annual bonus
Annual bonus targets were agreed for
Dr Maslovskiy following his appointment
as Chief Executive Officer on 29 June 2018,
in accordance with the Company’s
Remuneration Policy.
Pension
The Group made contributions into a personal
pension scheme on behalf of Mr Andrey
Maruta, Chief Financial Officer from 1 January
Immediately following the Company’s 2018
AGM, the newly elected Board committed
itself to restore leadership
and momentum to Petropavlovsk’s
management and, in the then immediate
future, to focus on three critical tasks:
(i) The construction and commissioning
of the Company’s POX Hub facility;
(ii) The refinancing of IRC’s existing ICBC loan
facility and restructuring of the Group’s
associated guarantee of this, so as to
reduce the related risk exposures; and
(iii) Rebuilding the Company’s Board and the
senior management team.
Consequently, upon his appointment as Chief
Executive Officer, Dr Maslovskiy undertook a
full operational review, which revealed that,
under the previous Board, there had been
disruptions to mining operations in H1 2018,
a delay in the development of underground
mining at North East Bakhmut Pioneer and
more critically that there had been delays in the
development schedule for the POX Hub facility.
Taking these factors into account the
Committee determined bonus objectives for
Dr Maslovskiy, which were fully aligned to the
Board’s strategy. The bonus objectives and the
outcome are provided in the table below. 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 table below.
2018 annual bonus objectives - for Chief Executive Officer
Objective
Strategic
Construction of POX – expenditure
Weighting
(% of max)
40%
Construction of POX – commissioning
40%
Target
Stretch
Actual outturn achieved
Bonus payable
(% of max)
2018 total project
expenditure
<105% of budget
Hot commissioning
by end
December 2018
2018 total project
expenditure
in line with budget
Hot commissioning
by end
November 2018
Expenditure
in line with budget
Hot commissioning
achieved in
November 2018
40%
40%
Operational
Total Cash Costs
Gold production
IRC
Health & Safety
Total
=/400,000oz
=/420,000oz
Resolving the guarantee provided to ICBC in respect of
IRC’s project finance facility
<3.0
=/<2.5
5%
5%
5%
100%
US$786oz
422,000oz
Achieved – see
pages 6 and 29
2.5
3.375%
5%
5%
5%
98.375%
132 Petropavlovsk Annual Report 2018
c.75% of the total bonus payable of £324,654,
will be paid in cash with the remaining c.25%
payable in the form of a Deferred Bonus
Award. The Deferred Bonus Award will be
granted following the publication of the 2018
Annual Report, and will vest after one year
subject to the continued employment of
the individual. Mr Ermolenko did not receive
a bonus for the period that he was a
Director. Mr Maruta and Mr Deniskin
did not receive an annual bonus for 2018.
LTIP
Due to the complete change in the
membership of the Remuneration Committee
on 29 June 2018, it was agreed that no grant
of Performance Share Awards should be
made under the Long-Term Incentive Plan
during 2018 until the new Board had been
able to assess the Company and the
Committee had been able to consider the
remuneration structure and the appropriate
performance conditions.
Chairman and Non-Executive Director
remuneration (audited information)
The fees paid to Sir Roderic Lyne, Non-
Executive Chairman from his date of
appointment and to Mr Ian Ashby since his
date of retirement as Non-Executive
Chairman and to the Company’s Non-
Executive Directors, in respect of the financial
years ended 31 December 2018 and
31 December 2017 are as follows:
Non-Executive Directors
Roderic Lyne 1
James W Cameron Jr 2
Damien Hackett 2
Robert Jenkins 1,7
Harry Kenyon-Slaney 3
Bektas Mukazhanov 4
Former Non-Executive Directors
Ian Ashby 5
Bruce M. Buck 5
Adrian Coates 5
Garrett Soden 5
Vladislav Egorov 6
Alexander Green 7
Andrew Vickerman 7
Total
Total fees £
2018
Total fees US$
2017
2018
2017
75,577
15,865
15,865
42,827
11,346
32,115
75,000
45,000
25,000
42,500
0
–
–
381,095
–
–
–
46,250
–
–
79,038
47,423
N/A
44,788
0
37,500
41,250
296,249
104,296
21,894
21,894
59,101
15,658
44,319
103,500
62,100
34,500
58,650
0
–
–
525,911
–
–
–
59,612
–
–
101,873
61,124
–
57,728
0
48,334
53,167
381,838
1. Sir Roderic Lyne and Mr Robert Jenkins were appointed as Non-Executive Chairman and Independent Non-Executive Director on 29 June 2018 respectively.
2. Messrs James W Cameron Jr and Damien Hackett were appointed as Independent Non-Executive Directors on 15 October 2018.
3. Mr Harry Kenyon-Slaney was appointed as an Independent Non-Executive Director on 7 November 2018.
4. Mr Bektas Mukazhanov was appointed as a Non-Executive Director on 8 February 2018 and departed as a Director on 8 June 2018, he was re-appointed on 27 July 2018. The remuneration
shown relates to the period from 27 July 2018 to 31 December 2018. Mr Mukazhanov did not receive any fee for his period as a Director of the Company from 8 February 2018 to 8 June 2018.
5. Messrs Ian Ashby, Bruce M. Buck, Adrian Coates and Garrett Soden were not re-elected by shareholders at the 2018 AGM held on 29 June 2019 and accordingly retired as Directors on that date.
6. Mr Egorov retired as a Director on 1 January 2018.
7. Messrs Alexander Green, Robert Jenkins and Andrew Vickerman were not re-elected by shareholders at the 2017 AGM held on 22 June 2017 and accordingly retired as Directors on that date.
During 2018, 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 is entitled to an
additional fee of £7,500 per annum.
Mr Jenkins has not accepted a fee for his
Chairmanship of the Remuneration
Committee during the period 29 June 2018
to 31 December 2018.
Payments for loss of office (audited)
The table below sets out the treatment in
relation to Mr Roman Deniskin, Chief Executive
Officer, who was not re-elected as a Director at
the Annual General Meeting of the Company
held on 29 June 2018 and therefore retired from
the Board on that date (the ‘Termination Date’).
Under the terms of Mr Deniskin’s service
agreement with the Company, failure to be
re-elected as a Director at the Annual General
Meeting caused Mr Deniskin’s employment with
the Company as Chief Executive Officer to
terminate on the Termination Date. Such
termination was in breach of his service
agreement with the Company effective from 16
April 2018 (the ‘Service Agreement’) and without
prejudice to any claim for damages in respect of
such breach.
The remuneration arrangements in respect of
Mr Deniskin’s departure, set out below, were
approved by the Company’s Remuneration
Committee, in line with the Company’s
Remuneration Policy.
Under the Service Agreement Mr Deniskin was
entitled to 6 months’ notice of termination and,
as at the Termination Date, received an annual
basic salary of £700,000. However, Mr Deniskin
entered into an agreement with the Company
under which he received a lump sum payment
of £160,100 in full and final settlement of any and
all claims he may have against the Company. All
sums payable to or in respect of Mr Deniskin
were subject to such deductions as the
Company was required by law to make.
Petropavlovsk Annual Report 2018 133
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Former Chief Executive Officer
Roman Deniskin
Payment in
lieu of notice
£160,000
Payment in settlement
of any and all claims
£100
Total
£160,100
Mr Deniskin had no outstanding awards under
the Company’s Long-Term Incentive Plan.
Payment of salary and all other benefits
(including bonus) ceased with effect from the
Termination Date.
Mr Maruta resigned as a Director on
31 March 2018. He did not receive a payment
for loss of office. As at the date of Mr Maruta’s
resignation 179,017 shares the subject of the
Deferred Bonus Award made to Mr Maruta on
1 August 2017 lapsed with the balance of
358,032 share vesting. The value of these
shares on 31 March 2018 was £25,492.
Payments to past Directors (audited)
There were no payments to past Directors
during the period in respect of services
provided to the Company as a Director.
Upon the appointment of Mr Deniskin
as Chief Executive Officer, Mr Ermolenko
reverted to his former role as General Director
MC Petropavlovsk. He did not receive any
payment for loss of office.
External directorships
None of the Executive Directors earned
remuneration from external non-executive
appointments during the year.
Implementation of Remuneration Policy in 2019
The section below sets out a summary of how the proposed Remuneration Policy will be implemented for the year ending 31 December 2019.
Executive Directors Salary
The Remuneration Committee reviewed the Chief Executive Officer’s salary and determined that no salary increase should be awarded for the
year commencing 1 January 2019.
Annual bonus
The maximum annual bonus opportunity for the Chief Executive Officer for the 2019 financial year will remain 100% of salary. The target bonus is
37.5% of salary; bonuses will be payable on a straight-line basis between target and stretch.
The Committee has approved the following bonus targets for the Chief Executive Officer:
Objective
POX Performance
Financial
Gold Production
Health & Safety
Total
Weighting (% of max)
50%
25%
20%
5%
100%
Payable at Target
25%
N/A
10%
Achievement of
budgeted production
2.5%
Achievement of
approved LTIFR target
37.5%
Payable at Stretch
50%
25%
20%
Achievement of
=/+5% of budgeted production
5%
2019 LTIFR 5%
or more below approved target
100%
As was the case last year, full details of the
specific targets have not been disclosed in
advance particularly for the first two bonus
objectives detailed above, due to their
commercial sensitivity. The financial objective
is a single measure that is either achieved or
not achieved. Hence there is no performance
range. Full retrospective disclosure of the
specific targets and performance against
them will be provided in the 2019 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 2019, 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 applicable 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 after payment.
LTIP
The Committee intends to grant performance
share awards under the LTIP following the
announcement of the results for the year
ended 31 December 2018.
Dr Maslovskiy will receive a Performance
Share Award over shares worth 100% of
salary. The award will vest based upon the
satisfaction of performance targets over a
three-year performance period. The award
will be subject to a full two-year post vesting
holding period.
134 Petropavlovsk Annual Report 2018
The targets to be applied to this award are as follows:
TSR Outperformance (70%)
TSR vs. TSR of a bespoke Gold Mining Index Balanced Scorecard (30%) Strategic
25% for TSR equal to median
100% for Median +10% p.a.
or above
1. Construction and launch of a flotation plant at Pioneer
2. Start of operations at the Elginskoye deposit, preparation for a Feasibility Study of permanent
conditions and protection of reserves in the State Committee of Mineral Reserves
3. Preparation of technical documentation and the start of construction of the 3rd phase of the
flotation on Malomir
20%
5%
5%
The constituents of the bespoke Gold Mining Index will be announced at the date of the award together with more detail on the three strategic targets.
Chairman
The Non-Executive Chairman’s fee for 2019 has remained unchanged from 2018 levels. The Board approved an increase of c.6.7% in the fee
payable to the Non-Executive Directors effective from 1 January 2019, from £75,000 to £80,000. This is the first time that fees have been reviewed
since May 2015 when fees were reduced by c.18.5%. No increase was made to the additional fee for the Audit Committee or Remuneration
Committee Chair or for the position of Senior Independent Director. 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 Chairman fee
Fees
2019
£150,000
£80,000
£7,500
£10,000
£7,500
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 the Group’s Executive
Committee members. Given that the Group
operates in a number of diverse locations and
its employees cover a wide range of roles,
the majority of whom are operational
employees based at the Group’s mining
related business operations 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 considers that
taking the Executive Committee as a
reference 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.
Item
Base salary
Taxable benefits
Annual bonus
1. For 2018, based on the sum of remuneration paid to:
– Mr Sergery Ermolenko from 1 January to 16 April
– Mr Roman Deniskin from 16 April to 29 June
– Dr Pavel Maslovskiy from 29 June to 31 December
2. For 2017, based on the sum of remuneration paid to:
– Dr Pavel Maslovskiy from 1 January to 17 July
– Mr Sergey Ermolenko from 18 July to 31 December
Percentage change: 20181 vs. 20172
Chief Executive
Officer
6.4%
0%
471.7%
Executive
Committee
(15.1%)
33.6%
223%
Petropavlovsk Annual Report 2018 135
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
Relative importance of the spend on pay
The table below shows the movement in spend on staff costs between the 2018 and 2017 financial years, compared to profit before tax and dividends:
Staff costs
Average number of staff
Profit before tax
Dividends
2018
US$101.5
8,681
US$82.4m
–
2017
US$103.63
8,519
US$48.9m
–
% change
(2.06)%
1.9%
68.5%
–
There were no dividends paid or declared during the years ended 31 December 2018 and 31 December 2017 and no share buy-backs were
undertaken.
Total shareholder return
This graph shows the Company’s TSR performance relative to the FTSE350 Mining Index over a period of ten years to 31 December 2018. 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
Dec 2008
POG
FTSE300
Dec 2009
Dec 2010
Dec 2011
Dec 2012
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
Chief Executive Officer Remuneration
The table below shows the single figure of total remuneration for the Chief Executive Officer during each of the last ten financial years.
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
Chief Executive Officer
during the year(a)
Total remuneration £
Annual bonus (%)
LTIP vesting (%)
Dr Maslovskiy
Mr Ermolenko
1,138,339 (b) 1,025,991 1,569,190 661,000 400,000
0%
0%
94.4% 45.5%
0%
70% (b)
0%
45%
0%
0%
Mr Ermolenko/
Dr Maslovskiy
Dr Maslovskiy
977,605 655,000
100%
n/a
0% (c)
n/a
786,000
20%
n/a
Dr Maslovskiy/
Mr Ermolenko
584,583
25%
n/a
2018
Mr Ermolenko/
Mr Deniskin/
Dr Maslovskiy
622,123
98.375% (d)
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.
Mr Ermolenko resigned as Chief Executive Officer on 16 April 2018 and Mr Roman Deniskin was appointed as Chief Executive Officer on that date. Mr Deniskin was not re-elected by shareholders at the
2018 Annual General Meeting. Accordingly, Mr Deniskin ceased to be a Director and Chief Executive Officer on 29 June 2018 and Dr Maslovskiy was appointed as Chief Executive Officer on that date.
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.
d. Dr Maslovskiy received a bonus of 98.375% of his salary for the period 1 July 2018 to 31 December 2018.
136 Petropavlovsk Annual Report 2018
Directors’ shares and share plan interests
Directors’ share interests
The interests of the Directors who held office during the period from 1 January 2018 to 31 December 2018 in the ordinary shares of the
Company, together with details of changes to shareholdings between 1 January 2019 and 24 April 2019, are as set out in the table below.
For the period 8 February 2018 to 8 June 2018
For the period 27 July 2018 to 24 April 2019
Director
Current Directors:
Sir Roderic Lyne 1
Dr Pavel Maslovskiy 1
Mr James W Cameron Jr 2
Mr Damien Hackett 2
Mr Robert Jenkins 1
Mr Bektas Mukazhanov 3
Mr Harry Kenyon-Slaney 4
Former Directors:
Mr Ian Ashby 5
Mr Bruce M. Buck 5
Mr Adrian Coates 6
Mr Roman Deniskin 7
Mr Vladislav Egorov 8
Mr Sergey Ermolenko 9
Mr Andrey Maruta 10
Mr Garrett Soden 5
Shares held as at
1 January 2018
or date of
appointment if later
Shares held as at
31 December 2018
or date of
retirement if earlier
0
0
0
0
0
0
1,192,406
0
0
0
0
0
0
318,247
33,925
0
0
0
0
0
0
1,192,406
1,192,406
0
0
0
142,255
0
0
318,247
33,925
0
Shares held
as at 24 April
0
0
0
0
0
1,192,406
1,192,406
0
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
1. Appointed as a Director on 29 June 2018
2. Appointed as an Independent Non-Executive Director on 15 October 2018.
3. Appointed as a Non-Executive Director on 8 February 2018, departed the Board on 8 June 2018 and was re-appointed as a Director on 27 July 2018. These shares are beneficially
owned by JSC Fincraft Investment House.
4. Appointed as an Independent Director on 7 November 2018.
5. Retired as a Director on 29 June 2018.
6. Appointed as an Independent Non-Executive Director on 16 February 2018 and retired as a Director on 29 June 2018.
7. Appointed as a Director and as Chief Executive Officer on 16 April 2018 and retired as a Director on 29 June 2018.
8. Resigned as a Non-Executive Director on 1 January 2018.
9. Resigned as Interim Chief Executive Officer on 16 April 2018.
10. Resigned as Chief Financial Officer and a Director on 31 March 2018.
Petropavlovsk Annual Report 2018 137
GovernanceFinancial statementsStrategic report Directors’ Remuneration Report continued
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, and to
Mr Ermolenko in respect of his 2017 bonus, there were no LTIP Awards outstanding to any Director as at 1 January 2018 and no LTIP Awards
were made to any Director during the year.
Director
Sergey Ermolenko
Sergey Ermolenko
Andrey Maruta
Date of award
6 April 2018
1 August 2017
1 August 2017
At 1 January 2018
–
441,876
537,049
Granted
during the year
707,173
–
–
Face value at grant
£50,563
£32,500
£39,500
Lapsed during the
year
–
–
179,017
At 31 December
2018 or date of
resignation if earlier Normal vesting date
707,173
6 April 2019
441,876 1 August 2018
358,032 1 August 2018
Mr Ermolenko received a Deferred Bonus
Award on 6 April 2018, under the rules of the
Long-Term Incentive Plan. The award was in
respect of 12.5% of Mr Ermolenko’s salary,
representing 50% of the bonus received by
Mr Ermolenko in respect of the year ended 31
December 2017, as disclosed in the 2017
Directors’ Remuneration Report.
Mr Ermolenko resigned as Interim Chief
Executive Officer on 16 April 2018, returning
to his previous role of General Director of
Management Company Petropavlovsk.
Mr Ermolenko’s award vested/will vest in
accordance with the Rules of the LTIP,
given his continued employment with
Petropavlovsk.
The number of ordinary shares awarded was
based on the mid-market closing share price
of Petropavlovsk PLC ordinary shares on 6
April 2018, being 7.15 pence.
Mr Maruta resigned as Chief Financial
Officer and as a Director of the Company
on 31 March 2018. In accordance with the
rules of the LTIP, 179,017 shares which
related to the Deferred Bonus Award
granted to Mr Maruta for the year ended
31 December 2016 lapsed on his date
of resignation.
Approval
The Annual Remuneration Report has been
approved by the Board of Directors and
signed on its behalf by:
Robert Jenkins
Chairman, Remuneration Committee
24 April 2019
138 Petropavlovsk Annual Report 2018
Directors’ Report
For the year ended 31 December 2018
This report
This report includes certain disclosure 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:
– The Strategic Report on pages 1 to 95 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. The Strategic Report
includes details of work carried out by
companies within the Group in relation to
exploration, development and analysis work
necessary to support the Group’s activities
and its strategy;
– Details of significant events since the
balance sheet date are contained in
note 10 to the financial statements;
– 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 Principal Risks and
Mitigation section on pages 16 to 33;
– Information about the use of financial
instruments by the Company and its
subsidiaries is given in note 27 to the
financial statements;
– Details of the Group’s corporate
governance arrangements and its
compliance with the UK Corporate
Governance Code (the ‘Code’) can be
found on pages 102 to 109;
– Directors’ interests in shares as at
31 December 2018 and any changes
thereafter can be found on page 137 of
the Directors’ Remuneration Report; and
– The Group’s disclosure of its greenhouse
gas emissions can be found on page 71.
Directors, Directors’ appointment,
conflict 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 98 and 99.
Changes to the Directors during 2018 and up
until the date of this Report are detailed in the
table below:
Name
Sir Roderic Lyne
Dr Pavel Maslovskiy
Mr James W Cameron Jr
Mr Damien Hackett
Mr Robert Jenkins
Mr Harry Kenyon-Slaney
Mr Bektas Mukazhanov
Mr Ian Ashby
Mr Bruce M. Buck
Mr Adrian Coates
Mr Roman Deniskin
Mr Sergey Ermolenko
Mr Vladislav Egorov
Mr Andrey Maruta
Mr Garrett Soden
Appointed
29 June 2018
29 June 2018
15 October 2018
15 October 2018
29 June 2018
7 November 2018
8 February 2018
27 July 2018
22 June 2017
22 June 2017
16 February 2018
16 April 2018
18 July 2017
22 June 2017
4 January 2011
22 June 2017
Retired/Resigned
8 June 2018
29 June 2018
29 June 2018
29 June 2018
29 June 2018
16 April 2018
1 January 2018
31 March 2018
29 June 2018
Position
Non- Executive Chairman
Chief Executive Officer
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Independent Non-Executive Director
Non-Executive Director
Non-Executive Chairman
Independent Non-Executive Director
Independent Non-Executive Director
Chief Executive Officer
Interim Chief Executive Officer
Non-Executive Director
Chief Financial Officer
Independent Non-Executive Director
Further details of these changes are provided on pages 102 to 107 of the Corporate 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 Nominations
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 published
in July 2018, all eligible directors will stand
for election or re-election at the 2019 AGM.
Information regarding the appointment of
our Directors is included in the Nominations
Committee Report on pages 110 and 111.
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 2018 139
GovernanceFinancial statementsStrategic report Directors’ Report continued
For the year ended 31 December 2018
Employees
The Group maintains a policy of providing
employees with information about the
Company and 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.
Further information regarding employment at
Petropavlovsk and the Board’s engagement
with the Group’s employees, is provided in the
Sustainability section of this Report on pages
72 and 76.
Modern Slavery and Human Trafficking
Statement
The Company’s statement can be found
on the Company’s website at:
http://www.petropavlovsk.net/sustainability/
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 77.
Share capital and related matters
Share capital
At 31 December 2018, the Company had
3,307,151,712 ordinary shares of £0.01 each
in issue (2017: 3,303,768,532). Details of the
Company’s issued share capital and
movements in the issued share capital are
shown in note 23 to the financial statements
on page 193.
Purchase of own shares
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 2018 AGM and no such
authority will be sought in 2019.
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.
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.
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 195.
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 2018. 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 and by covenants in the
Petropavlovsk 2016 Limited 8.125%
Guaranteed Notes due 2022, both of
which the Company is the guarantor.
140 Petropavlovsk Annual Report 2018
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 Resolutions relating to the allotment
of shares at the 2018 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 £10,900,000, 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; and
– The Directors were granted authority to
disapply statutory pre-emption rights over
new shares allotted for cash pursuant to the
above authority, up to an aggregate nominal
value of £1,651,880, equivalent to
approximately 5% of the total issued
Ordinary Share capital of the Company at
the time of passing the resolution.
The above authority has been exercised
during the reporting period. In accordance
with the terms of the Company’s Long-Term
Incentive Plan 3,383,180 Ordinary Shares
were allotted on 13 August 2018. Following
the allotment, the total issued share capital
of the Company increased to 3,307,151,712
Ordinary Shares.
Resolutions for a renewal of the authority to
allot new shares together with authority to
disapply pre-emption rights over new shares
allotted for cash pursuant to the authority to
allot new shares will be sought at the 2019
AGM. The resolutions being sought as
regards pre-emption rights disapplication
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.
2019 Annual General Meeting (AGM)
Notice of Annual General Meeting
A separate document, the Notice of Annual
General Meeting 2019, convening the AGM
of the Company to be held on 13 June 2019
at 11.00 a.m., 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.
Electronic copies of the Annual
Report and financial statements
and other publications
Copies of the 2018 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 Group
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.
The Company is committed to reducing
paper and improving efficiency in its
shareholder communications. From 2020, the
Company will no longer be sending proxy
cards to shareholders for the annual general
meeting unless specifically asked to do so.
The Company will provide advice on how to
request a paper proxy at the appropriate time.
Change of control
The Company is committed to reducing
paper and improving efficiency in its
shareholder communications. From 2020, the
Company will no longer be sending proxy
cards to shareholders for the annual general
meeting unless specifically asked to do so.
The Company will provide advice on how to
request a paper proxy at the appropriate time.
Significant contracts
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 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.
Pursuant to the issue of US$500 million
8.125% Guaranteed Notes due 2022 (‘the
Loan Notes’) issued by Petropavlovsk 2016
Limited on 14 November 2017 and
guaranteed by the Company, if any person
or group of persons acting in concert gains
control of the Company, constituting a
Relevant Event (as defined in the Terms and
Conditions of the Bonds), the Bondholders
have the right to require the redemption of the
Loan Notes at 101 per cent. of their principal
amount plus accrued and unpaid interest to
the date of redemption.
Information required by UK Listing
Rule 9.8.4
Details of the amount of interest capitalised
by the Group during the financial year can
be found on page 92 of the Chief Financial
Officer’s Statement.
There are no other disclosures to be made
under Listing Rule 9.8.4.
Petropavlovsk Annual Report 2018 141
GovernanceFinancial statementsStrategic report
Directors’ Report continued
For the year ended 31 December 2018
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 2018, the Company had received the following disclosures of major holdings of voting rights, pursuant to the requirements of
Rule 5 of the DGTR.
Fincraft Holdings Ltd (a)
Sothic Capital European Opportunities Master Fund Limited (b)
VTB Bank (Deutschland) AG
D.E. Shaw & Co., L.P. and D.E. Shaw & Co. (London) (c)
Slevin Ltd
CABS Platform Limited
No of Shares
440,565,485
347,534,872
300,000,000
256,609,333
150,517,537
150,517,537
Financial
instruments
with similar
economic effect
to Qualifying
Financial
Instruments % of voting rights
225,674,382 6.82 (nominal)
0.45 (Delta)
–
–
–
–
14,837,653
–
–
–
–
% interest in
voting rights
ordinary
shares
13.32
10.51
9.07
7.76
4.55
4.55
Total number of
voting rights
669,239,867
362,372,525
300,000,000
256,609,333
150,517,537
150,517,537
% voting rights
(as at 31
December
2018)
20.24
10.96
9.07
7.76
4.55
4.55
(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) D.E. Shaw & Co., L.P. and D.E. Shaw & Co. (London), LLP DBMMA015 is the full name of the shareholder with respect to the indirect interest over 256,609,333 Ordinary Shares.
As at 24 April 2019, the Company had received the following disclosures of major holdings of voting rights, pursuant to the requirements of Rule 5
of the DGTR.
% interest in
voting rights
ordinary
shares
13.32
10.51
9.07
7.76
5.00
No of Shares
440,565,485
347,534,872
300,000,000
256,609,333
165,519,276
Fincraft Holdings Ltd (a)
Sothic Capital European Opportunities Master Fund Limited (b)
VTB Bank (Deutschland) AG
D.E. Shaw & Co., L.P. and D.E. Shaw & Co. (London) (c)
Prosperity Capital Management Limited:
The Russian Prosperity Fund
The Prosperity Cub Fund
The Prosperity Quest Fund
Prosperity Capital Management SICAV 2384908
Ontario Limited
Financial
instruments with
similar economic
effect to
Qualifying
Financial
Instruments
% voting rights
225,674,382 6.82 (nominal)
0.45 (Delta)
–
–
–
14,837,653
–
–
–
Total number of
voting rights
669,239,867
362,372,525
300,000,000
256,609,333
165,519,276
% of voting
rights (as at
24 April 2018)
20.24
10.96
9.07
7.76
5.00
Slevin Ltd
Everest Alliance Limited (formerly CABS Platform Limited)(d)
150,517,537
150,517,537
4.55
4.55
–
–
–
–
150,517,537
150,517,537
4.55
4.55
(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) D.E. Shaw & Co., L.P. and D.E. Shaw & Co. (London), LLP DBMMA015 is the full name of the shareholder with respect to the indirect interest over 256,609,333 Ordinary Shares.
(d) CABS Platform Limited changed its name to Everest Alliance Limited. The Company was notified of the change of name on 7 March 2019.
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.
142 Petropavlovsk Annual Report 2018
Relationship Agreement
On 30 July 2018, Fincraft Holdings Ltd
(“Fincraft”) and Mr Kenges Rakishev
entered into a relationship agreement with
the Company due to Fincraft’s position as a
significant shareholder of the Company and
Mr Rakishev being the sole beneficial owner
of Fincraft. Under this relationship agreement
Fincraft has the right to appoint a director to
the board of the Company, which is currently
Mr Bektas Mukazhanov. In addition, Fincraft
has provided certain undertakings including
in respect of conducting transactions with the
Company and exercising its right to vote.
Accountability & 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 the 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, advances
received from customers under prepayment
arrangements 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
2018 Annual Report and Accounts. As at
31 December 2018, the Group had sufficient
liquidity headroom. The Group is also satisfied
that it has sufficient headroom under a base
case scenario for the period to May 2020.
The Group has also performed projections
under a layered stressed case that is based
on a gold price, which is approximately 10%
to 14% lower than the average of the market
consensus forecasts, non-refractory gold
production approximately 5% lower than
projected, and Russian Rouble : US Dollar
exchange rate that is approximately 8-9%
stronger than the average of the market
consensus forecasts. This layered stressed
case indicates that mitigating actions will be
required to be taken in order to ensure
sufficient liquidity for the relevant period to
May 2020. This includes sufficient liquidity
for the repayment, if necessary, of the
Company’s US$100 million 9% Convertible
Bonds, due in March 2020. The mitigating
actions include items within the control of the
management, such as cost cutting, reduction
of capital and operating expenditure, the
deferral of prepayment settlements as well
as working capital management.
context of its strategy and long-term mining
plan, the financial model reflecting it and the
principal related risks which could potentially
jeopardise this. The Board has selected a
five year period, from 2019 to 2023, for
assessing the Group’s longer term viability
in order to reflect the long term nature of
the Group’s business as well as the term
of the Company’s US$500 million 8.125%
Guaranteed Notes, due 14 November 2022.
As at 31 December 2018, the Group has
guaranteed the outstanding amounts IRC
owed to ICBC. The outstanding loan principal
was US$169 million as at 31 December 2018.
On 19 March 2019, the ICBC Facility was fully
refinanced by the loans from Gazprombank.
The Group has provided a guarantee in
respect of IRC’s new US$240 million facility,
of which approximately US$233 million has
been drawn down to date. The Gazprombank
Facility is subject to an initial US$160 million
guaranteed by the Group. The assessment of
whether there is any material uncertainty that
IRC will be able to repay this facility as it falls
due is another key element of the Group’s
overall going concern assessment. IRC
projections demonstrate that IRC expects to
have sufficient working capital liquidity over
the next 12 months and expects to meet its
obligations under the Gazprombank Facility.
If a missed repayment under debt or guarantee
obligations occurs, this would result in events
of default which, through cross-defaults and
cross-accelerations, could cause all other
Group’s debt arrangements to become
repayable on demand.
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 2018 Annual
Report and Accounts. Accordingly, they
continue to adopt the going concern basis of
accounting in preparing these consolidated
financial statements.
Viability Statement
Context and Period of Assessment
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.
The Board assesses and keeps under review
the longer term viability of the Group in the
The Group’s strategy, as set out in the
Strategic Report on pages 12 to 13, is
focused on the satisfactorily profitable
development of both its non-refractory and
refractory gold Ore Reserves and Mineral
Resources. This projects sustainable annual
gold production rising over the selected
period of viability assessment from a current
450 Koz to approaching 600 Koz (including
processing of concentrate from third party
producers).
In assessing the Group’s longer term viability,
the Board has given consideration to and
taken into account the Group’s identified
principal risks, as set out and reviewed on
pages 16 to 33 as well as the following key
considerations:
Reserves, Resources and Production
The Group’s sizable Ore Reserves and
Mineral Resources, the high mineral
prospectivity of the region in which it operates
and its mining exploration capability, underpin
the long-term sustainability of its business
and its financial viability into the longer term.
The Group’s existing JORC Ore Reserves are
the basis of its long term-mine plan, business
projections and longer term viability
statement. These in turn also reflect
substantiated assumptions, in particular,
about the grade and stripping ratios of its Ore
Reserves. For these reasons, the availability
of Ore Reserves in line with the Group’s
business model into the longer term is not
assessed as a critical risk area.
Full utilisation of the Group’s new 400-500k
tonne annual capacity for the four vessels
POX Hub gold concentrate processing facility
is a key part of its business plan into the
longer term. This assumes the expansion
of the Group’s own gold concentrate annual
production capacity from a current 120 /130k
tonnes to c.350 k tonnes by 2022, with full
utilisation of its POX Hub facility being
achieved also through the purchase and
processing of gold concentrate from third
party producers. There are a number of such
producers in the Eastern part of and across
Russia and these are well known to the
Petropavlovsk Annual Report 2018 143
GovernanceFinancial statementsStrategic report Directors’ Report continued
For the year ended 31 December 2018
Group. The Board’s longer term viability
assessment assumes that the Group will be
capable of purchasing such gold concentrate
as it may require and on satisfactory terms in
order to meet the Group’s business plan
objectives. While this is an area of risk, the
Board considers that it should not prove
critical. This key judgement is based on the
Group’s contacts to date with third party
gold concentrate producers, including initial
arrangements for the purchase of concentrate
from them.
The Board’s assessment of the Group’s
longer term viability also assumes that its POX
Hub facility will operate satisfactorily, including
in processing cost terms. However the Board
recognises this as a key possible risk area.
While the initial operational performance of
the Group’s POX Hub facility has been
successful and has validated its design,
it is still in its testing and ramp-up phase.
In assessing how the Group’s principal risks
might impact upon its future gold production,
the Board considers that, other than the
identified financial and country related risks,
all other risks should be capable of being
satisfactorily controllable by management.
Accordingly, the Group’s longer term viability
financial model does not reflect any
sensitivities in respect of these.
Financial Model and Risks
The Group’s business and financial model
shows its projected capital and exploration
expenditure over the period 2019 - 2023
being fully funded out of cash flow.
The Board’s longer term viability assessment,
based on the Group’s business and financial
model, also shows that the Company should
be able to fund out of cash flow, and the
financial resources expected to be available
to it, both the repayment of its US$ 100 million
9% Convertible Bonds, due 18 March 2020,
and its US$500 million 8.125% Guaranteed
Notes, due 14 November 2022.
The Group’s business and financial model
and the Board’s assessment of its longer
term viability reflects, in particular external
assumptions about the gold price, based
on consensus forecasts, and the Rouble US
dollar exchange rate. The Board considers
the assumptions regarding these to be
reasonable, but highlights these as principal
external risk factors which could otherwise
impact upon the Group’s longer term viability,
with the gold price and the exchange rate risk
being of significance in that around 80% of
the Group’s costs are Rouble based.
In the Board’s assessment of the Group’s
longer term viability, it has taken account of
stress test sensitivity analyses undertaken
of the Group’s business and financial model.
These stress test the impact of external
principal risk factors in relation to future gold
price and RUB/USD exchange rate, as these
may affect negatively the Group’s revenues,
costs and financial performance. The Board’s
assessment of the Group’s longer term
viability, takes into account, in particular,
in a stress tested scenario, that the Company
may need to refinance, at least partially, its
US$500 million 8.125% Guaranteed Notes,
due 14 November 2022, an assumption
which the Board considers reasonable.
In assessing the Company’s longer
term viability, the Board has also given
consideration to the risks relating to its
associate, IRC, for which the Company
provides a guarantee to Gazprombank in
relation to its loan facility with K&S, a
subsidiary of IRC. Following the refinancing
of IRC’s bank debt with Gazprombank, the
Board considers that the risks for the
Company in its associated guarantee of this
have been significantly reduced. Based on
consideration and analysis of IRC’s financial
performance in relation to its bank debt
obligations, the Board’s assessment of the
Company’s longer term viability accordingly
assumes that IRC’s future performance, in the
context of the risks relating to it, should not
jeopardise this.
Conclusion
Based on their assessment, as outlined
above, the Directors confirm they have a
reasonable expectation that the Group
will continue in operation and meet its
liabilities as they fall due during the period
to 31 December 2023. 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.
This information is given and should be
interpreted in accordance with the provisions
of Section 418 of the Companies Act.
Resolution to re-appoint independent
auditors
Deloitte LLP has expressed their willingness
to continue in office as auditors 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 position and 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
24 April 2019
144 Petropavlovsk Annual Report 2018
Directors’ Responsibilities Statement
For the year ended 31 December 2018
The directors are responsible for preparing
the Annual Report and the financial
statements in accordance with applicable law
and regulations.
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 102 “The
Financial Reporting Standard applicable in
the UK and Republic of Ireland”. 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
– 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:
– Properly select and apply accounting
policies;
– Present information, including accounting
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.
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.
Directors’ Responsibility statement
We confirm that to the best of our knowledge:
– 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.
This responsibility statement was approved by the board of directors on 23 April 2019 and is signed on its behalf by:
Sir Roderic Lyne
Non-Executive Chairman
24 April 2019
Dr Pavel Maslovskiy
Chief Executive Officer
24 April 2019
Petropavlovsk Annual Report 2018 145
GovernanceFinancial statementsStrategic report
Independent Auditor’s Report
to the Members of Petropavlovsk PLC
For the year ended 31 December 2018
Report on the audit of the financial
statements
We have audited the financial statements
which comprise:
Disclosure Framework” (United Kingdom
Generally Accepted Accounting Practice).
Opinion
In our opinion:
– The financial statements of Petropavlovsk
PLC (the ‘Company’) and its subsidiaries
(the ‘Group’) give a true and fair view of the
state of the Group’s and of the Company’s
affairs as at 31 December 2018 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 Group Statement of Profit and Loss;
– The Group Statement of Comprehensive
Income;
– The Group and Company Statements of
Financial Position;
– The Group and Company Statements of
Changes in Equity;
– The Group Statement of Cash Flows;
– The related notes 1 to 33 to the Group
financial statements; and
– The related notes 1 to 10 to the Company
– The Company financial statements have
financial statements.
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.
Summary of our audit approach
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
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 Financial Reporting Council’s
(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.
Key audit matters
The key audit matters that we identified in the current year were:
– Going concern;
– Impairment of property, plant and equipment;
– Valuation of the IRC investment;
– Accuracy and completeness of deferred tax; and
– Accounting for the guarantee of IRC’s debt.
Our assessment of the Group’s key audit matters is consistent with 2017, except for:
– The inclusion of accuracy and completeness of deferred tax due to the complexity of the
calculations and the error identified relating to the prior year; and
– The accounting for the guarantee of IRC’s debt because
a) The accounting is governed by IFRS 9 Financial Instruments which was adopted on
1 January 2018;
b) The valuation for the liability and related fee income asset is highly complex; and
c) The credit risk associated with IRC at the 2018 year end has significantly increased the
value of the liability recognised.
– The valuation of the IRC investment risk was previously referred to as accounting for the
investment in IRC
Materiality
We used a materiality of $8.5 million for our audit of the Group financial statements.
This represents less than 2% of net assets.
146 Petropavlovsk Annual Report 2018
Summary of our audit approach
Scoping
Significant changes in our approach
Conclusions relating to going concern,
principal risks and viability statement
Going concern
We have reviewed the directors’ statement in
note 2 to the financial statements about
whether they considered it appropriate to
adopt the going concern basis of accounting
in preparing them and their identification of
any material uncertainties to the group’s and
company’s ability to continue to do so over a
period of at least twelve months from the date
of approval of the financial statements.
We considered as part of our risk assessment
the nature of the group, its business model
and related risks including where relevant the
impact of Brexit, the requirements of the
applicable financial reporting framework and
the system of internal control. We evaluated
the directors’ assessment of the group’s
ability to continue as a going concern,
including challenging the underlying data and
key assumptions used to make the
assessment, and evaluated the directors’
plans for future actions in relation to their
going concern assessment.
We are required to state whether we have
anything material to add or draw attention to
in relation to that statement required by Listing
Rule 9.8.6R(3) and report if the statement is
materially inconsistent with our knowledge
obtained in the audit.
We confirm that we have nothing
material to report, add or draw attention
to in respect of these matters.
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 96% of the Group’s net
assets and 99% of the Group’s revenue.
We have performed a revised risk assessment considering the key developments in the year,
the Group’s business risks and its control environment. Aside from the new key audit matters
identified as noted above, there were no significant changes in our approach.
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.
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 16 to 33 that
describe the principal risks and explain how
they are being managed or mitigated;
– The directors’ confirmation on page
144 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 143 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.
We confirm that we have nothing
material to report, add or draw attention
to in respect of these matters.
Petropavlovsk Annual Report 2018 147
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2018
Going concern
Key audit matter description
The Group’s convertible bonds mature on 18 March 2020, requiring a repayment of
$100 million.
The Group’s forecasts indicate that it will maintain sufficient liquidity under both its base case
and mitigated downside scenarios. The critical assumptions in those forecasts relate to the
successful ramp-up of the POX Hub, the gold price and the Russian Rouble – US Dollar
exchange rate. The Group’s key mitigating actions include the deferral of uncommitted
exploration and evaluation activity, reduced mining of refractory ores given the existing
inventory stockpiles and exercising its contractual right to defer the repayment of the
advances received during the year under its customer prepayment arrangements.
The Group continues to guarantee the borrowings of its Hong Kong-listed associate, IRC
Limited (“IRC”), which were $169 million at 31 December 2018. On 12 March 2019, IRC
completed a refinancing, repaying the previous facility and the temporary financing advanced
by the Group, in exchange for a new facility with an extended repayment profile. To achieve
this the Group was required to provide the IRC with a revised guarantee, which at inception
attached to $160 million of IRC’s debt.
There are no covenant tests applicable to the Group during the forecast period. IRC is
subject to covenant tests under its refinanced debt agreement, albeit with less stringent
terms than its previous debt facility.
Please refer to notes 2 and 3 in the Group financial statements and the Audit Committee
report on page 116 for further details
How the scope of our audit responded
to the key audit matter
We challenged the key assumptions in management’s forecast cash flows for the 12 month
period from the date of the Annual Report by:
– Evaluating the design and implementation of key controls around the going concern and
forecasting process;
– Considering the Group’s historical forecasting accuracy;
– Benchmarking the forecast gold price and exchange rate assumptions with recent analyst
forecasts;
– Engaging our mining consultants to assess management’s production plan and in
particular challenge the modelled ramp-up profile for the POX Hub;
– Testing the mechanical accuracy of the Group’s cash flow model;
– We challenged the extent to which management’s identified mitigating actions were within
their control and reviewing the contractual terms of the prepayment arrangements;
– Reviewing the new facility and guarantee agreements to determine whether the key terms
were reflected in the Group and IRC forecasts;
– Evaluating the risk of default by IRC on the facility guaranteed by the Group by i) reviewing
the work performed by IRC’s auditors to challenge the critical assumptions in the cash
flow forecasts prepared by IRC management; ii) understanding the key operational risks
by speaking directly with the independent Competent Person who reviewed IRC’s mine
plan and reserves statement; and iii) performing our own assumption benchmarking
procedures, including through comparison of the forecast iron ore price to recent
analyst forecasts; and
– Assessing whether the going concern disclosures in the financial statements are
appropriate.
Key observations
We concur with management’s decision to adopt the going concern basis and consider the
related disclosures appropriate.
148 Petropavlovsk Annual Report 2018
Impairment of property, plant and equipment
Key audit matter description
The carrying value of property, plant and equipment (“PP&E”) at 31 December 2018 was
$1,097 million (2017: $938 million). The Group had previously recognised impairments at
each of its three mining operations and, following full impairment valuation exercises on all
three cash generating units (“CGUs”), reversals were recognised in the year ended 31
December 2018 at Malomir of $91 million and at Albyn of $11 million.
Determining the recoverable amount for the Group’s CGUs requires management to make
significant judgements in particular regarding the key assumptions of gold price, production
volumes and exchange rates (a key driver of operating costs) over the lifetime of the
operations and the discount rate.
In previous years management has not reversed impairments as a result of continued
uncertainty over the ramp up of the POX Hub. Given the first gold pour from the POX hub was
achieved in December 2018 with ramp up ahead of schedule, these risks appear to have
diminished and management has concluded it is appropriate to recognise an impairment
reversal to its PP&E.
Another key judgement was management’s determination that an active market for gold
concentrates does not exist such that operations were assessed to comprise three CGUs,
Albyn, Malomir and Pioneer, with certain joint and corporate assets allocated to them.
Please refer to note 6 to the Group financial statements and the Audit Committee report
on page 117 for further details.
How the scope of our audit responded
to the key audit matter
We challenged management’s recoverable amount calculations and decision to recognise
the above impairment reversals, by:
– Evaluating the design and implementation of key controls around the mine planning and
forecasting process;
– Considering the Group’s historical forecasting accuracy;
– Challenging management’s determination that the operations comprise three CGUs and
its assessment of the gold concentrate market including thorough independent research,
consistency with the Group’s historical decision making, review of its concentrate
contractual arrangements and future plans;
– Benchmarking gold prices and foreign exchange rates against analyst forecasts;
– Engaging our mining consultants to perform site visits at all three operations in order to
support our independent challenge of the production volumes, mine plans, the reserves
and resources, and the modelling of the operational risks in the cash flows, in particular in
respect of the POX Hub ramp up;
– Involving valuation specialists to benchmark the 8.5% post tax real discount rate;
– Testing the mechanical accuracy of the Group’s cash flow model;
– Evaluating the sensitivity analysis performed by management and performing our own; and
– Evaluating whether the key accounting judgement and critical accounting estimate
disclosures were appropriate.
Key observations
The assumptions made by management when determining the mining assets’ recoverable
amounts fell within a reasonable range.
We concluded that the carrying value of PP&E, the impairment reversals recognised and
disclosures made are appropriate.
Petropavlovsk Annual Report 2018 149
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2018
Valuation of the IRC investment
Key audit matter description
How the scope of our audit responded
to the key audit matter
The Group has to apply judgement in determining the recoverable amount for its 31.1%
shareholding in IRC Ltd, a Hong Kong-listed iron ore producer. During the year ended
31 December 2018, there had been a significant decline in the IRC share price which represented
an impairment indicator and a Group level impairment was recognised of $5.7 million giving a
carrying value of $85.1 million as at 31 December 2018 (2017: $70.9 million).
Management determined the value in use of the investment based on IRC’s audited balance
sheet at 31 December 2018, with adjustments made principally to:
(i) reflect the present value of future cash outflows such as corporate costs; and
(ii) the valuation effect of the substantially complete IRC refinancing which was accordingly
not yet reflected in IRC’s year end balance sheet .
IRC management had performed an impairment analysis on the PP&E recognised in its
financial statements and had recognised an impairment reversal of $90.5 million (Group
share: $28.1 million) in relation to the K&S mine such that the reported PP&E carrying values
approximated its fair value.
The key judgements related to the iron ore, discount rate and production volume
assumptions made by IRC management in its valuation of the PP&E and the completeness
and accuracy of the adjustments recognised by the Group.
Please refer to note 14 to the Group financial statements and the Audit Committee report on
page 117 for further details.
We challenged management’s valuation and accounting judgements by:
– Evaluating the design and implementation of key controls over its valuation of its associate,
based on the information available to it;
– Challenging the key IRC valuation assumptions, in particular in relation to the iron ore
price assumptions, the K&S ramp up profile, the life of mine production assumptions and
the discount rate through performing our own assumption benchmarking procedures
including the comparison of the forecast iron ore price to recent analyst forecasts and
the calculation of reasonable discount rate range by our valuation specialists.
– Understanding the key operational risks and production forecasts by speaking directly with
the independent competent person who reviewed IRC’s mine plan and reserves
statement;
– Challenging management’s methodology for determining the Group level valuation
adjustments, in particular the advanced nature of the refinancing such that it was
appropriate to recognise in the valuation and the calculation of future IRC corporate cash
costs; and
– Challenging the appropriateness of the key estimation disclosures and critical accounting
disclosures.
Key observations
We consider that the carrying value of the Group’s investment is within the reasonable range.
150 Petropavlovsk Annual Report 2018
Accuracy and completeness of deferred tax
Key audit matter description
The Group’s deferred tax calculations reflect the additional complexity of the key operating
entities having a US dollar functional currency for determining the accounting base but
have a Russian Rouble tax base. In addition the Group has historical losses for which the
recognition of deferred tax asset will often require a judgement of the forecast profitability
of the Group.
Management and Deloitte have identified prior year errors in relation to the calculation
and recognition of deferred tax assets (“DTA”) and deferred tax liabilities (“DTL”) which are
described in note 2. Given these errors, the complexity of the calculations and the material
size of the DTL balance recognised, we have identified the accuracy and completeness of
deferred tax as a new key audit matter in the current year.
Please refer to note 2.1 to the Group financial statements and the Audit Committee report on
page 119 for further details.
How the scope of our audit responded
to the key audit matter
We challenged management’s significant assumptions around the accuracy and
completeness of deferred tax by:
– Evaluating the design and implementation of management’s key controls in relation to its
deferred tax calculations;
– Reviewing deferred tax balances, which arise primarily in Russia, and the associated
consolidation adjustments and challenging management’s judgements on whether or not
these items should have been recorded;
– Arranging on-site visits for our Group tax audit partner and his team to meet with local
management and our component auditors to discuss audit approach and key judgements;
– Analysing material permanent differences in the Group income tax reconciliation and
determining whether they do not include any temporary tax differences;
– Assessing material 2018 transactions to determine whether the deferred tax impact has
been appropriately reflected;
– Recalculating deferred tax balances and evaluating whether the tax and accounting base
used in the management’s calculation are accurate; and
– Analysing the causal factors for the prior year error and performing additional targeted
audit procedures. We obtained and challenged management’s calculation of prior year
errors, including the assessment of whether or not errors identified are material individually
or in aggregate, and whether they should be restated in line with IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors.
We are satisfied that management has accounted for deferred tax in line with the requirements
of IAS 12 and it is accurate and complete and that the prior year errors identified have been
accounted for in accordance with IAS 8. The directors’ commentary in relation to the enhanced
taxation controls and procedures being implemented is set out on page 120.
Key observations
Petropavlovsk Annual Report 2018 151
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2018
Accounting for the guarantee of IRC’s debt
Key audit matter description
POG provided a guarantee over IRC’s $340m debt with ICBC in 2010 when IRC was a
subsidiary of the Group and it receives a fee based on a percentage of the guaranteed
amount. POG must value its liability for the provision of the guarantee, as well as the
associated income stream of guarantee payments from IRC, in accordance with IFRS 9
Financial Instruments, which was adopted from 1 January 2018. Furthermore, during 2018
POG provided two bridging loans, for a total of $56.8 million to IRC in order to enable it to
make scheduled repayments to ICBC, and avoid a potential default. These must also be
valued in accordance with IFRS 9.
The application of the new accounting standards valuations of these financial instruments is
complex in respect of the applicable valuable methodologies and the determination of the
asset and liabilities values where this is no directly observable inputs in relation to IRC’s
probability of default and the loss which would result on any default, as well as the likelihood
that the refinancing will complete at the balance sheet date. The credit risk associated with
IRC at the 2018 year end has significantly increased the value of the liability recognised.
Please refer to note 2.1 to the Group financial statements and the Audit Committee report on
page 118 for further details.
How the scope of our audit responded
to the key audit matter
We challenged management’s significant assumptions and conclusions reached in valuing
the associated financial instruments by:
– Challenging the competence, capability and objectivity and the scope of work of
management’s third party valuation expert used to perform these valuations. We reviewed
their engagement letter and used our own valuation experts to review their scope;
– Holding a number of joint meetings between management’s expert, management and our
valuation and technical accounting experts. In those meetings, and on receipt of their
reporting, we challenged the methodologies used, the assumptions applied and the
application of the accounting standards;
– Independently checking the source information used by management’s expert and
obtaining other market data available in order to compare that with the assumptions
applied in the valuations;
– Performing independent recalculations of certain key valuation workings in order to
benchmark the output of the valuation models; and
– Reviewing management’s disclosures of the arrangements in the financial statements
within note 25, the first time adoption effects of IFRS 9 in note 2.2 and the revised guarantee
arrangements established under the IRC refinancing in March 2019 which are set out in the
post balance sheet event note 30.
We consider that the financial liability recognised in respect of the guarantee, and the
financial asset in respect of the guarantee fee income are reasonable and in accordance
with the requirements of IFRS 9.
Key observations
152 Petropavlovsk Annual Report 2018
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
$8.5 million (2017: $8.7 million)
$7.6 million (2017: $8.3 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 2017.
Rationale for the benchmark applied
The Group’s net asset value reflects its mining
assets and proven and probable gold reserves
which support those assets. We determined
that using a balance sheet metric, rather than
profit-based metric, provides a more stable
base for materiality, and is more reflective of the
scale of the Group’s operations as it ramps up
the POX Hub.
Less than 2 per cent of the Company’s net
assets, consistent with the approach taken
in 2017.
We have determined materiality based on
the net asset position of the Company as its
principal activity is to hold investments in
subsidiaries.
We agreed with the Audit Committee that we
would report to the Committee all audit
differences in excess of $425 thousand (2017:
$435 thousand), 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.
Group materiality
Net assets
Net assets $601m
Group materiality $8.5m
Component materiality
range $2.1m to $7.6m
Audit Committee
reporting threshold $0.43m
An overview of the scope of our audit
We have performed a revised risk
assessment considering the key
developments in the year, the Group’s
business risks and its control environment.
Other areas of focus for the audit included
whether the Group exercises significant
influence or control over IRC, the accounting
in relation to the gold sale prepayment
arrangements entered into in the year, and
the recoverability of E&E assets and inventory
carrying values. In other areas the audit scope
and planned procedures remain consistent
with the previous year, with additional tailored
procedures where considered appropriate.
Our Group audit focused primarily on the
operating locations, being the four operating
mines (2017: four), eleven service entities
(2017: twelve), six exploration companies
(2017: four), twelve finance and holding
companies (2017: twenty five) as well as on
the Group’s associate, IRC. All of the
operating mines were subject to a full scope
audit, while 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 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%
(2017: 96%) of the Group’s net assets and
99% (2017: 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 teams in Russia and Hong Kong
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 $2.1 million to $7.6 million (2017:
$2.2 million to $8.3 million). The Group team
took direct responsibility for the audit work in
respect of the consolidation process 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
Petropavlovsk Annual Report 2018 153
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Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2018
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 members of the
Group audit team visited Moscow to review
the work performed by the Russian
component team and the Amur region of
Russia to visit 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 on the Group’s associate, IRC.
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.
Details of the extent to which the audit was
considered capable of detecting irregularities,
including fraud are set out below.
A further description of our responsibilities
for the audit of the financial statements
is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities.
This description forms part of our auditor’s
report.
Net assets
Revenue
Full audit scope
(60%)
Specific audit
procedures
(35%)
Review at
group level
(5%)
Full audit scope
(99%)
Specific audit
procedures
(1%)
Review at
group level
(0%)
154 Petropavlovsk Annual Report 2018
Extent to which the audit was
considered capable of detecting
irregularities, including fraud
We identify and assess the risks of material
misstatement of the financial statements,
whether due to fraud or error, and then design
and perform audit procedures responsive to
those risks, including obtaining audit evidence
that is sufficient and appropriate to provide a
basis for our opinion.
Identifying and assessing potential risks related
to irregularities
In identifying and assessing risks of material
misstatement in respect of irregularities,
including fraud and non-compliance with laws
and regulations, our procedures included the
following:
– Enquiring of management, internal audit
and the Audit Committee, including
obtaining and reviewing supporting
documentation, concerning the Group’s
and Company’s policies and procedures
relating to:
– Identifying, evaluating and complying with
laws and regulations and whether they
were aware of any instances of non-
compliance;
– Detecting and responding to the risks of
fraud and whether they have knowledge
of any actual, suspected or alleged fraud;
– The internal controls established to
mitigate risks related to fraud or non-
compliance with laws and regulations;
– Discussing among the engagement team
including significant component audit
teams and involving relevant internal
specialists, including tax, valuations,
financial instruments, IT and mining
specialists regarding how and where fraud
might occur in the financial statements and
any potential indicators of fraud. As part of
this discussion, we considered there was a
risk of fraud around going concern, which is
considered a key audit matter. We also
considered there was a risk of fraud around
the occurrence and cut off of gold sales and
management override of controls; and
– Obtaining an understanding of the legal and
regulatory frameworks that the Group
operates in, focusing on those laws and
regulations that had a direct effect on the
financial statements. These include the UK
Companies Act, Listing Rules, UK Corporate
Governance Code. In addition, we
considered compliance with those laws or
regulations that had a fundamental effect on
the operations of the Group. These included
terms of the group’s operating licence and
environmental regulations.
Report on other legal and regulatory
requirements
Audit response to risks identified
As a result of performing the above,
we identified going concern as a key audit
matter. The key audit matters section of
our report explains the matter in more
detail and also describes the specific
procedures we performed in response
to that key audit matter.
In addition to the above, our procedures
to respond to risks identified included the
following:
– Reviewing the financial statement
disclosures and testing to supporting
documentation to assess compliance with
relevant laws and regulations described
above as having a direct effect;
– Enquiring of management, the audit
committee and in-house and external legal
counsel concerning actual and potential
litigation and claims;
– Performing analytical procedures to identify
any unusual or unexpected relationships
that may indicate risks of material
misstatement due to fraud;
– Reading minutes of meetings of those
charged with governance, reviewing internal
audit reports and reviewing correspondence
with relevant authorities where matters
identified were significant;
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:
– In response to the risk of fraud around
– 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.
the occurrence and cut off of gold sales,
analysing sales transactions close to
the year end and receiving direct bank
customer confirmations for the volume
and the amount of gold sales; and
– In addressing the risk of fraud through
management override of controls, testing
the appropriateness of journal entries and
other adjustments; assessing whether the
judgements made in making accounting
estimates are indicative of a potential bias;
and evaluating the business rationale of any
significant transactions that are unusual or
outside the normal course of business.
We also communicated relevant identified
laws and regulations and potential fraud risks
to all engagement team members including
internal specialists and significant component
audit teams, and remained alert to any
indications of fraud or non-compliance with
laws and regulations throughout the audit
Petropavlovsk Annual Report 2018 155
GovernanceFinancial statementsStrategic report Independent Auditor’s Report
to the Members of Petropavlovsk PLC continued
For the year ended 31 December 2018
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.
Christopher Thomas, ACA
(Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
24 April 2019
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 10 years
covering the years ending 31 December
2009 to 31 December 2018. On this basis,
Petropavlovsk would have been required
to tender the audit for the year ended
31 December 2019. However, the FRC
approved the application submitted by
management to extend the period under
which Petropavlovsk is required to tender by
one year meaning the Group is now required
to tender for the 31 December 2020 audit.
Please refer to the Audit Committee report
on page 112 for further details.
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).
156 Petropavlovsk Annual Report 2018
Financial Statements
Financial Statements
Petropavlovsk Annual Report 2018 157
Financial statementsStrategic reportGovernance note
5
6
14
9
9
9
9
10
11
11
2018
US$’000
499,775
(388,643)
15,480
126,612
3,775
(29,520)
13,905
(32,354)
82,418
(56,489)
25,929
24,493
1,436
US$0.01
US$0.01
2017
(restated) (a)
US$’000
587,420
(522,267)
35,208
100,361
760
(25,905)
2,199
(28,470)
48,945
(11,804)
37,141
37,006
135
US$0.01
US$0.01
Consolidated Statement of Profit or Loss
For the year ended 31 December 2018
Group revenue
Operating expenses
Share of results of associate
Operating profit
Investment income
Interest expense
Other finance gains
Other finance losses
Profit before taxation
Taxation
Profit for the period
Attributable to:
Equity shareholders of Petropavlovsk PLC
Non-controlling interests
Profit per share
Basic profit per share
Diluted profit per share
(a) See note 2 for details regarding the restatement.
158 Petropavlovsk Annual Report 2018
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2018
Profit for the period
Items that may be reclassified subsequently to profit or loss:
Revaluation of available-for-sale investments
Exchange differences:
Exchange differences on translating foreign operations
Share of other comprehensive loss of associate
Cash flow hedges:
Fair value gains/(losses)
Tax thereon
Transfer to revenue
Tax thereon
Other comprehensive profit/(loss) for the period net of tax
Total comprehensive profit for the period
Attributable to:
Equity shareholders of Petropavlovsk PLC
Non-controlling interests
2018
US$’000
25,929
–
(3,183)
(329)
20,238
(3,743)
3,419
(633)
15,769
41,698
40,203
1,495
41,698
2017
(restated)
US$’000
37,141
(758)
832
(458)
(39,148)
7,343
(808)
162
(32,835)
4,306
4,334
(28)
4,306
Petropavlovsk Annual Report 2018 159
Financial statementsStrategic reportGovernance Consolidated Statement of Financial Position
As at 31 December 2018
Assets
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Investments in associates
Inventories
Trade and other receivables
Other non-current assets
Current assets
Inventories
Trade and other receivables
Loans granted to an associate
Derivative financial instruments
Cash and cash equivalents
Total assets
Liabilities
Current liabilities
Trade and other payables
Current income tax payable
Borrowings
Derivative financial instruments
Provision for close down and restoration costs
Net current assets
Non-current liabilities
Borrowings
Derivative financial instruments
Deferred tax liabilities
Provision for close down and restoration costs
Financial guarantee contract
Trade and other payables
Total liabilities
Net assets
Equity
Share capital
Share premium
Hedging reserve
Share based payments reserve
Other reserves
Retained earnings/(losses)
Equity attributable to the shareholders of Petropavlovsk PLC
Non-controlling interests
Total equity
31 December
2018
US$’000
note
31 December
2017
(restated)
US$’000
1 January
2017
(restated)
US$’000
12
13
14
15
16
15
16
25
17
19
20
18
22
20
18
21
22
25
19
23
43,115
1,097,075
85,140
56,805
547
1,177
1,283,859
205,844
68,394
50,966
–
26,152
351,356
1,635,215
(219,845)
(1,571)
–
(9,955)
(804)
(232,175)
119,181
(594,177)
(2,411)
(113,354)
(20,584)
(37,387)
(33,779)
(801,692)
(1,033,867)
601,348
48,963
518,142
(7,166)
227
(17,980)
47,538
589,724
11,624
601,348
53,518
937,547
70,890
72,720
8,931
347
1,143,953
172,652
75,830
–
–
11,415
259,897
1,403,850
(88,333)
(940)
(7,137)
–
(200)
(96,610)
163,287
(589,337)
(49,684)
(72,380)
(20,804)
(8,603)
–
(740,808)
(837,418)
566,432
48,920
518,142
(26,388)
144
(17,500)
32,985
556,303
10,129
566,432
49,270
918,811
36,140
51,686
11,383
1,105
1,068,395
183,266
90,430
–
7,478
12,642
293,816
1,362,211
(55,638)
(2,288)
(85,306)
–
–
(143,232)
150,584
(525,906)
(10,314)
(92,396)
(19,152)
(9,229)
–
(656,997)
(800,229)
561,982
48,920
518,142
5,900
–
(17,574)
(10,602)
544,786
17,196
561,982
These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 24 April 2019 and
signed on their behalf by
Sir Roderic Lyne
Director
Dr Pavel Maslovskiy
Director
160 Petropavlovsk Annual Report 2018
Consolidated Statement of Changes in Equity
For the year ended 31 December 2018
Balance at 1 January 2017
Correction of errors in accounting for property, plant
and equipment and deferred tax liabilities (b)
Balance at 1 January 2017 (restated)
Total comprehensive (loss)/income (restated)
Profit for the period (restated)
Other comprehensive (loss)/income
Deferred share awards
Issue of shares by subsidiary
Balance at 31 December 2017 (restated)
Impact of adopting IFRS 9 (c)
Impact of adopting IFRS 15 (c)
Total comprehensive income/(loss)
Profit for the period
Other comprehensive income/(loss)
Deferred share awards
Balance at 31 December 2018
Total attributable to equity holders of Petropavlovsk PLC
Share
Share
capital
premium
US$’000
US$’000
48,920 518,142
Share
based
payments
reserve
US$’000
–
Hedging
reserve
US$’000
5,900
Other
reserves (a)
US$’000
(17,574)
Retained
earnings/
(losses)
Total
US$’000
US$’000
(1,502) 553,886
Non-
controlling
interests
Total equity
US$’000
US$’000
16,447 570,333
–
–
–
–
–
–
–
48,920 518,142
–
–
–
–
–
48,920 518,142
–
–
–
–
–
–
48,963 518,142
–
–
–
–
–
43
–
–
–
–
–
144
–
144
–
–
–
–
–
83
227
–
5,900
(32,288)
–
(32,288)
–
–
(26,388)
–
–
19,222
–
19,222
–
(7,166)
–
(17,574)
74
–
74
–
–
(17,500)
2,703
–
(3,183)
–
(3,183)
–
(17,980)
(9,100)
(9,100)
(10,602) 544,786
4,334
36,548
37,006
37,006
(32,672)
(458)
144
–
7,039
7,039
32,985 556,303
(7,256)
(9,959)
58
58
40,203
24,164
24,493
24,493
15,710
(329)
416
290
47,538 589,724
749
(8,351)
17,196 561,982
4,306
(28)
37,141
135
(32,835)
(163)
144
–
–
(7,039)
10,129 566,432
(7,256)
58
41,698
25,929
15,769
416
11,624 601,348
–
–
1,495
1,436
59
–
(a) Including translation reserve of US$(18.0) million (31 December 2017: US$(14.8) million).
(b) See note 2 for details regarding the restatement.
(c) See note 2 for details of adoption of IFRS 9 and IFRS 15.
Petropavlovsk Annual Report 2018 161
Financial statementsStrategic reportGovernance Consolidated Statement of Cash Flows
For the year ended 31 December 2018
Cash flows from operating activities
Cash generated from operations
Interest paid
Income tax paid
Net cash from operating activities
Cash flows from investing activities
Purchase of property, plant and equipment
Expenditure on exploration and evaluation assets
Proceeds from disposal of property, plant and equipment
Loans granted
Interest received
Net cash used in investing activities
Cash flows from financing activities
Issue of Notes, net of transaction costs
Repayments of borrowings
Notes related costs
Debt transaction costs paid in connection with bank loans
Funds advanced to the Group under investment agreement with the Russian Ministry of Far East Development
Funds transferred under investment agreement with the Russian Ministry of Far East Development
Guarantee fee in connection with ICBC facility
Net cash used in financing activities
Net increase/(decrease) in cash and cash equivalents in the period
Effect of exchange rates on cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
note
24
24
12
25
29
29
17
17
2018
US$’000
2017
US$’000
282,826
(60,577)
(5,024)
217,225
(131,213)
(3,153)
1,170
(56,960)
3,667
(186,489)
–
(4,006)
(2,599)
(6,412)
–
–
–
(13,017)
17,719
(2,982)
11,415
26,152
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
162 Petropavlovsk Annual Report 2018
Notes to the Consolidated Financial Statements
For the year ended 31 December 2018
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 certain financial
assets and financial liabilities (including
derivative financial 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 the 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, advances
received from customers under prepayment
arrangements 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
2018 Annual Report and Accounts. As at
31 December 2018, the Group had sufficient
liquidity headroom. The Group is also satisfied
that it has sufficient headroom under a base
case scenario for the period to May 2020.
The Group has also performed projections
under a layered stressed case that is based
on a gold price, which is approximately 10%
to 14% lower than the average of the market
consensus forecasts, non-refractory gold
production approximately 5% lower than
projected, and Russian Rouble : US Dollar
exchange rate that is approximately 8-9%
stronger than the average of the market
consensus forecasts. This layered stressed
case indicates that mitigating actions will be
required to be taken in order to ensure
sufficient liquidity for the relevant period to
May 2020. This includes sufficient liquidity
for the repayment, if necessary, of the
Company’s US$100 million 9% Convertible
Bonds, due in March 2020. The mitigating
actions include items within the control of the
management, such as cost cutting, reduction
of capital and operating expenditure, the
deferral of prepayment settlements as well
as working capital management.
As at 31 December 2018, the Group has
guaranteed the outstanding amounts IRC
owed to ICBC. The outstanding loan principal
was US$169 million as at 31 December 2018.
On 19 March 2019, the ICBC Facility was fully
refinanced by the loans from Gazprombank.
The Group has provided a guarantee in
respect of IRC’s new US$240 million facility,
of which approximately US$233 million has
been drawn down to date. The Gazprombank
Facility is subject to an initial US$160 million
guaranteed by the Group (see note 30). The
assessment of whether there is any material
uncertainty that IRC will be able to repay this
facility as it falls due is another key element of
the Group’s overall going concern
assessment. IRC projections demonstrate that
IRC expects to have sufficient working capital
liquidity over the next 12 months and expects
to meet its obligations under the Gazprombank
Facility. If a missed repayment under debt or
guarantee obligations occurs, this would result
in events of default which, through cross-
defaults and cross-accelerations, could cause
all other Group’s debt arrangements to
become repayable on demand.
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 2018 Annual
Report and Accounts. Accordingly, they
continue to adopt the going concern basis
of accounting in preparing these consolidated
financial statements.
Guarantee over IRC’s external
borrowings
The Group historically entered into an
arrangement to provide a guarantee over
its associate’s, IRC, external borrowings,
the ICBC Facility. At 31 December 2018 the
principal amounts outstanding subject to
the guarantee were US$169.6 million (2017:
US$233.75 million). Under the terms of the
arrangement the Group is entitled to receive
an annual fee equal to 1.75% of the
outstanding amount.
The financial guarantee contract liability
and the guarantee fee income receivable
are accounted for under IFRS 9 “Financial
instruments”. This standard was adopted as
at 1 January 2018 (note 2.2). The valuation of
these instruments is complex, as set out within
the key estimation disclosures in note 3.
As at 31 December 2018, the value of
the financial guarantee contract liability
recognised was US$37.4 million (1 January
2018: US$11.9 million). The additional
provision for expected credit losses (ECL) of
US$25.5 million, which reflects the declining
credit status of IRC during the year prior to the
refinancing agreed in March 2019, has been
recognised within Other finance losses (note 9).
As at 31 December 2018, the fair value
of the receivable under ICBC guarantee
arrangements was US$6.8 million
(1 January 2018: US$10.5 million) comprising
both billed and future fees receivable, less
provision for credit losses. The result from
re-measurement of the guarantee receivable
to fair value of US$3.7 million was recognised
within Other finance losses (note 9).
As set out in note 30, IRC has subsequently
refinanced the ICBC Facility through entering
into a US$240 million new facility with
Gazprombank. In March 2019, IRC drew down
an aggregate of US$228.9 million on the
Gazprombank Facility that were used to repay
the amounts outstanding under the ICBC
Facility of approximately US$169 million in full,
the two loans provided by the Group in the
equivalent of approximately US$57 million in
full and to finance the K&S Project’s working
capital of approximately US$3 million. Part of
the remaining proceeds from the
Gazprombank Facility is to be used to repay
part of the guarantee fee of US$6 million owed
by IRC to the Group in respect
of the guarantee of the ICBC Facility.
Petropavlovsk Annual Report 2018 163
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
The remaining outstanding contractual
guarantee fee of approximately US$5 million
is payable by IRC no later than 31 March 2020.
In April 2019, IRC has further drawn down
US$4.5 million on the Gazprombank Facility.
As part of the refinancing the Group issued a
new guarantee which was approved by the
Company’s shareholders on 12 March 2019.
The initially guaranteed borrowings total
US$160 million. Further description of the
revised arrangements are set out in note 30.
Under the new guarantee arrangements, the
guarantee fees receivable is determined at
each reporting date on an independently
determined fair value basis.
Correction of errors related to property,
plant and equipment and deferred tax
In calculating depreciation expense for mining
assets calculated using the units of
production method (described in note 2.8),
the Group uses volumes of ore processed
during the period divided by total ore reserve
estimates, including both refractory and
non-refractory ore reserves. This ratio is then
applied to the depreciable asset base. As the
planned processing of the refractory ores
required further capital investment, future
budgeted capital expenditure has been
added to the net book value of mining assets
to determine the depreciable amounts. In
2018, the Group undertook a detailed review
of application of these accounting policies
and discovered that capital expenditure
incurred to date in relation to POX Hub and
carried within capital construction in progress
was excluded from adjustments to the
depreciable amounts. As a result, matching
between expected capital expenditure and
the mining activity over the life of mine was not
fully achieved and depreciation charges in
prior periods were understated. As a
consequence, property, plant and equipment
was overstated by US$35.0 million as at
1 January 2017 and US$46.6 million as at
31 December 2017 and associated deferred
tax liability was overstated by US$7.0 million
as at 1 January 2017 and US$9.3 million as at
31 December 2017.
When preparing consolidated financial
statements for relevant prior periods,
management applied judgement with regards
to whether it was probable that future taxable
profits would be available against which the
unused tax losses can be utilised and
whether it would be appropriate to recognize
relevant deferred tax assets accordingly.
Management concluded that there was
insufficient certainty with regards to relevant
project development and availability of future
taxable profits against which unused tax
credits could be utilised by relevant entities.
This was the basis for concluding that
recognition of deferred tax assets in relation
to unused tax losses would be inappropriate.
In 2018, the Group re-analysed criteria for
recognising deferred tax assets arising from
the unused tax losses under IAS 12 “Income
Taxes” and concluded that recognition of
deferred tax assets to the extent that the
relevant entity has sufficient taxable
temporary differences would be appropriate.
As a consequence, deferred tax liabilities
were overstated by US$19.6 million as at
1 January 2017 and US$24.6 million as at
31 December 2017.
These errors have been corrected by restating the comparative amounts and the opening balances of assets, liabilities and equity as set out below.
Consolidated Statement of Financial Position (extract)
Property, plant and equipment
Deferred tax liabilities
Net assets
Retained earnings/ (losses)
Non-controlling interests
Total equity
31 December 2017
US$’000
984,114
106,271
579,108
47,457
8,333
579,108
(Decrease)/
increase
US$’000
(46,567)
(33,891)
(12,676)
(14,472)
1,796
(12,676)
31 December 2017
Restated
US$’000
937,547
72,380
566,432
32,985
10,129
566,432
01 January 2017
US$’000
953,794
119,028
570,333
(1,502)
16,447
570,333
(Decrease)/
increase
US$’000
(34,983)
(26,632)
(8,351)
(9,100)
749
(8,351)
01 January 2017
Restated
US$’000
918,811
92,396
561,982
(10,602)
17,196
561,982
Consolidated Statement of Profit or Loss (extract)
Operating expenses
Taxation
Profit for the period
Attributable to:
Equity shareholders of Petropavlovsk PLC
Non-controlling interests
164 Petropavlovsk Annual Report 2018
2017
US$’ 000
510,683
19,063
41,466
42,378
(912)
(Decrease)/
increase
US$’ 000
11,584
(7,259)
(4,325)
(5,372)
1,047
2017
Restated
US$’ 000
522,267
11,804
37,141
37,006
135
Consolidated Statement of Comprehensive Income (extract)
Profit for the period
Other comprehensive loss for the period net of tax
Total comprehensive profit for the period
Attributable to:
Equity shareholders of Petropavlovsk PLC
Non-controlling interests
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 2018
and applicable to the Group have been
adopted:
– IFRS 9 “Financial Instruments”.
– IFRS 15 “Revenue from contracts with
customers”.
The Group applied the modified retrospective
transition approach and has not restated
2017
US$’ 000
41,466
(32,835)
8,631
9,706
(1,075)
(Decrease)/
increase
US$’ 000
(4,325)
–
(4,325)
(5,372)
1,047
2017
Restated
US$’ 000
37,141
(32,835)
4,306
4,334
(28)
comparative information on the initial application
of IFRS 9 and IFRS 15. The impact of the
adoption of these standards is disclosed below.
asset and the business model in which the
asset is held.
Impact of adoption - IFRS 9 “Financial
Instruments”:
The standard addresses the classification,
measurement and recognition of financial
assets and financial liabilities, and introduces
new rules for hedge accounting and a new
impairment model for financial assets.
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
Impairment: The new impairment model
requires the recognition of impairment
provision based on expected credit losses
(ECL) rather than only incurred credit losses
as under IAS 39. This may result in an earlier
recognition of credit losses.
Hedge accounting: The adoption of the
new standard did not materially change the
amounts recognised in relation to existing
hedging arrangements and the Group elected
to continue to adopt the hedge accounting
provisions of IAS 39.
Petropavlovsk Annual Report 2018 165
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
The classification and measurement of financial assets and financial liabilities under IAS 39 and IFRS 9 on the date of initial application,
1 January 2018, are set out below.
Financial assets
Cash and cash equivalents
Trade and other receivables:
Trade receivables and contract assets (a)
Other receivables – ICBC guarantee arrangements (b), (c)
Other receivables (a)
Other non-current assets (d)
Financial liabilities
Trade and other payables
Borrowings
Financial guarantee (b), (e)
Derivative financial instruments
Derivative financial instruments - cash flow hedge
Measurement category
Carrying amount as at 1 January 2018
Original
under IAS 39
New under
IFRS 9
Original under
IAS 39
US$’ 000
New
under IFRS 9
US$’ 000
Difference
US$’ 000
Amortised cost
Amortised cost
11,415
11,415
–
Amortised cost
Amortised cost
Amortised cost
Available for sale
Amortised cost
FVPL
Amortised cost
FVPL
9,297
13,077
5,401
347
9,256
10,566
4,926
347
(41)
(2,511)
(475)
–
Amortised cost
Amortised cost
Financial guarantee
contract
FVPL
FV designated as a
hedging instrument
Amortised cost
Amortised cost
Financial guarantee
contract
FVPL
FV designated as a
hedging instrument
53,695
596,474
53,695
596,474
–
–
8,603
17,207
11,928
17,207
(3,325)
–
32,477
32,477
–
(a) The difference in carrying amounts is the result of applying new ECL model.
(b) Please refer to notes 14 and 25 for the details of the financial guarantee issued to IRC in relation to ICBC Facility.
(c) The following criteria were evaluated when concluding on classification of the financial asset:
- Business model test: Reflects how the financial asset is managed. Business model for the ICBC guarantee asset is concluded to be “hold to collect” and
- SPPI (“Solely payments of Principal and Interest”) test: the cash flows the Group is entitled under the guarantee arrangement are not considered to be consistent with “basic lending arrangement”.
In view of the above, the financial asset was classified at FVPL. The difference in carrying amounts is the result of re-measurement of the receivable at fair value.
(d) US$2.7 million associated accumulated revaluation losses previously recognised through other comprehensive losses were re-classified from Other reserves to Retained earnings.
(e) The difference in carrying amounts is the result of re-measurement of the associated liability in accordance with ECL model.
(f) A further US$0.9 million increase in loss allowance was recognised to reflect the impact of adopting the ECL approach by the Group’s associate IRC on the Group’s share in net assets of IRC (note 14).
Impact of adoption - IFRS 15 “Revenue from
contracts with customers”:
The main principle under IFRS 15 is that
revenues earned from contracts should be
apportioned to individual performance
obligations on a relative standalone selling
price basis, based on a five-step model that
involves identifying the contract with a
customer, identify the performance obligations
in the contract, determining the transaction
price, allocating the transaction price to each
performance obligation and recognising
revenue when a performance obligation is
satisfied by transferring a promised good or
service to a customer. The timing of revenue
recognition under IFRS 15 occurs when
control is transferred to the customer, while
under IAS 18 this took place when risk and
rewards were transferred.
Sales of gold and silver: The point of revenue
recognition for gold and silver sales is
dependent on the contract sales terms.
As the transfer of risks and rewards coincides
with the transfer of control at a point in time,
the Group retains no continuous involvement
over the goods sold and consideration is fixed
when control is transferred, the timing and
amount of revenue recognised for the sale of
gold and silver was not affected as a result of
adoption of IFRS 15.
New standards, amendments and
interpretations that are applicable to the
Group, issued but not yet effective for the
reporting period beginning 1 January
2018 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):
Other revenue: The adoption of IFRS 15 has
resulted in earlier recognition of revenue from
procurement of certain materials and
consumables for third parties. This change
resulted in a corresponding increase in costs
of sales and, therefore, did not have material
impact on previously reported operating
profit. Revenue from engineering and
construction contracts was not materially
affected as a result of adoption of IFRS 15.
– 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
166 Petropavlovsk Annual Report 2018
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.
2.5. Investments in associates
An associate is an entity over which the Group
is in a position to exercise significant influence
but not control or joint control.
Investments in associates are accounted for
using the equity method of accounting. Under
the equity method of accounting, the
investments are initially recognised at cost
and adjusted thereafter to recognise the
Group’s share of the post-acquisition profits
or losses of an associate in profit or loss and
the Group’s share of movements in other
comprehensive income of an associate in
other comprehensive income.
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.
When a Group entity transacts with an
associate of the Group, unrealised profits and
losses are eliminated to the extent of the
Group’s interest in the relevant 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 profit or loss 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 change significantly.
The Group reviewed the Group’s lease and
other contractual arrangements over the last
year in light of the new lease accounting rules
in IFRS 16. The Group expects to recognise
right-of-use assets of approximately US$2
million and corresponding lease liabilities.
– Annual improvements to IFRS Standards:
2015-2017 Cycle.
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.
2.3. Basis of consolidation
These consolidated financial statements
consist of the financial statements of the
Company and its subsidiaries as at the
reporting 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
Petropavlovsk Annual Report 2018 167
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
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.
The rates of exchange used to translate balances from other currencies into US Dollars were as follows (currency per US Dollar):
As at
31 December 2018
0.78
69.47
Average year ended
31 December 2018
0.75
62.68
As at
31 December 2017
0.74
57.60
Average year ended
31 December 2017
0.78
58.32
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
statement of financial position 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.
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 profit or loss.
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 reporting 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.
168 Petropavlovsk Annual Report 2018
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 the related assets under
construction and 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.
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.
Buildings
Plant and machinery
Vehicles
Office equipment
Computer equipment
Average life
Number of years
15-50
3-20
5-7
5-10
3-5
Residual values and useful lives are reviewed
and adjusted if appropriate, at each reporting
date. Changes to the estimated residual
values or useful lives are accounted for
prospectively.
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.
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’.
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.
If the carrying amount of the asset exceeds
its recoverable amount, the asset is impaired
and an impairment loss is charged to profit
or loss so as to reduce the carrying amount
in the statement of financial position 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
profit or loss 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 profit or loss 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.
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.
Petropavlovsk Annual Report 2018 169
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
The subsequent measurement of financial
assets and liabilities is set out below.
Effective interest method
The effective interest rate method is a method
of calculating the amortised cost of a financial
asset or financial liability and of allocating
interest over the relevant period. The effective
interest rate is the rate that exactly discounts
estimated future cash receipts and payments
through the expected life of the financial asset
or financial liability, or where appropriate, a
shorter period, to the net carrying amount on
initial recognition.
Financial assets
Classification and subsequent measurement
From 1 January 2018, the Group classified its
financial assets in the following measurement
categories:
– Those to be measured subsequently at fair
value (either through profit or loss or through
OCI); and
– Those to be measured at amortised cost.
The classification depends on the entity’s
business model for managing the financial
assets and the contractual cash flow
characteristics of the financial asset.
Financial assets the meet the following
conditions are subsequently measured
at amortised cost:
– The financial asset is held within a business
model whose objective is to hold financial
assets in order to collect contractual cash
flows; and
– The contractual terms of the financial asset
give rise on specified dates to cash flows
that are solely payments of principal and
interest on the principal amount
outstanding.
All other financial assets are subsequently
measured at fair value either through OCI or
profit or loss.
The Group may, at initial recognition,
irrevocably designate a financial asset as
measured at FVPL if doing so eliminates or
significantly reduces a measurement or
recognition inconsistency (sometimes
referred to as an ‘accounting mismatch’) that
would otherwise arise from measuring assets
or liabilities or recognising the gains and
losses on them on different bases.
Impairment
From 1 January 2018, the Group assesses on
a forward-looking basis the ECL associated
with its financial assets carried at amortised
cost. The impairment methodology applied
depends on whether there has been a
significant increase in credit risk.
For trade receivables and contract assets,
the group applies the IFRS 9 simplified
approach to measuring ECL which uses a
lifetime expected loss allowance for all trade
receivables and contract assets. Trade
receivables and contract assets are written
off when there is no reasonable expectation
of recovery.
Credit-impaired financial assets
A financial asset is credit-impaired when one
or more events that have a detrimental impact
on the estimated future cash flows of that
financial asset have occurred. Evidence that a
financial asset is credit-impaired include
observable data about the following events:
– Significant financial difficulty of the issuer
or the borrower;
– A breach of contract, such as a default or
past due event;
– The lender(s) of the borrower, for economic
or contractual reasons relating to the
borrower’s financial difficulty, having
granted to the borrower a concession(s)
that the lender(s) would not otherwise
consider;
– It is becoming probable that the borrower
will enter bankruptcy or other financial
reorganisation;
– The disappearance of an active market for
that financial asset because of financial
difficulties; or
– The purchase or origination of a financial
asset at a deep discount that reflects the
incurred credit losses.
For credit-impaired financial assets, the
credit-adjusted effective interest rate is applied
to the amortised cost of the financial asset
from initial recognition. When calculating the
credit-adjusted effective interest rate, The
Group estimates the expected cash flows by
considering all contractual terms of the
financial asset and ECL.
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 profit or loss 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 reporting date.
All other costs of continuous rehabilitation
are charged to profit or loss 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 profit or loss. 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 assets and financial liabilities are
recognised in the consolidated statement of
financial position when the Group entity
becomes party to the contractual provisions
of the instrument.
Financial assets and liabilities are initially
measured at fair value. Transaction costs that
are directly attributable to the acquisition or
issue of financial assets and financial liabilities
are added to or deducted from the fair value
of the financial assets or financial liabilities, as
appropriate, on initial recognition. Transaction
costs attributable to financial assets and
financial liabilities carried at FVPL are
expensed in profit or loss.
170 Petropavlovsk Annual Report 2018
Cash and cash equivalents
Cash and cash equivalents includes 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 recognised initially at
fair value and are subsequently measured at
amortised cost using the effective interest rate
method, less loss allowance.
Financial assets - accounting policies
applied until 31 December 2017
Financial assets were 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 depended on
the nature and purpose of the financial assets
and was determined at the time of initial
recognition. Financial assets were recognised
at trade-date, the date on which the Group
commits to purchase the asset. The Group
did not hold any financial assets which met
the definition of ‘held-to-maturity
investments’.
Financial assets at fair value through profit
or loss
This category had two sub-categories: financial
assets held for trading, and those designated
at fair value through profit or loss at inception.
A financial asset was classified in this category
if acquired principally for the purpose of selling
in the short term or if so designated by
management. Assets in this category were
classified as current if they are either held for
trading or are expected to be realised within
12 months after the reporting date.
Available-for-sale financial assets
Available-for-sale financial assets were
non-derivative financial assets that were
either designated in this category or not
classified in any of the other categories.
They were included within non-current assets
unless the investment matures or
management intends to dispose of them
within 12 months after the reporting date.
Available-for-sale financial assets were initially
measured at cost and subsequently carried at
fair value. Changes in the carrying amount of
available-for-sale financial assets were
recognised in other comprehensive income
and accumulated under the heading of other
reserve in equity. When the investment was
disposed of or is determined to be impaired,
the cumulative gain or loss previously
accumulated in equity is reclassified to profit
or loss.
Loans and receivables
Loans and receivables were non-derivative
financial assets fixed or determinable
payments that were not quoted on an active
market. Loans and receivables were
recognised initially at fair value and
subsequently measured at amortised cost
using the effective interest method, less any
impairment. Interest income was recognised
by applying the effective interest rate, except
for short-term receivables when the
recognition of interest would be immaterial.
Impairment
The Group assessed at each reporting date
whether there was objective evidence that a
financial asset or a group of financial assets
was 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 was considered in
determining whether the securities were
impaired. If any such evidence existed 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 – was removed from equity and
recognised in profit or loss. Impairment losses
recognised in profit or loss on equity
instruments were not reversed.
Financial liabilities and equity
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.
Borrowings
Borrowings are recognised initially at fair
value, net of transaction costs incurred.
Borrowings are subsequently measured at
amortised cost, using the effective interest
method. Any difference between the
proceeds (net of transaction costs) and the
redemption amount is recognised in profit or
loss 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 reporting date.
Trade and other payables
Trade and other payables are recognised
initially at fair value and subsequently
measured at amortised cost, using the
effective interest method.
Financial guarantee contracts
Financial guarantee contracts are recognised
as a financial liability at the time the guarantee
is issued. The liability is initially measured at
fair value and subsequently at the higher of:
– The amount determined in accordance with
the ECL model under IFRS 9 Financial
Instruments; and
– The amount initially recognised less, where
appropriate, the cumulative amount of
income recognised in accordance with the
principles of IFRS 15 Revenue from
Contracts with Customers.
Derivatives and hedging activities
Derivatives are initially recognised at fair
value at the date the derivative contracts
are entered into and are subsequently
re-measured at fair value. The accounting
for subsequent changes in fair value depends
on whether the derivative is designated as a
hedging instrument, and if so, the nature of
the item being hedged.
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.
Petropavlovsk Annual Report 2018 171
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
Currently the Group has only 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 statement of profit or loss 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.
Changes in fair value of any derivative
instrument that does not qualify for hedge
accounting are recognised in profit or loss
immediately and included in other finance
gains or losses.
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 in profit or loss.
Embedded derivatives which are settled net
are disclosed in line with the maturity of their
host contracts.
172 Petropavlovsk Annual Report 2018
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 reporting 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.
– Deferred stripping costs are included in
inventories where appropriate, as set out
in note 2.10.
– Flotation concentrate represents very fine,
powder-like product containing the valuable
ore mineral from which most of the waste
mineral has been eliminated. Flotation
concentrate is valued at the average
production costs.
Inventories are valued at the lower of cost
and net realisable value, with cost being
determined primarily on a weighted average
cost basis.
Provisions are recorded to reduce ore
in stockpiles, work in process, flotation
concentrate and finished goods inventory to
net realisable value where the net realisable
value is lower than relevant inventory cost at
the reporting 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
reporting 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 profit or loss on a straight-line
basis over the period of the lease.
2.16. Revenue recognition
To recognise revenue under IFRS 15, the
Group applies the following five steps:
– Identify the contract(s) with a customer.
– Identify the separate performance
obligations in the contract: Performance
obligations are promises in a contract to
transfer to a customer goods or services
that are distinct.
– Determine the transaction price:
The transaction price is the amount of
consideration to which the Group expects
to be entitled in exchange for transferring
promised goods or services to a customer.
If the consideration promised in a contract
includes a variable amount, the Group
estimates the amount of consideration to
which it expects to be entitled in exchange
for transferring the promised goods or
services to a customer.
– Allocate the transaction price to each
performance obligation on the basis of the
relative stand-alone selling prices of each
distinct good or service promised in the
contract.
– Recognise revenue when a performance
obligation is satisfied by transferring a
promised good or service to a customer
(which is when the customer obtains control
of that good or service). A performance
obligation may be satisfied at a point in time
or over time. For a performance obligation
satisfied over time, the Group selects an
appropriate measure of progress to
determine how much revenue should be
recognised as the performance obligation
is satisfied.
Sales of gold and silver
The majority of the Group’s revenue is derived
from the sale of refined gold. The sale of gold
is classified as a single performance
obligation and revenue is recognised at a
point in time when control has passed to the
customer, as specified in individual sales
contracts. The sales price is determined with
reference to LBMA fixing at the time of sale.
Silver is a co-product of gold production.
Revenue from the sales of silver is recognised
in revenue. Sales of silver is classified as a
single performance obligation and revenue is
recognised at a point in time when control has
passed to the customer, as specified in
individual sales contracts.
Other revenue
Other revenue is recognised as follows:
– Engineering contracts: revenue under each
engineering contract is classified as a single
performance obligation and revenue is
recognised over time based on percentage
completion applied to the contract price;
– Flotation concentrate: the sale of flotation
concentrate is classified as a single
performance obligation and revenue is
recognised at a point in time when control
has passed to the customer, as specified in
individual sales contracts;
– Sales of other goods represent the
procurement of materials, consumables
and equipment for third parties. Revenue
from sales of other goods is classified as a
single performance obligation and revenue
is recognised at a point in time when control
has passed to the customer;
– Other services: revenue from other services
is classified as a single performance
obligation and revenue is recognised over
time during the term of the relevant
contract; and
– Rental income from operating leases is
classified as a single performance
obligation and revenue is recognised over
time during 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.
2.18. Taxation
Tax expense for the period comprises current
and deferred tax. Tax is recognised in profit or
loss, 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.
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 reporting date.
It includes adjustments for tax expected to
be payable or recoverable in respect of
previous periods.
Full provision is made for deferred taxation
on all temporary differences existing at the
reporting 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.
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 to profit or loss, except
when it relates to items charged or credited
directly to equity, in which case the deferred
tax is also dealt within equity.
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.
Petropavlovsk Annual Report 2018 173
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
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
Significant influence over IRC
As at 31 December 2018, the Group was the
single largest shareholder of IRC, holding
approximately 31.1% of IRC’s issued shares.
The Group considers that it exercises
significant influence, but does not control,
over IRC such that it is equity accounted as an
investment in an associate, in accordance
with IAS 28 “Investments in associates”.
Significant influence is defined as the power
to participate in the financial and operating
policy decisions of the investee. If control
were to exist then IRC would be required to be
consolidated as a subsidiary into the Group’s
consolidated financial information.
In making this assessment, the Group also
considered the definition of control under
IFRS 10 “Consolidated Financial Statements”
being where an investor controls an investee
when it is exposed, or has rights, to variable
returns from its involvement with the investee
and has the ability to affect those returns
through its power over the investee.
The factors considered included:
– Relative shareholdings
– Shareholder voting rights;
– Rights to nominate and appoint Directors
and executive management of IRC;
– Influence over the IRC Board and executive
management; and
– Operational independence of IRC.
After taking into account the aforementioned
control factors in aggregate, it is considered
that the Group does not exercise de facto
control over IRC and IRC is not a subsidiary to
the Group. Accordingly, accounting treatment
applied to treat the Group’s investment in IRC
is as an investment in associate in
174 Petropavlovsk Annual Report 2018
accordance with IAS 28 “Investments in
associates”.
Functional currency
IAS 21 “The Effects of Changes in Foreign
Exchange Rates” defines functional currency
as the currency of the primary economic
environment in which the entity operates.
The Group therefore performs an analysis
of the currencies in which each subsidiary
primarily generates and expends cash.
This involves an assessment of the currency
in which sales are generated and operational
and capital expenditures are incurred, and
currency in which external borrowing costs
are denominated. Management makes
judgements in defining the functional
currency of the Group’s subsidiaries based
on economic substance of the transactions
relevant to these entities.
For each of the Group’s consolidated entities,
management performed analysis of relevant
factors that are indicators of functional
currency and, based on the analysis
performed, determined functional currency,
accordingly. The Group concluded that
the functional currency for each of the
subsidiaries in Russia, except for its research
institute Irgiredmet, is the US Dollar.
Functional currency for Irgiredment was
concluded to be the Russian Rouble.
Cash generating unit (“CGU”)
determination and impairment
indicators
The Group exercises judgement in
determining the Groups individual CGUs
based upon an assessment of the whether
the cash inflows generated are capable of
being separately identifiable and
independent. This assessment considered
whether there is an active market for the
outputs of each significant element of the
production process, including gold
concentrate. Management also applies
judgement in allocating assets that do not
generate independent cash inflows to the
Group’s CGUs. Any changes to CGU
determinations would impact the carrying
values of the respective CGUs.
The Group considers both external and
internal sources of information in assessing
whether there are any indications that its
CGUs are impaired. External sources of
information include changes in the market,
economic and legal environment in which the
Group operates that are not within its control.
Internal sources of information include the
manner in which mining assets and plant and
equipment are being used or are expected to
be used and indicators of economic
performance of such assets. Judgement
is therefore required to determine whether
these updates represent significant changes
in the service potential of an asset or CGU,
and are therefore indicators of impairment
or impairment reversal.
Advances from customers under gold
sales contracts
During the year ended 31 December 2018,
the Group has entered into prepaid gold
sales arrangements, which are settled solely
through physical delivery and are priced
based on the spot gold price, prevailing at
the date of the respective shipment.
The arrangements fall under IFRS 15
‘Revenue from Contracts with Customers’
and advances received represent contract
liabilities included within Trade and other
payables as Advances from customers.
As of 31 December 2018, the relevant
contract liabilities amount to US$163.8 million
(31 December 2017: US$nil).
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.
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:
Valuation of financial guarantee
contracts
The Group has provided a guarantee over
IRC’s external borrowings from the Industrial
and Commercial Bank of China (“ICBC”).
IFRS 9 “Financial Instruments” requires that
financial guarantee contracts are valued at the
higher of:
Taxation
The Group is subject to income tax in the UK,
Russian Federation and Cyprus.
Deferred tax liabilities are calculated on
taxable temporary differences, being the
difference between the tax and accounting
base.
– Asset carrying values due to changes in
– The amount of the loss allowance; and
estimated future cash flows (note 6).
– Depreciation charged to profit or loss
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.
Impairment and impairment reversals
The Group reviews the carrying values of
property, plant and equipment 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.
The Group necessarily applies judgement in
the determining the assumptions to be
applied within the value in use calculations.
The key assumptions which formed the basis
of forecasting future cash flows and the value
in use calculation are set out in note 6.
Future changes to the key 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,
together with a sensitivity analysis, in relation
to the property, plant and equipment are set
out in note 6.
– The amount initially recognised less the
cumulative amount of income recognised in
accordance with the principals of IFRS 15
“Revenue from Contracts with Customers”
In determining the loss allowance, the Group
must make significant judgements in the
estimating the expected credit losses. This
includes using a probability-based approach
to determine a range of possible outcomes,
assessing the time value of money and
thereby determining an estimate of the
payments required to reimburse ICBC in the
event of a future default by IRC.
Details of the Group’s financial guarantee are
set out in note 14. The valuation of the
financial guarantee contract liability was
sensitive to a number of factors including
IRC’s default risk and the probability of IRC’s
refinancing completing as at 31 December
2018. Given the successful completion of the
refinancing in March 2019 on improved terms,
the valuation of the guarantee liability may
reduce materially and the fee receivable asset
may increase.
Valuation of ore stockpiles
Costs are allocated to ore mined based on the
cost per tonne of extraction. At 31 December
2018 the group held ore stockpile inventories
of US$93.2 million (2017: US$110.2 million).
These are tested for impairment at each
reporting date based on the expected costs
to complete their processing and the
realisable gold price. Changes in these
assumptions, particularly for ore stockpiles
of a lower grade, can give rise to write downs.
In the year ended 31 December 18, the Group
recognised a charge of US$18 million and as
at 31 December 2018 the Group had
US$10.1 million ore stockpiles carried at net
realisable value. A 10% reduction in the
forecast gold price would give rise to an
additional write down of approximately
US$1.7 million.
Deferred tax assets, including those arising
from unused tax losses carried forward for
the future tax periods and deductible
temporary differences, are recognised only
when it is either probable that the future
taxable profits will be available against which
the unused tax losses can be utilised or there
are sufficient taxable temporary differences.
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. In addition, the functional
currency for the subsidiaries in Russia is the US
Dollar which gives rise to foreign exchange
movements in relation to temporary differences
and deferred tax (note 10).
The aforementioned 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 recognised in the statement of
financial position 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 profit or
loss. In particular, if the Russian Rouble was
10% weaker as at 31 December 2018, this
would give rise to an additional US$13.2
million deferred tax liability and corresponding
increase to the tax charge for the year ended
31 December 2018.
Going Concern
Details about the Group’s ability to continue
as a going concern are set out in note 2.1.
Petropavlovsk Annual Report 2018 175
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
3.3. Other sources of estimation
uncertainty
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 profit
or loss. Details of exploration and evaluation
assets are set out in note 12.
Deferred stripping costs
Stripping costs are deferred and capitalised if
they relate to gaining improved access to an
identified component of an ore body to be
mined in future periods. The capitalised
amount is determined based on the volume of
waste extracted, compared with expected
ore volume in the identified component of the
ore body. The identification of the
components of a mine’s ore body is a critical
estimate and is made by reference to the
respective life of mine plan. Changes to the life
of mine plan, including the life and design of a
mine, may result in the capitalisation of
production stripping costs or adjustments of
the carrying value of stripping costs
capitalised in previous periods. 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.
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 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.
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 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.
The financial performance of the segments
is principally evaluated with reference to
operating profit less foreign exchange impacts.
176 Petropavlovsk Annual Report 2018
4. Segment information continued
2018
Revenue
Gold (a)
Silver
Flotation concentrate
Other external revenue
Inter segment revenue
Intra group eliminations
Total Group revenue from external customers
Operating expenses and income
Operating cash costs (b)
Depreciation
Central administration expenses
Reversal of impairment of mining assets
Impairment of exploration and evaluation assets
Impairment of ore stockpiles
Impairment of gold in circuit
Total operating expenses (c)
Share of results of associates
Segment result
Foreign exchange gains
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 granted to associate
Borrowings
Net assets
Other segment information
Additions to non-current assets:
Exploration and evaluation expenditure
Capital Expenditure
Other items capitalised (d)
Average number of employees
(a) Net of US$(3.4) million net of cash settlement paid by the Group for realised cash flow hedges.
(b) Operating cash costs of Malomir include cost of flotation concentrate sold US$2.6 million.
(c) Operating expenses excluding foreign exchange losses (note 6).
(d) Interest and close down and restoration costs capitalised (note 13).
171,023
591
–
–
524
(524)
171,614
(108,466)
(36,982)
–
–
–
–
(1,415)
(146,863)
–
24,751
437,203
(66,689)
1,092
50,277
28,789
2,711
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
Consolidated
US$’000
8,173
29
–
–
–
–
8,202
(8,667)
(681)
–
–
–
–
(17)
(9,365)
–
(1,163)
98,343
61
3,202
–
807
(807)
101,606
(63,913)
(22,701)
–
82,958
(12,192)
(309)
(536)
(16,693)
–
84,913
189,135
160
–
–
5
(5)
189,295
(112,687)
(41,427)
–
–
–
(17,712)
(157)
(171,983)
–
17,312
–
–
–
29,058
170,916
(170,916)
29,058
(31,286)
(445)
(39,195)
18,737
–
–
–
(52,189)
15,480
(7,651)
466,674
841
3,202
29,058
172,252
(172,252)
499,775
(325,019)
(102,236)
(39,195)
101,695
(12,192)
(18,021)
(2,125)
(397,093)
15,480
118,162
8,450
126,612
3,775
(29,520)
13,905
(32,354)
(56,489)
25,929
1,575,776
(326,336)
(113,354)
8,473
50,966
(594,177)
601,348
–
–
–
–
–
–
630,918
319,139
188,516
(75,876)
(100,569)
(83,202)
1,090
59,879
5,130
1,138
971
14,539
(115)
1,485
–
2,558
–
3,347
3,153
127,253
33,804
8,681
Petropavlovsk Annual Report 2018 177
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
4. Segment information continued
2017
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
Accrual for additional mining tax (f)
Depreciation
Central administration expenses
Reversal of impairment/(impairment) of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Total operating expenses (g)
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
Borrowings
Net assets
Other segment information
Additions to non-current assets:
Exploration and evaluation expenditure
Capital Expenditure
Other items capitalised (h)
Average number of employees
(e) Including US$0.8 million contribution from realised cash flow hedges.
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
Consolidated
(restated)
US$’000
202,392
743
–
815
(815)
203,135
(127,657)
(6,511)
(36,168)
–
3,589
(2,594)
–
(169,341)
–
33,794
40,687
121
–
–
–
40,808
(39,988)
(2,255)
(7,112)
–
(175)
(733)
–
(50,263)
–
(9,455)
83,098
42
–
1,001
(1,001)
83,140
(61,079)
(2,780)
(16,959)
–
(304)
(563)
–
(81,685)
–
1,455
228,915
185
–
327
(327)
229,100
(98,354)
(8,306)
(44,346)
–
1,592
–
–
(149,414)
–
79,686
–
–
31,237
154,325
(154,325)
31,237
(30,030)
–
(215)
(39,944)
–
–
(629)
(70,818)
35,208
(4,373)
383,012
(35,777)
11,117
(7,583)
474,164
(14,474)
379,040
(35,949)
154,281
(74,781)
555,092
1,091
31,237
156,468
(156,468)
587,420
(357,108)
(19,852)
(104,800)
(39,944)
4,702
(3,890)
(629)
(521,521)
35,208
101,107
(746)
100,361
760
(25,905)
2,199
(28,470)
(11,804)
37,141
1,401,614
(168,564)
(72,380)
2,236
(596,474)
566,432
5,592
44,349
26,438
1,670
–
37
355
990
44
29,700
8,540
1,021
127
10,000
1,052
1,535
–
2,070
–
3,303
5,763
86,156
36,385
8,519
(f) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.
(g) Operating expenses excluding foreign exchange losses (note 6).
(h) Interest and close down and restoration costs capitalised (note 13).
178 Petropavlovsk Annual Report 2018
4. Segment information continued
Entity wide disclosures
Revenue by geographical location (a)
Russia and CIS
Other
(a) Based on the location to which the product is shipped or in which the services are provided.
Non-current assets by location of asset (b)
Russia
Other
(b) Excluding financial instruments and deferred tax assets.
2018
US$’000
499,716
59
499,775
2017
US$’000
587,361
59
587,420
2018
US$’000
1,282,672
50
1,282,722
2017
US$’000
(restated)
1,134,630
45
1,134,675
Information about major customers
During the years ended 31 December 2018 and 2017, 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 2018 are revenues of US$451 million which arose from
sales of gold to two banks that individually accounted for more than 10% of the Group’s revenue, namely US$368 million to Sberbank of Russia
and US$83 million to Gazprombank (2017: 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$142 million to VTB). The proportion of Group revenue of each
bank may vary from year to year depending on commercial terms agreed with each bank. Management considers there is no major customer
concentration risk due to high liquidity inherent to gold as a commodity.
5. Revenue
Sales of goods:
Gold
Silver
Flotation concentrate
Other goods
Sales of services:
Engineering and construction contracts
Other services
Rental income
Timing of revenue recognition:
At a point in time
Over time
2018
US$’000
2017
US$’000
466,674
841
3,202
14,603
11,653
2,136
666
499,775
555,092
1,091
–
15,483
13,952
1,093
709
587,420
2018
US$’000
2017
US$’000
485,320
14,455
499,775
571,666
15,754
587,420
Petropavlovsk Annual Report 2018 179
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
6. Operating expenses and income
Net operating expenses (a)
Accrual for additional mining tax (b)
Reversal of impairment of mining assets and in-house service (a)
Impairment of exploration and evaluation assets
Impairment/(reversal of impairment) of ore stockpiles (a)
Impairment of gold in circuit
Central administration expenses (a)
Foreign exchange (gains)/losses
Impairment of non-trading loans
(a) As set out below.
(b) Amounts of mining tax for the six-month period to 31 December 2016, interest and penalties paid by the Group in 2017 following unfavourable court decisions.
Net operating expenses
Depreciation
Staff costs
Materials
Fuel
External services
Mining tax credit
Electricity
Smelting and transportation costs
Movement in ore stockpiles, deferred stripping, work in progress, bullion in process, limestone and flotation concentrate
attributable to gold production
Taxes other than income
Insurance
Operating lease rentals
Provision for impairment of trade and other receivables
Bank charges
Repair and maintenance
Security services
Travel expenses
Goods for resale
Other operating expenses
2018
US$’000
427,255
–
(101,695)
12,192
18,021
2,125
39,195
(8,450)
–
388,643
2018
US$’000
102,236
76,110
95,282
45,713
48,058
(131)
26,563
607
(15,853)
6,418
7,168
2,034
1,435
414
6,078
3,966
2,955
11,200
7,002
427,255
2017
(restated)
US$’000
461,908
19,852
–
–
(4,702)
3,890
39,944
746
629
522,267
2017
(restated)
US$’000
104,800
80,071
108,201
43,793
38,719
–
30,074
794
7,456
5,886
8,214
3,352
364
258
6,643
2,750
3,369
11,802
5,362
461,908
180 Petropavlovsk Annual Report 2018
6. Operating expenses and income continued
Central administration expenses
Staff costs
Professional fees
Insurance
Operating lease rentals
Business travel expenses
Office costs
Other
2018
US$’000
25,366
5,531
616
1,723
1,541
589
3,829
39,195
2017
US$’000
23,556
6,854
928
1,920
1,142
533
5,011
39,944
Impairment charges
Impairment of mining assets
The Group undertook a review of impairment
indicators and impairment reversal indicators of
the tangible assets attributable to its gold mining
projects and supporting in-house service
companies. Detailed calculations of recoverable
amounts, which are value-in-use calculations
based on discounted cash flows, were
prepared which concluded no impairment was
required as at 31 December 2018 and 2017.
Having considered the excess of estimated
recoverable amounts over the carrying values
of the associated assets on the statement of
financial position as at 31 December 2018
and taking into consideration removed
uncertainty connected with the timing of
the final construction and performance
of the POX hub, the Directors concluded
on the following:
– A reversal of impairment previously
recorded against the carrying value of
the assets that are part of the Malomir
CGU would be appropriate. Accordingly,
a post-tax impairment reversal of
US$66.4 million (being US$83.0 million
gross impairment reversal net of associated
deferred tax liabilities) has been recorded
against the associated assets within
property, plant and equipment.
The aforementioned impairment reversal
takes into consideration the effect of
depreciation attributable to relevant
mining assets and intra-group transfers
of previously impaired assets to Malomir.
– A further reversal of impairment previously
recorded against the carrying value of the
assets of the supporting in-house service
companies would be appropriate to the
extent of the headroom available at Malomir
and Albyn CGUs and relevant carrying
values allocated to these CGUs.
Accordingly, a post-tax impairment reversal
of US$15.2 million (being US$18.7 million
gross impairment reversal net of associated
deferred tax liabilities) has been recorded
against the associated assets within
property, plant and equipment.
The aforementioned impairment reversal
takes into consideration the effect of
depreciation attributable to relevant
assets and intra-group transfers of
previously impaired assets.
The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation are set out below:
Long-term real gold price
Discount rate (a)
RUB : US$ exchange rate
(a) Being the post-tax real weighted average cost of capital, equivalent to a nominal pre-tax discount rate of 12.5% (2017: 11.6%).
Year ended
31 December 2018
US$1,300/oz
8.5%
Year ended
31 December 2017
US$1,300/oz
8.0%
RUB67.0 : US$1 RUB60.0 : US$1
With all other assumptions being constant, changes to the aforementioned key assumptions could potentially result in impairment of certain
mining assets as set out below.
Long-term real gold price
Discount rate
RUB : US$ exchange rate
(a) Primarily in relation to Pioneer CGU.
US$1,150/oz
9.5%
RUB61.0 : US$1
Potential impairment (a)
US$129 million
US$12 million
US$42 million
Petropavlovsk Annual Report 2018 181
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
6. Operating expenses and income continued
Impairment of exploration and evaluation assets
The Group performed a review of its exploration and evaluation assets and concluded to suspend exploration at the Flanks of Malomir and
surrender the relevant licences. An aggregate impairment charge of US$12.2 million was recorded against associated exploration and evaluation
assets. No impairment was recorded against exploration and evaluation assets in 2017.
As at 31 December 2018, all exploration and evaluation assets in the statement of financial position related to the areas adjacent to the existing
mines (note 12).
Impairment of ore stockpiles
The Group assessed the recoverability of the carrying value of ore stockpiles and recorded impairment charges/reversals of impairment as set
out below:
Year ended 31 December 2018
Year ended 31 December 2017
Pre-tax
impairment
charge
US$’000
–
–
309
17,712
18,021
Taxation
US$’000
–
–
(62)
(3,011)
(3,073)
Post-tax
impairment
charge
US$’000
–
–
247
14,701
14,948
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)
Taxation
US$’000
(35)
717
(61)
271
892
Pokrovskiy
Pioneer
Malomir
Albyn
7. Auditor’s remuneration
The Group, including its overseas subsidiaries, obtained the following services from the Company’s auditor and their associates:
Audit fees and related fees
Fees payable to the Company's auditor for the annual audit of the parent company and consolidated financial statements
Fees payable to the Company’s auditor and their associates for other services to the Group:
For the audit of the Company's subsidiaries as part of the audit of the consolidated financial statements
For the audit of subsidiary statutory accounts pursuant to legislation (a)
Non-audit fees
Other services pursuant to legislation – interim review
Fees for reporting accountants services (b)
Tax services
(a) Including the statutory audit of subsidiaries in the UK and Cyprus.
2018
US$’000
2017
US$’000
803
320
65
1,188
273
900
–
1,173
568
296
57
921
231
202
12
445
(b) Fees payable in relation to the ICBC guarantee restructuring process (notes 25 and 30) (2017: Fees payable in relation to the issuance of the US$500 million 8.125 per cent Guaranteed Notes (note 20).
182 Petropavlovsk Annual Report 2018
8. Staff costs
Wages and salaries
Social security costs
Pension costs
Share-based compensation
Average number of employees
9. Financial income and expenses
Investment income
Interest income
Interest expense
Bank loans
Notes
Convertible bonds
Prepayment on gold sale agreements
Interest capitalised
Unwinding of discount on environmental obligation
Other finance gains
Fair value gain on listed equity investments
Fair value gain on derivative financial instruments (a)
Financial guarantee fee (b)
Other finance losses
Financial guarantee contract (b)
Fair value loss on guarantee receivable (c)
Impairment of financial assets (d)
Loss on bank debt refinancing
Fair value loss on derivative financial instruments (a)
2018
US$’000
80,090
20,855
115
416
101,476
2017
US$’000
81,619
21,696
168
144
103,627
8,681
8,519
2018
US$’000
2017
US$’000
3,775
3,775
(1,083)
(41,886)
(12,579)
(7,213)
(62,761)
33,666
(425)
(29,520)
244
13,661
–
13,905
(25,471)
(3,720)
(3,163)
–
–
(32,354)
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)
(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) Provision for ECL under ICBC guarantee (notes 14 and 25).
(c) Result of re-measurement of receivable from IRC under ICBC guarantee arrangements to fair value, net of US$4.0 million guarantee fee charges (note 25).
(d) Including US$2.4 million lifetime ECL recognised on origination of loans granted to IRC and US$0.8 million further impairment charges in relation to loans granted to IRC (note 25).
Petropavlovsk Annual Report 2018 183
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
10. Taxation
Current tax
Russian current tax
Deferred tax
Origination/(reversal) of timing differences (a)
Total tax charge
2018
US$’000
19,861
19,861
36,628
56,489
2017
(restated)
US$’000
24,357
24,357
(12,553)
11,804
(a) Including effect of foreign exchange movements in respect of deductible temporary differences of US$30.6 million (year ended 31 December 2017: US$(8.6) 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 profit before tax per the statement of profit or loss 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% (2017: 20%)
Effect of the reduced corporation tax rate (a)
Effect of different tax rates of subsidiaries operating in other jurisdictions
Tax effect of expenses that are not deductible for tax purposes
Tax effect of tax losses for which no deferred income tax asset was recognised (b)
Utilisation of previously unrecognised tax losses
Foreign exchange movements in respect of deductible temporary differences (c)
Effect of the reduced corporation tax rate on previously recognised deferred tax
Income not subject to tax (d)
Other adjustments
Tax charge for the period
2018
US$’000
82,418
(15,480)
66,938
13,387
(354)
1,161
1,191
17,055
(442)
30,618
–
(2,209)
(3,918)
56,489
2017
(restated)
US$’000
48,945
(35,208)
13,737
2,747
(2,034)
912
3,043
21,385
(288)
(8,602)
(4,283)
–
(1,076)
11,804
(a) 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 over the
period until 2027, subject to eligibility criteria. In 2018 and 2017, LLC Albynskiy Rudnik has received tax relief as a RIP participant and was entitled to the reduced statutory corporation tax rate of 17%.
(b) Primarily relate to interest expense and central administration expenses incurred in the UK and loss on fair value change on financial guarantee fee (note 9) (2017: primarily relate to central administration
expenses and interest expense incurred in the UK).
(c) Foreign exchange movements primarily 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.
(d) Primarily relate to the fair value income on re-measurement of the conversion option of the Convertible Bonds (note 9).
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.
184 Petropavlovsk Annual Report 2018
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
2018
US$’000
24,493
–
24,493
2017
(restated)
US$’000
37,006
–
37,006
No of shares
3,305,069,755
-
3,305,069,755
No of shares
3,303,768,532
-
3,303,768,532
US$
0.01
0.01
US$
0.01
0.01
(a) Convertible bonds which could potentially dilute basic profit per ordinary share in the future are not included in the calculation of diluted profit per share because they were anti-dilutive for the year ended
31 December 2018 and 2017.
12. Exploration and evaluation assets
At 1 January 2018
Additions
Impairment (a)
Transfer to mining assets (b)
At 31 December 2018
(a) Note 6
Flanks of
Pioneer
US$’000
5,827
1,092
–
–
6,919
Flanks of
Albyn
US$’000
34,076
971
–
–
35,047
Flanks of
Malomir
US$’000
12,192
–
(12,192)
–
–
Other
US$’000
1,423
1,090
–
(1,364)
1,149
(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.
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$’000
12,148
44
–
12,192
Other (c)
US$’000
1,423
–
–
1,423
(c) 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.
Total
US$’000
53,518
3,153
(12,192)
(1,364)
43,115
Total
US$’000
49,270
5,763
(1,515)
53,518
Petropavlovsk Annual Report 2018 185
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
13. Property, plant and equipment
Cost
At 1 January 2017
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)
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 (e)
Disposals of subsidiaries
Reallocation and other transfers
Foreign exchange differences
At 31 December 2018 (d)
Accumulated depreciation and impairment
At 1 January 2017 (restated)
Charge for the year (restated)
Disposals
Reallocation and other transfers
Foreign exchange differences
At 31 December 2017 (restated)
Charge for the year
Disposals
Disposals of subsidiaries
Reallocation and other transfers
Reversal of impairment (note 6)
Foreign exchange differences
At 31 December 2018
Net book value
At 31 December 2017 (restated)
At 31 December 2018
Mining assets
US$’000
Non-mining
assets
US$’000
Capital
construction in
progress (c)
(US$’000
Total
US$’000
1,821,764
34,725
–
1,793
1,515
22,397
(8,856)
1,727
–
1,875,065
51,709
–
138
1,364
108,479
(53,744)
(7,400)
(1,325)
–
1,974,286
1,249,228
102,446
(8,062)
192
–
1,343,804
100,578
(52,818)
(7,400)
(352)
(82,958)
–
1,300,854
531,261
673,432
174,476
2,048
–
–
–
4,042
(4,731)
(1,897)
1,245
175,183
2,730
–
–
–
582
(4,526)
–
(41)
(4,407)
169,521
154,679
2,708
(5,196)
2,213
1,014
155,418
2,016
(4,410)
–
(23)
(18,737)
(3,479)
130,785
19,765
38,736
330,394
49,383
34,592
–
–
(26,439)
(72)
170
4
388,032
72,814
33,666
–
–
(109,061)
(3)
–
988
(21)
386,415
3,916
–
–
(2,405)
–
1,511
–
–
–
(3)
–
–
1,508
2,326,634
86,156
34,592
1,793
1,515
–
(13,659)
–
1,249
2,438,280
127,253
33,666
138
1,364
–
(58,273)
(7,400)
(378)
(4,428)
2,530,222
1,407,823
105,154
(13,258)
–
1,014
1,500,733
102,594
(57,228)
(7,400)
(378)
(101,695)
(3,479)
1,433,147
386,521
384,907
937,547
1,097,075
(a) Borrowing costs were capitalised at the weighted average rate of the Group’s relevant borrowings being 9.3% (2017: 10%).
(b) Being costs primarily associated with continuous development of Malomir and Pioneer projects.
(c) Including US$345.8 million costs associated with the POX Hub project (31 December 2017: US$277.6 million).
(d) Including US$400.8 million of fully depreciated property, plant and equipment (31 December 2017: US$215.6 million).
(e) Including US$18.1 million of fully depreciated mining fleet that is not suitable for future use due to wear and tear, US$5.8 million of fully depreciated infrastructure that is not intended for future use,
US$19.1 million disposals associated with closure of Pokrovskiy mine as the site was transformed into a key component of the POX Hub and US$8.1 million mining fleet parts replaced as part of
capital repair and maintenance programme.
186 Petropavlovsk Annual Report 2018
14. Investment in associate
IRC Limited (‘IRC’)
Summarised financial information for those associates that are material to the Group is set out below.
Non-current assets
Exploration and evaluation assets
Property, plant and equipment
Other non-current assets
Current assets
Cash and cash equivalents
Other current assets
Current liabilities
Borrowings (a), (b)
Other current liabilities
Non-current liabilities
Borrowings (a)
Other non-current liabilities
Net assets
2018
US$’000
85,140
85,140
2017
US$’000
70,890
70,890
IRC
2018
US$’000
7,607
533,446
15,185
556,238
7,637
34,195
41,832
(111,954)
(55,080)
(167,034)
(100,915)
(22,501)
123,416
307,620
IRC
2017
US$’000
7,259
458,624
5,486
471,369
8,997
54,026
63,023
(61,309)
(37,729)
(99,038)
(162,078)
(33,722)
195,800
239,554
(a) Including US$158.8 million (2017: US$221.6 million) million under ICBC Facility and loans provided by the Group in the equivalent of US$54.0 million (2017: US$nil) (note 25).
(b) 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$169.6 million as at 31 December 2018 (2017: US$233.75 million).
The loan is carried at amortised cost with effective interest rate 6.8% per annum (2017: 6.41%). ICBC Facility Agreement contains certain financial covenants to which ICBC had agreed to grant a waiver until
31 December 2018, inclusive.
As at 31 December 2018 and 31 December 2017, 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.
On 20 March 2019, IRC repaid the outstanding loan principal and interest in full as set out below and terminated the ICBC Facility Agreement.
On 18 December 2018, IRC entered into two facility agreements for a loan in aggregate of US$240 million with Gazprombank (the “Gazprombank Facility”). The Gazprombank Facility will mature in March 2026
and consists of two tranches. The principal under the first tranche amounts to US$160 million with interest being charged at LIBOR+5.7% per annum and is repayable in equal quarterly payments during the
term of the Gazprombank Facility, the final payment in December 2026. The principal under the second tranche amounts to US$80 million with interest being charged at LIBOR+7.7% per annum and is
repayable in full at the end of the term, in December 2026. Interest charged on the drawn down amounts under the two tranches is payable in equal quarterly payments during the term of the
Gazprombank Facility.
In March 2019, IRC drew down an aggregate of US$228.9 million on the Gazprombank Facility that were used to repay the amounts outstanding under ICBC facility of approximately US$169 million in full and
the loans provided by the Group in the equivalent of approximately US$57 million in full, the remaining proceeds were to finance the K&S Project’s working capital of approximately US$3 million. In April 2019,
IRC has further drawn down US$4.5 million on the Gazprombank Facility.
Petropavlovsk Annual Report 2018 187
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
14. Investments in associates continued
Revenue
Net operating (expenses)/ income
Including:
Depreciation
Reversal of impairment of mining assets
Foreign exchange gains/(losses)
Impairment of financial assets
Investment income
Interest expense
Taxation
Profit for the period
Other comprehensive loss
Total comprehensive profit
Group’s share %
Group’s share in profit for the period
Impairment of investment in associate
Share of results of associate
IRC
Year ended
31 December
2018
US$’000
151,549
(53,876)
IRC
Year ended
31 December
2017
US$’000
109,265
25,657
(21,208)
90,483
4,554
(7,741)
82
(21,679)
(130)
68,205
(1,057)
67,148
31.1%
21,210
(5,730)
15,480
(14,618)
129,614
(859)
–
114
(22,410)
590
113,216
(1,470)
111,746
31.1%
35,208
–
35,208
Impairment of investment in associate
The Group undertook a review of impairment indicators of its investment in IRC. Detailed calculations of recoverable amounts, which are
value-in-use calculations based on discounted cash flows, were prepared which concluded a US$5.7 million impairment was required as at 31
December 2018 (2017: US$nil).
15. Inventories
Current
Construction materials
Stores and spares
Ore in stockpiles (a), (b)
Gold in circuit
Deferred stripping costs
Bullion in process
Flotation concentrate
Other
Non-current
Ore in stockpiles (a), (b), (c)
(a) As at 31 December 2018, ore in stockpiles include balances in the aggregate of US$10.1 million carried at net realisable value (2017: US$28.9 million).
(b) For details of ore stockpile impairments see note 6.
(c) Ore in stockpiles that is not planned to be processed within twelve months after the reporting period.
188 Petropavlovsk Annual Report 2018
2018
US$’000
2017
US$’000
6,267
69,082
36,395
16,751
46,988
606
25,654
4,101
205,844
56,805
56,805
6,792
57,226
37,496
24,088
39,767
391
–
6,892
172,652
72,720
72,720
16. Trade and other receivables
Current
VAT recoverable
Advances to suppliers
Prepayments for property, plant and equipment
Trade receivables (a)
Contract assets
Guarantee fee receivable (b)
Other debtors (c)
Non-current
Guarantee fee receivable (b)
Other
2018
US$’000
2017
US$’000
20,474
5,919
7,233
13,389
3,307
6,829
11,243
68,394
–
547
547
20,438
11,343
5,809
9,297
–
4,681
24,262
75,830
8,396
535
8,931
(a) Net of provision for impairment of US$0.9 million (2017: US$0.2 million). Trade receivables are generally due for settlement between three and twelve months.
(b) Please refer to notes 14 and 25 for the details of ICBC guarantee arrangements. Measured at fair value as at 31 December 2019 (note 2.2) and considered Level 3 of the fair value hierarchy which valuation
incorporates the following inputs:
– Assessment of the credit standing of IRC and yield on comparable bonds issued by mining companies of a similar credit standing;
– Share price and share price volatility of IRC as at 31 Dec 2018;
– Prospective terms of the proposed refinancing of IRC debt and the likelihood of this being achieved.
(c) Net of provision for impairment of US$1.7 million (2017: US$1.3 million).
Other than receivables from IRC in the aggregate of US$2.1 million (2017: US$1.0 million), there is no significant concentration of credit risk with respect
to trade and other receivables. The Group has implemented policies that require appropriate credit checks on potential customers before granting
credit. The Group has adopted a policy of only dealing with creditworthy counterparties. The Group’s exposure and credit ratings of its counterparties
are monitored by the Board of Directors. The maximum credit risk of financial assets is represented by the carrying value of the asset.
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
17. Cash and cash equivalents
Cash at bank and in hand
Short-term bank deposits
2018
US$’000
10,682
15,470
26,152
2017
US$’000
8,109
3,306
11,415
Petropavlovsk Annual Report 2018 189
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
18. Derivative financial instruments
Forward gold contracts – cash flow hedge (a), (b), (c)
Call Option over the Company’s shares (d)
Conversion option (e), (f)
31 December 2018
31 December 2017
Assets
US$’000
–
–
–
–
Liabilities
US$’000
(8,819)
(1,136)
(2,411)
(12,366)
Assets
US$’000
–
–
–
–
Liabilities
US$’000
(32,477)
(3,097)
(14,110)
(49,684)
(a) Forward contracts to sell an aggregate of 200,000 ounces of gold at an average price of US$1,252 per ounce are outstanding as at 31 December 2018 (31 December 2017: 400,000 ounces of gold at an
average price of US$1,252 per ounce).
(b) Measured at fair value and considered as Level 2 of the fair value hierarchy which valuation incorporates the following inputs:
– gold forward curves observable at quoted intervals; and
– observable credit spreads.
(c) The hedged forecast transactions are expected to occur at various dates during the period to December 2019.
Gain and losses recognised in the hedging reserve in equity as at the reporting date will be recognised in profit or loss in the periods during which the hedged gold sale transactions affect profit or loss.
There was no ineffectiveness to be recorded from the cash flow hedge during the years ended 31 December 2018 and 2017.
(d) Cash settled call option issued in relation to 3.6 per cent. of the outstanding aggregate ordinary share capital in the Company exercisable between December 2018 and June 2019 at strike price of £0.068.
Measured at fair value and considered as Level 3 of the fair value hierarchy which valuation incorporates the following inputs:
– historic share price volatility;
– historic GBP : US$ exchange rate volatility;
– conversion price;
– time to maturity; and
– risk free rate.
(e) Note 20.
(f) Measured at fair value and considered as Level 3 of the fair value hierarchy which valuation incorporates the following inputs:
– the Group’s credit risk and implied credit spreads;
– historic share price volatility;
– historic GBP : US$ exchange rate volatility;
– dividend yield;
– conversion price;
– time to maturity; and
– risk free rate.
19. Trade and other payables
Current
Trade payables
Payables for property, plant and equipment
Advances from customers (a)
Advances received on resale contracts (b)
Accruals and other payables
Non-current
Advances from customers (c)
2018
US$’000
2017
US$’000
50,099
5,242
131,752
5,432
27,320
219,845
33,779
33,779
39,902
10,389
826
1,029
36,187
88,333
–
–
(a) The current advances from customers as at 31 December 2018 include US$86.0 million and US$44.0 million advance payments received from Gazprombank and Sberbank, respectively, under gold sales
agreements. Advance payments are to be settled against physical delivery of gold produced by the Group in regular intervals over the period of up to twelve months from the reporting date based on the sales
price prevailing at delivery that is determined with reference to LBMA fixing. For details of interest charged in relation to the aforementioned advances please refer to note 9.
(b) Amounts included in advances received on resale contracts at 31 December 2018 and 31 December 2017 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.
(c) The non-current advances from customers as at 31 December 2018 include US$33.8 million advance payments received from Gazprombank under gold sales agreements. Advance payments are to be
settled against physical delivery of gold produced by the Group in regular intervals over the period after twelve months from the reporting date. based on the sales price prevailing at delivery that is determined
with reference to LBMA fixing. For details of interest charged in relation to the aforementioned advances please refer to note 9.
190 Petropavlovsk Annual Report 2018
The Directors consider that the carrying amount of trade and other payables approximates to their fair value.
20. Borrowings
Borrowings at amortised cost
Notes (a)
Convertible bonds (b)
Bank loans (c)
Amount due for settlement within 12 months
Amount due for settlement after 12 months
2018
US$’000
2017
US$’000
499,007
95,170
–
594,177
–
594,177
594,177
497,747
91,590
7,137
596,474
7,137
589,337
596,474
(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 2018, the fair value of debt component of the convertible bonds, considered as Level 2 of the fair value hierarchy, amounted to US$86.8 million (31 December 2017: US$102.1 million).
Valuation incorporates the following inputs: the Group’s credit risk and implied credit spreads, time to maturity and risk-free rate.
As at 31 December 2018, 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$89.2 million (31 December 2017: US$116.3 million).
(c) The weighted average interest rate during the year ended 31 December 2018 was 15.0% (2017: 9.3%).
As at 31 December 2018 and 2017, the carrying value of the bank loans approximated their fair value.
As at 31 December 2018 and 2017, there was no security and financial covenants attached to the bank loans.
Petropavlovsk Annual Report 2018 191
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
21. Deferred taxation
At 1 January
Deferred tax charged/(credited) to profit or loss (a)
Deferred tax charged/(credited) to equity
Exchange differences
At 31 December
Deferred tax liabilities
Net deferred tax liability
(a) Note 10.
Property, plant and equipment
Inventory
Exploration and evaluation assets
Fair value adjustments
Other temporary differences
Tax losses carried forward (a)
2018
US$’000
72,380
36,628
4,376
(30)
113,354
(113,354)
(113,354)
2017
(restated)
US$’000
92,396
(12,553)
(7,505)
42
72,380
(72,380)
(72,380)
At 1 January
2018
US$’000
79,665
10,711
8,070
6
(1,494)
(24,578)
72,380
Charged/
(credited)
to profit or loss
US$’000
37,846
5,158
(982)
(6)
(6,351)
963
36,628
Charged
directly
to equity
US$’000
–
–
–
–
4,376
–
4,376
Exchange
differences
US$’000
(82)
(234)
–
–
286
–
(30)
At 31 December
2018
US$’000
117,429
15,635
7,088
–
(3,183)
(23,615)
113,354
(a) Deferred tax recognised in relation to unused tax losses of LLC Malomirskiy Rudnik and LLC TEMI to the extent that it is either probable that future taxable profit will be available against which the unused tax
losses can be utilised or there are sufficient taxable temporary differences.
Property, plant and equipment
Inventory
Exploration and evaluation assets
Fair value adjustments
Other temporary differences
Tax losses carried forward (b)
At 1 January
2017 (restated)
US$’000
89,028
10,056
5,008
129
7,811
(19,636)
92,396
Charged/
(credited)
to profit or loss
(restated)
US$’000
(9,422)
655
3,062
(123)
(1,783)
(4,942)
(12,553)
Credited
directly
to equity
US$’000
–
–
–
–
(7,505)
–
(7,505)
Exchange
differences
US$’000
59
–
–
–
(17)
–
42
At 31 December
2017 (restated)
US$’000
79,665
10,711
8,070
6
(1,494)
(24,578)
72,380
(b) Deferred tax recognised in relation to unused tax losses of LLC Malomirskiy Rudnik and LLC TEMI to the extent that it is either probable that future taxable profit will be available against which the unused tax
losses can be utilised or there are sufficient taxable temporary differences.
future. As at 31 December 2018, statutory
unremitted earnings comprised in aggregate
US$845.3 million (2017: US$943.8 million).
As at 31 December 2018, the Group did not
recognise deferred tax assets in respect of
the accumulated unused tax losses
comprising US$595.4 million (2017: US$575.8
million) on the basis that there is no certainty
about future taxable profit of relevant entities
against which
the unused tax losses can be utilised or there
are insufficient relevant taxable temporary
differences. Tax losses of US$566.6 million
(2017: US$531.0 million) arise in the UK and
tax losses of US$28.8 million (2017: US$44.7
million) arise in Russia, both can be carried
forward indefinitely.
As at 31 December 2018, the Group did not
recognise deferred tax assets of US$2.6
million (2017: US$2.7 million) in respect of
deductible temporary differences arising on
property, plant and equipment and close
down and restoration costs.
The Group has not recorded a deferred tax
liability in respect of withholding tax and other
taxes that would be payable on the
unremitted
earnings associated with investments in its
subsidiaries and associates as the Group is
able to control the timing of the reversal of
those temporary differences and does not
intend to reverse them in the foreseeable
192 Petropavlovsk Annual Report 2018
22. Provision for close down and restoration costs
At 1 January
Unwinding of discount
Change in estimates (a)
Amounts charged against provision
At 31 December
(a) Primarily reflects the effect of change in the forecast the Russian Rouble to the US Dollar exchange rate and the inflation rate.
The Group recognised provisions in relation to close down and restoration costs for the following mining operations:
POX Hub/ Pokrovskiy (a)
Pioneer
Malomir
Albyn
2018
US$’000
21,004
425
138
(179)
21,388
2018
US$’000
3,256
2,941
6,903
8,288
21,388
2017
US$’000
19,152
267
1,793
(208)
21,004
2017
US$’000
3,195
2,876
6,679
8,254
21,004
(a) With the closure of Pokrovskiy mine in 2018, as the site was transformed into a key component of the POX Hub, the associated amounts of close down and restoration costs were attributed to the
POX project accordingly.
The provision recognised represents the present value of the estimated expenditure that will be incurred, which has been arrived at using the
long-term risk-free pre-tax cost of borrowing. The expenditure arises at different times over the life of mine. The expected timing of significant cash
outflows is between years 2019 and 2034, varying from mine site to mine site.
23. Share capital
Allotted, called up and fully paid
At 1 January
Issued during the period
At 31 December
2018
2017
No of shares
US$’000
No of shares
US$’000
3,303,768,532
3,383,180
3,307,151,712
48,920
43
48,963
3,303,768,532
–
3,303,768,532
48,920
–
48,920
The Company has one class of ordinary shares which carry no right to fixed income.
Petropavlovsk Annual Report 2018 193
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
24. Notes to the cash flow statement
Reconciliation of profit before tax to operating cash flow
Profit before tax
Adjustments for:
Share of results of associate
Investment income
Interest expense
Other finance gains
Other finance losses
Share based payments
Depreciation
Impairment of exploration and evaluation assets
Impairment/(reversal of impairment) of ore stockpiles
Effect of processing previously impaired stockpiles
Provision for impairment of trade and other receivables
Impairment of gold in circuit
Effect of processing previously impaired gold in circuit
(Gain)/loss on disposals of property, plant and equipment
Foreign exchange (gains)/losses
Impairment of non-trading loans
Reversal of impairment of mining assets
Other non-cash items
Changes in working capital:
(Increase)/decrease in trade and other receivables
(Increase)/decrease in inventories
Increase in trade and other payables
Net cash generated from operations
Reconciliation of cash flows used to purchase property, plant and equipment
Additions to property, plant and equipment
Non-cash additions to property, plant and equipment:
Transfer from materials
Capitalised depreciation
Finance lease additions
Associated cash flows:
Purchase of property, plant and equipment
Increase in prepayments for property, plant and equipment
(Decrease)/increase in payables for property, plant and equipment
Cash movements presented in other cash flow lines:
Changes in working capital
194 Petropavlovsk Annual Report 2018
2018
US$’000
82,418
(15,480)
(3,775)
29,520
(13,905)
32,354
416
102,236
12,192
18,021
(10,496)
1,435
2,124
(3,384)
(862)
(8,450)
–
(101,695)
(106)
(18,510)
(26,054)
204,827
282,826
2018
US$’000
127,253
(747)
(293)
(55)
126,158
131,213
(1,419)
(5,147)
1,511
126,158
2017
(restated)
US$’000
48,945
(35,208)
(760)
25,905
(2,199)
28,470
144
104,800
–
(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
Non-cash transactions
An equivalent of US$8.0 million of VAT
recoverable was offset against profit tax
during the year ended 31 December 2018. An
equivalent of US$14.5 million of VAT
recoverable was offset against additional
mining tax (note 6) during the year ended 31
December 2017. There were no other
significant non-cash transactions during the
years ended 31 December 2018 and 2017.
25. Related parties
Related parties the Group entered into
transactions with during the reporting
period
PJSC Asian-Pacific Bank (‘Asian-Pacific
Bank’), LLC Insurance Company Helios
Reserve (‘Helios’) and Peter Hambro Limited
were considered to be related parties as
members of key management had an interest
in and collectively exercise significant influence
over these entities until 22 June 2017 when the
Group lost significant influence over these
companies.
The Petropavlovsk Foundation for Social
Investment (the ‘Petropavlovsk Foundation’)
is considered to be a related party due to
the participation of the key management
of the Group in the governing board of the
Petropavlovsk Foundation and their presence
in its board of guardians.
IRC Limited and its subsidiaries (Note 32)
are associates to the Group and hence are
related parties since 7 August 2015.
Transactions with related parties which the
Group entered into during the years ended
31 December 2018 and 2017 are set out
below.
Trading Transactions
Related party transactions the Group entered into that relate to the day-to-day operation of the business are set out below.
Entities in which key management have interest and exercise a significant influence
or control
IRC Limited and its subsidiaries
Sales to related parties
Purchases from related parties
2018
US$’000
2017
US$’000
2018
US$’000
2017
US$’000
–
164
164
3
85
88
764
681
1,445
1,336
2,062
3,398
During the year ended 31 December 2018, the Group made US$0.4 million charitable donations to the Petropavlovsk Foundation
(2017: US$0.2 million).
The outstanding balances with related parties at 31 December 2018 and 2017 are set out below.
Entities in which key management have interest and exercise a significant
influence or control
IRC Limited and its subsidiaries
Amounts owed by related parties
Amounts owed to related parties
2018
US$’000
2017
US$’000
2018
US$’000
2017
US$’000
1,556
2,078
3,634
236
2,099
2,335
–
976
976
–
527
527
In March 2018, the Group entered into
a transaction with the member of key
management personnel to purchase the
office building and land, currently subject
to an operating lease arrangement.
The aggregate consideration payable is
US$3.5 million, of which US$1.5 million of
advance payments were paid by the Group
as at 31 December 2018.
Financing transactions
The Group has charged a fee for the provision
of the guarantee to IRC under ICBC Facility,
equal to 1.75% on the ICBC outstanding loan
principal (note 14), which amounted to
US$4.0 million during the year ended
31 December 2018 (2017: US$4.1 million).
The guarantee fee contractual balance
outstanding amounted to US$10.3 million
(2017: US$6.4 million) which corresponding
fair value was US$6.8 million (2017:
US$10.5 million).
In June 2018, the Group provided a Rouble
denominated unsecured loan to IRC in the
amount of RUB1,878 million (an equivalent of
US$29.75 million). The loan carried interest of
12% per annum and was repaid on 21 March
2019. The loan was recognised net of lifetime
ECL of US$0.5 million at inception. The Group
recognised further US$0.8 million impairment
based on ECL model.
In December 2018, the Group provided a
dollar denominated unsecured loan to IRC
in the amount of US$27.0 million. The loan
carried interest of 16% per annum and
was repaid on 21 March 2019. The loan
was recognised net of lifetime ECL of
US$1.9 million at inception.
In March 2018, the Group entered into
a loan agreement with Dr Pavel Maslovskiy.
At 31 December 2018, the loan principal
outstanding amounted to an equivalent of
US$0.2 million. Interest charged during the
year ended 31 December 2018 comprised
an equivalent of US$0.01 million.
Petropavlovsk Annual Report 2018 195
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
25. Related parties continued
Key management compensation
Key management personnel, comprising a group of 16 individuals during the period (2017: 13), 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◆
(a) Being US$53.8 interest paid on borrowings and US$4.0 million repayment of bank loan.
(b) Being amortisation of borrowings (note 20).
Cash and cash equivalents
Borrowings
Net Debt◆
At 1 January
2018
US$’000
11,415
(596,474)
(585,059)
At 1 January
2017
US$’000
12,642
(611,212)
(598,570)
Net cash
movement
US$’000
17,719
57,845 (a)
75,564
Net cash
movement
US$’000
(1,605)
87,191 (c)
85,586
Exchange
movement
US$’000
(2,982)
–
(2,982)
Exchange
movement
US$’000
378
-
378
2018
US$’000
7,761
136
404
8,301
2017
US$’000
6,285
176
136
6,597
Non-cash
changes
US$’000
–
(55,548)
(55,548) (b)
At 31 December
2018
US$’000
26,152
(594,177)
(568,025)
Non-cash
changes
US$’000
-
(72,453)
(72,453) (d)
At 31 December
2017
US$’000
11,415
(596,474)
(585,059)
(c) Including US$49.1 million interest paid on borrowings, US$495.0 million net proceeds from the issue of Notes (note 20), US$525.8 million repayment of bank loans and US7.4 million debt transaction costs.
(d) Being amortisation of borrowings (note 20) and the effect of the bank debt refinancing.
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 2018,
the capital comprised US$1.2 billion (2017:
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.
◆ Net Debt is an Alternative Performance Measure (APM), which is not defined or calculated in accordance with IFRS. Go to “The Use and Application of Alternative Performance Measures (APMs)”
section for further information on our APMs.
196 Petropavlovsk Annual Report 2018
27. Financial instruments and financial risk management continued
Categories of financial instruments
Financial assets
Financial assets at amortised cost
Cash and cash equivalents
Trade receivables and contract assets
Loans granted to an associate
Other financial assets at amortised cost
Other loans and receivables
Financial assets at FVPL
Guarantee fee receivable
Listed equity securities
Available-for-sale investments
Financial liabilities
Financial liabilities at amortised cost
Trade and other payables
Borrowings
Derivative financial instruments
Financial guarantee contract
(a) Please refer to note 2.2 for the impact of adopting IFRS 9.
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
2018
US$’000
2017 (a)
US$’000
26,152
13,389
50,966
5,271
–
6,829
590
–
58,343
594,177
12,366
37,387
11,415
9,297
–
–
18,478
–
–
347
53,695
596,474
49,684
8,603
management, as well as guidance covering
specific areas, such as foreign exchange risk,
interest rate risk, gold price risk, credit risk
and investment of excess liquidity.
Interest rate risk
The Group has borrowings with fixed rate,
which are carried at amortised cost. They are
therefore not subject to interest rate risk as
defined in IFRS 7, since neither the carrying
amount nor the future cash flows will fluctuate
because of a change in market interest rates.
The Group does not have borrowings with
variable interest rates.
Foreign exchange risk
The Group operates internationally and is
exposed to foreign exchange risk arising
from fluctuations in currencies the Group
transacts, primarily US Dollars, GB Pounds
Sterling and Russian Roubles.
Exchange rate risks are mitigated to the
extent considered necessary by the Board
of Directors, through holding the relevant
currencies. At present, the Group does
not undertake any foreign currency
transaction hedging.
The carrying amounts of the Group’s foreign
currency denominated monetary assets
and monetary liabilities at period end are set
out below.
Russian Roubles
US Dollars (a)
GB Pounds Sterling
EUR
Other currencies
(a) US Dollar denominated monetary assets and liabilities in Group companies with Rouble functional currency.
Assets
Liabilities
2018
US$’000
66,285
4,652
1,905
22
159
2017
US$’000
40,101
3,101
2,560
–
–
2018
US$’000
54,757
5,886
1,033
2,301
312
2017
US$’000
55,740
3,768
3,173
763
313
Petropavlovsk Annual Report 2018 197
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
27. Financial instruments and financial risk management continued
The table set out below illustrates the Group’s profit sensitivity to changes in exchange rates by 25% (2017: 25%), representing
management’s assessment of a reasonably possible change in foreign exchange currency rates. The analysis was applied to monetary assets
and liabilities at the reporting dates denominated in respective currencies.
Russian Rouble currency impact
US Dollar currency impact
GB Pounds Sterling currency impact
EUR currency impact
Other currencies
2018
US$’000
2,882
309
218
570
38
2017
US$’000
3,910
167
153
191
78
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). The Group has loans advanced
to its associate, IRC, with a carrying value at
31 December 2018 of US$51.0 million, net of
expected credit losses (2017: US$nil).
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.
The Group’s maximum exposure to credit risk
is limited to the carrying amounts of the
financial assets recorded in the consolidated
financial statements and the outstanding
principal and interest under the ICBC facility
(note 14).
The major financial assets at the reporting
date are cash and cash equivalents held with
the counterparties as set out below.
Carrying
amount at
31 December 2018
US$’000
14,841
8,011
872
764
598
337
266
145
3
–
Carrying
amount at
31 December 2017
US$’000
6,559
–
–
1,436
914
660
78
11
7
1,493
Credit rating
BB+
AA-
BBB-
–
BBB-
A
CCC
B-
BB+
A+
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.
The table opposite 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 statement of financial
position. The contractual maturity is based on
the earliest date on which the Group may be
required to pay.
Counterparty
VTB
Citibank
Raiffeisen Bank
AVANGARD
Sberbank
Barclays
Asian-Pacific Bank
Bank of Cyprus
Alfa-Bank
UBS
Commodity price risk
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. In
2018 and 2017, 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
198 Petropavlovsk Annual Report 2018
27. Financial instruments and financial risk management continued
2018
Borrowings
- Convertible bonds
- Notes
Future interest payments (a)
Trade and other payables
2017
Borrowings
- Convertible bonds
- Notes
- 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$’000
–
–
2,250
31,506
33,756
–
–
–
2,395
30,438
32,833
–
–
47,375
26,837
74,212
–
–
4,006
51,229
23,257
78,492
100,000
–
42,875
–
142,875
–
–
–
49,625
–
49,625
–
–
40,625
–
40,625
100,000
–
–
42,875
–
142,875
–
500,000
40,625
–
540,625
–
500,000
–
81,250
–
581,250
(a) Future interest payments have been estimated using interest rates applicable at 31 December. There are no borrowings that are subject to variable interest rates and, therefore, subject to change in line with
the market rates.
28. Operating lease arrangements
The Group as a Lessee
The Group incurred rental expense, primarily associated with rent of office premises and rent of mining fleet, as set out below.
Minimum lease payments under operating leases recognised as an expense in the year
2018
US$’000
3,757
2017
US$’000
5,256
At the reporting date, the Group had outstanding commitments for future minimum lease payments under a non-cancellable operating lease for
office premises and vehicles, which fall due as follows:
Expiring:
Within one year
In two to five years
2018
US$’000
2017
US$’000
929
468
1,397
369
123
492
The Group as a Lessor
The Group earned property rental income during the year of US$0.7 million (2017: US$0.7million) on buildings owned by its subsidiary Irgiredmet.
Petropavlovsk Annual Report 2018 199
Financial statementsStrategic reportGovernance
Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
29. Capital commitments
At 31 December 2018, the Group had entered
into contractual commitments in relation to the
acquisition of property, plant and equipment
amounting to US$9.5 million (31 December
2017: US$19.1 million) including US$6.8 million
in relation to POX Hub project (31 December
2017: US$17.6 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$79 million as at
31 December 2018) 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 2018, the Group did not receive and
made no transfers of funds under the
Investment Agreement (2017: the Group
received an aggregate RUB1.8 billion (an
equivalent to US$31.2 million) in funding and
transferred these funds to DRSK).
30. Subsequent events
Refinancing of the ICBC facility
Following the approval by the Company
shareholders at a General Meeting held on
12 March 2019, to guarantee the obligations
of K&S under the Gazprombank Facility, the
refinancing of the ICBC Facility has been
completed.
IRC entered into a new US$240 million facility
with Gazprombank. In March 2019, IRC drew
down an aggregate of US$228.9 million on
the Gazprombank Facility that were used to
repay the amounts outstanding under ICBC
Facility of approximately US$169 million in full,
the two loans provided by the Group in the
equivalent of approximately US$57 million in
full and to finance the K&S Project’s working
capital of approximately US$3 million. The
remaining proceeds from the Gazprombank
Facility are to be used to repay part of the
guarantee fee of US$6 million owed by IRC to
the Group in respect of the guarantee of the
ICBC Facility with the remaining guarantee fee
outstanding of approximately US$5 million
payable no later than 31 March 2020.
In April 2019, IRC has further drawn down
US$4.5 million on the Gazprombank Facility.
A new guarantee was issued by the Group
over part of the Gazprombank Facility, the
guarantee mechanism is implemented through
a series of five guarantees that fluctuate in
value through the eight-year life of the loan,
with the possibility of the initial US$160 million
principal amounts guaranteed reducing to
US$40 million within two to three years,
subject to certain conditions being met. For the
final two years of the Gazprombank Facility, the
guaranteed amounts will increase to US$120
million to cover the final principal and interest
repayments.
31. Reconciliation of non-GAAP measures (unaudited)
Profit for the period
Add/(less):
Investment income
Interest expense
Other finance gains
Other finance losses
Foreign exchange (gains)/losses
Accrual for additional mining tax (a)
Taxation
Depreciation
Reversal of impairment of mining assets and in-house service
Impairment of exploration and evaluation assets
Impairment/(reversal of impairment) of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Share of results of associates (b)
Underlying EBITDA◆
2018
US$’000
25,929
(3,775)
29,520
(13,905)
32,354
(8,450)
–
56,489
102,236
(101,695)
12,192
18,021
2,125
–
(8,065)
142,976
2017
(restated)
US$’000
37,141
(760)
25,905
(2,199)
28,470
746
19,852
11,804
104,800
–
–
(4,702)
3,890
629
(28,744)
196,832
(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 gains/losses, taxation, depreciation and impairment/reversal of impairment recognised by the
associate and impairment recognised against investment in the associate (note 14).
◆ Net Debt is an Alternative Performance Measure (APM), which is not defined or calculated in accordance with IFRS. Go to “The Use and Application of Alternative Performance Measures (APMs)”
section for further information on our APMs.
200 Petropavlovsk Annual Report 2018
32. 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 mine
LLC Malomirskiy Rudnik
LLC Albynskiy Rudnik
LLC Osipkan
LLC Tokurskiy Rudnik
LLC Rudoperspektiva
LLC TEMI
LLC AGPK
LLC Perspektiva DV
LLC Vostok Geologiya
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
2018
31 December
2017
31 December
2018
31 December
2017
Russia
Jersey
Jersey
Russia
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
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%
100%
19.37%
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
100%
100%
100%
99.38%
99.94%
100%
100%
100%
–
75%
99.38%
99.94%
99.94%
100%
100%
100%
99.38%
94%
99.69%
100%
100%
49%
100%
99.38%
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%
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.
Petropavlovsk Annual Report 2018 201
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
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
2018
31 December
2017
31 December
2018
31 December
2017
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
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%
21.85%
31.10%
31.07%
31.10%
31.10%
18.75%
14.31%
14.31%
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 Orlovsko-Sokhatinskiy Rudnik
Russia
JSC Giproruda
Russia
LLC SHMTP
LLC Amursnab
Russia
Heilongjiang Jiatal Titanium Co., Limited China
Russia
LLC Uralmining
Russia
LLC Gorniy Park
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
Joint ventures of IRC
Heilongjiang Jianlong Vanadium Industries
Co., Limited
(a) In the ordinary class of shares.
China
Vanadium project
202 Petropavlovsk Annual Report 2018
33. 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 2018 is disclosed below. The Group’s principal subsidiaries and other significant
investments are set out in note 32.
Name of undertaking
Subsidiaries
Eponymousco Limited
Victoria Resources Limited
Petropavlovsk Mining Treasury UK Limited
Petropavlovsk Rouble Treasury Limited
Petropavlovsk Dollar Treasury Limited
Petropavlovsk 2010 Limited
Petropavlovsk 2016 Limited
Petropavlovsk Group Finance Limited
JSC Management Company Petropavlovsk
JSC Pokrovskiy mine
LLC Malomirskiy Rudnik
LLC Albynskiy Rudnik
LLC Osipkan
LLC Tokurskiy Rudnik
LLC TEMI
LLC AGPK
LLC Perspektiva DV
LLC Vostok Geologiya
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
Cayiron Limited
Associates
IRC Limited (b)
Subsidiaries of IRC
LLC Petropavlovsk- Iron Ore
Country of
incorporation
Proportion of
shares held by
the Group(a)
Registered address
UK
UK
UK
UK
UK
Jersey
Jersey
Guernsey
Russia
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
Cayman Islands
100%
100%
100%
100%
100%
100%
100%
100%
100%
99.38%
99.94%
100%
100%
100%
75%
99.38%
99.94%
99.94%
100%
100%
99.38%
94%
99.69%
100%
100%
49%
100%
99.38%
100%
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
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
680021, Khabarovskiy Region, Khabarovsk, Vladivostokskaya Street,
22, build.3, office 11
680021, Khabarovskiy Region, Khabarovsk, Vladivostokskaya Street,
22, build.3, office 9
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
Clifton House, 75 Fort Street, PO Box 1350, Grand Cayman, KY1-1108
HK
31.10%
6H, 9 Queen’s Road Central, Central, Hong Kong
Russia
31.10%
127055, Moscow, Lesnaya Street, 43, Office 313
Petropavlovsk Annual Report 2018 203
Financial statementsStrategic reportGovernance Notes to the Consolidated Financial Statements continued
For the year ended 31 December 2018
Proportion of
shares held by
the Group(a)
Registered address
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 Prospect,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
Building 50, Block12, Advanced Business Park, No. 188.West Road,
South Ring 4, Fengtai District, Beijing
Name of undertaking
LLC Olekminsky Rudnik
LLC KS GOK
Country of
incorporation
Russia
Russia
LLC Garinsky Mining & Metallurgical Complex
LLC Kostenginskiy GOK
Russia
Russia
LLC Orlovsko-Sokhatinskiy Rudnik
JSC Giproruda
LLC SHMTP
Russia
Russia
Russia
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
Thorrouble Limited
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
Cayman Islands
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%
31.10%
Thordollar Limited
Cayman Islands
31.10%
Thorholdco Limited
Cayman Islands
31.10%
Aricom UK Limited
Aricom Limited
Joint ventures of IRC
Heilongjiang Jianlong Vanadium Industries Co.,
Limited
UK
UK
China
(a) In the ordinary class of shares.
(b) IRC Limited and its principal subsidiary and joint venture undertakings.
31.10%
31.10%
14.31%
204 Petropavlovsk Annual Report 2018
Company Balance Sheet
As at 31 December 2018
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
Other reserves
Profit and loss account
Shareholders’ funds
31 December
2018
31 December
2017
note
US$’000
US$’000
3
4
4
5
5
20
790,409
790,429
1,144,420
–
8,365
1,152,785
(873,324)
279,461
1,069,890
(3,547)
(639,624)
426,719
48,963
518,142
228
(140,614)
426,719
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
The loss after tax for the year of the Company was US$42.2 million (2017: loss after tax of US$35.6 million).
The accompanying notes are an integral part of this balance sheet.
These financial statements for Petropavlovsk PLC, registered number 4343841, on pages 205 to 209 were approved by the Directors on
24 April 2019 and signed on their behalf by
Sir Roderic Lyne
Director
Dr Pavel Maslovskiy
Director
Petropavlovsk Annual Report 2018 205
Financial statementsStrategic reportGovernance
Company Statement of Changes in Equity
For the year ended 31 December 2018
Balance at 1 January 2017
Loss for the year
Deferred share awards
Revaluation of available-for-sale investments
Balance at 1 January 2018
Impact of adopting IFRS 9 (b)
Loss for the year
Deferred share awards
Balance at 31 December 2018
(a) Please see note 23 to the consolidated financial statements.
(b) Please see note 2.9 for the details of adoption of IFRS 9.
Share capital (a)
US$’000
48,920
–
–
–
48,920
–
–
43
48,963
Share premium (a)
US$’000
518,142
–
–
–
518,142
–
–
–
518,142
Other reserves
US$’000
(1,946)
–
144
(758)
(2,560)
2,705
–
83
228
Retained earnings
US$’000
(6,542)
(35,607)
–
–
(42,149)
(56,541)
(42,214)
290
(140,614)
Total
US$’000
558,574
(35,607)
144
(758)
522,353
(53,836)
(42,214)
416
426,719
206 Petropavlovsk Annual Report 2018
Notes to the Company Financial Statements
For the year ended 31 December 2018
2.5 Financial assets and liabilities
Financial assets are measured on initial
recognition at fair value and are subsequently
measured at amortised cost using the
effective interest rate method, less any
impairment.
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.
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,
are recognised at fair value at inception 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 public
company limited by shares, 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.
Investments, other than investments in
subsidiary undertakings and joint ventures,
are measured at fair value. Changes to the fair
value of other investments are recognised
through profit or loss.
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.
Petropavlovsk Annual Report 2018 207
Financial statementsStrategic reportGovernance
Notes to the Company Financial Statements continued
For the year ended 31 December 2018
2.9 Adoption of new and revised standards and interpretations
The impact of adoption of IFRS 9 is detailed in note 2.2 to the consolidated financial statements.
The impact of the impairment models changes on Company-specific financial assets on the date of initial application is set out below:
Owed by Group companies
31 December
2017
US$’000
1,116,939
1 January
2018
US$’000
1,068,939
Transition
adjustment
US$’000
(48,000)
On initial application of IFRS 9, the Company recognised an additional provision for expected credit losses on amounts owed by Group companies
of US$48 million.
The impact of adoption of IFRS 16 is detailed in note 2.2 to the consolidated financial statements. The Company expects to recognise right-of-use
assets of approximately US$0.9 million and corresponding lease liabilities.
2.10 Areas of judgement in applying accounting policies and key sources of estimation uncertainty
When preparing these financial statements in accordance with the accounting policies as set out in note 2, management necessarily makes
judgements and estimates that can have a significant impact on the financial statements. These judgements and estimates are based on
management’s best knowledge of the relevant facts and circumstances and previous experience. Actual results may differ from these estimates
under different assumptions and conditions (note 3 to the consolidated financial statements).
3. Investments
Cost
At 1 January 2018
Additions
Fair value change
At 31 December 2018
Provision for impairment
At 1 January 2018
Charge for the year
At 31 December 2018
Net book value
At 1 January 2018
At 31 December 2018
Investments
in Group
companies
US$’000
2,134,968
303
–
2,135,271
(1,359,654)
14,205 (a)
(1,345,449)
775,314
789,822
Other
investments
US$’000
343
–
244
587
–
–
–
343
587
Total
US$’000
2,135,311
303
244
2,135,858
(1,359,654)
14,205
(1,345,449)
775,657
790,409
(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 2018 are provided in note 32 to the consolidated financial statements.
4. Debtors
Owed by Group companies (a)
VAT recoverable
Other debtors
Due within one year
Due after more than one year
(a) Net of provision for impairment of US$41.3 million (2017: nil).
208 Petropavlovsk Annual Report 2018
2018
US$’000
1,134,845
2,021
7,554
1,144,420
1,144,420
–
1,144,420
2017
US$’000
1,116,939
2,053
13,304
1,132,296
1,123,900
8,396
1,132,296
5. Creditors
Due to Group companies
Bank loans (a)
Trade creditors
Accruals and other creditors
Due within one year
Due after more than one year
(a) Please see note 20 to the consolidated financial statements.
6. Taxation
2018
US$’000
1,469,066
–
682
43,200
1,512,948
873,324
639,624
1,512,948
2017
US$’000
1,342,638
7,137
1,362
19,489
1,370,626
803,142
567,484
1,370,626
As at 31 December 2018, the Company has tax losses available to carry forward in the amount of US$300.7 million (2017: US$274.4 million).
7. Parent company guarantees
The Company provided a number of corporate guarantees on behalf of certain Group undertakings. Please also see note 14 to the consolidated
financial statements.
8. Operating lease arrangements
At the balance sheet date, the Company had outstanding commitments for future minimum lease payments under a non-cancellable operating
lease for office premises, which fall due as follows:
Due:
Within one year
Within two to five years
9. Directors’ remuneration
2018
US$’000
2017
US$’000
468
468
936
369
123
492
There was one Executive Director who held office at the end of the year (2017: two Executive Directors who held office at the end of the year).
Details of Directors’ remuneration are provided in the Directors’ Remuneration Report on pages 121 to 138 of this Annual Report.
10. Subsequent events
On 11 April 2019 it was resolved that the principal subsidiary of the Company would distribute a dividend in the amount of equivalent of
US$36.6 million.
Petropavlovsk Annual Report 2018 209
Financial statementsStrategic reportGovernance 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 Statement
of Profit or Loss (SPL), Consolidated Statement
of Financial Position (SFP), Consolidated
Statement of Cash Flows (SCF) 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 and cost
of flotation concentrate. 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.
210 Petropavlovsk Annual Report 2018
Ref
SPL
2018
Operating expenses
Deduct:
note 6
Foreign exchange gains
note 6
Depreciation
Reversal of impairment of mining assets
note 6
Impairment of exploration and evaluation assets note 6
note 6
Impairment of ore stockpiles
note 6
Impairment of gold in circuit
note 6
Central administration expenses
Operating cash costs
note 4
Deduct:
Corporate and other segment
Deduct: silver revenue
Deduct: cost of flotation concentrate
Total Cash Costs
note 4
note 4
note 4
Total ounces sold
Total Cash Cost per ounce sold
oz
US$/oz
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
Ref
SPL
note 6
note 6
note 6
note 6
note 6
note 6
note 6
note 4
note 4
note 4
Total ounces sold
Total Cash Cost per ounce sold
oz
US$/oz
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
108,466
8,667
63,913
112,687
31,286
(591)
–
107,875
135,001
799
(29)
–
8,638
6,442
1,341
(61)
(2,558)
61,294
77,448
791
(160)
–
112,527
150,720
747
(31,286)
–
–
–
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
127,657
39,988
61,079
98,354
30,030
(743)
126,914
160,421
791
(121)
39,867
32,250
1,236
(42)
61,037
65,678
929
(185)
98,169
181,485
541
(30,030)
-
-
Total
US$’000
388,643
8,450
(102,236)
101,695
(12,192)
(18,021)
(2,125)
(39,195)
325,019
(31,286)
(841)
(2,558)
290,334
369,611
786
Total
US$’000
522,267
(746)
(19,852)
(104,800)
4,702
(3,890)
(629)
(39,944)
357,108
(30,030)
(1,091)
325,987
439,834
741
Petropavlovsk Annual Report 2018 211
Financial statementsStrategic reportGovernance
The Use and Application of Alternative
Performance Measures (APMs) continued
All in Sustaining Costs (AISC)
Definition
AISC includes both operating and capital
costs required to sustain gold production on
an ongoing basis, over and above the direct
mining and selling costs shown by TCC.
Calculation
AISC are calculated by the Group as
TCC plus/(minus) impairment/(reversal of
impairment) of ore stockpiles and gold in
circuit, central administration expenses,
plus capitalised stripping at end of the period,
minus capitalised stripping at beginning of the
period, plus close-down and site restoration
and sustaining capital and exploration
expenditure. This is then divided by the
ounces of gold sold. AISC are presented
on a segment basis.
AISC are calculated in accordance with
guidelines for reporting AISC as published
by the World Gold Council in June 2013.
Other companies may calculate this
measure differently.
Relevance
AISC allows for a better understanding of the
true cost of producing gold once key
components such as central admin costs and
the cost of sustaining capital and exploration
expenditure are taken into account.
Management uses this measure to monitor
the performance of our assets and their ability
to generate positive cash flows.
Reconciliation
The tables below provide a reconciliation
between total cash costs and all-in sustaining
costs to calculate all-in sustaining cost per
ounce sold for relevant periods.
Pioneer
US$’000
107,875
Pokrovskiy
US$’000
8,638
Malomir
US$’000
61,294
Albyn
US$’000
112,527
Corporate
and other
US$’000
–
–
1,415
14,316
21,970
172
8,902
20,003
174,653
135,001
1,294
–
17
683
–
–
–
–
9,338
6,442
1,449
309
536
8,214
895
559
5,502
4,612
81,921
77,448
1,058
17,712
157
15,982
(15,644)
511
4,079
11,471
146,795
150,720
974
–
–
–
–
–
–
–
–
–
–
Pioneer
US$’000
126,914
Pokrovskiy
US$’000
39,867
Malomir
US$’000
61,037
Albyn
US$’000
98,169
Corporate
and other
US$’000
–
(1,347)
2,594
14,569
917
101
5,993
15,351
165,092
160,421
1,029
175
733
2,929
–
201
37
159
44,101
32,250
1,367
304
563
5,965
7,024
327
3,789
4,929
83,938
65,678
1,278
(1,592)
–
16,481
5,639
868
6,318
4,510
130,393
181,485
718
–
–
–
–
–
–
–
–
–
–
Total
US$’000
290,334
18,021
2,125
39,195
7,221
1,242
18,483
36,085
412,706
369,611
1,117
Total
US$’000
325,987
(2,460)
3,890
39,944
13,580
1,497
16,137
24,949
423,524
439,834
963
2018
Total cash costs
Add:
Impairment of ore stockpiles
Impairment of gold in circuit
Central administration expenses
Net capitalised stripping
Site restoration costs
Sustaining exploration expenditures
Sustaining Capital Expenditures
All–in Sustaining Costs
Ref
note 6
note 6
note 6
note 15
Total ounces sold
All–in Sustaining Costs per ounce sold
oz
US$/oz
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$/oz
212 Petropavlovsk Annual Report 2018
All in Costs (AIC)
Definition
AIC comprises of AISC as well as capital
expenditures for major growth projects
or enhancement capital for significant
improvements at existing operations.
Calculation
AIC are calculated by the Group as AISC plus
non-sustaining exploration and capital
expenditure and (reversal of impairment)/
impairment of refractory ore stockpiles.
This is then divided by the ounces of gold
sold. AIC are presented on a segment basis.
AIC is calculated in accordance with
guidelines for reporting AIC as published
by the World Gold Council in June 2013.
Other companies may calculate this
measure differently.
Relevance
AIC reflect the costs of producing gold over
the life-cycle of a mine.
Reconciliation
The tables below provide a reconciliation
between all-in sustaining costs and all-in
costs to calculate all-in cost per ounce sold
for relevant periods.
2018
All-in Sustaining Costs
Add:
Exploration expenditure
Capital Expenditure
All-in costs
Total ounces sold
All-in costs per ounce sold
2017
All-in Sustaining Costs
Add:
Reversal of impairment of ore stockpiles
Exploration expenditure
Capital Expenditure
All-in costs
Total ounces sold
All-in costs per ounce sold
oz
US$/oz
Ref
note 6
oz
US$/oz
Ref
Pioneer
US$’000
174,653
Pokrovskiy
US$’000
9,338
Malomir
US$’000
81,921
Albyn
US$’000
146,795
Corporate
and other
US$’000
–
–
–
–
–
–
1,092
22,740
198,485
135,001
1,470
–
–
9,338
6,442
1,449
1,084
53,910
136,915
77,448
1,768
971
–
147,766
150,720
980
Pioneer
US$’000
165,092
Pokrovskiy
US$’000
44,101
Malomir
US$’000
83,938
Albyn
US$’000
130,393
Corporate
and other
US$’000
–
(2,242)
5,592
18,237
186,679
160,421
1,164
–
–
–
44,101
32,250
1,367
–
44
22,972
106,954
65,678
1,628
–
127
–
130,520
181,485
719
–
–
–
–
–
–
Total
US$’000
412,707
3,147
76,650
492,504
369,611
1,332
Total
US$’000
423,524
(2,242)
5,763
41,209
468,254
439,834
1,065
Petropavlovsk Annual Report 2018 213
Financial statementsStrategic reportGovernance
The Use and Application of Alternative
Performance Measures (APMs) continued
Average Realised Gold Sales Price
Definition
The average realised gold sales price is the
mean price at which the Group sold its gold
production output throughout the reporting
period, including the realised effect of cash
flow hedge contracts during the period.
Calculation
The average realised gold sales price is
calculated by dividing total revenue received
from gold sales (including the realised effect
of any hedging contracts) by the total quantity
of gold sold during the period. Other
companies may calculate this measure
differently.
Gold revenue
Gold sold
Average realised gold price
Ref
note 4
Relevance
As gold is the key commodity produced and
sold by the Group, the average realised gold
sales price is a key driver behind the Group’s
revenues and profitability.
Reconciliation
The average realised gold price has been
calculated as set out in the table below.
US$’000
ounces
US$/oz
2018
466,674
369,611
1,263
2017
555,092
439,834
1,262
Capital Expenditure (CAPEX)
Definition
CAPEX is the investment required by the
Group to explore and develop its gold assets
and keep current plants and other equipment
at its gold mines in good working order.
Calculation
CAPEX represents cash flows used in investing
activities, namely Purchases of property, plant
and equipment and Expenditure of exploration
and evaluation assets.
Relevance
Capital expenditure is necessary in order not
only to maintain but also to develop and grow
the business. Capex requirements need to
be balanced in line with the Group’s strategy
and provide an optimal allocation of the
Group’s funds.
Reconciliation
The table below provides a reconciliation
between capital expenditure and cash flows
used in investing activities.
Purchase of property, plant and equipment
Expenditure on exploration and evaluation assets
Total Capital Expenditure
Ref
SCF
SCF
31 December 2018
US$’000
131,213
3,153
134,366
31 December 2017
US$’000
82,295
5,763
88,058
Net Debt
Definition
Net Debt shows how indebted a company is
after total debt and any cash (or its equivalent)
are netted off against each other.
Calculation
Net Debt is calculated as the sum of current
borrowings and non-current borrowings less
cash and cash equivalents. Other companies
may calculate this measure differently.
statement of financial position. The measure
is also widely used by various stakeholders.
Relevance
Management considers Net Debt a key
measure of the Company’s leverage and its
ability to repay debt as well showing what
progress is being made in strengthening the
Reconciliation
The table below provides calculation of net
debt at relevant reporting dates.
Cash and cash equivalents
Borrowings
Net debt
Ref
SFP
SFP
31 December 2018
US$’000
26,152
(594,177)
(568,025)
31 December 2017
US$’000
11,415
(596,474)
(585,059)
214 Petropavlovsk Annual Report 2018
Underlying EBITDA
Definition
EBITDA is a common measure used to
assess profitability without the impact of
different financing methods, tax, asset
depreciation and amortisation of intangibles
and items of an exceptional / non-recurring
nature, or those that could make comparison
of results from prior periods less meaningful.
Calculation
Underlying EBITDA is calculated as profit/
(loss) for the period before financial income,
financial expenses, foreign exchange gains
and losses, fair value changes, taxation,
depreciation, impairment charges and
accrual for additional mining tax. Other
companies may calculate this measure
differently.
Relevance
Underlying EBITDA is an indicator of the
Group’s ability to generate operating cash
flows, which are the source of funding for
the Group’s working capital requirements,
capital expenditure and debt service
obligations. The measure is also widely
used by various stakeholders.
Reconciliation
The tables below provide reconciliations
between net profit and Underlying EBITDA as
well as reconciliation between operating profit
and Underlying EBITDA for relevant periods.
Profit for the period
Add/(less):
Investment income
Interest expense
Other finance gains
Other finance losses
Foreign exchange (gains)/losses
Accrual for additional mining tax
Taxation
Depreciation
Impairment of exploration and evaluation assets
Impairment/(reversal of impairment) of ore stockpiles
Impairment of gold in circuit
Impairment of non-trading loans
Reversal of impairment of mining assets
Share of results of associates (a)
Underlying EBITDA
Ref
SPL
SPL
SPL
SPL
SPL
note 6
note 6
SPL
note 6
note 6
note 6
note 6
note 6
note 6
note 14
2018
US$’000
25,929
(3,775)
29,520
(13,905)
32,354
(8,450)
–
56,489
102,236
12,192
18,021
2,125
–
(101,695)
(8,065)
142,976
2017
(restated)
US$’000
37,141
(760)
25,905
(2,199)
28,470
746
19,852
11,804
104,800
–
(4,702)
3,890
629
–
(28,744)
196,832
(a) Group’s share of interest expense, investment income, other finance gains and losses, foreign exchange gains and losses, taxation, depreciation and impairment/reversal of impairment recognised
by an associate and impairment recognised against investment in the associate.
Petropavlovsk Annual Report 2018 215
Financial statementsStrategic reportGovernance The Use and Application of Alternative
Performance Measures (APMs) continued
2018
Operating profit
Foreign exchange gains
Segment result
Add/ (less):
Depreciation
Reversal of impairment of mining assets
Impairment of exploration and evaluation assets
Impairment of ore stockpiles
Impairment of gold in circuit
Share of results of associates (a)
Underlying EBITDA
Ref
SPL
note 6
note 4
notes 4,6
notes 4,6
notes 4,6
notes 4,6
notes 4,6
note 14
Ref
SPL
note 6
note 4
2017
(restated)
Operating profit
Foreign exchange losses
Segment result
Add/ (less):
notes 4,6
Accrual for additional mining tax
Depreciation
notes 4,6
(Reversal of impairment)/impairment of ore stockpiles notes 4,6
notes 4,6
Impairment of gold in circuit
notes 4,6
Impairment of non–trading loans
Share of results of associates (a)
note 14
Underlying EBITDA
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
Corporate
and other
US$’000
24,751
(1,163)
84,913
17,312
(7,651)
36,982
–
–
–
1,415
681
–
–
–
17
22,701
(82,958)
12,192
309
536
41,427
–
–
17,712
157
63,148
(465)
37,693
76,608
Pioneer
US$’000
Pokrovskiy
US$’000
Malomir
US$’000
Albyn
US$’000
445
(18,737)
–
–
–
(8,065)
(34,008)
Corporate
and other
US$’000
33,794
(9,455)
1,455
79,686
(4,373)
6,511
36,168
(3,589)
2,594
–
2,255
7,112
175
733
–
2,780
16,959
304
563
–
8,306
44,346
(1,592)
–
–
75,478
820
22,061
130,746
–
215
–
–
629
(28,744)
(32,273)
Consolidated
US$’000
126,612
(8,450)
118,162
102,236
(101,695)
12,192
18,021
2,125
(8,065)
142,976
Consolidated
US$’000
100,361
746
101,107
19,852
104,800
(4,702)
3,890
629
(28,744)
196,832
(a) Group’s share of interest expense, investment income, other finance gains and losses, foreign exchange gains and losses, taxation, depreciation and impairment/reversal of impairment recognised
by an associate and impairment recognised against investment in the associate.
216 Petropavlovsk Annual Report 2018
Appendix, Glossary and Definitions
For the year ended 31 December 2018
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 the JORC Code. The assets
are subdivided into ‘core’ and ‘non-core’
projects. Core projects are classified as the
Group’s four operational mines (Pokrovskiy,
Pioneer, Malomir, Albyn) and their satellites
scheduled for production using 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
estimates are based on a long-term gold price
assumption of US$1,200/oz with other
modifying factors derived from the actual
2018 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.
Petropavlovsk Annual Report 2018 217
Financial statementsStrategic reportGovernance Appendix, Glossary and Definitions continued
For the year ended 31 December 2018
alluvial
assay
Au
autoclave
backfill
bondholder
material that is transported by a river and deposited at points along the flood plain and river bed.
The material may contain economical deposits of gold and other valuable minerals
the chemical laboratory analysis of a sample of ores to determine the proportion of gold, silver, or other metal
contained within
chemical symbol for the element gold
equipment used in the pressure oxidation (POX) process to facilitate gold extraction from refractory ores
waste material used to fill the void created by mining an ore body
holders of the Group’s US$100 million 9% convertible bonds due 2020
brownfield exploration
exploration work carried out close to, at or adjacent to existing mines. Also known as near-mine exploration
concentrate yield
cut off grade
cyanidation
depletion
deposit
doré
feasibility study
flotation
the Foundation or
the Petropavlovsk Foundation
geochemical prospecting
the percentage of the mass of the original ore which is pulled into the concentrate
the lowest grade of mineralised material considered economic for mining, used in the reporting of Ore Reserves
and Mineral Resources
the treatment of finely crushed or ground ore with cyanide solution to dissolve and extract the gold from it
a decrease in the quantity of ore at a deposit due to mining / extraction
a natural occurrence of a mineral or ore, in sufficient quantity and concentration to enable exploitation
an impure alloy of gold and silver produced at the mine before being forwarded to a refinery for additional
purification
an extensive technical and financial study to assess the commercial viability of a mining project
the process of separation, extraction and concentration of ore that results in the production of a high-grade
refractory concentrate to be processed inside the autoclaves at the POX Hub
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
gram per metric tonne
the amount of gold contained in a tonne of gold bearing ore (expressed in grams per metric tonne)
greenfield exploration
exploration carried out at a location where minimal to no previous exploration work has taken place
Group
head grade
heap leach
the Company and its subsidiaries
the grade of ore as it comes from a mine and goes into a mill for processing at the plant
the process used for the recovery of metal from low grade ore. Crushed material is laid on a mildly sloping,
impervious pad and uniformly leached by the percolation of the leaching solution through the beds of ore by gravity
and pumped to holding ponds. The metal is recovered via conventional methods from the solution
HSE Committee
Health, Safety and Environmental Committee
ICBC
Indicated Resource
Inferred Resource
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, 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
218 Petropavlovsk Annual Report 2018
IRC
JORC
K&S
koz
KPI
ktpa
life of mine
IRC Limited, the Hong Kong listed former subsidiary, now associate, of the Group. Petropavlovsk remains a major
shareholder with a holding of 31.1%
Joint Ore Reserves Committee of the Australasian Institute of Mining and Metallurgy, Australian Institute
of Geoscientists and the Minerals Council of Australia
the Kimkan and Sutara deposits, which are being developed as one project by IRC
thousand ounces
Key Performance Indicator, used to monitor progress and performance against strategic objectives
and to benchmark the Group’s performance
thousand tonnes per annum
the remaining years of production at a particular location or asset, based on production rates and ore reserves,
as per the Company’s current mine plan
Lost Time Injury Frequency Rate
(LTIFR)
the time lost as a result of an accident or fatality, measured as the number of accidents per million man
hours worked
mill
mineralisation
Mineral Resource
mining
Mtpa
OHS/OH&S
open pit
ore
ore body
Ore Reserve
ounce or oz
overburden
placer deposit
equipment used to grind crushed rocks to the desired size for mineral extraction
the process of formation and concentration of elements and their chemical compounds within a mass or
body of rock
the 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
the process of obtaining useful minerals from the earth’s crust via both underground and surface / open pit mining
activities
million tonnes per annum
occupational health and safety
large excavation developed to extract a mineral deposit located near the surface
mineral rock that can be extracted and marketed profitably
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 Proven and Probable
troy ounce (31.1035 grams)
material (usually soil and rock) that sits above the ore deposit and must be removed to expose the ore
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
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
recovery rate
the quantity of metal physically extracted from the processing of ore, as a percentage of the total metal content,
after accounting for mining losses
Petropavlovsk Annual Report 2018 219
Financial statementsStrategic reportGovernance Appendix, Glossary and Definitions continued
For the year ended 31 December 2018
refractory ore
R&D
Resin-in-pulp (RIP)
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
a processing technique by which a resin medium is used to absorb the desired element
out of solution or pulp
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
stope
strike
strike length
strip ratio
tailings
tailings dam
trench sampling
an accumulation of unprocessed ore or mineralised material intended to serve as a reserve for current or future
processing or as an additional source of material to achieve a uniform feed for the plant via blending with ore
received from the mine
an area in an underground mine where ore is mined
direction of the line formed by the intersection of a fault, bed, or other planar feature and a horizontal plane
longest horizontal dimension of an ore body or zone of mineralisation
stripping ratio or strip ratio refers to the ratio of the volume of overburden (or waste material) removed relative to the
volume of ore mined. 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 or waste that remains after all metals / minerals considered economic have been removed from the
ore during the milling process. Tailings have the potential be reprocessed in the future if the economics of the
contained metal or mineral change
an open air storage facility used to store the waste by-products produced during the process of extracting gold
from the ore
taking samples from a trench on the surface or along a trench excavated underground, generally in the form of a
series of continuous channels (channel samples)
tpm
tonnes per month
220 Petropavlovsk Annual Report 2018
Shareholder Information
For the year ended 31 December 2018
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: investorservices@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 indicated price and valuation
– View movements on their shareholdings
– View dividend payment history
– Change their address
– Register or change their email address
– Sign up to receive communications by email
instead of post
– Access the online voting service.
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:
Mr Patrick Pittaway
Head of Investor Relations
Company Secretary:
Amanda Whalley ACIS
Additional documents:
Shareholders are encouraged to sign up to
receive news alerts by email. These include
all of the financial news releases throughout
the year.
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 2019
This year’s Annual General Meeting (AGM)
will be held at the offices of Buchanan
Communications, 107 Cheapside, London
EC2V 6DN. The meeting is on 13 June 2019
commencing at 11 a.m. 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.
Petropavlovsk Annual Report 2018 221
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