ANNUAL REPORT 2016
IMPLEMENTING
A COMPELLING
GROWTH STRATEGY
ABOUT US
POLYMETAL IS A PRECIOUS METALS
MINING GROUP WITH A STRONG TRACK
RECORD OF CONSISTENT OPERATING
PERFORMANCE AND DELIVERING
ON NEW PROJECTS.
OUR ROBUST OPERATING AND
FINANCIAL RESULTS REFLECT THE
SUCCESS OF OUR STRATEGY FOCUSED
ON GROWTH AND DELIVERING VALUE
TO OUR STAKEHOLDERS.
FRONT COVER IMAGE
Kyzyl, Kazakhstan
We have made considerable progress at Kyzyl, our flagship
project, which is on track to go into production in late 2018,
ramping up to full capacity in 2019. One of the highest
grade and largest untapped gold deposits in the Former
Soviet Union, with a long mine life and low-capital intensity,
it is set to become the main source of medium-term
growth for Polymetal and will create significant returns
for our shareholders.
FIND OUT MORE ON OUR WEBSITE
www.polymetalinternational.com
SEE OUR SUSTAINABILITY REPORT
www.polymetalinternational.com/sustainable-development
CONTENTS
STRATEGIC REPORT
Chairman’s statement
Group Chief Executive’s review
At a glance
Business model
Market overview
Our strategy
Performance highlights
Operating review
Sustainability
Financial review
Risks and risk management
GOVERNANCE
Board of Directors
Senior management
Corporate governance
Audit and Risk Committee report
Remuneration report
Directors’ report
Directors’ responsibility statement
FINANCIAL STATEMENTS
Independent auditor’s report
Consolidated income statement
Consolidated statement
of comprehensive income
Consolidated balance sheet
Consolidated statement of cash flows
Consolidated statement
of changes in equity
Notes to the consolidated
financial statements
APPENDICES
Operational statistics
Reserves and Resources
Glossary
Shareholder information
02
04
06
08
10
11
20
22
42
52
64
70
71
72
78
83
100
103
104
109
110
111
112
113
114
158
165
176
179
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
01
CHAIRMAN’S STATEMENT
POLYMETAL CONTINUED TO DELIVER
ON ITS STRATEGY OF BUILDING
THE LONG-TERM FUTURE OF THE
COMPANY, WHILE GENERATING
SIGNIFICANT FREE CASH FLOW
AND CREATING VALUE FOR ITS
STAKEHOLDERS.
NET PROFIT
US$395 million
(2015: US$221 million)
DIVIDEND YIELD (5-YEAR AVERAGE)
4.1%
Dear fellow stakeholders
I am pleased to report on Polymetal’s robust financial
performance and consistent operational delivery throughout
the year. In 2016, Adjusted EBITDA grew by 15% to
US$759 million, and underlying net earnings increased
by 31% to US$382 million. In the meantime, the Company
delivered strong free cash flows and paid its shareholders
significant dividends.
By the middle of 2016, there was an air of optimism and hope
that the down-cycle in the precious metals market was finally
at an end. However, this turned out to be short-lived as the
unexpected results of the US elections had a strong impact
on markets and asset types across the globe towards the
year-end.
Unpredictable geopolitical developments continued to
drive high volatility in all of Polymetal’s key markets: directly
in the gold and silver markets, where we sell our product,
and in the oil market, a key component of our cost base,
but also indirectly through the exchange rates in Russia
and Kazakhstan which are closely linked to oil.
However, more recently, we have begun to see an
improvement in the development of macroeconomic
conditions, with exchange rates stabilising and inflation
going down. There has also been a certain relaxation in
cross-border tensions, which has led to increased investor
interest in Russian assets, alongside significantly better
cost and availability of debt funding.
Despite ongoing global and local challenges, Polymetal
continued to deliver on its strategy in the reporting year.
We further expanded our operations into Armenia, adding
another geologically and economically attractive asset
to our portfolio within the Former Soviet Union, which
we view as our home market. I am also pleased to say
that this was among several important steps made
towards building the long-term future of the Company.
PERFORMANCE IN 2016
Sadly, there were four fatalities at our operations during 2016.
While this is fewer than in 2015, it is still four more than it
should be. I send my personal condolences to the families
affected and the assurance that the Board and executive
management are placing ever-greater focus on this matter,
determined to achieve a major improvement in the health
and safety of our employees in 2017 and beyond.
Our production performance across the portfolio was solid,
allowing us to meet our production guidance for the fifth year
in a row, notwithstanding the increased production target set
in May following the acquisitions in Armenia and Kazakhstan.
Delivering on our promises has become a distinguishing
feature of Polymetal in the sector.
We are fully on track with the construction of Kyzyl, our
flagship development project. We also acquired new assets
during the year: Kapan and Komar through M&A activities
and Nezhda through a joint venture. At the same time,
our strong operating performance and low costs enabled
us both to finance these projects and to generate a
meaningful free cash flow of US$257 million during 2016
(2015: US$263 million). This in turn allowed us to sustain
ATTRACTIVE INVESTMENT OPPORTUNITY
Within its sector, Polymetal is a remarkable example of a
company that is both able to acquire and explore attractive
investment opportunities, and deliver on them. Our set
of strategic competitive strengths is unparalleled: selective
mining, processing refractory ores, trading precious metals
concentrates and an in-depth knowledge of the precious
metals mining space in the Former Soviet Union. Together,
these allow us to select individually attractive assets –
whether large, high grade, synergistic or a suitable
combination – and then leverage these strengths for
future growth.
We have ambitious growth plans, projecting 40% production
growth by 2020 combined with strong cash flow generation
from existing mines, which should allow us to pay dividends
to shareholders throughout the cycle. This is backed by
our strong track record of meeting, and often exceeding,
our operating and cost guidance, as well as the excellence
of our project execution.
We have a portfolio of high-grade
assets generating free cash flow
through the cycle. We employ a
processing hub strategy to ensure
high returns on invested capital and
reduce execution risks.
We continue to invest in greenfield
exploration and review opportunistic
M&A ideas with a focus on reserve
quality or low-capital intensity.
We are committed to capital
discipline and provide a substantial
dividend yield while maintaining
a strong balance sheet.
a sector-leading dividend yield and provide cash returns
to our shareholders through regular and special dividends
while maintaining a strong balance sheet.
social and governance (ESG) matters. These challenges,
faced by every company in our sector, are a priority and
the Board will ensure that they are addressed effectively.
Our Group Chief Executive, Vitaly Nesis, expands on this
and other activities in his detailed report on Polymetal’s
operating performance on the following pages.
DIVIDENDS DELIVER VALUE
Polymetal continues to maintain a track record of substantial
dividends payments and delivering meaningful cash
returns to its shareholders. The Company has consistently
implemented its dividend policy, re-affirming our commitment
to capital allocation discipline and value distribution, while
retaining the flexibility to invest in attractive projects. In 2016,
dividend pay-outs totalled US$158 million and the dividend
yield over the last five years has averaged 4.1%. The Board
proposes a final dividend for 2016 of US$0.18 per share,
subject to approval at the Annual General Meeting (AGM),
in May 2017.
This was underpinned by a healthy free cash flow generation
in both 2016 and 2015, which remains a key differentiator
for Polymetal. We remain fully committed to translating this
into cash returns for our investors.
THE YEAR AHEAD
Given Polymetal’s track record, I am confident that the
strength of our operating performance will enable us to
deliver on our production plans for 2017 and make good
progress with our project pipeline for the ambitious future
growth of the Company.
At all of our operating mines, particularly given the increased
proportion of underground mining, there will be a greater
focus on health and safety issues. The dedicated Safety
and Sustainability Committee, formed in 2015, has already
started a broader review of safety and other environmental,
On a strategic level, we will concentrate our efforts
on progressing with the construction of Kyzyl within
the approved budget and timeline. We will also continue
to explore other strategic opportunities within the
Former Soviet Union, such as the recently formed joint
venture for the development of the Nezhda deposit.
The Board remains committed to ensuring prudent liquidity
management and a sound approach to leverage while
maintaining cash returns to our shareholders in the
continuing complex macroeconomic environment.
As Chairman of the Polymetal Board, I commend the
dedication and skills of the management and employees
of the Company and their contribution to the outstanding
success of the business during 2016. With their continued
support, we look forward to another year of delivering
consistent growth and value creation.
Bobby Godsell
Chairman
14 March 2017
02
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
03
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016 GROUP CHIEF EXECUTIVE’S REVIEW
ON TRACK WITH DELIVERING AMBITIOUS
GROWTH PLANS
While the macro environment for our business once again
remained volatile and unpredictable, Polymetal reports solid
operating and financial results for the year. We also made
significant progress on advancing our key strategic goals.
We have always focused on delivering superior returns
from our carefully selected and efficiently run high-quality
assets, and this remained our priority throughout the year.
Polymetal’s strategic growth plans were reinforced in May
2016 with two new acquisitions, and despite unexpected
political outcomes and ensuing fluctuations in the
commodity markets, we remain on track.
GENERATING LONG-TERM VALUE
Our portfolio of high-grade, low-capital-intensity assets
ensures both profitable operations and sustainable cash
returns throughout the cycle. This ability to generate a healthy
cash flow today enables us to finance the pipeline of future
projects that drive our ambitious growth plans. At the same
time, we are also able to maintain a sound capital structure
and pay out significant dividends.
We are on track with the construction of our flagship project,
Kyzyl. It is one of the highest grade and largest untapped
gold deposits in the Former Soviet Union which will go into
production in late 2018, and will then be ramped up to full
capacity in 2019.
In the meantime, we are continuously on the lookout for
attractive and synergistic growth options. In this reporting
year, we have acquired Kapan, our first operating mine in
Armenia, and Komar in Kazakhstan. Both are value-accretive
and we are already turning the operations around; in the
case of Komar, immediately creating additional high-grade
feedstock source for our existing Varvara mine. We are also
working on the development of our joint venture at Nezhda.
We invest substantial amounts towards in-house exploration
(both brownfield and greenfield), with the dual purpose of
extending the life-of-mine at existing operations and finding
new resources for future standalone growth projects.
Our maiden platinum group metals (PGM) resource at the
Viksha project in Karelia is a prime example of this, with
positive results from our initial exploration and a further
feasibility study planned.
KEY HIGHLIGHTS IN 2016
Polymetal reports another year of strong operational delivery.
Gold equivalent (GE) production for the year comprised
1.27 Moz, in line with the increased GE production guidance
for 2016. This was achieved due to the robust operating
performance at key mines such as Dukat, Albazino and
Omolon, as well as input from Kapan (acquired in April 2016)
and Svetloye – Okhotsk hub (launched one year ahead of its
original schedule).
We have addressed geotechnical issues at Mayskoye and
ramped up underground mining during the year, while also
achieving higher grade levels. We have also improved the
profitability of Varvara by adding Komar to the feedstock.
EFFICIENTLY RUN, PROFITABLE
OPERATIONS PROVIDE US WITH
THE OPPORTUNITY TO INVEST
IN VALUE-ACCRETIVE ASSETS
THROUGHOUT THE CYCLE
AND LEVERAGE POLYMETAL’S
CORE COMPETENCIES FOR
FUTURE GROWTH.
ADJUSTED EBITDA
US$759 million
(2015: US$658 million)
GOLD EQUIVALENT PRODUCTION
1.27 Moz
(6% 5-year average annual growth)
The effect of currency devaluations in Russia and
Kazakhstan improved our operating profitability, despite
depressed gold and silver prices. Our all-in sustaining cash
costs (AISC) of US$776/GE oz remain at low levels that allow
us to generate a healthy free cash flow margin, driven not
only by devaluation but also by our careful choice of high-
grade assets (which have an average reserve grade of 3.8 g/t
GE, and an average grade processed during 2016 of 4.0 g/t).
Free cash flow generation remains the distinguishing feature
of Polymetal. On the back of robust cash flow generation for
the year, the Company paid out US$158 million in regular and
special dividends to shareholders, while maintaining stable
net debt and also financing the construction of Kyzyl out of
free cash flow.
INVESTING IN FURTHER GROWTH
In the reporting year, we have made significant progress
towards achieving our growth plans of 1.8 Moz of GE
production by 2020.
We are pleased with the progress at Kyzyl. Having completed
all regulatory approvals and permitting processes, we
started construction of the processing plant and commenced
pre-stripping.
The Board has also approved the Amursk POX expansion
project, which will enable us to divert 50% of the concentrate
produced at Kyzyl for in-house processing rather than
offtake. This will significantly improve the economics of the
project, through better recovery and the cost of treatment.
The project will be completed in 2018, in line with the start-up
of Kyzyl.
Our new assets at Kapan and Komar both started generating
positive free cash flow shortly after acquisition and offer
further growth potential. At Kapan, we plan to eliminate
bottlenecks at the existing mine and add feedstock from
our other Armenian mine, Lichkvaz. Komar is a bolt-on
acquisition to Varvara, offering up to 1.2 Mtpa of ore,
accessible by rail and with a grade that is twice as high
as that of the main Varvara mine.
Our joint venture at Nezhda is another example of a
potentially long-lived asset leveraging our core competencies.
During the year, we performed an extensive exploration
campaign and are now much more confident about
proceeding with Stage 2 of the development, which
is expected to bring us to commercial production within
four years.
CREATING A SUSTAINABLE FUTURE
The health and safety record for the year is, unfortunately,
the largest area of concern for the Company. We are greatly
saddened by the four fatalities at our sites during 2016 and
remain committed to our aim of achieving zero fatalities.
Management at all levels continues to take steps aimed
at radically improving our safety performance. While we
have seen improvement in the underground safety record,
breaches in other areas of our operations have demonstrated
a significant need to reinforce the safety culture and tighten
up procedures across all functions.
ROBUST GROWTH PROFILE
GOLD PRODUCTION1
(Koz of GE)
1,400
1,400
1,550
80
1,470
1,269
1,700
280
1,420
1,800
330
1,470
2016A
2017E
2018E
2019E
2020E
SHARE OF GOLD IN PRODUCTION1
(%)
69
77
82
87
87
2016A
2017E
2018E
2019E
2020E
■ Existing operations ■ Kyzyl
Source: Company information.
1GE at 80:1 Ag oz/Au oz and 1:5 Cu mt/Au oz conversion ratios.
Investment in our people, local communities and the
surrounding environment are also key to the commercial
success of the business. We continue to provide support
for the well-being of our employees and communities,
particularly given the current macroeconomic environment.
Polymetal is committed to equal opportunities, the
development of our staff and to making a positive impact
on the remote areas and communities where we operate.
I would like to thank our employees and partners for
all their hard work in 2016. Together, I am confident that
we will achieve even more in 2017 towards reaching our
mission of sustainable value creation.
Vitaly Nesis
Group CEO
14 March 2017
04
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
05
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016 AT A GLANCE
Polymetal International plc is a leading precious metals
mining group operating in Russia, Kazakhstan and Armenia.
Listed on the London Stock Exchange, Polymetal has
a portfolio of eight producing gold and silver mines and
an impressive pipeline of future growth projects. It is
a major employer in the regions where it operates.
KEY FINANCIAL FIGURES1
REVENUE
TOTAL CASH COST
ADJUSTED EBITDA
US$1,583 million
(2015: US$1,441 million)
US$570/GE oz
(2015: US$538/GE oz)
US$759 million
(2015: US$658 million)
ALL-IN SUSTAINING CASH COST
FREE CASH FLOW
NET PROFIT
US$776/GE oz
(2015: US$733/GE oz)
US$257 million
(2015: US$263 million)
US$395 million
(2015: US$221 million)
RESERVES AND RESOURCES2
PRODUCTION
RESERVES AND RESOURCES
(Moz)
AVERAGE RESERVE/RESOURCE
GRADES (GE g/t)
PRODUCTION
(GE Koz)
25
20
15
10
5
21.6
20.8
14.6
12.8
19.8
16.5
5
4
3
2
1
4.3 4.2
4.2
4.8
4.2
3.8
1,500
1,200
900
600
300
1,312
1,267
1,269
2014
2015
2016
2014
2015
2016
2014
2015
2016
■ Reserves ■ Resources
■ Reserves ■ Resources
PROFILE AMONG PEERS
ALL-IN SUSTAINING CASH COSTS
(US$/GE oz)
1,057 987 986 984 958 912 911 900 894
AVERAGE RESERVE GRADE
(g/t/GE)
861
856
829
813*
776
762
730
4.2
3.8 3.6*
2.9*
2.3
1.9 1.7 1.6 1.4 1.4* 1.4* 1.3 1.3 1.3 1.1 1.1* 1.1* 1.0 0.9* 0.9 0.7
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Source: Company data. Hochschild: AISC based on Ag/Au ratio of 74.
*Randgold: BMO calculation based on FY2016 results
Source: Company data. Gold, silver, copper proved and probable reserves
as of 01.01.2017. GE at 80:1 Ag oz/Au oz and 1:5 Cu mt/Au oz conversion ratios.
*Proved and probable reserves as of 01.01.2016.
1 Please see definitions in the Financial Review on pages 57-59.
2 Mineral Resources and Ore Reserves are estimated in accordance with the JORC Code (2012). Mineral Resources are additional to Ore Reserves.
Total licence area
7,800 km2
(2015: 8,985 km2)
Hub
Operating mine
Development project
Exploration project
Head office
+ City/town
Seaport
Pevek
5
2
1
Magadan
13
12
6
Okhotsk
4
3
Khabarovsk +
Vanino
11
+
St. Petersburg
+
Moscow
Georgia
9
Azerbaijan
Armenia
Russia
7
+ Ekaterinburg
+
Kostanay
8
Oskemen +
10
Kazakhstan
OPERATING ASSETS
1 DUKAT HUB
Operating mines: Dukat, Lunnoye,
Goltsovoye, Arylakh
DEVELOPMENT PROJECTS
6 OKHOTSK HUB
Operating mines: Avlayakan, Ozerny,
Svetloye
10 KYZYL
Large high-grade gold project
in North-Eastern Kazakhstan
Key exploration project: Perevalnoye,
Primorskoye
Key exploration project: Kirankan,
Khotorchan, Kundumi, Levoberezhny
Processing: 1.6 Mtpa Dukat concentrator
and 400 Ktpa Lunnoye Merrill-Crowe plant
Processing: 600 Ktpa Merrill-Crowe plant
and Svetloye 1 Mtpa Heap Leach plant
2 OMOLON HUB
Operating mines: Birkachan, Sopka, Tsokol,
Oroch, Olcha
Development projects: Burgali
Key exploration project: Yolochka, Irbychan,
Nevenrekan
Processing: 850 Ktpa Kubaka CIP
and Merrill-Crowe plant
3 AMURSK HUB
Processing: 500 tpd Amursk POX plant
4 ALBAZINO
Operating mines: Albazino
Processing: 1.6 Mtpa concentrator
5 MAYSKOYE
Operating mines: Mayskoye
Processing: 850 Ktpa concentrator
7 VORO
Operating mine: Voro
Key exploration project: North Kaluga, Saum,
Tamunier
Processing: 950 Ktpa CIP and 900 Ktpa HL
8 VARVARA
Operating mines: Varvara, Komar
Key exploration project: Tarutin
Processing: 4.2 Mtpa Float + Leach
9 KAPAN
Operating mine: Kapan
Development project: Lichkvaz
Processing: Fully mechanised underground mine
with current capacity of approximately 400 Ktpa.
Conventional 750 Ktpa flotation concentrator and
various infrastructure facilities.
Reserves: 7.3 Moz at 7.7 g/t Au (JORC)
Resources: 3.1 Moz at 6.8 g/t Au (JORC)
Mining: Open-pit followed by underground
Processing: Flotation + POX/concentrate offtake
First production: H2 2018
Life of mine: 22 years
EXPLORATION
11 VIKSHA
9.5 Moz of platinum equivalent (PE)
12 NEZHDA
Joint venture with Polyus Gold
13 PROGNOZ1
Largest undeveloped primary silver deposit
in Russia
1 5% acquired in January 2017, with an option to increase
stake to 50% in 2019.
06
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
07
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
BUSINESS MODEL
Our business model achieves positive outcomes for
our stakeholders: the strength of our capitals, how
we manage our assets and the differentiators that
make us successful.
OUR CAPITAL
MINING CYCLE
WHAT MAKES US DIFFERENT
VALUE CREATION FOR
STAKEHOLDERS
FINANCIAL
Strong balance sheet and
a large portfolio of available
undrawn credit facilities;
access to international equity
markets and use of shares
as acquisition currency.
INTELLECTUAL
Investment in skills and expertise;
mastering leading technologies in
refractory gold processing (POX);
selective mining; development
of know-how.
BUSINESS
Key competencies in refractory
gold concentrate trading;
sustainable relationships with
suppliers and contractors.
HUMAN
Attracting and retaining high-
potential employees across Russia
and Kazakhstan; nurturing young
leaders to manage further growth.
SOCIAL
Mitigating the impact of our
activities to justify social licence to
operate; fostering and maintaining
good relations with local
governments and communities.
NATURAL
Unparalleled portfolio of high-grade
reserves ensuring robust cost and
operating performance through the
cycle; water, energy and fuel to run
our operations.
Our investment in the skills
and expertise that support key
competencies, backed by strong
financial discipline, ensures a robust
performance throughout the cycle.
EXPLORATION
We replenish reserves
through active brownfield
and greenfield exploration,
and have a robust
evaluation system to select
high-quality assets for
further development.
DEVELOPMENT
We have a track record of
delivery on time and within
budget, including growth
projects in challenging
locations without access
to infrastructure.
MINING ORE
We have a strong skill set
in selective open-pit and
underground mining,
incorporating global best
practices and robust grade
and dilution control.
MINING CLOSURE
AND REHABILITATION
We manage the end-of-
mine life responsibly,
employing environmental
best practice and a duty of
care to local communities
during the closure/
rehabilitation process.
SELLING
We sell gold and silver
bars, mainly to Russian
and Kazakhstan banks,
and precious metals
concentrates to
offtakers throughout
the global market.
PROCESSING
We employ both
conventional (such as
flotation or heap leaching)
and leading processing
technologies (such as POX)
that maximise recoveries
at our plants.
LOGISTICS/
TRANSPORTING ORE
In the remote regions
of our operation, we
have acquired vital skills
for inbound logistics
of consumables and
outbound transportation
of ores and concentrates
to make the best use
of our hub strategy.
INVESTING IN EXPLORATION
Investment in both greenfield and near-mine exploration
provides us with a cost-effective increase in our reserve base
and, along with successful acquisitions, is the key source
of our long-term growth.
HUB-BASED SYSTEM
Our centralised hub-based system handles ores from different
sources, achieving economies of scale by minimising processing
and logistics costs, as well as reducing capital spending per
ounce. This facilitates production at otherwise uneconomical
medium- and small-sized near-plant deposits.
FOCUS ON HIGH-GRADE ASSETS
Return on investment in the precious metals industry is reliant on
grades and mining conditions. We achieve better returns and lower
risks from our project portfolio by setting appropriate thresholds
on head grades and largely focusing on open-pit mines.
STRONG CAPITAL DISCIPLINE
We engender a strong focus on capital discipline throughout the
business; maximising risk-adjusted return on capital is our priority
in all investment decisions. We do not retain excess cash and
return free cash flow to shareholders through substantial dividend
payments while retaining a safe leverage level.
EXEMPLARY GOVERNANCE AND RESPONSIBILITY
We believe that good corporate governance is key to the ongoing
success of the business and value creation for our shareholders.
We are compliant with all regulatory requirements and are
recognised as sustainability leaders in the countries in which we
operate, adopting best practice in nurturing relationships with all
our stakeholders in government, industry and the communities.
OPERATIONAL EXCELLENCE
We pride ourselves on our operational excellence and delivering on
our promises to shareholders. Despite difficult trading conditions,
we meet our production guidance for the fifth consecutive year.
SHAREHOLDERS
We deliver on our promises while
providing a sustainable dividend
stream and future growth through
quality assets.
OTHER CAPITAL PROVIDERS
We have an excellent credit history
and strong partnerships within
financial markets.
EMPLOYEES
We provide remuneration that is
above the regional average and
comfortable working conditions,
along with career development
opportunities.
COMMUNITIES
We invest in our local communities,
providing employment opportunities
and improving infrastructure, and
engage with them to achieve their
support for the projects that
we undertake.
GOVERNMENT
We contribute to the national wealth
and are a significant tax payer in
the regions of operation, supporting
local governments’ social projects.
SUPPLIERS
We provide fair terms and are
developing long-term partnerships,
while ensuring suppliers’ integrity
and Environmental, Social And
Governance (ESG) compliance.
MARKET CHALLENGES AND OPPORTUNITIES
Our business model allows us to invest in high-quality
assets at attractive valuations during the low point of the
commodities cycle; these in turn ensure sustainable free
cash flow generation even at depressed commodity
price levels.
STRATEGY
A robust business model is supported by flexible
strategies, which enable us to respond effectively
to both market opportunities and challenges.
RISK MANAGEMENT
An efficient risk management system is designed
to minimise potential threats to achieving our
strategic objectives.
GOVERNANCE
Through effective leadership and management we adhere
to the highest of ethical standards that shape our business
model and strategic approach.
READ MORE ON PAGES 10-11
READ MORE ON PAGES 11-19
READ MORE ON PAGES 64-69
READ MORE ON PAGES 70-103
08
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
09
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016 MARKET REVIEW
OUR STRATEGY
2016 was an unusually volatile year for the
precious metals sector, yet gold and silver
prices recovered some of their 2015 losses.
Significantly, for the first time in years,
global gold and silver output decreased
year-on-year; believed by many to mark
the start of a multi-year downtrend, driven
by depletion of quality reserves and
decreased investment in new capacity.
GOLD
Following three consecutive years of annual price declines,
gold became one of the best performing assets in 2016, rising
8% and amassing significant inflows through physical-backed
gold ETFs, driven by unpredictable macroeconomic events,
most notably Brexit and the outcome of the US elections.
As a result, gold ended the year at US$1,159/oz versus
US$1,062/oz in 2015, averaging US$1,250/oz for the year
and recording a year-high of US$1,366/oz in the third quarter.
Gold demand grew 2% year-on-year to reach a multi-year
high of 4,308 tonnes, largely driven by ETFs. However,
physical demand for gold reached a seven-year low, due
to a significant decrease in jewellery demand, notably
in India (curbed by the demonetisation of large banknotes
and high gold prices), and a sharp decline in official sector
purchases on the back of US Federal Reserve pressures.
2017 is expected to be a crucial year for gold, amidst rising
economic and political uncertainty. Yet, economic growth
and inflation in the US could be key to Federal Reserve
decisions on potential rate increases.
downtrend in gold mine output. Set to continue in 2017,
this is mainly driven by delays and thinning of project
pipelines, on the back of lower gold prices, and wider
project development challenges across the sector.
The biggest precious metals producing countries in 2016
were China, Russia and Australia.
OUR OPERATING ENVIRONMENT
In Russia, the hard rock mining industry is the second-largest
sector after oil and gas. However, despite the country’s vast
resource potential, it remains largely underexplored with a
lack of investment in the sector, mainly due to low gold prices
and limited availability of foreign debt and equity investments
stemming from international sanctions introduced in 2014.
Economically, 2016 was a better year for Russia with a modest
recovery in the oil price and strengthening of the Rouble by
roughly 10%. However, this trend could have a negative impact
on the sector, through cost increases in US Dollar terms.
Although Kazakhstan and Armenia have a significantly
smaller share in global gold mine production, both have
an impressively strong growth profile, partially attributable
to a better investment climate and government incentives.
The economics of Kazakh gold mining was supported
by the devaluation of the Kazakh Tenge, while the Armenian
Dram was the most stable currency in the region.
HOW WE RESPOND TO THESE TRENDS
We utilise our experience in mine performance optimisation
and the pursuit of high-grade and high-optionality assets in
order to ensure robust economics even at current commodity
prices. Our performance in 2016 reaffirms the success of
our approach, marked by robust free cash flow generation,
a strong balance sheet and several strategic acquisitions.
SILVER
During 2016, silver price dynamics largely followed gold,
apart from the second half of the year where gold fell
more sharply. Silver finished the year strongly, averaging
US$17.11 (up 9% year-on-year) and recording a year-high
of US$20.7/oz in August, post Brexit. However, with the
US rate hike in December, silver closed at US$16.24.
To limit our exposure to risk, in the process of project
approval, our stress tests are carried out with a 20%
discount to spot gold and silver prices, ensuring that our
operations can be sustained even under volatile market
conditions. We also review the prices used for our reserve-
and-resource estimates on a regular basis to reflect
market fluctuations.
MINE PRODUCTION AROUND THE WORLD
After peaking in 2015, year-on-year gold mine production
remained virtually unchanged in 2016 for the first time since
2008. Many believe this marks the start of a sustained
To learn more about our market risk management process,
please see page 66.
PRECIOUS METAL MARKET SUMMARY
GOLD DEMAND BY CATEGORY IN 2016
(Tonnes)
Gold price, US$/oz
Silver price, US$/oz
1,600
1,400
1,200
1,000
800
600
400
200
0
02 Jan
15
02 Apr
15
02 Jul
15
02 Oct
15
02 Jan
16
02 Apr
16
02 Jul
16
02 Oct
16
■ Gold ■ Silver
10
25
20
15
10
0
9%
14%
22%
36%
8%
47%
57%
7%
2016
■ Jewellery
■ Technology
■ Investment
■ Central bank net purchases
2015
■ Jewellery
■ Technology
■ Investment
■ Central bank net purchases
2,042
323
1,561
384
2,389
332
919
577
Source: Metals Focus; World Gold Council
KEY GOALS – COMBINING GROWTH AND DIVIDENDS
1 PAY SIGNIFICANT AND SUSTAINABLE
DIVIDENDS THROUGH THE CYCLE
2 CONTINUE TO GROW OUR BUSINESS
WITHOUT DILUTING ITS QUALITY
Polymetal already stands out in the mining sector for its
dividend policy and track record of substantial dividend
payments. We want to continue delivering meaningful
cash returns to our shareholders at any stage of the
commodity cycle and our investment cycle through
a combination of regular and special dividends.
At the same time, we also want to grow production
and, hence, free cash flow, through the addition
of new high-grade, value-accretive assets.
MARKET TRENDS
STRATEGIC OBJECTIVES
PERFORMANCE
• Global pricing, while still
volatile, showed signs
of recovery.
• Demand for gold fell to
a seven-year low, largely
due to the decrease in
jewellery demand and
a decline in official
sector purchases.
• Year-on-year gold mine
production was virtually
unchanged and this is
likely to continue in 2017,
possibly marking the start
of a sustained
downward trend.
• The economic situation
in Russia improved
during 2016 with oil
prices recovering and a
strengthened Rouble but
increased costs in US
Dollar terms could have a
negative impact. Kazakh
gold mining is supported
by the devaluation of the
Kazakh tenge, while the
Armenian dram is stable.
DELIVER ROBUST
OPERATING AND FINANCIAL
PERFORMANCE AT EXISTING
MINES THROUGH COST
CONTROL AND RESERVE
REPLACEMENT
• 1.27 Moz GE produced in 2016,
6% average annual increase
over five years
• Free cash flow of US$257 million
• Successful Svetloye launch
• Additional mineral resources:
3.7 GE Moz
DELIVER MEDIUM-TERM
GROWTH THROUGH
BUILDING AND
RAMPING UP KYZYL
• 100% permitting milestone completed
• Processing plant construction
completed
• Start of open-pit mining in May 2016
• Approval and commencement of
Amursk POX de-bottlenecking project
BUILD AND ADVANCE
LONG-TERM GROWTH
PIPELINE THROUGH
OPPORTUNISTIC M&A AND
GREENFIELD EXPLORATION
• Acquisition of Kapan (Armenia)
• Acquisition of Komar (Varvara hub,
Kazakhstan)
• Nezhda (Yakutia, Russia)
• Establishment of maiden PGM
resource at Viksha (Karelia, Russia)
• Acquisition of interest in Prognoz
in early 2017 (Yakutia, Russia)
MAINTAIN HIGH
STANDARDS OF
CORPORATE GOVERNANCE
AND SUSTAINABLE
DEVELOPMENT
• Full compliance with the provisions
of UK Corporate Governance Code
• Inclusion in sustainability indices
FTSE4Good, Vigeo, STOXX
• ESIA for Kyzyl completed
• Became signatories to the
International Cyanide
Management Code
SEE MORE ABOUT OUR STRATEGY ON PAGES 12-19
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
11
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
OUR STRATEGY
DELIVER ROBUST
OPERATING AND FINANCIAL
PERFORMANCE AT EXISTING
MINES THROUGH COST
CONTROL AND RESERVE
REPLACEMENT
By focusing on full-capacity utilisation and robust cost performance
of our operating mines, we are driving continued operating improvement.
At the same time, we aim to extend our life-of-mine by continuous
investment in near-mine brownfield exploration and bolt-on acquisitions.
This will allow us to generate free cash flow sustainably and translate
it into significant dividends.
TARGETS FOR 2017
• Annual production of 1.4 Moz GE
• Total cash costs of US$600-
650/GE oz (at current exchange
rates and oil price levels)
• Achieve full capacity at newly
acquired Komar and recently
launched Svetloye mines
• First gold from open-pit crown
pillar project at Mayskoye
• Progress de-bottlenecking
at Kapan
PERFORMANCE
SOLID OPERATING
PERFORMANCE…
With total gold equivalent (GE)
production for the year of 1,269 Koz,
in 2016 we have maintained our
track record of solid operational
delivery, meeting our increased
production guidance of 1.26 Moz
GE. While the production was flat
compared with the prior year
(in line with our expectations),
during 2016 we have made
considerable progress on our
long-term growth plans: we
launched Svetloye, which is
expected to contribute to increased
production at Okhotsk hub next
year, and successfully integrated
the newly acquired
Kapan and Komar operations,
which are both on track to deliver
further growth and improved
cost performance in 2017. As a
consequence, we are on course
to deliver further growth in 2017 and
2018, with production of 1.40 Moz
and 1.55 Moz GE, respectively.
Significantly, our performance in
2016 marks the fifth consecutive
year in which Polymetal has met
its production guidance.
…TRANSLATED INTO LOW
COST AND ROBUST CASH
GENERATION
With high-quality assets and a solid
production profile at existing mines,
supported by the continuing effect
of currency devaluations in both
Russia and Kazakhstan, Polymetal
remains one of the lowest-cost
producers globally. Our all-in
sustaining cash costs (AISC)
of US$776/oz GE are in the lower
quartile of the global cash-cost
curve. All our mines generated
positive free cash flow in 2016,
and are expected to do so
going forward, even at current
commodity price levels. Our
internal free cash flow generation
helped us to maintain substantial
regular and special dividends
while financing both construction
at Kyzyl and new acquisitions.
ANNUAL PRODUCTION
(Koz of GE)*
1,350
1,100
850
600
+6%
900
952
+10%
+4%
+1%
+7%
1,168
1,090
1,312
1,190
1,220
1,267
1,260
1,269
RISKS
• Production
• Health and safety
• Market
• Exploration
2012
2013
2014
2015
2016
READ MORE ON PAGES 64-69
■ Guidance ■ Actual *Based on 80:1 Ag/Au ratio.
Company historical gold equivalent guidance also recalculated using 80:1 Ag/Au conversion ratio.
FREE CASH FLOW
(US$)
ALL-IN SUSTAINING CASH COST
(US$/GE oz)
400
300
200
100
1,669
1,410
1,266
1,160
1,250
306
263
257
129
148
1,200
1,000
800
600
1,059
1,086
893
733
776
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Gold price, US$/oz
RELATED KPIS FOR
EXECUTIVE MANAGEMENT
Annual bonus:
• Achieving production budget
(Group CEO and below)
• Total cash costs
(Group CEO and below)
• Health and safety
(Group CEO and below)
• Resource growth
(Chief Geologist and below)
READ MORE ON PAGES 86-99
Image: Albazino open-pit mine.
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POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
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POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
OUR STRATEGY
DELIVER MEDIUM-TERM
GROWTH THROUGH
BUILDING AND
RAMPING UP KYZYL
The Kyzyl project is a major medium-term growth driver for
Polymetal, with average production of 320 Koz per annum from 2019.
We are aiming to deliver the first gold at Kyzyl in Q3 2018. In 2016-2017,
we will enter the active construction phase and will continue
marketing concentrate.
PERFORMANCE
Kyzyl remains one of the best
development-stage gold projects
in the world, and is now the main
source of medium-term growth for
Polymetal. With its large high-grade
reserves, long mine life and low-
capital intensity, it is set to create
significant shareholder returns even
at current commodity price levels.
Although the ore is refractory and
the previous owners were unable
to bring Kyzyl into production, it
offers a perfect fit with Polymetal’s
core competencies: project
development from scratch, open-pit
mining, treating refractory materials
in-house (through Amursk POX
plant) and trading concentrates
with offtakers.
Since formal approval of the
construction decision in 2016,
Polymetal has made considerable
progress on project development.
Construction activities are in line
with the project schedule. Permitting
is 100% complete. Open-pit mining
was started in May 2016 and mining
activities are now entirely focused
on drill-and-blast pre-stripping.
Kyzyl remains on track to produce
its first concentrate in Q3 2018.
AMURSK POX
EXPANSION PROJECT
Approval and commencement
of expansion at the Amursk POX
plant was another important
milestone of 2016 for Kyzyl.
The project targets an increase
in POX capacity, which will enable
Polymetal to retain approximately
50% of Kyzyl concentrate for
in-house treatment, as opposed
to a third-party offtake. This is
expected to improve effective gold
recovery from concentrate, as well
as bring down processing and
transportation costs. Key additions
to the equipment will comprise a
second oxygen plant, an autoclave
discharge thickener, separate filters
for thickener underflow and
upgrades for heat recovery and
water treatment. We plan to ramp
up the de-bottlenecked POX plant
to full expanded capacity in the
second half of 2018, in time
to take first feed from the
Kyzyl concentrator.
TARGETS FOR 2017
• Advance full-scale processing
plant construction, commence
major equipment installation
• Continue stripping activities
• Advance POX expansion project
RISKS
• Market
• Construction and
development risk
READ MORE ON PAGES 64-69
RELATED KPIS FOR
EXECUTIVE MANAGEMENT
• Annual bonus – project
delivery on time and budget
(Group CEO and below)
• LTIP – TSR above peers,
which can only be generated
by delivering sustainable growth
through projects such as Kyzyl
READ MORE ON PAGES 86-99
LARGE
7.3 Moz
LONG LIFE-OF-MINE
22 years
Gold reserves (including 2.8 Moz open pit)
(first 10 years open pit)
LOW CAPITAL INTENSITY
US$377m
Capital expenditure (open pit + flotation
+ Amursk POX expansion)
HIGH-GRADE
7.7 g/t
(6.7 g/t in the open pit)
EXCELLENT EXPLORATION UPSIDE
3.1 Moz
of additional resources at 6.8 g/t
+ Bolshevik satellite deposit with
further mineralised potential
Image: Mining activities at Kyzyl.
14
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
15
POLYMETAL INTERNATIONAL PLC ANNUAL REPORT & ACCOUNTS 2016
OUR STRATEGY
BUILD AND ADVANCE
LONG-TERM GROWTH
PIPELINE THROUGH
OPPORTUNISTIC M&A AND
GREENFIELD EXPLORATION
While generating free cash flow from existing operations,
we want to secure high-quality sources of long-term growth through
our own greenfield exploration programme and opportunistic M&A.
We are actively looking at targets within the Former Soviet Union,
where we can create value with our core competencies.
In 2016, we made significant progress on both fronts.
PERFORMANCE
KAPAN (ARMENIA)
• Fully mechanised underground
mine with current capacity
of approximately 400 Ktpa
• Conventional 750 Ktpa flotation
concentrator and various
infrastructure facilities
• Synergy with our Lichkvaz
deposit through the processing
hub approach, utilising excess
capacity at the Kapan
concentrator
Next steps
• De-bottleneck underground
mine and improve
concentrate utilisation:
• 650 Ktpa by 2H 2017
• 900 Ktpa by 2H 2018
(including feed from Lichkvaz)
• Streamline the cost structure,
leveraging Polymetal’s
experience in mechanised
narrow-vein
KOMAR
Excellent strategic fit for
Varvara operation:
• Medium-size operating
gold asset: JORC reserves
0.9 Moz of gold at 1.8 g/t
• Open pit, simple and well-
understood metallurgy (CIL)
• Direct rail link (187km)
• Limited initial capital expenditure: