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Petropavlovsk Plc (POG)

  Print      Mail a friend       Annual reports

Thursday 25 March, 2010

Petropavlovsk Plc

Final Results

RNS Number : 1635J
Petropavlovsk PLC
25 March 2010
 



 

 

 

25 March 2010

 

 

Annual Results for the year ended 31 December 2009

 

Petropavlovsk PLC ("Petropavlovsk" or the "Company") and its subsidiaries (altogether the "Group") today announce its 2009 full year results.

Financial summary:


Year ended 31 Dec
 2009

US$m

Year ended 31 Dec
 2008

US$m

Variable %

Group Revenue

472

382

+24%

Underlying EBITDA*

225

136

+65%

Earnings per share (basic), US$

0.98

0.27

+263%

Net Debt

(19)

(389)

(95%)

Group average gold price received (US$/oz)

US$975/oz

US$845/oz

+15%

Group total cash cost per ounce (US$/oz)

US$309/oz

US$319/oz

(3%)

*Underlying EBITDA is a profit for the period before financial income, financial expenses, foreign exchange gains and losses, fair value changes, taxation, depreciation, amortisation and impairment. Reconciliation of profit for the year and underlying EBITDA is set out in note 39 to the consolidated financial statement below.

 

Highlights

Financial:

·    Earnings per share of US$0.98 up 263% versus 2008 driven by a record production result, successful cost control and a 15% increase in the average price achieved;

·     Underlying EBITDA up 65% versus 2008;

·    Interim dividend of £0.07 per share declared in January 2010 on the back of strong 2009 performance with the Board intending to pay interim and final dividends in the future; and

·     Net debt at 31 December 2009 reduced by US$370m to US$19m.

 

Operational:

·    Total attributable gold production* increased by 21% to 486,800oz, which was in the middle of the Group's original 2009 production target of 460,000 - 510,000oz;

·    Group total cash costs of US$309/oz confirm the Group as one of the lowest cost gold producers in the world;

·    Strong production performance of 234,100oz at Pioneer sustained by successful commissioning of second milling line in September;

·    Capacity of the second line at Pioneer after ramp-up period has exceeded the design capacity by c.60% to 200,000t of ore a month;

·    Commissioning of Pioneer's third milling line accelerated; now expected in the first half of 2010 from the second half of 2010; and

·    Construction of Kuranakh iron ore project nearing completion and significant progress made in development of non-precious metal portfolio.

 

JORC Classified Gold Ore Reserves and Mineral Resources:

·    Proven and Probable Reserves increased by 103% to 6.67Moz compared to November 2008 estimate;

·    Measured and Indicated Mineral Resources of 8.2Moz (inclusive of resources modified to produce the Reserves) representing an increase of 90% compared to November 2008 estimate; and

·    Further Inferred Mineral Resources of 3.6Moz was also indentified;

·    The Group's reporting on reserves and resources based on the JORC Code (2004) reporting system presented in this report will be continued annually.

 

Corporate:

·    Balance sheet strengthened via acquisition of Aricom plc, US$105m equity issue, repurchase of US$180m 7% gold equivalent exchangeable bonds, conversion of US$140m convertible bonds and new US$380m 4% per annum 5-year convertible bond issued in February 2010;

·    Move to the Main Market of the London Stock Exchange completed in April 2009 shortly followed by inclusion in the FTSE UK Index Series;

·    Rebranding and repositioning of the Group to form a diversified Russian Far East Mining champion;

·    Up to US$500m facility Term-Sheet signed with ICBC and CNEEC for funding of Stage 1 of the K&S iron ore operation;

 

2010 Production Plan and Outlook

·    The Directors believe that the Group's attributable gold production for 2010 will be between 670,000oz and 760,000oz;

·    The Board is also setting out its current view of the Group's attributable production plans for the period 2010/2015 which is stated below.

 

2009 Gold Exploration Highlights

·     Pokrovskiy Flanks

-    Continued encouraging exploration data from Zheltunak with the identification of three potentially economic mineralised zones;

·     Pioneer

-    Significant drilling results have proved a 0.78km extension of the Bakhmut zone  towards the north-east, including two high-grade enriched zones;

-    Geophysical surveys indicate a 6.5km north eastwards extension to the east of the Bakhmut zone below the Neogene sediments; and

-    A new zone, Nikolaevskaya, 1.4km south of, and sub-parallel to Andreevskaya, discovered and traced laterally for about 3km, with gold grades up to 15-20g/t Au.

·     Malomir

-    Discovery of gold mineralisation in the "Magnetite zone", traceable by magnetic survey for a number of kilometres to both west and east;

·     Burinda

-    The Central ore body actively explored, with relatively easily processed gold/silver epithermal vein mineralisation established;

·     Odolgo Joint Venture

-    Kirovskoye deposit. Exploration has identified multiple ore bodies, with ore columns at structural intersections, with high grades (up to 65g/t Au).

 

Total attributable gold production, as stated throughout this document is comprised of 100% of production from the Group's subsidiaries and the relevant share of production from joint ventures and other investments. Figures for the comparative period are restated accordingly. The Group has held c.1.1% interest in Rusoro Mining Ltd since March 2009; no attributable ounces are included in the Group figures. The Company's direct and indirect interest in Pokrovskiy Rudnik (the holder of the Group's Pokrovskiy, Pioneer & Malomir interests) is 98.61%.

 

Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly gold produced in the year consists of gold recovered during the period and adjusted for the movement in gold still in the circuit.

Chairman's and CEO's Statement

2009 was a successful year in the life of our Company but not without some challenges, and as we move into 2010, we find ourselves in a strong position that is reflected in our financial performance for the year. Earnings have risen this year by 263% versus 2008 to US$0.98 per share. In line with these results and the Board's previously stated aim to return money to investors from profits, we felt able to resume dividend payments.

Three corporate initiatives defined the year for Petropavlovsk. The Aricom acquisition strengthened the Company's financial and strategic position, the move to the Main Market of the London Stock Exchange confirmed our position in the mining mainstream and the rebranding of the Company as Petropavlovsk reinforced its historical and geographical significance.

The team delivered record full year production of 486,800oz in spite of a maintenance delay at Pioneer and small pit-wall movement at Pokrovskiy. This record production figure demonstrates the effectiveness of our phased approach to the development of our project pipeline. The production increase has coincided with gold price strength in 2009 and we are confident that we will be able to deliver our forecast production growth over the next few years. Thanks to the nature of our deposits, the skill of the workforce and management control, our mines are producing gold at a consistently low total cash cost, putting Petropavlovsk in the lowest cost quartile for global gold producers.

The Pokrovskiy mine continued its resilience in 2009 producing some 190,100oz and remains an important base for the development of the Group's other assets in the Amur region. It is expected that current exploration work will provide sufficient resources to extend the life of the mine to 2020 and beyond.

Pioneer has become the engine driving our current production increase. During the year we commissioned the second stage of the modular processing plant and thus the mine was able to increase production by 56% to 234,100oz. Delivering Stage 2 without incident allowed us to bring forward the anticipated completion of Stage 3 of the Pioneer processing circuit from the second half of 2010 to the first half of 2010, which will enable us to increase immediate production capacity.

Exploration at the Pioneer mine has also continued during the year providing an increase in the quality of reserves and resources, including two new ore bodies with high grade samples, and the establishment of a continuation of the high grade Andreevskaya ore zone.

The cornerstone of our business to date has been the Group's ability to progress greenfield deposits thanks to our phased developmental process, supported by our in-house technical teams. In this regard, the progress of our next gold projects at Malomir and Albyn confirm the robustness of this model. Malomir remains on track to begin production in the second half of 2010 and ongoing exploration of the deposit has confirmed the potential for additional, non-refractory resources that may allow the mine to employ the simpler and cheaper, direct cyanidation technology for a longer period. As a result of active exploration activities, the Albyn deposit's potential has grown significantly during 2009 so as to become a profitable development for the future. With its location close to Malomir in the north east of the Amur region, the project is currently expected to start production at the end of 2011 and, at an anticipated full production output rate of 205,000oz, at double our initial estimates.

Crucial to the Group's phased developmental strategy is the role of our in-house technical teams, made up of the engineering, construction and exploration divisions. Many of the technological and engineering advances that have driven the mine development have been down to the investment made in our in-house expertise. An example this year has been the commissioning of the Group's new metallurgical testing plant in Blagoveschensk which enables us to test, at bulk sample rates, almost any metallurgical recovery process.

We continue to believe that our iron ore business is a source of significant potential value and will be a major contributor to our value creation. The acquisition of Aricom plc delivered a developing non-precious metal division with a range of iron ore projects, all with the potential to deliver shareholder value because of the logistical advantage that they enjoy over a number of other suppliers to China. With construction being finalised at the Group's first iron ore mine at Kuranakh, concentrate production is due to ramp up to its full output by the middle of 2010. However, the main focus of the division has been the financing for the development of the larger iron ore projects at Kimkanskoye, Sutarskoye and Garinskoye, the Term Sheet for which was announced on 22 March 2010. It is hoped that this will be finalised during 2010.

Petropavlovsk took several decisive steps in 2009 to strengthen its balance sheet including the acquisition of Aricom, the repurchase in full of the US$180m Gold Equivalent Exchangeable Bonds and a US$105m equity placing. Later in the year, thanks to a rising share price, holders were able to convert nearly all US$140m of our 7.125% Convertible Bonds into equity. The result of these transactions is that, with the addition of cash-flow throughout the year, the Group had net debt at the 2009 year end of only US$19m reduced from US$389m a year ago. We further strengthened our balance sheet in February 2010 by the issuing of US$380m of 4% Convertible Bonds due 2015.

Outlook

Every spring we try, with the help of our colleagues, to give you a vision of the road ahead of us. We are sure that 2010 will present the Group with further challenges and opportunities and that these will again be caused as much as anything by movements in the international financial system. We also believe that the gold price - and thus our Group - will benefit from these circumstances.

We also foresee that the movement of economic power from West to East will continue apace and that our iron ore business, with its comparatively short delivery distances to China, will benefit from this.

Commercially, the third production line at Pioneer and the start of production at Kuranakh (both due in the first half of 2010), Malomir's commissioning in the second half and the achievement of third party funding for our iron ore strategy are our short-term strategic goals. We believe that the Albyn deposit and our other development projects will ensure longer term success for the Group.

From a management point of view, we have been lucky enough to add the experience of Dr. Graham Birch to our team of non-executive directors. We welcome Dr. Birch, who has recently retired from BlackRock where he was in charge of major investment in the mining industry, and believe his insight will benefit us greatly.

We remain confident that the Group has the right team, the right expertise and the right experience to ensure that the achievements of the last 15 years will continue to be built upon as we move into another key phase of our growth trajectory.  As founders and shareholders, we would like to thank the whole team - directors, managers and employees, as well as our banking, legal, accounting and technical advisors - for their contributions to our 2009 success and we look forward to the Group continuing to move forward in 2010.

Peter Hambro, Chairman

Pavel Maslovskiy, CEO

 

There will be a conference call today to discuss the announcement at 10:00 (London time).

Details to access the conference call are as follows:

The Dial-in number in the UK will be: 0800 694 0257

The Dial-in number in Russia will be: 8108 002 097 2044

The Dial-in number in the USA will be: 1866 966 9439

Elsewhere, the Dial-in number will be: 0044 1452 555 566

 

The Conference ID in all cases will be: 64146500

The Company's Annual Report and Accounts for the year ended 31 December 2009 will be published on the Company's website on www.petropavlovsk.net in due course.

 

Enquiries:

 

Petropavlovsk PLC

Alya Samokhvalova 

Charles Gordon

Rachel Tuft

 

 

 +44 (0) 20 7201 8900 

 

 

Merlin

David Simonson

Tom Randell 

 

 

 +44 (0) 20 7726 8400 

 

Precious Metals Operational Review

 

Reserves and Resources (in accordance with the guidelines of the JORC Code 2004)

A strategic decision has been taken by the Group on the system of reporting Ore Reserves and Mineral Resources. Whilst the Russian System for reporting reserves and resources remains in use within the Russian legal environment - as this is the basis of the Group's accountability to the Russian state - it has been decided that the Group's reporting on reserves and resources to investor audiences will be carried out in the JORC reporting system. An independent mineral consultant, AuVerdi Capital, has been working with the Group to set up an internal JORC reporting system to report fully JORC compliant reserves and resources. The first results audited by Wardell Armstrong International Ltd ("WAI") form part of a mineral expert's report which is being prepared by WAI. A summary of this report, which states the Group's reserves and resources, for its main deposits, to JORC classification standards is set out below and the longer form Executive Summary of the WAI Report will be placed later today on the Company's website at www.petropavlovsk.net.

 

A summary of Mineral Resources is given in the table below:

 

Summary of Precious Metals Group - Mineral Resources - JORC Code (2004)

Category

Tons

(Mt)

Grade

(g/t)

Gold

(Moz)

Measured

69.0

1.30

2.9

Indicated

131.70

1.25

5.3

Measured & Indicated

200.7

1.27

8.2

Inferred

101.90

1.10

3.6

Notes

·   Mineral Resources are reported inclusive of Ore Reserves;

·   Contained Gold represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery; and

·   Numbers may not add up due to rounding

 

 

A summary of Ore Reserves is given in the table below:

 

Summary of Precious Metals Group - Ore Reserves - JORC Code (2004)

Category

Tons

(Mt)

Grade

(g/t)

Gold

(Moz)

Proven

54.1

1.33

2.3

Probable

110.1

1.23

4.3

Proven & Probable

164.2

1.26

6.7

Notes

·   Numbers may not add up due to rounding.

 

 

Precious Metals Group - Mineral Resources and Ore Reserves by Asset

 

A summary of Mineral Resources by Asset is given in the table below:

 

 

Precious Metals Group - Summary of Mineral Resources by Asset - JORC Code (2004)

Deposit

Category

Tonnage

(kt)

Au

(g/t)

Au Metal (Moz)

Pokrovskiy

Measured

13,010

0.96

0.40

Indicated

8,312

1.51

0.40

Measured + Indicated

21,322

1.17

0.80

Inferred

2,655

1.35

0.12

Pioneer

Measured

23,367

1.48

1.11

Indicated

37,795

1.07

1.30

Measured + Indicated

61,161

1.22

2.40

Inferred

14,490

0.85

0.40

Malomir

Measured

4,700

1.67

0.25

Indicated

41,141

1.58

2.09

Measured + Indicated

45,841

1.59

2.34

Inferred

42,335

1.32

1.80

Albyn

Measured

15,999

1.21

0.62

Indicated

28,373

1.05

0.96

Measured + Indicated

44,372

1.11

1.58

Inferred

969

0.55

0.17

Tokur

Measured

11,952

1.30

0.50

Indicated

16,096

1.06

0.55

Measured + Indicated

28,048

1.16

1.05

Inferred

10,706

1.09

0.38

Yamal

Inferred

30,780

0.90

0.89

Total

Measured

69,028

1.30

2.88

Indicated

131,717

1.25

5.30

Measured + Indicated

200,744

1.27

8.18

Inferred

101,935

1.10

3.59

Notes:     

·   Mineral Resources are reported inclusive of Ore Reserves;

·   Contained Gold represents estimated contained metal in the ground and has not been adjusted for metallurgical recovery; and

·   Numbers may not add up due to rounding.

 

A summary of Ore Reserves by Asset is given in the table below:

 

Precious Metals Group - Summary of Ore Reserves by Asset - JORC Code (2004)

Area

Category

Tonnage (kt)

Au (g/t)

Au Metal

(Moz)

Pokrovskiy

Proven

11,451

0.91

0.33

Probable

10,492

0.89

0.30

Proven + Probable

21,944

0.90

0.63

Pioneer

Proven

26,096

1.33

1.12

Probable

43,631

0.92

1.30

Proven + Probable

69,725

1.08

2.42

Malomir

Proven

5,343

1.52

0.26

Probable

40,481

1.46

1.91

Proven + Probable

45,924

1.48

2.18

Albyn

Proven

9,225

1.79

0.53

Probable

13,325

1.77

0.76

Proven + Probable

22,550

1.78

1.29

Tokur

Proven

1,969

1.16

0.07

Probable

2,134

1.14

0.08

Proven + Probable

4,103

1.15

0.15

Total

Proven

54,084

1.33

2.32

Probable

110,063

1.23

4.34

Proven + Probable

164,246

1.26

6.65

Notes:

·   Numbers may not add up due to rounding.

 

 

Non-Precious Metals Group - Mineral Resources by Asset - JORC Code 2004

 

 


Tons

(Mt)

Grade

(%Fe)

Fe

(Mt)

Kuranakh




Measured




Indicated

37.9

32.1

12.2

Inferred




Total

37.9

32.1

12.2

K&S




Measured

201.5

32.6

65.5

Indicated

390.0

33.0

128.7

Inferred

127.4

32.2

41.1

Total

718.9

32.7

235.4

Garinskoye




Measured




Indicated

244.0

34.2

83.4

Inferred

146.9

31.6

46.4

Total

390.9

33.2

129.9

 

 

Pokrovskiy

In 2009, the Pokrovskiy mine performed ahead of expectations, yielding 199,600oz of gold production (including 9,500oz recovered from the ore mined at Pioneer) at a total cash cost of US$296/oz. The Pokrovskiy mine exceeded its 2009 production target by 13% and operated successfully throughout 2009 with the plant processing 1,782,000t of ore.

 

Following the rescheduling exercise, some mining has been diverted to the flanks of the main deposit where production on the 'inner flanks' Pokrovka-II area started. The revised plan envisages a development of series of shallow open pits in this area.

 

The assessment of Ore Reserves at Pokrovskiy carried out by WAI is based on new Mineral Resources estimated in accordance with the JORC Code (2004) and has been economically optimised using cut-off grades based on a US$1,000/oz gold price. The table above summarises the Mineral Resources and Ore Reserves under the guidelines of the JORC Code (2004) at Pokrovskiy.

 

The Proven and Probable Ore Reserves derived by WAI under the guidelines of the JORC Code (2004) based on a US$1,000/oz gold price are 21.9Mt of ore at an average grade of 0.9g/t of gold (economic COG of 0.4g/t Au) and require that 71.7Mt of waste be removed to access the orebody at a stripping ratio of 3.3 (t/t). A significant further Inferred Mineral Resource exists within the deposit.

 

The Group's mining schedule based on Ore Reserves reported under the JORC Code (2004) gives an inventory of mineable material of 14.2Mt at an average grade of 1.34g/t of gold and requires 58.2Mt of waste be removed to access the ore body.

 

This mining schedule also includes Ore Reserves from stockpile material. It is planned that in 2010 and 2011, the mine will produce at a production rate of 135,000 - 145,000oz per annum which will then decline in 2012 to 100,000oz when the main Pokrovskiy pit is expected to be exhausted and remaining stockpiles will be processed. The Pokrovskiy ore body at the main pit is open at depth and the continuing strength in the gold price may allow for an increase in the reserve base of the main pit. The current schedule for post 2012 is that production will move to a series of smaller open pits, the "Pokrovskiy Satellite Deposits," producing at the rate of 70,000 - 100,000oz per annum.

 

The mining schedule for Pokrovskiy is optimised to balance ore mining, waste mining and average grade each year. The mining rate and amount of blending required is not significantly different to the current operational practices and therefore WAI considers the schedule to be both practical and achievable.

 

Costs

Total cash costs at Pokrovskiy of US$296/oz were in line with 2008 principally due to rising electricity, chemical reagent and consumables costs as well as lower grades being offset by a decline in Rouble denominated diesel prices and overall Rouble depreciation. Pokrovskiy's administrative overheads (part of the operating cash expenses) decreased by 27% from US$14.9m in the year 2008 to US$8.6m in 2009 due partly to the commissioning of the Pioneer operations allowing for the partial allocation of these Pokrovskiy costs to Pioneer, and partly due to a weaker Rouble.

 

Pioneer

The Pioneer mine confirmed its position in 2009 as Petropavlovsk's flagship operation with production rising by 208% versus 2008 to 224,600 oz at a total cash cost of US$265/oz and a further 2,500oz recovered from the ore mined at Pokrovskiy.

 

The production increase was mainly due to the successful commissioning and ramp-up of the second milling processing line in September 2009. This extra production facility, with a design capacity of 125,000t of ore per month (without heap leach operations), was constructed on schedule and on budget. The actual capacity of the new line achieved after the ramp-up period has exceeded the design capacity by approximately 60% to 200,000t of ore a month, principally due to the operational team's ongoing efficiency improvements. The expansion work during 2009 also included increasing the size of the mining fleet to meet the requirements of the mine expansion.

 

Overall the plant operated efficiently during 2009, achieving the designed annual recovery rates of 90%.

 

The Ore Reserves at Pioneer are based on the Mineral Resources and have been economically optimised using a cut-off grade based on a gold price of US$1,000/oz. The Pioneer mine consists of four main open pits, Yuzhnaya, Promezhutochnaya, Bakhmut and Andreevskaya. In addition a new northeast extension to the Bakhmut zone was discovered as a result of geological exploration works in 2009. The Pioneer reserves as derived by WAI are based on a US$1,000/oz gold price. This gives combined Proven and Probable Ore Reserves of 69.7Mt at an average grade of 1.08g/t Au and requires that 289.2Mt waste be removed to access the ore bodies at an average stripping ratio of 4.1 t/t.

 

The Group's mining schedule based on Ore Reserves reported under the JORC Code (2004) gives an inventory of mineable material of 43Mt at an average grade of 1.52g/t Au and requires 217Mt of waste be removed to access the ore body.

 

The Pioneer mining schedule anticipates production at the mine reaching 375,000 - 420,000oz in 2010. Due to good progress in construction, the commissioning of the third line of the Pioneer plant has been brought forward to the first half of 2010. The decision has been taken to further expand the plant by adding in 2011 a fourth line containing an additional 7.5m SAG mill which will increase the capacity of the mine to 7.9Mt per annum of ore. The current plan provides for modification and expansion of the plant to treat primary ore from 2014 with all equipment being used at the flotation-autoclave-cyanidation plant.

 

The original mine design provided for the inclusion of heap leach operations from mine commissioning. This was designed for the cost efficient treatment of mill feed of less than 1.3g/t Au. Due to the original underestimation of reserve grades, this implementation has not been necessary until now. However, successful exploration work in 2009 has identified a significant lower grade resource base (0.7-0.8g/t Au), for example at Vostochnaya, and in 2010, the Group intends to commence trial heap leach operations.

 

The mining schedule proposed for Pioneer is optimised to balance ore mining, waste mining and average grade each year. Mining will take place from four separate open pits and will thereafter be blended in the combined processing facilities. WAI considers the proposed schedule to be both practical and achievable given Group's experience and management expertise gained through the Pokrovskiy operations.

 

Costs

Total cash costs for 2009 at Pioneer increased by 17% versus 2008 to US$265/oz. The above-mentioned inflation in electricity, chemical reagents and consumables was mitigated by Rouble denominated diesel price falls and overall Rouble depreciation. However, with the commissioning of the mine's second grinding circuit (fully commissioned in the second half of 2009, there was an upward processing cost movement in the second half as well as some additional cost ramping up production.

 

Malomir

During 2009, the Group made excellent construction and development progress at Malomir. The construction of the main infrastructure including roads, power lines, substations, warehouses, workshops, accommodation and storage facilities is now complete and all the machinery (cranes, bulldozers, excavators etc.) required for the first stage of mining operations has now been delivered to the site. Site preparation for the plant and tailings dam has been completed and construction of the plant's crushing and grinding blocks has commenced.

 

During December 2009, the first mining (stripping) commenced at Malomir's Quarzitovoye deposit, which is scheduled for first production in the second half of 2010. Testing of Malomir's refractory ore has been completed with the results confirming the technical feasibility of treating the ore.

 

The Ore Reserves at Malomir are based on new Mineral Resource estimates and have been economically optimised using a cut-off grade based on a gold price of US$1,000/oz. The Malomir deposit consists of the main ore body and two other ore bodies Quarzitovoye and Ozhidaemoye. The Malomir Ore Reserves as derived by WAI are based on a US$1,000/oz gold price. This gives combined Proven and Probable Ore Reserves of 45.9 Mt at an average grade of 1.48g/t Au and requires that 343.5Mt waste be removed to access the orebodies. The Group's mining schedule based on Ore Reserves reported under the JORC Code (2004) gives an inventory of mineable material of 34.8Mt at an average grade of 1.77g/t Au and requires 282Mt of waste be removed to access the ore body.

 

Gold extraction at Malomir is expected to commence in the second half of 2010 with the commissioning of the milling/grinding line for non-refractory ore, including a 5.5m x 1.8m SAG mill, two 3.2m x 5.4m ball mills and a sorption/desorption circuit with 200m3 tanks. The annual capacity of the line is expected to be at 0.7Mt per annum with the Group expecting 2010 production at Malomir to be in the range of 68,000 - 100,000 oz. In 2011 it is planned to commission a second line for non-refractory material with the capacity of 0.7 Mtpa.

 

The commissioning of the first line of the refractory ore plant is scheduled for 2012. This line will include two 7.5m x 2.5m SAG mills, four 4.0m x 6.0m ball mills and flotation and autoclaving circuits with the capacity of the plant expected to reach 4.8Mt per annum. Further expansion of this plant is expected to be completed in 2013 with the addition of a second refractory ore line. This will include a 7.5m x 2.5m SAG mill and two 4.0m x 6.0m ball mills, thus increasing the total capacity of the plant to 7.2Mt per annum.

 

This gradual phasing in of production lines will allow for optimal capital expenditure as revenues from the first line's production (from Quartzitovoye) can be used to expand the plant. This technical decision will also allow for the simultaneous processing of refractory and non-refractory ores, which will have a positive effect on the cost structure at the future mine. WAI considers the schedule to be both practical and achievable.

 

Albyn

During 2009, exploration has continued and a technological study, including testing of 25t samples at the Blagoveshensk testing plant, was completed. Design work commenced in the second half of the year and construction of the main infrastructure including power lines, the substation, accommodation camp and the main deposit roads is planned for 2010. Contracts for the supply of the majority of the main mining machinery and equipment for the plant has been signed and for the remaining part is expected to be signed in 2010.

 

As a result of exploration work and metallurgical tests by the Group, a pre-feasibility study was completed for the deposit in 2009. The mine is expected to be developed by open pit with an average stripping ratio for the life of the mine of 15 (t/t) (within a framework of the optimal pit). Studies have also established that utilising gravity separation will recover between 79.3% and 95.2% with sorption/cyanidation between 92.0% and 97.3% and using heap-leaching between 50.3% and 89.1%.

 

The Ore Reserves at Albyn are based on the geological resources and have been economically optimised using a cut-off grade based on a gold price of US$1,000/oz. The Albyn reserves as derived by WAI are based on a US$1,000/oz gold price. This gives combined Proven and Probable Ore Reserves of 22.6 Mt at an average grade of 1.78 g/t Au and requires that 338Mt waste be removed to access the ore bodies at an average stripping ratio of 15 t/t. The Group's mining schedule based on Ore Reserves reported under the JORC Code (2004) gives an inventory of mineable material of 23.6Mt at an average grade of 1,80g/t Au and requires 350Mt of waste be removed to access ore body.

 

The Group plans to construct an RIP plant for direct cyanidation processing and expects to commission the first line of the plant at the end of 2011, comprising a 7.5m x 2.5m SAG mill, 2 4.0m x 6.0m ball mills and a sorption/desorption circuit with 200m³ tanks. The capacity of this first line will be 2.0Mt per annum.

 

The second line is planned to be commissioned in 2012 and will consist of a 7.5m x 2.5m SAG mill, two 4.0m x 6.0m ball mills with capacity increasing to 4.1Mt per annum.

 

The plan for 2010 involves the construction of the main infrastructure including electric power line, main camp, roads, preparation of the sites for the plant and tailing damns. Petropavlovsk is also expecting to sign contracts in 2010 for supply of the main part of mining fleet and milling equipment for the plant.

 

Tokur

First processing operations at Tokur commenced in 2009 with trial operations commissioning in the first half of 2009 to test a future processing method for the deposit. This will involve a re-processing of dumps from the old Tokur underground mine using new x-ray separation technology as the ore at the dumps bears the same technological characteristics as the main ore body. The resulting product yields of 4.5 g/t Au of material suitable for direct mill feed. This material is currently stockpiled until the main mining and processing operations commence. Gold recovery was 72% and the throughput of the classifier/separator complex was 50t of ore per day. A portion of alluvial gold was also produced during the process in line with the production schedule reported by the Group previously.

 

The Ore Reserves at Tokur are based on Mineral Resources and have been economically optimised using a cut-off grade based on a gold price of US$1,000/oz. The Tokur Ore Reserves as derived by WAI are based on a US$1,000/oz gold price. This gives combined Proven and Probable Ore Reserves of 4,103Mt at an average grade of 1.15g/t Au and requires that 38Mt waste be removed to access the ore bodies. The Group's mining schedule based on Ore Reserves reported under the JORC Code (2004) gives an inventory of mineable material of 4.1Mt at an average grade of 1.15g/t of gold and requires 38Mt of waste be removed to access ore body.

 

Yamal

After the completion of the majority of fieldwork at the Petropavlovskoye deposit which is part of the Toupugol-Khanmeishorskaya licence area, a report on this asset has been completed and approved by the local department for subsoil use.

 

The current mine design provides for open pit operations. Average stripping ratio for the life of the mine is 9.5:1 (t/t) (within a framework of the optimal pit). Subject to the Board's investment decision and suitable finance being available, commissioning of the plant is planned for the second half of 2013. 90% of the overburden stripping is expected to  produce high quality gravel which can be used as construction aggregates. The project envisages production of 1.2Mt per annum of construction material which is expected to substantially improve the project's economics.

 

Metallurgical studies of Yamal ores have established that the ore is ore is moderately refractory. Tests have shown that a combination of flotation and cyanidation technologies yields an overall recovery of 82%.

 

Throughput of 2.2Mt per annum, yielding c.100,000oz, is envisaged using primary crushing in jaw crusher, followed by two stage grinding in SAG and ball mills and flotation followed by cyanidation of the concentrate. It is planned to build two parallel processing lines simultaneously.

 

WAI has estimated an Inferred Mineral Resource for the Petropavlovskoye deposit of 30.8Mt at an average grade of 0.9g/t Au. Although these estimates are reported as an Inferred resource, the deposit has been explored to a level of detail which may justify reclassification of Mineral Resources into Measured or Indicated categories, but the metallurgical studies which would be required to demonstrate the potential economic value are not yet fully completed.

 

Joint ventures

Omchak Joint Venture

In line with expectations, Omchak produced 53,600oz of gold 2009, with Petropavlovsk's attributable share of production being 26,800oz.

 

Omchak exploration activities are concentrated on four main projects: three of them are located in the Zabaikalskiy Krai and one in the Irkutsk region. Exploration works at the Verkhne-Aliinskoye deposit were completed with a feasibility study approving reserves in the Russian Standard C1 and C2 categories of c.590,000oz at a grade of 10g/t Au. An additional 500,000 oz of category P1 resources were estimated as a result of exploration work. The deposit is expected to be developed via underground operations.

 

Exploration works at Bukhtinskaya ore field are ongoing with initial estimates of around 1Moz of P2 resources at 4-5 g/t Au. Initial exploration studies assessed around 2Moz of gold of P1 and P2 categories at the Kuliinskiy ore field whilst at the Birusinskiy, licence area estimates of 980,000oz at 3-5g/t Au and 670,000oz at 2g/t Au of P2 resources were made based on work carried out by the Group's predecessors.

 

Odolgo Joint Venture

In 2009, the Odolgo Joint Venture (formerly the Rudnoye Joint Venture with Petropavlovsk having a 50% attributable share) and the Solovevsky Rudnik assets (Petropavlovsk having a 13% attributable share of production) together produced an attributable 11,400 oz, a 6% increase on 2008.

 

Exploration

Pokrovskiy and Flanks

Further exploration is being carried out at a number of prospective areas within the Pokrovskiy Satellite Deposits with a view to increasing the reserves and resources base to replenish the Pokrovskiy mine main pit reserves. The main exploration attention at Pokrovskiy was focused on the Zheltunak area, 10km east of Pokrovka, where three mineralised zones have now been identified, associated with - but not confined to - a flat-lying thrust zone. Drilling and trenching during the winter months have traced the mineralisation to 80m depth - and it remains open in all directions.

 

Pioneer

Significant drilling results from 157 holes have proved a 780m north-eastwards extension of the Bakhmut zone, including two high-grade ore columns each up to 120m in length at the surface. Of even greater potential significance is that aerogeophysical data indicates a further 6.5km eastwards extension of the zone below the Neogene sediments.

 

The Vostochnaya ore zone, formerly considered merely an apophysis of the Yuzhnaya zone, has been found to be an extensive stockwork zone which is 400m x 250m in area, containing many ore intervals with thicknesses up to 136m.

 

The Nikolaevskaya ore body was discovered 1300-1500m to the south-east of the Andreevskaya zone. Trenching has continued in this area, supplemented by drill holes towards the end of the year. Gold ore zones have been traced, with some high grade areas being identified, as well as separate zones of silver mineralisation. There are indications of possible higher grade (4.5-12.5g/t Au so far) ore columns along the gold zones (with grades outside the columns typically 0.7-1.4g/t Au), similar to those of the Pioneer deposit. Exploration continues.

 

Reconciliation of production data with reserves and resources estimates from exploration has established consistently that the exploration estimates under-report the bonanza gold grades in both the Andreevskaya zone and the high grade ore columns in Bakhmut and Promezhutochnaya zones. The extent of this under-reporting may be up to 30%, and the reason for it has been shown to be the grade capping which is standard practice in both the Russian system and the western methods used for producing the Micromine models.

 

Malomir

Exploration work at Malomir in 2009 concentrated on the Quarzitovoye ore zone where confidence in the level of reserves has improved. Some enriched areas at depth were also identified with the potential to be developed as an underground mining operation in future. Initial relatively easily processed Quarzitovoye zone ore reserves with very high gold grades have now been established for a first stage of open-pit mining. However, just as at Pioneer, the capping of high-grade gold grades has led to under-reporting of reserves by an estimated 18%.

 

There has been a new discovery of gold mineralisation in the "Magnetite zone" (in the eastern flanks), traceable through magnetic survey up to 75km eastwards, as well as westwards to the north of the Quarzitovoye zone.

 

Other Amur assets

Tokur

Re-modelling of Tokur in the light of increased gold prices shows a range of open pit reserves estimates (depending on cut-off grade) with the WAI estimate of 4.1Mt ore at a grade of 1.15g/t containing 151,000oz of gold.

 

Production of gold concentrates from the old waste dumps continues, using radiometric separation technology.

 

Burinda (within the Taldan licence area)

Exploration continues on an epithermal gold/silver vein deposit at Burinda, 100km west of Pokrovka (44 drill holes and 20 trenches in 2009). Ore bodies remain open along a strike and down dip to 200m depth. Metallurgical testing has shown the ore to be relatively easily processable. A modelling exercise has been completed estimating initial resources at 1.5Mt at 5 g/t Au (Russian P1 resource category).

 

Kirovskoye Deposit

Drilling and trenching in the Kirovskoye area (part of the the Odolgo joint venture) continues to yield very promising results. This is a large deposit straddling the Mongol-Okhotsk plate boundary, partly within a Mesozoic basin to the south and partly in Archaean rocks to the north. Many ore zones, some with consistently high gold grades, have already been identified.

 

Exploration has concentrated on the Shirotnaya, Prirazlomnaya, and No.5 ore zones, in the southern part of the area. These are being explored by a series of trenches and inclined drill holes. In general the ore grades are in the range 1.7 to 7.5g/t Au, but at least four intersections have been identified so far, with high grades (up to 65g/tAu), and representing possible ore columns which coincide with intersections of E-W and NE-SW trending tectonic structures. Continuity of mineralisation has been established to 120m depth. There is sufficient data already for preliminary estimation of Russian P1 category resources in the explored parts of the ore zones: so far there is an estimated 300,000oz of gold. The deposits remain open in all directions. In ore zone No.5, there are two trench intersections averaging 21.7g/t Au over a length of 13m, and 20.63g/t Au over 3.1m. In the Shirotnaya ore zone there is a 1.1m intersection at a depth of 45m with 64.5g/t Au. In the Prirazlomnaya ore zone there is an 11m long intersection averaging 10.86g/t Au at a depth of 48-59m, and 28m (at a depth of 27-55m) averaging 5.77g/t Au. These are the most promising of 40 such intersections identified in 2009.

 

Exploration continues in this area as well as in the nearby area around the old underground Kirovskoye mine, north of the plate boundary fault, where vein and stockwork gold mineralisation is currently being drilled.

 

Verkhnetisskaya Area - Krasnoyarsk Region

Geochemical and geophysical surveys, 20 trenches, and 4 drill holes have confirmed the potential of the Olenka deposit, which comprised two 750-950m long and 20-110m thick gold-quartz-sulphide vein/stockwork zones, open laterally and vertically.

 

Yamal

The reserves on the Petropavlovskoye deposit have been estimated for open-pit mining of gold and aggregates. Additional small satellite deposits have been identified and partially explored, the most significant of which is Anomalniy, which consists of gold-bearing magnetite ore similar to Novogodnee Monto.

 

 

Gold Production Outlook 2010-2015

 

The Production scenario for the period between 2010 and 2015 is based only on Proven and Probable Ore Reserves prepared according to JORC (2004) guidelines.

 

The base case scenario for 2010 production of the Group provides for 680,000oz of gold. The 2010 production level reflects the completion of the third line at the Pioneer mine and commissioning of the Malomir plant in the second half of the year and the Group expects to deliver an increase on the base case scenario due to the following reasons:

 

·   Andreevskaya - gold grade assumptions are 25% higher due to underestimated JORC grades from top cutting, which was confirmed by the reconciliation between production and block model;

·   Pioneer main ore zones - gold grade assumptions are 10% higher due to enriched zones not included in the reserves and resources estimation which was also confirmed by a reconciliation between the production and block model;

·   Quarzitovoye - gold grades assumptions are 20% higher due to underestimated JORC grades from top cutting; and

 

The 2010 production is expected to be unevenly distributed throughout the year with the first two quarters delivering about 35% of yearly production due to scheduled stripping works at Pioneer during first two quarters and the third processing line of Pioneer ramping up to full capacity towards the second half of the year.

 

For gold production outlook for 2010 - 2015 the Group has undertaken a comprehensive business planning, geological and engineering analysis for each project, which was reviewed by WAI and confirmed as realistic. The Group also expects this production scenario to deliver an increase on the base case due to the above mentioned reasons and in addition due to gold grade assumptions at Albyn being underestimated by 10% due to the presence of nuggety gold.

 

The expected production profile is reflected in the table below:

 

Gold Production Estimates 2010-2015

(based on JORC Proven and Probable Ore Reserves as at 1 January 2010)

 

'000 oz

2010

2011

2012

2013

2014

2015

Total

680

720

960

1,020

1,140

1,150

 

Capital Expenditure

In 2009, the Group spent an aggregate of US$219.4m on its gold projects and compared to US$161.4m invested in 2008. The key area of focus this year was on the development of the Pioneer, Malomir projects and the ongoing exploration related to the Pokrovskiy, Pioneer, Malomir and Albyn projects.

 

Precious metal division related capital expenditure is expected to be approximately US$165m in 2010. The major planned capital expenditure by project is as follows:

 

US$m

2010

Pokrovskiy

4

Pioneer

20

Malomir

64

Albyn

75

Alluvials

4

Total

165

 

For the period between 2010 and 2015, assuming the development of all projects included in the above production profile, total precious metal expansionary capital expenditure is expected to be an aggregate amount of between US$600m and US$650m.  In addition, approximately US$50m is expected to be spent on exploration and US$10m of maintenance capital expenditure per annum.

 

Cost outlook

In 2010, the Group expects total cash costs to be volatile throughout the year due to the uneven production profile from the Group's main operations. With the planned stripping works in the first half of 2010 and commissioning of the new mill at Pioneer, total cash costs at the mine are expected to escalate and then decline in the second half of the year. At Pokrovskiy, total cash costs will moderately increase in 2010 due to a slight decrease in processed grades.

 

Non-Precious Metals Operational Review

 

Kuranakh

In 2009, the Kuranakh project made further significant steps to completion. The Group currently expects to ramp-up production during the second quarter of 2010 and to be producing at full capacity from the start of the second half of 2010. Despite a series of delays over the last year, principally due to the inhospitable weather conditions and equipment sourcing in this remote location in the far North West of the Amur region, Petropavlovsk is confident that the future performance of the mine will once again prove the Group's ability to construct and operate greenfield projects in the Amur region, this time in bulk commodities, utilising exclusively the Group's in-house exploration, engineering and construction expertise.

 

The expected transition to steady-state operation in 2010 will deliver the Group a small scale iron ore presence in the region, generate consistent cashflow and enable a further development of value adding relationships with trading partners and steel producers based in China in preparation for the future development of Petropavlovsk's much larger magnetite iron ore projects at K&S and Garinskoye. 

 

The Group has entered into an iron ore concentrate offtake agreement with Heilongjiang Jianlong, a Chinese steel producer located in Heilongjiang, the area across the Sino-Russian border from the Amur Region and EAO, to supply the titanomagnetite concentrate produced by Kuranakh. This concentrate contains a significant quantity of vanadium pentoxide which is a valuable commodity used in the hardening of steel. In order to capture these benefits and generate significant value by producing vanadium pentoxide, one of Petropavlovsk's subsidiaries and Jianlong have established a joint venture which envisages the construction of a plant to source the vanadium slag from Jianlong, adjacent to the steel-maker's current operations.

 

2009 Kuranakh Development

Mining continued in 2009 with the development of the Saikta open pit with operations concentrating on bench development at the 730-700m elevations with some preparation also happening on the 690-670m elevations. The total amount of overburden moved in 2009 was 1.69m3 and the total amount of ore mined was 52,000t. This ore was stockpiled at the crushing and screening plant pending the commissioning of the process plant during the first half of 2010. As at 31st December 2009, 117,000t of ore had been stockpiled.

 

The crushing and screening plant commenced production of pre-concentrate in 2008, but due to the downturn in the market for iron ore pre-concentrate the plant did not operate in 2009. Some additional infrastructure construction took place at the plant during 2009 including administration buildings, maintenance workshops and a water treatment facility.

 

Progress on the Olekma processing plant was relatively slow during the first half of the year due to the delay in receiving the 50t capacity overhead crane (necessary for installing all of the processing equipment) but good progress was made in the second half and by the end of the year the large majority of the equipment necessary to produce magnetite concentrate had been installed. At the end of December approximately 90% of the iron concentrate circuit and c.65% of the ilmenite circuit were complete. The new plant is expected to be producing concentrate in the first half of 2010 and to reach full capacity in the second half of 2010. 

 

Titanium Sponge

The titanium sponge joint venture between Aricom and Chinalco, the Chinese state-owned producer of non-ferrous metals was formed on 3 September 2008. The planned design capacity of the plant located in Jiamusi City, Heilongjiang is 15,000t per annum of aerospace-quality titanium sponge with the potential for expansion up to 30,000t per annum. The joint venture is owned 65% by Petropavlovsk PLC and 35% by Chinalco. It is expected that Petropavlovsk will supply approximately 60,000t per annum of ilmenite concentrate for the project's needs from its Kuranakh mine and Chinalco will off-take 100% of the product for 15 years, for sale into the Chinese domestic market.

 

In 2009, the engineering design of the plant was completed by the Shenyang Aluminium and Magnesium Institute (SAMI). The planning of the plant site is complete.

 

K&S and Garinskoye Project

On 23 March 2010, the Group announced the agreement of a Term-Sheet with Industrial and Commercial Bank of China (ICBC) and China National Electric Equipment Corporation (CNEEC), together with a Co-operation Framework Agreement for the implementation of K&S. The Term-Sheet for the loan, agreed by the Company and ICBC as part of the mandate, covers the facility for the development of Stage 1. The loan amount would be 85% of the total amount of the proposed engineering, procurement and construction (EPC) contract (currently estimated at c. US$400m) and with a total limit of US$500m. The loan term would be up to 10 years and is guaranteed by Petropavlovsk.

 

Stage 1 of the K&S project development contemplates a 10mtpa mining operation yielding c.3.2Mtpa of 65% iron ore concentrate with commercial production commencing in 2013. Total capital expenditure is estimated at c.US$400m.  Initially, the processing plant is expected to have a design capacity capable of processing 10Mt per annum of run-of-mine ore from Kimkan deposit.  Stages 2 & 3 of the project envisage the development of the Garinskoye deposit and the further beneficiation of the 65% concentrate to a form of metallised nuggets. 

 

Petropavlovsk is confident that, given the advantageous location close to the border with China and the expected long term strength in the Far East Asian iron ore markets, the K&S iron ore concentrate will prove to be a highly competitive product and generate significant long term cashflows for the Group.

 

Set out below is a proposed production schedule of Stage 1 for the K&S deposit for the first eleven years of the project's life. Full production is currently expected to be reached in 2013.

 

 

 

 



Year

1

Year

2

Year

3

Year

4

Year

5

Year

6

Year

7

Year

8

Year

9

Year 10

Year 11

Ore mined

Mt

-

2

8

10

10

10

10

10

10

10

10

Concentrate

Mt

-

-

3.2

3.2

3.2

3.2

3.2

3.2

3.2

3.2

3.2

 

Completion of a full feasibility study for the development of a combined K&S and Garinskoye project was announced by Aricom in October 2008 prior to the unfolding global economic upheaval.  The Garinskoye deposit, with almost 400Mt of JORC compliant Ore Reserves and Mineral Resources (and further expansion opportunities thereafter),  will contribute to an expanded iron ore concentrate output of 8.3Mt per annum with pre-concentrate produced at site and then transported to an expanded 20Mt per annum of ore capacity beneficiation plant at K&S. Whilst the volatility in the iron ore market over the last year was to be expected given the external economic downturn, the Group believes that the long term fundamentals in the region have remained robust and Garinskoye represents a higher return, higher grade projected next stage for the Group's iron ore development.

 

2009 K&S Development

During 2009, a contract was signed with Dalgeologia to carry out the geological section of the Project Technical Study Conditions report for the deposit which will be submitted to the regional authorities for approval during 2010. This contract, created in accordance with GKZ, proposes to combine the geological studies for Kimkanskoye and Sutarskoye which will entail additional drilling at Kimkanskoye, and is expected to take approximately one year. In line with this, the mineral licence requirements were changed in September 2009 with revised licence terms including the postponement of Kimkanskoye required milestones for the next three years. Consequently the preparation of the technical documentation and the start of construction is required to be done before 30 December 2013.

 

At the K&S site the clearing of land continued during the year including around the proposed accommodation camp site, process plant site, explosives site, ash dump, pulp-line, access roads, and waste disposal sites. In addition, all required geotechnical exploration for the new rail connection between Izvestkovoye station and the process plant site, a distance of 4.3km, was completed in March 2009.

 

The first section of a permanent accommodation camp was started in March 2009 consisting of two accommodation blocks (for 200 people each) and an administration block with the camp expected to be fully complete by the end of 2010, accommodating around 1,500 people. A tender was issued for the construction of the camp buildings in April and this was won by a local company from Birobidjan.

 

In keeping with the Group's ongoing education programme, five students were selected and sent to Zeya's mining college to study as mining technicians.

 

2009 Garinskoye Development

673 core samples were taken during the year. The sampling took place mainly in the Group laboratory in Blagoveschensk with control samples being sent for external quality control to the Republican Analytical Center in Ulan-Ude in Buryatia. This latest information, when analysed with drilling results from 2008, has shown the Fe (total) grade in the confirmation drilling to be 42.83%, marginally higher than the grade in the 1950's exploration samples (41.75%).

 

In September, Regis commenced work on the hydrogeological evaluation of the deposit and by the end of the year, initial hydrogeological and geophysical logging of the holes was complete and were proceeding with the detailed drilling and pump testing.

 

New magnetic anomalies have been identified in the proposed area for infrastructure facilities which has considerably changed the overall picture of the project. The result is that the project's schedule is likely to be altered to take into account the additional drilling and a project redesign. 

 

Further exploration work has also been carried out at the Orlovsko-Sokhatinskaya area (formerly known as the Garinskoye flanks), a license that covers a total area of 3,530 square kilometres.

 

Discussions continue regarding the road and rail route from Garinskoye to Chagoyan and the potential for construction by a state-private partnership.

 

As part of the iron ore development plan, in 2009 the Group acquired the Ushumun coal deposit, situated in the EAO approximately 40km to the south of Birobidjan. This will be a source of coal for the Group's heating plant requirements and for the metallisation plant to be built at K&S.

 

 

Capital expenditure

The Group spent an aggregate of US$56.1m on its iron ore projects in 2009. The key area of focus this year was construction of Kuranakh (US$34m) and K&S development (US$19m).

 

On 23 March 2010, Petropavlovsk announced that the Group had agreed the terms of a Term-Sheet for the funding of stage 1 of its Kimkano-Sutarskiy ("K&S") iron ore mining operation in Russia's Far East with ICBC and had entered into a Co-operation Framework Agreement for the implementation of the K&S and Garinskoye projects with CNEEC. In light of the progress in the development of the Group's operational iron ore asset, Kuranakh, and the Group's K&S and Garinskoye projects, the Group expects to spend around US$84m in furthering the development of its iron ore portfolio in 2010. The major planned capital expenditure by project is as follows:

 

US$m

2010

Kuranakh

26

K&S and Garinskoye

50

Other

8

Total

84

 

 

 

Principal risks relating to the Company/Group

 

Legal and regulatory risks

 

Russian foreign investment legislation may impact transactions by, and investments in, the Group

On 7 May 2008, legislation was introduced in the Russian Federation regulating foreign investment into strategic sectors of the Russian economy - the Federal Law No. 57-FZ of 29 April 2008 "On the manner of conducting foreign investments into companies having strategic significance for securing the defence of the country and the security of the State" (the Foreign Investment Law) and Federal Law No 58-FZ dated 29 April 2008 "On introducing amendments in certain legal acts of the Russian Federation and declaring null and void certain provisions of legal acts of the Russian Federation in connection with the adoption of the Federal Law on the manner of conducting of foreign investments into companies having strategic significance for securing the defence of the country and the security of the State" (the Amendment Law and together with the Foreign Investment Law, the Laws). The Foreign Investment Law 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.

 

None of the Group's assets were included on the list of Strategic Areas published by the Russian Government.

 

Risks relating to the legal and regulatory environment in general

The exploration and extraction activities of the Group are subject to various laws governing prospecting, development, production taxes, labour standards, occupational health, site safety, toxic substances and other matters. Although the Directors believe that the exploration, development and production activities of the Group are currently carried out in accordance with all applicable rules and regulations relevant to the current stage of development and that they hold all necessary approvals, licences and permits under those laws and regulations for the Group's current activities, no assurance can be given that new rules and regulations will not be applied in a manner which could limit or curtail exploration, production or development. Amendments to current laws and regulations governing operations and activities of exploration for and extraction of mineral resources, or more stringent implementation thereof, could have a material adverse impact on the business, operations and the financial performance of the Group.

 

Risks associated with litigation

Legal proceedings which do not have a material effect on the Group or its operations arise from time to time in the ordinary course of the Group's business and the Directors cannot prevent litigation being brought against the Group or any of its subsidiaries in the future.

 

Country-specific risks

 

Risks relating to the jurisdictions in which the Group operates

The Group may be adversely affected by changes in economic, political, judicial, administrative, taxation or other regulatory factors or foreign policy in the areas in which the Group operates or will operate and holds or will hold its major assets, as well as other unforeseen matters.

 

Fluctuations in the global economy may adversely affect  Russia's economy

Russia's economy has recently become increasingly dependent  on global economic trends and is more vulnerable to market downturns and economic slowdowns elsewhere in the world,  as well as to reductions and fluctuations in the prices of hydrocarbons and minerals.

 

Financial risks

 

The Group is dependent on revenue from key gold mines

A substantial portion of the Group's revenues and cash flows are derived from sales of gold mined at Pokrovskiy and Pioneer, and the Directors expect that these mines will continue to provide a substantial portion of the Group's operating revenues and cash flows in at least the short to medium term. Consequently, the Group's results of operations, cash flows and financial condition could be materially and adversely affected by fluctuations in the price of gold realised by Pokrovskiy Rudnik or the Group or by the failure of the Pokrovskiy and Pioneer mines to produce the expected amounts of gold.

 

The Malomir project is currently being prepared for production and it is expected that the commissioning of the Malomir mine will take place in the second half of 2010. It is intended that the Malomir project will commence works processing non-refractory material similar to Pokrovskiy ore; subsequently, it is expected that pressure oxidisation processing methods will be introduced to process refractory material.

 

The profitability of the Group's operations and the cash flows generated by its operations is affected by changes in the market price for relevant metals and related products, which in the past have fluctuated significantly

Although the Group's anticipated cash operating costs, total cash costs and total production costs at Pokrovskiy are each expected to be relatively low by world standards, the Group's ability to achieve or maintain earnings, pay dividends in the future and undertake capital expenditure may be affected in the event of a sustained material fall in the price of gold and/or related products. There can also be no assurance that the Group's actual costs (including cash operating costs, total cash costs and total production costs) will not be higher than currently anticipated.

 

The majority of the Group's revenues and cash flows have historically come from the sale of gold. Traditionally, the market price for gold has fluctuated significantly and has been affected  by numerous factors, over which the Group has no control.

 

In addition, the current demand for, and supply of, gold affects the price of gold, but not necessarily in the same manner as current demand and supply affect the prices of other commodities. Historically, gold has tended to retain its value in relative terms against basic goods in times of inflation and monetary crisis. As a result, central banks, financial institutions, and individuals hold large amounts of gold as a store of value, and production in any given year constitutes a very small portion of the total potential supply of gold. Since the potential supply of gold is large relative to mine production in any given year, normal variations in current production will not necessarily have a significant effect on the supply of gold or its price.

 

Currency risk

The Company reports in US Dollars, being the currency in which gold is principally traded and therefore in which most of its revenue is generated. A large part of the Group's operating expenses are denominated in Roubles and a substantial portion are denominated in Pounds Sterling. The Company's financial condition and results of operations could be adversely affected by changes in the exchange rates between the currencies in which it operates.

 

Operational risks

 

Notwithstanding anything in the operational risk factors, these  risk factors should not be taken as implying that the Issuer,  the Guarantor or the Group will be unable to comply with their obligations as companies with securities admitted to the  Official List.

 

The Group's future profitability is dependent on changes in its technology for gold extraction

Historically, the Group used heap leach and resin-in-pulp (RIP) recovery routes at Pokrovskiy to extract gold from mined ore. The Group's level of profitability, results of operations and financial condition are dependent on the continued ability satisfactorily to operate the RIP plant. The consistency of the head grade of ore processed through the mill and heap leach operations can affect the productivity and profitability of that process. Both the Pioneer and Malomir mines will, in the future, need to switch to pressure oxidation methods for part of their gold recovery. Technical failure or delays in their implementation could have an adverse effect on the Group's profitability at these mines.

 

The Group's operations are subject to the inherent hazard and risks associated with the exploration for and development of mineral deposits

Any metals exploration programme entails risks relating to the location of economically viable ore bodies or gold deposits, the development of appropriate metallurgical processes, the receipt of necessary governmental permits and the construction of mining and processing facilities. The geology in which vein gold occurs can make evaluations of the potential size of deposits especially difficult to determine, as the veins in which they occur have inherently unpredictable characteristics. No assurance can be given that any minerals exploration programme will result in any new commercial mining operation or in the discovery of new resources.

 

Other hazards and risks include unusual and unexpected geological formations, rock falls, flooding and other climatic conditions, any one of which could result in damage to, or destruction of, the Group's facilities, damage to life or property, environmental damage or pollution and legal liability which could have a material adverse impact on the business, operations and financial performance of the Group. Although precautions to minimise risk are taken, even a combination of careful evaluation, experience and knowledge may not eliminate all of the hazards and risks.

 

If the Group fails to acquire or find and develop additional reserves, its reserves and production will decline from their current levels

Except to the extent that the Group conducts successful exploration and development activities or acquires further licences and/or properties containing reserves or both, the Group's reserves will decline as gold and iron ore are produced. In addition, the volume of production from the properties generally declines as reserves are depleted. The Group's future production growth is dependent upon its success in finding or acquiring and developing additional reserves. If the Group is unsuccessful in this, the Group's total reserves and production will decline.

 

The Group may not be able to manage the expansion of its operations or have the resources to support its operations.

While the Group believes that it has necessary structures and management in place, there can be no guarantee that the Group will be able to manage effectively the expansion of its mining operations or that its current personnel, systems, procedures and controls will be adequate to support its mining operations.

 

The Group's joint venture arrangements may not be successful

Members of the Group are involved in a number of joint ventures. There are special risks involved in joint ventures by their nature, in particular that relevant counterparties may:

• have different economic or business goals;

• take action contrary to the policies or objectives of the other party with respect to its investments, for example by vetoing proposals on operations; or

• as a result of financial or other difficulties, be unable or unwilling  to fulfil their obligations.

 

Any of these may have a material adverse effect on the results of operations, financial condition or prospects of the Group through operational issues arising or the delay or non-completion of joint venture development projects.

 

Reserves and resources may be subject to restatement

The reserve and resource estimates of the Group are estimates of the reserves and resources in the ground and stockpiles within existing licence areas. The ore reserve and resource estimates are based on many factors, including:

• the results of exploratory drilling and an ongoing sampling of  the ore bodies;

• past experience with mining properties; and

• the experience of the person making the reserve estimates.

 

Because the ore reserve and resource estimates are calculated based on current estimates of production costs and product prices, they should not be interpreted as assurances of the economic life of the deposits or the profitability of the Group's future operations. Reserve and resource estimates may require revisions based on definitive exploration figures and actual production experience. Furthermore, a sustained decline in relevant market prices could render ore reserves and resources containing lower grades and/or mineralisation uneconomic to recover and ultimately require a restatement of reserves and resources.

 

Payment and other obligations under licences (and related agreements) and contracts may not be complied with which may lead to, at worst, loss of mineral licences

Licences: under the mineral licences (and related agreements) which are held by the relevant companies in the Group or which may be held by them in the future, such companies are or may become subject to payment and other obligations. If such obligations are not complied with when due to be performed, in addition to any other remedies which may be available to the state authorities, this could result in the loss of such mineral licences.

 

Contracts: there are contractual agreements to which Group companies are, or may in the future become, parties and which relate to direct or indirect interests held by such companies in or in respect of such mineral licences. If the relevant company does not comply with its payment or other obligations under such agreements when they are due to be performed, in addition to any other remedies which may be available to other parties, this could result in dilution or forfeiture of interests held by such companies.

 

Risks associated with obtaining access rights to mining tenements, land rights and third party rights

There may be cases where the Group requires additional rights to access or to exploit future mining projects.

 

In accordance with Russian legislation and terms commonly included in licence agreements, a licence holder is obliged to obtain rights to the part of the licensed area where certain geological works are carried out. This requires the licence holder to obtain lease agreements and mine allotment acts in respect of those areas to ensure it has all of the required land rights (together, Land Rights). The lease agreements must also be registered with the state to be enforceable. If the Land Rights are not obtained, fines can be imposed on licence holders.

 

Operational failures, the impact of climatic conditions and other unscheduled interruptions

The achievement of the Group's operational targets will be subject to the completion of planned operational goals on time and according to budget, and will be dependent on the effective support of the Group's personnel, systems, procedures and controls. Any failure of these may result in delays in the achievement of operational targets with a consequent material adverse impact on the business, operations and financial performance of the Group.

 

The location of the Group's deposits means that climatic conditions have an impact on operations and, in particular, severe weather could disrupt operations, including the delivery of supplies, equipment and fuel. It is, therefore, possible that exploration and extraction activity levels may fall as a result of meteorological factors.

 

Unscheduled interruptions in the Group's operations due to mechanical or other failures or industrial relations-related issues or problems or issues with the supply of goods or services may occur and could have a material adverse impact on the financial performance of those operations.

 

Lack of infrastructure or difficulties with state-owned infrastructure

Although a number of the Group's deposits are in regions with well-developed state infrastructure, some of its assets which are not currently in production are situated in areas lacking some of the necessary infrastructure, which must be developed. The Group must invest heavily in the construction of the required mining and auxiliary infrastructure if the Group decides to proceed with the development of these deposits. Construction and operation of this infrastructure will require substantial capital expenditure by the Group and no assurance can be given that market conditions will continue to make such investments financially viable.

 

Labour risks including health and safety issues

Certain of the Group's operations are carried out under potentially hazardous conditions. Whilst the Directors intend to continue to operate in accordance with relevant health and safety regulations and requirements, the Group remains susceptible to the possibility that liabilities might arise as a result of accidents, fatalities or other workforce-related misfortunes, some of which may be beyond the Group's control. The occurrence of any accidents could delay production, increase production costs and/or result in liability for the Group.

 

Dependence on certain key personnel

The Group's growth and future success will depend in significant part upon the continued contributions of a number of the Group's key senior management and personnel, in particular the Group's Chairman, Peter Hambro, and the Group's Chief Executive, Pavel Maslovskiy.

 

There is no certainty that the services of these key persons will continue to be available to the Group and, if the Group is not successful in retaining or attracting highly qualified individuals in key management positions, its business may be harmed.

 

Risks not covered by insurance

The Group's insurance coverage may not satisfy future claims against the Group or to protect the Group against natural disasters or operational catastrophes.

 

The Group, as a participant in exploration and mining programmes, may become subject to liability for hazards that cannot be insured against, which could exceed policy limits or against which it may elect not to be so insured because of high premium costs. The Group may incur a liability to third parties in excess of any insurance cover arising from pollution or other damage or injury.

 

Costs of environmental compliance and rehabilitation

The Group accrues estimated rehabilitation costs over the operating life of a mine. Estimates of ultimate rehabilitation costs are subject to revision as a result of future changes in regulations and cost estimates.

 

Risks in relation to licences, permitting and environmental issues

 

Risks relating to the licensing regime and extensions of existing licences

The Group's production licences are granted for a defined period as specified in the terms of the relevant licence.

 

Currently, the Subsoil Law does not provide for an automatic extension of a mining licence or the upgrading of an exploration licence to a mining licence to its current holder, but allows the current holder to apply to the licensing authority for the extension of an existing licence or upgrading of an exploration licence to a mining licence provided that it has complied with the terms and conditions of the licence. While the Group has been successful in renewing and/or extending several of its gold extraction licences in the past, no assurances can be given that the Group's licences will be in a position to achieve renewal by way of extension.

 

The Group would be adversely affected if any extension, upgrade or renewal exactly applied for was not granted. The Group's mineral licences may be challenged.

 

The Group's operations depend on the Group's ability to obtain necessary permits

Generally, compliance with various government regulations will require the Group to obtain permits issued by Russian governmental agencies, both to implement new developments or projects or on the basis of periodic renewal or review for ongoing activities or operations. Non-renewal of a permit may cause the Group to discontinue the operations requiring the permit, and the imposition of additional conditions on a permit may cause the Group to incur additional compliance costs, either of which could have a material adverse effect on the Group's financial condition and results of operations.

 

The Group may not be able to, or may voluntarily decide not to, comply, or may not have complied in all respects, with the licence requirements for some or all of the licences. If the Group fails to fulfil the specific terms of any of its licences or if the Group operates in the licence areas in a manner that violates Russian law, regulators may impose fines on the Group or suspend or withdraw or not renew its licences, any of which could have a material adverse effect on the operational and financial position of the Group.

 

Environmental risks and issues arising from compliance with environmental regulations and permitting requirements

The Group's operations are subject to the extensive environmental risks inherent in the mining and processing industry. Although the Directors believe that the relevant Group companies are in compliance in all material respects with applicable environmental laws and regulations and hold all necessary approvals, licences and permits under those laws and regulations, there are certain risks inherent in their activities and those which the Group will undertake in the future, such as risks of accidental spills, leakages or other unforeseen circumstances, that could subject the Group to considerable liability. In addition, the Group is subject to checks, including spot checks, by various regulators including the Russian environmental regulator, Rosprirodnadzor. Environmental legislation and permitting requirements and the manner in which these are enforced are likely to evolve in a manner which will require higher and more demanding standards and stricter enforcement, as well as increased fines and penalties for non-compliance. However, the Directors are unable to predict the extent and effect of additional environmental laws and regulations which may be adopted in the future, including whether any such laws or regulations would materially increase the Group's cost of doing business or affect its operations in any area.

 

During the conduct of its operations, the Group is subject to regular inspections and reporting requirements for a range of issues relating to environmental pollution, and must comply with maximum acceptable concentrations, determined by state authorities, for air quality, water quality, soils and sediments. Any issues identified in such inspections or reporting processes and/or any breach of these requirements could have adverse consequences for the Group.  The Group may be subject to investigations by Rosprirodnadzor, which may make announcements relating to such investigations when they are at a very preliminary stage and in advance of any findings, which could have an adverse impact on the Group.

 

Overview

As a result of its work undertaken during the year, the Risk Committee has concluded that it has acted in accordance with its terms of reference. The Chairman of the Risk Committee will be available at this year's Annual General Meeting to answer any questions about the work of the Risk Committee.

 

Responsibility statement of the directors on the annual report

The responsibility statement below has been prepared in connection with the company's full annual report for the year ending 31 December 2009. Certain parts thereof are not included within this announcement.

'We confirm to the best of our knowledge:

·     the financial statements, prepared in accordance with IFRSs as adopted by the European Union, 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; and

·     the management report, which is incorporated into the directors' 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 they face.

This responsibility statement was approved by the board of directors on 24 March 2010 and is signed on its behalf by:

 

 

 

 

Peter Hambro                                                  Brian Egan                                                         

Chairman                                                        Chief Financial Officer

 

PETROPAVLOVSK PLC

Consolidated Income Statement

For the year ended 31 December 2009

 

 


Note


2009

US$'000


 2008

US$'000







Group revenue

5


472,331


381,688







Net operating expenses

6


(301,190)


(296,139)




171,141


85,549







Share of results of joint ventures

17


2,723


(1,261)







Operating profit


173,864


84,288






Fair value change on derivatives

24


(819)


(18,307)

Financial income

9


31,480


7,709

Financial expenses

10


(7,140)


(33,302)







Profit before taxation



197,385


40,388







Taxation

11


(52,601)


(17,643)







Profit for the period



144,784


22,745







Attributable to:






- equity shareholders of Petropavlovsk PLC



143,194


22,002

- non-controlling interests



1,590


743







Earnings per share






Basic

12


US$0.98


US$0.27

Diluted

12


US$0.96


US$0.27

 

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Recognised Income and Expense

For the year ended 31 December 2009

 

 




2009

US$'000


 2008

US$'000







Profit for the period



144,784


22,745







Income and expense recognised directly in equity:






Revaluation of available-for-sale financial investments



(464)


-

Exchange differences on translating foreign operations



158


-

Net expense recognised directly in equity



(306)


-







Total recognised income for the period



144,478


22,745







Attributable to:






- equity shareholders of Petropavlovsk PLC



142,520


22,002

- non-controlling interests



1,958


743







 

 

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Changes in Equity

 

 



Total attributable to equity holders of the Company





Share

capital

Share premium

Merger reserve

Own shares

Retained earnings

Convertible bonds

Share based payments reserve

Translation reserve

Other reserves

Total

Non-controlling interests

Total equity


note

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$' 000

US$'000

US$'000

US$'000

US$'000

US$'000

Balance

at 1 January 2008


1,311

35,082

-

-

122,208

1,583

-

-

176,722

336,906

5,950

342,856

Recognised income and expenses


-

-

-

-

22,002

-

-

-

-

22,002

743

22,745

Dividends


-

-

-

-

-

-

-

-

(22,994)

(22,994)

-

(22,994)

Acquisition of shares in subsidiaries


-

-

-

-

-

-

-

-

-

-

(281)

(281)

Balance

at 1 January 2009


1,311

35,082

-

-

144,210

 

1,583

-

-

153,728

335,914

6,412

342,326

Recognised income and expense


-

-

-

-

143,194

-

-

(210)

(464)

142,520

1,958

144,478

Transfer to retained earnings (a)


-

-

-

-

153,728

-

-


(153,728)

-

-

-

Share based payments


-

-

-

-

-

-

3,334

-

-

3,334

-

3,334

Share placing of 16 million Ordinary Shares

 

27

232

104,564

-

-

-

-

-

-

-

104,796

-

104,796

Costs associated with placing of 16 million Ordinary Shares


-

(5,240)

-

-

-

-

-

-

-

(5,240)

-

(5,240)

Shares issued in exchange for 100% share capital of Aricom plc

 

31

1,079

-

570,071

-

-

-

-

-

-

571,150

-

571,150

Warrants and option issued in relation to acquisition of Aricom plc

 

 

27, 31

-

-

-

-

-

-

-

-

6,970

6,970

-

 

 

6,970

LTIP award in relation to acquisition of Aricom plc

 

31

-

-

-

-

-

-

934

-

-

934

-

934

Own shares acquired through  business combination with Aricom plc

 

28, 31

-

-

-

(14,003)

-

-

-

-

-

(14,003)

-

(14,003)

Conversion of convertible bonds

 

23, 27

180

139,620

-

-

1,583

(1,583)

-

-


139,800

-

139,800

Employee options exercised


3

1,716

-

-

421

-

(421)

-

-

1,719

-

1,719

Acquisition of shares in subsidiaries


-

-

-

-

-

-

-

-

-

-

3,500

3,500

Balance

at 31 December 2009


2,805

275,742

570,071

(14,003)

443,136

-

3,847

(210)

6,506

1,287,894

11,870

1,299,764

 

(a)    Following cancellation of the Share Premium Account of the Company registered on 25 August 2005, the amount of US$176.7 million was transferred to Other Distributable Reserves. The balance of US$153.7 million outstanding at 31 December 2008 is distributable and was transferred to Profit and Loss Account of the Company and shown as part of the consolidated Retained Earnings. 

 

 

 

PETROPAVLOVSK PLC

Consolidated Balance Sheet

At 31 December 2009

 


Note


2009

US$'000


2008

US$'000

Assets






Non-current assets






Goodwill

14


21,675


21,675

Intangible assets

15


104,029


225,446

Property, plant and equipment

16


1,065,490


342,261

Interests in joint ventures

17


31,886


7,427

Available-for-sale investments

18


3,543


972

Inventories

19


8,628


19,078

Trade and other receivables

20


8,856


19,790

Derivative financial instruments

24


-


1,875

Deferred tax assets

25


9,318


17,057




1,253,425


655,581







Current assets






Inventories

19


101,630


72,332

Trade and other receivables

20


140,505


84,775

Derivative financial instruments

24


96


-

Cash and cash equivalents

21


76,467


26,444




318,698


183,551







Total assets



1,572,123


839,132







Liabilities






Current liabilities



 



Trade and other payables

22


(64,379)


(42,142)

Current income tax payable



(6,201)


(638)

Borrowings

23


(11,944)


(220,946)

Derivative financial instruments



-


(42,476)




(82,524)


(306,202)







Net current assets/ (current liabilities)



236,174


(122,651)

 

 












Non-current liabilities






Borrowings

23


(83,602)


(152,778)

Deferred tax liabilities

25


(97,578)


(32,580)

Provision for close down and restoration costs

26


(8,655)


(5,246)




(189,835)


(190,604)







Total liabilities



(272,359)


(496,806)







Net assets



1,299,764


342,326







Equity






Share capital

27


2,805


1,311

Share premium



275,742


35,082

Merger Reserve



570,071


-

Treasury shares

28


(14,003)


-

Convertible bonds



-


1,583

Share based payments reserve



3,847


-

Translation reserve



(210)


-

Other reserves



6,506


153,728

Retained earnings



443,136


144,210

Equity attributable to the shareholders of Petropavlovsk PLC



1,287,894


335,914

Non-controlling interests



11,870

 


6,412







Total equity



1,299,764


342,326

 

 

 

PETROPAVLOVSK PLC

Consolidated Cash Flow Statement

For the year ended 31 December 2009

 

 


 



 

Note

 

2009

US$000

 

2008

US$000

Cash flows from operating activities




Cash generated from operations

29

188,213

58,582

Interest paid


(24,401)

(26,909)

Income tax paid


(24,203)

(14,871)

Net cash from operating activities


139,609

16,802





Cash flows from investing activities




Acquisitions of subsidiaries, net of cash acquired

31

224,996

(6,032)

Purchase of available-for-sale investments

18

(3,048)

-

Investments in joint ventures

17

(2,021)

-

Purchase of property, plant and equipment and exploration expenditure


(259,510)

 (161,391)

Proceeds from disposal of property, plant and equipment


801

2,428

Loans granted


(12,740)

(34,909)

Repayment of amounts loaned to other parties


9,517

6,670

Interest received


3,542

5,751

Net cash used in investing activities


(38,463)

(187,483)





Cash flows from financing activities




Proceeds from issuance of Ordinary Shares, net of transaction costs


101,275

-

Buy back of exchangeable bonds

23

(178,365)

-

Repayments of borrowings


(70,513)

(253,810)

Proceeds from borrowings


96,786

299,047

Dividends paid to Company's shareholders


-

(22,994)

Net cash (used in)/from  financing activities


(50,817)

22,243





Net increase/(decrease) in cash and cash equivalents in the period


50,329

(148,438)

Effect of exchange rates on cash and cash equivalents


(306)

(3,560)

Cash and cash equivalents at beginning of period


26,444

178,442

Cash and cash equivalents at end of period


76,467

26,444

 

 

 

PETROPAVLOVSK PLC

Notes to the Consolidated Financial Statements

For the year ended 31 December 2009

 

1.         General information

 

Petropavlovsk PLC (the "Company") is a company incorporated 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 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared under the historical cost convention, as modified by the revaluation of available-for-sale financial investments, financial assets and financial liabilities (including derivative instruments) at fair value through profit or loss. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, unless otherwise stated.

 

These consolidated financial statements do not constitute the Company's statutory accounts for the years ended 31 December 2009 or 2008. Statutory accounts for 2008 have been delivered to the Registrar of Companies and those for 2009 will be delivered following the Company's Annual General Meeting. The Auditor's reports on both the 2008 and 2009 accounts were unqualified, did not draw attention to any matters by way of emphasis and did not contain statements under s498(2) or (3) of Companies Act 2006 or equivalent preceding legislation.

 

 

Going concern

The Directors have reviewed the Group's cash flow forecasts and operating projections as part of their consideration of going concern. These forecasts are primarily susceptible to gold price fluctuations over the next 12 months. Consideration has also been given to the Group's contractual capital commitments and planned development of future projects. The Directors are  satisfied that the Group has sufficient liquidity and cash resources in order to meet its commitments and existing obligations in light of the Group's cash flow forecasts as well as the availability of a US$150 million syndicated loan facility which was in place and largely undrawn at 31 December 2009 and the proceeds from the issue of the US$380 million convertible bonds in February 2010.

 

After making appropriate inquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.  Accordingly, they continue to adopt the going concern basis in preparing the consolidated financial statements.

 

2.2.         Adoption of new and revised standards and interpretations

 

In the current year the Group has adopted the following revised standards and interpretations:

 

·      Starting from 1 January 2009, the Group has adopted IAS 1 "Presentation of Financial Statements" (revised 2007) ("IAS 1"), IFRS 8 "Operating Segments" ("IFRS 8"), and IAS 23 "Borrowing Costs" (revised 2007) ("IAS 23").

 

·      IAS 1 (revised 2007) requires the presentation of 'non-owner changes in equity' to be presented separately from owner changes in equity. The Group has chosen to present two statements, the income statement and statement of recognised income and expenses which includes items of comprehensive income. As a result, a statement of recognised income and expenses (statement of comprehensive income) has been included in the primary statements. In addition, the adoption of IFRS 8 triggers the need to present a second year of comparatives for the balance sheet. As there were no changes to the balance sheet at 31 December 2007 previously presented, this has not been disclosed.  

 

·      IFRS 8 requires operating segments to be determined based on the Group's internal reporting to the Chief Operating Decision Maker which is then used to allocate resources to the segments and to assess their performance. In contrast, the predecessor standard (IAS 14 "Segment Reporting") required the Group to identify two sets of segments, business and geographical, based upon a risk and rewards approach. A summary of the changes to the operating segments identified is set out in note 4.

 

·      IAS 23 (revised 2007) requires capitalisation of borrowing costs directly attributable to the acquisition, construction, or production of a qualifying asset as part of the cost of that asset. In contrast, the predecessor standard IAS 23 (revised 1993) allowed the option of immediately expensing those borrowing costs which has been used by the Group as its accounting policy. The change in accounting policy, which was adopted prospectively from 1 January 2009, resulted in capitalisation of borrowings costs attributed to the Group's development and construction projects; such costs comprised US$ 14.7 million during the year ended 31 December 2009 (note10). Accounting policy on borrowing costs is set out in note 2.21.

 

Standards and amendments which are effective in future reporting periods are:

 

·     IFRS 3 (revised 2008)                 "Business combinations", effective for accounting periods beginning on or after 1 July 2009.

·     IAS 27 (revised 2008)                  "Consolidated and separate financial statements", effective for accounting periods beginning on or after 1 July 2009.

·     IAS 28 (revised 2008)                 "Investments in associates", effective for accounting periods beginning on or after 1 July 2009. IFRIC 17 "Distributions of non-cash assets to owners", effective for accounting periods beginning on or after 1 July 2009

·      Improvements to IFRSs            IASB's annual improvements project published in April 2009.

 

The directors anticipate that these amendments will be adopted in the Group's financial statements, where applicable, for the period beginning 1 January 2010.

 

2.3.         Comparatives

Following the adoption of IFRS 8, as well as the acquisition of Aricom plc on 22 April 2009 (note 31), the composition of the Group's reportable segments has changed. The comparative information for the year ended 31 December 2008 has been restated accordingly. 

 

2.4.         Basis of consolidation

These consolidated financial statements consist of the financial statements of the Company and the entities controlled by the Company (its subsidiaries) as at the balance sheet date.

 

Subsidiaries are all entities over which the Group has the power to govern the financial and operating policies, generally accompanying a shareholding of more than one half of the voting rights. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing whether the Group controls another entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They are de-consolidated from the date on which control ceases.

 

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 the policies adopted by the Group.

 

Minority interests in the net assets of consolidated subsidiaries are identified separately from the Group's equity therein. Minority interests consist of the amount of those interests at the date of the original business combination or acquisition of ore deposits by way of a corporate vehicle and the minority's share of changes in equity since the date of the combination. Losses applicable to the minority in excess of the minority's interest in the subsidiary's equity are allocated against interests of the Group except to the extent that the minority has a binding obligation and is able to make an additional investment to cover the losses.

 

2.5.         Business combinations and goodwill

The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, plus costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group's share of the identifiable net assets acquired is recorded as goodwill. If the cost of acquisition is less than the fair value of the Group's share of the net assets of the subsidiary acquired, the difference is recognised immediately in the income statement.

 

The interest of minority shareholders in the acquiree is initially measured at the minority's proportion of the net fair value of the assets, liabilities and contingent liabilities recognised.

 

2.6.         Acquisition of assets

Frequently, the acquisition of mining licences is effected through a non-operating corporate structure. As these structures do not represent a business, it is considered that the transactions do not meet the definition of a business combination. Accordingly the transaction is accounted for as the acquisition of an asset. The net assets acquired are recognised at cost.

 

Where the Group has full control but does not own 100% of the assets, then a minority interest is recognised at an equivalent amount based on the Group's cost, the assets continue to be carried at cost and changes in those values are recognised in equity.

 

2.7.         Interests in joint ventures

A joint venture is a contractual arrangement whereby the Group and other parties undertake an economic activity that is subject to joint control (i.e. when the strategic financial and operating policy decisions relating to the activities of the joint venture require the unanimous consent of the parties sharing control). Joint venture arrangements that involve the establishment of a separate entity in which each venturer has an interest are referred to as jointly controlled entities.

 

The Group's interests in jointly controlled entities are accounted for using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Interests in joint ventures are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments.

 

Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the jointly controlled entity recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

 

The Group's share of its joint ventures' post-acquisition profits or losses is recognised in the income statement and its share of post-acquisition movements in reserves is recognised in reserves. The cumulative post-acquisition movements are adjusted against the carrying amount of the investment in joint ventures.

 

2.8.         Investments in associates

 

An associate is an entity over which the Group is in a position to exercise significant influence and that is neither a subsidiary nor an interest in a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

 

Investments in associates are accounted for using the equity method of accounting, except when the investment is classified as held for sale, in which case it is accounted for in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Investments in associates are carried in the balance sheet at cost as adjusted by post-acquisition changes in the Group's share of the net assets of the associate, less any impairment in the value of individual investments. Losses of an associate in excess of the Group's interest in that associate (which includes any long-term interests that, in substance, form part of the Group's net investment in the associate) are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate.

 

Any excess of the cost of acquisition over the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognised at the date of acquisition is recognised as goodwill. The goodwill is included within the carrying amount of the investment and is assessed for impairment as part of that investment. Any excess of the Group's share of the net fair value of the identifiable assets, liabilities and contingent liabilities over the cost of acquisition, after reassessment, is recognised immediately in profit or loss.

 

When a Group entity transacts with an associate of the Group, profits and losses are eliminated to the extent of the Group's interest in the relevant associate. Losses may provide evidence of an impairment of the asset transferred in which case appropriate provision is made for the impairment.

 

2.9.         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):

 


31 December 2009

31 December 2008

GB Pounds Sterling

0.63

0.69

Russian Rouble

30.24

29.38

 

In preparing the financial statements of the individual companies, transactions in currencies other than the entity's functional currency (foreign currencies) are translated into the functional currency using the exchange rates prevailing at the dates of the transactions or valuation where items are remeasured. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at the year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement. Non-monetary items carried at fair value that are denominated in foreign currencies are translated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated.

 

For the purpose of presenting consolidated financial statements, the assets and liabilities of the Group's foreign operations which have a functional currency other than US dollars are translated at exchange rates prevailing on the balance sheet date. Income and expense items are translated at the average exchange rates for the year, unless exchange rates fluctuate significantly during that year, in which case the exchange rates at the date of transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and expenses and accumulated in equity, with share attributed to non-controlling interests as appropriate. On the disposal of a foreign operation, all of the accumulated exchange differences in respect of that operation attributable to the shareholders of the Company are reclassified to profit or loss.

 

Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation.

 

2.10.       Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net identifiable assets of a subsidiary, associate or joint venture at the date of acquisition. Goodwill on acquisition of a subsidiary is included in non-current assets as a separate line item. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill on acquisition of an associate or a joint venture is included in the carrying amount of investment and is tested for impairment as part of the overall balance.

 

Goodwill is allocated to cash-generating units for the purpose of impairment testing. The allocation is made to those cash-generating units or groups of cash-generating units that are expected to benefit from the synergies of the business combination in which the goodwill arose.

 

The excess of the acquirer's interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired over cost is recognised immediately in the income statement.

 

2.11.       Intangible assets

 

Exploration and evaluation expenditure and mineral rights acquired

Exploration and evaluation expenditure incurred in relation to those projects where such expenditure is considered likely to be recoverable through future extraction activity or sale, or where the exploration activities have not reached a stage which permits a reasonable assessment of the existence of reserves, are capitalised and recorded on the balance sheet within intangible 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

 

Mineral rights acquired through a business combination or an asset acquisition are capitalised separately from goodwill if the asset is separable or arises from contractual or legal rights and the fair value can be measured reliably on initial recognition.

 

Exploration and evaluation expenditure capitalised and mining rights 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 expenditure capitalised and mining rights within intangible 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, as set out in note 2.12 below.

 

Other intangible assets

Other intangible assets represent licensed intellectual property purchased in relation to the processing of titanium sponge. These intangible assets are measured at cost and are amortised on a straight line basis over their estimated useful life, which is a period of up to ten years, but dependent upon the start-up of the titanium sponge plant.

 

 

2.12.       Property, plant and equipment

 

Land and buildings, plant and equipment

On initial recognition, land, property, plant and equipment are valued at cost, being the purchase price and the directly attributable cost of acquisition or construction required to bring the asset to the location and condition necessary for the asset to be capable of operating in the manner intended by the Group.

 

Assets in the course of construction are capitalised in the capital construction in progress account. On completion, the cost of construction is transferred to the appropriate category of property, plant and equipment.

 

Development expenditure

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. No depreciation is recognised in respect of mine development costs until they are reclassified as mining assets. Mine development costs are tested for impairment in accordance with the policy in note 2.13.

 

Subsequent costs are included in the asset's carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are charged to the income statement during the financial period in which they are incurred.

 

Depreciation

Property, plant and equipment are depreciated using a units of production method or on a straight-line basis as set out below.

 

Mining assets, except for those related to alluvial gold operations, 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 ore reserves, which results in a depreciation charge proportional to the depletion of reserves. The basis for determining ore reserve estimates is set out in note 3.1. Where the mining plan anticipates future capital expenditure to support the mining activity over the life of the mine, the depreciable amount is adjusted for such estimated future expenditure.

 

Certain property, plant and equipment within mining assets are depreciated based on estimated useful lives, if shorter than the remaining life of the mine or if such property, plant and equipment can be moved to another site subsequent to the mine closure.

 

Mining assets related to alluvial gold operations are depreciated based on estimated useful lives.

 

Non-mining assets are depreciated on a straight-line basis based on estimated useful lives.

 

Mine development costs and capital construction in progress are not depreciated, except for that 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.

 

Estimated useful lives normally vary as set out below.

 


Average life

Number of years

Buildings

15-50

Plant and machinery

3-20

Vehicles

5-7

Office equipment

5-10

Computer equipment

3-5

 

Residual values and useful lives are reviewed and adjusted if appropriate, at each balance sheet date. Changes to the estimated residual values or useful lives are accounted for prospectively.

 

 

2.13.       Impairment of non-financial assets

Property, plant and equipment and finite life intangible assets are reviewed by management for impairment if there is any indication that the carrying amount may not be recoverable. This applies to the Group's share of the assets held by the joint ventures as well as the assets held by the Group itself.

 

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 pre-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 the income statement so as to reduce the carrying amount in the balance sheet to its recoverable amount. A previously recognised impairment loss is reversed if the recoverable amount increases as a result of a reversal of the conditions that originally resulted in the impairment. This reversal is recognised in the income statement and is limited to the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognised in prior years.

 

2.14.       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 before the commercial production commences 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 where this is the most appropriate basis for matching the costs against the related economic benefits as follows:

 

-       Where stripping costs do not fluctuate significantly over the life of the mine, such costs are deferred as part of cost of inventory and are written off to the income statement in the following year, this being the period over which economic benefits related to the stripping activity are realised;

 

-       Where stripping costs fluctuate significantly over the life of the mine, such costs are deferred based on the ratio obtained by dividing the tonnage (or volume, where applicable) of waste mined by the quantity of ore mined ("stripping ratio"). Stripping costs incurred in the period are deferred to the extent that the current period stripping ratio exceeds the life-of-mine ratio for the particular mine. Such stripping costs are included in 'mining assets' within property, plant and equipment and are amortised in subsequent periods to the extent that the period's stripping ratio falls below the life-of-mine ratio. The life-of-mine ratio is based on the mineable reserves of the mine.

 

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.

 

2.15.       Provisions for close down and restoration costs

Close down and restoration costs include the dismantling and demolition of infrastructure and the removal of residual materials and remediation of disturbed areas. Close down and restoration costs are provided for in the accounting period when the legal or constructive obligation arising from the related disturbance occurs, whether this occurs during the mine development or during the production phase, based on the net present value of estimated future costs. Provisions for close down and restoration costs do not include any additional obligations which are expected to arise from future disturbance. The costs are estimated on the basis of a closure plan. The cost estimates are calculated annually during the life of the operation to reflect known developments and are subject to formal review at regular intervals.

 

The amortisation or unwinding of the discount applied in establishing the net present value of provisions is charged to the income statement in each accounting period. The amortisation of the discount is shown as a financing cost, rather than as an operating cost. Other movements in the provisions for close down and restoration costs, including those resulting from new disturbance, updated cost estimates, changes to the lives of operations and revisions to discount rates are capitalised within property, plant and equipment. These costs are then depreciated over the lives of the assets to which they relate.

 

Where rehabilitation is conducted systematically over the life of the operation, rather than at the time of closure, provision is made for the outstanding continuous rehabilitation work at each balance sheet date. All other costs of continuous rehabilitation are charged to the income statement as incurred.

 

2.16.       Financial instruments

Financial instruments recognised in the balance sheet include cash and cash equivalents, other investments, trade and other receivables, borrowings, derivatives, and trade and other payables.

 

Financial instruments are initially measured at fair value when the Group becomes a party to their contractual arrangements. Transaction costs are included in the initial measurement of financial instruments, except financial instruments classified as at fair value through profit or loss. The subsequent measurement of financial instruments is dealt with below.

 

Financial assets

Financial assets are classified into the following specified categories: "financial assets at fair value through profit or loss", "held-to-maturity investments", "available-for-sale financial assets" and "loans and receivables". The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. Financial assets are recognised at trade-date, the date on which the Group commits to purchase the asset. The Group does not hold any financial assets which meet the definition of "held-to-maturity investments".

 

Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss at inception. A financial asset is classified in this category if acquired principally for the purpose of selling in the short term or if so designated by management. Derivatives are also categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current if they are either held for trading or are expected to be realised within 12 months of the balance sheet date.

 

Available-for-sale financial assets

Available-for-sale financial assets are non-derivative financial assets that are either designated in this category or not classified in any of the other categories. They are included within non-current assets unless management intends to dispose of them within 12 months of the balance sheet date. Available-for-sale financial assets are initially measured at cost and subsequently carried at fair value. Changes to the fair value of available-for-sale financial assets are recognised in equity. When available-for-sale financial assets are sold or impaired, the accumulated fair value adjustments recognised in equity are included in the income statement as "gains and losses from investment securities".

 

Loans and receivables

Loans and receivables that have fixed or determinable payments are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less accumulated impairment. Interest income is recognised by applying the effective interest rate, except for short term receivables when the recognition of interest would be immaterial.

 

Effective interest method

The effective interest rate method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or where appropriate, a shorter period.

 

Cash and cash equivalents

Cash and cash equivalents are defined as cash on hand, demand deposits and short-term, highly liquid investments readily convertible to known amounts of cash and subject to insignificant risk of changes in value and are measured at cost which is deemed to be fair value as they have a short-term maturity.

 

Trade receivables

Trade receivables are measured on initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method. Impairment of trade receivables is established when there is objective evidence as a result of a loss event that the Group will not be able to collect all amounts due according to the original terms of the receivables. The amount of the impairment is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. The impairment is recognised in the income statement.

 

Other investments

Listed investments and unlisted equity investments, other than investments in subsidiaries, joint ventures and associates, are classified as available-for-sale financial assets and subsequently measured at fair value. Fair values for unlisted equity investments are estimated using methods reflecting the economic circumstances of the investee. Equity investments for which fair value cannot be measured reliably are recognised at cost less impairment. Changes in fair value are recognised in equity in the period in which they arise. These amounts are removed from equity and reported in income when the asset is derecognised or when there is evidence that the asset is impaired.

 

Financial liabilities

Financial liabilities, other than derivatives, are subsequently measured at amortised cost, using the effective interest rate method.

 

Borrowings

Borrowings are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortised cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognised in the income statement over the period of the borrowings using the effective interest method.

 

The fair value of the liability portion of a convertible bond is determined using a market interest rate for an equivalent non-convertible bond. This amount is recorded as a liability on an amortised cost basis until extinguished on conversion or maturity of the bonds. The remainder of the proceeds is allocated to the conversion option. This is recognised and included in shareholders' equity, net of income tax effects.

 

The exchangeable bonds, after separation of the embedded options, are recognised at fair value which is determined as the net proceeds received from the issuance of the bonds less transaction costs and premiums received or paid for the embedded options. The bonds are subsequently measured on an amortised cost basis, using the effective interest rate valuation method until redemption or maturity of the bonds.

 

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

 

Derivative financial instruments

In accordance with IAS 39 the fair value of all derivatives are separately recorded on the balance sheet. 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 operatingprofit within the income statement. Embedded derivatives which are settled net are disclosed in line with the maturity of their host contracts.

 

The fair value of embedded derivatives is determined by using market prices where available. In other cases, fair value will be calculated using quotations from independent financial institutions, or by using appropriate valuation techniques.

 

Trade payables

Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.

 

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of the Group after deducting all of its liabilities. Equity instruments issued are recorded at the proceeds received, net of direct issue cost.

 

The Group assesses at each balance sheet date whether there is objective evidence that a financial asset or a group of financial assets is impaired. In the case of equity securities classified as available-for-sale, a significant or prolonged decline in the fair value of the security below its cost is considered in determining whether the securities are impaired. If any such evidence exists for available-for-sale financial assets, the cumulative loss - measured as the difference between the acquisition cost and the current fair value, less any impairment loss on that financial asset previously recognised in profit or loss - is removed from equity and recognised in the income statement. Impairment losses recognised in the income statement on equity instruments are not reversed.

 

2.17.       Provisions

Provisions are recognised when the Group has a present obligation, whether legal or constructive, as a result of a past event for which it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation.

 

Provisions are measured at the present value of management's best estimate of the expenditure required to settle the obligation at the balance sheet date. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability.

 

2.18.       Inventories

Inventories are valued at the lower of cost and net realisable value after appropriate allowances for redundant and slow moving items. Net realisable value represents estimated selling price in the ordinary course of business less any further costs expected to be incurred to completion. Cost is determined on the following bases:

 

·      Gold in process is valued at the average total production cost at the relevant stage of production;

·      Gold on hand is valued on an average total production cost method;

·      Ore stockpiles are valued at the average moving cost of mining and stockpiling the ore. Stockpiles are allocated as a non-current asset where the stockpile exceeds current processing capacity;

·      Consumable stores are valued at average cost; and

·      Heap leach pad materials are measured on an average total production cost basis. The cost of materials on the leach pad from which gold is expected to be recovered in a period greater than 12 months is classified as a non-current asset.

 

A portion of the related depreciation, depletion and amortisation charge relating to production is included in the cost of inventory.

 

As described in note 2.14, deferred stripping costs are included in inventories where appropriate.

 

2.19.       Leases

Leases of property, plant and equipment where the Group has substantially all the risks and rewards of ownership are classified as finance leases. Finance leases are capitalised at the lease's inception at the lower of the fair value of the leased property and the present value of the minimum lease payments. Each lease payment is allocated between the liability and finance charges so as to achieve a constant rate on the finance balance outstanding. The corresponding rental obligations, net of finance charges, are included in other long-term payables. The interest element of the finance cost is charged to the income statement over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

 

Leases where the lessor retains substantially all the risks and rewards of ownership are classified as operating leases. Payments made under operating leases (net of any incentives received from the lessor) are charged to the income statement on a straight-line basis over the period of the lease.

 

2.20.       Revenue recognition

Revenue is recognised at the fair value of the consideration received or receivable to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be reliably measured. Revenue derived from goods and services comprises the fair value of the sale of goods and services to third parties, net of value added tax, rebates and discounts. The following criteria must also be present:

 

·      The sale of mining products is recognised when the significant risks and rewards of ownership of the products are transferred to the buyer;

·      Revenue derived from services is recognised in the accounting period in which the services are rendered;

·      Revenue from bulk sample sales made during the exploration or development phases of operations is recognised as a sale in the income statement;

·      Dividends are recognised when the right to receive payment is established; and

·      Interest is recognised on a time proportion basis, taking account of the principal outstanding and the effective rate over the period to maturity, when it is determined that such income will accrue to the Group.

 

2.21.       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.

 

To the extent that funds are borrowed to finance a specific mining project, borrowing costs capitalized represent the actual borrowing costs incurred. To the extent that funds are borrowed for the general purpose, borrowing costs capitalized 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.

 

2.22.       Taxation

Current tax is the tax expected to be payable on the taxable income for the year calculated using rates that have been enacted or substantively enacted by the balance sheet date. It includes adjustments for tax expected to be payable or recoverable in respect of previous periods.

 

Full provision is made for deferred taxation on all temporary differences existing at the balance sheet date with certain limited exceptions. Temporary differences are the difference between the carrying value of an asset or liability and its tax base. The main exceptions to this principle are as follows:

 

·      Tax payable on the future remittance of the past earnings of subsidiaries, associates and jointly controlled entities is provided for except where the Company is able to control the remittance of profits and it is probable that there will be no remittance in the foreseeable future;

·      Deferred tax is not provided on the initial recognition of goodwill or from the initial recognition of an asset or liability in a transaction that does not affect accounting profit or taxable profit and is not a business combination, such as on the recognition of a provision for close down and restoration costs and the related asset or on the inception of finance lease; and

·      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 in the income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt within equity.

 

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.

 

2.23.       Share-based payments

 

The Group has a number of equity-settled share-based payment arrangements in place, details of which are set out in note 32.

 

Equity-settled share-based payment awards are measured at fair value at the grant date. The fair values determined at the grant date are recognised as an expense on a straight-line basis over the expected vesting period with a corresponding adjustment to the share-based payments reserve within the equity.

 

The fair values of equity-settled share-based payment awards are determined at the dates of grant using a Black Scholes model for those awards vesting based on operating performance conditions and Monte Carlo model for those awards vesting based on market related performance conditions.

 

The estimate of the number of the awards likely to vest is reviewed at each balance sheet date up to the vesting date, at which point the estimate is adjusted to reflect the actual awards issued. The impact of the revision of the original estimates, if any, is recognised in income statement so that the cumulative expense reflects the revised estimate, with a corresponding adjustment to the share-based payments reserve within the equity.

 

2.24.   Employee Benefit Trust

 

Certain Ordinary Shares underlying the share-based payment awards granted are held by the Employee Benefit Trust. Details of employee benefit trust arrangements are set out in note 32. The carrying value of shares held by the employee benefit trust are recorded as treasury shares, shown as a deduction to shareholders' equity.

 

3.            Judgements 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.

 

Areas of judgement that have the most significant effect on the amounts recognised in the financial statements are set out below.

 

3.1  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 of December 2004 (the JORC Code). The JORC Code requires 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, impairment charges and for forecasting the timing of the payment of close down and restoration costs. Also, for the purpose of impairment review 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:

 

-       Asset carrying values due to changes in estimated future cash flows;

-       Depreciation chargedin the income statement where such charges are determined by using a units of production method or where the useful economic lives of assets are determined with reference to the life of the mine;

-       Provisions for close down and restoration costs where changes in estimated reserves affect expectations about the timing of the payment of such costs;

-       Carrying value of deferred tax assets and liabilities where changes in estimated reserves affect the carrying value of the relevant assets and liabilities. 

 

Change in ore reserve estimates

Prior to 1 January 2009, the Group estimated its ore reserves and mineral resources based on the Russian Reserves and Resources Classification System, being the reporting system under which it is legally required to operate in the Russian Federation and which was approved by the State Committee of Reserves (GKZ) in 1965 (amended in 1981 and 2008).

 

Ore reserves represented A, B, C1 and C2 category reserves, estimated according to the Russian Reserves and Resources Classification System. The Russian Reserves and Resources Classification System is based primarily on the degree of geological knowledge and the technical ability to extract a mineral reserve. Although economic considerations form a part of the justification for A, B, C1 and C2 category reserves, the system does not take into account the economic viability of extraction in the same way as the Joint Ore Reserves Committee ("JORC") Code does.

 

If the Group continued using the Russian Reserves and Resources Classification System to estimate its ore reserves and life of the mine, depreciation charged in the income statement where such charges are determined by using a units of production method would have been US$3.8 million lower (note 6).

 

3.2  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 capitalised, a judgement is made that recovery of the expenditure is unlikely or the project is to be abandoned, the relevant capitalised amount will be written off to the income statement.

 

3.3  Impairment

The Group reviews at least annually the carrying values of its tangible and intangible assets and goodwill to determine whether there is any indication that those assets are impaired.

 

In making the assessment for impairment, assets that do not generate independent cash flows are allocated to an appropriate cash generating unit (CGU). Goodwill acquired through business combinations is allocated to CGU or groups of CGUs that are expected to benefit from the related business combination. The recoverable amount of an asset, or CGU, is measured as the higher of fair value less costs to sell and value in use.

 

Management necessarily apply their judgment in allocating assets to CGUs, in estimating the profitability, timing and value of underlying cash flows and in selecting appropriate discount rates to be applied within the value in use calculation. Subsequent changes to CGU allocation or estimates and assumptions in the value in use calculation could impact the carrying value of the respective assets.

 

3.4  Close down and restoration costs

Costs associated with restoration and rehabilitation of mining sites are typical for extractive industries and are normally incurred at the end of the life of the mine. Provision is recognised for each mining site for such costs discounted to their net present value, as soon as the obligation to incur such costs arises. The costs are estimated on the basis of the scope of site restoration and rehabilitation activity in accordance with the mine closure plan and represent management's best estimate of the expenditure that will be incurred. Estimates are reviewed annually as new information becomes available.

 

The initial provision for close down and restoration costs together with other movements in the provision, including those resulting from updated cost estimates, changes to the estimated lives of the mines, and revisions to discount rates are capitalised within "mine development costs" or "mining assets" of property, plant and equipment. Capitalised costs are depreciated over the live of the mine they relate to and the provision is increased each period via unwinding the discount on the provision. Changes to the estimated future costs are recognised in the balance sheet by adjusting both the asset and the provision.

 

The actual costs may be different from those estimated due to changes in relevant laws and regulations, changes in prices as well as changes to the restoration techniques. The actual timing of cash outflows may be also different from those estimated due to changes in the life of the mine as a result of changes in ore reserves or processing levels. As a result, there could be significant adjustments to the provision for close down and restoration costs established which would affect future financial results.

 

3.5  Tax provisions and tax legislation

The Group is subject to income tax in the UK, Russian Federation and Cyprus. Assessing the outcome of uncertain tax positions requires judgements to be made. The Group recognises liabilities for anticipated tax issues based on estimates of whether additional taxes will be due, such estimates are based on the status of ongoing discussions with the relevant tax authorities and advice from independent tax advisers.

 

Russian tax and currency control legislation is subject to varying interpretations. Fines and penalties for any errors and omissions could be significant. The Directors believe that there have been no material breaches of Russian tax regulations and that these financial statements contain all necessary provisions in respect of the Group's tax liabilities in Russia.

 

3.6  Recognition of deferred tax assets

Deferred tax assets, including those arising from tax losses carried forward for the future tax periods, capital losses and temporary differences, are recognised only where it is considered more likely than not that they will be recovered. The likelihood of such recoverability is dependent on the generation of sufficient future taxable profits which relevant deferred tax asset can be utilised to offset.

 

Assumptions about the generation of future taxable profits depend on management's estimates of future cash flows. Judgements are also required about the application of income tax legislation. These judgements and assumptions are subject to risk and uncertainty and there is a possibility that changes in circumstances will alter expectations, which may impact the amount of deferred tax assets recognised on the balance sheet and the amount of other tax losses and temporary differences not yet recognised. In such circumstances, the carrying amount of recognised deferred tax assets may require adjustment, resulting in a corresponding charge or credit to the income statement.

 

4.            Segmental information

 

Business segments

 

The Group has five reportable segments under IFRS 8:

 

§  Precious metals segment, comprising gold operations at different stages, from field exploration through to mine development and gold production. The Gold segment includes the Group's principal mines (Pokrovskiy and Pioneer), the Group's alluvial operations, the Group's operations under Omchak and Odolgo joint venture arrangements as well as various gold projects at the exploration and development stages.

 

§  Non-precious metals segment, comprising iron ore projects. The Iron segment includes the Kuranakh project, the K&S project, the Garinskoye project and the Bolshoy Seym project as well as the Kostenginskoye and Garinskoye Flanks projects.

 

§  Exploration, comprising in-house geological exploration expertise performed by the Group's exploration companies Regis and Dalgeologiya.

 

§  Construction and Engineering segment, comprising in-house construction and engineering expertise. The Construction and Engineering segment includes construction performed by the Group's specialist construction company Kapstroi and the engineering and scientific operations represented by PHM Engineering, Irgiredmet and Giproruda.

 

§  The Other segment primarily includes procurement of materials such as reagents and consumables and equipment for third parties undertaken by Irgiredmet, the Group's interest in joint venture arrangements for design and development of a titanium sponge production plant in China, the Group's interest in joint venture arrangements for production of vanadium penoxides and related products in China as well as various other projects.

 

The Group has changed the composition of its reportable segments from 1 January 2009, following the adoption of IFRS 8, as well as following the acquisition of Aricom plc on 22 April 2009.

 

The key changes in the basis of segmentation from the financial statements for the year ended 31 December 2008 are set out below:

 

§  Projects at the exploration stage have been moved from the 'Exploration and Evaluation' segment reported in the financial statements for the year ended 31 December 2008 into the 'Gold' segment. This change primarily affected segmental assets, namely, exploration and evaluation expenditure capitalised and shown within the intangible assets category.

 

§  Construction and engineering in-house expertise, which has been identified as a separate segment under IFRS 8,  was included in the  'Construction and other services' segment reported in the financial statements for the year ended 31 December 2008.

 

§  The acquisition of Aricom plc has resulted in a new reportable segment 'Non-precious metals'.

 

Segment information

 

Segment information about the Group's reportable segments is presented below.  Amounts reported for the prior year have been restated to conform with the requirements of IFRS 8.

 

2009

 


Precious

metals 

Non-precious

metals

Exploration

Construction and Engineering

Other

Consolidated


US$'000

US$'000

US$'000

US$'000

US$'000

US$' 000

Revenue







Gold sales

426,956

-

-

-

-

426,956

Silver sales

2,856

-

-

-

-

2,856

Other external sales

802

-

2,508

20,245

18,964

42,519

Total Group revenue from external customers

430,614

-

2,508

20,245

18,964

472,331








Inter-segment sales

274

-

24,941

85,862

31,764

142,841








Net operating expenses

(181,461)

(6,456)

(5,800)

(22,455)

(25,050)

(241,222)

including







Depreciation and amortisation

(32,156)

(867)

(2,834)

(3,193)

(1,472)

(40,522)

Impairment

(4,243)

-

-

-

-

(4,243)








Share of results in joint ventures

2,470

-

-

-

253

2,723

Segment result

251,623

(6,456)

(3,292)

(2,210)

(5,833)

233,832

Central administration






(54,063)

Foreign exchange losses






(5,905)

Operating profit






173,864

Fair value change on derivatives






(819)

Financial income






31,480

Financial expenses






(7,140)

Taxation






(52,601)

Profit for the period






144,784















Segment Assets

808,100

432,512

15,885

74,129

123,157

1,453,783

Segment Liabilities

(31,717)

(9,768)

(3,238)

(11,059)

(23,453)

(79,235)

Goodwill(a)






21,675

Deferred tax - net






(88,260)

Derivative financial instruments - net






96

Unallocated cash






56,677

Loans given






30,574

Borrowings






(95,546)

Net Assets






1,299,764








Other segment information







Additions to non-current assets:







Exploration and evaluation expenditure capitalised  within intangible assets

11,694 

36 

302 

465 

12,497

Other additions to intangible assets

56 

107 

163

Capital expenditure

180,661 

61,239 

804 

4,885 

2,854 

250,443

Other items capitalised

17,063 





17,063















Average number of employees

3,510 

567 

880 

1,750 

1,059 

7,766

(a)       In making the assessment for impairment, goodwill is allocated to the group of cash generating units likely to benefit from acquisition-related synergies, altogether comprising the Precious Metals Segment (note 14)

 

 

2008

 


Precious

metals

Exploration

Construction and Engineering

Other

Consolidated

 


US$'000

US$'000

US$'000

US$'000

US$' 000

 

Revenue






 

Gold sales

288,029

-

-

-

288,029

 

Silver sales

383

-

-

-

383

 

Other external sales

2,368

6,027

50,418

34,463

93,276

 

Total Group revenue from external customers

290,780

6,027

50,418

34,463

381,688

 







 

Inter-segment sales

261

30,184

38,181

22,534

91,160

 







 

Net operating expenses

(145,065)

(8,759)

(50,007)

(31,241)

(235,072)

 

including







Depreciation and amortisation

(16,782)

(2,384)

(1,918)

(1,202)

(22,286)


Impairment

(3,240)

-

-

-

(3,240)








 

Share of results in joint ventures

(1,261)

-

-

-

(1,261)

 

Segment result

144,454

(2,732)

411

3,222

145,355

 

Central administration





(36,054)

 

Foreign exchange losses





(25,013)

 

Operating profit





84,288

 

Fair value change on derivatives





(18,307)

 

Financial income





7,709

 

Financial expenses





(33,302)

 

Taxation





(17,643)

 

Profit for the period





22,745

 







 








Segment Assets

618,675

20,119

51,692

76,990

767,476


Segment Liabilities

(21,578)

(2,162)

(8,153)

(16,133)

(48,026)


Goodwill(a)





21,675


Deferred tax - net





(15,523)


Derivative financial instruments - net





(40,601)


Unallocated cash





5,479


Loans given





25,570


Borrowings





(373,724)


Net Assets





342,326









Other segment information







Additions to non-current assets:







Exploration and evaluation expenditure capitalised  within intangible assets

53,522  

-  

187  

2,642 

56,351


Other additions to intangible assets

364

-

1,723

-

2,087


Capital expenditure

86,268

5,914

10,228

1,330

103,740


Other items capitalised

3,407




3,407








Average number of employees

3,237

869

1,465

973

6,544


 

 

 

Entity wide disclosures

 

Revenue by geographical location (a)

 

 


2009

2008


US$'000

US$'000

Russia and CIS

433,126

272,821

UK

39,205

30,002

Rest of Europe

-

78,865

  

472,331

381,688

(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)

 


2009

2008


US$'000

US$'000

Russia

1,200,090

615,887

China

31,619

-

  

1,231,709

615,887

(b)        Excluding financial instruments and deferred tax assets.

 

Information about major customers

 

During the years ended 31 December 2009 and 2008, the Group generated revenues from the sales of gold to a number of financial institutions, namely, to Russian banks for Russia domestic sales of gold and to foreign banks for sales of gold outside of Russia. Included in gold sales revenue for the year ended 31 December 2009 are revenues of US$356 million which arose from sales of gold to three banks that individually accounted for more than 10% of the Group's revenue (2008: US$231 million revenues from sales of gold to three banks that individually accounted for more than 10% of the Group's revenue). The proportion of Group revenue of each bank may vary from year to year depending on commercial terms agreed with each bank. Management consider there is no major customer concentration risk due to high liquidity inherent to gold as a commodity.

 

During the year ended 31 December 2008, the Group generated revenues of US$47 million to Aricom plc and its subsidiaries (note 30) which comprised 12% of the Group's revenue. On 22 April 2009, Aricom plc became a subsidiary of the Group and from that date the revenues have been eliminated on consolidation.

 

5.            Revenue

 

 

2009

2008


US$'000

US$'000

Sales of goods

445,880

310,524

Rendering of services

24,263

68,965

Rental income

2,188

2,199

  

472,331

381,688

Investment income

7,661

7,709

  

479,992

389,397

 

 

6.         Net operating expenses

 

 

2009

2008


US$'000

US$'000

Net operating expenses:



Cost of sales (a)

195,220

198,495

Impairment charges

4,243

3,240

Administration expenses (b)

96,326

70,174

Foreign exchange losses

5,905

25,013

Other net operating income

(504)

(783)


301,190

296,139

 

(a)      


2009

2008


US$'000

US$'000

Cost of Sales:



Staff costs

50,430

58,503

Fuel

15,944

19,508

Materials

43,131

52,773

Depreciation

27,587

13,472

Electricity

8,222

5,307

Royalties

24,353

17,410

Smelting and transportation costs

3,216

2,593

Selling and distribution

1,021

2,073

Movement in work in progress and bullion in process attributable to gold production

(7,290)

(14,014)

Other costs

15,004

23,794

Goods for resale

13,602

17,076


195,220

198,495

 

 

(b)


2009

2008


US$'000

US$'000

Administration expenses:



Staff costs

38,112

22,136

Depreciation

12,936

8,812

Professional fees

6,059

6,633

Bank charges

1,084

1,562

Insurance

3,175

1,788

Office rent

3,907

2,011

Travel and entertainment

5,332

3,902

Office cost

2,086

1,335

Allowance for bad debts

1,510

957

Other

17,631

17,129


91,832

66,265

Costs incurred in relation to the admission to the main board of London Stock Exchange

4,494

3,909


96,326

70,174

 

 

 

7.       Auditors' remuneration                   

                                                                                                                                                               

The Group, including its overseas subsidiaries, obtained the following services from the Company's auditors and its associates: 

 


2009

2008(a)


US$'000

US$'000

Fees payable to the Company's auditor for the annual audit of the parent company and consolidated financial statements

363

475

Fees payable to the Company's auditor and its associates:



For the audit of the Company's subsidiaries as part of the audit of the consolidated financial statements

331

-

For the audit of subsidiary statutory accounts pursuant to legislation 

167

25

Total audit fees

861

500




Tax services

10

-

Fees for reporting accountants services

-

636

Other services pursuant to legislation - interim review fee

97

60

Accounting advice

39

-

Transaction based corporate finance services

-(b)

456

Offer assistance in preparation for listing

-

449

Other services

33

-

Total non-audit fees

179

1,601

(a)    The fees disclosed for the year ended 31 December 2008 were paid to the Company's previous auditors Moore Stephens LLP

(b)    Prior to their appointment as auditors, fees of US$269,000 were paid to Deloitte for transaction based corporate finance services that were provided as part of the Group's admission to the main board of London Stock Exchange.

 

 

8.        Staff costs

 

 



2009

2008



US$'000

US$'000

Wages and salaries


73,630

68,717

Social security costs


11,756

11,895

Pension costs


223

27

Share-based compensation


2,933

-



88,542

80,639

Average number of employees

4

7,766

6,544

 

9.         Financial income

                              


Note

2009

2008



US$'000

US$'000

Interest income


7,661

7,709

Gain on redemption of exchangeable bonds

23

23,716

-

Other finance income


103

-



31,480

7,709

 

 

 

10.      Financial expenses

           


2009

2008


US$'000

US$'000

Interest on bank and other loans

6,142

5,466

Interest on exchangeable bonds

6,048

16,606

Interest on convertible bonds

9,317

10,994


21,507

33,066

Interest capitalised

(14,749)

-

Unwinding of discount on environmental obligation

382

236

Total

7,140

33,302

 

 

11.      Taxation


Note

2009

2008



US$'000

US$'000

Current tax




UK current tax


(470)

(917)

Russian current tax


39,627

19,974



39,157

19,057

Deferred tax




Reversal and origination of timing differences

25

13,444

(1,414)

Total tax charge


52,601

17,643

 

 

The charge for the year can be reconciled to the profit per the income statement as follows:

 


2009

2008


US$'000

US$'000

Profit before tax

197,385

40,388




Tax at the UK corporation tax rate of 28% (2008: 28.5%)(a)

55,268

11,510

Effect of different tax rates of subsidiaries operating in other jurisdictions

(11,380)

(4,517)

Tax effect of share of results of joint ventures

(763)

481

Tax effect of expenses that are not deductible for tax purposes

9,106

3,772

Tax effect of tax losses for which no deferred income tax asset was recognised

7,395

-

Income not subject to tax

(3,731)

-

Utilisation of previously unrecognised tax losses

(6,409)

-

Re-measurement of deferred tax - change in Russia corporation tax rate(b)

-

(6,306)

Adjustments in respect of prior years

77

740

Foreign exchange movements in respect of deductible temporary differences

3,038

11,963

Tax expense for the period

52,601

17,643

(a)        The corporation tax rate in the United Kingdom changed from 30% to 28% effective 1 April 2008

(b)        The corporation tax rate in Russia changed from 24% to 20% effective 1 January 2009

 

 

 

12.      Earnings per ordinary share

 

 



2009

2008



US$'000

US$'000

Profit for the period attributable to equity holders of Petropavlovsk PLC


143,194

22,002

Interest expense on convertible bonds, net of tax


 6,708

- (a)

Profit used to determine diluted earnings per share


149,902

22,002







No of shares

No of shares

Weighted average number of Ordinary Shares


146,701,446

81,155,052

Adjustments for dilutive potential Ordinary Shares:




 - assumed conversion of convertible bonds


9,926,580

- (a)

 - grant of share options in exchange for share options previously granted to the Directors of Aricom plc


42,049

-

Weighted average number of Ordinary Shares


156,670,075

81,155,052

for diluted earnings per share

(a)  Convertible bonds which could potentially dilute basic earnings per ordinary share were not included in the calculation of diluted earnings per share because they were anti-dilutive for the year ended 31 December 2008.

 



US$

US$

Basic earnings per ordinary share


0.98

0.27

Diluted earnings per ordinary share


0.96

0.27

 

 

As at 31 December 2009, the Group had a potentially dilutive option issued to IFC to subscribe for 1,067,273 Ordinary Shares (31 December 2008: nil) and 8,312,463 (31 December 2008: nil) potentially dilutive warrants which were anti-dilutive for the year ended 31 December 2009 and were not included in the calculation of diluted earnings per share.

 

 

13.      Dividends

 



2009(a)

2008



US$'000

US$'000

Amounts recognised as distributions to equity holders in the year:








Final dividend for the year ended 31 December 2007 of 7.5 pence per share (b)


-

12,166

Interim dividend for the year ended 31 December 2008 of 7.5 pence per 
share
(b)


-

10,828



-

22,994

(a)        Information on dividends declared subsequent to 31 December 2009 is set out in note 38.

(b)        US dollar equivalent of dividend payment has been arrived at by translating sterling amounts paid into US dollars at the date of payment.

 

 

14.     Goodwill

 



2009

2008



US$'000

US$'000

Cost




At 1 January


22,161

16,304

Goodwill arising on acquisition of PRP Stancii 


-

5,430

Goodwill arising on acquisition of ZAO PHM Engineering


-

427

At 31 December


22,161

22,161





Accumulated impairment losses




At 1 January


(486)

(486)

Impairment loss


-

-

At 31 December


(486)

(486)





Carrying amount at 31 December


21,675

21,675

 

Goodwill primarily relates to the Group's investment in Irgiredmet and PRP Stancii.

 

On the acquisition of Irgiredmet, management determined that cash generating units likely to benefit from acquisition-related synergies are the individual mining projects, which reside in the precious metals and exploration segments. Goodwill recognised on acquisition of Irgiredmet in the amount of US$16 million has been allocated for impairment testing purposes in equal parts between the two groups of cash generating units, being precious metals segment and exploration segment.

 

Goodwill recognised on acquisition of PRP Stancii in the amount of US$5 million has been allocated to the group of cash generating units likely to benefit from acquisition-related synergies, residing in the precious metals segment.

 

The recoverable amount of cash generating units is determined based on value-in-use calculations. These calculations correspond to the present value of estimated future net cash flows based on ten year budget and business plan approved by management. Management determined budgeted cash flows based on expected production profile of the existing mining projects using a discount rate of 11.5%, being an estimate of the Group's after tax nominal weighted average cost of capital.

 

The Group tests goodwill annually for impairment or more frequently if there are indicators that goodwill might be impaired.

 

Based on the impairment tests carried out at 31 December 2009 and 2008 no goodwill impairment was indicated for Irgiredmet and PRP Stancii.

 

 

15.      Intangible assets

 


Malomir

Albyn

Tokur

Yamal deposits

Flanks of Pokrovskiy

Kostenginskoye

Others(a)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2009

41,308

10,390

61,549

62,973

21,635

-

27,591

225,446

Additions

-

1,040

24

4,545

176

36

6,839

12,660

Assets acquired through business combination with Aricom plc (note 31)

-

-

-

-

-

27,381

610

27,991

Assets acquired through other business combinations (note 31)

-

-

-

-

-

-

845

845

Impairment

-

-

(2,702(b)

(1,506)(c)

-

-

(35)

(4,243)

Transfer to mine development costs

(40,172)

(11,430)

(58,871)

(40,564)

-

-

-

(151,037)

Transfer  to mining assets

-

-

-

-

(7,521)

-

-

(7,521)

Reallocation

(1,136)

-

-

-

1,136

-

-

-

Disposal

-

-

-

-

-

-

(112)

(112)

At 31 December 2009

-

-

-

25,448

15,426

27,417

35,738

104,029

 

(a)   Represent amounts capitalised in respect of a number of projects in the Amur and Buryatia regions.

 

(b)   Following the expiration of the licence to explore the flanks of Tokur deposit and decision to abandon exploration, associated exploration and evaluation costs previously capitalised were written off.

 

(c)   Following the decision to abandon exploration of Yarshor-Laptoyeganskaya zone of the Yamal deposits, associated exploration and evaluation costs previously capitalised were written off.

 

 


Malomir

Albyn

Tokur

Yamal deposits

Flanks of Pokrovskiy

Others(a)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2008

25,483

3,385

58,437

48,641

19,931

14,905

170,782

Additions

15,825

7,005

435

14,661

7,621

12,891

58,438

Impairment

-

-

-

-

  (3,240(d)

-

(3,240)

Transfer to mine development costs

-

-

-

-

-

(205)

(205)

Reallocation

-

-

2,677

-

(2,677)

-

-

Disposals

-

-

-

(329)

-

-

(329)

At 31 December 2008

41,308

10,390

61,549

62,973

21,635

27,591

225,446

 

(d)   Following the decision to abandon the licence to explore Voroshilovskoye deposit, associated exploration and evaluation costs previously capitalised were written off.

 

 

16.      Property, plant and equipment

 


Mine development costs

Mining assets

Non-mining assets

Capital construction in progress

Total

 


US$'000

US$'000

US$'000

US$'000

US$'000

Cost






At 1 January 2008

66,281

152,039

80,221

13,046

311,587

Additions

20,708

31,098

16,357

35,577

103,740

Acquired through business combinations

-

2,927

1,536

154

4,617

Close down and restoration costs capitalized (note 26)

-

3,407

-

-

3,407

Transfers from intangible assets

-

205

-

-

205

Transfers from capital construction in progress

-

14,778

9,423

(24,201)

-

Transfer from mine development costs

(73,209)

73,209

-

-

-

Disposals

-

(3,213)

(2,866)

(247)

(6,326)

Reallocation

(12,596)

(16,314)

16,314

12,596

-

At 31 December 2008

1,184

258,136

120,985

36,925

417,230

Additions

102,981

45,186

10,857

91,419

250,443

Acquired through business combination with Aricom plc (note 31)

303,431

-

29,318

10,346

343,095

Close down and restoration costs capitalized (note 26)

2,142

172

-

-

2,314

Interest capitalized (note 10)

14,749

-

-

-

14,749

Transfers from intangible assets

151,037

7,521

-

-

158,558

Transfers from capital construction in progress

(3,416)

63,518

20,686

(80,788)

-

Reallocation

11,333

6,117

(10,653)

(6,797)

-

Disposals

(81)

(444)

(1,859)

(1,768)

(4,152)

Exchange difference

-

-

(176)

-

(176)

At 31 December 2009

583,360

380,206

169,158

49,337

1,182,061







Accumulated depreciation and impairment






At 1 January 2008

-

42,401

11,385

-

53,786

Charge for the period

-

13,474

9,755

-

23,229

Disposals

-

(1,324)

(722)

-

(2,046)

Reallocations

-

(98)

98

-

-

At 31 December 2008

-

54,453

20,516

-

74,969

Charge for the period

935

27,324

14,543

-

42,802

Disposals

(4)

(324)

(927)

-

(1,255)

Reallocation

585

210

(795)

-

-

Exchange difference

-

-

55

-

55

At 31 December 2009

1,516

81,663

33,392

-

116,571







Net book value






At 31 December 2009

581,844

298,543

135,766

49,337

1,065,490

At 1 January 2009

1,184

203,683

100,469

36,925

342,261

 

 

Property, plant and equipment with a net book value of US$75.6 million (31 December 2008: US$49.8 million) have been pledged to secure borrowings of the Group. The Group is not allowed to pledge these assets as security for other borrowings or sell them to another entity.

 

Additions to Mine development costs include deferred stripping costs of US$6 million, related to Kuranakh iron ore deposit.

 

 

17.          Interests in joint ventures

 

The Group has various interests in jointly controlled entities as set out in note 40. These interests are accounted for in accordance with accounting policies set out in note 2.7.

 

 

 

2009

US$' 000

2008
US$'000

At 1 January

7,427

8,635

Acquired as part of business combination with Aricom plc(a) (note 31)

20,077

-

Acquired on incorporation(b)

2,021

-

Share of joint ventures' profit/ (loss)

Unrealised (gain)/loss

Foreign currency exchange differences

2,723

(350)

(12)

(1,261)

53

At 31 December

31,886

7,427

 

(a)    In accordance with the terms of the joint venture agreement between Aricom and Chinalco to establish a Chinese Titanium JV project, Heilongjiang Jiatai Titanium Co. Limited, signed and approved by the Chinese Ministry of Commerce on 12 August 2008, the Group holds 65% of the joint venture and 35% is held by Chinalco, with the parties exercising joint control. The first tranche of US$20.8 million was paid by Aricom in September 2008. The remaining tranches to be contributed by the Group comprise a US Dollar equivalent of US$48.7 million as at 31 December 2009 and are expected to be made in 2010.

 

(b)    On 19 February 2009, the Group signed the agreement with Heilongjiang Jianlong Steel Company Limited (China) and Kuranakii Investment Co. Limited (HK) to establish a Chinese Vanadium JV project, Heilongjiang Jianlong Vanadium Industries Co. Limited. The Group holds 46% of the joint venture and the remaining 49% and 5% are held by Heilongjiang Jianlong Steel Company and Kuranakii Investment Co. respectively, with the parties exercising joint control. The first tranche in the US Dollar equivalent of US$2 million has been paid by the Group in November 2009. The remaining tranches to be contributed by the Group comprise a US Dollar equivalent of US$4.7 million as at 31 December 2009 and are to be made in 2010.

 

The summary of the financial information of the Group's jointly controlled entities is set out below.

 


Omchak Joint Venture

Odolgo Joint Venture

Titanium

Joint Venture

Vanadium

Joint Venture

Total

Total



US$'000


US$'000


US$'000


US$'000

2009
US$'000

2008
US$'000








Share of joint ventures' assets and liabilities:







Non-current assets

10,712

5,871

14,736

-

31,319

13,617

Current assets

12,315

962

7,973

2,021

23,271

15,078


23,027

6,833

22,709

2,021

54,590

28,695








Current liabilities

(8,834)

(551)

(2,393)

-

(11,778)

(12,862)

Non-current liabilities and provisions

(822)

(7,767)

-

-

(8,589)

(6,824)


(9,656)

(8,318)

(2,393)

-

(20,367)

(19,686)

Non-controlling interest

(2,337)

-

-

-

(2,337)

(1,582)

The Group's share of net assets

11,034

(1,485)

20,316

2,021

31,886

7,427








Share of joint ventures' revenue and expenses:







Sales revenue

29,421

1,964

-

-

31,385

22,204

Net operating expenses

(26,500)

(2,581)

206

-

(28,875)

(23,945)

Operating profit/(loss)

2,921

(617)

206

-

2,510

(1,741)

Financial income

2,331

551

48

-

2,930

2,610

Financial expenses

(1,114)

(7)

-

-

(1,121)

(1,155)








Taxation

(802)

(28)

-

-

(830)

(481)

Non-controlling interest

(766)

-

-

-

(766)

(494)

The Group's share of profit/(loss) for the year

2,570

(101)

 

254

-

2,723

(1,261)

 

 

 

18.          Available-for-sale investments

 



2009

2008


Note

US$'000

US$'000

Listed securities:




Rusoro Mining Limited(a)


2,584

-

Unlisted securities(b)




Solovyevskiy Priisk


939

940

Verkhnetisskaya GRK

31

-

12

Other


20

20

Total


3,543

972

(a)    In March 2009, the Group acquired 6,166,666 new shares in Rusoro Mining Limited ("Rusoro") as part of an equity placing by Rusoro for consideration of US$3 million. The Group's stake in the share capital of Rusoro as enlarged by the placing is c.1.1%. The investment in Rusoro is recorded at fair value which is determined with reference to the market price of the shares quoted on the stock exchange.

(b)    The value of these investments are recorded at cost as, in the opinion of the Directors, fair values cannot be reliably measured as there are no active markets with quoted market prices.

 

 

19.          Inventories




2009

2008




US$'000

US$'000

Current





Construction materials



11,181

14,313

Stores and spares



44,619

30,387

Work in progress



34,726

15,960

Deferred stripping costs



8,724

7,476

Bullion in process



2,380

4,196




101,630

72,332






Non-current





Work in progress(a)



8,628

19,078




8,628

19,078

(a)        Non-current inventories comprise long-term ore stockpiles that are not planned to be processed within one year.

 

 

20.      Trade and other receivables

 




2009

2008




US$'000

US$'000

Current





VAT recoverable



43,624

24,073

Prepayments for property, plant and equipment



41,635

33,030

Advances to suppliers



14,187

5,881

Trade receivables (a)



3,779

3,857

Loan to Omchak Joint Venture



3,151

3,046

Exchangeable loan to Rusoro (c)



17,863

-

Loan to Uralmining



760

-

Other loans receivable



709

2,734

Advances paid on resale and commission contracts (b)



785

4,243

Interest accrued



467

408

Other debtors



13,545

7,503




140,505

84,775

Non-current





Loan to Odolgo Joint Venture



7,789

6,089

Exchangeable loan to Rusoro (c)



-

13,701

Other loans receivable



302

-

Other  assets



765

-




8,856

19,790

(a)    Amounts included in trade receivables at 31 December 2009 and 31 December 2008 relate mostly to services performed by the Group's subsidiary, Irgiredmet. Trade receivables are due for settlement between one and six months. All outstanding trade receivables at period end are not past due and are considered recoverable.

 

(b)    Amounts included in advances paid on resale and commission contracts at 31 December 2009 and 31 December 2008 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)    On 10 June 2008, the Company participated in an US$80 million senior secured exchangeable loan (the "Exchangeable Loan") to Venezuela Holdings (BVI) Limited, a wholly owned subsidiary of Rusoro Mining Limited ("Rusoro").  The Company subscribed for US$20 million of the Exchangeable Loan and the remainder of the funds were provided by other parties (the "Lenders"). The Exchangeable Loan carries an interest rate of 10% per-annum payable semi-annually in arrears and is exchangeable into Rusoro shares at C$1.25 (the "Rusoro Embedded Derivative"). The loan component is measured at amortised cost, whilst the Rusoro Embedded Derivative is separately fair valued (note 24).

 

There is no significant concentration of credit risk with respect to trade and other receivables. The Group has implemented policies that require appropriate credit checks on potential customers before granting credit. The Group has adopted a policy of only dealing with creditworthy counterparties. The Group's exposure and credit ratings of its counterparties are monitored by the Board of Directors. The maximum credit risk of such financial assets is represented by the carrying value of the asset.

 

The Directors consider that the carrying amount of trade and other receivables approximates their fair value.

 

 

21.          Cash and cash equivalents

 




2009

2008




US$'000

US$'000

Cash at bank and in hand



18,607

22,792

Short-term bank deposits



57,344

3,652

Promissory notes and other liquid investments



516

-




76,467

26,444

 

 

22.      Trade and other payables

 




2009

2008




US$'000

US$'000

Trade payables



17,871

11,519

Advances from customers



2,487

1,772

Advances received on resale and commission contracts (a)



5,222

7,438

Accruals and other payables



38,799

21,413




64,379

42,142

(a)    Amounts included in advances paid on resale and commission contracts at 31 December 2009 and 31 December 2008 relate to services performed by the Group's subsidiary, Irgiredmet, in its activity to procure materials such as reagents, consumables and equipment for third parties.

 

The Directors consider that the carrying amount of trade and other payables approximates their fair value.

 

 

23.      Borrowings

 



2009

US$'000

2008

US$'000

Borrowings at amortised cost




Convertible bonds (a)


-

140,663

Exchangeable bonds (b)


-

162,863

Bank loans (c)


95,546

60,198

Other loans


-

10,000



95,546

373,724





Amount due for settlement within 12 months


11,944

220,946

Amount due for settlement after 12 months


83,602

152,778



95,546

373,724

 

(a)    In August 2005, the Group issued US$140 million of convertible bonds due on 11 August 2010. The convertible bonds were issued at par by the Company's wholly owned subsidiary, Peter Hambro Mining Group Finance Limited, and were guaranteed by the Company. The convertible bonds carried a coupon rate of 7.125% payable semi-annually in arrears and could be converted into fully paid Ordinary Shares of the Company at the price of 724pence per share. If not converted or previously redeemed the convertible bonds would be redeemed at par on maturity.

 

The net proceeds received from the issue of the convertible bonds were split between the liability component and the equity component of US$1.6 million  representing the fair value of the embedded option to convert the liability into equity of the Group. The liability component of the convertible bonds was measured at amortised cost. The interest charged for the year was calculated by applying an effective interest rate of 8.3% to the liability component. The fair value of the liability component of the convertible bonds at 31 December 2008 amounted to US$160.6 million, calculated using cash flows discounted at a rate based on the weighted average external borrowings rate of 12%.

 

Following satisfaction of the conditions precedent, in November 2009 the Group exercised its option to redeem all of the outstanding convertible bonds prior to their final maturity date. Bondholders holding a total of US$139.8 million of the nominal amount of the convertible bonds elected to convert their bonds into Ordinary Shares of the Company (note 27).

 

(b)    On 19 October 2007, the Group issued US$180 million of bonds, exchangeable, at the discretion of the bond holder, into the cash equivalent of (in aggregate) 180,000 Troy ounces anytime from 19 October 2009 (the second anniversary of the issue date of the exchangeable bonds) until 30 September 2012 (20 days prior to the maturity of the exchangeable bonds). The exchangeable bonds were issued at par by the Company's wholly owned subsidiary, Peter Hambro Mining Group Finance Limited, and were guaranteed by the Company. The bonds carry a coupon rate of 7% per annum payable semi-annually in arrears.

 

The exchangeable bonds were measured at amortised cost and include embedded derivatives which are separately fair valued (note 24). The carrying value of the liability component of the exchangeable bonds approximated its fair value at 31 December 2008. The interest charged for the year was calculated by applying an effective interest rate of 10.56% to the liability component measured at amortised cost.

 

During the year ended 31 December 2009, the Group purchased a total of $127 million nominal amount of its 7% exchangeable bonds at an average price of US$95.00 plus accrued interest, a total of US$51.9 million nominal amount at an average price of US$109.00 plus accrued interest and a total of US$1.1 million nominal amount at an average price of US$104.00 plus accrued interest.  The net gain on redemption of the exchangeable bonds of US$23.7 million recognised during the year as part of financial income was comprised of US$16.7 million excess of cash paid over the carrying amount of liability settled and US$40.4 million gain on unwinding of the embedded derivative financial liability upon redemption (notes 9, 24)

 

(c)    On 10 July 2009, the Group entered into a US$60 million loan facility with Sberbank. The loan bears an annual interest of 9.5%, which has been reduced to 9% starting from 1 January 2010 and further down to 8% starting from 1 March 2010, and is repayable between August 2010 and November 2013.

 

On 16 December 2009, the Group entered into an up to US$150 million loan facility with US$120 million committed by ING Bank, Unicredit Bank and Raiffeisenbank at that time. The loan bears interest rate of LIBOR plus 6.3% and is repayable between December 2010 and December 2012. In January 2010, Société Générale and BNP joined the facility as lenders and the aggregated amount committed was increased to US$150 million (note 38).

 

As at 31 December 2009, the amounts undrawn under the loan facilities comprised US$80.2 million (2008: all loan facilities have been fully drawn down).

 

All bank loans outstanding as at 31 December 2009 are secured against certain items of property, plant and equipment of the Group (note 16). Bank loans outstanding as at 31 December 2008 included liabilities of US$46.8 million which were secured against certain items of property, plant and equipment of the Group (note 16).

 

The carrying value of the bank loans and other loans approximated their fair value at each period end.

 

The weighted average interest rate paid during the year ended 31 December 2009 was 8% (2008: 12%)

 

 

24.      Derivative financial instruments



2009

US$'000

2008

US$'000

Derivative financial assets - Rusoro Embedded Derivative (a)




Fair value of the Rusoro Embedded Derivative at the beginning of the period and at inception


1,432

6,560

Fair value change


(1,338)

(5,128)



94

1,432





Derivative financial assets - Rusoro Call Option (a)




Fair value of the Call Option at the beginning of the period and at inception


443

1,780

Fair value change


(441)

(1,337)



2

443





Total derivative financial assets


96

1,875





Derivative financial liabilities - Exchangeable Bonds Embedded Derivatives (b)




Fair value of Gold Exchangeable Bonds Embedded Derivatives at the beginning of period


(41,400)

(30,634)

Fair value change


1,030

(10,766)

Reduction of the derivative financial liability upon redemption of exchangeable bonds (note 23)


40,370

-



-

(41,400)





Derivative financial liabilities - Foreign Currency Forward Contract (c)




Fair value of the foreign currency forward contract at the beginning of the period and at inception


(1,076)

-

Fair value change


(70)

(1,076)

Reduction of the derivative financial liability upon of settlement of the host contract


1,146

-



-

(1,076)





Total derivative financial liabilities


-

(42,476)

(a)    The derivative financial assets recognised at 31 December 2009 and 2008 relate to the Rusoro Embedded Derivative within the Exchangeable Loan and the Call Option.

 

Rusoro Embedded Derivative: The Exchangeable Loan issued to Rusoro on 10 June 2008 is exchangeable into Rusoro common shares at C$1.25, at any time from the 30th day after the Drawdown Date of the loan up to six days prior to the Repayment Date or up to the prepayment date in accordance with the loan agreement.

 

Call Option: On 10 June 2008, the Company entered into an option agreement with the other Lenders, the "Call Option", separate from the Exchangeable Loan, giving the Company the right to acquire from the other Lenders, at a price of C$2.20 per share, the Rusoro common shares which such other Lenders may receive upon exchange of their portion of the Exchangeable Loan. The Call Option may be exercised from the Drawdown Date to 3 June 2010 however may be shortened in the event that the Lenders exchange their portion of the Exchangeable Loan or if prepayment takes place.

 

(b)    Embedded derivatives within the US$180 million Gold Equivalent Exchangeable Bonds represented a written option to the bond holders and a cap which is held by the Group.

 

Written Option:  A written option for the bond holder to exchange their exchangeable bonds into cash equivalents at the time of exchange of (in aggregate) up to 180,000 Troy ounces of gold at any time from 19 October 2009 (the second anniversary of the issue date of the exchangeable bonds) until 30 September 2012 (20 days prior to the maturity of the exchangeable bonds). 

 

Cap: The Group has the option to call the exchangeable bonds at par plus accrued interest after 19 October 2011 (the fourth anniversary of the issue date) provided that the London afternoon gold price fixing reaches a level of US$1,500 per Troy ounce, with investors retaining the right to convert within the call period up to the 15th day before the date fixed by the call for redemption.

 

During the year ended 31 December 2009, the Group purchased all the outstanding US$180 million Gold Equivalent Exchangeable Bonds (note 23).

 

(c)    Forward contract to sell US$10 million at the agreed exchange rate between Russian Rouble and US Dollar on 22 April 2009.

 

The fair values of the derivative financial instruments are determined using appropriate valuation techniques based on market data.

 

25.          Deferred taxation

 

 

 


2009

2008


US$'000

US$'000

At 1 January

15,523

16,289

Deferred tax credited to income statement

13,444

(1,414)

Deferred tax arising on acquisition of subsidiaries (note 31)

59,423

648

Deferred tax charged to equity

(110)

-

Exchange differences

(20)

-

At 31 December

88,260

15,523 

 

Deferred tax assets

9,318

17,057

Deferred tax liabilities

(97,578)

(32,580)

Net deferred tax liability

(88,260)

(15,523)




 

 


At 1 January
2009

Credited/

(charged)

to the income statement

Credited/

(charged)

directly to equity

Acquisition of subsidiary

Exchange differences

At 31 December
2009

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Property, plant and equipment

19,569

3,286

-

59,362

(35)

82,182

Inventory

6,560

1,820

-

(239)

(24)

8,117

Capitalised exploration and evaluation expenditure

(2,664)

(916)

-

-

-

(3,580)

Derivative financial instruments

(11,067)

11,428

-

-

-

361

Exchangeable bonds

4,251

(4,251)

-

-

-

-

Exchangeable loan to Venezuela Holdings (BVI) Limited

(1,735)

1,735

-

-

-

-

Fair value adjustments

10,680

(681)

-

-

-

9,999

Tax losses

(6,518)

(801)

-

-

-

(7,319)

Other temporary differences

(3,553)

1,824

(110)

300

39

(1,500)

Total

15,523 

13,444

(110)

59,423

(20)

88,260

 

 

 

 

 

 

At 1 January
2008

Credited/

(charged)

to the income statement

Acquisition of subsidiary

At 31 December
2008

US$'000

US$'000

US$'000

US$'000

Property, plant and equipment

6,378

13,191

-

19,569

Inventory

3,660

2,900

-

6,560

Capitalised exploration and evaluation expenditure

(1,654)

(1,010)

-

(2,664)

Derivative financial instruments

(8,418)

(2,649)

-

(11,067)

Exchangeable bonds

5,030

(779)

-

4,251

Exchangeable loan to Venezuela Holdings (BVI) Limited

-

(1,735)

-

(1,735)

Fair value adjustments

12,905

(2,872)

647

10,680

Tax losses

-

(6,518)

-

(6,518)

Other temporary differences

(1,612)

(1,942)

1

(3,553)

Total

16,289

(1,414)

648

15,523 

 

The Group did not recognise deferred income tax assets in respect of tax losses comprising US$102.7 million (2008: US$17.9 million) that can be carried forward against future taxable income. Tax losses of US$34.5 million can be carried forward indefinitely. Tax losses of US$68.2 million substantially expire between 2015 and 2019.

 

The Group did not recognise deferred income tax assets of US$34.5 million (2008: nil) in respect of temporary differences arising on certain capitalised development 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 and interests in joint ventures as the Group is able to control the timing of the reversal of those temporary differences and does not intend to reverse them in the foreseeable future. Unremitted earnings comprised in aggregate US$386.2 million (2008: US$217.5 million). 

 

 

26.     Provision for close down and restoration costs

 


2009

2008


US$'000

US$'000

At 1 January

5,246

1,603

Acquisition of Aricom (note 31)

646

-

Unwinding of discount

382

236

Foreign exchange movements

67

-

Change in estimates

2,314

3,407(a)

At 31 December

8,655

5,246

(a)    Including provision for the close down and restoration costs for the Pioneer mine of US$2.4 million recognised following the Pioneer plant being put into operation in 2008.

 

The Group recognised provisions in relation to close down and restoration costs for the following mining sites:

 

 


Pokrovskiy mine

Pioneer mine

Kuranakh

Provision recognised, US$' 000

3,017 (2008: 2,716)

2,648 (2008: 2,530)

2,990

 

Expected timing of the closure of a mining operation and the cash outflows

at least 7 years from 31 December 2009

at least 10 years from 31 December 2009

at least 12 years from 31 December 2009





 

Provision recognised represents the present value of estimated expenditure that will be incurred arrived at using the long term risk-free pre-tax cost of borrowing. 

 

 

27.     Share capital

 

 


2009

2008


No of shares

 

US$'000

No of shares

US$'000

Authorised:





Ordinary Shares of £0.01 each

350,000,000


120,000,000







Allotted, called up and fully paid:





At 1 January

81,155,052

1,311

81,155,052

1,311

Issued during the period

100,924,715

1,494

-

-

At 31 December

182,079,767

2,805

81,155,052

1,311

Details of the Ordinary Shares in issue at the commencement of the period, Ordinary Shares issued during the period, and Ordinary Shares in issue at the period-end are given in the table below.

Date

Description

No of shares

 

1 January 2009

Number of Ordinary Shares in issue at the commencement of the year

81,155,052

10 February 2009

Issue of Ordinary Shares of £0.01 each following a Placing

16,000,000

22 April 2009

Issue of Ordinary Shares of £0.01 each following the Aricom Scheme of Arrangement

73,928,433

19 October 2009

Issue of Ordinary Shares of £0.01 each following the exercise of options (a)

156,250

29 October 2009

Issue of Ordinary Shares of £0.01 each following the conversion of the convertible bonds(b)

7,753

18 November 2009 - 8 December 2009

Issue of Ordinary Shares of £0.01 each following the conversion of the convertible bonds(c)

10,832,279

31 December 2009

Number of Ordinary Shares in issue at the end of the year

182,079,767

 

(a)   Options granted under the Share Option Scheme of Aricom plc to the Directors on 19 July 2006 which were exchanged for options over Ordinary Shares of the Company on the acquisition of Aricom plc.

(b)   Converted at the option of the bondholders.

(c)   Converted following the Group having exercised its option to redeem all the outstanding convertible bonds (note 23). 

 

The Company has one class of Ordinary Shares which carry no right to fixed income.

 

Warrants in issue

 

On the acquisition of Aricom plc, the Company issued 8,312,463 warrants in consideration for the transfer of the Aricom warrants to the Company (note 31). Each warrant confers the right to subscribe for one ordinary share of Petropavlovsk PLC at an exercise price of US$17.72, determined by reference to the exchange rate of US$1.384 : £1 to the exercise price of £12.80 which is an equivalent of the exercise price of £0.80 per Aricom warrant, adjusted by the exchange ratio of one Petropavlovsk warrant for every 16 Aricom warrants. These warrants expire on 9 June 2010.

 

Issue of options

 

On the acquisition of Aricom plc, the Company issued an option to IFC to subscribe for 1,067,273 Ordinary Shares at an exercise price of £11.84 per share, subject to adjustments, in exchange of an option previously issued by Aricom plc (note 31). The option expires on 25 May 2015, subject to adjustments. 

 

28.          Own shares

 


2009
US$'000

2008
US$'000

Balance at 1 January

-

-

Acquired during the year through business combination with Aricom plc

(14,003)

-

Balance at 31 December

(14,003)

-


Own shares represent
1,812,500 Ordinary Shares held by the Employee Benefit Trust ("EBT") to provide benefits to employees under the Long Term Incentive Plan (note 32). 

 

 

29.      Notes to the cash flow statement

 

(a)       Reconciliation of profit before tax to operating cash flow

 



2009

2008



US$'000

US$'000

Profit before tax


197,385

40,388





Adjusted for:




Share of results in joint ventures


(2,723)

1,261

Fair value change on derivatives


819

18,307

Financial income


(31,480)

(7,709)

Financial expenses


7,140

33,302

Share-based payments


2,933

-