Information  X 
Enter a valid email address

Petropavlovsk Plc (POG)

  Print      Mail a friend       Annual reports

Thursday 26 August, 2010

Petropavlovsk Plc

Half Yearly Report

RNS Number : 6610R
Petropavlovsk PLC
26 August 2010
 



NOT FOR RELEASE, PUBLICATION OR DISTRIBUTION IN, OR INTO, THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN

26 August 2010

HALF-YEAR REPORT FOR THE PERIOD ENDED 30 JUNE 2010

Petropavlovsk PLC ("Petropavlovsk", or the "Company" or, together with its subsidiaries, the "Group") is pleased to present its results for the six months ended 30 June 2010 (the "Period").

  

Financial Highlights

US$ million

6 months to 30 June


2010

(unaudited)

2009

(unaudited)

Year ended 31 December 2009

Group Revenue

195.7

214.1

472.3

Revenue from precious metals operations

181.3

194.4

430.6

Underlying EBITDA(1) before exceptional items(4)

50.0

115.9

229.0

Operating profit before exceptional items

10.7

92.5

178.4

Net (loss)/profit

(55.4)

74.6

144.8

(Loss)/earnings per ordinary share (basic, US$)

(0.31)

0.61

0.98

CAPEX

210.9

81.7

259.5

Cash

255.1

165.5

76.5

Borrowings

(380.6) (5)

(236.0)

(95.5)

Net debt

(125.5)

(79.1)

(19.1)

Operational Highlights

Total attributable gold production (000'oz) (2)

166.3

224.6

486.8

Gold sold (000'oz)

155.3

210.0

438.2

Average gold price received (US$/oz)

1,154

917

975

Pokrovskiy mine gold production (000'oz) (3)

59.4

91.7

190.1

Pokrovskiy mine total cash costs

(US$/oz) (3)

502

281

296

 Pioneer mine gold production 

(000'oz) (3)

89.9

118.1

234.1

Pioneer mine total cash costs 

(US$/oz) (3)

539

222

265

 

 

(1) Underlying EBITDA is profit for the Period before fair value changes, financial income, financial expenses, foreign exchange gains and losses, taxation, depreciation, amortisation and impairment (see note 24 to the Interim Financial Statements).

 

(2) 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 a 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.

 

(3) In H1 2009, some of the gold from the Pioneer deposit was processed through the Pokrovskiy mill. Pioneer gold processed through the Pokrovskiy mill is included in the Pioneer production figures.

 

(4) Exceptional items are those significant items of income and expense, which due to their nature or the expected infrequency of the events that give rise to these items should, in the opinion of the Directors, be disclosed separately to enable better understanding of the financial performance of the Group.

 

(5) Including US$380 million convertible bonds due in 2015, out of which US$320.3 million is shown within borrowings and US$59.0 million is shown within equity and representing the fair value of the embedded option to convert the liability into equity of the Group. 

 

Past performance of the Company and its shares is not a guide to future performance.

 

Financial Highlights

·          Gold production was 166,300oz, (-26% vs. H1 2009). The reduction in production was in large part attributable to the processing of lower grades while substantial stripping work of higher-grade areas was undertaken at both Pioneer and Pokrovskiy during the Period;

·          Underlying EBITDA before exceptional items for H1 2010 of US$50.0 million (-57% vs. H1 2009);

·          Operating profit before exceptional items of US$10.7 million (-88%  vs. H1 2009);

·          Cash costs per tonne of the ore processed at Pioneer decreased by 59% due to economies of scale which partially offset the effect of lower grade material processed through the mine;

·          Total cash costs of US$538/oz (+112% vs. H1 2009) mainly due to processing  significantly lower grades at Pokrovskiy and Pioneer;

·          Exceptional impairment provision of US$33.1 million against amounts invested in the Titanium Sponge Joint Venture due to uncertainty arising from Chinalco, the joint venture partners' decision not to proceed with the Titanium Sponge Joint Venture;

·          The Board has declared an interim dividend of 3 pence per share.The dividend will be paid on 29 October to shareholders on the register at 1 September 2010. 

 

Operational Highlights

·          The Malomir mine and plant successfully commissioned on time and on budget on 25 August 2010. The new plant is expected to achieve capacity of 55,000t/month by the end of September;

·          Pioneer's third production line successfully commissioned on time and on budget in April 2010, increasing the capacity of the Pioneer plant by 80% to 420,000t/month;

·        Kuranakh's first commercial shipment of titanomagnetite concentrate and ilmenite expected to be dispatched from the plant on 2 September 2010.

 

Development Highlights

·       Albyn's development is on schedule for the project's commissioning in H2 2011; the main equipment has been ordered and significant progress has been made in constructing the camp accommodation and the power line;

·           K&S's optimised and staged development plan for the iron ore project and exploration assets has been finalised. Appropriate funding and construction plans are advancing with Chinese parties although no binding commitments have yet been made;

·           Good progress was made with preparatory construction works at the K&S iron ore operation.

 

JORC Classified Gold Ore Reserves and Mineral Resources

·          Further modelling and updating of reserves and resources under the JORC Code (2004) ("JORC Code") was carried out by the Group's geologists together with consultants from Au Verdi and Wardell Armstrong International ("WAI");

·          An updated model for the Bakhmut North-East area of the Pioneer's deposit estimated  Proven and Probable gold reserves under the JORC Code of 10.2Mt of ore at an average grade of 1.32g/t (economic COG of 0.4g/t Au) with a stripping ratio of 6.7t/t;

·          A further Inferred Mineral Resource of c.246,000oz under the JORC Code was identified at Pioneer;

·          Yamal's Petropavlovskoye deposit has a new Datamine model withwhich estimated Proven and Probable Ore Reserves of 11.1Mt of ore under the JORC Code at an average grade of 1.1g/t of gold (economic COG of 0.4g/t Au) with a stripping ratio of 8.3 t/t;

·          A further Inferred Mineral Resource of c.176,000oz under the JORC Code was identified at the Petropavlovskoye deposit;

·          Vysokoye, in the Krasnoyarsk region, has an initial assessment estimated at 1.0 million oz of JORC Code-compliant Inferred Mineral Resources.

 

Exploration Highlights

·          A new ore column, similar to two other high grade ore columns previously identified in the Bakhmut North East zone at Pioneer, has been discovered. The average grades vary between 4.2g/t-11.4g/t for a thicknesses of 9.3m- 32m. The enriched area was followed for 240m and is open in all directions, with the highest grades up to 128g/t;

·          The newly discovered Nikolaevskaya ore zone at Pioneer is estimated at 200,000oz of Inferred Resources under the JORC Code;

·          At Albyn, a new mineralised area located 1km south of the central area was discovered, and the Sukhoi Log mineralised zone to the north of the central area has been linked to the previously mined Kharginskoye vein gold deposit; the main Albyn ore body was followed to the eastern boundaries of the licence area with visible gold found on the border of the existing licence area;

·          Exploration works at the Verkhnetisskaya licence area in the Krasnoyarsk region identified the highly prospective Olenka deposit with an initial assessment of c.580,000oz of reserves in the Russian Classification Category C2 at an average grade of 3.6g/t  and c.340,000oz of resources in Russian Classification Category P1 at an average grade of 3.7g/t;

·          Additional exploration work at K&S and Garinskoye is ongoing with exploration work at the latter expected to confirm the presence of additional magnetic anomalies close to the main pit, potentially increasing the size of the pit.

 

Corporate Highlights

·          In June 2010, the Group entered into a conditional agreement with a wholly-owned subsidiary of Asia Resources Fund Limited (managed by General Enterprise Management Services (International) Limited) and CEF Holdings Limited (50% owned by Canadian Imperial Bank of Commerce and 50% owned by Cheung Kong (Holdings) Limited) (together the Investors) for a total equity investment of US$60m into the Group's non-precious metals division, valuing these assets at US$860m following the investment. Completion of the investment is expected to occur on 26 August 2010. The Investors will have the option to put the investment back to Petropavlovsk after two years under certain circumstances or earlier in the case of certain trigger events;      

·          The Board of Directors continues to explore further strategic options for the non-precious metals division, including a possible listing on the Stock Exchange of Hong Kong Limited ("SEHK"). As part of this exploration, a listing application form (Form A1) has been submitted to the SEHK;

·          Good progress is being made in negotiations for the funding of Stage 1 of the K&S iron ore mining operation with Industrial and Commercial Bank of China (ICBC) and Sinosure, the Chinese State Export Credit Agency. Sinosure issued a letter of intent in June 2010 relating to insurance cover for up to 95% of the facility in relation to certain commercial and political risks;

·         The Company received US$101,236,184 in cash as a result of the exercise of warrants to subscribe for 5,755,326 new Ordinary Shares, at US$17.59 per Ordinary Share. The outstanding warrants lapsed on 9 June 2010 and were delisted on 21 July 2010;

·          In July 2010 the Group increased its total holding in ZAO ZRK Omchak to 90% after the acquisition of 32.5% and 7.5% of the issued capital of the Joint Venture from OAO Susumanzoloto and OAO Shkolnoye respectively. Accordingly Omchak has become a subsidiary of the Group.

 

Outlook

·          The H2 2010 production schedule for the remainder of the year is very challenging and the Group continues to work to reach the lower end of the 2010 gold production target of 670,000oz set out in the last production update. The principal risks involve maintaining continued success in the operation of Malomir and successful scheduling of Pioneer's mining capacity.

 

Chairman's Statement

"We have had a number of notable achievements in the first half: underlying EBITDA is positive, there has been a major upgrade in Pioneer's process capacity, the Kuranakh iron ore mine is in production, Malomir started to treat gold ore on 25 August, Albyn is on track for launch in 2011, good progress has been made with external funding for the iron ore assets at K&S and a Form A1 has been lodged with the Stock Exchange of Hong Kong Limited for the possible listing of our iron ore division. 

"In my view it is a remarkable success to have delivered a 417% increase in ore milled and a corresponding 59% decrease in costs per tonne at Pioneer, which is now a world-scale bulk tonnage operation with excellent reconciliation between predicted and recovered ounces.  At the same time, we have acquired an important new licence area around Pioneer, discovered a new high grade ore column at the Bakhmut area of Pioneer and have acquired approximately 7.4 million ounces of Russian Classification System reserves and resources in the Krasnoyask region."

"In addition, the proceeds of the convertible bonds that we issued in February have enabled us to advance the timing of our investment in gold and iron ore production at a time when both of these commodities are much in demand and at a good margin compared to our expected costs."

"Looking forward to the remainder of 2010, at the present time we are not expecting a material shortfall, more than 5%, in achieving our base case annual production target of 670,000oz. Pokrovskiy, following the completion of remedial works on the south pit wall, can now move back to higher grades. In addition to the new production capacity at Pioneer coming on stream and the successful commissioning of Malomir, the achievement of this target should be aided by increased attributable production from the Omchak Joint Venture following the increase in our stake in July 2010."

"In the mean time we should not forget that, historically, the Group has achieved a compound annual growth in production of 18% from 2004 to 2009, including 35% from 2007-2008, and that the delivery of the new processing circuits at Pioneer and the new mine at Malomir would mean a 38% production increase from 2009 to 2010."

 

 

Peter Hambro,

Chairman

 

 

CONFERENCE CALL 

 

There will be a conference call today, Thursday, 26 August 2010, at 10:00 BST. Details to access the call are as follows:

 

The dial-in telephone numbers will be:

 

In the UK:        0800 694 0257

In the USA:      1866 966 9439

In Russia:        8108 002 097 2044

 

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

 

The conference ID in all cases will be: 96149424.

 

A presentation to accompany the call will be available to view on the Company's website www.petropavlovsk.net.

 

Enquiries


Petropavlovsk PLC

+44 (0) 20 7201 8900

Alya Samokhvalova


Rachel Tuft




Merlin

+44 (0) 20 7726 8400

David Simonson


Fiona Crosswell


 

 

FINANCIAL REVIEW

 

 

 

FINANCIAL HIGHLIGHTS




6 months to 30 June


2010

2009


US$ million

US$ million

Group Revenue

195.7

214.1

Operating profit before exceptional items

10.7

92.5

Underlying EBITDA before exceptional items

50.0

115.9

Net (loss)/ profit

(55.4)

74.6

(Loss)/ earnings per ordinary share (basic)

(US$0.31)

US$0.61

 


30 June 2010

31 December 2009


US$ million

US$ million

Net debt

(125.5)

(19.1)

 

REVENUE

 


6 months to 30 June


2010

2009


US$ million

US$ million

Revenue

195.7

214.1

Including:



Revenue from precious metals operations

181.3

194.4

Revenue from other operations

14.4

19.7

 

Physical volumes of gold production and sales


6 months to 30 June


2010

2009


'000oz

'000oz

Gold sold from Pokrovskiy, Pioneer and alluvial operations

155.3

210.0

Movement in gold in circuit and doré-bars

1.4

5.2

Gold produced by subsidiaries of the Group

156.7

215.2

Gold produced by joint ventures and investments

9.6

9.4

Total attributable production

166.3

224.6

 

Group revenue during the Period was US$195.7 million, 9% lower than the US$214.1 million achieved in the first half of 2009.

 

The decrease in revenue was primarily attributable to a 7% decrease in revenue from the precious metals operations from US$194.4 million in the first half of 2009 down to US$181.3 million in the first half of 2010. Gold remains the key commodity produced and sold by the Group, comprising 93% of total revenue generated during the Period. The physical volume of gold sold decreased by 26% from 210,049oz in the first half of 2009 to 155,299oz in the first half of 2010, in line with a decrease in volumes of gold produced, which contributed to a US$50.2 million decrease in revenue from the precious metals operations. The effect of decrease in volume of gold sold was partially offset by the 26% increase in the Group's average gold price realised from US$917/oz in the first half of 2009 to US$1,154/oz in the first half of 2010, which contributed to a US$36.8 million offsetting increase in revenue from the precious metals operations.

 

There was also a reduction in revenue from other operations. This is primarily due to a decrease in revenue from services historically provided to Aricom from US$8.7 million in the first half of 2009 to nil in the current period as a result of such services becoming intra-group subsequent to Aricom being acquired on 22 April 2009. Revenue from other operations is mainly comprised of construction and engineering services of US$9.2 million and US$4.4 million generated by Irgiredmet from procurement of materials such as reagents and consumables and equipment for third parties.

 

EXCEPTIONAL ITEMS

 

The Group has decided to disclose separately exceptional items. Exceptional items are those significant items of income and expense, which due to their nature or the expected infrequency of the events that give rise to these items, should, in the opinion of the Directors, be disclosed separately to enable better understanding of the financial performance of the Group.

 

During the Period, the following items were considered exceptional:

 

·    US$33.1 million attributable to impairment against the amounts invested in the Titanium Sponge Joint Venture and related assets due to its joint venture partner, Chinalco, advising that it no longer wishes to proceed with the project as a consequence the building of the plant has been postponed and thus there is uncertainty as to the eventual outcome of the project.

 

·    US$2.4 million listing costs incurred in relation to the proposed listing of the Non-precious Metals Division in Hong Kong.

 

EBITDA, OPERATING PROFIT AND EXPENSES

 

 


6 months to 30 June


2010

2009


US$ million

US$ million

EBITDA before exceptional items

50.0

115.9

Depreciation, amortisation and impairment

(32.6)

(16.2)

Foreign exchange losses

(6.7)

(7.2)

Operating profit before exceptional items

10.7

92.5

 

Operating profit before exceptional items, as contributed by business segments, are set out below.

 


6 months to 30 June


2010

2009


US$ million

US$ million

Precious metals

65.5

124.0

Non-precious metals

(8.7)

(0.9)

Exploration

(3.4)

(1.7)

Construction and engineering

(0.8)

(1.5)

Other

(2.9)

(2.5)

Operating profit before exceptional items as contributed by business segments

49.7

117.4

Central Administration

(32.3)

(17.7)

Foreign exchange losses

(6.7)

(7.2)

Operating profit before exceptional items

10.7

92.5

 

Precious Metals Division

 

The results of the Precious Metals Division are set out below.

 

During the Period, the Precious Metals Division generated an operating profit before exceptional items of US$65.5 million compared to US$124.0 million in the first half of 2009. Lower volumes of gold sold during the period contributed to a US$36.3 million decrease in the operating profit. Total cash costs per ounce increased from US$254/oz in the first half of 2009 to US$538/oz during the Period, the effect of which was partially offset by the increase in average gold price realised resulting in a further net US$7.3 million decrease in operating profit. An increase in depreciation reflecting higher volumes of ore processed and reduction in grades of ore delivered resulted in a further US$12.9 million decrease in  operating profit.

 






6 months to 30 June


Pioneer

Mine

Pokrovskiy

Mine 

Alluvial Operations

Other

 2010

Total

2009

Total


US$ million

US$ million

US$ million

US$ million

US$ million

US$ million








 Physical volume of gold sold, '000oz

95.1

60.0

0.2

-

155.3

210.0








Revenue







Gold

109.8

69.2

0.2

-

179.2

192.6

Silver

1.8

0.3

-

-

2.1

1.8


111.6

69.5

0.2

-

181.3

194.4








Expenses







Operating cash expenses 

41.6

24.2

1.2

0.4

67.4

38.9

Refinery and transportation

0.9

0.5

-

-

1.4

1.5

Royalties

7.3

4.5

0.4

-

12.2

11.5

Other taxes

1.5

0.9

-

0.2

2.6

1.4

Total cash costs

51.3

30.1

1.6

0.6

83.6

53.3















Total cash cost per oz, US$

539

502

n/a(a)


538

254








Depreciation and amortisation





22.6

9.7

Impairment





3.7

2.7

Amortisation of deferred stripping costs





3.2

5.7








Operating expenses





113.1

71.4








Share of results in joint-ventures





 

(2.7)

 

1.0








Result of Precious Metals Division before exceptional items





 

65.5

 

124.0

(a)   The Group does not report cash cost per ounce of the alluvial operations as it is not representative in the first half of the year. Alluvial operations are seasonal with the production skewed towards the second half of the year. The Group includes results from all mines and operations within the Precious Metals Division for total cash cost calculation.

 

Non-Precious Metals Division and other segments

 

The Non-Precious Metals Division and other operations in total generated a loss before exceptional items of US$15.8 million compared to a US$6.6 million loss in the first half of 2009. US$3.5 million was attributable to operating expenses following commencement of operations at Kuranakh and a further US$1.4 million was attributable to an impairment charge against the amounts invested in the Group's associate, Uralmining through loans advanced due to uncertainty as to the eventual outcome of the Bolshoi Seym project undertaken by Uralmining.

 

Central administration expenses

 

The Group has head offices in London, Moscow and Blagoveschensk which represent the central administration function. Central administration expenses before exceptional items increased by US$14.6 million from US$17.7 million in the first half of 2009 to US$32.3 million in the first half of 2010. This was mainly due to the full six months overhead expenses of Aricom being included in the Group's consolidated results this period and other costs are in line with the second half of 2009.

 

FINANCIAL INCOME BEFORE EXCEPTIONAL ITEMS

 

 


6 months to 30 June


2010

2009


US$ million

US$ million

Interest income

2.7

3.6

 

The Group earned interest income on loans issued to Venezuela Holdings Limited, a subsidiary of Rusoro Mining Limited ("Rusoro") as well as joint ventures within the Precious Metals Division, the Omchak Joint Venture and Odolgo Joint Venture, and proceeds from the issue of the US$380 million convertible bonds due in 2015 (the "Bonds") placed on cash deposits with banks.

 

FINANCIAL EXPENSES

 


6 months to 30 June


2010

2009


US$ million

US$ million

Interest expense

19.8

13.8

Less interest capitalised

(9.1)

-

Other

0.4

0.1


11.1

13.9

 

Financial expenses decreased by US$2.8 million from US$13.9 million in the first half of 2009 to US$11.1 million in the first half of 2010. Interest expense for the Period was comprised of US$9.7 million effective interest on the Bonds after splitting out the embedded option to convert, US$7.5 million effective interest on the up to US$150 million facility and US$2.6 million interest on the Sberbank facility. A further US$9.1 million of interest expense was capitalised as part of mine development costs within property, plant and equipment (six months ended 30 June 2009: no interest was capitalised as part of mine development costs within property, plant and equipment).

 

TAXATION

 


6 months to 30 June


2010

2009


US$ million

US$ million

Tax charge

22.0

22.1

 

The Group pays current income tax under the UK, Russian and Cypriot tax legislation. The tax charge for the Period was US$22.0 million, arising primarily in relation to the precious metals operations. The high  tax charge relative to the consolidated losses before tax of US$33.4 million was primarily due to the current period tax losses represented by central administration costs, operating losses of the non-precious metals operations and other operations, for which no deferred income tax asset was recognised, the US$33.1 million impairment charge against amounts invested in the Titanium Sponge Joint Venture for which no tax relief was available and US$7.8 million foreign exchange effect on deferred tax.

 

During the Period, the Group made corporate tax payments in aggregate of US$10 million in Russia.

 

 

FINANCIAL POSITION AND CASH FLOWS

 




At 30 June

2010

At 31 December

2010


US$ million

US$ million

Cash and cash equivalents

255.1

76.4

Borrowings

(380.6)

(95.5)

Net debt

(125.5)

(19.1)

 

Key movements in cash and debt are set out below.

 

Reconciliation of net debt position

 


Cash

Debt

Net Debt


US$ million

US$ million

US$ million

As at 31 December 2009

76.4

(95.5)

(19.1)





Net cash used in operating activities

(30.4)

-


Interim dividend paid

(19.0)

-


Capital expenditure

(210.9)

-


Issue of US$380m convertible bonds

370.3(a)

(310.6)(b)


Amounts drawn down under up to US$150m facility (a)

18.2(c)

(19.5)


Repayment of up to US$150m facility (a)

(60.8)

60.8


Issue of Ordinary Shares

101.5

-


Other cash and non-cash movements, net

9.8

(15.8)(d)


 

As at 30 June 2010

255.1

(380.6)

(125.5)

(a)   Net of transaction costs

(b)   The net proceeds received from the issue of the convertible bonds were split between the liability component and the equity component of US$59 million representing the fair value of the embedded option to convert the liability into equity of the Group.

(c)   Including payment for US$1.3 million transaction costs unpaid as at 31 December 2009.

(d)   Interest expense, net of interest payments

 

Net cash outflows from operations comprised US$30.4 million, primarily reflecting US$47.7 million total EBITDA offset by US$61.3 million used to finance working capital and a further US$4.5 million interest payments and US$10.1 million income tax payments.

 

The Group's increased investment in working capital of US$61.3 million is analysed as follows:

 

·    US$34.4 million was invested in inventories, out of which US$15 million was attributed to 22,000oz of bullion in process and US$6 million to work in progress. Building of supplies at Kuranakh and Malomir in advance of commencement of operations and continuous development of projects resulted in a further US$11.5 million increase.

·    Accounts receivable increased by US$42.2 million, such increase was primarily attributable to fixed asset prepayment, advances to suppliers and VAT recoverable.

·    The effect of the above was partially offset by a US$15.3 million increase in trade and other payables, primarily attributed to the increase in trade and salaries payables.

 

In June 2010, holders of 5,755,326 warrants exercised their rights to subscribe for Ordinary Shares of the Company at an exercise price of US$17.59. Accordingly, the Group raised US$101.2 million, which was partially used to repay up to US$150 million facility with ING Bank, Unicredit Bank, Raiffeisenbank, Société Générale and BNP Paribas. In June 2010, the Group also issued an additional 25,000 shares under the employee share option scheme which resulted in a further US$0.3 million of cash raised. 

 

In February 2010, the Group issued US$380 million convertible bonds due in 2015. The Bonds were issued at par by the Company's wholly owned subsidiary, Petropavlovsk 2010 Limited, and are guaranteed by the Company. The Bonds carry a coupon of 4.00% payable semi-annually in arrears and are convertible into redeemable preference shares of Petropavlovsk 2010 Limited which are guaranteed and will be exchangeable immediately upon issuance for Ordinary Shares in the Company.

 

CAPITAL EXPENDITURE

 

The Group spent an aggregate of US$210.9 million on its gold and iron projects compared to US$81.7 million invested in the first half of 2009. The key areas of focus during the Period were on the development of Malomir and completion of the third stage of the Pioneer and Kuranakh projects and ongoing exploration related to the Pokrovskiy, Pioneer, Malomir and Albyn projects.

 


Exploration expenditure

Development expenditure

Other CAPEX investments

Total


US$ million

US$ million

US$ million

US$ million

Pokrovskiy

1.0

-

7.0

8.0

Pioneer

5.7

31.3

-

37.0

Malomir

4.6

60.1

-

64.7

Albyn

5.7

12.4

-

18.1

Other

8.7

-

13.9

22.6

Total spent on Precious Metals Division

25.7

103.8

20.9

150.4






Kuranakh

-

34.0

-

34.0

K&S

2.9

18.0

-

20.9

Other

1.0

1.1

3.5

5.6

Total spent on Non-precious Metals Division

3.9

53.1

3.5

60.5

Total

29.6

156.9

24.4

210.9

 

FOREIGN CURRENCY EXCHANGE DIFFERENCES

 

The principal subsidiaries have a US Dollar functional currency. Foreign exchange differences arise on translation of monetary assets and liabilities denominated in foreign currencies, which for the principal subsidiaries of the Group are Russian Rouble and GB Pounds Sterling.

 

The following exchange rates to the US dollar have been applied to translate monetary assets and liabilities denominated in foreign currencies.

 


30 June

2010

31 December

2009

GB Pounds Sterling (GBP: US$)

0.66

0.63

Russian Rouble (RUR : US$)

31.20

30.24

 

 

The Group recognised foreign exchange losses of US$6.7 million during the Period compared to US$7.2 million in the first half of 2009 arising primarily on Russian Rouble denominated net monetary assets and GB Pounds Sterling denominated net monetary liabilities.

 

POST BALANCE SHEET EVENTS

 

In July 2010, the Group entered into an agreement to acquire and completed the acquisition of 100% of the share capital of LLC Iljinskoye, holder of exploration and mining rights for the Vysokoye gold deposit, for a total cash consideration of US$35 million.

 

In July 2010, the Group entered into an agreement to acquire and completed the acquisition of 100% of the share capital of LLC Iljinskoye, holder of exploration and mining rights for Vysokoye gold deposit, for the total cash consideration of US$35 million.

 

In July 2010, the Group entered into agreements to acquire a further 40% in aggregate in the Omchak Joint Venture from the other joint venture partners for a total cash consideration of US$27 million. Accordingly, the Omchak Joint Venture has become a subsidiary of the Group.

 

On 25 August 2010, the Board of Directors approved an interim dividend of £0.03 per share which is expected to result in an aggregate payment of £5.6 million. The dividend will be paid on 29 October 2010 to the Company's shareholders on the register at the close of business on 1 October 2010.

 

COSTS

 

Pokrovskiy Mine

2010 6m

US$/oz

2009 6m

US$/oz

Operating cash expenses

404

212

Refinery and transportation cost

8

7

Cash operating costs

412

219

State Royalties

75

55

Other taxes

15

7

Total cash costs

502

281

 

During the first six months of the year, the Group sold 59,930oz of gold produced at Pokrovskiy at a total cash cost of US$502/oz, an increase of 79% compared to a total cash cost of US$281/oz in the same period in 2009.

The key cost drivers affecting the production costs were significantly lower grades of ore processed, Rouble inflation, fluctuations in the Rouble versus the US Dollar and somewhat higher mining, handling and processing costs per tonne of ore.

Compared to the first six months ended 30 June 2009 in Rouble terms, electricity prices increased by 16% and prices for chemical reagents and consumables were generally flat. In the meantime, prices for diesel increased by 12%. The effects of Rouble price inflation were enhanced by the appreciation of the Rouble against the US Dollar by 10%, with the average exchange rate for the Period dropping from 33.58 Roubles per US Dollar in the first six months of 2009 to 30.06 Roubles per US Dollar in the period ended 30 June 2010. These issues, together with the structural changes in the mining, handling and processing costs led to higher costs per tonne of ore processed. The volume of ore processed remained unchanged at 871,200 tonnes in the first six months of 2010.

As a result of the above factors and due to a significant decrease in grades of ore processed at Pokrovskiy, from an average of 4.2 g/t in the first half of 2009 to an average of 2.3 g/t in the first half of 2010, Pokrovskiy cash operating costs increased by 88% from US$219/oz in the period ended 30 June 2009 to US$412/oz in the comparable period ended 30 June 2010.

Refinery and transportation costs are variable costs dependent on production volume and royalties of 6% of the gold price. Other taxes not directly linked to production increased as the Group had lower production and sales volumes.

 

Pioneer Mine

 

2010 6m

US$/oz

2009 6m

US$/oz

Operating cash expenses

438

154

Refinery and transportation cost

9

7

Cash operating costs

447

161

State Royalties

77

54

Other taxes

15

7

Total cash costs

539

222

 

During the first four months of the year, Pioneer processed 1,661,000 tonnes of ore through the resin-in-pulp plant (RIP"), 417% up versus the first half of 2009, when the Pioneer RIP processed 321,000 tonnes. The increase was attributable to the commencement of the second line in September 2009 and third line in late April 2010. In the first half of 2009 only the first grinding circuit was in operation.

Much higher capacity of the plant and increased scale of the mining operations enabled the Group to significantly reduce the total cost per tonne of ore processed. Though average grades of 2.0 g/t processed at Pioneer during the first six months of the year were almost six times lower than in the comparable period of 2009 (when they were 11.3g/t), cash operating costs increased by less than three times.

The total cash costs were also affected by Rouble inflation and Rouble to US Dollar exchange rate movements, similar to the Pokrovskiy mine, as stated above.

As a result, the Group sold 95,126oz of gold produced at the Pioneer mine at a total cash cost of US$538/oz, a 142% increase, compared to a total cash cost of US$222/oz achieved in the comparable period of 2009, when the Group sold 109,428oz.

 

Outlook

The Company expects that the higher grades of ore scheduled to be processed in the second half of the year will have a positive effect on the cash operating cost per ounce.

 

Precious metals division

 

OPERATIONS

Pokrovskiy

During the Period, Pokrovskiy produced 59,396oz of gold and the Pokrovskiy plant treated lower grade material from Pokrovka-1 (Ozernoye ore body) and the Pokrovka-II pit (Olegovskoye ore body). In accordance with the mining schedule for the year, it is anticipated that, during the second half of the year, the Pokrovskiy plant will process higher grade ore of c.3.0-3.5g/t from the main Pokrovskiy pit. In preparation for this, mining works at Pokrovskiy during the first half of the year concentrated on stripping the southern wall of the pit in order to gain access to the rich ore of the main ore body. This stripping work has now been completed and small volumes of ore from the main pit have already been processed through the Pokrovskiy plant with the processing of larger volumes of this higher grade material to commence in September 2010.

Heap leach operations commenced at Pokrovskiy in May 2010 and 4,535oz of gold were recovered during the Period.

During the first half of the year, the Pokrovskiy mill operated steadily, processing 873,000t of ore at an average grade of 2.3g/t with recovery rates of 84.2%.

 

Operating results


6 months to 30 June

Units

2010

2009

Var. %

Mining operations


Total material moved

m³ '000

2,828

2, 641

7

Ore mined 

`000t

795

972

(18)

Average grade

g/t

2.2

2.8

(21)

Gold content

`000oz

55.7

87.5

(36)

Processing operations


Resin in Pulp Plant (RIP)


Total milled

`000t

873

870

0.3

Average grade

g/t

2.3

4.2

(45)

Gold content

`000oz

65.2

116.2

(44)

Recovery rate

%

84.2

83.9

0.4

Gold recovered

`000oz

54.9

97.5

(44)

Heap Leach (HL)


Ore stacked

`000t

337

311

8

Average grade

g/t

0.9

0.8

13

Gold content

`000oz

9.0

8.0

13

Recovery rate

%

49.2

44.0

12

Gold recovered

`000oz

4.5

3.6

25

Total





Gold recovered

`000oz

59.4

101.1

(41)

incl.





Pokrovskiy*

`000oz

59.4

91.7

(35)

Pioneer*

`000oz

0.0

9.4

(100)

* In H1 2009, some of the gold from the Pioneer deposit was processed through the Pokrovskiy mill. Pioneer gold processed through Pokrovskiy is included in Pioneer's production figures

 

Pioneer

During the Period, Pioneer produced 89,862oz of gold, compared with 118.000oz produced during the first six months of 2009.

Production during the Period was lower due to scheduled pre-stripping work to access the high-grade ore bodies at Andreevskaya and Bakhmut.  However, progress with this pre-stripping was delayed due to the late arrival of the first of three 15m3 capacity excavators ordered by the Group. This delay to the stripping work resulted in grades delivered to the mill being c.33% lower than budgeted (c.2g/t versus c.3g/t). The challenging schedule of mining works during the first half of the year was also adversely affected by extreme cold weather and subsequent minor flooding.

Remedial measures included the engagement of a mining contractor to mitigate problems caused by the delivery delay and acquisition of a number of additional dump trucks. Furthermore, the supplier provided two substitute 5m3 capacity excavators on a complimentary seven-month lease basis. It is anticipated that this stripping work will be finalised by September, after which mining and processing of the high-grade areas will commence.

Processing

During April 2010, the third milling line at Pioneer was successfully commissioned achieving designed production capacity in May 2010. This new line comprises a 7.5m SAG mill and two 4m x 6m ball mills.

Recovery rates achieved during the Period were slightly lower than those achieved during the first half of 2009 due to the introduction into the blend of new types of ore from the North-East Bakhmut area, which have slightly lower recoverability characteristics compared to the Andreevskaya ore. However, recovery rates are expected to average 90% for the year with the introduction of the Andreevskaya ore during the second half of 2010.

Heap leaching operations were commissioned at Pioneer towards the end of the Period. The Group plans to use this technology to process lower-grade ore (ore with an average gold content of 0.7g/t). During the second half of the year, the Group plans to process 300,000 tonnes of low-grade ore from Vostochnaya, a newly discovered deposit, using the heap leach operations.

 

Pioneer     


6 months to 30 June

Units

2010

2009

Var. %

Mining operations

Total material moved

`000 m3

7,707

 

3,503

120

Ore Mined

`000 t

1,706

399

328

Grade

g/t

2.1

10.1

(79)

Gold

`000oz

117.4

129.0

(9)

Processing operations

Total milled

`000t

1,661

321

417

Average grade

g/t

2.0

11.3

(82)

Gold content

 `000oz

107.2

116.6

(8)

Recovery rate

%

83.8

93.2

(10)

Gold recovered

 `000oz

89.9

108.7

(17)

 

Alluvial Production 

During the Period, attributable gold production from the Group's alluvial mining operations, OAO ZDP Koboldo, OOO Tokurskiy Rudnik and OOO Zeyazoloto, amounted to c.7,400oz. This figure represents an increase of c.37% compared to the same period in 2009. Extensive exploration of new alluvial sites was conducted during the Period. Results from this work indicate the potential to add to current gold reserves. 

 

Joint Ventures 

Omchak Joint Venture

In line with expectations, the Omchak joint venture produced 14,700oz of gold during the Period, of which 7,300oz were attributable to the Group. During the Period, Omchak carried out extensive exploration of three licence areas in Chita, an area that borders the Amur region. Exploration was also carried out on two licence areas in the Irkutsk region.

 

In July 2010, the Group entered into agreements to acquire a further 40% in aggregate in the Omchak Joint Venture from the other joint venture partners for a total cash consideration of US$27 million. Accordingly, the Omchak Joint Venture has become a subsidiary of the Group.

 

Odolgo Joint Venture and Priisk Solovyevskiy

During the Period, attributable gold production from the Odolgo joint venture and Priisk Solovyevskiy amounted to 2,300oz.

 

PROJECT DEVELOPMENT

Malomir

Processing of ore at Malomir, the Group's third major mining project, successfully began on 25 August 2010 with the commissioning of the first line of the plant to treat the non-refractory ore from the Quartzitovoye deposit.

During the Period, work at Malomir was progressing towards the commissioning of the plant. The construction of the plant and tailings dam was finalised and the construction of the administrative building and the new laboratory was completed. 349,000 m3 of material was moved and the mining fleet, consisting of 7 excavators, 23 trucks, 3 bulldozers and 3 drill rigs, was put into operation. In the third quarter the delivery of a further 10 VolvoA-40 trucks is expected.

 

The newly commissioned plant consists of a 5.5m x 1.8m SAG mill, two 3.2m x 5.4m ball mills and a sorption / desorption circuit with 200m3 tanks. Upon successful ramp-up, the capacity of the plant is expected to reach 55,000 tonnes of ore per month.

After commissioning of the plant in August 2010, works on construction of the second stage will continue with its commissioning planned for August 2011. The plant will treat high grade oxidised material from Quarzitovoye and the main Malomir deposits, where approximately 1.5 million tonnes of oxidised ore at an average grade of 2.08g/t has been identified on the surface.

 

Tokur

A bulk sample of 30 tonnes has been taken for metallurgical testing, to determine the optimum processing regime (gravitational / flotation / cyanide extraction) for the ore to be mined from the planned open pit. The first production of gold by treating waste dumps was achieved during the Period.

Albyn

During the Period, work at Albyn continued as planned in preparation for the project's commissioning, which is on-track for the second half of 2011. Construction of camp accommodation and a power supply line was undertaken, orders for the mining fleet were finalised and orders for key milling equipment were placed.

 

Yamal

Novogodnee Monto and Petropavlovskoye

A new detailed model with the assistance of a world leading geostatistician, Professor Isobel Clark, was developed for Petropavlovsk estimating the Petropavlovskoye deposit's Proven and Probable Ore Reserves at this zone to be 11.1Mt of ore under the JORC Code at an average grade of 1.1g/t of gold (economic COG of 0.4g/t Au) requiring that 91.2Mt of waste be removed to access the ore body at a stripping ratio of 8.3 (t/t). A further Inferred Mineral Resource of c.176,000oz under the JORC Code was also identified. This data will be used for preparation of detailed mine planning.

 

Acquisition OF NEW LICENCE AREAS

During the Period, a series of highly prospective licence areas were acquired by the Group in several regions of Russia.

Amur Region

Pioneer Flanks

The Alkaganskaya licence area adjacent to Pioneer provides highly prospective ground similar to the main Pioneer geology. The total licence area is c.470km2. The combined licence grants the Group mineral rights for exploration, exploitation and production of gold valid until 2035. The area is famous for rich alluvial mines but was not explored for primary deposits of gold. Four prospective high grade ore bodies located on the territory of the main Pioneer licence area extend towards the newly acquired territory.

 

Osezhinskaya area

The Osezhinskaya area, to the south west of Taldan, has two known ore occurrences and highly prospective geology. This new licence area is 349km2 and is close to the Federal road and the Trans-Siberian Railway. The area contains mainly Jurassic and Cretaceous sediment and volcanic rocks, and it is known to host epithermal vein deposits similar to Burinda. There are two known ore occurrences, Osezhinskoye (in the north-west of the area) and Tuparkovskoye (in the centre). Exploration project documentation is currently in preparation, for submission in August 2010.

 

Jewish Autonomous Region (EAO)

 

Sredneamurskaya area

 

This new 159km2 licence area was obtained by the Group in 2010. It is located close to the River Amur in the far south-west of the EAO. The estimated resource potential is 1.6 million oz of gold under the Russian Classification System. The area has been worked for placer deposits and geochemical aureoles suggest the presence of gold mineralisation.

 

Krasnoyarsk Region

 

Verkhnetisskaya area

 

The Verkhnetisskaya licence area occupies 50.3km2. Surveying works at this area established five geochemical anomalies. Trenching at the biggest anomaly has led to the discovery of the Olenka deposit. This deposit contains two main ore zones, each zone has been traced for about 700m along strike. Mineralisation in both zones is continuous. The eastern zone contains average gold grades in the region of 2-3g/t, while the western zone contains average gold grades of 5-6g/t. are. Preliminary estimates suggest 580,000oz of gold in Category C2 at 3.6g/t, 340,000oz of gold in Russian Category P1 at 3.7g/t and total estimated resources to be 2.2 million oz of contained gold.

 

Troyeusovskaya area

 

The Troyeusovskaya licence area lies immediately adjacent to the west of the Verkhnetisskaya licence area and occupies c.295km2. Previous surveying works have identified the presence of gold mineralisation at this area with gold ore bodies outcropping to the surface. It has the same geology as the Olenka deposit. The geology is favourable for the location of Olimpiada type of gold-sulphide mineralisation. The area has an estimated 2.6 million oz of resource potential under the Russian Classification System.

 

Visokaya area

 

The Visokoye deposit occupies an area of 15km2, and is located in the same geological structure as the Blagodatnoye deposit. A Datamine model for the deposit developed by the Company estimates 1 million oz of Inferred Resource under the JORC Code.

 

 

EXPLORATION

Pioneer

Exploration activity on the Andreevskaya zone is currently focused to the east of the open pit. The new Bakhmut North-East open pit is already 40m deep and the extraction of ore from the two parallel ore bodies is already underway. The latest exploration results identified a high grade ore zone to the east of the pit, indicating that open-pit mining will continue to be feasible further eastwards.  A new enriched zone has been intersected so far by three cross sections. The average grades at this area vary between 4.2g/t to 11.4g/t for thicknesses 9.3m to 32 m. The enriched area was followed for 240m and is open in all directions, with highest grades up to 128g/t.

 

Successful exploration works at the Bakhmut North-East zone of the Pioneer deposit allowed for  the addition to the Proven and Probable Ore Reserves at this zone of 11.1Mt of ore at an average grade of 1.1g/t of gold (economic COG of 0.4g/t Au) as derived by WAI under the guidelines of the JORC Code and based on a US$1,000/oz gold price and require that 91.2Mt of waste be removed to access the ore body at a stripping ratio of 8.3(t/t). A further Inferred Mineral Resource of c.180,000oz under the JORC Code was also identified.

 

The initial Datamine model for the newly discovered Nikolaevskaya zone was developed by the Company estimating 200,000oz of JORC compliant Inferred Resources of gold. The maximum grade is 13-14g/t after removal of visible gold. Infill sampling to a 40m grid is being carried out to upgrade the resource estimates to Russian reserve Category C1.

A new ore zone in the north-west of the licence area has been discovered, which is up to 50m thick, and which has been explored so far by trenching and shallow mapping holes. Grades are mainly in the range 0.4 to 3.8g/t and the zone has been traced laterally for 2.8km, but there is insufficient data yet for any resource estimation.

The Vostochnaya zone, adjacent and to the west of Yuzhnaya zone, has now been explored by drilling and by channel sampling of a pre-stripped area. It contains low-grade ore at shallow depths, and is located close to the mill; this ore is suitable for heap-leaching and for blending with higher grade Andreevskaya or Bakhmut ore for control of mill feed quality. Open pit development is about to commence.

A new licence has been received for a number of areas adjacent to Pioneer. It allows exploration and mining for an additional 1km-1.5km eastwards at the Bakhmut and Andreevskaya zones. Aerogeophysical surveys show a strong NE-SW anomaly in this direction to the south of the Pioneer licence, and include two or three exploration targets, as well as a potential southern extension of Yuzhnaya zone.

 

The Pokrovskiy Flanks

Velikie Luzhki

Resources in the 11 established ore bodies have now been estimated to Russian Classification Category P1. This is a preliminary estimate which includes both oxide and primary ore. A study of bulk samples has shown that the oxide ore can be treated with cyanidation. Mineralisation at Velikie Luzhki is located in crush zones cutting meta-siltstones and granite porphyry. Total resources estimated to 140m depth are about 225,000oz contained gold.

Zheltunak

Exploration work has now established that the western of the two main ore zones identified at Zheltunak contains ore distributed along a sub-horizontal thrust fault, which has been traced southwards to a depth of 65m and is open to the west and north-west.

The eastern area displays patchy mineralisation, with some high grades. The highest grades are found in two adjacent boreholes (80m apart) at a depth of 25m in each (8m thickness at 6g/t). It is possible that these two intersections represent the continuation of the same thrust surface.  Exploration is continuing with shallow drilling to test this interpretation.

 

Malomir

Quartzitovoye deposit

The Quartzitovoye zone open pit, exploiting the high grade ore body No.55, is now being actively developed, with ore being stockpiled in preparation for startup of the mill. The pit is currently at a depth of 20m. The ore zone dips at 75-80 degrees eastwards.

Diagonalnaya exploration area

Exploration has continued in the Magnetitovaya zone to the far eastern end of the licence area, 3km eastwards of Ozhidaemaya zone. This zone underlies the Diagonalnaya thrust. Two ore bodies have so far been identified, intersected by trenches. Intersections are 3m to 30m in thickness and the ore is similar to that in the main Malomir deposit, metasomatised crush zones, with arsenopyrite but with higher gold grades.

 

Albyn

Exploration has now reached the eastern margin of the licence area. Mineralisation continues without a break to this margin, with visible gold in drill holes. Moving from the central area, now well explored, eastwards, infill trenching (with spacing reduced from 160m to 40m) and drilling is progressively improving the confidence levels in the deposit model.

The main layer of metasomatic rocks (containing the gold mineralisation) hosts NE-SW trending quartz veinlets which are the likely location of much of the gold. Channel samples show gold grades averaging several grams per tonne across the whole thickness of this metasomatic layer.

A new zone, the Sukhoi Log deposit, has been established from exploration trenching, which is a cross-cutting (SW-NE) zone of mineralised fractures and veins passing through the old Kharginskoye deposit. 

About 1km south of the central Albyn area, intersected gold mineralization has been identified in one trench. This has been confirmed as an east-west zone, intersected by two further trenches (at 40m interval) to the west and three further trenches (also at 40m spacing) to the east.

 

Sagur-Semertak

This licence area of 90km2 is divided into two parts by the River Selemdja: Sagur on the east and the Semertak area on the west. It contains mainly metamorphic rocks. In the Sagur area a gold deposit was discovered in 1925, and was worked on for a number of years from 1944, with underground production of 3.5 tonnes of gold at grades of 5-7g/t.

In the 1950s gold-bearing quartz veins were identified, at thicknesses of 20-50cm, and grades of 10-20g/t. That exploration concentrated on sampling the veins and ignored the associated crush zones.

Current exploration by the Group is evaluating the gold potential of these crush zones in both the Sagur and Semertak areas.

Drilling has confirmed trench results with one 20m intersection averaging 1.5g/t , in a zone of crushing and thin veinlets (the surface trench intersection was 20m at 1g/t). The next trench confirmed this mineralised zone, with high gold grades in brecciated ore, with visible gold.

In the Semertak area, a number of mineralised zones are being explored, including those associated with the previously identified quartz veins.

A preliminary estimate of the gold potential is 2.5 tonnes up to 80m depth, in the Pokrovskaya zone, where grades typically around 5g/t have been found in mineralised crush zones.

In the Pridorozhnaya zone to the south-east of the Gerbichan intrusion, trenching has been started, and has intersected vein 88, with 7.2g/t gold in 0.7m quartz vein. New trenches have been dug in both NS and EW orientation, and ore intervals found at the southern end of a possible NS trending structure, where crush zones have been intersected with grades around 5g/t. This is brecciated contact between a vein and host rock, and visible gold has been identified in grains up to 2mm, with maximum sample grade of 58.5g/t.

 

Other Amur assets

Taldan / Burinda

Magnetic surveying indicates a northward extension of the Burinda structure, and this is confirmed by the location of ore body No.10; samples collected during the geological mapping 2.5-3km north of this contain gold and high silver grades. Exploration is continuing in this direction. Resources of the Burinda deposit, at Russian Classification Category P1 (60% of which would qualify on exploration spacing criteria as Russian Classification Category C2 reserves) are estimated at c. 180,000oz of ore at 2.5g/t (450,000oz of contained gold).

Topazovskoye

Exploration has also continued here. There are an estimated 3.85 tonnes of gold resources classed as Russian Classification Category P1, and the deposit, although constrained northwards and eastwards by a village and cemetery, is open to the west and south. It is a different ore type from Burinda, with very low silver content but high (900) gold fineness.

Kirovskiy (Solovevskiy)

Exploration has concentrated on the Prirazlomnaya and Tsentralnaya zones. The Prirazlomnaya zone trends E-W and contains three main ore bodies, which have now been explored in trenches and drill holes. Average grades are in the range of 3-5g/t, but these ore bodies typically contain intervals of 2-3 metres thickness with much higher grades, up to 40-60g/t. Metallurgical samples have been tested from oxide, mixed, and primary ore. Oxide and mixed ores are easily processable by cyanide extraction, with recoveries above 90%. The primary ore also gives good cyanide recoveries, varying from 60% to 92%.

The Tsentralnaya zone lies immediately to the south of the intrusion. The structure of this area is complex and requires further exploration, but it appears that there is potential for enrichment areas at the intersection of the two sets of ore zones.

The main part of the Tsentralnaya zone is currently being explored by trenching and drilling and a number of mineralised zones have been intersected. Gold grades are typically in the range of 1-5g/t, with enriched sections (as in the Prirazlomnaya zone) up to 14g/t.

At the eastern end of Tsentralnaya zone, thick mineralised intervals have been intersected both in trenches and drill holes. At the surface the gold grades are low, but at depth, high grade intervals appear, with sample grades up to 30g/t.

 

Yamal assets

Novogodnee Monto, Petropavlovskoye and Toupugol-Khanmeishorskaya areas

During the first half of the year, detailed exploration work was conducted on the Petropavlovskoye deposit and its flanks. One high-grade intersection (10.72g/t) and several low-grade ore bodies (with grades of up to 2.1g/t) were identified in the northern flanks of the deposits.

A new metasomatite zone was identified at the north-west flank of the deposit. The estimated length of this zone is 400m, with thickness of 73.4m. Prognostic resources of gold in Russian Classification Category P1 are 675,000oz at an average grade of 1.5g/t.

During the first six months of the year work at the Novogondnee Monto deposit concentrated on the stripping of 23,641m³ of topsoil and hard rock material from the area of the pit.

This year, exploration trenching and drilling have been resumed on Anomalnoye, Karyernoye, and other zones within the Toupugolskaya-Khanmeishorskaya area.

 

Zapadnoye deposit - Chromite

A final set of reserves estimates has been prepared, approximately twice as large as originally estimated, and the report is currently with GKZ in Moscow for approval.

 

Buryatia - Talikitskaya area

Drilling and trenching continued during the Period, and reserves in the Russian Classification System were identified. Central and Southern ore bodies are currently being estimated as Russian Classification Category C2 reserves. Preliminary estimates are resources of c.1.4 million oz of contained gold in the Russian Classification Category P2, and resources of c.2.6 million oz of contained gold in the Russian Classification Category P3, but the new work is expected to upgrade much of the Russian Classification Category P2 and some of the Russian Classification Category P3 material.

This project is planned as an underground mining operation: grades up to 20g/t are currently believed to be sufficient to allow profitable underground working. If this project proceeds to extraction, then there are other targets nearby, both within and beyond the current licence boundary, which merit exploration.

 

NON-PRECIOUS METALS DIVISION - OPERATIONS

Kuranakh

Following the successful commissioning of Kuranakh's processing plant in May 2010, the plant's primary ball mill and spiral classifier have been working at full capacity on low grade ore and waste in order to test the equipment and provide a base lining for the tailings dam.

The first ilmenite and magnetite concentrates were produced in June 2010. The first commercial shipment of concentrate from the Kuranakh titanomagnetite and ilmenite project is expected to be dispatched from the plant on 2 September 2010.

During H1 2010, mining operations continued with the development of the Saikta open pit. Mining operations at Saikta concentrated on bench development on the 740-680m elevations with ore being mined mainly from the 720m elevation.

The total amount of overburden moved in H1 2010 was 982,000m3 and the total amount of ore mined was 83,000t. The Kuranakh crushing and screening plant recommenced production of pre-concentrate in April 2010 and processed 139,000t of ore in H1 2010 producing 66,000t of pre-concentrate with a grade of 43.7%Fe. As at 30 June 2010, 63,900t of ore and 53,900t of pre-concentrate was stockpiled at the Kuranakh crushing and screening plant and the Olekma processing plant.

During the Period, the fleet of 40t capacity articulated mining trucks was replaced by a fleet of 55t capacity rigid mining trucks. The articulated trucks will be used to construct the new 4.5km haul road from the crushing and screening plant to the Kuranakh open pit. It is intended that during H2 2010, the EKG rope shovels will be replaced by two hydraulic shovels and one front end loader in order to achieve the full mining rate of 2.6Mt of ore per annum.

Two further accommodation blocks were completed in H1 2010 as was the laboratory and the medical centre. The light vehicle maintenance garage is under construction.

 

DEVELOPMENT

K&S

A significant amount of preparatory construction work took place at the K&S site during the first half of 2010, including completion of the administrative building and the first dormitory block and progress with the main haul road from the process plant to the Kimkan central pit. Clearance of the site for future construction was also undertaken, focusing on clearance of the Kimkan central pit area and the site of the processing plant. Exploration works also continued during the Period, focussing on the Kimkan area and the northern and southern sections of the Sutara area.

Garinskoye

In January 2010, the State Geological Committee approved the plan for additional geological exploration work at Garinskoye. This work will investigate additional magnetic anomalies close to the main pit, thought to represent further magnetite mineralisation, which would allow an increase in the size of the pit.

Chinalco Joint Venture

As a result of the acquisition of Aricom PLC in April 2009, the Group is a partner in a joint venture with Aluminium Corporation of China (Chinalco) that was intended to make use of  Ukrainian technology to produce titanium sponge from the Group's ilmenite production from Kuranakh.  To date, the Group has invested approximately US$21m in the joint venture, and a further US$16m in the titanium sponge processing technology, which was expected to be recharged to the joint venture. The Group has now learnt from its joint venture partner, Chinalco, that it no longer wishes to proceed with the project.  As a consequence, the building of the plant has been postponed and thus there is uncertainty as to the eventual outcome of the joint venture activities and the recoverability of the amounts invested to date. 

The Directors believe that the economics of the project remain robust and accordingly the Company is currently reviewing its options.  One option may be to continue with the project alone and another to accept a different joint venture partner.

As a result, the Directors have concluded that the level of uncertainty resulting from Chinalco's withdrawal calls for the Company to make a provision of US$33m against its investment in the project.

 

EXPLORATION

Kuranakh

Kuranakh and Saikta

The evaluated deposits so far are the two westernmost: Kuranakh and Saikta, each of similar ore tonnage, though geometrically different: Kuranakh has a greater strike length but thinner ore zones than Saikta. The first mine to be developed is Saikta, which is ramping up to a full production rate of 2.6m tonnes/year of ore.

Saikta contains a total of seven identified parallel ore zones. The ore in Saikta and Kuranakh contains both vanadium (typically 0.2 - 0.5% V2O5) and chromium (0.4% Cr2O3), both in the titanomagnetite.

 

Kimkan and Sutara

Kimkan and Sutara form a chain of deposits striking north-south 120km west of Birobidjan in the EAO.

Geologically the deposits are banded iron formations, of Proterozoic age, similar to such deposits elsewhere, such as in the Hamersley region of Western Australia.  They consist of finely layered iron ore and quartzite, sometimes with intensive micro-folding, and also tightly folded on a large scale. The iron ore is a fine-grained mixture of magnetite and haematite.

 

Kostenginskoye

This deposit is of the same banded iron formation type, and lies a further 24km south of Sutara.

 

Garinskoye

This deposit is, like Kimkan and Sutara, of Proterozoic age. It is located in the central Amur region. It was discovered in 1949 and first explored in the 1950s by drill holes, trenches, and underground trial workings to a depth of 200m.

A magnetic survey of the entire area was carried out during 2008-2009, and has identified extension of the deposit to the south-west as well as a possibility of additional parallel ore bodies to the south of the main deposit. There is also a major magnetic anomaly sub-parallel to the north of Garinskoye, and of much greater length than the known deposit.

 

Exploration potential

While Garinskoye itself is potentially a major deposit with potentially many years of mine production, there are other significant exploration targets within the licence area. There is a significant sub-parallel anomaly 3km to the north of the Garinskoye deposit which merits exploration, and other intense magnetic anomalies elsewhere which should also be investigated.

 

Deposit modelling

The Company is moving to using Datamine software for its deposit modelling, with the assistance of Dr Simon Ingram of AuVerdi Capital as well as consultants from Wardell Armstrong International. The Group has also now retained the full-time services of Professor Isobel Clark on a long-term contract. Professor Clark is a world-leading geostatistician with extensive experience in deposit modelling and resource estimation of gold, iron, and other minerals. The Group's independent geological adviser, Dr Stephen Henley strongly endorses this appointment and considers that Professor Clark's participation in the deposit modeling is a very positive step.

 

LABORATORIES

In February 2010, the Group's laboratories supporting mineral exploration were separated from those serving the mining operations.

 

An analytical centre was established which includes: a central assaying and analytical laboratory, a laboratory for soil analysis, the Tokur assaying/analytical laboratory, and an environmental monitoring laboratory. The Analytical Centre has prepared material for standard samples, from ores obtained from the Group's deposits, and in the first half of the year these samples successfully passed the certification procedures of VIMS and Irgiredmet institutes. The Analytical Centre is also involved in international comparative tests, which confirm its high rating among the other laboratories in Russia.

The modernised laboratory at the Pokrovskiy mine is operating successfully, providing analytical services for the processing plants and mines and also includes a research laboratory.

 

The laboratory at Malomir is at the commissioning stage. The laboratory has been built taking into account the introduction of all the processing lines of the mining complex and is provided with modern equipment. Assays will be performed by Australian methods, to carry out environmental monitoring a set of instruments has been acquired, providing complete control of the air in the working area, as well as water and sewage. In the analytical centre two months 'internship' training has been provided for Malomir laboratory staff. Assayers and chemical analysts have been trained at the Pokrovsky Mining College.

 

All the Group's laboratories of the are constantly engaged in inter-laboratory comparison tests on analysis of the various elements according to their area of accreditation.

 

CORPORATE UPDATE

In light of the Group's performance during the Period, the Board has declared an interim dividend of £0.03 per share payable on 29 October to shareholders on the register at 1 October 2010.  Going forward, the Board will continue to evaluate the possibility of paying both interim and final dividends to shareholders.

 

PRESIDENTIAL VISIT

In July 2010, the Russian President, Dmitry Medvedev, honoured Petropavlovsk with a visit to its metallurgical test plant in Blagoveshchensk, Amur Region. During his visit the President took part in a ceremony via video conference to celebrate the launch of the new Kuranakh iron ore processing facility and the third processing line at Pioneer.

 

PRINCIPAL RISKS AND UNCERTAINTIES

The Group is exposed to a variety of risks and uncertainties which could significantly affect its business and financial results.  The Group's view of the principal risks that could impact it for the remainder of the current financial year are substantially unchanged from the ones set in the 2009 Annual Report.  A comprehensive review of the key risks facing the Group is set out on pages on pages 47 to 51 of the 2009 Annual Report which is available on the Group's website www.petropavlovsk.net.  A summary of these key risks are set out below:

 

·     Legal and regulatory risks

·     Political risk

·     Gold and iron-ore price risk

·     Risk of restatement of reserves

·     Currency risks

·     Technology risk

·     Exploration and development risks

·     Human resources and labour risks

·     Risks arising from joint venture relationships

·     Risks relating to licences and permits

 

Specific key risks that may affect the Group during the remainder of the year relate to:

 

1.   Successful ramp up and continued  production at the Malomir plant:

 

Processing of ore at Malomir began on 25 August 2010, with the commissioning of the first line of the plant to treat the non-refractory ore from the Quartzitovoye deposit.  Performance in the second half is dependent on the successful ramp-up and continued production. 

 

2.   The delivery of expected excavation equipment  at Pioneer

 

A further delay to the delivery of the excavators at Pioneer would have an adverse impact on the Group's business and results. 

 

This should not be regarded as a complete or comprehensive list of all potential risks that the Group may experience. In addition, there may be additional risks currently unknown to the Group and other risks, currently believed to be immaterial, which could turn out to be material and significantly affect the Group's business and financial results.

 

IMPORTANT INFORMATION

 

Past performance of the Company and its shares is not a guide to future performance.

 

The material set forth herein is for informational purposes only and does not constitute an offer of securities for sale in the United States or any other jurisdiction.  The securities referred to herein have not been and will not be registered under the United States Securities Act of 1933, as amended (the "Securities Act"), or the laws of any state, and may not be offered or sold within the United States except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state laws.  No public offering of securities will be made in the United States.

 

Forward-looking statements

This release may include statements that are, or may be deemed to be, "forward-looking statements". These forward-looking statements can be identified by the use of forward-looking terminology, including the terms "believes", "estimates", "plans", "projects", "anticipates", "expects", "intends", "may", "will" or "should" or, in each case, their negative or other variations or comparable terminology, or by discussions of strategy, plans, objectives, goals, future events or intentions. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this release and include, but are not limited to, statements regarding the Group's intentions, beliefs or current expectations concerning, among other things, the Group's results of operations, financial position, liquidity, prospects, growth, strategies and expectations of the industry.  

By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Forward-looking statements are not guarantees of future performance and the development of the markets and the industry in which the Group operates may differ materially from those described in, or suggested by, any forward-looking statements contained in this release. In addition, even if the development of the markets and the industry in which the Group operates are consistent with the forward-looking statements contained in this release, those developments may not be indicative of developments in subsequent periods. A number of factors could cause developments to differ materially from those expressed or implied by the forward-looking statements including, without limitation, general economic and business conditions, industry trends, competition, commodity prices, changes in law or regulation, currency fluctuations (including the US dollar and Rouble), the Group's ability to recover its reserves or develop new reserves, changes in its business strategy, political and economic uncertainty.  Save as required by the Listing and Disclosure and Transparency Rules, the Company is under no obligation to update the information contained in this release.

 

Responsibility Statement

 

We confirm that to the best of our knowledge:

 

(a)          the condensed set of financial statements has been prepared in accordance with IAS 34 "Interim Financial Reporting";

 

(b)          the interim management report includes a fair review of the information required by DTR 4.2.7R (indication of important events during the first six months and description of principal risks and uncertainties for the remaining six months of the year); and

 

(c)          the interim management report includes a fair review of the information required by DTR 4.2.8R (disclosure of related parties' transactions and changes therein).

 

 

By Order of the Board

 

 

 

Peter C P Hambro                               Brian Egan

Director                                                  Director

 

Independent Review Report to Petropavlovsk PLC

 

We have been engaged by the Company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2010 which comprises the condensed consolidated interim income statement, the condensed consolidated interim statement of recognised income and expense, the condensed consolidated interim statement of changes in equity, the condensed consolidated interim balance sheet, the condensed consolidated interim cash flow statement and related notes 1 to 24. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the Company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting," as adopted by the European Union.

 

Our responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2010 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Services Authority.

 

 

 

Deloitte LLP

Chartered Accountants

London, United Kingdom

26 August 2010

 

Condensed Consolidated Interim Income Statement

 

 

 

Notes

Six months to 30 June 2010

(Unaudited)


Six months to 30 June 2009

(Unaudited)


Year ended 31 December 2009



Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items

Total



US$' 000

US$' 000

US$' 000


US$' 000

US$' 000

US$' 000


US$' 000

US$' 000

US$' 000














Group revenue


195,698

-

195,698


214,082

-

214,082


472,331

-

472,331














Net operating expenses

5

(182,205)

(35,421)

(217,626)


(122,478)

(4,486)

(126,964)


(296,696)

(4,494)

(301,190)



13,493

(35,421)

(21,928)


91,604

(4,486)

87,118


175,635

(4,494)

171,141














Share of results of joint ventures


(2,759)

-

(2,759)


862

-

862


2,723

-

2,723

Operating profit/ (loss)


10,734

(35,421)

(24,687)


92,466

(4,486)

87,980


178,358

(4,494)

173,864














Fair value change on derivatives


(402)

-

(402)


1,999

-

1,999


(819)

-

(819)

Financial income

8

2,738

-

2,738


3,598

23,131

26,729


7,764

23,716

31,480

Financial expenses

9

(11,054)

-

(11,054)


(13,904)

-

(13,904)


(7,140)

-

(7,140)

Profit/ (loss) before taxation


2,016

(35,421)

(33,405)


84,159

18,645

102,804


178,163

19,222

197,385

Taxation

6

(22,025)

-

(22,025)


(22,129)

(6,029)

(28,158)


(45,260)

(7,341)

(52,601)

(Loss)/ profit for the period


(20,009)

(35,421)

(55,430)


62,030

12,616

74,646


132,903

11,881

144,784














Attributable to:













Equity shareholders of Petropavlovsk PLC


(20,729)

(35,421)

(56,150)


61,601

12,616

74,217


131,313

11,881

143,194

Non-controlling interests


              720  

-

             720  


429

-

429


1,590

-

1,590














(Loss)/ earnings per share













Basic

7

(US$0.11)

(US$0.20)

(US$0.31)


US$0.51

US$0.10

US$0.61


US$0.90

US$0.08

US$0.98

Diluted

7

(US$0.11)

(US$0.20)

(US$0.31)


US$0.50

US$0.09

US$0.59


US$0.88

US$0.08

US$0.96

 

The accompanying notes are an integral part of this condensed consolidated interim financial information. 

 

 

Condensed Consolidated Interim Statement of Recognised Income and Expense 

 



Six months to

30 June
2010

(Unaudited)

US$'000


Six months to

30 June
 2009

(Unaudited)

US$'000


Year ended
31 December
 2009

 

US$'000








(Loss)/ profit for the period


(55,430)


74,646


144,784








Income and expense recognised directly in equity:







Revaluation of available-for-sale financial investments


(1,351)


(344)


(464)

Exchange differences on translation of foreign operations


(1,595)


(1,516)


158

Net expense recognised directly in equity


(2,946)


(1,860)


(306)








Total recognised (loss)/ income for the period


(58,376)


72,786


144,478








Attributable to:







Equity shareholders of Petropavlovsk PLC


(58,959)


72,123


142,520

Non-controlling interests


583


663


1,958








 

The accompanying notes are an integral part of this condensed consolidated interim financial information. 

 

 

Condensed Consolidated Interim Statement of Changes in Equity

 


Total attributable to equity holders of the Company




Share

capital

Share premium

Merger reserve

Own shares

Retained earnings

Convertible bond

reserve

Share based payments reserve

Translation reserve

Other  reserves

Total

Non-controlling interests

Total equity


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 2009

1,311

35,082

-

-

144,210

 

1,583

-

-

153,728

335,914

6,412

342,326

Recognised income/(expense)

-

-

-

-

74,217

-

-

(1,750)

(344)

72,123

663

72,786

Transfer to retained earnings (a)

-

-

-

-

153,728

-

-


(153,728)

-

-

-

Share based payments

-

-

-

-

-

-

697

-

-

697

-

697

Share placing - 16 million ordinary shares

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

1,079

-

570,071

-

-

-

-

-

-

571,150

-

571,150

Warrants and option issued in relation to acquisition of Aricom plc

-

-

-

-

-

-

-


6,969

6,969

-

6,969

LTIP award in relation to acquisition of Aricom plc

-

-

-

-

-

-

934

-

-

934

-

934

Own shares acquired through  business combination with Aricom plc

-

-

-

(14,003)

-

-

-

-

-

(14,003)

-

(14,003)

Acquisition of shares in subsidiaries

-

-

-

-

-

-

-

-

-

-

4,214

4,214

Balance

at 30 June 2009 (Unaudited)

2,622

134,406

570,071

(14,003)

372,155

1,583

1,631

(1,750)

6,625

1,073,340

11,289

1,084,629

Recognised income/(expense)

-

-

-

-

68,977

-

-

1,540

(119)

70,398

1,295

71,693

Share based payments

-

-

-

-

-

-

2,637

-

-

2,637

-

2,637

Conversion of convertible bonds

180

139,620

-

-

1,583

(1,583)

-

-

-

139,800

-

139,800

Employees' options exercised

3

1,716

-

-

421

-

(421)

-

-

1,719

-

1,719

Acquisition of shares in subsidiaries

-

-

-

-

-

-

-

-

-

-

(714)

(714)

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

Recognised (expense)/ income

-

-

-

-

 (56,150) 

-

-

(1,458)  

(1,351)

(58,959)

583

(58,376)

Dividends

-

-

-

-

(19,003)

-

-

-

-

(19,003)

-

(19,003)

Share based payments

-

-

-

-

-

-

972

-

-

972

-

972

Vesting of Replacement LTIP

-

-

-

3,328

(68)

-

(3,260)

-

-

-

-

-

Employees' options exercised

3

246

-

-

-

-

(21)

-

-

 228

-

228

Issue of convertible bonds

-

-

-

-

-

59,032

-

-

-

 59,032

-

59,032

Exercise of warrants

83

101,152

-

-

-

-

-

-

-

101,235

-

101,235

Balance

at 30 June 2010 (Unaudited)

2,891

377,140

570,071

(10,675)

367,915

59,032

1,538

(1,668)

5,155

1,371,399

12,453

1,383,852

(a)    Following cancellation of the Share Premium Account of the Company on 25 August 2005, the amount of US$176,722 thousand was transferred to Other Distributable Reserves. The balance of US$153,728 thousand outstanding at 31 December 2008 had become distributable and was transferred to the Profit and Loss Account Reserves of the Company and shown as part of the consolidated Retained Earnings. 

 

The accompanying notes are an integral part of this condensed consolidated interim financial information. 

 

Condensed Consolidated Interim Balance Sheet

 


Note

At 30 June

2010

(Unaudited)

U$'000


At 30 June

2009

(Unaudited)

US$'000


At 31 December 2009

 

US$'000

Assets







Non-current assets







Goodwill


21,675


21,675


21,675

Intangible assets

10

109,600


144,512


104,029

Property, plant and equipment

11

1,219,691


868,668


1,065,490

Interests in joint ventures


16,052


28,565


31,886

Available-for-sale investments


2,191


3,530


3,543

Inventories

12

9,983


17,063


8,628

Trade and other receivables

13

8,539


6,862


8,856

Deferred tax assets


9,038


11,254


9,318



1,396,769


1,102,129


1,253,425








Current assets







Inventories

12

135,699


87,142


101,630

Trade and other receivables

13

187,340


129,164


140,505

Derivative financial instruments


179


1,239


96

Cash and cash equivalents

14

255,062


165,478


76,467



578,280


       383,023


318,698








Total assets


1,975,049


1,485,152


1,572,123








Liabilities







Current liabilities


 


 



Trade and other payables

15

(87,810)


(51,281)


(64,379)

Current income tax liabilities


(3,128)


(3,910)


(6,201)

Borrowings

16

(16,998)


         (78,677)


(11,944)

Derivative financial instruments


(484)


 (8,655)


-



(108,420)


(142,523)


(82,524)








Net current assets


469,860


240,500


236,174















Non-current liabilities







Borrowings

16

(363,594)


(157,275)


(83,602)

Deferred tax liabilities


(110,387)


(94,637)


(97,578)

Provision for close down and restoration costs


(8,796)


(6,088)


(8,655)



(482,777)


(258,000)


(189,835)








Total liabilities


(591,197)


(400,523)


(272,359)








Net assets


1,383,852


1,084,629


1,299,764








Equity







Share capital

20

2,891


2,622


2,805

 

Share premium


377,140


134,406


275,742

Merger reserve


570,071


570,071


570,071

Treasury shares


(10,675)


(14,003)


(14,003)

Convertible bond reserve


59,032


1,583


-

Share based payments reserve


1,538


1,631


3,847

Translation reserve


(1,668)


(1,750)


(210)

Other reserves


5,155


6,625


6,506

Retained earnings


367,915


372,155


443,136

Equity attributable to the shareholders of Petropavlovsk PLC


1,371,399


1,073,340


1,287,894

Non-controlling interests


12,453


  11,289


11,870








Total equity


1,383,852


1,084,629


1,299,764

 

The accompanying notes are an integral part of this condensed consolidated interim financial information. 

This condensed consolidated interim financial information was approved by the Directors on 26 August 2010.

 

 

 

 

Peter C P Hambro                               Brian Egan

Director                                                  Director

 

 

Condensed Consolidated Interim Cash Flow Statement

 


 



 

Notes

Six months to

30 June
 2010

(Unaudited)

US$000

Six months to

30 June
 2009

(Unaudited)

US$000

Year to

31 December 2009

US$000

Cash flows from operating activities





Cash (used in)/ generated from operations

17

(15,887)

67,537

188,213

Interest paid


(4,454)

(14,724)

(24,401)

Income tax paid


(10,082)

(11,777)

(24,203)

Net cash (used in)/from operating activities


(30,423)

41,036

139,609






Cash flows from investing activities





Acquisitions of subsidiaries, net of cash acquired


-

229,358

224,996

Purchase of property, plant and equipment and exploration expenditure


(210,917)

(81,688)

(259,510)

Proceeds from disposal of property, plant and equipment


500

257

801

Purchase of available-for-sale investments


-

(3,048)

(3,048)

Investments in joint ventures


(2,021)

-

(2,021)

Loans granted


(907)

(2,513)

(12,740)

Repayment of amounts loaned to other parties


10,206

707

9,517

Interest received


2,500

1,536

3,542

Net cash (used in)/from investing activities


(200,639)

144,609

(38,463)






Cash flows from financing activities





Proceeds from issuance of Ordinary Shares,

net of transaction costs


101,484

99,556

101,275

Buy back of exchangeable bonds


-

(120,650)

(178,365)

Repayments of borrowings


(60,832)

(24,065)

(70,513)

Issue of convertible bonds due 2015,

net of transaction costs

16

370,290

-

-

Proceeds from borrowings


18,843

-

96,786

Dividends paid to Company's shareholders


(19,003)

-

-

Net cash from/(used in) financing activities


410,782

(45,159)

(50,817)






Net increase in cash and cash equivalents in the period


179,720

140,486

50,329

Effect of exchange rates on cash and cash equivalents


(1,125)

(1,452)

(306)

Cash and cash equivalents at beginning of period

14

76,467

26,444

26,444

Cash and cash equivalents at end of period

14

255,062

165,478

76,467

 

The accompanying notes are an integral part of this condensed consolidated interim financial information. 

 

Notes to the Interim Financial Statement for the period ended 30 June 2010

 

1.         General information

 

Petropavlovsk PLC (the "Company") is a company incorporated in Great Britain and registered in England and Wales. The address of the registered office is 11 Grosvenor Place, London SW1X 7HH.

 

These condensed consolidated interim financial statements are for the six months ended 30 June 2010. The interim financial statements are unaudited.

 

The information for the year ended 31 December 2009 does not constitute statutory accounts as defined in section 434 of the Companies Act 2006. This information was derived from the statutory accounts for the year ended 31 December 2009, a copy of which has been delivered to the Registrar of Companies. The auditors' report on those accounts was not qualified and did not include reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report and did not contain a statement under section 498(2) or 498(3) of the Companies Act 2006.

 

2.         Basis of preparation

 

The annual financial statements of the Company and its subsidiaries (the "Group") for the year ended 31 December 2009 were prepared in accordance with IFRSs as adopted by the European Union.

 

The condensed set of financial statements included in this half-yearly financial report has been prepared using accounting policies consistent with those set out in the annual financial statements for the year ended 31 December 2009 and in accordance with IAS 34 'Interim Financial Reporting', as adopted by the European Union.

 

Changes in accounting policies

 

Starting from 1 January 2010, the Group has adopted International Financial Reporting Standard 3 "Business Combinations" (revised 2008) and International Accounting Standard 27 "Consolidated and Separate Financial Statements" (revised 2008).

 

The most significant changes to the Group's previous accounting policy for business combinations and accounting for changes in non-controlling interests are as follows:

 

§ acquisition related costs which previously would have been included in the cost of a business combination are included in administrative expenses as they are incurred;

 

§ any pre-existing equity interest in the entity acquired is re-measured to fair value at the date of obtaining control, with any resulting gain or loss recognized in profit or loss;

 

§ any changes to the Group's ownership interest subsequent to the date of obtaining control are recognized directly in equity, with no adjustment to goodwill; and

 

§ any changes to the cost of an acquisition, including contingent consideration, resulting from an event after the date of an acquisition are recognized in profit or loss. Previously, such changes resulted in an adjustment to goodwill.

 

The changes in accounting policies did not affect these condensed consolidated interim financial statements as the Group did not enter into business combinations during the six months ended 30 June 2010 as well as there having been no changes to the cost of acquisitions made prior to 1 January 2010.

 

Exceptional items

 

The Group has adopted disclosure of exceptional items. Exceptional items are those significant items of income and expense, which due to their nature or the expected infrequency of the events that give rise to these items should, in the opinion of the Directors, be disclosed separately to enable better understanding of the financial performance of the Group.

 

Comparatives

 

Certain comparatives for the six months ended 30 June 2009 have been re-classified to ensure comparability with the classifications adopted in the interim financial statements for the six months ended 30 June 2010 and the year ended 31 December 2009, including the disclosure of exceptional items. 

 

Going concern

 

The Directors have reviewed the Group's cash flow forecasts and operating projections for the period to the end of December 2011 as part of their consideration of going concern. These forecasts are primarily susceptible to fluctuations in gold price and price for iron ore concentrate over the next 18 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 and available cash at 30 June 2010.

 

After making appropriate inquiries, the Directors have a reasonable expectation that the Group has 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.

 

3.         Foreign currency translation

 

The following exchange rates to the US dollar have been applied to translate balances and transactions in foreign currencies:

 

 


As at

30 June

2010

Average

six months ended

30 June 2010

As at

30 June
 2009

Average

six months ended

30 June 2009

As at

31 December
2009

Average

year ended

31 December 2009

GB Pounds Sterling (GBP: US$)

0.66

0.66

0.61

0.67

0.63

0.63

Russian Rouble (RUR : US$)

31.20

30.06

31.29

33.58

30.24

31.99

 

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 Precious metals 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 Non-precious metals 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. The Engineering Segment includes exploration works undertaken 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 undertaken 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 pentoxide and related products in China as well as various other projects.

 

Segment information about the Group's reportable segments is presented below. 

4.         Segmental information (continued)

 

Six months to 30 June 2010

 


Precious

metals  

Non-precious

metals

Exploration

Construction and Engineering

Other

Consolidated


US$'000

US$'000

US$'000

US$'000

US$'000

US$' 000








Gold sales

          179,182  

-

-

-

-

     179,182

Silver sales

              2,113  

-

-

-

-

        2,113

Other external sales

-

-

           166  

        9,219  

          5,018  

       14,403

Total Group revenue from external customers

          181,295  

-

166

9,219  

          5,018  

     195,698








Inter-segment sales

                990  

          1,664  

       20,992  

       59,480  

        28,869  

     111,995








Net operating expenses before exceptional items

           (113,022)  

(8,656)

(3,553)

(10,075)

(7,895)

(143,201)

Share of results in joint ventures

             (2,759)  

-

-

-

-

             (2,759)

Segment result before exceptional items

65,514  

              (8,656)  

           (3,387)  

               (856)  

(2,877)

49,738

Exceptional items

-

-

-

-

(33,052)

(33,052)

Segment result

65,514  

              (8,656)  

           (3,387)  

               (856)  

           (35,929)  

16,686

Central administration (a)





  

      (34,657)

Foreign exchange losses






     (6,716)

Operating loss






(24,687)

Fair value change on derivatives






          (402)

Financial income






        2,738

Financial expenses






     (11,054)

Taxation






     (22,025)

Loss for the period






     (55,430)

 

(a)    Unallocated income and expenses include exceptional items of US$ 2.4 million within central administration (note 5)

 


Precious

metals

Non-precious

metals

Exploration

Construction and engineering

Other

Consolidated


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Segment Assets

          983,599  

       515,213  

       27,520  

       86,910  

      108,419  

  1,721,661

Goodwill






       21,675

Deferred tax assets






        9,038

Derivative financial instruments






179

Unallocated cash






     202,914

Loans given






       19,582

Consolidated total assets






1,975,049








 

4.         Segmental information (continued)

 

Six months to 30 June 2009

 


Precious

metals  

Non-precious

metals

Exploration

Construction and Engineering

Other

Consolidated


US$'000

US$'000

US$'000

US$'000

US$'000

US$' 000








Gold sales

192,580

-

-

-

-

192,580

Silver sales

1,817

-

-

-

-

1,817

Other external sales

46

-

1,037

10,606

7,996

19,685

Total Group revenue from external customers

194,443

-

1,037

10,606

7,996

214,082








Inter-segment sales

3,277

-

9,577

32,257

13,886

58,997








Net operating expenses before exceptional items

(71,409)

(954)

(2,749)

(12,081)

(10,323)

(97,516)

Share of results in joint ventures

1,014




(152)

862

Segment result before exceptional items

124,048

(954)

(1,712)

(1,475)

(2,479)

117,428

Exceptional items

-

-

-

-

-

-

Segment result

124,048

(954)

(1,712)

(1,475)

(2,479)

117,428

Central administration (a)






(22,226)

Foreign exchange losses






(7,222)

Operating profit






87,980

Fair value change on derivatives






1,999

Financial income (a)






26,729

Financial expenses






(13,904)

Taxation (a)






(28,158)

Profit for the period






74,646

 

(a)    Unallocated income and expenses include exceptional items of US$ 4.5 million within central administration (note 5), US$ 23.1 million within financial income (note 8) and US$6.0 million within tax charge (note 6)

 


Precious

metals

Non-precious

metals

Exploration

Construction and engineering

Other

Consolidated


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Segment Assets

681,901

393,903

17,053

69,673

113,176

1,275,706

Goodwill






21,675

Deferred tax assets






11,254

Derivative financial instruments






1,239

Unallocated cash






146,213

Loans given






29,065

Consolidated total assets






1,485,152








 

4.         Segmental information (continued)

 

Year ended 31 December 2009

 


Precious

metals

Non-precious

metals

Exploration

Construction and Engineering

Other

Consolidated


US$'000

US$'000

US$'000

US$'000

US$'000

US$' 000








Gold sales

426,956

-

-

-

-

426,956

Silver sales

2,856

-

-

-

-

2,856

Iron sales

-

-

-

-

-

-

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 before exceptional items

(181,461)

(6,456)

(5,800)

(22,455)

(25,050)

(241,222)

Share of results in joint ventures

2,470

-

-

-

253

2,723

Segment result before exceptional items

251,623

 

(6,456)

(3,292)

(2,210)

(5,833)

233,832

Exceptional items

-

-

-

-

-

-

Segment result before exceptional items

251,623

 

(6,456)

(3,292)

(2,210)

(5,833)

233,832

Central administration (a)






(54,063)

Foreign exchange losses






(5,905)

Operating profit






173,864

Fair value change on derivatives






(819)

Financial income (a)






31,480

Financial expenses






(7,140)

Taxation (a)






(52,601)

Profit for the period






144,784

 

(a)        Unallocated income and expenses include exceptional items of US$ 4.5 million within central administration (note 5), US$ 23.7 million within financial income (note 8) and US$7.3 million within tax charge (note 6)

 


Precious

metals

Non-precious

metals

Exploration

Construction and engineering

All other

Consolidated


US$'000

 

US$'000

US$'000

US$'000

US$'000

US$'000

Segment Assets

808,100

432,512

15,885

74,129

123,157

1,453,783

Goodwill






21,675

Deferred tax assets






9,318

Derivative financial instruments






96

Unallocated cash






56,677

Loans given






30,574

Consolidated total assets






1,572,123








 

5.             Net operating expenses and income

 


 

Six months to 30 June 2010

Six months to 30 June 2009

Year ended 31 December 2009


Before exceptional items

Exceptional items

Total

Before exceptional items

Exceptional items

Total

Before exceptional items

Exceptional items

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Net operating expenses:










Cost of sales(a)

111,493

-

111,493

77,372

-

77,372

195,220

-

195,220

Impairment charges (b)

5,126

33,052

38,178

2,739

-

2,739

4,243

-

4,243

Administration expenses(c)

60,973

2,369

63,342

35,382

4,486

39,868

91,832

4,494

96,326

Foreign exchange losses

6,716

-

6,716

7,222

-

7,222

5,905

-

5,905

Other net operating income

(2,103)

-

(2,103)

(237)

-

(237)

(504)

-

(504)


   182,205  

 

35,421

   217,626  

122,478

4,486

126,964

296,696

4,494

301,190

 

(a)            


Six months to

30 June
2010

Six months to

30 June
2009

Year ended

31 December 2009


US$'000

US$'000

US$'000

Cost of Sales:




Staff costs

35,629

20,386

50,430

Fuel

10,941

6,301

15,944

Materials

28,002

18,751

43,131

Depreciation

20,644

7,619

27,587

Electricity

7,155

3,059

8,222

Royalties

12,268

11,499

24,353

Smelting and transportation costs

1,372

1,505

3,216

Selling and distribution

309

506

1,021

Movement in work in progress and finished goods attributable to production

(22,488)

(3,803)

(7,290)

Other costs

14,471

6,283

15,004

Goods for resale

3,190

5,266

13,602


111,493

77,372

195,220

 

(b) During the six months to 30 June 2010, the Company has been advised that its joint venture partner Chinalco no longer wishes to proceed with the Titanium Sponge Joint Venture.  To date the Group's share of amounts invested in the joint venture comprised approximately $22.6 million and a further $15.3 million on the titanium sponge processing technology, which was expected to be recharged to the joint venture. As a consequence the building of the plant has been deferred and there is uncertainty as to the eventual outcome of the joint venture activities and the recoverability of the amounts invested to 30 June 2010.  As a result, the directors have concluded that the most appropriate course of action is to provide for the impairment against the amounts invested in the amount of US$33.1 million. This impairment has been allocated to intangible assets (US$0.7million), property plant and equipment (US$14.6 million) and investment in joint ventures (US$17.8million). The impairment takes into account the recoverable value of the Group's share of the joint venture of $4.9 million which reflects the Group's 65% share of the cash within the joint venture, net of its liabilities. A number of alternatives are being considered by the Company, including the potential involvement of a new joint venture partner.

 

Following the decision to abandon exploration of the Gar-2 license area, associated exploration and evaluation costs of US$ 3.7 million previously capitalised within intangible assets were written off (six months ended 30 June 2009: following the expiration of the licence to explore the flanks of Tokur deposit and decision to abandon exploration, associated exploration and evaluation costs of US$ 2.7 million previously capitalised within intangible assets were written off; year ended 31 December 2009: following the expiration of the licence to explore the flanks of Tokur deposit and decision to abandon exploration, associated exploration and evaluation costs of US$ 2.7 million previously capitalised within intangible assets were written off, and following the decision to abandon exploration of Yarshor-Laptoyeganskaya zone of the Yamal deposits, associated exploration and evaluation costs of US$1.5 million previously capitalised within intangible assets were written off)

 

Due to uncertainty as to the eventual outcome of the Bolshoy Seym project being undertaken by the Group's associate Uralmining, the Directors have concluded that the most appropriate course of action is to provide for impairment against the amounts invested in the associate through loans advanced of US$1.4 million (six months ended 30 June 2009 and year ended 31 December 2009: nil).

 

5.             Net operating expenses and income (continued)

 

(c)


Six months to 30 June 2010

Six months to 30 June 2009

Year ended 31 December 2009


Before exceptional items

Exceptional items(a)

Total

Before exceptional items

Exceptional items(b)

Total

Before exceptional items

Exceptional items(b)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Administration expenses:










Staff costs

26,652

-

26,652

11,901

-

11,901

38,112

-

38,112

Depreciation

6,818

-

6,818

5,814

-

5,814

12,936

-

12,936

Professional fees

3,080

2,369

5,449

3,671

4,394

8,065

6,059

4,402

10,461

Bank charges

656

-

656

445

-

445

1,084

-

1,084

Insurance

2,644

-

2,644

1,024

-

1,024

3,175

-

3,175

Office rent

2,743

-

2,743

2,267

-

2,267

3,907

-

3,907

Travel and entertainment

3,052

-

3,052

1,252

-

1,252

5,332

-

5,332

Office cost

1,347

-

1,347

757

-

757

2,086

-

2,086

Allowance for bad debts

(47)

-

(47)

871

-

871

1,510

-

1,510

Other

14,028

-

14,028

7,380

92

7,472

17,631

92

17,723


60,973

2,369

63,342

35,382

 

4,486

39,868

91,832

4,494

96,326

 

(a) Costs incurred in relation to the proposed listing of Non-precious Metals Division in Hong Kong

(b) Costs incurred in relation to the admission of Petropavlovsk PLC to the main board of London Stock Exchange

 

6.         Taxation

 

 

Six months to 30 June 2010

Six months to 30 June 2009

Year ended 31 December 2009

 

Before exceptional items

Exceptional items(a)

Total

Before exceptional items

Exceptional items(a)

Total

Before exceptional items

Exceptional items a)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Current tax










UK current tax (28%)

                 47

-

47

729

-

729

(470)

-

(470)

Russian current tax (20%)

            

             8,573

-

8,573

17,561

-

17,561

39,627

-

39,627


8,620

-

8,620

18,290

-

18,290

39,157

-

39,157

Deferred tax










Reversal and origination of timing differences

           13,405

-

13,405

3,839

6,029

9,868

6,103

7,341

13,444

Total tax charge

22,025

-

22,025

22,129

6,029

28,158

45,260

7,341

52,601

 

(a) Tax impact of exceptional items. During the six months ended 30 June 2010, exceptional items were tax neutral (six months ended 30 June 2009 and year ended 31 December 2009: tax impact of exceptional items relates to deferred tax charge on redemption of exchangeable bonds).

7.         Earnings per ordinary share

 


Six

months to

30 June
2010

Six

months to

30 June
2009

Year ended

31 December 2009






US$'000

US$'000

US$'000

(Loss)/profit for the period attributable to equity holders of Petropavlovsk PLC

(56,150)

74,217

143,194

Before exceptional items

(20,729)

61,601

131,313

Exceptional items

(35,421)

12,616

11,881





Interest expense on convertible bonds, net of tax

-(a)

4,031

6,708

(Loss)/profit used to determine diluted earnings per share

(56,150)

78,248

149,902

Before exceptional items

(20,729)

65,632

138,021

Exceptional items

(35,421)

12,616

11,881






No of shares

No of shares

No of shares

Weighted average number of Ordinary Shares

181,094,131

121,599,705

146,701,446

Adjustments for dilutive potential Ordinary Shares:




Assumed conversion of convertible bonds, due 2010 and converted into Ordinary Shares in 2009

-

10,855,564

9,926,580

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

- (b)

-(b)

42,049

Weighted average number of Ordinary shares

for diluted earnings per share

181,094,131

132,455,269

156,670,075






US$

US$

US$

Basic (loss)/earnings per ordinary share:




Before exceptional items

(0.11)

0.51

0.90

Exceptional items

(0.20)

0.10

0.08


(0.31)

0.61

0.98

Diluted (loss)/earnings per ordinary share:




Before exceptional items

(0.11)

0.50

0.88

Exceptional items

(0.20)

0.09

0.08


(0.31)

0.59

0.96

 

(a)   Convertible bonds due 2015 which could potentially dilute basic earnings per Ordinary Share in the future were not included in the calculation of diluted earnings per share because they were anti-dilutive for the six months ended 30 June 2010.                       

(b)   Share options which could potentially dilute basic earnings per Ordinary share were not included in the calculation of diluted earnings per share becase they were anti-dilutive for the six months ended 30 June 2010 and 30 June 2009.                                                                       

As at 30 June 2010, 30 June 2009 and 31 December 2009, the Group had a potentially dilutive option issued to IFC to subscribe for 1,067,273 Ordinary Shares (note 20) which was anti-dilutive for the six months ended 30 June 2010 and 30 June 2009 and the year ended 31 December 2009 and therefore was not included in the calculation of diluted earnings per share.

 

During the six months ended 30 June 2010, the Group had 8,312,463 potentially dilutive warrants in issue until these were exercised during the period or otherwise lapsed unexercised on 9 June 2010 (30 June 2009 and 31 December 2009: 8,312,463) which were anti-dilutive for the six months ended 30 June 2010 and 30 June 2009 and the year ended 31 December 2009 and therefore were not included in the calculation of diluted earnings per share (note 20).

 

8.         Financial income

 


Six months to 30 June 2010

Six months to 30 June 2009

Year ended 31 December2009


Before exceptional items

Exceptional

 items

Total

Before

Exceptional

 items

Exceptional items (a)

Total

Before exceptional items

Exceptional items (a)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

Interest income

2,738

-

2,738

3,598

-

3,598

7,661


7,661

Gain on redemption of exchangeable bonds

-

-

-

-

23,131

23,131


23,716

23,716

Other finance income

-

-

-

-

-

-

103


103


2,738

-

2,738

3,598

23,131

26,729

7,764

23,716

31,480

 

(a)      During the six months to 30 June 2009, the Group purchased a total of $127.0 million nominal amount of its 7% exchangeable bonds at an average price of US$95.00 plus accrued interest. This resulted in a net gain of US$23.1 million recognised during the six months to 30 June 2009. Subsequent to 30 June 2009, The Group purchased a further total of US$51.9 million nominal amount of its 7% exchangeable bonds at an average price of US$95.00 plus accrued interest and US$1.1 million nominal amount at an average price of US$104.00 plus accrued interest. This resulted in an aggregate net gain of US$23.7 million recognised during the year ended 31 December 2009.

 

9.         Financial expenses

           



Six

months to

30 June
2010

Six

months to

30 June
2009

Year ended

31 December 2009



US$'000

US$'000

US$'000

Interest on bank and other loans


10,092

3,424

6,142

Interest on exchangeable bonds


-

4,759

6,048

Interest on convertible bonds


9,720

5,599

9,317



19,812

13,782

21,507

Interest capitalised


(9,143)

-

(14,749)

Unwinding of discount on environmental obligation


385

122

382



11,054

13,904

7,140

 

10.      Intangible assets

 


Yamal deposits

Flanks of Pokrovskiy

 

Kostenginskoye

Other(a)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2010

25,448

15,426

27,417

35,738

104,029

Additions

974

997

2

7,190

9,163

Impairment (b)

-

-

-

(4,384)

(4,384)

Transfer from mine development costs

-

-

-

792

792

At 30 June 2010

26,422

16,423

27,419

39,336

109,600

 

(a)      Represent amounts capitalised in respect of a number of projects in the Amur region.

(b)      See note 5

 

11.      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 2010

583,360

380,206

169,158

49,337

1,182,061

Additions (a)

125,175

15,653

4,498

48,860

194,186

Interest capitalized

9,143

-

-

-

9,143

Transfers to intangible assets

(792)

-

-

-

(792)

Transfers from capital construction in progress (b)

(160)

52,761

4,685

(57,286)

-

Transfers from mine development (c)

(70,507)

70,507

-

-

-

Disposals and other transfers

(101)

(563)

(1,297)

(1,833)

(3,794)

Reallocation

8,516

(1,014)

(7,058)

(444)

-

Exchange difference

-

-

(1,608)

(8)

(1,616)

At 30 June 2010

654,634

517,550

168,378

38,626

1,379,188







Depreciation and impairment






At 1 January 2010

1,516

81,663

33,392

-

116,571

Charge for the period

             2,394

              20,415

              7,198

-

30,007

Disposals

                          (58)

                        (436)

                           (967)

-

(1,461)

Reallocation

(17)

462

(445)

-

-

Impairment (d)

-

-

-

             14,572  

14,572

Exchange difference

-

-

                           (192)

-

(192)

At 30 June 2010

3,835

102,104

38,986

14,572

159,497







Net book value






At 1 January 2010

581,844

298,543

135,766

49,337

1,065,490

At 30 June 2010 (e)

650,799

415,446

129,392

24,054

1,219,691

 

(a)   Additions to Mine development costs include deferred stripping costs of US$6 million (30 June 2009: US$1.5 million and 31 December 2009: US$6 million), related to the Kuranakh iron ore deposit.

(b)   Following completion of the third stage of Pioneer development, associated construction costs were transferred to the mining and non-mining assets.

(c)   Following commencement of commercial production at Tokur, associated mine development costs were transferred to the mining assets.

(d)    See note 5

(e)    Property, plant and equipment with a net book value of US$30.7 million (30 June 2009: US$42.2 million and 31 December 2009: US$75.6 million) have been pledged to secure borrowings of the Group. The Group was not permitted to pledge these assets as security for other borrowings or sell them to another entity.

 

12.          Inventories

 

 

 

30 June
2010

30 June
2009

31 December 2009



US$'000

US$'000

US$'000

Current


 

 

 

Construction materials


13,556

9,604

11,181

Stores and spares


53,779

37,365

44,619

Work in progress


39,424

23,029

34,726

Deferred stripping costs


11,928

8,227

8,724

Bullion in process


17,012

8,917

2,380



135,699

87,142

101,630






Non-current





Work in progress(a)


9,983

17,063

8,628



9,983

17,063

8,628

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

 

13.      Trade and other receivables

 



30 June
2010

30 June
2009

31 December 2009



US$'000

US$'000

US$'000

Current





VAT recoverable


54,758

31,381

43,624

Prepayments for property, plant and equipment


66,104

12,397

41,635

Advances to suppliers


30,556

40,339

14,187

Trade receivables


6,942

6,404

3,779

Loan to Omchak Joint Venture


3,215

4,519

3,151

Exchangeable loan to Rusoro


7,665

15,603

17,863

Other loans receivable


605

2,222

1,469

Advances paid on resale and commission contracts


356

10,011

785

Interest accrued


901

576

467

Other debtors


16,238

5,712

13,545



187,340

129,164

140,505

Non-current





Loan to Odolgo Joint Venture


7,664

6,197

7,789

Other loans receivable


433

259

302

Other assets


442

406

765



8,539

6,862

8,856

 

14.      Cash and cash equivalents

 

 

 

30 June
2010

30 June
2009

31 December 2009

 

 

US$'000

US$'000

US$'000

Cash at bank and in hand

 

69,891

25,886

18,607

Short-term bank deposits

 

184,722

93,889

57,344

Money market funds (a)

 

-

45,067

-

Promissory notes and other liquid investments

 

449

636

516


 

255,062

165,478

76,467

(a)   Investments in money market funds were held for the purposes of diversification of risk. Accordingly, as these funds are available on demand and have insignificant risk of change in value they are classified as cash equivalents. The credit risk on money market funds is limited.  because the counterparties are investment funds with high credit-ratings assigned by international credit-rating agencies. These investment funds are managed in accordance with approved investment criteria, requiring that investments have certain credit ratings and limiting the concentration of investment in any one security.

 

 

 

 

30 June
2010

30 June
2009

31 December 2009

 

 

US$'000

US$'000

US$'000

Trade payables

 

22,559

15,844

17,871

Advances from customers


3,284

1,159

2,487

Advances received on resale and commission contracts

 

8,761

8,542

5,222

Accruals and other payables

 

53,206

25,736

38,799



87,810

51,281

64,379

 

16.      Borrowings

 


30 June
 2010

US$'000

30 June
 2009

US$'000

31 December 2009

US$'000

Borrowings at amortised cost




Convertible bonds due 2015 (a)

320,308

-

-

Convertible bonds due 2010

-

141,275

-

Exchangeable bonds

-

48,600

-

Bank loans

60,284

46,077

95,546


380,592

235,952

95,546





Amount due for settlement within 12 months

16,998

78,677

11,944

Amount due for settlement after 12 months

363,594

157,275

83,602


380,592

235,952

95,546

 

(a)    In February 2010, the Group issued US$380 million of convertible bonds due on 18 February 2015 ("the Bonds"). The Bonds were issued at par by the Company's wholly owned subsidiary Petropavlovsk 2010 Limited and are guaranteed by the Company. The Bonds carry a coupon of 4.00% payable semi-annually in arrears and are convertible into redeemable preference shares of Petropavlovsk 2010 Limited which are guaranteed by and will be exchangeable immediately upon issuance for Ordinary Shares in the Company. The conversion price has been set at £12.9345 per share, subject to adjustment for certain events, for each US$100,000 principal amount of a Bond and the conversion exchange rate has been fixed at US$1.6244 per £1. The Bonds were admitted to listing on the Official List of the UK Listing Authority and admitted to trading on the Professional Securities Market of the London Stock Exchange on 19 February 2010.

 

The net proceeds received from the issue of the convertible bonds were split between the liability component and the equity component of US$59 million representing the fair value of the embedded option to convert the liability into equity of the Group. The liability component of the Bonds is measured at amortised cost. The interest charged for the six months ended 30 June 2010 was calculated by applying an effective interest rate of 8.65% to the liability component.

 

17.      Cash flow analysis

 

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

 


Six

months to

30 June
2010

Six

months to

30 June
2009

Year ended

31 December 2009


US$'000

US$'000

US$'000

(Loss)/ profit before tax

       (33,405)

102,804

197,385

Adjustments for:




Share of results in joint ventures

              2,759

(862)

(2,723)

Fair value change on derivatives

                 402

(2,069)

819

Financial income

             (2,738)

(26,729)

(31,480)

Financial expenses

            11,054

13,904

7,140

Share-based payments

906

963

2,933

Depreciation

            27,462

13,433

40,523

Impairment charges

            38,178

2,739

4,243

Loss on disposals of property, plant and equipment

                (112)

226

230

Exchange losses/(gains) in respect of investment activity

              1,499

836

(844)

Exchange (gains)/losses in respect of cash and cash equivalents

              1,125

1,452

306

Other non-cash items

             (1,686)

2,760

520

Changes in working capital:




Increase in trade and other receivables

(42,205)

(31,036)

(24,322)

Increase in inventories

(34,468)

(8,449)

(13,313)

Increase/(decrease) in trade and other payables

15,342

(2,435)

6,796

Net cash (used in)/  generated from operations

(15,887)

67,537

188,213

 

 

 

(b)      Major non cash transactions

 

There have been no significant non-cash transactions during the six months ended 30 June 2010 (30 June 2009: the principal non-cash transactions were the issue of shares, share options and warrants as consideration for the acquisition of Aricom plc and 31 December 2009: the principal non-cash transactions were the issue of shares, share options and warrants as consideration for the acquisition of Aricom plc and conversion of convertible bonds into the Ordinary Shares of Petropavlovsk PLC)

 

18.      Analysis of net debt

 


At
1 January 2010

Net cash movement

Exchange movement

Non-cash changes

At

30 June 2010


US$'000

US$'000

US$'000

US$'000

US$'000

Cash and cash equivalents

76,467

179,720

(1,125)

-

255,062

Debt due within one year

(11,944)

4,318

7

(9,379)

(16,998)

Debt due after one year

(83,602)

(330,740)

35

50,713

(363,594)

Net debt

(19,079)

(146,702)

(1,083)

41,334

(125,530)

 

19.      Dividends



Six

 months to

30 June
2010

Six

months to

30 June
2009

Year ended

31 December 2009



US$'000

US$'000

US$'000

Amounts recognised as distributions to equity holders in the period:





Interim dividend for the year ended 31 December 2009  of £0.07 per share(a)


19,003

-

-



19,003

-

-

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

 

20.     Share capital

 


30 June 2010

30 June 2009

31 December 2009


No of shares

US$'000

No of shares

US$'000

No of shares

US$'000

Authorised







Ordinary shares of £0.01 each

350,000,000


350,000,000


350,000,000









Allotted, called up and fully paid







At 1 January

182,079,767

2,805

81,155,052

1,311

81,155,052

1,311

Issued during the period

5,780,326

86

89,928,433

1,311

100,924,715

1,494

At the end of the period

187,860,093

2,891

171,083,485

2,622

182,079,767

2,805

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 2010

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

182,079,767

11 June 2010

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

25,000

15 June 2010

Issue of Ordinary Shares of £0.01 each following the exercise of warrants(b)

5,755,326

30 June 2010

Number of Ordinary Shares in issue at the end of the reporting period

187,860,093

(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) On the acquisition of Aricom plc on 22 April 2009, the Company issued 8,312,463 warrants in consideration for the transfer of the Aricom warrants to the Company. Each warrant conferred the right to subscribe for one ordinary share of Petropavlovsk PLC at an exercise price of US$ 17.59, an equivalent of the exercise price of £0.80 per Aricom warrant, adjusted by the exchange ratio of one PHM warrant for every 16 Aricom warrants and subsequently adjusted for the Interim dividend declared in 2010. These warrants were due to expire on 9 June 2010 and the unexercised warrants lapsed on 9 June 2010

 

The Company has one class of Ordinary shares which carries no right to fixed income.

 

The Company has an option issued to the IFC on 22 April 2009 on acquisition of Aricom plc to subscribe for 1,067,273 ordinary shares at an exercise price of £11.84 per share, subject to adjustments. The option expires on 25 May 2015, subject to adjustments. 

21.      Related parties

 

Related parties the Group entered into transactions with during the reporting period

 

Aricom plc ("Aricom") and its subsidiaries were considered to be related parties due to Mr Peter Hambro, Mr Jay Hambro and Dr Pavel Maslovskiy's shareholdings and directorships in those companies and in Petropavlovsk PLC. On 22 April 2009, Aricom plc became a subsidiary of the Group and hence ceased to be a related party requiring disclosure.

 

OJSC Asian-Pacific Bank ('Asian-Pacific Bank'), V.H.M.Y. Holdings Limited, OJSC M2M Private Bank ('M2M Private Bank') and OJSC Kamchatprombank ('Kamchatprombank') are considered related parties as Mr Peter Hambro and Dr Pavel Maslovskiy have an interest in these companies.

 

OJSC Apatit ('Apatit'), a subsidiary of OJSC PhosAgro ('PhosAgro'), is considered to be a related party due to PhosAgro's minority interest and significant influence in the Group's subsidiary Giproruda.

 

OJSC Krasnoyarskaya GGK is considered to be a related party due to this entity's minority interest and significant influence in the Group's subsidiary Verhnetisskaya GRK.

 

Omchak Joint Venture, Odolgo Joint Venture, Titanium Joint Venture and Vanadium Joint Venture are joint ventures of the Group and hence are related parties.

 

Uralmining is an associate of the Group and hence is a related party.

 

Transactions with related parties the Group entered into during the six months ended 30 June 2010 and 30 June 2009 and the year ended 31 December 2009 are set out below.

 

 

Trading Transactions

 

Related party transactions the Group entered into that relate to the day to day operation of the business are set out below.

 


Sales to related parties

Purchases from related parties


Six months to

30 June 2010

Six months to

30 June 2009

Year

ended
31 December 2009

Six months to

30 June 2010

Six months to

30 June 2009

Year

ended
31 December 2009


US$' 000

US$' 000

US$' 000

US$' 000

US$' 000

US$' 000








Aricom and its subsidiaries (a)







Construction and engineering services

-

7,327

7,327

-

1,062

1,062

Exploration services

-

97

97

-

25

25

Other

-

1,325

1,325

-

1,464

1,464


-

8,749

8,749

-

2,551

2,551

Asian-Pacific Bank







Sales of gold and silver

         18,990  

-

33,946

-

-

-

Other

             572  

805

1,160

         1,215  

56

1,008


         19,562  

805

35,106

1,215  

56

1,008








Trading transactions with other related parties







Engineering services provided to Apatit

           1,969  

204

2,051

-

-

-

Exploration services provided from Krasnoyarskaya GGK

-

-

-

3,031

273

543

Rent, insurance and other transactions with other entities in which Mr Peter Hambro and/or Dr Pavel Maslovskiy have a controlling interest or exercise a significant influence

             247 

153

1,425

            907  

366

2,721

Joint ventures and associates

             113  

-

18

               2  

-

-


           2,329  

357

3,494

            3,940

639

3,264

(a)     Until 22 April 2009 when Aricom became a subsidiary of the Group

 

21.       Related parties (continued)

 

 

The outstanding balances with related parties at 30 June 2010, 30 June 2009 and 31 December 2009 are as follows:

 


Amounts owed by related parties

Amounts owed to related parties


30 June 2010

30 June 2009

31 December 2009

30 June 2010

30 June 2009

31 December 2009


US$' 000

US$' 000

US$' 000

US$' 000

US$' 000

US$' 000















Other entities owned by Mr Peter Hambro and/or Dr Pavel Maslovskiy

             118

-

928

         2,640

-

1,017

Apatit

             411

-

398

-

-

-

Krasnoyarskaya GGK

373

-

38

1,880

293

-

Joint ventures and associates

             -

-

2

-

-

-


           902

-

1,366

         4,520

293

1,017

 

 

Banking arrangements

 

The Group has current and deposit bank accounts with Asian-Pacific Bank.

 

The bank balances at 30 June 2010, 30 June 2009 and 31 December 2009 are set out below:

 


30 June

2010

30 June

2009

31 December

2009


US$' 000

US$' 000

US$' 000





Asian-Pacific Bank

         52,811

29,800

27,577

 

 

Financing Transactions

 

The Group previously received a number of loans from related parties details of which are set out below: 

 


Loans received from

related parties

Interest on loans received from

related parties 

Loan and interest amounts

owed to related parties


Six months to

30 June 2010

Six months to

30 June 2009

Year

ended
31 December 2009

Six months to

30 June 2010

Six months to

30 June 2009

Year

ended
31 December 2009

30 June 2010

30 June 2009

31 December 2009


US$' 000

US$' 000

US$' 000

US$' 000

US$' 000

US$' 000

US$' 000

US$' 000

US$' 000











V.H.M.Y. Holding Limited

-

-

-

-

357

375

-

-

-

M2M Private Bank

-

-

-

-

441

463

-

-

-

Asian-Pacific Bank

-

-

-

-

-

37

-

-

-

Kamchatprombank

-

-

-

-

-

9

-

-

-


-

-

-

-

798

884

-

-

-

 

The Group provided a number of loans to the joint ventures (note 13). Interest on the loans to the joint ventures accrued during the six month ended 30 June 2010 comprised US$0.2 million (six month ended 30 June 2009: US$0.1 million and year ended 31 December 2009: US$0.3 million). Outstanding nterest on the loans to the joint ventures comprised US$0.6 million at 30 June 2010 (30 June 2009: US$0.4 million and 31 December 2009: US$0.5 million).

 

 

The Group also invested US$0.7 million in the associate through loans advanced (six month ended 30 June 2009: nil and year ended 31 December 2009: US$0.7 million) (note 5).

 

22.          Contingent liabilities

 

The Group is involved in legal proceedings with Gatnom Capital & Finance Limited and O.M. Investments & Finance Limited, who are the minority shareholders in Lapwing Limited, the Group's 99.58% owned subsidiary incorporated in Cyprus and holding a 100% interest in Garinsky Mining and Matallurgical Complex. The claim was filed in September 2008 in Cyprus and the respondents are Lapwing Limited and Aricom UK Limited. The claimants allege their holdings in Lapwing Limited were improperly diluted as the result of the issuance of additional shares following a shareholders' meeting held in September 2007. The claimants have asked the court to dissolve Lapwing or, alternatively, to order that their shares be purchased at a price allegedly previously agreed upon or to be determined by an expert appointed by the court. On 20 January 2010, the claimants withdrew their composite claim and re-filed individual claims in substantially similar form. The maximum potential liability arising from the claim cannot currently be accurately assessed although the Directors believe that the claim is of a limited merit.

 

23.          Reconciliation of non-GAAP measures

 

 

Note

Six months to 30 June 2010

Six months to 30 June 2009

Year ended 31 December 2009

 

 

Before exceptional items

Exceptional items

Total

Before exceptional items

Exceptional items

Total

Before exceptional items

Exceptional items

Total

 

 

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

(Loss)/profit for the period


(20,009)

(35,421)

(55,430)

62,030

12,616

74,646

132,903

11,881

144,784

Add/(less):











Financial expense

9

11,054

-

11,054

13,904

-

13,904

7,140

-

7,140

Financial income

8

(2,738)

-

(2,738)

(3,598)

(23,131)

(26,729)

(7,764)

(23,716)

(31,480)

Foreign exchange losses

5

6,716

-

6,716

7,222

-

7,222

5,905

-

5,905

Fair value change on derivatives


402

-

402

(1,999)

-

(1,999)

819

-

819

Taxation

6

22,025

-

22,025

22,129

6,029

28,158

45,260

7,341

52,601

Depreciation, amortisation and impairment

5

32,588

33,052

65,640

16,172

-

16,172

44,766

-

44,766

Underlying EBITDA


50,038

(2,369)

47,669

115,860

(4,486)

111,374

229,029

(4,494)

224,535

 

24.          Subsequent events

 

In July 2010, the Group entered into an agreement to acquire and completed the acquisition of 100% of the share capital of LLC Iljinskoye, holder of exploration and mining rights for Vysokoye gold deposit, for the total cash consideration of US$35 million.

 

In July 2010, the Group entered into agreements to acquire a further 40% in aggregate in the Omchak Joint Venture from the other joint venture partners for the total cash consideration of US$27 million. Accordingly, the Omchak Joint Venture has become a subsidiary of the Group.

 

 On 25 August 2010, the Board of Directors approved an interim dividend of £0.03 per share which is expected to result in an aggregate payment of £5.6 million. The dividends will be paid on 29 October 2010 to the Company's shareholders on the register at the close of business on 1 October 2010.

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
END
 
 
IR XELLLBVFEBBL