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Petropavlovsk Plc (POG)

  Print      Mail a friend       Annual reports

Thursday 31 March, 2011

Petropavlovsk Plc

Annual Results for the Year Ended 31 December 2010

RNS Number : 9734D
Petropavlovsk PLC
31 March 2011
 



Annual Results for the year ended 31 December 2010

 

Petropavlovsk PLC ("Petropavlovsk" or the "Company", or together with its subsidiaries "the Group") today issues its audited annual results for the period ended 31 December 2010 (the "Period"). 

 

FINANCIAL SUMMARY

 


YE 31 Dec 2010

YE 31 Dec 2009

Change

Gold produced (oz)

506,800

486,800

4%

Gold sold (oz)

445,348

438,215

2%

Group average gold price received

US$1,253/Oz

US$975/Oz

29%

Cash costs of hard rock mines

 

US$558/Oz

US$303/Oz

84%

Cash costs of alluvial production

US$862/Oz

US$769/Oz

12%

Group Revenue (US$m)

612

472

30%

Underlying EBITDA (US$m)

(before exceptional items, excluding IRC)

229

241

(5%)

Underlying EBITDA (US$m)

(before exceptional items, including IRC)

205

229

(10%)

Earnings per share (basic)(US$)

0.11

0.98

(89%)

Net Debt (US$m)

(171)

(19)

(152)

Interim Dividend paid

£0.03

£0.07

(57%)

Final Dividend proposed

£0.07

n/a

n/a

 

NOTES

 

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

 

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 JSC Pokrovskiy mine (the holder of the Group's Pokrovskiy and Pioneer interests) is 98.61%. In July 2010, the Group increased its total holding in CJSC ZRK Omchak to 90% after the acquisition of 32.5% and 7.5% of the issued capital of the Omchak from OJSC Susumanzoloto and OJSC Shkolnoye respectively. Accordingly, Omchak has become a subsidiary of the Group and production from Omchak for H2 2010 is 100% attributable to Group. Production from Omchak for H1 2010 and for 2009 was 50% attributable to the Group. Cumulative gold production, as stated throughout this document, consists of gold physically recovered and gold in circuit. Accordingly gold produced in the year consists of gold recovered during the period and adjusted for the movement in gold still in the circuit.

 

Group's Total Cash Costs have been calculated inclusive of costs of stripping, 2009 Group's Total Cash Costs have been restated with the same calculation.

 

FINANCIAL HIGHLIGHTS

 

·    Group revenue of US$612 million - increased by 30% from US$472 million in 2009 due to a 1.7% increase in ounces of gold sold and a 29% increase in the average realised gold sales price;

 

·    Group total cash costs for hard-rock assets of US$558/oz represent a 84% increase compared to 2009, principally due to a 55% decrease in mined and processed grades at Pioneer;

 

·    Total cash costs per tonne of ore mined and processed at Pioneer decreased by 43% due to increased capacities and economies of scale;

 

·    Total cash costs for alluvial production were at US$862oz; the share of alluvial production in the Group's total gold output amounted to 16% in 2010 compared to 11% in 2009;

 

·    The Group's average realised gold price increased by 29% from US$975/oz in 2009 to US$1,253/oz in 2010;

 

·    Underlying EBITDA before exceptional items for the Period was US$205 million, a 10% decrease on 2009;

 

·    Earnings per share of US$0.11 were down 89% versus the 2009 figure, impacted by the increase in production costs and US$25.7 million of exceptional items;

 

·    On 30 March 2011, the Board of Directors resolved to recommend a final dividend of £0.07 per share which is expected to result in an aggregate payment of £13.2 million. Subject to shareholder approval at the Annual General Meeting on 19 May 2011, the final dividend is proposed to be paid on 28 July 2011 to the shareholders on the register at the close of business on 1 July 2011;

 

·    Net debt as at 31 December 2010 was US$171.1 million.

 

RESERVES AND RESOURCES

 

·    There was a significant uplift in the Group's JORC Code (2004) compliant Mineral Resources and Ore Reserves;

 

·    Proven and Probable Ore Reserves have increased by 36% to 9.1Moz compared to 6.7Moz reported in March 2010;

 

·    Total Mineral Resources increased by 96% from 11.8Moz of gold at an average grade of 1.23g/t Au in 300Mt of mineralised material to an estimated 23.1Moz of gold at an average grade of 0.98g/t Au in 732Mt of mineralised material;

 

·    Of the estimated 23.1Moz Measured and Indicated Mineral Resources increased by 55% to 12.8Moz (inclusive of resources modified to produce the Ore Reserves) compared to estimates reported in March 2010, and a further 10.3Moz of Inferred Mineral Resources were identified;

 

·    The increase in reserves and resources was achieved despite depletion of c.485,200oz of reserves as a result of 2010 production;

 

·   The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2010 at its principal assets, predominantly at Malomir and Pioneer, as well as an evaluation of Proven and Probable Ore Reserves at Petropavlovskoye in the Yamal Region;

 

·   The Mineral Resources and Ore Reserves update has been prepared by the Group in conjunction with external experts and independently audited by mining consultants Wardell Armstrong International ("WAI"). Both 2010 and 2011 estimates were completed using aUS$1,000/oz long-term gold price;

 

·    In addition, the Group holds reserves and resources of its alluvial projects, which are classified in accordance with the Russian Classification System.  

 

OPERATIONAL AND DEVELOPMENT HIGHLIGHTS

 

·    Total attributable gold production for 2010 amounted to 506,800oz, representing an increase of 4% compared with attributable gold production in 2009 (486,800oz);

 

·    The successful commissioning of a third milling line at Pioneer plant has increased the total processing capacity of the mine to 5.7Mtpa (including the heap-leach) and underpinned a strong performance that yielded 230,900oz in 2010 despite a more than threefold decrease in the head grades achieved;

 

·    Delays in the delivery of key 15m3 excavator equipment together with adverse weather caused disruption to the Pioneer mining schedule resulting in the processing of lower than scheduled grades of ore reducing production for the year;

 

·    The Malomir mine was commissioned on schedule in August 2010 and ramped up smoothly to its design capacity, despite the logistical challenges of operating in a different part of the Amur region;

 

·    The second milling facility at Malomir remains on schedule for commissioning in H2 2011 and the second stage of mine development to process refractory ore is also on track for commissioning in 2012;

 

·    Construction work at Albyn is advancing as planned with commissioning expected to take place during Q4 2011;

 

·    A full feasibility study has been commissioned on establishing a pressure oxidation facility ("POX") at Pokrovskiy to process flotation concentrate from Malomir and Pioneer. The detailed results of the feasibility study are expected to be announced in Q2 2011.

 

CORPORATE HIGHLIGHTS

 

·    The successful listing of the Group's former Non-Precious Metals Division ("IRC") on the Stock Exchange of Hong Kong Limited raised gross proceeds of c.US$240 million;

 

·    The balance sheet was strengthened by the issue of low-cost US$380 million 4% per annum guaranteed convertible bonds due 2015 in February 2010;

 

·   In December 2010 a subsidiary of IRC entered into a US$340 million project finance arrangement with the International and Commercial Bank of China Limited ("ICBC"), and a US$400 million Engineering, Procurement and Construction Contract ("EPC") was signed with the China National Electric Engineering Company, Limited ("CNEEC")1;

 

·    During Q4 2010 a strategic review of the business was conducted by the Board. As a result of this review, three additional Executive Directors were appointed in January 2011: Dr Alya Samokhvalova as Strategic Director, Mr Andrey Maruta as Finance Director, Russia, and Mr Martin Smith as Technical Director;

 

·   The Board established two new committees in January 2011: the Strategic Committee to formulate annual and long-term budgets, set production forecasts, and monitor the Group's performance against these targets, and the Technical Committee, to aid the Strategic Committee by providing a technical analysis of the Group's budgets, forecasts and investment plans;

 

·     In January 2011, Dr Graham Birch assumed the role of Senior Non-Executive Director;

 

·     Mr Peter Hill-Wood, a Non-Executive Director at Petropavlovsk, is to retire from his role at the Company's Annual General Meeting on 19 May 2011.

 

____________________________
1
In January 2011, the China National Electric Equipment Corporation, a major Chinese state-owned enterprise, was re-named the China National Electric Engineering Company, Limited

 

2011 PRODUCTION PLAN AND OUTLOOK

 

·   The Group's attributable gold production for 2011 is currently estimated to be 600,000oz, representing an increase of c.18% over total attributable gold production for 2010. Group sale volumes in 2011 are also expected to exceed 600,000oz;

 

·    In accordance with the Group's communications policy, the estimate of 600,000oz excludes any additional production that may be derived from Malomir's expansion, due in H2 2011, and the commissioning of the Albyn mine, due to take place during Q4 2011. The Group's management has no reason to believe that commissioning and ramp up will not run as scheduled;

 

·    It is expected that the Group's production will, as usual, be weighted towards the second half of the year due to an anticipated increase in attributable alluvial production, coupled with increased production from heap leach operations, both of which are seasonal, and to the substantial backlog of stripping works initially scheduled for 2010 that are now due to take place in H1 2011;

 

·    It is the Company's intention to continue to update the market on the Group's anticipated full-year production plans on a quarterly basis, or if additional material information comes to light.

 

2010 EXPLORATION HIGHLIGHTS AND LICENCE ACQUISITIONS

 

·     Pioneer

-     A series of new, parallel ore zones with non-refractory mineralisation to the north-west of Bakhmut have been identified;

 

·     Pokrovskiy and Flanks  

-     A 24% increase in reserves allows for prolonging of the life of the main pit at Pokrovskiy. Continued encouraging exploration at Pokrovka-2 has identified additional ore adjacent to the previously identified ore body;

 

·     Malomir

-     In-fill drilling on the Sukhonyr ore body allowed an upgrade from the previously identified Inferred resources into the Measured and Indicated category expanding the proposed open pit reserves;

-     Exploration on the Magnetitovaya zone, located in the eastern part of the Malomir licence area, identified two ore bodies. Further exploration continues;

-     Drilling has commenced to explore the possibility of a "bridge" zone between the Malomir and Ozhidaemoye deposits;

 

·     Albyn

-     In-fill drilling completed in 2010 allowed better definition of the high grade zones and improved the average grade of the project resources and reserves;

 

·     Krasnoyarsk region

-    Combined Indicated and Inferred Mineral Resources (in accordance with the JORC Code (2004)) have been identified at the Visokoe deposit, infill drilling is on-going to upgrade current resources to the Measured and Indicated category;

-     An Inferred Mineral resource of 542,000oz has been estimated for the Olenka ore bodies which are located 70km north from Visokoe;

-     A Pre-Feasibility study is being prepared for Visokoe.

 

·     New licences in the Amur region

-    The new Alkagan-Adamovskaya licence (472.8km2 in size) surrounding Pioneer's initial licence area has been acquired;

-     Exploration at Bakhmut NE has already identified additional zones of mineralisation;

-    The highly prospective Kharginskoye licence south-east of the Albyn deposit has been acquired.

 

IRC HIGHLIGHTS 

 

·    IRC was listed on the Stock Exchange of Hong Kong Limited in October 2010, raising gross proceeds of c.US$240 million. During 2010, a subsidiary of IRC entered into a US$340 million project finance arrangement with ICBC, and a US$400 million EPC was signed with CNEEC;

 

·    A threefold increase in Ore Reserves in accordance with the JORC Code (2004) was announced in March 2011;

 

·    Kuranakh was commissioned in May 2010, with a formal commissioning ceremony undertaken by the Russian President, Dmitry Medvedev in July 2010;

 

·     Profitable sales of iron ore concentrate from Kuranakh are ongoing;

 

·    Development of the K&S iron ore concentrate production facility is on-track for commissioning in 2013; K&S is designed to comprise a 10Mtpa mining operation at two open pits and is expected to yield 3.2Mtpa of 65% iron ore concentrate. The EPC contract is intended to bring K&S into commercial production in 2013.

 

·    The first thousand tonnes of ore were mined at the K&S for testing purposes. The results of these tests have been satisfactory, with negligible impurities found.

 

Petropavlovsk is an indirect 65.6% shareholder in IRC. IRC is a producer and developer of industrial commodities, with operations in north eastern China and the Far East of Russia. IRC is listed on the Stock Exchange of Hong Kong Limited Further information about IRC, and the IRC 2010 Annual Report, may be found at the IRC website, www.ircgroup.com.hk.

 

CHAIRMAN'S STATEMENT AND CHIEF EXECUTIVE OFFICER'S REPORT

 

2010 marked a transitional phase for the Group; a year of both challenges and achievements, as it evolves into a world-class multi-mine operator.

 

Achievements

We ended the year with total gold production of 506,800oz, a 4% increase on 2009. The growth in production is partly attributable to increased capacity at Pioneer and the launch of our latest project, Malomir. Together with Pokrovskiy and Omchak, these assets formed the core of Petropavlovsk's producing gold mining operations in 2010. Although this was a record for us, the 2010 production figure was significantly below our initial production forecast range due to operational challenges, some of which were beyond our control, as outlined below, and the hurdle of moving to a seamless multi-mine operation. Whilst we faced a number of challenges, these should be kept in perspective.

 

Total gold revenue advanced to US$557.9 million, a 31% increase on 2009 figures, supported by a continued strong momentum in the gold price. Whilst the full-year production figure is lower than the target we initially set, it is still another consecutive annual production increase. 

 

As a vertically integrated mining business, a significant part of what we have accomplished has been planned and executed in-house. Several achievements are worthy of particular mention this year. The commissioning of a third milling line at our flagship Pioneer mine, on schedule, has transformed the site into a significant bulk-tonnage operation, capable of processing in excess of 5 million tonnes of ore annually and representing an 80% increase in the throughput capacity of the plant. During 2010, 19.6 million m3 of material was moved at Pioneer (up 116% on FY 2009), 3.9 million tonnes of ore were mined (up 203% on FY 2009) and 3.9 million tonnes were milled (up 263% on FY 2009).

 

In addition to the substantial expansion of capacity at Pioneer, in August 2010, our Malomir mine and plant were launched, with the new plant achieving a capacity of 55,000 tonnes per month shortly after commissioning. This was a remarkable achievement, given the remote location of the asset and the infrastructure challenges it presented. Malomir's first line began operating in August 2010, with work on the second phase of the plant continuing in parallel. Commissioning of the second line is scheduled for the second half of 2011.

 

We are proud to have delivered both of these gold projects on schedule and look forward to their contribution in years to come.

 

Looking ahead, we endeavour to replicate our success in commissioning further quality assets with the planned launch of our fourth mine, Albyn, in the fourth quarter of 2011.

 

We are pleased to report that the Group's former Non-Precious Metals Division, IRC, was listed on the Stock Exchange of Hong Kong Limited in October 2010, raising c.US$240 million. IRC is fully funded for near-term growth including bringing K&S into production in 2013. K&S is designed to comprise a 10Mtpa mining operation at two open pits and is expected to yield 3.2Mtpa of c.65% iron ore concentrate. The Kuranakh site was commissioned in May 2010 and formally opened by the President of Russia, Dmitry Medvedev, in July 2010. Commercial sales from Kuranakh began in September 2010 and are now ongoing on a regular basis.

 

Costs

Group total cash costs for hard rock deposits in 2010 were US558/oz, with total cash costs at alluvial projects amounting to US$862/oz. The increase in costs at hard rock operations was mainly due to the processing of lower grades, Rouble inflation and fluctuations in Rouble to US Dollar exchange rate.

 

Compared to 2009, electricity costs increased by 16%, the cost of chemical reagents increased in the range between 7% and 19%, the cost of diesel increased by 12% and consumables prices increased by up to 3%, due to Rouble inflation. Wages increased by 6%. The effects of Rouble price inflation were increased by the appreciation of the Rouble against the US Dollar by 5%, with the average exchange rate for the year going from 32 Roubles per US Dollar in 2009 to 30.4 Roubles per US Dollar in 2010.

 

It is worth noting that total cash costs per tonne of ore processed at Pioneer decreased by 44% due to increased capacities and economies of scale.

 

New licence acquisitions

As an organically grown producer, the acquisition of prospective new licences and subsequent exploration of these is a key focus in our strategy. During 2010, the Group acquired new licences covering an area totalling c. 3,279km2 in the Amur, Krasnoyarsk, Irkutsk and Yamal regions, as well as the EAO. We look forward to exploring these prospective assets in due course.

 

Reserves and Resources

We continued to actively build our gold reserves and resources base during 2010, with Proven and Probable Ore Reserves increasing by 36% and Mineral Resources by 96%. In accordance with the JORC Code (2004), Petropavlovsk now has 9.1Moz of Proven and Probable Reserves (compared to 6.7Moz in 2010), 12.8Moz of Measured and Indicated Resources (compared to 8.2Moz in 2010) and 10.3Moz of Inferred Resources (compared to 3.7Moz in 2010). The additional reserves and resources are attributable to both exploration works at existing sites as well as value generating acquisitions. As in the past, future exploration will continue to be a key driver of our strategy and an effective way to convert quality reserves and resources into cost-effective gold ounces.

 

Challenges

As an extensive expansion programme progressed through 2010, the Group tackled a number of operational challenges. At Pokrovskiy, stabilisation of the southern pit wall impacted, albeit not significantly, on our production capability. Nevertheless, during 2010, 6.2 million m3 of material were moved at the site (up 114% on 2009), 1.7 million tonnes of ore were mined (down 10% on 2009 as Pokrovskiy is a maturing asset) and 1.7 million tonnes were milled (down 1% on 2009).

 

Delays in the delivery of key 15m3 excavator equipment in combination with adverse weather, including extreme cold and subsequent flooding at the Pioneer mine, caused disruption to the mining schedule. This meant that the increased capacity of the plant was used to process lower grades of ore than scheduled, resulting in reduced production for the year. Nonetheless, it is worth remembering that the underlying gold deposits are still there to be excavated and sold to the market with the price increasing by 29% in the last year.

 

Production at the newly commissioned Malomir mine was lower than we originally envisaged due to the complicated structure of the upper levels of the Quartzitovoye ore body, surrounded by lower grade material, resulting in lower than expected grades being processed through the mill.

 

These challenges resulted in a revision to our 2010 production estimates, as we took a more conservative stance.

 

Management restructuring and new committees

Following a strategic review, we were pleased to welcome the appointment of three experienced executives to the Board. Dr. Alfiya (Alya) Samokhalova joined as Strategic Director, Mr Andrey Maruta as Finance Director, Russia, and Mr Martin Smith as Technical Director. Each of these individuals brings with them a deep understanding of the Company and its operations. The Board looks forward to drawing on their valuable expertise and detailed knowledge in helping Petropavlovsk to achieve its objectives as it continues in its evolution as a major gold producer. Additionally, Mr Peter Hill-Wood relinquished his position as Senior Independent Non-Executive Director and Dr. Graham Birch has assumed this role.

 

Two new committees have been created alongside the new Board appointments. The Strategic Committee is tasked with formulating long-term strategy and performance monitoring, while the Technical Committee oversees budgeting and forecasting. Working together, the efforts of the two committees are designed to generate additional confidence in future production and budget estimates.

 

Corporate highlights

In February 2010, the Group took advantage of comparatively low market interest rates by issuing US$380 million 4% guaranteed convertible bonds which mature in February 2015. The funds received have strengthened our balance sheet and were mostly invested in prospective exploration and development work in order to deliver future production growth.

 

In August 2010, the Group increased its total holding in CJSC ZRK Omchak, predominantly an alluvial operation, to 90%. Accordingly, this asset became a subsidiary, having formerly been a joint venture, and Petropavlovsk now consolidates all of Omchak's production.

 

In October 2010, the Group's Non-Precious Metals Division, IRC, was listed on the Stock Exchange of Hong Kong Limited, raising gross proceeds of c. US$240 million. IRC Limited's IPO was a commercial opportunity that helped us to realise the value of our non-precious metals operations and to partially spin-off the division, leaving us to concentrate on our core business of gold exploration, development and production, while retaining an interest of 65.6% in IRC Limited.

 

In December 2010, a subsidiary of IRC Limited entered into a US$340m loan facility with the ICBC. The loan will be used towards funding the construction of IRC's mining operations at K&S with production commencing in 2013. In the same month, IRC also entered into a contract with CNEEC, a major Chinese state-owned contractor, for the design and construction of mining and processing operations at K&S, including a processing plant that will produce iron ore concentrate.

 

Share price performance and dividend

Petropavlovsk's share price appreciated by 11.5% between 1 January and 31 December 2010, which we believe to be a fair performance given the operational challenges we tackled. However, our share price is subject to market risks and past performance cannot be relied on as a guide to future performance.

 

Paying a dividend, in our view, is the hallmark of a strong and confident business. We are certain that the long term fundamentals of the Group are robust and we wish to reward shareholders as the business prospers and develops, striking a balance between returning profit to shareholders and reinvesting capital back into the business. We are pleased that on 30 March 2011, the Board of Directors resolved to recommend a final dividend of £0.07 per share which is expected to result in the aggregate payment of £13.2 million. Subject to shareholder approval at the Annual General Meeting on 19 May 2011, the final dividend is proposed to be paid on 28 July 2011 to the shareholders on the register at the close of business on 1 July 2011.

 

Presidential visit

In July 2010, we were delighted to welcome the Russian President Dmitry Medvedev, who honoured the Group with a visit to our metallurgical test plant in Blagoveschensk in the Amur region. During his visit, the President took part in a ceremony to celebrate the launch of the newly commissioned line at Pioneer and the processing facility at Kuranakh.

 

The gold market

The gold price reached new nominal highs in 2010. Having started the year at US$1,088, and with an intra-day high of US$1,431 in December, the precious metal closed the year at US$1,406, an increase of 29% over 2009 prices.

 

The rise in the price of gold has been underpinned by the precious metal's appeal as an alternative monetary asset, as a hedge against inflation, sovereign risk and weaker currencies and also as a store of value during times of uncertainty. Aside from investment demand, gold also continued to benefit from purchases by central banks as well as renewed demand in the jewellery, industrial and retail sectors.

 

Amidst fiscal imbalances and quantitative easing polices introduced by central banks to stimulate economic recovery, there are reasons to consider that gold may find further momentum in 2011. With this in mind, it is worth noting that, in real terms, the gold price is well below its all-time high of US$2,399 (January 1980). As an unhedged gold producer, Petropavlovsk is well positioned to take advantage of further strength in the gold price going forward.

 

The road ahead

2010 was a transitional year for the Group, its employees and shareholders. The Group continues to evolve from a small-scale business into a multi-mine operation and this evolution has naturally presented some challenges. But with challenges come opportunities and the progress we made during 2010 has allowed us to build on our strong foundations, positioning the Group to deliver sustainable production growth in 2011 and beyond.

 

This year's accomplishments have positioned the Group for its next phase of development and growth and we believe that our prospects remain encouraging. In particular, our producing investment in iron ore, through IRC, gives us great confidence. As we look to the future and continue to execute our strategy we will be guided by Conservatism in our forecasts, greater Consistency in our operations, as well as ensuring Contingency plans are in place, and that investor's will continue to benefit from frequent and transparent Communications.

 

Since we founded this business in 1994, our vision has always been to build Russia's Far East mining champion. More than 2.7 million ounces of gold later and as one of Russia's top three gold producers, our vision continues to stand strong.

 

2010 was an eventful year for the Group, a period during which we encountered numerous challenges, but also delivered record gold production, record revenues, new mines, a strong balance sheet and significant additions to our reserves and resources.

 

Our people

Human capital is the most important aspect of every successful business. On behalf of the Board of Directors, we wish to express our gratitude to the Group employees, who continue to work with tireless commitment and enthusiasm, driving our ambitions forward.

 

As he steps down as a Director we would like to record our special thanks to Mr Peter Hill-Wood.  He joined us in 2003 and has been with us through ups and downs since then and his sound common sense, his enthusiasm and his encouragement have been of great assistance to us both.  Being at various times, Chairman of the Audit Committee and Senior Non-Executive Director was very different from his day job as Chairman of Arsenal Football Club but, in spite of this, we have benefited hugely from his active participation and instinctive feel for the right way of doing things.  We will miss him very much.

 

Peter Hambro, Chairman

Pavel Maslovskiy, Chief Executive Officer

 

There will be a presentation of the above-mentioned highlights today at 10:00. A webcast of the presentation will be available on the Group's website www.petropavlovsk.net. The presentation will be followed by a question and answer session. 

 

The dial in-details to access the conference call in "listen-only" mode or to ask a question are as follows:

 

In the UK:                     020 8817 9301

Elsewhere:                   +44 (0) 20 8817 9301

 

Conference ID:            To access the conference call state "Petropavlovsk" and "Annual Results 2010" as the name of the presentation.

 

The Company's Annual Report and Accounts for the year ended 31 December 2010 will be published on the Company's website www.petropavlovsk.net in due course.

 

ENQUIRIES

 

Petropavlovsk PLC

Dr. Alya Samokhvalova 

Rachel Tuft

 

 

 +44 (0) 20 7201 8900 

 

 

Merlin

David Simonson

Fiona Crosswell

 

 

 +44 (0) 20 7726 8400 

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

The Group maintains its commitment to report its Mineral Resources and Ore Reserves in accordance with the JORC Code (2004). The Russian System for reporting reserves and resources remains in use within the Russian legal environment forming the basis of the Group's accountability to the Russian state whilst the Group's reporting on reserves and resources to investor audiences is carried out in accordance with the JORC Code (2004).

 

An independent mineral consultant, Group in-house specialists and external advisers co-operated to set up an internal system for reporting reserves and resources in accordance with the JORC Code (2004). The results were audited by Wardell Armstrong International Ltd ("WAI") and form part of a Mineral Expert's Report, which has been prepared by WAI. The Executive Summary of this report will be available on the Company's website at www.petropavlovsk.net later today.

 

A summary of the Group's gold Ore Reserves and Mineral Resources as at 1 January 2011 in accordance with the guidelines of the JORC Code (2004) is shown below. This summary is based on the annual review prepared by WAI as part of the Group's annual reporting procedure. The estimates were completed following an extensive exploration programme conducted by the Group during 2010.

 

Summary of Mineral Resources in accordance with the JORC Code (2004) for hard rock gold assets

Category

Tonnage

(kt)

Grade

(g/t)

Gold

(Moz)

Measured

63,254

1.26

2.56

Indicated

304,567

1.04

10.23

Measured & Indicated

367,822

1.08

12.78

Inferred

364,560

0.88

10.31

Notes

·     Mineral Resources are reported inclusive of Ore Reserves

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

·     Numbers may not add up due to rounding

 

Summary of Ore Reserves in accordance with the JORC Code (2004) for hard-rock gold assets

Category

Tonnage (Kt)

Grade

(g/t)

Gold

(Moz)

Proven

43,522

1.36

1.91

Probable

199,347

1.13

7.22

Proven & Probable

242,869

1.17

9.13

Notes

·     Numbers may not add up due to rounding

 

Proven and Probable Ore Reserves in accordance with the guidelines of the JORC Code (2004) increased by 36%, from 6.7Moz of gold at an average grade of 1.26g/t Au in 164Mt of ore to 9.1Moz of gold at an average grade of 1.17g/t Au in 243Mt of ore. The increase in Ore Reserves is attributable to the successful exploration programme conducted by the Group during 2010 at its principal assets, predominantly at Malomir and Pioneer, as well as evaluation of Proven and Probable Ore Reserves for Petropavlovskoye in the Yamal Region (Northern Russia). Both 2010 and 2011 estimates were completed using a long-term gold price of US$1,000/oz.

 

Total Mineral Resources have increased by 96%, from 11.8Moz of gold at an average grade of 1.23g/t Au, in 300Mt of mineralised material to 23.1Moz of gold at an average grade of 0.98g/t Au, in 732Mt of mineralised material. Of the 23.1Moz, 12.8Moz are Measured and Indicated and 10.3Moz are Inferred Mineral Resources. The reported uplift in Ore Reserves and Mineral Resources has been achieved notwithstanding depletion of c.490koz of gold through production at Pokrovskiy, Pioneer and Malomir mines during 2010.

 

 

Breakdown of Mineral Resources in accordance with the JORC Code (2004) for hard rock assets

Deposit

Category

Tonnage (kt)

Grade (g/t Au)

Contained Metal (Moz)

AMUR REGION ASSETS

Pokrovskiy

Measured

5,034

1.52

0.25

Indicated

29,441

0.85

0.80

Measured+Indicated

34,475

0.95

1.05

Inferred

10,888

0.74

0.26

Pioneer

Measured

28,936

1.19

1.11

Indicated

70,951

1.00

2.28

Measured+Indicated

99,888

1.05

3.39

Inferred

53,511

0.69

1.18

Malomir

Measured

12,570

1.28

0.52

Indicated

143,360

0.96

4.40

Measured+Indicated

155,930

0.98

4.92

Inferred

216,166

0.70

4.84

Albyn

Measured

803

2.18

0.06

Indicated

17,267

2.13

1.18

Measured+Indicated

18,070

2.13

1.24

Inferred

9,076

2.03

0.59

Tokur

Measured

11,952

1.30

0.50

Indicated

16,096

1.06

0.55

Measured+Indicated

28,048

1.16

1.05

Inferred

10,706

1.09

0.38

KRASNOYARSK REGION ASSETS

Visokoe (Krasnoyarsk)

Measured

-


-

Indicated

14,271

1.10

0.50

Measured+Indicated

14,271

1.10

0.50

Inferred

43,811

1.07

1.51

Olenka

Measured

-


-

Indicated

-


-

Measured+Indicated

-


-

Inferred

11,144

1.51

0.54

YAMAL REGION ASSETS

Petropavlovskoye

Measured

3,959

1.03

0.13

Indicated

12,623

0.97

0.40

Measured+Indicated

16,582

0.99

0.53

Inferred

6,133

0.90

0.18

CHITA REGION ASSETS

Verhne-Aliinskoe

Measured

-

-

-

Indicated

558

5.81

0.10

Measured+Indicated

558

5.81

0.10

Inferred

3,125

8.38

0.84

Notes

·     Mineral Resources are reported inclusive of Ore Reserves

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

·     Numbers may not add up due to rounding

 

Precious Metals Group: Summary of Ore Reserves by asset

Deposit

Category

Tonnage (kt)

Grade (g/t Au)

Contained Metal (Moz)

Pokrovskiy (Amur)

Proven

4,914

1.47

0.23

Probable

21,634

0.80

0.55

Proven+Probable

26,547

0.92

0.79

Pioneer (Amur)

Proven

21,276

1.35

0.92

Probable

46,072

1.13

1.68

Proven+Probable

67,348

1.20

2.60

Malomir (Amur)

Proven

11,489

1.34

0.50

Probable

105,559

1.06

3.60

Proven+Probable

117,048

1.09

4.10

Albyn (Amur)

Proven

853

1.99

0.05

Probable

15,894

2.01

1.03

Proven+Probable

16,747

2.01

1.08

Tokur (Amur)

Proven

2,028

1.47

0.10

Probable

2,195

1.44

0.10

Proven+Probable

4,223

1.45

0.20

Petropavlovskoe (Yamal)

Proven

2,962

1.12

0.11

Probable

7,993

1.03

0.26

Proven+Probable

10,956

1.05

0.37

 

Notes

·      Numbers may not add up due to rounding

 

The Proven and Probable Ore Reserves estimated by WAI following the guidelines of the JORC Code (2004) and using a US$1,000/oz long-term gold price as of 1 January 2011 are 243Mt of ore containing 9.1Moz of gold at an average grade of 1.17g/t Au (economic cut-off grade 0.3-0.57g/t Au depending on the deposit). This includes 4.6Mt at an average grade of 0.72g/t within ore stockpiles at the Group's active operations. The proposed open pits will require 1,340Mt of waste to be removed in order to access the ore body at a stripping ratio of 5.6t/t. A further 0.4Moz of contained gold in Inferred Mineral Resource exists within the optimised pit shells.

 

In addition to the Ore Reserves and Mineral Resources estimated in accordance with the JORC Code (2004), the Group also holds significant alluvial gold reserves and resources classified in accordance with the Russian Classification System. A summary of the alluvial resources and reserves is presented below:

 

Alluvial Reserves

(in accordance with the Russian Classification System)

Category

Volume (000 m3)

Grade (g/m3 Au)

Contained Metal (Moz)

B

1,443

0.23

0.01

C1

46,491

0.36

0.53

B+C1

47,934

0.35

0.54

C2

3,674

0.34

0.04

Total B+C1+C2

51,609

0.35

0.58

 

Alluvial Resources

(in accordance with the Russian Classification System)

Category

Volume (000 m3)

Grade (g/m3 Au)

Contained Metal (Moz)

B

5,798

0.11

0.02

C1

74,613

0.32

0.77

B+C1

80,411

0.30

0.79

C2

9,697

0.86

0.27

Total B+C1+C2

90,108

0.36

1.06

 

Notes:    (1) Alluvial resources are reported inclusive of alluvial ore reserves;

 

(2) Ore reserves include only on-balance material for open cut and dredge extraction; resources include the ore reserves, off-balance material for open pit and dredge extraction as well as on-balance and off-balance material considered for potential underground mining;

 

   (3) As per the Russian Classification System, ore reserves are reported at in-situ grade and tonnage, however it has been demonstrated that the material remains economically viable after application of the reasonably assumed or estimated modifying factors such as mining dilution and recovery;

 

(4) In July 2010, the Group increased its total holding in ZAO ZRK Omchak to 90%. Accordingly, Omchak became a subsidiary of the Group and production from the assets held by Omchak from H2 2010 onwards is 100% attributable to the Group. Production from Omchak for H1 2010 and for FY 2009 was 50% attributable to the Group.

 

 

OPERATIONS AND DEVELOPMENT REPORT

POKROVSKIY

During 2010, Pokrovskiy produced 144,900oz of gold, reaching the upper end of the Group's 2010 production forecast for Pokrovskiy for the year (135,000oz - 145,000oz). This can be attributed to the mining and processing of reserve grades that were higher than predicted. During the first half of the year, the majority of production at Pokrovskiy came from lower grade ore bodies at the Pokrovka-1 and Pokrovka-2 deposits (the Ozernoye and Olegovskoye ore bodies respectively). This allowed the Group to focus on extensive stripping works in the main Pokrovskiy pit in order to access higher grade material of 3.0-3.5g/t Au, which was processed during the second half of the year in accordance with the Group's mine plan. These stripping works also allowed the Group to successfully stabilise the southern wall of the main Pokrovskiy pit, which experienced movement towards the end of 2009.

 

The Proven and Probable Ore Reserves estimated by WAI at Pokrovskiy under the guidelines of the JORC Code (2004) using a gold price of US$1,000/oz, are 26.5Mt of ore at an average grade of 0.92g/t Au (economic COG of 0.3g/t Au) containing 0.8Moz of gold. This includes 4.4Mt of reserves at stockpiles at an average grade of 0.63g/t Au and the remaining open pit reserves at both the Pokrovka-1 and Pokrovka-2 areas. Ore extraction will require 87.6Mt of waste to be removed to access the ore body at a stripping ratio of 3.95t/t. A significant further Inferred Mineral Resource exists within the deposit.

 

Costs

Total cash costs at Pokrovskiy for 2010 were US$564/oz. This increase compared to the 2009 figures was in line with the Group's expectations and was attributable to the processing of lower grades combined with the fluctuation of the Rouble/Dollar exchange rates and increased prices for diesel, electricity and other consumables.

 

Outlook

Total production from Pokrovskiy for 2011 is expected to be c. 96,200oz. The life of the main open pit, previously expected to be exhausted by the end of 2012, has now been prolonged as the result of identification of the additional ore reserves.  Nevertheless, production will gradually shift to the Pokrovskiy Flanks, from where it is currently estimated to continue for many years. Exploration is continuing on other parts of the Pokrovskiy licence area which may result in the discovery of additional resources providing a possible further extension to the life of the mine.

 

By 2013, the Group is planning to install a POX facility at the Pokrovskiy site to process flotation concentrate from Malomir and Pioneer. A full feasibility study has been commissioned with detailed results of the study to be announced in Q2 2011.

 

The focus of exploration works in 2011 within the Pokrovskiy licence area is to define ore reserves of previously identified resources of refractory ore which will be suitable for treatment at the future POX plant.

 

PIONEER

Mining at Pioneer is conducted using open-pit methods and ore is currently being extracted from four pits. The complete fleet of mining excavators includes five 15m3 and one 16m3 bucket capacity excavators which are working on-site.           

 

During 2010, Pioneer produced 230,900oz of gold (with 98,500oz produced in Q4 2010), representing 45.5% of the Group's total production for the year.

 

In April 2010, the Group commissioned a third milling line at Pioneer, four months earlier than originally planned. This new line increased the overall annual processing capacity of the plant by c.79% to 5.0Mtpa. Metallurgical recovery rates were 84% for the year.

 

The increase in the plant's capacity, together with the increased tonnage of stripping works, significantly enlarged the amount of mining works at Pioneer in 2010 with the total amount of material moved increasing by 116%.

 

The mining schedule was disrupted by the delayed delivery of three 15m3 excavators, which were ordered in good time but arrived several months later than their original stipulated delivery date. Mining was further affected by extreme adverse weather conditions with consistent extreme temperatures below -400C. This resulted in key mining equipment being unable to function, and subsequent minor flooding of the pit during Q2 2010. These factors caused a delay in waste stripping works, particularly at the Andreevskaya ore body, preventing timely access to the higher grade ores.

 

As a result, the Group was unable to fulfil Pioneer's original 2010 production plan of 375,000oz to 420,000oz. The lower grade material from the pit and stockpiles was treated resulting in the 2.1g/t average head grades processed through the mill during the year. These were 30% lower than originally forecast.

 

Ore at Pioneer is processed at the on-site 5.0Mtpa RIP plant, which consists of three processing lines: one 5.5m x 1.8m SAG mill, one 3.2m x 5.4m ball mill and a sorption and desorption circuit with 200m3 tanks, and two larger processing lines consisting of two 7.5m x 2.5m SAG mills, four 4.0 m x 6.0m ball mills and a sorption and desorption circuit with 450m3 tanks. The Group is planning to commission a flotation unit at the plant in 2013/14 to process refractory ores simultaneously with direct cyanidation leaching and to ship the resultant flotation concentrate to the POX plant that will be constructed at the nearby Pokrovskiy mine for further processing and recovery of gold.

 

During 2010, trial heap-leach operations were carried out at Pioneer to process material with a grade lower than 0.8g/t Au, recovering a total of 3,800oz of gold.

 

The Ore Reserves at Pioneer are based on the Measured and Indicated Mineral Resources independently audited by WAI that have been economically optimised using a gold price of US$1,000/oz. The Pioneer mine now consists of five main open pits: Yuzhnaya, Promezhutochnaya, Bakhmut, Andreevskaya and north-east Bakhmut with four being actively mined this year. The north-east Bakhmut pit was commissioned in 2010 and contributed considerably to the production numbers for the year. The total Pioneer Proven and Probable Ore Reserves are estimated at 67.3Mt of ore at an average grade of 1.20g/t Au containing 2.6Moz of gold. Ore extraction will require that 318.2Mt of waste is removed to access the ore bodies at an average stripping ratio of 4.7t/t.

 

The previously reported management restructuring at Pioneer has now been completed and the Board believes this has greatly strengthened operational efficiency.

 

Costs

Total cash costs at Pioneer for 2010 were US$565/oz. This increase on 2009 was in line with the Group's expectations and is mainly due to the processing of lower grade material combined with the change in Rouble/Dollar exchange rates and increased prices for diesel, electricity and other consumables.  During 2011, the Group expects mining costs to reduce due to the full utilisation of new, more efficient mining equipment and increased capacity of the processing plant. Total cash costs per tonne of ore processed at Pioneer decreased by 44% due to increased capacities and economies of scale.

 

Outlook

In light of the disrupted 2010 mining operations which created a backlog of stripping works, and the successful results of exploration works defining additional new reserves, the Group has reviewed its mining schedule for Pioneer. The new schedule estimates that c.323,500oz of gold will be produced in 2011. Some high grade material which was originally scheduled for 2011 processing will now be treated in 2012.

 

MALOMIR

The 0.7Mtpa RIP plant for the processing of non-refractory ores at Malomir was commissioned in August 2010. The plant consists of a 5.5m x 1.8m SAG mill, two 3.2m x 5.4m ball mills and a sorption and desorption circuit with 200m3 tanks.

 

The plant was commissioned on schedule, despite the logistical challenges it posed to the Group due to the distance from other current operations (670km from Pokrovskiy) and from the Group's regional headquarters in Blagoveschensk.

 

Mining at Malomir is conducted by open-pit methods and is currently extracting ore from a single pit at the Quartzitovoye deposit. Work at Malomir from 2009 to 2010 focused on the Quartzitovoye deposit's ore bodies, which contain ore at higher grades and with lower sulphides than the main Malomir deposit. In particular, the focus has been on the preparation of ore body no.55, which is currently being mined and processed as a feed for a new RIP plant.

 

Following its commissioning in August 2010, the Malomir plant ramped up smoothly to its design capacity, producing a total of 36,400oz of gold. This production was lower than the Group's original 2010 production target for Malomir of 68,000oz to 100,000oz due to dilution at the upper part of the ore body - a higher grade ore body core scheduled for processing was narrower and more complex in shape than predicted during exploration and resulted in it being mined together with the surrounding lower grade material.

 

Problems have been encountered in the grade control process as definition of boundaries at a cut-off grade of 0.8g/t has proved to be difficult to achieve. This resulted in lower than expected head grades at the mill (5.4g/t versus the anticipated 12.2g/t). A review of mining works allowed the Group to reduce dilution, resulting in mining operations continuing steadily and with the average grade through the mill increasing to 8.6g/t in December 2010 and meeting the Company's expectations. Despite the lower than expected head grade, the Malomir plant has been operating consistently since being commissioned, achieving high gold recovery rates.

 

The Ore Reserves at Malomir are based on an updated Mineral Resources estimate that incorporates significant results from in-fill drilling which have been economically optimised by WAI using a gold price of US$1,000/oz. The Malomir deposit consists of the main extensive ore body also referred to as Malomir Central, and two other deposits, Quartzitovoye and Ozhidaemoye. This gives combined Proven and Probable Ore Reserves of 117.0 Mt at an average grade of 1.09g/t Au. This includes 241kt of ore at an average grade of 2.40g/t Au at the stockpiles. Ore extraction will require that 447.8.Mt of waste is removed to access the ore bodies.

 

Costs

Total cash costs at Malomir for 2010 were US$473/oz. Costs were adversely affected by expected project start-up costs and are expected to decrease during the course of 2011 when the plant should be working at full capacity.  

 

Outlook

Total gold production from Malomir for 2011 is expected to be c.93,300oz.

 

The commissioning in August 2010 of the 0.7Mtpa RIP plant at Malomir for the processing of non-refractory ores represents the first stage of Malomir development. The Group is also planning the commissioning of a second processing line consisting of a 7.5m x 2.8m SAG mill and two 4m x 6m ball mills during the second half of 2011.

 

It is currently anticipated that milling and crushing facilities will be further expanded during 2012, resulting in the plant reaching a total capacity of 5.7Mtpa by 2013. During the second half of 2012 a flotation circuit will be installed at the plant to treat the refractory ore from the Malomir and Ozhidaemoye ore bodies producing flotation concentrate. This will subsequently be transported to the Pokrovskiy mine site where the Group is installing a POX facility to process and recover gold from flotation concentrates.

 

This gradual introduction of processing lines allows the simultaneous processing of refractory and non-refractory ores.

 

Exploration work to identify further non-refractory reserves at Malomir is ongoing.

 

POX Plant

As a result of internal studies conducted during 2010, the Group is planning to install a pressure oxidation (POX) and hydro-metallurgical plant processing facility ("POX plant") at Pokrovskiy to process flotation concentrate. It is envisaged that this will centralise the processing of refractory concentrates anticipated to be produced at Pioneer and Malomir.

 

As part of this development plan, in Q4 2010 the Group commissioned Outotec Oy to design the POX plant at Pokrovskiy and flotation concentrators at Malomir and Pioneer. This design has now been finalised and is being reviewed by the Group. The design envisages the installation of six 60m3 autoclaves, with two vessels for the processing of Pioneer concentrate and four for the processing of concentrate from Malomir. The total POX plant capacity will be c.600kt of concentrate a year. 

 

The design is based on extensive metallurgical tests completed by the Group's research and development centres, Irgiredmet and Gidrometallurgiya.  In conjunction with Outotec, the Group plans to conduct further tests on larger bulk samples at its pilot test plant in Blagoveschensk (Amur region) during the summer. The pilot test plant was commissioned by the Group in 2009 in order to test gold recovery processes under conditions approximating real production. The Group installed a POX facility at the plant in 2010.

 

The Group's engineering institute, PHM Engineering, is drawing up construction plans in accordance with the Russian Technical Regulations which will form the basis for the permitting procedure.

 

In order to facilitate the project's efficient development, Petropavlovsk intends to enter into an agreement with Outotec which will outline  both parties' respective responsibilities and roles. The Group anticipates that Outotec will be responsible for the design, procurement and commissioning of the plants, whereas the Group will complete the construction work using its in-house services.  

 

On-site preparation work at Pokrovskiy has begun. Flotation plants at Malomir and Pioneer together with a hydrometallurgical circuit at Pokrovskiy will start processing refractory ores in the beginning of 2013. 

 

ALBYN

Mining at Albyn is planned to be conducted by open-pit methods. The Group is planning to treat ore from Albyn at an on-site 4.0Mtpa RIP plant using direct cyanidation technology.

 

The first of two RIP processing lines at Albyn is expected to be commissioned in the fourth quarter of 2011. This will consist of one 7.5m x 2.5m SAG mill, two 4.0m x 6.0m ball mills and a sorption and desorption circuit with 200m3 tanks. Upon ramp-up, which the Group anticipates will be finalised by the beginning of 2012, the total plant capacity for this first processing line is expected to be 2.0Mtpa.

 

The development of Albyn is currently on schedule and on budget due to the significant volume of work conducted during 2010. This work included the construction of on-site accommodation, temporary fuel storage and machinery maintenance facilities as well as the construction of project infrastructure including a second power line and on-site roads. Work has been conducted to prepare the site for the start of mining operations. 

 

In addition to this construction work, the Group placed key orders for processing and mining equipment during 2010. These orders were placed earlier than previously planned to make allowances for any possible delays, as experienced at Pioneer in 2010.

 

The Ore Reserves at Albyn are based on the independently audited geological resource estimates that have been economically optimised using a gold price of US$1,000/oz by WAI. WAI estimated combined Proven and Probable Ore Reserves of 16.7 Mt at an average grade of 2.01 g/t Au. Development of the open pit will require 365.4Mt of waste to be removed in order to access the ore bodies with an average stripping ratio of 21.8 t/t.

 

Outlook

In line with the Group's new approach to forecasting, the decision has been taken in 2011 not to release anticipated production figures for Albyn for 2011 although the Group has no reason to believe that these will not proceed smoothly as planned. Consequently, production from Albyn has not been included in the Group's current estimate of 2011 production of 600,000oz of gold.

 

The Group is constructing an RIP plant and the first line is expected to be commissioned at the end of 2011, comprising a 7.5m x 2.5m SAG mill, two 4.0m x 6.0m ball mills and a sorption and desorption circuit with 200m³ tanks. The capacity of this first line is expected to be 2.0Mt per annum.

 

A second processing line is scheduled to be installed by the end 2013, which is anticipated to take the overall plant capacity to 4.0Mtpa.  It is planned that the second line will be of a similar design comprising of one 7.5m x 2.5m SAG mill and two 4.0m x 6.0m ball mills.

 

TOKUR

First trial operations at Tokur were commissioned by the Group in 2009 to test proposed processing methods for the deposit focused on the re-processing of low-grade stockpiles from the old Tokur underground mine using new x-ray separation technology. Gold recovery was 72% and the throughput of the classifier/separator complex was 50t of ore per day. The resulting product yielding 4.5 g/t Au suitable for direct mill feed is currently being stockpiled until the industrial scale mining and processing operations commence. At the end of 2010, a 3.2kt bulk sample of this pre-concentrate was processed through the RIP plant at Malomir, returning 85% metallurgical recovery and providing the Group with confidence in the selected development concept.

 

The ore from the stockpiles bears the same metallurgical characteristics as the principal ore body and this exploration work will be invaluable when designing the future processing plant.

 

The Ore Reserves at Tokur are based on Measured and Indicated Mineral Resources that have been economically optimised using a gold price of US$1,000/oz by WAI. WAI estimated combined Proven and Probable Ore Reserves of 4.2Mt at an average grade of 1.45g/t Au. Ore extraction requires that 37.6Mt of waste is removed in order to access the ore bodies.

 

Currently the Board is reviewing various scenarios for the development of this project and expects the feasibility study to be finalised by the end of 2011.

 

PETROPAVLOVSKOYE, NOVOGODNEE MONTO, YAMAL

During 2010, the Ore Reserves at Petropavlovskoye were audited by WAI using Measured and Indicated Mineral Resources and a gold price of US$1,000/oz. WAI estimated combined Proven and Probable Ore Reserves of 11.0Mt at an average grade of 1.05g/t Au. Ore extraction will require that 79.5Mt waste is removed to access the ore bodies.

 

In 2010, exploration at Petropavlovskoye concentrated on the deposit's flanks where drilling was conducted on an 80 x 80m grid and samples were prepared and assayed at the Group's fully accredited laboratory in the nearby town of Harp. Grades of between 0.68g/t and 2.1g/t were identified, with individual samples assaying up to 10.72g/t Au.

 

The unmineralised overburden rock at both Petropavlovskoye and Novogodnee Monto, the Group deposit located 1km from Petropavlovskoye, has suitable properties for use as a building material. The Group is planning to use the overburden rock to produce high quality gravel for the local market where there is high demand for such products. A feasibility study for the project taking into account the positive economic effects of gravel sales is being developed. The development work in 2010 included pre-stripping and stockpiling of 46,700m3 of rock to prepare the quarry for industrial gravel production. A preliminary Environmental Impact Assessment ("EIA") was also conducted.

 

ALLUVIAL OPERATIONS

Koboldo

Koboldo currently holds 29 licences to mine alluvial gold deposits in the Amur region. Koboldo operates a variety of alluvial mining methods such as open cut and selective hydraulic, bulk hydraulic and dredge mining.

 

In 2010, Koboldo together with Tokur produced 28,000oz of gold, representing a 15% increase on the same period in 2009 (24,400oz). It is expected that alluvial operation will yield 31,000oz of gold production in 2011.

 

 

Omchak

Omchak was formed in 2003 when Petropavlovsk (then Peter Hambro Mining PLC) entered into a 50:50 joint venture with OJSC Susumanzoloto and OJSC Shkolnoye, both established and respected Russian gold mining companies. The joint venture enabled the Group to work in one of the most famous gold provinces in Russia, the Magadan region.

 

In July 2010, Omchak became a subsidiary of the Group following an increase in the Group's total holding to 90% after the acquisition of 32.5% and 7.5% of the issued capital of the joint venture from Susumanzoloto and Shkolnoye, respectively.

 

Omchak and its subsidiaries own gold licences for both alluvial and hard-rock deposits of which only alluvials are currently in production. Total attributable gold production from Omchak during 2010 was 52,300oz of gold. This figure was in-line with the Group's forecast.

 

Omchak and its subsidiaries also hold licences relating to five hard-rock gold assets: Verkhne-Aliinskoye, Kulinskoye and Bukhtinskaya in the Zabaikalskiy krai, Birusinskiy in the Irkutsk region and Kaurchak in the Republic of Altai. None of these assets are currently in production.

 

It is expected that Omchak assets will produce c.56,000oz in 2011.

 

Alluvial total cash costs

2010 total cash costs for the Group's alluvial operations were US$862/oz. This figure was broadly in line with expectations, as alluvial mining typically requires more costly overheads than hard rock mining.

 

JOINT VENTURES AND INVESTMENTS

The Group and OJSC Priisk Solovievskiy, a 13.76% investment of the Group, each hold a 50% interest in LLC GDK Odolgo which currently possesses four combined mining and exploration licences relating to properties in the Amur region, two of which are alluvial operations.

 

Total attributable gold production from the Group's joint ventures in 2010 was 21,600oz, of which 7,300oz were produced by Omchak prior to the Group increasing its holding from 50% to 82.5% in July 2010, resulting in Omchak becoming a subsidiary of the Group. 2010 production from joint ventures was in line with the Group's forecast following this transaction.

 

2010 EXPLORATION REPORT AND LICENCE ACQUISITIONS

Pokrovskiy and Flanks  

A 24% increase in reserves allows for prolonging of the life of the main pit at Pokrovskiy. Exploration continued at Pokrovka-2 as well as at a number of prospective areas at the Pokrovskiy satellite deposits, with a view to increasing the reserves and resources base to replenish the depletion of the main pit at the Pokrovskiy mine. Drilling at Pokrovka-2 confirmed a new mineralised zone.

 

The new perspective Borovaya area was acquired in late 2010 with a view to exploration being commenced in 2011.

 

Trenching completed at the Zheltunak East prospect returned promising results with grades of 1.4-6.03g/t Au at an apparent thickness of 1.0-4.0m.

 

Pioneer 

On-going drilling on the Bakhmut NE area continues following the long, untested strike length available. A new licence has been acquired in order to continue following this exploration trend for at least another 1.5km. This additional licence also covers a new mineralised zone identified north-west of Bakhmut.

 

Ongoing exploration has identified continuations to the mineralised structures at Andreevskaya, as well as presence of sub-parallel mineralised zones.

 

Considerable exploration has been undertaken at the Nikolaevskaya zone allowing an estimation of c.227,557oz of Inferred gold resources in accordance with the JORC Code (2004) at an average grade of 0.84g/t.

 

Malomir

Exploration work at Malomir in 2010 continued on the Quartzitovoye ore zone where confidence in the level of reserves has grown.  Exploration on the Magnetitovaya zone located in the eastern part of licence area continues, having located two ore bodies. In-fill drilling completed on the Sukhonyr deposit allowed an upgrade to a significant part of the previously identified Inferred resources into the Indicated category that consequently expanded the project ore reserves and the proposed open pit. Further Inferred resources have also been identified.

 

Albyn

In-fill drilling completed in 2010 allowed better definition of the high grade zones and improved the average grade of the project's resources and reserves.

 

Other Amur assets

The new Alkagan-Adamovskaya licence (472.8km2 in size) surrounding the Pioneer initial licence area has been acquired, allowing further eastward exploration of the high grade Bakhmut and Andreevskaya trends. Exploration at Bakhmut NE has already identified additional zones of mineralisation - a new mineralised zone has been discovered c.1,400m north-west of Bakhmut.

 

The Group's geologists believe that the newly-acquired Kharginskoye licence located south-east of the Albyn deposit offers the potential to discover a new target of a similar size and nature as Albyn.

 

The Group has also acquired the Osezhinskaya licence area, located south-west of Taldan, which contains two known ore occurrences and has a number of geological prospects.

 

Burinda and Topazovskoye (Taldan licence area)

The Burinda and Topazovskoye prospects are situated in a similar geological environment to Pokrovskiy and are considered to be highly prospective by the Group's geologists. During 2010, the Group continued to explore these assets. A number of steep dipping mineralised bodies were identified with a thickness of up to 40m and assays of up to 35g/t Au in selected samples. Preliminary metallurgical tests indicate that primary mineralisation is amenable to direct cyanidation with recoveries of up to 95%. Magnetic and geological surveys have identified a 2.5-3.0km northwards extension of the Burinda structure with gold presence confirmed by samples. The Group plans to release a JORC Code (2004) resource estimate for Burinda later in 2011.

 

Kirovskoye Deposit (Solovievskaya licence)

2010 exploration was concentrated on the Prirazlomnaya and Tsentralnaya zones.  Intersections of up to 60g/t Au at 2-3m of apparent thickness with a wider surrounding area at a grade of 3-5g/t Au were identified at Prirazlomnaya.  The exploration results received at Tsentralnaya are also encouraging with gold grades up to 14g/t. Mineralisation trends seen within the Solovievskaya licence area continue to provide strong potential for the discovery of further gold resources. The work undertaken in 2010 has further demonstrated the importance of the area and continued exploration is warranted. Preliminary test work on oxide samples has shown cyanide leach recoveries of more than 95%, indicating that gold within the samples is non-refractory, subsequently increasing the prospects at this target.

 

Sagur-Semerotakskaya area

This is a recently acquired prospect area situated to the south of Albyn, in a region of significant alluvial mining and within the same geological formations as Malomir. The high grade veins known in the area were mined in the past using underground methods with reported total production of 3.5t of gold. 720kg reportedly still remain in the mine as a historical resource. Quartz veins mined half a century ago were 0.3-3.2m thick containing 40-60g/t Au with some substantial grades of up to 2,700g/t Au.

 

Exploration remains at an early stage and is targeting wider zones that are host to high grade veins and also contain lower grade disseminated gold mineralisation that can potentially be extracted using open pit mining methods. Grades of 1.0-5.0g/t Au at a mineable width have been identified so far in trenches with exploration continuing.

 

Osipkan

The Osipkan prospect is located to the south of Albyn and north of the Sagur-Semerotakskaya area.  Exploration, including trenching as well as diamond drilling, was conducted in 2009 and 2010 and identified quartz veins as well as stockwork mineralisation. A sub-horizontal 2.6-6.0m thick mineralised zone with grades between 1.22-1.69g/t Au was intersected by drill holes as well as a steeply dipping body with 5.82-7.13g/t Au at a thickness of 1.0m-4.2m. During 2010, a further promising intersection was discovered with a grade of 1.35g/t over a thickness of 13m. The Group's geologists consider Osipkan to be highly prospective and are currently evaluating the best way to realise its potential.

 

Krasnoyarsk Region

The new Visokoe licence was acquired in the Krasnoyarsk region during 2010 hosting significant gold resources. Both oxide and primary ore is suitable for direct cyanidation treatment. The mineralised zone defined to date by drilling and trenching exceeds 1,400m in length with an average width of 40-50m.  The exploration drilling continues with the current stage of exploration due to be completed later this year. Utilising the drilling results received to date, the Group estimated 500,000oz of gold in Indicated resources and a further 1,500koz of Inferred that have been included in the current resource statement.  The exploration potential of the licence is far from being fully realised, the main ore body is still open to the depth; a parallel narrow but higher grade structure running 300m to the south-west is also yet to be explored and evaluated.

 

Yamal

In 2010, the Group acquired a new prospective licence in the Yamal region, named Sob-Kharbeiskaya. This area is located c. 40km north-west from Petropavlovskoye. Initial state-funded gold prospecting completed between 2000 and 2009 identified several geochemical anomalies and concluded that the area has potential to host gold-quartz-sulphide mineralisation.

 

EAO

During 2010, the Group acquired a gold licence in the EAO, a region south-east of the Amur region. This new licence area is situated c. 40km south of IRC's K&S deposits. Numerous indications of gold mineralisation, including a historically mined alluvial deposit, geochemical anomalies and historical trenching results with reported grades of up to 20g/t, have led the Group's geologists to believe that this area is highly prospective for discovery of significant gold mineralisation. The Group is scheduled to commence its exploration programme in mid-2011.

 

GOLD PRODUCTION OUTLOOK 2011

The Group currently estimates total attributable gold production for 2011 at 600,000oz, including c.513,000oz from the Pokrovskiy, Pioneer and Malomir mines and c. 87,000oz from the Group's alluvial operations. This estimated production represents a c.18% increase compared to 2010 attributable gold production.

 

2011 production is expected to ramp-up towards the second half of the year with c.40% of annual gold output to be produced in H1 2011. The expected increase in the second half is attributable to the seasonal nature of alluvial and heap-leach operations.

 

Production from Albyn that is expected to be commissioned in the fourth quarter of 2011 is excluded from the target, as part of the Group's new conservative approach to forecasting its production output.

 

GOLD PRODUCTION OUTLOOK 2012-2016

The Group continues to review its production schedule for the period 2012 - 2016 and in light of the latest additions to reserves base at the main producing assets to optimise grades scheduling at Pioneer and Malomir mines.

 

The Group expects some changes to the previous estimates, significant production growth is expected to be achieved due to a substantial increase in production capacities.

 

The Group plans an increase of 116% in production capacities during 2011 through to 2015 representing an increase from the 8.9Mtpa current capacity to 19.2Mtpa capacity in 2015.

 

CAPITAL EXPENDITURE

In 2010, the Group spent a total of US$368 million on its gold projects. The key area of focus was the development of the Pioneer and Malomir projects, whilst continuing with ongoing exploration at the Pokrovskiy, Pioneer, Malomir and Albyn projects.

 

Capital expenditure for gold projects in 2011 is expected to be c. US$353m. A significant amount of this planned capital expenditure will be allocated to construction of the Albyn mine, as well as the second milling line for processing of refractory ores at Malomir and infrastructure expansion for the Pokrovskiy POX hub.

 

CASH COSTS

Group total cash costs for hard rock deposits in 2010 were US558/oz, with total cash costs for alluvial projects amounting to US$862/oz. The increase in costs at the hard rock operations was mainly due to the processing of lower than anticipated grades, Rouble inflation and fluctuations in the Rouble to US Dollar exchange rate.

 

Compared to 2009, electricity costs increased by 16%, cost of chemical reagents increased in the range between 7% and 19%, cost of diesel increased by 12% and consumables prices increased by up to 3%, due to Rouble inflation and wages increased by 6%. The effects of Rouble price inflation were increased by the appreciation of the Rouble against the US Dollar by 5%, with the average exchange rate for the year going from 32 Roubles per US Dollar in 2009 to 30.4 Roubles per US Dollar in 2010.

 

At Pioneer the Group expects a slight increase in unit operating cash cost per tonne, mainly attributable to the higher cost of ore because of a higher stripping ratio compared to 2010. Other overheads are expected to decrease on a per tonne basis due to economies of scale.

 

Cash costs per tonne at Malomir will be positively affected by an absence of the negative effect of 2010 start up costs although negatively affected by a higher stripping ratio compared to 2010.

 

CORPORATE UPDATE

DIVIDENDS

As the business of the Company develops, and subject to the availability of distributable reserves, the Directors intend to pursue a dividend policy which reflects the Group's cash flow and earnings, while maintaining an appropriate level of dividend cover and taking into consideration further funding relating to the development of the Group's activities.

On 30 March 2011, the Board of Directors resolved to recommend a final dividend of £0.07 per share which is expected to result in an aggregate payment of £13.2 million. Subject to shareholder approval at the Annual General Meeting on 19 May 2011, the final dividend is proposed to be paid on 28 July 2011 to shareholders on the register at the close of business on 1 July 2011.

In future the Board would expect to pay both interim and final dividends, with the interim dividend being paid in October and the final dividend in July/August of the following year subject to the Group's results. The Board considers that the proposed dividend level is appropriately covered and is consistent with the Group's development spending.

 

CHANGES TO BOARD MEMBERSHIP

 

Change to Senior Independent Non-Executive Director

In 2011 Mr Peter Hill-Wood stepped down as Senior Independent Non-Executive Director and Dr Graham Birch was appointed in his place.

 

Dr Birch became a Non-Executive Director in February 2010, retiring in 2009 as head of international fund manager BlackRock's successful Natural Resources team, where he was responsible for c. US$40 billion of assets under management.  Dr Birch is well known in the investor community and will provide shareholders with further independent access to the Company.

 

Retirement of Non-Executive Director

Mr Peter Hill-Wood, a Non Executive Director of Petropavlovsk, is to retire from his role at the Company's Annual General Meeting on 19 May 2011.

 

As was announced in January 2011, the Board is seeking to make an additional Non-Executive Director appointment to replace Mr Hill-Wood and ensure an appropriate balance between executive and non-executive directors.  This search is currently still ongoing.

 

New Board appointments

In relation to the strategic review of the business conducted by the Board in Q4 2010, three additional Executive Directors were appointed in January 2011.

 

Dr Alya Samokhvalova was appointed Strategic Director and chairs the newly created Strategic Committee.  Dr Samokhvalova continues in her role as Group Head of External Communications, a position she has held since joining Petropavlovsk in 2002. Dr Samokhvalova has a Masters in Investment Management from the CASS Business School in London and a PhD in Economics from the Moscow International High Business School.

 

Mr Andrey Maruta became Finance Director, Russia, and serves on the Strategic Committee.  Mr Maruta, who was Group Financial Controller, qualified as a Chartered Certified Accountant at Moore Stephens in 2001 and joined the Group in 2003 as Group Chief Accountant. He was appointed Deputy Finance Director in 2005 and Finance Director in 2006 before the Group's merger with Aricom plc.

 

Mr Martin Smith was appointed Technical Director and chairs the Technical Committee.  Mr Smith, now Group Head, Technical Services, joined as Technical Director of Aricom plc in June 2006. He has more than 25 years' operational and corporate management experience across the global mining industry, and has previously worked with Anglo-American Corporation, Kier International, Costain Mining and Shell International.

 

Establishment of new committees at an executive level

The Board established a Strategic Committee and a Technical Committee in January 2011.

The Strategic Committee is responsible both for formulating annual and long-term budget and setting production forecasts and for monitoring the Group's performance against these targets. The Technical Committee was established to provide support for the Strategic Committee by providing a technical analysis of the Group's budgets, forecasts and investment plans. Both Committees report directly into the Group's Executive Committee.

 

The Strategic Committee is chaired by Dr Alya Samokhvalova, Strategic Director and Group Head of External Communications, and includes Mr Andrey Maruta, Finance Director, Russia. Dr Samokhvalova and Mr Maruta both sit on the Board of Directors and the Executive Committee, having each worked for the Group in London for over seven years.  Dr Pavel Maslovskiy, Chief Executive Officer, and Mr Dmitry Chekashkin, a member of the Executive Committee and Group Head of Precious Metals Operations, also serve on the Strategic Committee. 

 

The Technical Committee was established to provide support for the Strategic Committee by providing a technical analysis of the Group's budgets, forecasts and investment plans. The Committee reports directly to the Group's Executive Committee. The Technical Committee is chaired by Mr Martin Smith, Technical Director, who also sits on the Board of Directors and the Executive Committee. The Technical Committee draws experience from the Company's technical services divisions, including geology, engineering, mining and processing. 

 

Management restructuring

 

These new management structures were designed to enable the Group to overcome the challenges of evolving into a multi-mine producer, and establish a more predictable and sustainable production pattern by restructuring the planning department and having wider involvement from independent consultants for mining scheduling and production optimisation.

 

POST-YEAR END EVENTS

On 18 February 2011, Petropavlovsk entered into a non-binding Heads of Agreement ("HoA") with Meridian Minerals Limited ("Meridian") relating to the potential sale by the Group of a 75% interest in Omchak (the "Sale"). The alluvial assets, currently owned by Omchak and its subsidiaries, are not intended to form part of the Sale and it is anticipated that these assets will be transferred to the Group prior to the Sale. Therefore, the potential Sale would only relate to the above-mentioned non-producing hard rock assets. It is the intention of the parties that, subject to satisfaction of all of the conditions specified in the HoA, the definitive transaction documents for the Sale, including a sale and purchase agreement and a shareholders' agreement, will be entered into on or before 11 May 2011. The anticipated consideration for the Sale is US$40 million, which is intended to be payable by Meridian to the Group within 60 days after the date of entry into the definitive transaction documents for the Sale.

 

IRC

IRC Highlights

In October 2010, the Group completed the listing of IRC on the Stock Exchange of Hong Kong Limited, which raised proceeds of c. US$240m. The Group has retained a 65.6% stake in IRC. The IRC assets were previously the Group's Non-Precious Metals Division.

 

In December 2010 IRC entered into a US$340 million project finance arrangement with ICBC, and a US$400 million EPC was signed with CNEEC. This contract aims to bring K&S into production in 2013. IRC projects are fully funded for their near term growth plans.

 

Deed of Non-Competition

The Company and IRC have entered into a Deed of Non-Competition (the "Deed") to ensure that their respective businesses do not compete.  The Deed, dated 22 September 2010, commenced from the date on which IRC was listed on the Stock Exchange of Hong Kong Limited and shall continue in force until such time as the shares of IRC Limited cease to be listed on the SEHK or until the Company controls less than 50% of the issued share capital of IRC.  The Directors confirm that the Company has complied with the terms of the Deed during the period commencing from the commencement date of the Deed up to the date of the Annual Report.

 

Kuranakh

Kuranakh was commissioned in May 2010, with a formal commissioning ceremony undertaken by the President of Russia in July 2010. The design capacity is 0.9Mtpa titanomagnetite concentrate and 0.29Mtpa ilmenite concentrate.

 

Production ramped up during the second half of the year with some adjustments being needed for the ilmenite circuit. By December 2010, the plant was working towards reaching full capacity and producing titanomagnetite concentrate with the grade of approximately 62.8% Fe and ilmenite concentrate with the grade of 47% to 48% TiO2.

 

The ilmenite circuit has not yet achieved optimal yields due to issues with the concentrators. The supplier of the high intensity electro-separation circuits for the ilmenite concentrate has visited Kuranakh to correct the yield issue and will report to IRC shortly. IRC is also carrying out independent testing of the materials and circuit.

 

Commercial sales of iron ore concentrate began in September 2010 under a long term off take agreement that prices IRC's product at a formula related to the spot price for iron ore concentrate. The price achieved rose steadily thereafter, with an average price agreed in December of US$131/tonne. As the sales volume rose, so too did the prices achieved, and IRC is currently realising a price closer to the local spot price. Further information will be made available in IRC's forthcoming trading statement which is due on 12 April 2011.

 

Summary of Principal IRC mineral resources for Kuranakh

(in accordance with the JORC Code (2004))

 

Cut Off Grade

Resource category

Tonnage (Mt)

Grade

(% Fe total)

17 % Fetot

Indicated

37.38

31.17

Inferred

5.68

31.55

Total

43.06

31.22

 

K&S

K&S is an advanced stage construction project which is currently on track to commence production of iron ore concentrate in 2013.

 

K&S is expected to be part-funded from IRC's US$340 million project finance facility with ICBC, with the remaining costs to be funded from a portion of the proceeds from IRC's listing on the Stock Exchange of Hong Kong Limited in October 2010. The project will see IRC's management and engineering team work with an experienced Chinese state contractor towards the planned first stages of commercial production in 2013. K&S is designed to comprise a 10Mtpa mining operation at two open pits. The total mine output will be processed on-site, and is expected to yield 3.2Mtpa of c.65% iron ore concentrate.

 

During 2010, on-site work at K&S focused on preparing the site for commissioning. This included clearance and construction work. The first accommodation block and offices were completed, and the first 1,000t of test ore was mined.

 

Summary of Principal IRC mineral resources for K&S

(in accordance with the Guidelines of the JORC Code (2004))

Project

Cut Off Grade

Resource category

Tonnage

(Mt)

Grade

(% Fe total)

K&S

25 % Fetot

Measured

195.66

32.45

Indicated

396.77

32.91

Inferred

148.65

32.07

Total

741.08

32.62

 

Other projects

IRC owns licences to explore and mine the Garinskoye iron ore deposit, which is located in the Amur region. IRC plans to commission this project in 2015 and estimates that Garinskoye's full design capacity will be 7.3Mtpa of iron ore pre-concentrate. In addition IRC owns three early-stage development assets, 100% of Kostenginskoye, located in the EAO, 49% of Bolshoi Seym, located in the Amur region and the Garinskoye Flanks, which surround the main Garinskoye project.

 

IRC is developing a joint venture in Heilongjiang province, China, with a major Chinese steel producer, to produce c.6,000tpa of vanadium pentoxide. IRC owns 46% of this enterprise. IRC expects this to commence production in late 2011.

 

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 and to implement its expansion plans and achieve cost reductions and efficiency measures, changes in its business strategy or development, 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.

 

Past performance cannot be relied on as a guide to future performance.

 

Basis of reporting reserves and resources

Mineral Resource and Ore Reserve estimates for the Group's hard rock deposits are reported in accordance with the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves as prepared by the Joint Ore Reserves Committee of the Australian Institute of Mining and Metallurgy, Australian Institute of Geosciences and Minerals Council of Australia ("JORC Code (2004)").

 

The basis for reporting reserves and resources for the Group's alluvial deposits is in accordance with the Russian Classification System, approved by the State Committee on Reserves ("GKZ") in 1965 (amended in 1981 and 2008).

 

The Russian Classification System is based principally on the degree of geological knowledge and the technical ability to extract a mineral reserve. Although economic considerations form a part of the justification for A, B, C1, and C2 category reserves, the system does not take into account the economic viability of extraction in the same manner as the JORC Code (2004), or other internationally recognised mineral reserves classification codes. The Russian Classification System also classifies reserves as "on-balance" if they economically viable at the time of the estimate and "off-balance" if the economic viability is yet to be demonstrated. Licence holders must register A, B, C1, and C2 category reserves with the GKZ to be able to extract them (depending upon the structural complexity class of the deposit. Gold deposits are usually in complexity class 2, 3 or 4 which require categories C1 and/or C2 only; categories A and B are rarely recorded for such deposits).

 

The content of this announcement have been approved for release by Dr. P. Newall, BSc, PhD, CEng, FIMMM, of Wardell Armstrong International. Dr. P. Newall has consented to the inclusion of the material in the form and context in which it appears.

 

PETROPAVLOVSK PLC

Consolidated Income Statement

For the year ended 31 December 2010

 

 

 

 

note

2010


2009



Before

exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items

Total



US$' 000

US$' 000

US$' 000


US$' 000

US$' 000

US$' 000










Group revenue

5

612,016

-

612,016


472,331

-

472,331

Operating expenses

6

(490,556)

(15,417)

(505,973)


(296,696)

(4,494)

(301,190)



121,460

(15,417)

106,043


175,635

(4,494)

171,141










Share of results of joint ventures


(3,168)

-

(3,168)


2,723

-

2,723

Operating profit/ (loss)


118,292

(15,417)

102,875


178,358

(4,494)

173,864










Investment income 

9

6,525

-

6,525


7,661

-

7,661

Interest expense

9

(32,172)

-

(32,172)


(7,140)

-

(7,140)

Other finance (losses)/ gains

9

2,285

(10,314)

(8,029)


(716)

23,716

23,000

Profit/ (loss) before taxation


94,930

(25,731)

69,199


178,163

19,222

197,385

Taxation

10

(46,228)

-

(46,228)


(45,260)

(7,341)

(52,601)

Profit/(loss) for the period


48,702

(25,731)

22,971


132,903

11,881

144,784

Attributable to:









Equity shareholders of Petropavlovsk PLC


45,508

(25,731)

19,777


131,313

11,881

143,194

Non-controlling interests


3,194  

-

           3,194  


1,590

-

1,590



48,702

(25,731)

22,971


132,903

11,881

144,784










Earnings/ (loss) per share









Basic

11

US$0.25

(US$0.14)

US$0.11


US$0.90

US$0.08

US$0.98

Diluted

11

US$0.25

(US$0.14)

US$0.11


US$0.88

US$0.08

US$0.96

 

 

PETROPAVLOVSK PLC

Consolidated Statement of Recognised Income and Expense

For the year ended 31 December 2010




2010

US$'000


 2009

US$'000







Profit for the period



22,971


144,784







Income and expense recognised directly in equity:






Revaluation of available-for-sale financial investments



(100)


(464)

Exchange differences on translating foreign operations



443


158

Net income/ (expense) recognised directly in equity



343


(306)







Total recognised income for the period



23,314


144,478

Attributable to:






- equity shareholders of Petropavlovsk PLC



20,161


142,520

- non-controlling interests



3,153


1,958

 


 

PETROPAVLOVSK PLC

Consolidated Statement of Changes in Equity

 

 
 
Share
capital
Share premium
Merger reserve
Own shares
Convertible bonds
Share based payments reserve
Other reserves
Retained earnings
Total
Non-controlling interests
Total equity
 
note
US$'000
US$'000
US$'000
US$'000
US$'000
US$’ 000
US$'000
US$'000
US$'000
US$'000
US$'000
Balance
at 1 January 2009
 
1,311
35,082
-
-
 
1,583
-
153,728
144,210
335,914
6,412
342,326
Recognised income and expense
 
-
-
-
-
-
-
(674)
143,194
142,520
1,958
144,478
Transfer to retained earnings(a)
 
-
-
-
-
-
-
(153,728)
153,728
-
-
-
Share based payments
 
-
-
-
-
-
3,334
-
-
3,334
-
3,334
Share placing of 16 million Ordinary Shares
 
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
 
-
-
-
-
-
-
6,970
-
6,970
-
 
 
6,970
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)
Conversion of convertible bonds
 
180
139,620
-
-
(1,583)
-
 
1,583
139,800
-
139,800
Employee options exercised
 
3
1,716
-
-
-
(421)
-
421
1,719
-
1,719
Acquisition of shares in subsidiaries
 
-
-
-
-
-
-
-
-
-
3,500
3,500
Balance
at 1 January 2010
 
2,805
275,742
570,071
(14,003)
-
3,847
6,296
443,136
1,287,894
11,870
1,299,764
Recognised income and expense
 
-
-
-
-
-
-
384
19,777
20,161  
3,153
23,314
Dividends
12
-
-
-
-
-
-
-
(27,774)
(27,774)
-
(27,774)
Share based payments
 
-
-
-
-
-
2,574
-
-
2,574
-
2,574
Vesting of Replacement LTIP
 
-
-
-
3,328
-
(3,260)
-
(68)
-
-
-
Employees’ options exercised
 
3
246
-
-
-
(21)
-
21
249
-
249
Issue of convertible bonds
22
-
 
-
-
59,032
-
-
-
59,032
-
59,032
Exercise of warrants
 
83
101,152
-
-
-
-
-
-
101,235
-
101,235
Acquisition of subsidiary
29
-
-
-
-
-
-
-
-
-
15,608
15,608
Issue of ordinary shares by subsidiary
31
-
-
-
-
-
-
-
(12,046)
(12,046)
241,653
229,607
Other transactions with non-controlling interests
 
-
-
-
-
-
-
-
328
328
(4,989)
(4,661)
Balance
at 31 December 2010
 
2,891
377,140
570,071
(10,675)
59,032
3,140
6,680
423,374
1,431,653
267,295
1,698,948
 

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


PETROPAVLOVSK PLC

Consolidated Balance Sheet

At 31 December 2010

 


note


2010

US$'000


2009

US$'000

Assets






Non-current assets






Goodwill

13


21,675

 


21,675

Intangible assets

14


346,862

 


104,029

Property, plant and equipment

15


1,320,333

 


1,065,490

Interests in joint ventures

16


8,446

 


31,886

Available-for-sale investments

17


3,443

 


3,543

Inventories

18


11,611

 


8,628

Trade and other receivables

19


29,196

 


8,856

Deferred tax assets

23


6,774

 


9,318




1,748,340

 

 


1,253,425







Current assets






Inventories

18


197,951

 


101,630

Trade and other receivables

19


218,508

 

 


140,505

Derivative financial instruments



2,381

 


96

Cash and cash equivalents

20


320,986

 


76,467




739,826

 

 


318,698







Total assets



2,488,166

 


1,572,123







Liabilities






Current liabilities






Trade and other payables

21


(142,738)

 


(64,379)

Current income tax payable



(9,735)

 


(6,201)

Borrowings

22


(93,104)

 


(11,944)




(245,577)

 


(82,524)







Net current assets



494,249

 


236,174

 

 












Non-current liabilities






Borrowings

22


(399,014)

 


(83,602)

Deferred tax liabilities

23


(133,542)

 


(97,578)

Provision for close down and restoration costs

24


(11,085)

 


(8,655)




(543,641)

 


(189,835)







Total liabilities



(789,218)

 


(272,359)







Net assets



1,698,948

 


1,299,764







Equity






Share capital

25


2,891

 


2,805

Share premium



377,140

 


275,742

Merger Reserve



570,071

 


570,071

Own shares

26


(10,675)

 


(14,003)

Convertible bond reserve

22


59,032

 


-

Share-based payments reserve



3,140

 


3,847

Other reserves



6,680

 


6,296

Retained earnings



423,374

 


443,136

Equity attributable to the shareholders of Petropavlovsk PLC



1,431,653

 


1,287,894

Non-controlling interests



267,295

 


11,870

 







Total equity



1,698,948

 


1,299,764

These consolidated financial statements for Petropavlovsk PLC, registered number 4343841, were approved by the Directors on 30 March 2011 and signed on their behalf by

 

 

Peter Hambro                                      Brian Egan

Director                                                  Director

 

PETROPAVLOVSK PLC

Consolidated Cash Flow Statement

For the year ended 31 December 2010


 



 

note

 

2010

US$000

 

2009

US$000

Cash flows from operating activities




Cash generated from operations

27

80,494

188,213

Interest paid


(26,787)

(24,401)

Income tax paid


(15,404)

(24,203)

Net cash from operating activities


38,303

139,609





Cash flows from investing activities




Acquisitions of subsidiaries, net of cash acquired

29

(11,505)

224,996

Acquisitions of non-controlling interests


(3,113)

-

Purchase of property, plant and equipment and exploration expenditure


(507,400)

(259,510)

Proceeds from disposal of property, plant and equipment


953

801

Purchase of available-for-sale investments

17

-

(3,048)

Investments in joint ventures

16

(4,731)

(2,021)

Loans granted


(1,413)

(12,740)

Repayment of amounts loaned to other parties


18,507

9,517

Interest received


5,812

3,542

Net cash used in investing activities


(502,890)

(38,463)





Cash flows from financing activities




Proceeds from issuance of Ordinary Shares, net of transaction costs


101,484

101,275

Issue of convertible bonds, net of transaction costs

22

370,290

-

Issue of ordinary shares by subsidiary, net of transaction costs

31

234,589

-

Repayments of borrowings


(136,764)

(70,513)

Proceeds from borrowings


174,147

96,786

Debt transaction costs prepaid


(4,090)

-

Buy back of exchangeable bonds

22

-

(178,365)

Dividends paid to shareholders of Petropavlovsk PLC


(27,773)

-

Dividends paid to non-controlling interests


(327)

-

Net cash from/ (used in)  financing activities


711,556

(50,817)





Net increase in cash and cash equivalents in the period


246,969

50,329

Effect of exchange rates on cash and cash equivalents


(2,450)

(306)

Cash and cash equivalents at beginning of period


76,467

26,444

Cash and cash equivalents at end of period


320,986

76,467

 

PETROPAVLOVSK PLC

Notes to the Consolidated Financial Statements

For the year ended 31 December 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.

 

2.         Basis of preparation and presentation

 

This preliminary results announcement is for the year ended 31 December 2010. While the financial information contained in this preliminary results announcement has been computed in accordance with International Financial Reporting Standards ("IFRS"), this announcement does not itself contain sufficient information to comply with IFRS.  For these purposes, IFRS comprise the Standards issued by the International Accounting Standards Board ("IASB") and Interpretations issued by the International Financial Reporting Interpretations Committee ("IFRIC") that have been endorsed by the European Union. The Group will send its full financial statements that comply with IFRS to shareholders in April 2011.

 

This preliminary results announcement does not constitute the Group's statutory accounts as defined in section 434 of the Companies Act 2006 (the "Act") but is derived from those accounts. The statutory accounts for the year ended 31 December 2010 have been approved by the Board and will be delivered to the Registrar of Companies following the Company's Annual General Meeting which will be held on 8 June 2011. The auditors have reported on those accounts and their report was unqualified, with no matters by way of emphasis, and did not contain statements under section 498(2) of the Act (regarding adequacy of accounting records and returns) or under section 498(3) (regarding provision of necessary information and explanations).

 

The information contained in this announcement for the year ended 31 December 2009 also does not constitute statutory accounts.  A copy of the statutory accounts for that year has been delivered to the Registrar of Companies.  The auditors' report on those accounts was unqualified, with no matters by way of emphasis, and did not contain statements under sections 498(2) or (3) of the Companies Act 2006. 

 

Going concern

The Group monitors and manages its liquidity risk on an ongoing basis. Cash forecasts are regularly produced and sensitivities run for different scenarios including, but not limited to, changes in commodity prices, different production rates from the Group's producing assets and the timing of expenditure on development projects. The Group meets its capital requirements through a combination of sources including the convertible bond as well as a number of banking facilities.

 

The Group's forecasts and projections, taking account of reasonably possible changes in trading performance and expenditure, show that the Group should be able to operate within the level of its current facilities, however, in addition to the Group's current facilities and in order to provide further headroom and additional flexibility the Group expects to secure further financing facilities for the subsequent 12 months from the date of approval of the 2010 Annual Report and Accounts.

 

The directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.

 

Exceptional items

The Group has adopted disclosure of exceptional items in the year ended 31 December 2010 and accordingly the comparative financial information for the year ended 31 December 2009 has been represented to identify those items that are considered exceptional under this classification approach. 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 (notes 6 and 9).

 

New and revised standards and interpretations adopted for the current reporting period 

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). In accordance with the transitional provisions, these standards have been applied prospectively.

 

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 revised IFRS 3 was applied to the acquisition of the controlling interest in CJSC ZRK Omchak in July 2010, resulting in re-measurement of the pre-existing 50% equity interest to fair value at the date of obtaining control with a US$28.9 million gain recognised as an exceptional item within Net operating income and expenses. The Group has chosen to recognise the non-controlling interest at the proportionate share of the fair value of the net assets of Omchak, which is in line with accounting policies adopted in prior reporting periods. See note 29 for further details.

 

3.             Judgements in applying accounting policies and key sources of estimation uncertainty

 

When preparing the consolidated financial statements in accordance with the accounting policies as set out in note 2, management necessarily makes judgements and estimates that can have a significant impact on the financial statements. These judgements and estimates are based on management's best knowledge of the relevant facts and circumstances and previous experience. Actual results may differ from these estimates under different assumptions and conditions.

 

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

 

3.1  Ore reserve estimates

The Group estimates its ore reserves and mineral resources based on the Australasian Code for Reporting of Exploration Results, Mineral Resources and Ore Reserves of December 2004 (the JORC Code). The JORC Code requires the use of reasonable investment assumptions when reporting reserves, including future production estimates, expected future commodity prices and production cash costs.

 

Ore reserve estimates are used in the calculation of depreciation of mining assets using a units of production method, impairment charges and for forecasting the timing of the payment of close down and restoration costs. Also, for the purpose of impairment review and the assessment of life of mine for forecasting the timing of the payment of close down and restoration costs, the Group may take into account mineral resources in addition to ore reserves where there is a high degree of confidence that such resources will be extracted. 

 

Ore reserve estimates may change from period to period as additional geological data becomes available during the course of operations or economic assumptions used to estimate reserves change. Such changes in estimated reserves may affect the Group's financial results and financial position in a number of ways, including the following:

 

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

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

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

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

 

3.2  Exploration and evaluation costs

The Group's accounting policy for exploration and evaluation expenditure results in exploration and evaluation expenditure being capitalised for those projects where such expenditure is considered likely to be recoverable through future extraction activity or sale or where the exploration activities have not reached a stage which permits a reasonable assessment of the existence of reserves. This policy requires management to make certain estimates and assumptions as to future events and circumstances, in particular whether the Group will proceed with development based on existence of reserves or whether an economically viable extraction operation can be established. Such estimates and assumptions may change from period to period as new information becomes available. If, subsequent to the exploration and evaluation expenditure being capitalised, a judgement is made that recovery of the expenditure is unlikely or the project is to be abandoned, the relevant capitalised amount will be written off to the income statement.

 

3.3  Impairment

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

 

The recoverable amount of an asset, or CGU, is measured as the higher of fair value less costs to sell and value in use.

 

Management necessarily apply their judgement in allocating assets to CGUs as well as in making assumptions to be applied within the value in use calculation.

 

The key assumptions which formed the basis of forecasting future cash flows and the value in use calculation as of 31 December 2010 are:

 

§  The successful extraction and processing of the reserves in accordance with the available ore reserves and mineral resources and sale of the commodity produced;

§  Commodity prices, which are internal forecasts by management that are based on the forecasts of industry market researchers;

§  Costs, which are internal forecasts prepared by management, adjusted for future inflation rates in countries of operation; and

§  Discount rate to be applied to the future cash flows, being the pre-tax weighted average nominal cost of capital, calculated by management and consistent with an assessment from an external advisor, being in the range between 13.3% and 15.9% for precious metals mining projects and 17.3% and 11.3% for non-precious metals mining projects, depending on the risk inherent to a particular project.

 

Subsequent changes to CGU allocation or estimates and assumptions in the value in use calculation could impact the carrying value of the respective assets.

 

3.4  Close down and restoration costs

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

 

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

 

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

 

3.5  Tax provisions and tax legislation

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

 

3.6  Recognition of deferred tax assets

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

 

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

 

4.             Segmental information

 

Business segments

 

The Group has three reportable segments under IFRS 8 which reflect the way the Group's businesses are managed and reported:

 

§  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, Pioneer and Malomir), the Group's alluvial operations and the Group's operations under gold joint venture arrangements as well as various gold projects at the exploration and development stages.

 

§  IRC segment, comprising IRC Limited and its subsidiaries (note 31).

 

§  The Other segment, comprising the in-house geological exploration expertise performed by the Group's exploration companies Regis and Dalgeologiya, the in-house construction and engineering expertise performed by the Group's specialist construction company Kapstroi and the engineering and scientific operations represented by PHM Engineering and Irgiredmet as well as procurement of materials such as reagents and consumables and equipment for third parties undertaken by Irgiredmet.

 

The Group has changed the composition of its reportable segments in 2010, following the changes in management of the Group's businesses as a result of listing of the Group's Non-Precious Metals Division, IRC Limited ("IRC"), on the Main Board of The Stock Exchange of Hong Kong Limited (note 31).

 

The key changes in the basis of segmentation from the financial statements for the year ended 31 December 2009 are set out below:

 

§  In-house geological exploration expertise and the in-house construction and engineering expertise reported within the "Exploration" and the "Construction and Engineering" segments have been aggregated within the "Other" segment.

 

§  The "Non-precious metals" segment has been renamed to "IRC" segment.

 

§  The Group's interest in joint venture arrangements for the design and development of a titanium sponge production plant in China, the Group's interest in joint venture arrangements for production of vanadium pentoxides and related products in China as well as various infrastructure projects within the Non-Precious Metals Division have been moved from the "Other" segment into the "IRC" segment.

 

§  In-house engineering expertise related to Giproruda reported within the "Construction and Engineering" segment has been moved into the "IRC" segment.

 

The comparative information for the year ended 31 December 2009 has been restated to conform to the current period presentation resulting in the following reallocations:

 

§  Segmental losses of US$ 5.5 million in aggregate recorded within the Exploration, Construction and Engineering and Other segments were re-allocated to the IRC segment in the amount of US$0.3 million and to Othersegment in the amount of US$5.2 million; and

 

§  Segmental assets and liabilities of US$90.0 million and US$14.3 million in aggregate, respectively, recorded within the Exploration, Construction and Engineering and Other segments were re-allocated to the IRC segment in the amounts of US$60.6 million and US$3.4 million, respectively, and to Other segment in the amounts of US$29.4 million and US$10.9 million, respectively.

 

Segment information

               

 

2010 

Precious

metals 

IRC

Other

Consolidated


US$'000

US$'000

US$'000

US$' 000

Revenue





Gold

    557,853

-

-

557,853

Silver

             3,853

-

-

3,853

Iron ore concentrate

-

12,594

-

12,594

Other external sales

-

13,198

24,518

37,716

Total Group revenue from external customers

561,706

25,792

24,518

 

612,016






Inter-segment sales

6,146

-

231,083

237,229






Net operating expenses

(315,042)

(74,540)

(39,755)

(429,337)

including





Depreciation and amortisation

(60,247)

(4,915)

(8,290)

(73,452)

Impairment

(8,868)

(35,973)

-

(44,841)






Share of results in joint ventures

(3,033)

(135)

-

(3,168)

Segment result

243,631

(48,883)

(15,237)

179,511

Before exceptional items

214,749

(13,939)

(15,237)

185,573

Exceptional items

28,882(a)

(34,944)(b)

-

(6,062)






Central administration (c)




(73,471)

Foreign exchange losses




(3,165)

Operating profit




102,875

Investment income




6,525

Interest expense




(32,172)

Other finance (losses)/ gains




(8,029)

Taxation




(46,228)

Profit for the period




22,971











Segment Assets

1,365,221

856,146

208,093

2,429,460

Segment Liabilities

(58,893)

(55,807)

(48,857)

(163,557)

Goodwill(d)




21,675

Deferred tax - net




(126,768)

Derivative financial instruments - net




2,381

Unallocated cash




17,506

Loans given




10,369

Borrowings




(492,118)

Net Assets




1,698,948






Other segment information





Additions to non-current assets:





Exploration and evaluation expenditure capitalised  within intangible assets

60,095

3,323

337

63,755

Other additions to intangible assets

2,271

-

-

2,271

Capital expenditure

298,965

115,987

17,809

432,761

Other items capitalised

8,055

92

-

8,147











Average number of employees

6,054

1,561

4,174

11,789

(a)    See note 29.

(b)    See note 6.

(c)    Including central administration expenses of IRC Limited of US$25.9 million out of which US$9.4 million is an exceptional item, being costs incurred in relation to the listing of IRC Limited on the Stock Exchange of Hong Kong Limited.

(d)    In making the assessment for impairment, goodwill is allocated to the group of cash generating units likely to benefit from acquisition-related synergies (note 13).       

 

 

2009

(restated) 

Precious

metals 

IRC

Other

Consolidated


US$'000

US$'000

US$'000

US$' 000

Revenue





Gold

426,956

-

-

426,956

Silver

2,856

-

-

2,856

Other external sales

802

6,571

35,146

42,519

Total Group revenue from external customers

430,614

6,571

35,146

472,331






Inter-segment sales

274

-

142,567

142,841






Net operating expenses

(181,461)

(13,618)

(46,143)

(241,222)

including





Depreciation and amortisation

(32,156)

(1,552)

(6,814)

(40,522)

Impairment

(4,243)

-

-

(4,243)






Share of results in joint ventures

2,470

253

-

2,723

Segment result

251,623

(6,794)

(10,997)

233,832

Before exceptional items

251,623

(6,794)

(10,997)

233,832

Exceptional items

-

-

-

-






Central administration (a)




(54,063)

Foreign exchange losses




(5,905)

Operating profit




173,864

Investment income




7,661

Interest expense




(7,140)

Other finance gains/ (losses)




23,000

Taxation




(52,601)

Profit for the period




144,784











Segment Assets

808,101

493,096

152,586

1,453,783

Segment Liabilities

(31,717)

(13,184)

(34,334)

(79,235)

Goodwill(b)




21,675

Deferred tax - net




(88,260)

Derivative financial instruments - net




96

Unallocated cash




56,677

Loans given




30,574

Borrowings




(95,546)

Net Assets




1,299,764






Other segment information





Additions to non-current assets:





Exploration and evaluation expenditure capitalised  within intangible assets

11,694

36

767

12,497

Other additions to intangible assets

56

107

-

163

Capital expenditure

180,662

61,756

8,025

250,443

Other items capitalised

17,063

-

-

17,063











Average number of employees

3,510

754

3,502

7,766

                                                                                                                               

(a)    Including US$6.8 million, central administration expenses attributed to IRC, and an exceptional item of US$4.5 million, being costs incurred in relation to the admission of Petropavlovsk PLC to the main board of London Stock Exchange.

(b)    In making the assessment for impairment, goodwill is allocated to the group of cash generating units likely to benefit from acquisition-related synergies (note 13).       

 

Entity wide disclosures

 

Revenue by geographical location (a)

 

2010

2009


US$'000

US$'000

Russia and CIS

578,152

433,126

UK

-

39,205

China

12,608

-

Other

21,256

-

  

612,016

472,331

(a)        Based on the location to which the product is shipped or in which the services are provided.

 

Non-current assets by location of asset (b)

 

 

2010

2009


US$'000

US$'000

Russia

1,693,551

1,200,090

China

10,411

31,619

Other

340

-

  

1,704,302

1,231,709

(b)        Excluding financial instruments and deferred tax assets.

 

Information about major customers

 

During the years ended 31 December 2010 and 2009, the Group generated revenues from the sales of gold to a number of financial institutions, namely, to Russian banks for Russia domestic sales of gold and to foreign banks for sales of gold outside of Russia. Included in gold sales revenue for the year ended 31 December 2010 are revenues of US$511 million which arose from sales of gold to banks that individually accounted for more than 10% of the Group's revenue, namely US$287 million to Sberbank of Russia and US$224 million to the Bank of Moscow (2009: US$356 million revenues from sales of gold to three banks that individually accounted for more than 10% of the Group's revenue, namely US$116 million to Sberbank of Russia, US$125 million to Bank of Moscow and US$115 million to Standard Bank). The proportion of Group revenue of each bank may vary from year to year depending on commercial terms agreed with each bank. Management consider there is no major customer concentration risk due to high liquidity inherent to gold as a commodity.

 

5.             Revenue

 

 

2010

2009


US$'000

US$'000

Sales of goods

586,628

445,880

Rendering of services

22,866

24,263

Rental income

2,522

2,188

  

612,016

472,331

Investment income

6,525

7,661

  

618,541

479,992

 

6.         Operating expenses and income


2010


2009


Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items

Total


US$'000

US$'000

US$'000


US$'000

US$'000

US$'000

Net operating expenses (excluding items shown separately)

413,378

-

413,378


236,979

-

236,979

Impairment charges

9,897

34,944

44,841


4,243

-

4,243

Central administration expenses

64,116

9,355

73,471


49,569

4,494

54,063

Foreign exchange losses

3,165

-

3,165


5,905

-

5,905

Gain on re-measuring existing interest in Omchak on acquisition (note 29)

-

(28,882)

(28,882)


-

-

-


          490,556  

                15,417  

                 505,973  


296,696

4,494

301,190

 

Net operating expenses (excluding items shown separately)

 


 


2010


2009


US$'000


US$'000

Staff costs

108,483


56,504

Fuel

34,875


15,944

Materials

84,526


43,131

Depreciation

73,452


40,523

Electricity

20,723


8,222

Royalties

33,886


24,353

Smelting and transportation costs

3,518


3,216

Shipping costs

5,096


-

Professional fees

3,586


1,790

Other external services

45,776


8,825

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

(46,827)


(7,290)

Insurance

4,329


2,454

Operating lease rentals

2,056


1,207

Allowance for bad debts

372


1,530

Bank charges

1,436


1,000

Office costs

1,992


855

Taxes other than income

8,056


3,540

Goods for resale

10,624


13,602

Other operating expenses

22,661


20,269

Business travel expenses

1,879


1,349

Other income

(7,121)


(4,045)


413,378


236,979

 

Exceptional impairment charges

In 2010, the Company was advised that its joint venture partner Aluminium Corporation of China Limited ("Chinalco") has decided to withdraw from some of its non-core ventures and consequently no longer wishes to proceed with the Titanium Sponge Joint Venture. To date the Group has invested approximately US$20.8 million in the joint venture, and a further US$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 was deferred and there is uncertainty as to the eventual outcome of the joint venture activities and the recoverability of the amounts invested. As a result, the directors concluded that the most appropriate course of action was to provide for the impairment against the invested amounts of US$34.9 million. This impairment was allocated to intangible assets (US$0.7 million), property, plant and equipment (US$14.6 million) and interests in joint ventures (US$19.6 million).  The impairment took into account the recoverable value of the Group's share of the joint venture of US$3.5 million which reflected the Group's 65% share of the cash within the joint venture, net of its liabilities. Following discussions with Chinalco, the Group has entered into an agreement with Chinalco pursuant to which the Chinalco's interest ("Chinalco Interest") will be independently appraised and, subject to certain conditions including the receipt of the necessary approvals for the implementation of the transfer and for an extension for the period in which the outstanding capital has to be paid up and there being no material adverse change, the Group will bid for the Chinalco Interest at the appraised value if the appraised value is at or below RMB76 million or such higher number as the Group may agree.  The Group is considering how it would proceed if it does acquire the Chinalco Interest. One route might be to continue with the project alone and another to proceed with a different joint venture partner.  In the event that the Company is successful in acquiring Chinalco's interest and proceeds with the project alone or with a different joint venture partner, it may be possible to reverse some or all of the impairment charge.  In the event that the Company acquires the Chinalco's stake but ultimately does not proceed with the project, a further impairment charge may be required.

 

All other impairment charges

Following the decision to abandon exploration of the Gar-2, Shaman and Sungjar license areas, associated exploration and evaluation costs of US$8.9 million previously capitalised within intangible assets were written off (2009: following the expiration of the licence to explore the flanks of Tokur deposit and decision to abandon exploration, associated exploration and evaluation costs of US$ 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 it is most appropriate to provide for impairment against the amounts invested in the associate through loans advanced of US$1.0 million (2009: nil).

 

Central administration expenses


2010


2009


Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items

Total


US$'000

US$'000

US$'000


US$'000

US$'000

US$'000

Staff costs

38,986

-

38,986


32,038

-

32,038

Professional fees

6,677

9,355(a)

16,032


4,269

4,402(b)

8,671

Insurance

1,142

-

1,142


721

-

721

Operating lease rentals

3,641

-

3,641


2,700

-

2,700

Business travel expenses

5,266

-

5,266


3,983

-

3,983

Office cost

1,467

-

1,467


1,231

-

1,231

Other

6,937

-

6,937


4,627

92(b)

4,719


64,116

9,355

73,471


49,569

4,494

54,063

(a) Costs incurred in relation to the listing of IRC Limited on the Stock Exchange of Hong Kong Limited

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

 

7.      Auditors' remuneration                    

                                                                                                                   

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

 

2010

2009


US$'000

US$'000

Audit fees and related fees



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

         395

363

Fees payable to the Company's auditor and its associates for other services to the Group:



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

         322

331

For the audit of subsidiary statutory accounts pursuant to legislation(a)

608

167

Other services pursuant to legislation - interim review

160

97


1,485

958

Non-audit fees



Corporate finance services:



Fees for reporting accountants services(b)

2,729

-

Other corporate finance services

93

-(c)

Tax services

197

10

Other services

115

72


3,134

82

(a)    Including the statutory audit of subsidiaries in the UK and Cyprus as well as US$459 thousand payable for the audit of the consolidated financial statements of IRC Limited

(b)    Fees payable in connection with the listing of the shares of IRC Limited on the Stock Exchange of Hong Kong Limited a significant component of which relates to the audit of historical financial information

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

 

8.        Staff costs

 

 

 


2010

2009



US$'000

US$'000

Wages and salaries


123,689

73,630

Social security costs


20,768

11,756

Pension costs


427

223

Share-based compensation


2,585

2,933



147,469

88,542

Average number of employees


            11,789  

7,766

 

9.         Financial income and expenses


2010


2009


Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items (a)

Total


US$'000

US$'000

US$'000


US$'000

US$'000

US$'000









Investment income








Interest income

6,525

-

6,525


7,661

-

7,661


6,525

-

6,525


7,661

-

7,661









Interest expense








Interest on bank and other loans

(14,551)

-

(14,551)


(6,142)

-

(6,142)

Interest on exchangeable bonds

-

-

-


(6,048)

-

(6,048)

Interest on convertible bonds

(23,269)

-

(23,269)


(9,317)

-

(9,317)


(37,820)

-

(37,820)


(21,507)

-

(21,507)

Interest capitalised

7,253

-

7,253


14,749

-

14,749

Unwinding of discount on environmental obligation

(1,605)

-

(1,605)


(382)

-

(382)


(32,172)

-

(32,172)


(7,140)

-

(7,140)









Other finance gains/ (losses)








Finance costs incurred in relation to listing of IRC Limited on the Stock Exchange of Hong Kong Limited (a)

-

(10,314)

(10,314)


-

-

-

Gain on redemption of exchangeable bonds (b)

-

-

-


-

23,716

23,716

Fair value gains/ (losses) on derivative financial instruments

2,285

-

2,285


(819)

-

(819)

Other finance income

-

-

-


103

-

103


2,285

(10,314)

(8,029)


(716)

23,716

23,000

(a)    Being the agreed exit cost paid to facilitate the unwinding of the pre-IPO investment into IRC Limited in order to meet the requirements of the Stock Exchange of Hong Kong Limited placed on IRC Limited in connection with the listing.

 

(b)    During the year ended 31 December 2009, the Group purchased a total of $127 million nominal amount of its 7% exchangeable bonds at an average price of US$95.00 plus accrued interest, a total of US$51.9 million nominal amount at an average price of US$109.00 plus accrued interest and a total of US$1.1 million nominal amount at an average price of US$104.00 plus accrued interest. This resulted in an aggregate net gain of US$23.7 million recognised during the year ended 31 December 2009.

 

10.      Taxation

 



2010


2009



Before exceptional items

Exceptional items

Total


Before exceptional items

Exceptional items (a)

Total



US$'000

US$'000

US$'000


US$'000

US$'000

US$'000

Current tax









UK current tax


-

-

-


(470)

-

(470)

Russian current tax


           23,429

-

                  23,429


39,627

-

39,627



23,429

-

23,429


39,157

-

39,157

Deferred tax









Reversal and origination of timing differences


           22,799

-

           22,799


6,103

7,341

13,444

Total tax charge


46,228

-

46,228


45,260

7,341

52,601

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

 

 

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

 

 

2010

2009


US$'000

US$'000

Profit before tax

              69,199

197,385




Tax at the UK corporation tax rate of 28%

              19,376

55,268

Effect of different tax rates of subsidiaries operating in other jurisdictions

               (6,623)

(11,380)

Tax effect of share of results of joint ventures

                   887

(763)

Tax effect of expenses that are not deductible for tax purposes

           26,934

9,106

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

  18,622

7,395

Income not subject to tax

               (8,090)

(3,731)

Utilisation of previously unrecognised tax losses

               (4,415)

(6,409)

Other adjustments

(1,562)

77

Foreign exchange movements in respect of deductible temporary differences

     1,099

3,038

Tax expense for the period

              46,228

52,601

 

11.      Earnings per ordinary share



2010

2009



US$'000

US$'000

Profit for the period attributable to equity holders of Petropavlovsk PLC


19,777

143,194

Before exceptional items


45,508

131,313

Exceptional items


          (25,731)

11,881

Interest expense on convertible bonds, net of tax


-(a)

              6,708

Profit used to determine diluted earnings per share


19,777

149,902

Before exceptional items


45,508

138,021

Exceptional items


         (25,731)

11,881







No of shares

No of shares

Weighted average number of Ordinary Shares


183,815,830

   146,701,446

Adjustments for dilutive potential Ordinary Shares(a):




 - assumed conversion of convertible bonds


-(a)

       9,926,580

 - share options in issue


23,966

            42,049

Weighted average number of Ordinary Shares


183,839,796

    156,670,075

for diluted earnings per share

 



US$

US$

Basic earnings per ordinary share


0.11

0.98

Before exceptional items


0.25

0.90

Exceptional items


(0.14)

0.08





Diluted earnings per ordinary share


0.11

0.96

Before exceptional items


0.25

0.88

Exceptional items


(0.14)

0.08

(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.

 

As at 31 December 2009 and 2010, the Group had a potentially dilutive option issued to IFC to subscribe for 1,067,273 Ordinary Shares (note 25) which was anti-dilutive (2009: anti-dilutive) and therefore was not included in the calculation of diluted earnings per share.

 

During the year ended 31 December 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 which were anti-dilutive and therefore were not included in the calculation of diluted earnings per share (note 25). As at 31 December 2009, the Group had 8,312,463 potentially dilutive warrants in issue which were anti-dilutive and therefore were not included in the calculation of diluted earnings per share.

 

12.      Dividends

 



2010(a)

2009



US$'000

US$'000





Interim dividend for the year ended 31 December 2009 of £0.07 per share paid on 30 March 2010 (b)


19,003

-

Interim dividend for the year ended 31 December 2010 of £0.03 per share paid on 29 October 2010 (b)


8,771

-



27,774

-

(a)   Information on dividends proposed subsequent to 31 December 2010 is set out in note 38.

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

 

13.     Goodwill

 


2010

2009



US$'000

US$'000

Cost




At 1 January


22,161

22,161

At 31 December


22,161

22,161





Accumulated impairment losses




At 1 January


(486)

(486)

Impairment loss


-

-

At 31 December


(486)

(486)





Carrying amount at 31 December


21,675

21,675

 

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

 

Goodwill recognised on acquisition of Irgiredmet in the amount of US$16 million has been allocated to the group of cash generating units likely to benefit from acquisition-related synergies, which are those within the precious metals segment.

 

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

 

The recoverable amount of cash generating units is determined based on value-in-use calculations as set out in note 3.3.

 

14.      Intangible assets

 


Vysokoe(a)

Verkhne-Aleinskoye

Tokur(b)

Yamal deposits(c)

Flanks of Pokrovskiy

 

Kostenginskoye

 

Other(d)

 

Total


US$'000

US$'000

US$'000

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

36,826

506

-

1,243

2,697

1,719

23,035

66,026

Assets acquired through business combinations (note 29)

-

66,642

-

-

-

-

6,280

72,922

Impairment (note 6)

-

-

-

-

-

-

(9,585)

(9,585)

Transfer to mining assets

-

-

-

-

-

-

(2,106)

(2,106)

Reallocation and other transfers

-

-

62,955

51,143

685

-

793

115,576

At 31 December 2010

36,826

67,148

62,955

77,834

18,808

29,136

54,155

346,862

 

(a)   See note 30.

(b)   Management is currently re-assessing the expanded development plan for the Tokur license area. Until such time as the feasibility study for the enlarged project is in place and a new development plan is approved by the Board, amounts capitalised in relation to the Tokur mining project have been re-allocated from property, plant and equipment to intangible assets.

(c)   Management is currently re-assessing the development strategy for the Yamal deposits. Until such time as the updated development strategy is in place and approved by the Board, amounts capitalised in relation to the Yamal deposits have been re-allocated from property, plant and equipment to intangible assets.

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

 


Malomir

Albyn

Tokur

Yamal deposits

Flanks of Pokrovskiy

 

Kostenginskoye

Other(e)

Total


US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

US$'000

At 1 January 2009

41,308

10,390

61,549

62,973

21,635

-

27,591

225,446

Additions

-

1,040

24

4,545

176

36

6,839

12,660

Assets acquired through business combination with Aricom plc

-

-

-

-

-

27,381

610

27,991

Assets acquired through other business combinations

-

-

-

-

-

-

845

845

Impairment

-

-

(2,702)(f)

(1,506)(g)

-

-

(35)

(4,243)

Transfer to mine development costs

(40,172)

(11,430)

(58,871)

(40,564)

-

-

-

(151,037)

Transfer  to mining assets

-

-

-

-

(7,521)

-

-

(7,521)

Reallocation and other transfers

(1,136)

-

-

-

1,136

-

-

-

Disposal

-

-

-

-

-

-

(112)

(112)

At 31 December 2009

-

-

-

25,448

15,426

27,417

35,738

104,029

 

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

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

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

 

15.      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 2009

1,184

258,136

120,985

36,925

417,230

Additions (a)

102,981

45,186

10,857

91,419

250,443

Acquired through business combination with Aricom plc

303,431

-

29,318